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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 1-8145
THORATEC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-2340464
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6035 STONERIDGE DRIVE, PLEASANTON, CALIFORNIA 94588
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 847-8600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT: COMMON
STOCK
Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates was
$247,230,000 computed by reference to the last sale reported of such stock on
March 26, 2001 as listed on The Nasdaq National Stock Market(R).(1)
As of March 26, 2001, registrant had 54,727,616 shares of common stock
outstanding.
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(1) Exclusion of shares held by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to cause the
direction of the management or policies of the issuer, or that such person
is controlled by or under common control with the issuer.
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the documents incorporated by
reference in this annual report, includes forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. Our actual results could differ materially from
those discussed in, or implied by, these forward-looking statements.
Forward-looking statements are identified by words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may" and other similar
expressions. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements. Forward-looking statements include, but are not necessarily limited
to, those relating to:
- our ability to obtain and maintain regulatory approval of our products in
the United States and internationally;
- the other competing therapies that may in the future be available to
heart failure patients;
- our plans to develop and market new products;
- our ability to improve our financial performance; and
- effects of the merger with Thermo Cardiosystems.
Factors that could cause actual results or conditions to differ from those
anticipated by these and other forward-looking statements include those more
fully described in the "Risk Factors" section and elsewhere in this annual
report. We are not obligated to update or revise these forward-looking
statements to reflect new events or circumstances.
You should assume that the information appearing in this annual report is
accurate as of the date on the front cover of this annual report only. Our
business, financial condition, results of operations and prospects may have
changed since that date.
Thoratec, the Thoratec logo, Thoralon, and TLC-II are registered
trademarks, and Vectra and Aria are trademarks of Thoratec Corporation.
HeartMate and HeartPak are registered trademarks of Thoratec Cardiosystems,
Inc. (formerly Thermo Cardiosystems, Inc.) our wholly-owned subsidiary.
HEMOCHRON, ProTime, Surgicutt, Tenderlett and Tenderfoot are registered
trademarks of International Technidyne Corporation, a wholly-owned subsidiary of
Nimbus, Inc. Nimbus, Inc. is a wholly-owned subsidiary of Thoratec
Cardiosystems.
ITEM 1. BUSINESS
GENERAL
We began our business in March 1976 and are incorporated in the State of
California. Our initial public offering of common stock occurred in 1981.
We develop, manufacture and market proprietary medical devices used for
circulatory support, vascular graft, blood coagulation and skin incision
applications. We currently market the Thoratec Ventricular Assist Device System
(which we call the Thoratec VAD System or the VAD System) and the HeartMate Left
Ventricular Assist System (which we call the HeartMate LVAS) in the United
States and internationally for use as a bridge to heart transplant. Additionally
the Thoratec VAD System is marketed for use in the recovery of the heart after
open-heart surgery and the HeartMate LVAS is marketed internationally as an
alternative to medical therapy. We have also developed small diameter vascular
grafts for use in hemodialysis access and coronary artery bypass surgery. All of
these products that come into contact with human tissue or blood incorporate
Thoralon, our proprietary biomaterial. Thoralon is a unique biomaterial that
provides strength and
2
flexibility to our products with surface properties designed to minimize patient
blood clotting and inflammatory response.
Our VAD System is currently the only device approved by the U.S. Food and
Drug Administration (FDA) that can provide left, right or biventricular support
for both bridge to heart transplant and for recovery of the heart after
open-heart surgery. We are also pursuing additional indications for the VAD
System and developing other circulatory support products for patients suffering
from heart failure. At March 27, 2001, our VAD System had been used in more than
1,500 patients worldwide ranging in age from six to 77 years and in weight from
37 to 317 pounds (17 to 144 kg).
Our hemodialysis access graft product, which we call the Vectra, was
approved for sale in the United States in December of 2000 and is currently
marketed in Japan through Goodman Co., Ltd. and through Guidant Corporation in
the United States and the rest of the world. We believe this graft offers
significant advantages over currently available prosthetic grafts used in
hemodialysis. Unlike current grafts, which require up to several weeks of
patient recovery prior to use, the Vectra's self-sealing design allows for
patient use as soon as 24 hours after surgical implantation. We are applying the
same technological expertise used in the Vectra for use in coronary artery
bypass surgery through our development of our Aria CABG (coronary artery bypass
graft). This small diameter graft is designed for use by patients who have no or
too few suitable blood vessels of their own. Clinical trials are underway in the
United States for the Aria.
On February 14, 2001 we completed a merger with Thermo Cardiosystems Inc.,
which we call Cardiosystems, a Massachusetts-based manufacturer of cardiac
assist, blood coagulation testing, and skin incision devices. As a consequence
of the merger, Cardiosystems became our wholly-owned subsidiary, and Thermo
Electron Corporation, Cardiosystems' sixty-percent owned parent acquired
approximately 36% of our outstanding stock on a proforma basis.
At the time of the merger we changed our name from Thoratec Laboratories
Corporation to Thoratec Corporation and Thermo Cardiosystems, Inc. was renamed
Thoratec Cardiosystems, Inc. (Cardiosystems). Thermo Cardiosystems was
originally incorporated in Massachusetts in 1988.
Cardiosystems develops, manufactures, and markets products in two segments:
Left Ventricular Assist Systems (LVAS) also called the HeartMate, and blood
coagulation testing, and skin incision products through International
Technidyne. The Cardiosystems' LVAS is an implantable heart-assist device that
is designed to perform substantially all or part of the pumping function of the
left ventricle of the natural heart for patients suffering from cardiovascular
disease. Cardiosystems has commercialized two systems for patients requiring
cardiac support: an implantable pneumatic LVAS that is powered by an external
electrically driven air-pump, and an electric LVAS that is driven by an
implanted electric motor and powered by a lightweight battery pack worn by the
patient.
In 1994, the U.S. Food and Drug Administration (FDA) granted approval for
the commercial sale of the air-driven Cardiosystems' LVAS for use as a bridge to
transplant. The electric Cardiosystems' LVAS was granted the same approval by
the FDA in September 1998. With these approvals, the air-driven and electric
systems became available for sale to cardiac centers throughout the United
States. In August 1998, the HeartMate LVAS received Canadian approval,
permitting the sale of both the air-driven and electric versions throughout
Canada. Cardiosystems' air-driven LVAS received the European Conformity Mark (CE
Mark) in April 1994, and received the same marking for the electric system in
August 1995. In late 1995, the FDA approved the protocol for conducting clinical
trials of the electric LVAS as an alternative to medical therapy, and in April
1996, the first patient was implanted with an electric LVAS under this trial.
The electric LVAS is being used in Europe as both a bridge to transplant and as
an alternative to medical therapy.
In addition, Cardiosystems is developing two advanced HeartMate systems,
HeartMate II and HeartMate III, that meet the needs of a wider range of
patients, offer extended durability and longevity, and further improve patients'
quality of life. HeartMate II is a next-generation LVAS that features a
miniature rotary blood pump with axial bearings. Nimbus, Inc. has been involved
in artificial heart technology for over 20 years and has carried out research in
two primary fields: ventricular assist devices and total artificial hearts.
Nimbus was instrumental in developing the basic technology for high-speed rotary
blood pumps. Because of
3
their smaller size, rotary blood pumps may potentially be used to provide
cardiac support in small adults and in children.
In 2000, Cardiosystems initiated a clinical trial for HeartMate II, with a
team of cardiac surgeons in Israel performing the first human implant. Clinical
trials are about to commence in Europe, and data are being collected to support
our intended Investigational Device Exemption (IDE) submission to the FDA,
which, if approved, would allow us to begin conducting a human clinical trial in
the U.S. HeartMate III is an advanced heart-assist system featuring a miniature
centrifugal pump and state-of-the-art magnetic technology. This system is
currently being evaluated under an ongoing animal trial.
International Technidyne Corporation, is a leading manufacturer of
near-patient, whole-blood coagulation testing equipment and related disposables,
and also manufactures premium-quality, single-use, skin incision devices.
OUR STRATEGY
Our goal is to be a leading developer and manufacturer of medical devices
to the congestive heart failure, cardiac surgery and vascular graft markets. Our
key strategies to achieve this goal are:
Increase Ventricular Assist Device Market Penetration. The Thoratec VAD
System is the only ventricular assist device with approvals for both
bridge-to-transplant and recovery after open-heart surgery indications and can
be used to treat both ventricles for patients of all sizes, and in a less
invasive manner than fully implanted systems. The HeartMate LVAS is implantable
and is offered both as a pneumatic (air-driven) system and as an electric system
driven by an internal electric motor mounted in the blood pump housing. It is
approved as a bridge-to-transplant and is undergoing clinical trials in the U.S.
as an alternative to medical therapy. We intend to utilize our existing sales
channels throughout the world to continue to gain acceptance and adoption by
both transplant and non-transplant open heart centers, and to treat a greater
number and variety of patients within our current customer base. In addition, in
order to further expand the clinical utility of all VAD products, we intend to
pursue:
- the U.S. launch of the TLC-II Portable VAD Driver, which weighs
approximately 20 pounds and operates interchangeably with current
products. The TLC-II improves patient mobility, and is designed to allow
patients to be discharged from the hospital while still using the VAD
System;
- the completion of the REMATCH (Randomized Evaluation of Mechanical
Assistance in Congestive Heart Failure) clinical trial for the HeartMate
electric LVAS for use as an alternative to medical therapy;
- the initiation of clinical trials for the HeartMate II LVAS for use as an
alternative to transplant;
- the initiation of clinical trials for our implantable ventricular assist
device, which we call the IVAD, for use in longer term
bridge-to-transplant patients;
- the education of cardiac surgeons and heart failure cardiologists as to
the benefits of Thoratec's ventricular assist device products; and
- the regulatory approval of a therapeutic recovery indication.
Significant market expansion opportunities could exist for us in treating
the end-stage heart failure patients:
- We estimate that there are as many as 160,000 late stage CHF patients in
the United States whose cardiac recovery may potentially be facilitated
by the use of the Thoratec VAD System in treating specific types of
end-stage heart failure.
- The HeartMate electric LVAS may offer an alternative to current medical
therapies in treating late stage CHF patients.
Support the European and the U.S. Market Launch of Vectra. We believe the
clinical use of synthetic grafts for dialysis access is an established clinical
practice. However, existing commercial graft technologies
4
have significant shortcomings that are widely recognized. We believe the Vectra
device will address some of the most significant of those shortcomings. We
received FDA clearance to market and sell the Vectra in the United States in
December 2000. We have established distribution partnerships for the Vectra
product line, the most significant of which is Guidant. We will continue to
identify and pursue opportunities for product line extensions that enhance the
Vectra product offering.
Attain Global Approval to Commercialize the Aria Coronary Artery Bypass
Graft. We intend to complete Aria coronary artery bypass clinical trials and
seek approvals in all major medical device markets. Through clinical trials, we
expect to demonstrate the efficacy of the Aria as an option for completing the
revascularization of coronary artery bypass patients. These patients' only other
option may be very poor quality veins, or even no available veins at all.
Therefore, our objective in these clinical trials is to show that the Aria has
similar or superior patency rates as compared to poor quality veins. We believe
that in as many as 20% of the 900,000 bypass surgeries performed worldwide, the
unavailability of any or enough suitable vessels creates a treatment problem.
Explore the Use of Thoralon for Additional Medical Products. Thoralon was
developed for safe and effective use in long-term cardiovascular implants, with
properties designed to provide:
- excellent blood and tissue compatibility;
- thromboresistance, which means resistance to blood clotting;
- durability; and
- stability.
These properties allow Thoralon biomaterials to be configured and applied
in a variety of ways and may allow its use for other medical device applications
as a coating or stand-alone material. We intend to apply our biomaterials
technologies to those applications where our high-value, critical care
implantable medical devices are desired.
Complete the Integration of Thoratec and Cardiosystems. We believe that the
merger will result in a combined medical device company with:
- substantially greater resources than Thoratec as a stand-alone company;
- a more diversified product base than that of Thoratec as a stand-alone
company;
- an enhanced research and development and manufacturing capability;
- a broader international presence; and
- a larger sales force able to reach more hospitals and doctors.
Continue to Explore the Acquisition of, or Partnership with, Companies that
Possess Complementary Products or Technologies. We expect to leverage our
expertise and technologies with other products and technologies being developed
by other firms or research centers. We have established a strong direct sales
presence with some of the world's largest heart centers. We believe other
companies, product lines or technologies may benefit from this sales and
distribution capability. We intend to pursue opportunities to acquire products
or technologies that complement our products and allow us to leverage our
competencies in selling and marketing, regulatory affairs and manufacturing.
CIRCULATORY SUPPORT MARKET
Cardiac failure is the leading cause of death in the United States,
accounting for more deaths than all forms of cancer combined. Deaths associated
with cardiac failure fall into two broad categories:
- congestive heart failure, which is a chronic disorder that occurs when a
weakening of the heart muscle reduces the pumping power of the heart; and
- acute cardiac failure resulting from heart attacks and various infections
of the heart muscle.
5
CONGESTIVE HEART FAILURE
CHF is a slow, degenerative process leading to cardiac insufficiency
resulting in a decreased supply of oxygen and nutrient rich blood to various
vital organs such as the lungs, brain and kidneys. CHF tends to be progressive
and is associated with profound symptoms that limit daily activities. Long-term
survival rates are low. We estimate that more than 85% of patients die within
eight to twelve years of diagnosis. CHF is the most common cause of
hospitalization in patients over 65 years of age. According to the American
Heart Association, there are currently four million to five million CHF patients
in the United States, and approximately 550,000 newly diagnosed patients each
year. While most patients suffering from CHF are initially treated with
medication, which may delay the progression of CHF, conventional drug therapy
cannot cure the disease. The only available method of treating end-stage CHF is
a heart transplant.
Although heart transplants have been very successful, there are too few
donor hearts available to adequately address the problem of cardiac failure. The
United Network for Organ Sharing reported that there were only approximately
2,400 hearts available for transplant in the United States in 1998, a level that
has remained relatively unchanged for the last several years. However, published
government sources estimate that the number of patients suffering from CHF who
could benefit from some form of permanent cardiac assist is 30,000 to 50,000 per
year. The median wait for a donor heart by patients on a heart transplant
waiting list is approximately seven months, and many patients have to wait as
long as one to two years before receiving one of the few donor hearts available
each year. In 1998, approximately 19% of such patients died while waiting for a
donor heart.
When other therapies are unsuccessful, ventricular assist devices can be
used to support one or both sides of the patient's heart until a donor heart can
be found. Ventricular assist devices are mechanical systems used to assist the
heart's function. In patients awaiting heart transplants, physicians decide to
use a ventricular assist device when the death of the patient appears imminent.
ACUTE CARDIAC FAILURE
In addition to providing a bridge to heart transplant, ventricular assist
devices have other potential applications. It is estimated that out of
approximately 800,000 open-heart surgeries performed annually in the United
States, some 15,000 to 20,000 patients die following such procedures, resulting
in a total VAD market potential of over $300 million. We believe that only
approximately ten percent of the potential market is currently being treated
with VAD devices. Many of these deaths are caused by heart failure when the
heart, weakened by disease and the additional trauma of surgery, fails to
maintain adequate blood circulation. The use of a ventricular assist device
after surgery can support the circulation to the heart until it recovers. In
addition, ventricular assist devices may also be useful in assisting the
recovery of the heart in a small portion of patients suffering from acute
cardiac failure that may result from heart attack and various infections of the
heart muscle. There is significant demand for effective ventricular assist
devices serving a broad spectrum of patient profiles.
THORATEC CIRCULATORY SUPPORT PRODUCTS
We received FDA approval in December 1995 to market the Thoratec VAD System
as a bridge to heart transplant in patients suffering from heart failure, and
began marketing the VAD System in the United States in January 1996. The VAD
System has received regulatory clearance and is currently being marketed in
major European countries, Canada and certain other major international markets.
As of February 2001, our VAD System had been used in more than 1,500 patients
worldwide ranging in age from six to 77 years and in weight from 37 to 317
pounds (17 to 144 kg). The VAD System has also been approved for use after heart
surgery to rest the heart and allow it to recover.
6
OVERVIEW OF THE THORATEC VAD SYSTEM
The VAD System consists of three major components:
- the single-use blood pump, a type of artificial ventricle;
- the single-use cannulae, which connect the blood pump to the heart and
vessels; and
- the Thoratec Dual Drive Console, a multi-use device that pneumatically
activates the blood pump.
Also available in international markets is the TLC-II Portable VAD Driver,
a small lightweight unit that can be used interchangeably with the Dual Drive
Console and is designed to allow the patient to move around the hospital or
return home. A PMA Supplement was submitted to the FDA in September 2000 for
market approval for the TLC-II in the United States.
The VAD System provides partial or total circulatory assistance when the
natural heart is unable to maintain adequate circulation to perfuse vital organs
and permits left, right, or biventricular support.
ADVANTAGES OF THE THORATEC VAD SYSTEM
Compared to other ventricular assist devices, we believe that the VAD
System has the following principal advantages:
- Biventricular Support. Most long-term systems available today provide
only left ventricular support. While many patients do well with only a
LVAS, we estimate that at least 20 - 30% of these patients also have or
can develop right ventricular failure and require a right ventricular
assist device (RVAD). Death and morbidity rates are extremely high for
this patient group if not adequately supported. Since there are no risk
factors that allow a surgeon to predict reliably which patients will
require biventricular support, the decision for univentricular or
biventricular support is simplified with the Thoratec VAD System, as RVAD
support may be added at the time of LVAS placement if needed. Isolated
RVAD support may also be suitable for patients with right heart failure
only.
- Paracorporeal Placement. With the Thoratec VAD System, the blood pump is
worn outside the body. This placement facilitates patient movement and
allows patients to walk, exercise and move around the hospital. This
paracorporeal placement allows the system to support patients of varying
sizes, including very small patients such as small women, adolescents and
children. To date, our VAD System has been used in patients as small as
37 pounds and as young as six years old. In contrast, other commercially
available ventricular assist devices for bridge to heart transplant must
be implanted and can only be used in patients large enough to accommodate
the device within their abdomen. In addition, unlike implantable VAD's,
paracorporeal attachment does not require two invasive abdominal
surgeries, one for implant and one for extraction. This makes the VAD
System more suitable for critically ill patients who may potentially
recover normal function of the heart without this additional surgical
trauma.
- Multiple Indications. Our VAD System is the only device approved in the
United States to provide circulatory support for both post open-heart
surgery recovery and bridge to transplant indications. To date, the VAD
System has been used to support patients for periods ranging from a few
hours to well over one year. This unique flexibility to treat multiple
patient groups allows hospitals to invest in a single product line and,
therefore, make a smaller investment in inventory as one product line can
be used with two patient groups. In addition, the surgical training
required for our device can apply to a broader patient population. Also,
for those post open heart surgery patients who become transplant
candidates, use of our VAD System can eliminate the need for a second
surgery to remove a device designed or approved for recovery only.
- Thoratec Biomaterials. Our proprietary biomaterials are used in most
surfaces of the VAD System that contact blood or are implanted in the
body, providing biocompatibility, resistance to blood clotting, flex life
and strength. These materials have been used in cardiovascular products
for over 15 years. We have also licensed these biomaterials to health
care manufacturers Gambro, Inc. and COBE Cardiovascular for use in
non-competing applications.
7
- Multiple Cannulation Options. Cannulae for the VAD System come in a
number of shapes and sizes, allowing the surgeon to fit the size of the
cannulae to the size of the patient and to place the cannulae in
different parts of the heart. Other commercially available systems have
only limited cannula shape and size. The small size of our cannulae,
compared to other systems, could make it easier for the heart to recover
when the cannulae are removed. Variations of our cannulae also allow the
surgeon to place the cannulae in places other than the apex of the heart
(the only place used by the currently available left ventricular-only
systems).
CURRENT AND POTENTIAL INDICATIONS
We have identified the following three basic clinical needs for the
Thoratec VAD System:
- Bridge to Heart Transplant. We commenced marketing the Thoratec VAD
System in the United States in January 1996 for use as a bridge to heart
transplant in patients suffering from heart failure following receipt of
pre-market approval from the FDA in December 1995. In 2000, we sold 689
VAD pumps to heart centers worldwide. We maintain a record of all
patients reported treated with the VAD System, which we call the
Voluntary Registry. Since FDA approval, this registry has relied upon
strictly voluntary input from our customers. As of February 2001, our
Voluntary Registry included 931 patients treated with the VAD System for
bridge to transplant. At any given time, there are approximately 4,000 to
5,000 patients on the waiting list for a heart transplant in the United
States, and we believe a comparable number are waiting in Europe. We
believe that the percentage of these patients bridged to transplant will
continue to increase, as surgeons' level of comfort with the technology
increases, particularly for longer-term support cases.
- Recovery of the Natural Heart. Approximately two percent of patients who
undergo open-heart surgery have difficulty recovering normal cardiac
function, which makes it difficult to wean the patient from the
heart/lung machine. Patients can only stay on the heart/lung machine
after surgery for a limited period of time (generally less than six
hours), and if they are unable to regain normal heart function, they will
not survive without ventricular support. The use of a ventricular assist
device after surgery can provide support to the heart until the heart can
recover. We received FDA approval for this indication in May 1998.
As of February 2001, our voluntary registry reported that the VAD System
had been used in 274 patients who were unable to regain normal heart
function following surgery requiring cardiopulmonary bypass and were,
therefore, unable to be removed from the heart/lung machine following
surgery. Normally, patients who cannot be weaned from the heart/lung
machine die. Of the 274 patients who have been placed on the VAD System,
34% (94 patients) survived following removal from the heart/lung machine.
Of those patients, 59% were discharged from the hospital. Duration of
patient cardiac support ranged from one to 118 days. Although most
patients were supported less than ten days, several required support for
between one and three months before they successfully recovered cardiac
function.
- Therapeutic Recovery as an Alternative to Heart Transplant. We believe
that for most patients, recovery of his or her own heart is a better
alternative than either heart transplantation or permanent implantation
of a blood-pumping device. Based on recently reported cases of recovery
in heart failure patients, we believe that the VAD System is a potential
therapy to reverse the complications of late-stage heart failure in
certain patients. In December 2000, we filed a PMA Supplement with the
FDA seeking approval to market the Thoratec VAD System for bridge to
recovery in the therapeutic treatment and reversal of late stage heart
failure in certain types of patients. While this therapeutic recovery
indication is not yet approved for the device, we continue to actively
investigate the worldwide experience with the Thoratec VAD System for
this indication. It is estimated that as many as five million Americans
experience congestive heart failure each year, and it is believed the use
of the VAD System for therapeutic recovery could represent a significant
opportunity for these patients, their doctors and Thoratec. We are
working with physicians to track the experience of all patients who
8
recover while being treated with the VAD System while we continue to
implement our regulatory and clinical strategy both in the U.S. and
abroad.
We have noted that approximately two dozen patients have experienced
recovery of their natural heart while being supported by the Thoratec VAD
System. These patients have ranged in age from 12 to 46 years old and
have been supported by the VAD System from ten to 190 days. Our PMA
Supplement submission to the FDA included retrospective chart analysis of
patients who have recovered compared with a control group of patients
that were part of the primary cohort presented in our bridge to
transplant PMA.
CIRCULATORY SUPPORT PRODUCTS UNDER DEVELOPMENT
In addition to our commercially available VAD System, we currently have
under development or in the final stages of U.S. regulatory approval the
circulatory support products described below. We may be unable to successfully
develop any of these products, or if successfully developed, these products may
not obtain regulatory approval or market acceptance or be manufactured and sold
on commercially acceptable terms.
- TLC-II Portable VAD Driver. Although patients supported with the Dual
Drive Console can walk throughout the hospital and transfer from critical
care units to general wards, they usually cannot leave the hospital
because of the size of the console. We have developed the TLC-II, a
compact and lightweight (approximately 20 pounds), battery or
line-operated biventricular pneumatic drive unit designed to promote
greater mobility and self-care. It is designed to allow the patient to
exercise more easily and move freely around the hospital grounds and
eventually leave the medical facility. This device provides several
portability options, either by hand-carrying the driver or by using a
shoulder strap or mobility cart. This portable device connects with a
docking station, which houses a battery charger and the external
monitoring computer.
We received authority to CE Mark (an international symbol of quality
required for products to be distributed in the European Community) this
product in March 1998 and introduced the TLC-II in Europe in the middle of
1998. We received approval for an IDE from the FDA in November 1998 to
begin a clinical trial of this device in the United States for use in
conjunction with the approved VAD System and submitted a PMA supplement to
the FDA in September 2000. We hope to receive FDA clearance of the TLC-II
device in the first half of 2001.
In November 2000, we received approval from the FDA of an IDE supplement
allowing for an additional 20 patients to be enrolled in an existing
clinical trial using the TLC-II and we filed an additional original IDE
for a new clinical trial involving home discharge of patients being
supported by the TLC-II. In December 2000, we received conditional
approval from the FDA of the home discharge IDE. The new trial will
involve up to 35 patients at up to 15 hospitals. Once the total data added
from all patients reaches 365 days of at-home VAD system support, that
data will be submitted to the FDA in a separate PMA supplement. In
February 2001, the first U.S. patient was discharged from the hospital
supported by the TLC-II.
- Implantable VAD (IVAD). While the placement of the current VAD System
outside the body of the patient has the advantages described above, we
are developing an implantable version of our existing VAD blood pump and
cannulae to provide additional options for surgeons. The Thoratec IVAD is
designed for patients who require long-term VAD support. It is also
significantly smaller than the other commercially available implantable
LVAS devices, weighing approximately one pound. Because of its small
size, the IVAD can be used in smaller patients, and through the use of
two IVADs, in some biventricular patients, a capability unique to any
commercially available implanted VAD device. In January 2001 we filed an
IDE for the IVAD with the FDA to start clinical trials in the United
States. The study is expected to treat up to 30 patients at up to ten
hospitals. In February 2001, we received conditional approval of the IDE
from the FDA.
- MVAD. MVAD is being developed as a muscle-powered, implantable VAD system
that is expected to free patients from the battery powered console. MVAD
uses the patient's own muscle system to
9
hydraulically power a VAD pump. New technologies being developed for the
MVAD product include tendon attachment methodology, a hydraulic
transmission line between energy converter and blood pump, a modified
IVAD for specific application for skeletal muscle applications, a
compliance chamber, optimized pacing protocols, new surgical implantation
techniques and control algorithms.
CARDIOSYSTEMS' CIRCULATORY SUPPORT PRODUCTS
Cardiosystems has commercialized two versions of its implantable LVAS and
is developing two advanced systems, the HeartMate II and HeartMate III. Either a
bedside or portable console can control the implantable pneumatic, or
air-driven, system. The electric system features an internal electric motor
powered by an external battery pack worn by the patient. All of Cardiosystems'
Left Ventricular Assist Systems employ the HeartMate blood pump, and are
designed for long-term use. This pump is implanted just below the diaphragm in a
position that minimizes interference with normal circulation and other bodily
functions. An inlet tube is inserted into the apex of the left ventricle to
drain blood into the pump chamber. Blood is then forced out of the pump through
an animal tissue valve and back into the aorta. The HeartMate blood pump works
with the biological control mechanism of the natural heart to increase pumping
capability when required for activities such as climbing stairs. Cardiosystems'
LVAS devices are at various stages of regulatory approval.
AIR-DRIVEN LVAS. In October 1994, the FDA approved the air-driven
system as a bridge to transplant for patients awaiting heart
transplantation. This approval allows the air-driven LVAS to be sold to any
of the nearly 900 cardiac surgery centers in the United States. In April
1994, Cardiosystems received the CE Mark for commercial sale of the
air-driven LVAS in all European Community countries. In August 1998, the
Medical Devices Bureau of Health Canada issued a Notice of Compliance for
the air-driven HeartMate LVAS, permitting its sale throughout Canada. In
the air-driven LVAS, the HeartMate blood pump is coupled to an external
console connected to the body by a tube. Cardiosystems has also developed
the HeartPak, a lightweight portable console that can be carried over the
shoulder. The portable console received the CE Mark for commercial sale in
European Community countries in February 1995. In July 1995, the FDA
approved the beginning of clinical trials of the HeartPak portable
pneumatic driver, and Cardiosystems began evaluating the safety of the
system in the hospital. In June 1999, the FDA approved Cardiosystems'
request to begin evaluating the HeartPak in the home environment. With this
approval, patients in the trial may be discharged routinely.
ELECTRIC LVAS. Cardiosystems has also developed an electric LVAS that
uses the HeartMate blood pump driven by an internal electric motor mounted
in the blood pump housing. The system is connected to its external battery
pack by wires that exit the body. Since the power source and control
elements are worn on a battery belt, the system allows the patient complete
mobility. In August 1995, the electric LVAS received the CE Mark, allowing
commercial sale of this system in all European Community countries. The
electric system is used as a bridge to transplant in the United States,
Europe, and other regions, and is also implanted as an alternative to heart
transplant in Europe and other regions. In August 1998, the Canadian Health
approved the electric HeartMate LVAS, for sale throughout Canada. In
September 1998, the FDA approved the electric system for commercial sale as
a bridge to transplant for patients awaiting heart transplantation.
In December 1995, the FDA approved the protocol for conducting
clinical trials of the electric LVAS as an alternative to medical therapy.
The trial is called the REMATCH study and is expected to compare the
results of approved patients using the device to a similar number using
drug therapy. In December 1997, the FDA approved Cardiosystems' proposal to
broaden the entrance criteria and increased the number of participating
sites under this trial. We estimate that we will complete patient
enrollment into this trial in 2001.
HEARTMATE II. HeartMate II is a next-generation LVAS that features a
miniature rotary blood pump with axial bearings. In 2000, Cardiosystems
initiated a clinical trial for HeartMate II, with a team of cardiac
surgeons in Israel performing the first human implant. Data are being
collected to support the intended IDE submission to the FDA, which, if
approved, would allow Cardiosystems to begin
10
conducting a human clinical trial in the U.S. Because of its smaller size,
HeartMate II may potentially be used to provide cardiac support in small
adults and in children.
HEARTMATE III. HeartMate III is an advanced heart assist system
featuring a miniature centrifugal pump and state-of-the-art magnetic
technology. This system is currently being evaluated under an ongoing
animal trial. We believe the HeartMate III will have a significantly longer
life than any such device requiring traditional bearings because its moving
components do not contact each other.
VASCULAR GRAFT MARKET
VASCULAR ACCESS FOR HEMODIALYSIS
The principal use of vascular access grafts is for hemodialysis for
patients with end stage renal disease ("ESRD"), a debilitating disorder
characterized by gradual erosion of kidney function. ESRD is irreversible, and
the majority of all patients suffering from this disease worldwide are
maintained by hemodialysis. According to the U.S. Renal Data System's 1999
Annual Data Report, hemodialysis is the primary treatment for approximately 87%
of all end stage renal disease patients in the United States, an estimated
195,000 patients at the end of 1997. Market estimates suggest that approximately
200,000 prosthetic vascular access grafts used for hemodialysis were implanted
worldwide in 1999, representing an annual market approaching $120 million. We
estimate that the United States represents less than one-half of the worldwide
hemodialysis patient population.
Hemodialysis removes toxins and excess fluid from a patient's blood by
circulating the blood through a dialyzer, or so-called "artificial kidney." This
procedure is generally performed three times per week and lasts three to four
hours. Patients undergoing hemodialysis require easy, routine access to the
blood stream at a high flow rate. This access to the patient's blood stream is
achieved using one of three methods: creation of an arterio-venous (A/V) shunt
from the patient's blood vessels, inserting a central venous catheter, or
implanting an artificial vascular access graft (VAG). The majority of
hemodialysis patients in the United States depends on the use of a VAG that is
surgically connected between the patient's artery and vein. The vast majority of
available VAGs are made from expanded polytetrafluorethylene (ePTFE). The graft
is accessed using needles connected to tubing that carries the patient's blood
to the dialyzer and returns it back cleansed to the patient.
Vascular access methods currently available for hemodialysis applications
have certain limitations. Both A/V shunts and ePTFE grafts must mature for two
to six weeks before use and therefore require the use of a temporary central
venous catheter until the graft is ready for use. Such catheters entail
additional cost, including those associated with catheter insertion, maintenance
and treatment for complications, and risk to the patient such as infection,
thrombosis and venous stenosis. Additionally, ePTFE VAGs are usually accompanied
by profuse and prolonged bleeding, often up to 20 minutes, when the needles used
for hemodialysis are removed, increasing patient treatment time at the dialysis
center.
CORONARY ARTERY BYPASS SURGERY
Currently, obstructed coronary arteries are either partially cleared
through the use of angioplasty or related procedures or treated surgically
through coronary artery bypass surgery. Coronary artery bypass surgery involves
connecting one or more new vessels from the aorta to the heart to re-route blood
around blockages in the coronary arteries. Grafts using saphenous veins (from
the leg) or the internal mammary artery of the patient have been successfully
used in bypass procedures for a number of years and have shown a relatively high
patency with no risk of tissue rejection. We estimate that in 1998 there were
approximately 600,000 coronary artery bypass surgery procedures performed in the
United States and approximately 300,000 performed outside the United States. We
estimate that on average three bypasses are performed in each surgical
procedure.
While the use of natural vessels is the standard of care in coronary artery
bypass surgery, the harvesting of vessels from the patient for grafts involves
significant trauma and expense. Use of these vessels requires additional time in
surgery and results in patient morbidity associated with removal of the blood
vessel. In addition, a significant number of patients requiring coronary artery
bypass surgery have insufficient vessels as a result of previous bypass
surgeries, or their vessels are of inferior quality due to trauma or disease. We
estimate
11
that these patients may represent as much as 20% of the total patients
undergoing bypass surgery. No artificial graft currently has full market
approval or is being marketed in the United States for coronary artery bypass
surgery, but we believe a significant market opportunity for such grafts exists.
The major reason for the unavailability of a synthetic graft for this indication
has been that synthetic grafts configured in small diameters (less than five
millimeters) necessary for this indication generally do not remain patent.
THORATEC VASCULAR GRAFT PRODUCTS
We are developing small diameter vascular graft products intended initially
to address the vascular access and coronary artery bypass surgery markets. Both
products utilize our proprietary Thoralon biomaterial, and are protected by
several patents covering Thoralon as well as the graft design and manufacturing
processes. We believe that our vascular grafts are highly compliant, have
excellent handling and suturing properties and have the "feel" of a natural
blood vessel. Our manufacturing process creates a structure in which the three
different layers in the graft wall have different properties, which make the
graft closely resemble natural blood vessels. The inner textured layer is
designed for contact with blood and provides improved resistance to blood clots.
The solid middle layer gives the graft its strength and self-sealing properties.
The outer textured layer is designed to promote tissue ingrowth to promote graft
stability.
VECTRA VASCULAR ACCESS GRAFT
Other currently available vascular access grafts are commonly made out of
ePTFE, which can lose integrity after repeated punctures and render the patient
susceptible to bleeding and infection. The Vectra is designed for use as a shunt
between an artery and a vein, primarily to provide access to the bloodstream for
renal hemodialysis patients requiring frequent needle punctures during
treatment. We believe that the Vectra may provide significant advantages over
existing synthetic vascular access grafts that may encourage its use by surgeons
who are currently using natural vessels for vascular access. The Vectra received
marketing approval from the Canadian Ministry of Health in March 1996, from the
Japanese Ministry of Health in May 1997, and authority to CE Mark the product in
January 1998. In the second quarter of 2000, we submitted a 510(k) premarket
notification to the FDA and we received FDA clearance to market and sell the
Vectra in the United States in December 2000.
Based upon data obtained in clinical trials we believe that the Vectra
offers the following advantages:
- reduced inflammatory response after implantation;
- the ability to begin hemodialysis as soon as 24 hours after implantation,
as opposed to several weeks for ePTFE grafts;
- reduced bleeding complications during routine use because of the Vectra's
self-sealing properties; and
- improved handling and suturability.
The Vectra vascular access graft was approved for distribution in the
United States in December 2000. Clinical trial data involving 142 patients
submitted to the FDA showed that the Vectra grafts were allowed cannulation for
dialysis as early as 24-hours, with a significantly shorter time to hemostasis
as compared to ePTFE grafts. The Vectra grafts also had comparable patency rates
to the ePTFE control. These results were presented for the first time at the
Southern Association for Vascular Surgery in January 2001 and the manuscript is
being reviewed for publication in the prestigious Journal of Vascular Surgery.
In January 1999, we entered into a distribution agreement with Guidant
Corporation. Under the terms of this agreement, Guidant receives exclusive
worldwide marketing and distribution rights to the Thoratec Vectra product line,
except in Japan. In exchange for these rights, Guidant paid us $1.5 million at
the time the agreement was signed and paid us an additional $2.0 million when
the Vectra product line received FDA approval for use in the United States in
December 2000.
12
ARIA CORONARY ARTERY BYPASS GRAFT
We have developed from our proprietary Thoralon biomaterials a small
diameter graft for use in coronary artery bypass surgery patients who have no
suitable vessels of their own. A total of 27 patients in Canada and Germany
received our Aria coronary artery bypass grafts, ranging in internal size from
2.0 to 3.5 millimeters. All patients were extremely ill at the time of surgery,
and the grafts were implanted on a compassionate use basis (i.e., the patients
were found to have no other viable therapeutic options). All 22 surviving
patients were asymptomatic at follow-up points ranging from 2.5 to 5 years after
surgery. Of the five patients who did not survive, none is known to have died
from causes related to the graft. We need long-term test results from a
controlled clinical trial on a much larger patient population before we can
demonstrate the capabilities of this graft.
The potential for improved long-term patency in small diameter grafts is
the most unique aspect of the Aria. We believe that to date no other suitable
small diameter graft has been developed which will remain patent over long
periods of time when used in this critical application.
Thoratec received the FDA approval for a Phase I IDE study of the Aria
graft in May 2000. This study is designed to evaluate the Aria graft in patients
with inadequate autologous vessels to complete revascularization. Phase I study
will enroll up to 30 patients at six institutions. The first patient was
enrolled in July 2000 and as of February 2001, 14 patients have received the
Aria graft. After at least 20 patients have reached the two month follow-up
period, Thoratec will submit a summary of the clinical findings to the FDA and
request approval to begin the pivotal Phase II study involving an additional 120
patients and nine institutions. This submission is expected to occur sometime in
the middle of 2001.
OTHER POTENTIAL APPLICATIONS OF OUR TECHNOLOGIES
In addition to the Vectra and Aria, our graft products and biomaterial
technologies may potentially be used in other applications such as peripheral
vascular grafts for patients who require restoration of circulation to their
arms or legs due to blockages caused by certain disease processes. They may also
be used as a patch material in cardiovascular or peripheral vascular repair
procedures. While we are not currently pursuing development of these
applications, we have completed sufficient early stage preclinical work in the
graft area to believe our graft products could be developed for these
applications. Guidant has a right to negotiate for these applications for a
short period if we decide to develop them during the term of the Vectra
distribution agreement.
THORATEC BIOMATERIALS -- THORALON
We have developed a proprietary biomaterials technology that is used in the
Thoratec VAD System and graft products and licensed to other health care
manufacturers.
Our Thoralon biomaterials technology is critical to the successful
performance of the Thoratec VAD system and graft products that come into contact
with human blood or tissue. These products and some of those under development
incorporate these proprietary biomaterials, which are designed to minimize blood
clotting and inflammatory response. In addition, these products must maintain
their strength and flexibility. A VAD System blood pump, for instance, must
contract and expand approximately 40 million times per year without a decrease
in performance or failure. The two major components of Thoralon are surface
modifying additives ("SMAs") and BPS-215 polyurethaneurea ("BPS-215"), a high
flex-life elastomer.
SMAs are proprietary multipolymers designed to enhance the biocompatibility
of the surface of a device that comes into contact with blood or other tissues.
SMAs are added to the base polymer component of the biomaterial in the bulk
fabrication stage. A unique property of SMAs is their ability to concentrate at
the surface of any finished part, thus determining its surface properties
independent of the base polymer. This SMA-based surface layer is not a coating
but a fully integrated part of the polymer, which is not soluble in water or
blood. The result is a biocompatible, thromboresistant surface. BPS-215 is the
base component that provides the bulk properties of strength and flexibility to
Thoralon. The combination of bulk and surface
13
properties provided by SMAs and BPS-215 provides Thoralon with the critical
properties necessary for implantable cardiovascular and other medical devices.
In 1992, we granted COBE a royalty-bearing license and sublicense to use
Thoratec's SMAs in certain COBE medical devices. In 1999, this license was
divided into two separate licenses. One is retained by COBE Laboratories, now
called Gambro, Inc., one of our major shareholders, and the other was granted to
Sorin COBE Cardiovascular when that division of Gambro was sold to Sorin.
CARDIOSYSTEMS' OTHER MEDICAL EQUIPMENT
Cardiosystems, through its subsidiary International Technidyne,
manufactures and supplies whole-blood coagulation testing equipment and related
disposables, as well as premium-quality, single use, skin incision devices.
WHOLE-BLOOD COAGULATION TESTING EQUIPMENT. The HEMOCHRON and HEMOCHRON Jr.
Signature product lines offer whole-blood coagulation systems for bedside
anticoagulation management, coagulation screening, and transfusion management.
Each analyzes small blood samples, then processes and quickly displays
comprehensive patient homeostasis information. Blood management of this type is
essential for cardiopulmonary bypass surgery and angioplasty. HEMOCHRON models
are designed for use in a clinical setting at the patient's bedside. They are
lightweight, battery-operated, portable, and some provide data-management
features.
THE PROTIME MICROCOAGULATION SYSTEM. This system is designed to allow
testing for patients who take the blood-thinning drug Warfarin (Coumadin). The
system consists of a hand-held instrument, a five-channel cuvette, and a finger
incision device. These tests are performed in a doctor's office, clinic, or by
the patients themselves. This instrument was the first such device approved by
the Federal government for home use.
SKIN INCISION DEVICES. International Technidyne manufactures a family of
single-use skin incision devices for drawing blood from adults, children, and
infants. Each employs a patented skin incision technology to provide a
standardized surgical incision. International Technidyne's line of Surgicutt
products are used to perform bleeding time tests on adults, children, and
newborns. The Tenderlett finger incision products for blood sampling are
available in models suitable for adults, children, and infants and toddlers.
Tenderfoot is a heel incision device that is designed specifically for toddlers,
infants, and premature infants. These devices feature a permanently retractable
blade to ensure safety for the patient and healthcare worker.
14
SUMMARY OF EXISTING PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The table below summarizes our existing products and products under
development.
-------------------------------------------------------------------------------------------------------
CIRCULATORY SUPPORT MARKETING
PRODUCTS INDICATIONS STATUS
-------------------------------------------------------------------------------------------------------
Thoratec VAD System, which - Bridge to transplant - Currently marketed in the
consists of a single-use blood United States and internationally
pump and cannulae, and a - Recovery after heart surgery for bridge to transplant and
multi-use drive console which recovery of the heart after
pneumatically activates the - Therapeutic recovery as an heart surgery.
blood pump alternative to heart
transplantation - PMA Supplement filed with the
FDA in December 2000; Comments
have been received from the FDA
and are being evaluated.
TLC-II Portable VAD Driver, - Designed to improve patient - Currently marketed
which is a battery or line mobility and facilitate internationally; PMA Supplement
operated pneumatic mobile drive hospital discharge. submitted September 2000 for
unit weighing approximately 20 hospital use; IDE approved for
pounds use outside hospital.
IVAD, an implantable VAD - Designed to support longer term - Conditional approval of IDE
weighing less than one pound bridge to transplant and received from FDA in February
recovery patients. 2001.
MVAD, implantable Muscle Driven - Alternative to heart transplant - Very early stages of laboratory
Support Device testing
Air-Driven HeartMate LVAS - Bridge to transplant - Currently marketed in the
United States and in European
countries for bridge to
transplant.
Electric Driven HeartMate LVAS - Bridge to transplant - Currently marketed in the U.S.
and Europe.
- Discharge from hospital
- REMATCH clinical study in US
- Alternative to medical therapy for use as an alternative to
medical therapy; expected to
- Alternative to transplant complete enrollment in mid-2001.
HeartMate II - Designed to be the smallest of - Clinical trials to start in
the VAD family of products for Europe in first half of 2001.
longer-term bridge to
transplants patients.
HeartMate III - Designed to be longer-term - Currently being evaluated in
product for all uses ongoing animal trials.
incorporating state-of-the-art
magnetic technology.
-------------------------------------------------------------------------------------------------------
15
-------------------------------------------------------------------------------------------------------
VASCULAR GRAFT MARKETING
PRODUCTS INDICATIONS STATUS
-------------------------------------------------------------------------------------------------------
Vectra, small diameter graft for - ESRD patients needing - Currently marketed through
patients needing hemodialysis hemodialysis distributors in the United
States and internationally;
510(k) approval received
December 2000.
Aria, small diameter graft for - CABG patients needing vessels - U.S. clinical trials underway;
patients with blocked arteries for revascularization IDE for Phase I approved May
and inadequate vessels of their 2000. Expanded to six sites
own July 2000.
-------------------------------------------------------------------------------------------------------
OTHER MEDICAL MARKETING
EQUIPMENT INDICATIONS/DESCRIPTION STATUS
-------------------------------------------------------------------------------------------------------
HEMOCHRON(R) - Assessment of coagulation - All instruments approved and
coagulation testing equipment (hemostasis) status in cardio- available worldwide.
pulmonary bypass surgery
- Catheterization procedures
- Critical care
- Intensive care
- Step-down units
- Dialysis
ProTime microcoagulation - Prothrombin time assessment for - Available worldwide.
patients on Coumadin (warfarin)
therapy for home and clinic use
Skin Incision Devices - All instruments approved and
available worldwide.
- Surgicutt - Bleeding time assessment
- Tenderlett - Finger stick incision for blood
collection
- Tenderfoot - Heel stick incision for infants
and toddlers blood collection
-------------------------------------------------------------------------------------------------------
SALES AND MARKETING
Following the merger with Cardiosystems we will operate in two business
segments with different products. One segment contains circulatory support and
graft products with the other segment containing coagulation, testing, and skin
incision products.
CIRCULATORY SUPPORT PRODUCTS
The potential customers for our circulatory support products are hospitals
that perform open heart surgery procedures and heart transplants. Based upon
published sources, we estimate that 140 of the approximately 900 hospitals in
the United States that perform open-heart surgery also perform heart
transplants. We are initially targeting these 140 heart transplant hospitals and
the largest of the remaining 900 hospitals plus an additional 110 heart
transplant hospitals in Europe.
We have recruited and trained a direct sales force that, as of March 2001,
was comprised of 20 experienced cardiovascular sales specialists to sell the
Thoratec VAD System and HeartMate LVAS products in the United States, Canada,
France, Germany, Spain, United Kingdom, Austria, Switzerland, Netherlands,
Portugal and South Africa.
The sales effort is complemented by eleven direct clinical specialists that
conduct clinical educational seminars, assist with a new open heart center's
first VAD implant and resolve clinical questions or issues. We also partner with
universities, experienced clinicians and opinion leaders to assist with
expanding clinical educational needs. The sales team focuses on cardiac surgeons
that perform heart transplantation and transplant cardiologists, perfusionists
and the transplant nursing staff. In addition to our direct selling effort,
16
we have established a network of international distributors that cover those
markets that represent the majority of ventricular assist device potential. We
employ sales and marketing tactics commonly found within the cardiovascular
capital equipment device market such as direct mail, clinical education
seminars, symposia, equipment purchase and lease programs, and journal
advertisement. We have also assembled a Medical Advisory Board consisting of
opinion leaders who provide clinical input and direction on product development,
marketing and market issues.
Hospitals or other medical institutions that acquire the VAD System or the
HeartMate LVAS generally purchase VAD pumps, related disposables and training
and purchase or rent two of the associated pump drivers (to ensure that a backup
driver is available). The time from the initial contact with the cardiac surgeon
until purchase is generally between nine and eighteen months, due to the expense
of the product and common hospital capital equipment acquisition procedures.
Upon receipt of a purchase order, we will usually ship the products within
thirty days.
The introduction of a new system requires training of the appropriate
personnel. We provide initial training for the surgical and clinical support
teams when a center purchases and takes delivery of one of our VAD products. As
a follow-up to the initial training, we provide clinical support at the first
implant whenever possible. We also provide 24-hour access to clinically trained
personnel. Our sales force also assists customers with obtaining reimbursement
from third-party payors.
VASCULAR GRAFT PRODUCTS
We intend to market the Vectra through our distributor in Japan and through
Guidant in the rest of the world, and to market the Aria CABG device through a
direct sales force in the United States and Europe and potentially through
distributors in other international markets.
We envision the market positioning of the Vectra as one that replaces an
existing product used in an accepted procedure, and at a comparable or premium
price. We plan to commission additional studies comparing our products to ePTFE
grafts. We believe the Vectra will have significant advantages over these
existing products and will therefore offer significant benefits to users and
patients, without the need for additional clinical training. We also believe the
demand for prosthetic VAGs will continue to grow. The worldwide hemodialysis
patient population continues to grow and is older and living longer, increasing
the requirement for multiple access procedures over many years. Additionally,
this population is increasingly made up of sicker patients, such as diabetics,
who have exhausted the number of sites available for A/V fistula creation,
thereby necessitating the need for a prosthetic VAG.
We intend to initially position the Aria CABG device as a preferable
clinical option for patients who lack suitable native vessels. We believe that
more clinician education will be required for the Aria CABG device in terms of
patient indications, product use, and product capabilities. We may accomplish
this education by sponsoring educational programs, video educational tools, and
scientific lecture programs. We also anticipate that we will need a larger
domestic sales force structure to effectively market the Aria CABG device.
BLOOD COAGULATION, TESTING, AND SKIN INCISION DEVICES
International Technidyne maintains a direct sales staff of 31 in the United
States, selling to hospitals as well as to third party dealers/distributors.
Outside of the United States, International Technidyne has two sales people
selling principally to third party dealers.
MANUFACTURING
We manufacture our Thoratec VAD System and graft products at our 62,000
square foot leased facility in Pleasanton, California. This facility was
inspected by the FDA under cGMP regulation prior to entering into production and
has received the International Standards Organization (ISO) 9001 certification.
Our manufacturing processes for the VAD System consist of the assembly of
standard and custom component parts, including blood-contacting components
fabricated from our proprietary biomaterials, and the testing of completed
products. We rely on single sources of supply for several components of the
17
VAD System. We are aware of alternative suppliers for all single-sourced items
other than the mechanical valves. In October 1997, we executed a four-year
supply agreement with Arrow International Inc. for the mechanical valves for the
VAD System.
Cardiosystems' products are manufactured at facilities that we believe are
in good condition and are adequate for present operations. We also believe that
suitable alternative space is readily available if any leases are not extended.
The Cardiosystems' properties by industry segment as of December 30, 2000, are
as follows:
- HeartMate devices are manufactured at a 34,000 square foot sub-leased
facility in Woburn, Massachusetts.
- Blood coagulation, testing, and skin incision devices are manufactured at
a 66,000 square feet owned facility and a 24,000 square foot leased
facility in Edison, New Jersey.
PATENTS AND PROPRIETARY RIGHTS
We seek to patent certain aspects of our technology. We hold, or have
exclusive rights to, several U.S. patents. Except for the biomaterials patents
mentioned below, which are utilized in the Thoratec VAD blood pump and cannulae,
the VAD System is not protected by any patents other than one patent pertaining
to the TLC-II. We do not believe that this lack of patent protection will have a
material adverse effect on our ability to sell the VAD System because of the
lengthy regulatory period required to obtain approval of a ventricular assist
device. We are not aware of any ventricular assist devices that are based on our
product design currently approved by the FDA or undergoing clinical trials.
Several patents cover our proprietary biomaterials technology, some of these
were sold to The Goldschmidt AG ("Goldschmidt"), a German chemical manufacturer,
in 1989, but we have retained worldwide, royalty-free, exclusive rights to these
patents for most medical applications. Our vascular graft products are covered
by manufacturing process patents.
We and our subsidiaries hold, or have exclusive rights to, several
international patents, including several biomaterial patents licensed from
Goldschmidt. Thermedics has granted Cardiosystems a royalty-free license to use
the Dermaport(R) access device and Tecoflex(R) biomaterial in its LVAS.
The validity of any of our patents may be challenged by others, and we
could encounter legal and financial difficulties in enforcing our patent rights
against alleged infringes. In addition, others could develop technologies or
obtain patents which would render our patents obsolete. Although we do not
believe patents are the sole determinant in the commercial success of our
products, the loss of a significant percentage of our patents or the patents
relating to our graft products could have a material adverse effect on our
business.
We have developed technical knowledge, which although non-patentable, we
consider to be significant in enabling us to compete. However, the proprietary
nature of such knowledge may be difficult to protect. We have entered into an
agreement with each key employee prohibiting such employee from disclosing any
confidential information or trade secrets. In addition, these agreements provide
that any inventions or discoveries relating to our business by these individuals
will be assigned to us and become our sole property.
Claims by competitors and other third parties that our products allegedly
infringe the patent rights of others could have a material adverse effect on our
business. The medical device industry is characterized by frequent and
substantial intellectual property litigation. The cardiovascular device market
is characterized by extensive patent and other intellectual property claims.
Intellectual property litigation is complex and expensive and the outcome of
this litigation is difficult to predict. Any future litigation, regardless of
outcome, could result in substantial expense and significant diversion of the
efforts of our technical and management personnel. An adverse determination in
any such proceeding could subject us to significant liabilities or require us to
seek licenses from third parties or pay royalties that may be substantial.
Furthermore, we cannot assure you that necessary licenses would be available on
satisfactory terms, or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent us from manufacturing or selling certain of our products, any of
which could have a material adverse effect on our business.
18
Cardiosystems has received correspondence from a third party alleging that
the textured surface of the HeartMate LVAS housing infringes certain patent
rights of such third party. In general, an owner of intellectual property can
prevent others from using such property without a license and is entitled to
damages for unauthorized usage. We have investigated the bases of the allegation
and, based upon an evaluation of all of the facts and circumstances, we believe
that if sued on these bases, we would have meritorious defenses. Given the
inherent uncertainties in dispute resolution, however, if we were sued and the
outcome was unfavorable, our results of operations or financial condition could
be materially adversely affected in amounts that cannot be reasonably estimated.
In August 1998, Cardiosystems obtained an exclusive license to incorporate
technology developed by Sulzer Electronics Ltd. into an advanced version of the
HeartMate LVAS, HeartMate III. HeartMate III is a miniature centrifugal pump
featuring a magnetically controlled system that has been developed by
Levitronix. In December 2000, Cardiosystems was informed by Sulzer Electronics
that Sulzer had sold all of their business in the bearingless motor and magnetic
bearing fields to Levitronix and had assigned the agreements between Sulzer and
Cardiosystems to Levitronix.
COMPETITION
Principal competitors of the VAD System and the HeartMate LVAS include:
- World Heart, which manufactures and markets the Novacor implantable left
ventricular assist device approved only for bridge to heart transplant in
the United States; and
- ABIOMED, Inc., which manufactures and markets an FDA-cleared
biventricular assist device for temporary circulatory support of patients
in post heart surgery shock and other recovery indications.
We believe that the principal competitive factors in the ventricular assist
device market (circulatory support) are patient outcomes, product performance,
size and portability, quality, cost-effectiveness, and customer service. We
believe that our principal competitive advantages are:
- we can provide left, right or biventricular support;
- we can provide short-term or long-term circulatory support;
- we can provide implantable or paracorporeal VAD placement;
- we can provide support in the hospital or in the home;
- we can provide support to a greater range of patients because the smaller
size and placement of the paracorporeal system outside the body;
- the greater range of cannulation options available; and
- the quality of our biomaterials.
Although we believe that these attributes of the VAD System and/or the
HeartMate LVAS offer certain advantages over existing ventricular assist
devices, we expect our current competitors to defend their market positions
vigorously.
Our principal competitors in the vascular access graft market are W.L.
Gore, Inc., C.R. Bard, Boston Scientific/Vascular, and Baxter Corporation, who
manufacture and market ePTFE grafts worldwide. Smaller competitors include
CardioTech International, Inc., which manufactures and markets a polyurethane
graft that is available for sale outside of the United States. Finally, Possis
Medical, Inc. manufactures a self-sealing silicone rubber graft marketed with
limited indications in the U.S. through Horizon Medical Products, Inc.
International Technidyne's principal competitor for the HEMOCHRON
coagulation monitoring instruments, used in the operating room and in cardiac
catheterization, is the HemoTec division of Medtronic. The Roche Group competes
with the ProTime with a blood coagulation monitor that is marketed to clinics
and also is used for patient self-testing. There are also several new
competitors that have recently entered the blood
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coagulation monitoring market. International Technidyne's products compete
primarily on the basis of reputation, utility, and price.
International Technidyne's skin incision devices compete with products
offered by a number of companies, including Organon Teknika; Becton, Dickinson
and Company; and Owen-Mumford. The skin incision devices compete primarily on
the basis of safety, quality, and reputation.
There are many companies focusing on the development of circulatory support
devices, vascular grafts, coagulation monitoring equipment or skin incision
equipment that have substantially greater financial resources, have
substantially larger and more experienced sales and marketing organizations and
engage in substantially greater research and development efforts than we do. One
or more of these or other companies could design and develop products that
compete directly with our products, in which case we would face intense
competition. Moreover, certain academic institutions, government agencies and
other research organizations are conducting research in areas in which we are
working. These institutions are becoming increasingly aware of the commercial
value of their findings and are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for use of technology
that they have developed. These institutions may also market competitive
commercial products on their own or through joint ventures and will compete with
us in recruiting highly qualified scientific personnel.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of our
current and future products and in our ongoing product research and development
activities. All of our proposed products will require regulatory approval prior
to commercialization. In particular, medical devices are subject to rigorous
preclinical testing as a condition of approval by the FDA and by similar
authorities in foreign countries.
U.S. REGULATIONS
In the United States, the FDA regulates the manufacture, distribution and
promotion of medical devices pursuant to the Federal Food, Drug, and Cosmetic
Act and the regulations promulgated thereunder (the "FDC Act and Regulations").
The VAD System, TLC-II, IVAD, HeartMate II, HeartMate VE, and Aria and Vectra
graft products are, or will be regulated as medical devices. To obtain FDA
approval to market medical devices similar to those under development, the FDA
requires proof of safety and efficacy in human clinical trials performed under
an IDE. An IDE application must contain pre-clinical test data demonstrating the
safety of the product for human investigational use, information on
manufacturing processes and procedures, and proposed clinical protocols. If the
IDE application is accepted, human clinical trials may begin. The trials must be
conducted in compliance with FDA regulations. The results obtained from these
trials, if satisfactory, are accumulated and submitted to the FDA in support of
either a PMA application or a 510(k) premarket notification. Premarket approval
from the FDA is required before commercial distribution of devices similar to
those under development by the Company is permitted in the United States.
The PMA application must be supported by extensive data, including
preclinical and human clinical data, to prove the safety and efficacy of the
device. By regulation, the FDA has 180 days to review a PMA application and
during that time an advisory committee may evaluate the application and provide
recommendations to the FDA. While the FDA has approved PMA applications within
the allotted time period, reviews more often occur over a significantly
protracted period, usually 18 to 36 months, and a number of devices have never
been cleared for marketing. This is a lengthy and expensive process and there
can be no assurance that such FDA approval will be obtained.
Under the FDA's requirements, if a manufacturer can establish that a newly
developed device is "substantially equivalent" to a legally marketed predicate
device, the manufacturer may seek marketing clearance from the FDA to market the
device by filing a 510(k) premarket notification with the FDA. This is the
process that is used to gain FDA market clearance for most of the International
Technidyne products including HEMOCHRON and ProTime. The 510(k) premarket
notification must be supported by data establishing the claim of substantial
equivalence to the satisfaction of the FDA. The process of obtaining a
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510(k) clearance typically can take several months to a year or longer. If
substantial equivalence cannot be established, or if the FDA determines that the
device requires a more rigorous review, the FDA will require that the
manufacturer submit a PMA application that must be approved by the FDA prior to
marketing the device in the United States.
Both a 510(k) and a PMA, if approved, may include significant limitations
on the indicated uses for which a product may be marketed. FDA enforcement
policy prohibits the promotion of approved medical devices for unapproved uses.
In addition, product approvals can be withdrawn for failure to comply with
regulatory requirements or the occurrence of unforeseen problems following
initial marketing.
The approval process for each of our products is expensive and time
consuming and we cannot assure you that any regulatory agency will grant its
approval. Our inability to obtain, or delays in obtaining, such approval would
adversely affect our ability to commence marketing therapeutic applications of
our products. We cannot assure you that we will have sufficient resources to
complete the required testing and regulatory review processes. Furthermore, we
are unable to predict the extent of adverse governmental regulation which might
arise from future U.S. or foreign legislative or administrative action.
In addition, any products distributed pursuant to the above authorizations
are subject to pervasive and continuing regulation by the FDA. Products must be
manufactured in registered establishments and must be manufactured in accordance
with cGMP regulations and adverse events must be reported to the FDA. Labeling
and promotional activities are subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. The failure to comply with the FDA's
regulations can result in enforcement action, including seizure, injunction,
prosecution, civil penalties, recall and suspension of FDA approval. The export
of devices is also subject to regulation in certain instances.
INTERNATIONAL REGULATIONS
We are also subject to regulation in each of the foreign countries in which
we sell products with regard to product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. Many of the regulations applicable to our products in such
countries are similar to those of the FDA. The national health or social
security organizations of certain countries require our products to be qualified
before they can be marketed in those countries.
In order to be positioned for access to European and other international
markets, we sought and obtained certification under the ISO 9000 Series of
Standards. ISO 9000 is a set of integrated requirements, which when implemented,
form the foundation and framework for an effective quality management system.
These standards were developed and published by the ISO, a worldwide federation
of national bodies, founded in Geneva, Switzerland in 1946. ISO has over 92
member countries. ISO certification is widely regarded as essential to enter
Western European markets. We obtained certification and were registered as an
ISO 9002 compliant company in January 1995. Commencing in mid-1998, all
companies are required to obtain CE Marks for medical devices sold or
distributed in the European Community. The CE Mark is an international symbol of
quality. With it, medical devices can be distributed within the European
Community, which is comprised of 15 European countries representing a population
of over 360 million people. A prerequisite for obtaining authority to CE Mark
products is to achieve full quality system certification in accordance with ISO
9001 and EN 46001. These are quality standards that cover design, production,
installation and servicing of medical devices. We have our ISO 9001 and EN 46001
certification and authority to CE Mark the VAD System, the TLC-II and the
Vectra. We are also certified to be in compliance with the requirements of the
European Medical Device Directive, another prerequisite for applying the CE
Mark.
OTHER REGULATIONS
We are also subject to various federal, state and local laws and
regulations relating to such matters as safe working conditions, laboratory and
manufacturing practices and the use, handling and disposal of hazardous or
potentially hazardous substances used in connection with our research and
development work. Specifically, the manufacture of our biomaterials is subject
to compliance with federal environmental regulations and by various state and
local agencies. Although we believe we are in compliance with these laws and
regulations in
21
all material respects, we cannot assure you that we will not be required to
incur significant costs to comply with environmental laws or regulations in the
future.
THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT
Our products are purchased primarily by hospitals and other users, which
then bill various third party payors for the services provided to the patients.
These payors, which include Medicare, Medicaid, private health insurance
companies and managed care organizations, reimburse part or all of the costs and
fees associated with the procedures performed with these devices.
Third party payors are increasingly challenging the prices charged for
medical products and services and may deny reimbursement if they determine that
a device was not used in accordance with cost-effective treatment methods as
determined by the payor, was experimental or was used for an unapproved
application. To date, some private insurers and Medicare and Medicaid have
determined to reimburse the costs of the Thoratec VAD System and the
Cardiosystems' LVAS system. Changes in reimbursement, policies and practices of
third party payors could have a material adverse impact on sales of our
products.
EMPLOYEES
As of December 30, 2000 Thoratec had 183 full-time employees and Thoratec
Cardiosystems had 494 employees. As of February 24, 2001, Thoratec Corporation
and Thoratec Cardiosystems combined had 654 full-time employees, 321 of whom
worked in manufacturing, 92 in engineering, 50 in quality control and regulatory
affairs, 116 in marketing and sales support, 34 in administration and finance,
and 41 in other support functions, including personnel, management information,
purchasing and facilities. None of our employees are covered by a collective
bargaining agreement. We consider relations with our employees to be good.
RESEARCH AND DEVELOPMENT
Thoratec's research and development expenses in 1998, 1999 and 2000 were
$5.1 million, $5.8 million and $7.2 million, respectively.
Cardiosystems' research and development expenses in 1998, 1999 and 2000
were $12.3 million, $16.0 million and $16.2 million, respectively.
FACILITIES
Thoratec occupies leased facilities in Pleasanton, California totaling
approximately 62,000 square feet. The manufacturing areas have been inspected,
approved, and licensed by the FDA and the State of California Department of
Health Services, Food and Drug Section for the manufacture of medical devices.
We also have small leased facilities in the United Kingdom. We believe our
facilities will be sufficient to meet our needs for the next two years and that
additional space will be available at a reasonable price to satisfy space needs
thereafter.
Cardiosystems believes that its facilities are in good condition and are
adequate for its present operations and that suitable alternative space is
readily available if any leases are not extended. The location and general
character of Cardiosystems' properties by industry segment as of December 30,
2000, are as follows:
- Left Ventricular Assist Devices -- Cardiosystems subleases approximately
34,000 square feet of space from Thermo Electron Corporation in Electron
in Woburn, Massachusetts, pursuant to a sublease expiring in 2004. It
also leases approximately 12,000 square feet of office and research
facilities in Chelmsford, Massachusetts, under a lease expiring in 2001.
In addition, Cardiosystems occupies approximately 11,000 square feet of
office and research facilities in Rancho Cordova, California, pursuant to
a lease expiring in 2002.
22
- Blood Coagulation, Testing, and Skin Incision Devices -- Cardiosystems
also owns approximately 66,000 square feet and leases approximately
24,000 square feet of office, manufacturing, and research facilities in
Edison, New Jersey, under a lease expiring in 2002.
LITIGATION
We are not party to any material legal proceedings.
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RISK FACTORS
We make statements in this Annual Report on Form 10-K and other statements
from time to time that relate to future plans, events or performance that are
forward-looking statements which involve risks and uncertainties. Actual
results, events or performance may differ materially from those anticipated in
any forward-looking statements as a result of a variety of factors, including
those set forth below and elsewhere in this Annual Report on Form 10-K. You
should consider each of the risks and uncertainties described in this section
and all of the other information in this Annual Report on Form 10-K in
evaluating our company and our business before deciding to invest in our common
stock.
WE HAVE A HISTORY OF NET LOSSES, AND WE MAY NOT ACHIEVE OR MAINTAIN
PROFITABILITY.
We were founded in 1976 and have incurred a loss from operations in all but
one of the years of our existence. At the end of fiscal year 2000, our
accumulated deficit was approximately $56.9 million. Cardiosystems had also
accumulated a significant deficit at that time. While the combined company is
expected to be cash flow positive, we anticipate that our expenses will increase
as a result of increased preclinical and clinical testing, research and
development and selling, general and administrative expenses. Additionally, we
will incur significant costs in connection with the merger.
PHYSICIANS MAY NOT ACCEPT OR CONTINUE TO ACCEPT OUR PRODUCTS AND PRODUCTS UNDER
DEVELOPMENT.
A limited number of cardiovascular and vascular surgeons and interventional
cardiologists influence medical device selection and purchase decisions for a
large portion of the target cardiac patient population. In addition, physicians'
acceptance of our whole-blood coagulation monitoring systems and Coumadin
monitors is important to the success of those products. Accordingly, the success
of our current and future products will require acceptance or continued
acceptance by cardiovascular and vascular surgeons and interventional
cardiologists. Such acceptance will depend on clinical results and the
conclusion by these physicians that our products are safe, cost-effective and
acceptable alternative methods of treatment. Our products may not provide
benefits considered adequate by providers of cardiovascular and vascular
treatments or a sufficient number of such providers may not use our products.
Even if the safety and efficacy of our products are established, physicians may
elect not to use them for a number of reasons. These reasons could include the
high cost of equipment and training associated with their use or unfavorable
reimbursement from health care payors.
We have developed working relationships with cardiac surgeons and
cardiologists at a number of leading medical centers in connection with
developing our products. In addition, surgical teams at these medical
institutions have performed clinical trials to support our applications to be
filed with the FDA. A continuing working relationship with these and other
physicians and medical centers will be important to the commercial acceptance of
present and any future products. We may fail to maintain existing relationships
and arrangements and we may fail to establish new relationships in support of
our circulatory support and graft technology. Also, economic, psychological,
ethical and other concerns may limit general acceptance of ventricular assist
and graft devices.
WE RELY ON SPECIALIZED SUPPLIERS.
We depend on a number of custom-designed components and materials supplied
by other companies including, in some cases, single source suppliers. If we need
alternative sources for key raw materials or component parts for any reason,
such materials or component parts may not be available. For example, Arrow
International, Inc. is currently the single source of supply for valves used in
the blood pump portion of our VAD System. Sales of the VAD System accounted for
substantially all of our revenue in 1998, 1999, and 2000. Cessation or
interruption of sales of ventricular assist products would have a material
adverse effect on our business, financial condition and results of operations.
Alternative suppliers may not agree to supply us. In addition, we may need
to obtain FDA approval before using new suppliers. The cost to evaluate and test
alternative materials and components and the time necessary to obtain FDA
approval for these materials and components are inherently difficult to
determine
24
because both time and cost are dependent on at least two factors, the similarity
of the alternative material or component to the original material or component,
and the amount of third-party testing that may have already been completed on
alternative materials or components. If alternative suppliers are not available,
we may not have the expertise or resources necessary to produce such materials
or component parts internally. Any interruption in supply of raw materials or
component parts could have a material adverse effect on our ability to
manufacture products until a new source of supply is located.
WE MAY ENCOUNTER PROBLEMS MANUFACTURING OUR PRODUCTS.
We may encounter difficulties manufacturing our products for the following
reasons:
- we do not have experience in manufacturing our products in the commercial
quantities that might be required if we receive FDA approval of several
or all of the products currently under development;
- the manufacture of our products is complex and costly, involving a number
of separate processes and components; and
- certain manufacturing processes for our products are labor intensive, and
achieving significant cost reductions will depend in part upon reducing
the time required to complete these processes.
In addition, manufacturers often encounter difficulties in scaling up
manufacturing of new products. These difficulties include, for example:
- problems involving product yields, quality control and assurance;
- component and service availability;
- adequacy of control policies and procedures; and
- lack of qualified personnel.
We will continue to consider whether we should internally manufacture
components that are currently provided by third parties. We will also continue
to consider the implementation of new production processes, some of which may
require prior FDA approval. We may not be able to obtain or manufacture such
products in a timely fashion at acceptable quality and prices. In addition, we
may not be able to comply with the FDA's current good manufacturing practices,
also called cGMP. Our suppliers and we may not be able to manufacture an
adequate supply of products.
INTENSE COMPETITION COULD HARM OUR FINANCIAL PERFORMANCE.
Competition from medical device companies and medical device subsidiaries
of health care and pharmaceutical companies is intense and expected to increase.
Many of our competitors have substantially greater financial, technical,
distribution and marketing resources than we do. In addition, many of these
competitors have significantly greater experience than we do in obtaining
regulatory approvals for medical devices. Accordingly, our competitors may
succeed in obtaining regulatory approval for products more rapidly than we can.
Furthermore, many of these competitors have superior manufacturing capabilities,
and such competitors may be able to manufacture products more efficiently and at
a lower cost than we can. Our competitors may therefore offer competitive
products at a lower cost than our products. Any product we develop that gains
regulatory approval will have to compete for market acceptance and market share.
An important factor in such competition may be the timing of market introduction
of competitive products. Accordingly, we expect that competitive factors will
include the relative speeds with which we can:
- develop products;
- complete clinical testing;
- receive regulatory approval; and
- manufacture and sell commercial quantities of products.
25
OUR COMPETITORS MAY DEVELOP MORE EFFECTIVE PRODUCTS AND RENDER OUR PRODUCTS
OBSOLETE.
Our competitors may succeed in developing and marketing technologies and
products that are more effective than ours. Any such products may render our
technology and products obsolete or noncompetitive. In addition, new surgical
procedures and medications could be developed that replace or reduce the
importance of current procedures that use our products. Accordingly, our success
will depend in part on our ability to respond quickly to medical and
technological changes by developing and introducing new products, or modifying
existing products.
IF WE FAIL TO OBTAIN APPROVAL FROM THE FDA AND FROM FOREIGN REGULATORY
AUTHORITIES, WE CANNOT MARKET AND SELL OUR PRODUCTS UNDER DEVELOPMENT IN THE
UNITED STATES AND IN OTHER COUNTRIES.
Before we can market new products in the United States we must obtain
clearance from the FDA. This process is lengthy and uncertain. In the United
States, one must obtain clearance from the FDA of a 510(k) premarket
notification or approval of a more extensive submission known as a premarket
approval (PMA) application. If the FDA concludes that any of our products do not
meet the requirements to obtain clearance under Section 510(k) of the Federal
Food, Drug and Cosmetic Act, then we would be required to file a PMA
application. The process for a PMA application is lengthy, expensive and
typically requires extensive preclinical and clinical trial data. Preclinical
data may need to comply with FDA good laboratory practices.
We may not obtain clearance of a 510(k) notification or approval of a PMA
application with respect to any of our products on a timely basis, if at all. If
we fail to obtain timely clearance or approval for our products, we will not be
able to market and sell our products. That will limit our ability to generate
revenue. We may also be required to obtain clearance of a 510(k) notification or
PMA application from the FDA before we can market products that have been
cleared that we have now modified or for which we wish to make new claims.
The FDA also requires us to adhere to cGMP regulations, which include
production design controls, testing, quality control, storage and documentation
procedures. The FDA may at any time inspect our facilities to determine whether
we have adequately complied. Compliance with cGMP regulations for medical
devices is difficult and costly. In addition, we may not be found to be
compliant as a result of future changes in, or interpretations of, regulations
by the FDA or other regulatory agencies. If we do not achieve compliance, the
FDA may withdraw marketing clearance, require product recall or take other
enforcement action. Any change or modification in a device is required to be
made in compliance with cGMP regulations, which may cause interruptions or
delays in the marketing and sale of our products.
Sales of our products outside the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain approvals from foreign countries may be longer or shorter than that
required for FDA approval, and requirements for foreign licensing may differ
from FDA requirements.
The federal, state and foreign laws and regulations regarding the
manufacture and sale of our products are subject to future changes, as are
administrative interpretations and policies of regulatory agencies. If we fail
to comply with applicable federal, state or foreign laws or regulations, we
could be subject to enforcement actions. Enforcement actions could include
product seizures, recalls, withdrawal of clearances or approvals, and civil and
criminal penalties.
OUR INABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGIES COULD HARM OUR COMPETITIVE
POSITION.
Our success will depend, in part, on our ability to maintain the
proprietary nature of our technology, products and manufacturing processes. We
rely on trade secrets, know-how and patents to maintain our competitive
position. We have been issued or have licensed a number of U.S. and foreign
patents covering our core biomaterials technology and our graft technologies. In
addition, we have filed many other U.S. and non-U.S. patent applications. Aside
from the biomaterials patents mentioned above, which are utilized in Thoratec's
VAD System blood pump and cannulae, and one TLC-II patent, our VAD System is not
protected by any patents. Cardiosystems relies principally on trade secret
protection and, to a lesser extent, patents to
26
protect its rights with respect to LVAS and its reagents. It does, however, rely
principally on patents to protect its coagulation equipment and skin-incision
products.
Any existing or future patent applications may not result in issued
patents. In addition, current or future trade secrets, know-how or issued or
licensed patents may not sufficiently protect us from competitors with similar
technologies or processes. Others may independently develop proprietary
technologies and processes that are the same as or substantially equivalent to
ours. Any patents issued may be infringed upon or designed around by others.
Our products may be found to infringe prior or future patents owned by
others. We may need to acquire licenses under patents belonging to others for
technology potentially useful or necessary, and such licenses may not be
available to us. We could incur substantial costs in defending suits brought
against us on such patents or in bringing suits to protect our patents or
patents licensed by us against infringement.
Cardiosystems has received correspondence from another company alleging
that Cardiosystems LVAS infringes certain patent rights of that company.
Cardiosystems believes it has meritorious defense to that claim but cannot
assure that it would be successful were the matter litigated.
SINCE WE DEPEND UPON DISTRIBUTORS, IF WE LOSE A DISTRIBUTOR OR A DISTRIBUTOR
FAILS TO PERFORM, OUR OPERATION WOULD BE HARMED.
With the exception of Canada and Europe, Thoratec sells its VAD System in
foreign markets through distributors. In addition, we sell our vascular access
graft products through Goodman Co. Ltd., our distributor in Japan, and through
Guidant Corporation in the rest of the world. Cardiosystems sells it LVAS System
in foreign markets through distributors, and relies on distributors in all
markets. Allied Healthcare is International Technidyne's U.S. distributor.
Allied Healthcare's sales represented approximately 20% of Cardiosystems'
consolidated revenues during the first nine months of 2000. To the extent we
rely on distributors, our success will depend upon the efforts of others, over
which we may have little control. If we lose a distributor or a distributor
fails to perform, our revenues will be adversely affected.
SINCE WE DEPEND ON THIRD PARTY REIMBURSEMENT TO OUR CUSTOMERS, IF THIRD PARTY
PAYORS FAIL TO PROVIDE APPROPRIATE LEVELS OF REIMBURSEMENT FOR OUR PRODUCTS, OUR
OPERATION WOULD BE HARMED.
Significant uncertainty exists as to the reimbursement status of
newly-approved health care products such as Thoratec's VAD System and its
vascular grafts and Cardiosystems' LVAS system. Government and other third party
payors are increasingly attempting to contain health care costs. Payors are
attempting to contain costs by, for example, limiting coverage and the level of
reimbursement of new therapeutic products. Payors are also attempting to contain
costs by refusing in some cases to provide any coverage of uses of approved
products for disease indications other than those for which the FDA has granted
marketing approval.
To date, some private insurers, Medicare and Medicaid have determined to
reimburse the costs of Thoratec VAD System and Cardiosystems' LVAS systems.
These Systems may not continue to be approved for reimbursement. In addition,
changes in the health care system may affect the reimbursability of future
products. If we fail to obtain such reimbursement or if the reimbursement levels
are reduced, our revenues would be reduced.
PRODUCT LIABILITY CLAIMS COULD DAMAGE OUR REPUTATION AND HURT OUR FINANCIAL
RESULTS.
Our business exposes us to an inherent risk of potential product liability
claims related to the manufacturing, marketing and sale of human medical
devices. We maintain only a limited amount of product liability insurance. We
also maintain general commercial and property insurance. Our insurance policies
generally must be renewed on an annual basis. We may not be able to maintain or
increase such insurance on acceptable terms or at reasonable costs, and such
insurance may not provide us with adequate coverage against potential
liabilities. A successful claim brought against us in excess of, or outside of,
our insurance coverage could have a material adverse effect on our financial
condition and results of operations. Claims against us,
27
regardless of their merit or potential outcome, may also reduce our ability to
obtain physician endorsement of our products or expand our business.
OUR NON-U.S. SALES PRESENT SPECIAL RISKS.
During 2000, sales originating outside the United States and U.S. export
sales accounted for approximately 18% of Thoratec's total revenues and 16% of
Cardiosystems' total revenues. Cardiosystems and Thoratec anticipate that sales
outside the United States and U.S. export sales will continue to account for a
significant percentage of their revenues. Both companies hope to continue to
expand their presence in international markets. Non-U.S. sales are subject to a
number of special risks. For example, agreements may be difficult to enforce and
receivables difficult to collect through a foreign country's legal system,
foreign customers may have longer payment cycles, foreign countries may impose
additional withholding taxes or otherwise tax Thoratec's or Cardiosystems'
foreign income, impose tariffs or adopt other restrictions on foreign trade,
U.S. export licenses may be difficult to obtain, intellectual property may be
more difficult to enforce in foreign countries, and fluctuations in exchange
rates may affect product demand and adversely affect the profitability, in U.S.
dollars, of products sold in foreign markets where payments are made in local
currencies.
ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF HAZARDOUS
CHEMICALS AND BIOMATERIALS COULD BE TIME CONSUMING AND COSTLY.
Producing our proprietary biomaterial, Thoralon, requires the use of
hazardous materials, including chemicals and biomaterials. We cannot eliminate
the risk of accidental contamination or discharge and any resultant injury from
these materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials.
We could be subject to civil damages in the event of an improper or
unauthorized release of, or exposure of individuals to, hazardous materials. In
addition, claimants may sue us for injury or contamination that results from our
use or the use by third parties of these materials, and our liability may exceed
our total assets. Compliance with environmental laws and regulations may be
expensive, and current or future environmental regulations may impair our
research, development or production efforts.
OUR STOCK PRICE HAS BEEN VOLATILE, IS LIKELY TO CONTINUE TO BE VOLATILE, AND
COULD DECLINE SUBSTANTIALLY.
The price of our common stock has been, and is likely to continue to be,
highly volatile. The price of our common stock could fluctuate significantly for
the following reasons:
- future announcements concerning us or our competitors;
- quarterly variations in operating results;
- introduction of new products or changes in product pricing policies by us
or our competitors;
- acquisition or loss of significant customers, distributors and suppliers;
- changes in earnings estimates by analysts;
- changes in third party reimbursement practices;
- regulatory developments; or
- fluctuations in the economy or general market conditions.
In addition, stock markets in general, and the market for shares of health
care stocks in particular, have experienced extreme price and volume
fluctuations in recent years which have frequently been unrelated to the
operating performance of the affected companies. These broad market fluctuations
may adversely affect the market price of our common stock. The market price of
our common stock could decline below its current price and the market price of
our stock may fluctuate significantly in the future. These fluctuations may be
unrelated to our performance.
In the past, shareholders have often instituted securities class action
litigation after periods of volatility in the market price of a company's
securities. If a shareholder files a securities class action suit against us, we
28
would incur substantial legal fees and our management's attention and resources
would be diverted from operating our business in order to respond to the
litigation.
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
Future sales of substantial amounts of Thoratec's stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of Thoratec's stock. For example, Thermo Electron owns
approximately 19 million shares and twenty-five percent of those shares will be
eligible for sale starting in June 2001.
THE OCCURRENCE OF A CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR FACILITIES
AND EQUIPMENT, WHICH WOULD REQUIRE US TO CEASE OR CURTAIL OPERATIONS.
We are vulnerable to damage from various types of disasters, including
earthquake, fire, flood, power loss, communications failures and similar events.
For example, in October 1989 a major earthquake that caused significant property
damage and a number of fatalities struck near the area in which our Pleasanton
facility is located. If any disaster were to occur, we may not be able to
operate our business at our facilities. The insurance we maintain may not be
adequate to cover our losses resulting from disasters or other business
interruptions.
WE DO NOT ANTICIPATE PAYING DIVIDENDS.
We intend to retain all of our earnings for the future operation and
expansion of our business. We do not anticipate paying cash dividends on our
common stock at any time in the foreseeable future.
WE WILL FACE SIGNIFICANT CHALLENGES IN INTEGRATING CARDIOSYSTEMS AND, AS A
RESULT, MAY NOT REALIZE THE EXPECTED BENEFITS OF THE MERGER.
Thoratec and Cardiosystems have different technologies, products and
business operations that have operated independently. The combination of these
businesses is complex and difficult. We are uncertain that the integration will
be completed in a timely manner. If we fail to integrate the businesses
successfully, the operating results of the combined company could be adversely
affected and the combined company may not achieve the benefits or operating
efficiencies that we hope to obtain from the merger. The uncertainty of whether
Thoratec and Cardiosystems employees will remain with the combined company
during the integration process may also affect the business operations of each
company. Thoratec may not be able to retain enough key employees for the
combined company to operate its business effectively during the period after the
merger. We do not yet know that the products, systems and personnel of the two
companies will be fully compatible.
THE COSTS OF COMPLETING INTEGRATION ARE SUBSTANTIAL, AND WILL AFFECT OUR
OPERATIONS.
Integrating Thoratec and Cardiosystems will result in substantial costs.
These, primarily, are costs associated with combining the businesses of the two
companies and the fees of financial advisors, attorneys, consultants and
accountants. Unanticipated events could increase the costs of combining the two
companies. In any event, the costs associated with the merger will negatively
affect our results of operations for at least a year after the merger is
completed.
IF THORATEC DOES NOT SUCCESSFULLY INTEGRATE CARDIOSYSTEMS OR THE MERGER'S
BENEFITS DO NOT MEET THE EXPECTATIONS OF INVESTORS OR FINANCIAL OR INDUSTRY
ANALYSTS, THE MARKET PRICE OF THORATEC STOCK MAY DECLINE.
The market price of our stock may decline as a result of the merger for any
of the following reasons, among others:
- the integration of Thoratec and Cardiosystems is not completed in a
timely and efficient manner
- Thoratec does not achieve the benefits of the merger as rapidly as, or to
the extent, anticipated by financial or industry analysts
- significant numbers of our shareholders may dispose of their shares after
the merger.
29
UNCERTAINTIES ASSOCIATED WITH THE MERGER MAY CAUSE US TO LOSE KEY PERSONNEL.
Current and prospective employees may experience uncertainty about their
future roles with us after the merger. This uncertainty may adversely affect our
ability to retain key management, sales, marketing and technical personnel. In
addition, our ability to successfully integrate the two companies may be
adversely affected if a significant number of key personnel depart after the
merger.
THE MERGER WILL HAVE A NEGATIVE IMPACT ON PROFITABILITY.
As a result of the merger, Thoratec expects to incur a noncash "in process
research and development" expense of approximately $77 million in the first
quarter of 2001 and will also incur transaction related expenses. In addition,
as a result of the merger, Thoratec will recognize goodwill (currently estimated
to be approximately $100 million) that will be amortized over 20 years pending
adoption of new rules related to business combinations by the Financial
Accounting Standards Board. Additional noncash intangible assets (currently
estimated to be approximately $210 million) will be amortized over periods
ranging from 6 to 20 years. This amortization will result in a non-cash expense
that will reduce any reported operating profit during the amortization period.
ITEM 2. PROPERTY
We occupy leased facilities in Pleasanton, California totaling
approximately 62,000 square feet where we manufacture the Thoratec VAD system
and graft products. The manufacturing areas have been inspected, approved, and
licensed by the FDA and the State of California Department of Health Services,
Food and Drug Section for the manufacture of medical devices. The Pleasanton
facility also houses the research and development, sales and marketing, and
administrative and support personnel. We also have small leased facilities in
the United Kingdom. We believe our facilities will be sufficient to meet our
needs for the next two years and that additional space will be available at a
reasonable price to satisfy space needs thereafter.
We believe Cardiosystems' facilities are in good condition and are adequate
for present operations and that suitable alternative space is readily available
if any leases are not extended. The location and general character of the
Cardiosystems' properties by industry segment as of December 30, 2000, are as
follows:
- LVAS -- Cardiosystems subleases approximately 34,000 square feet of space
from Thermo Electron Corporation in Woburn, Massachusetts, pursuant to a
sublease expiring in 2004. It also leases approximately 12,000 square
feet of office and research facilities in Chelmsford, Massachusetts,
under a lease expiring in 2001. In addition, Cardiosystems occupies
approximately 11,000 square feet of office and research facilities in
Rancho Cordova, California, pursuant to a lease expiring in 2002.
- Blood Coagulation, Testing, and Skin Incision Devices -- Cardiosystems
also owns approximately 66,000 square feet and leases approximately
24,000 square feet of office, manufacturing, and research facilities in
Edison, New Jersey, under a lease expiring in 2002.
ITEM 3. LEGAL PROCEEDINGS
We are not party to any material legal proceedings.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
30
OFFICERS OF THE REGISTRANT
D. KEITH GROSSMAN*, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR, AGE
40, joined our company as President and Chief Executive Officer in January 1996.
He was elected to the Board of Directors in February 1996. Prior to joining us,
Mr. Grossman was a Division President of Major Pharmaceuticals, Inc., from June
1992 to September 1995, at which time it was sold. From July 1988 to June 1992,
Mr. Grossman served as the Vice President of Sales and Marketing for Calcitek,
Inc., a manufacturer of implantable medical devices, and division of
Sulzermedica (formerly Intermedics, Inc.). Prior to 1988, Mr. Grossman held
various other sales and marketing management positions within the McGaw
Laboratories Division of American Hospital Supply Corporation.
THOMAS E. BURNETT, JR.*, SENIOR VICE PRESIDENT AND CHIEF OPERATING OFFICER,
AGE 37, joined our company as Vice President -- Sales and Marketing in August
1996 and was promoted to his current position in December 1999. Prior to joining
us, Mr. Burnett was Vice President of Sales and Marketing at Sulzer Calcitek,
Inc. from June 1992 to August 1996, where he was responsible for global sales
and marketing which included a direct domestic sales force and an international
network encompassing 30 countries as well as new business development, strategic
and operational planning.
CHERYL D. HESS*, VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY, AGE
54, joined our company as Vice President and Chief Financial Officer in December
1983 and became Secretary in 1994. Prior to joining us, Ms. Hess was a manager
with the public accounting firm of Deloitte & Touche LLP, where she specialized
in audit and financial advisory services for entrepreneurial, rapidly-growing,
high technology companies. Ms. Hess is responsible for the direction of all
financial management, control and reporting activities and a portion of
administrative and operational activities. Ms. Hess is a Certified Public
Accountant.
DAVID J. FARRAR, PH.D., VICE PRESIDENT -- RESEARCH AND DEVELOPMENT, AGE 53,
joined our company as Program Manager of the VAD System in January 1980 and
became Vice President -- Circulatory Support Products in 1988, and Vice
President -- Research and Development in 1996. In addition, Dr. Farrar has a
research appointment in the Department of Cardiac Surgery at the California
Pacific Medical Center of San Francisco. Dr. Farrar has over 20 years of
research experience in the cardiovascular and medical device industry.
DONALD A. MIDDLEBROOK, VICE PRESIDENT -- REGULATORY AFFAIRS/QUALITY
ASSURANCE, AGE 50, joined our company as Vice President -- Regulatory
Affairs/Quality Assurance in September 1996. Before joining our company, he held
the position of Senior Director, Global Regulatory Affairs and Assurance for
Chiron Vision Corporation, a manufacturer of implantable ophthalmic devices and
surgical equipment. Prior to that, Mr. Middlebrook spent fifteen years with
Baxter International in a number of positions, including Vice President of
Regulatory Affairs and Quality Assurance for the Cardiovascular Group, a
producer of a wide range of cardiopulmonary, critical care, vascular and
cardiovascular products.
JOSEPH G. SHARPE, VICE PRESIDENT -- OPERATIONS, AGE 41, joined our company
as Vice President -- Operations in September 1997. Prior to joining us, Mr.
Sharpe was Director of Operations for the IV Systems Division of Baxter
International, Inc. from 1992 to September 1997. Prior thereto, Mr. Sharpe held
a number of other positions at Baxter International, Inc. including Director of
Engineering of the Pharmaseal Division, and Honeywell Information Systems.
JEFFREY C. MACK, VICE PRESIDENT -- FINANCE AND CORPORATE CONTROLLER, AGE
38, joined our company as Controller in 1996. He was promoted to Director of
Finance and Corporate Controller in September 1999 and to Vice President of
Finance in September 2000. Prior to joining Thoratec, he served as Director of
Finance and Corporate Controller for The North Face, a designer and manufacturer
of world-class high-tech outdoor apparel and equipment. He has also held various
other financial and operational positions with Kenetech Corporation, a
vertically integrated manufacturer and operator of utility grade wind turbines,
and Deloitte & Touche, LLP. Mr. Mack is a CPA.
---------------
*Denotes executive officer as of the date of this report.
31
BETH A. TAYLOR, VICE PRESIDENT -- HUMAN RESOURCES, AGE 39, joined our
company as Director of Human Resources in November 1999 and was promoted to Vice
President of Human Resources in February 2001. Prior to joining Thoratec, Ms.
Taylor served as Director of Human Resources for CCI/Triad and was responsible
for a division of 1,100 employees. She has also held various other human
resource positions such as Corporate Employee Development Manager with Valent
U.S.A. Corporation, and as Director of Human Resources with ADP where she was
responsible for 1,500 employees.
BRADLEY D. GOSKOWICZ, VICE PRESIDENT -- SALES AND MARKETING, AGE 45, joined
our company as Vice President, Sales and Marketing in January 2001. Prior to
joining Thoratec, Mr. Goskowicz was Director of Marketing in the Cardiac Surgery
Division of Medtronic where he was responsible for directing, developing and
implementing marketing strategies for a broad line of cardiovascular surgery
products worldwide. He joined Medtronic in March of 1999, as part of Medtronic's
acquisition of Avecor Cardiovascular, and was one of the original Directors when
Avecor Cardiovascular was formed in 1991. Before assuming the role of Director
of Marketing, he held the position of Director of Sales. Prior to 1991 Mr.
Goskowicz held various sales and marketing positions with Bio-Medicus, Medtronic
and Johnson & Johnson.
32
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on The NASDAQ National Market under the symbol
"THOR." The following table sets forth, for the periods indicated, the high and
low closing sales prices per share of our common stock, as reported by The
NASDAQ National Market. At March 9, 2001 there were approximately 700 holders of
record of our common stock, including multiple beneficial holders at
depositories, banks and brokers listed as a single holder in the "street" name
of each respective depository, bank or broker.
HIGH LOW
------ ------
Fiscal Year 1999
First Quarter............................................ $ 8.63 $ 6.25
Second Quarter........................................... 11.00 6.50
Third Quarter............................................ 11.63 6.38
Fourth Quarter........................................... 9.75 5.50
Fiscal Year 2000
First Quarter............................................ $19.88 $ 8.50
Second Quarter........................................... 18.63 8.50
Third Quarter............................................ 24.75 15.13
Fourth Quarter........................................... 20.56 7.75
We have not declared any dividends on our common stock.
33
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the five
fiscal years ended December 30, 2000 is derived from the Thoratec audited
financial statements. We have a 52 or 53 week fiscal year that ends on the
Saturday closest to December 31. Our consolidated financial statements at the
fiscal years ended December 30, 2000 and January 1, 2000 and for each of the
years in the three-year period ended December 30, 2000, and the independent
auditors' report thereon, are included elsewhere in this annual report. Our
selected consolidated financial data for fiscal 1998, 1997 and 1996 are derived
from audited consolidated financial statements not included in this annual
report. You should read the data set forth below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes thereto appearing
elsewhere in this annual report. The selected data in this section is not
intended to replace our financial statements.
FISCAL YEAR
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Product sales....................... $ 30,429 $ 22,508 $ 16,320 $ 9,441 $ 7,503
Cost of product sales............... 10,919 9,739 6,504 4,005 3,254
Research and development............ 7,245 5,793 5,096 4,583 3,724
Selling, general and
administrative.................... 10,969 9,361 7,656 6,027 3,998
Merger related expenses............. 4,169 -- -- -- --
Other operating income.............. 614 285 -- -- --
-------- -------- -------- -------- --------
Loss from operations................ (2,259) (2,100) (2,936) (5,174) (3,473)
Interest and other income (expense),
net............................... 713 324 660 772 210
Income tax expense.................. (183) (13) (45) -- --
-------- -------- -------- -------- --------
Net loss............................ $ (1,729) $ (1,789) $ (2,321) $ (4,402) $ (3,263)
======== ======== ======== ======== ========
Basic and diluted loss per share.... $ (0.08) $ (0.09) $ (0.11) $ (0.24) $ (0.20)
======== ======== ======== ======== ========
Weighted average shares used in
computing basic and diluted loss
per share......................... 21,831 20,446 20,340 18,360 16,694
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 3,406 $ 1,697 $ 2,713 $ 9,469 $ 5,348
Working capital..................... 26,945 10,533 11,251 15,885 17,266
Total assets........................ 44,721 25,060 25,208 28,477 21,847
Deferred revenue.................... 2,064 854 -- -- --
Accumulated deficit................. (56,920) (55,191) (53,402) (51,082) (46,679)
Total shareholders' equity.......... 35,358 20,276 21,877 24,027 19,330
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that relate to future plans, events or
performance are forward-looking statements which involve risks and
uncertainties. Actual results, events or performance may differ materially from
those anticipated in these forward-looking statements as a result of a variety
of factors, including those set forth under "Risk Factors" and elsewhere in this
Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. We
undertake no obligation to publicly release the result of any revisions to these
forward-looking statements that may be needed to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
OVERVIEW
We develop, manufacture and market medical devices for circulatory support
and vascular applications. We market our first product, the Thoratec VAD System,
in the United States and internationally for use as a bridge to heart transplant
and for recovery of the heart after heart surgery. We are pursuing additional
indications for the VAD System and developing other circulatory support products
for patients suffering from heart disease. We are also developing vascular
grafts for hemodialysis and coronary artery bypass surgery. All of our products
utilize our proprietary biomaterial, Thoralon, with surface properties designed
to minimize patient blood clotting and inflammatory response.
We have experienced operating losses in all but one year since inception in
1976. We incurred net losses of $1.7 million in 2000, $1.8 million in 1999, and
$2.3 million in 1998. At December 30, 2000, we had an accumulated deficit of
$56.9 million. We operate in a single business segment with different products
in circulatory support and vascular grafts. We conduct business both
domestically and internationally. Our domestic business comprises the United
States, and our international operations comprise Europe and the rest of the
world.
Because we acquired Cardiosystems after the end of fiscal year 2000, the
information in this Item 7 does not include any information about Cardiosystems.
LIQUIDITY AND CAPITAL RESOURCES
We had cash, cash equivalents and short-term investments at the end of 2000
of $16.1 million compared with $2.0 million at the end of 1999. The increase in
cash was due principally to the net proceeds from the April 2000 public offering
of $15.7 million partially offset by the loss from continuing operations of $1.7
million and capital expenditures of $1.2 million. Gross accounts receivable
increased $3.4 million in 2000 principally due to the $2.0 million Guidant
milestone payment, in addition to strong fourth quarter sales. The $2.0 million
Guidant milestone payment was recorded in December 2000 upon approval of the FDA
to sell the Vectra graft product in the US, and was received in first quarter
2001. Inventory increased $2.1 million in 2000 in preparation for planned
increases in sales activity and the introduction of a new product, in addition
to higher driver rental inventory. Accounts payable and accrued liabilities
increased principally due to merger related expenses and the short-term portion
of deferred distributor revenue associated with the Guidant agreement discussed
below.
In 1999, we entered into a distribution agreement with Guidant Corporation.
Under the terms of the agreement, Guidant receives exclusive worldwide marketing
and distribution rights to the Vectra product line, except in Japan. In exchange
for these rights, Guidant paid us $1.5 million and an additional $2.0 million
payment when the Vectra product line received FDA approval. We received FDA
approval for the Vectra graft in December 2000 and received the $2 million
payment in January 2001. The $3.5 million in milestone payments will be
recognized into income ratably over the estimated life of the contract with
Guidant. Deferred distributor income of $282,000 was recognized in 2000 and
$285,000 was recognized in 1999. $2.8 million remains to be recognized in the
four years of the remaining life of the Guidant agreement.
35
In 1996, we entered into a lease agreement on a new manufacturing facility
in Pleasanton, California, which accommodates all of our manufacturing, and
engineering and administrative activities. The administrative and engineering
portion of the building was completed and occupied in late 1997. The
manufacturing portion was completed in 1998 and occupied in April 1999. We
invested approximately $9.0 million in equipment and leasehold improvements to
the building. Annual payments under the lease are $781,000 for a lease term of
15 years beginning August 1997. The lease includes provisions, among others, for
annual cost of living adjustments to the lease payments, two five-year renewal
options, a purchase option, and a security deposit of $885,600. We can reduce or
eliminate a significant portion ($750,000) of the remaining security deposit
before the end of the initial lease term if we meet the criteria specified in
the lease.
In April 2000, 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, for which we
received no proceeds. In addition, the underwriters exercised a 30-day option to
purchase from us and Gambro 300,000 shares of common stock to cover any
over-allotments of which the proceeds from 225,000 shares were received by us.
After deducting underwriting discounts of $983,000, we received a total of
$16,267,000, from which $574,000 in offering-related costs have been paid.
Underwriting discounts and the other estimated offering-related costs were
recorded as an offset to common stock at the closing of the offering.
We believe that the current cash and short-term investments together with
expected cash flow from operations and cash and short-term investments obtained
in conjunction with our recent merger with Cardiosystems will be sufficient to
fund our operations for at least the next twelve months.
RESULTS OF OPERATIONS
PRODUCT SALES
Product sales in 2000 were $30.4 million compared to $22.5 million in 1999,
an increase of $7.9 million, or 35%. This increase is attributable to sales of
the VAD System disposable blood pump, which increased to $23.1 million in 2000
from $16.2 million in 1999, an increase of $6.9 million, or 43%. The growth of
sales in VAD pumps was primarily attributable to an increase of 29% in the
quantity of VAD pumps sold, which resulted from the growth in the number of new
centers using our VAD System. An increase in the average selling price of the
VAD pumps also contributed to the increase in revenue.
Product sales in 1999 were $22.5 million compared to $16.3 million in 1998,
an increase of $6.2 million, or 38%. This increase is attributable to sales of
the VAD System disposable blood pump, which increased to $16.2 million in 1999
from $11.0 million in 1998, an increase of $5.2 million, or 47%. The growth of
sales in VAD pumps was primarily attributable to an increase of 33% in the
quantity of VAD pumps sold, which resulted from the growth in the number of new
centers using our VAD System. An increase in the average selling price of the
VAD pumps also contributed to the increase in revenue.
GROSS PROFIT
Gross profit was $19.5 million, representing 64% of product sales in 2000
compared to a gross profit of $12.8 million, representing 57% of product sales
in 1999. The increase in the gross profit percentage in 2000 as compared to 1999
was due to proportionally higher domestic versus international sales, and
improved average prices on domestic VAD pumps. We expect gross profit to
increase as a percentage of product sales as we increase the number of devices
manufactured and improve the efficiency with which we manufacture.
Gross profit was $12.8 million, representing 57% of product sales in 1999
compared to a gross profit of $9.8 million, representing 60% of product sales in
1998. The decrease in the gross profit percentage in 1999 as compared to 1998
was due to approximately $400,000 of higher inventory scrap and rework costs
associated with a component part used in the TLC-II portable driver, $400,000
associated with higher overall manufacturing and service overhead costs
associated with the new Pleasanton facility, and $200,000 of costs associated
with the move to the Pleasanton facility.
36
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $7.2 million in 2000,
representing 24% of sales, from $5.8 million in 1999, representing 26% of sales,
an increase of $1.4 million, or approximately 25%. Of the total increase in
research and development expenses, $375,000 was associated with the TLC-II,
$164,000 was associated with the IVAD, $100,000 for grafts, and $71,000 for
support of the existing dual driver product. In addition to the above increases
was an increase of $748,000 in manufacturing support overhead applied to
research and development activities. Expenses for the graft products increased
primarily from the clinical trials for development of the Vectra. Expenses for
the TLC-II included costs to upgrade a component part. Expenses for the IVAD
included product prototype, development, and testing costs. We expect research
and development expenses to increase in 2001 principally as a result of clinical
trial costs for our graft products and our TLC-II portable driver, however, we
expect these expenses to decrease in 2001 as a percentage of product sales.
Research and development expenses increased to $5.8 million in 1999,
representing 26% of sales, from $5.1 million in 1998, representing 31% of sales,
an increase of $697,000, or 14%. Of the total increase in research and
development expenses, $372,000 was associated with the IVAD, $251,000 was
associated with graft products, and $210,000 was associated with the TLC-II.
Partially offsetting the above increases was a decrease of approximately
$216,000 in manufacturing support overhead applied to research and development
activities. Expenses for the graft products increased primarily from the
clinical trials for the Vectra. Expenses for the TLC-II included costs to
upgrade a component part. Expenses for the IVAD included product prototype,
design, development, and testing costs.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $11.0 million in
2000, representing 36% of sales, from $9.4 million in 1999, representing 42% of
sales, an increase of $1.6 million, or 17%. Of the total increase in selling,
general and administrative expenses, $900,000 is associated with higher payroll
and related costs associated with the continued development and expansion of our
domestic sales and marketing organization, and $400,000 is associated with
higher personnel-related administrative costs. We expect selling, general and
administrative expenses to increase in 2001 as we continue to build our sales
and marketing organization and as salaries for all personnel increase, however
we expect these expenses to decrease in 2001 as a percentage of product sales.
Selling, general and administrative expenses increased to $9.4 million in
1999, representing 42% of sales, from $7.7 million in 1998, representing 47% of
sales, an increase of $1.7 million, or 22%. Of the total increase in selling,
general and administrative expenses, $1.3 million is associated with higher
payroll and related costs associated with the continued development and
expansion of our domestic sales and marketing organization.
MERGER RELATED EXPENSES
Merger related expenses in 2000 are comprised principally of external costs
directly associated with the merger transaction previously discussed in the
Liquidity and Capital Resources section. Included in the $4.2 million merger
related expenses are approximately $1.7 million in accounting and legal costs
(financing due diligence, statutory filings, and regulatory legal efforts), $2.3
million in consulting costs (consulting and advisory services related to human
capital, information technology, and risk management), and $200,000 in other
expenses.
OTHER OPERATING INCOME
Other operating income includes amortization of deferred revenue from the
1999 Guidant agreement and was approximately $282,000 in 2000 and $285,000 in
1999. Also included in other operating income in 2000 is a one-time payment of
$332,000 in conjunction with an amendment to a license granted to Gambro, Inc.,
formerly known as COBE Laboratories.
37
We expect other operating income to increase in 2001 with the amortization
of the 2000 year end $2,757,000 deferred distributor revenue balance over the
remaining four year term of the distributor agreement.
INTEREST AND OTHER INCOME
Interest and other income includes interest earned on cash and marketable
securities, foreign translation gains and losses, and income from government
research grants. Interest and other income increased to $713,000 in 2000
representing 2% of sales, from $323,000 in 1999 representing 1% of sales, an
increase of $390,000, or approximately 121%. The increase in interest and other
income was primarily attributable to higher interest income earned on higher
cash balances due to cash proceeds from our stock offering partially offset by
lower grant revenue.
Interest and other income decreased to $323,000 in 1999 representing 1% of
sales, from $660,000 in 1998 representing 4% of sales, a decrease of $337,000,
or approximately 51%. The decrease in interest and other income was primarily
attributable to lower interest income earned on lower cash balances.
NET LOSS
Our net loss decreased $60,000 to $1.7 million in 2000 from $1.8 million in
1999, a decrease of 3%, as a result of the factors discussed above. Absent the
effects of the $4.2 million merger related expenses discussed above, net income
after taxes for the 2000 year would have been over $2.4 million.
Our net loss decreased $531,000 to $1.8 million in 1999 from $2.3 million
in 1998, a decrease of 23%, as a result of the factors discussed above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivative financial instruments in our operations or
investment portfolio. We do not have material exposure to market risk associated
with changes in interest rates, as we have no long-term debt obligations or
long-term investments outstanding. Our investment portfolio consists of
short-term money market funds and municipal government auction bonds that are
classified as available-for-sale. The weighted average maturity of our
investment portfolio was less than 90 days in both 1999 and 2000. Accordingly,
we do not expect to be subject to material interest rate risk with respect to
our short-term investments. We do not believe we have any other material
exposure to market risk associated with interest rates.
Although we conduct business in foreign countries, our international
operations consist primarily of sales and service personnel for our VAD System.
These employees report into our U.S. sales and marketing group and are
internally reported as part of that group. Additionally, foreign currency
transaction gains and losses were not material to our results of operations for
2000. Accordingly, we do not expect to be subject to material foreign currency
risk with respect to future costs or cash flows from our foreign operations. To
date, we have not entered into any significant foreign currency forward exchange
contracts or other derivative financial instruments to hedge the effects of
adverse fluctuations in foreign currency exchange.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are set forth at pages F-1 to F-18
of this Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE THORATEC CORPORATION
(a) Executive Officers -- See the section titled "Officers of the Registrant" in
Part I, Item 4 hereof.
(b) As of March 9, 2001 there are eight directors on the company's Board of
Directors. The term of office for each person elected as a director will
continue until the next Annual Meeting of Shareholders or until his successor
has been elected and qualified. There are no family relationships among any of
the directors or officers of the company.
The name of and certain other information regarding the directors is set
forth in the table below.
DIRECTOR
NAME OF DIRECTOR AGE POSITION WITH THE COMPANY SINCE
---------------- --- ------------------------- --------
J. Donald Hill(1)......................... 64 Director and Chairman of the Board 1976
D. Keith Grossman......................... 40 Director, President and Chief Executive 1996
Officer
Howard E. Chase(2)........................ 64 Director 1986
J. Daniel Cole(2)......................... 54 Director 1997
William M. Hitchcock(2)................... 61 Director 1996
George W. Holbrook, Jr.(1)................ 69 Director 1995
Daniel M. Mulvena(1)...................... 52 Director 1997
Theo Melas-Kyriazi(3)..................... 41 Director 2001
---------------
(1) Member of Compensation and Option Committee
(2) Member of Audit Committee
(3) Appointed as part of merger with Cardiosystems
D. KEITH GROSSMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR, joined
our company as President and Chief Executive Officer in January 1996. He was
elected to the Board of Directors in February 1996. Prior to joining us, Mr.
Grossman was a Division President of Major Pharmaceuticals, Inc., from June 1992
to September 1995, at which time it was sold. From July 1988 to June 1992, Mr.
Grossman served as the Vice President of Sales and Marketing for Calcitek, Inc.,
a manufacturer of implantable medical devices, and division of Sulzermedica
(formerly Intermedics, Inc.). Prior to 1988, Mr. Grossman held various other
sales and marketing management positions within the McGaw Laboratories Division
of American Hospital Supply Corporation.
HOWARD E. CHASE became a director of our company in November 1986. Mr.
Chase has been President and CEO of Carret Holdings, Inc. (formerly Matrix
Global Investments, Inc.) since June 1999. Mr. Chase served as President and CEO
of Trident Rowan Group, Inc. ("TRGI") from September 1995 to March 1998 and
Chairman of the Board of TRGI from March 1998 to December 1999. From 1984 to
August 1995, Mr. Chase was a partner in the law firm of Morrison Cohen Singer &
Weinstein, LLP in New York City. He acted as an advisor and as a special counsel
to our Company from 1979 to 1995. Mr. Chase also serves as a member of the board
of directors of Trident Rowan Group, Inc. and Centerpoint Corporation (formerly
Moto Guzzi Corporation).
J. DANIEL COLE became a director of our company in June 1997. Mr. Cole has
been a general partner of the Spray Venture Fund of Boston since March 1997. Mr.
Cole was President and Chief Operating Officer of SciMed Life Systems
Corporation from March 1993 to March 1995, and Senior Vice President and Group
President of Boston Scientific Corporation's vascular business from March 1995
to March 1997. He has also held a number of senior executive positions at Baxter
Healthcare Corporation, including President of its Edwards Less Invasive Surgery
Division and its Critical Care Division. Mr. Cole also serves as a member of the
board of directors of numerous private companies.
J. DONALD HILL, M.D. has been a director of our company since its inception
and is one of our significant shareholders. In January 1995, Dr. Hill became
Chairman of the Board of Directors. Dr. Hill is the director of
39
the heart transplant program at California Pacific Medical Center in San
Francisco where he has been a practicing cardiovascular surgeon since 1966.
WILLIAM M. HITCHCOCK became a director of our company in September 1996.
Mr. Hitchcock serves as a member of the board of directors of Plains Resources
Inc., Maxx Petroleum, Ltd and Luna Imaging, Inc. In 1996, Mr. Hitchcock became
President of Avalon Financial, Inc. And in 1999, Mr. Hitchcock became President
of Camelot Oil and Gas, LLC. He is a managing partner of Pembroke Financial
Partners, LLC., a NASD Firm.
GEORGE W. HOLBROOK, JR. became a director of our company in June 1995.
Since 1984 Mr. Holbrook has been the Managing Partner of Bradley Resources
Company, a private investment partnership. Mr. Holbrook is also a director and
trustee of Merrill Lynch Institutional Fund, Inc., and several associated funds,
in addition to being a director of Autogenics, Ltd., Radiomed Corporation,
Soilzone, and Radius Medical Technologies, Inc.
DANIEL M. MULVENA became a director of our company in May 1997. Mr. Mulvena
is the founder and owner of Commodore Associates, a consulting company. Mr.
Mulvena was Group Vice President of the Cardiac/Cardiology Division and a member
of the operating committee for Boston Scientific Corporation from February 1992
to May 1995. Prior to that, he was the President and Chief Executive Officer and
Chairman of Lithox Systems, Inc. Prior to that, Mr. Mulvena held a number of
executive positions, including President of the Implants Division and President
of the Cardiosurgery Division, at C.R. Bard, Inc. Mr. Mulvena also serves as a
member of the board of directors of Echocath, Inc., Magna-Lab Inc., Zoll Medical
Corporation and Cambridge Heart, Inc.
THEO MELAS-KYRIAZI became a director of our company in February 2001. He
was appointed Chief Financial Officer of Thermo Electron Corporation on January
1, 1999. He joined Thermo Electron in 1986 as Assistant Treasurer, and became
Treasurer in 1988. He was named President and Chief Executive Officer of
ThermoSpectra in 1994, a position he held until becoming Vice President of
Corporate Strategy of Thermo Electron in 1998.
BOARD MEETINGS AND COMMITTEES
The Board held a total of seven meetings during 2000. No director attended
fewer than 75 percent of the aggregate of all meetings of the Board and of the
committees upon which such director served.
The Audit Committee consists of Messrs. Chase, Cole, and Hitchcock, with
Mr. Chase serving as Chairman. The principal functions of the Audit Committee
are to recommend engagement of our Company's independent auditors, to consult
with our Company's auditors concerning the scope of the audit and to review with
them the results of their audit, to review and approve any material accounting
policy changes affecting our Company's operating results and to review our
Company's financial control procedures and personnel. The Audit Committee held
four meetings during 2000.
The Compensation and Option Committee currently consists of Messrs.
Holbrook and Mulvena, and Dr. Hill, with Mr. Mulvena serving as Chairman. The
Compensation and Option Committee reviews and recommends to the Board
compensation and benefits for our executive officers and management. The
Compensation and Option Committee held four meetings during 2000.
The Board does not have a nominating committee.
BOARD COMPENSATION
Until February 2001, Directors received reimbursement for travel and other
expenses directly related to their activities as directors. Outside directors
were paid $2,500 per meeting held in person and $500 per quarter for committee
meetings. In addition, with prior approval of the Chairman, consulting fees of
$1,500 per day for the first full day and $1,000 per day thereafter may have
been paid.
After February 2001, all Directors will receive a $15,000 retainer that
will be paid annually on a calendar basis. They will also receive $1,000 for
each quarter where there is a board meeting attended by the Director,
40
and $500 for each quarter where a committee meeting is attended by the Committee
member. If the committee meeting exceeds four hours, the Chairman may also grant
an additional fee. The Chairman of the Board will receive $1,000 per quarter in
which there is a board meeting that he attends, and each committee chairman will
receive $500 per quarter in which there is a committee meeting that he attends.
Outside directors are eligible to participate in our 1996 Nonemployee Directors
Stock Option Plan.
A total of 350,000 shares of our common stock have been reserved for
issuance under the Directors Option Plan. The Directors Option Plan provides for
the automatic granting of nonqualified stock options to directors of our company
who are not employees of our company or any parent or subsidiary of our company
and who have not been an employee of our company or any parent or subsidiary of
our company in the previous 12 months ("Eligible Outside Directors"). Each
person who is newly elected or appointed as an Eligible Outside Director on or
after the meeting of shareholders in 1999 will be granted an option to purchase
15,000 shares of common stock, at fair market value, in quarterly installments
on the effective date of such initial election or appointment (the "Initial
Grant"). Each eligible Outside Director (including the existing outside
directors) generally will be granted an option to purchase 7,500 shares of
common stock, at fair market value, in quarterly installments beginning on the
date of the first meeting of the Board of Directors following the annual
shareholders meeting (the "Annual Grant"). In any event, both the Initial Grant
and the Annual Grant will be made no later than August 31, November 30, February
28, or May 31 of the relevant year. As of March 9, 2001 options to purchase
182,915 shares, at fair market value, have been granted, of which 15,625 have
been exercised. We currently have six nonemployee directors who are eligible to
participate in the Directors Option Plan. The exercise price of the options in
all cases is equal to the fair market value of common stock on the grant date.
Each option granted after May 1999 pursuant to the Directors Option Plan expires
five years after the date of grant or earlier in the event of the termination of
the director's service on the Board. Each option granted after May 1999 under
the Directors Option Plan is exercisable immediately after the date of grant
with our company retaining the right to repurchase any stock acquired upon
exercise. Such right of repurchase shall expire at the rate determined by us. In
the event of acquisition of our company by a merger, consolidation, sale of all
or substantially all our company's assets or acquisition of our company's
shares, such right of repurchase shall lapse with respect to twice the number of
shares still subject to the right of repurchase. The Board may waive the
directors' fees in any given year and have the exercise price of options granted
under the Directors Option Plan reduced by the amount of the fees so waived.
For 2000 Dr. Hill and Messrs. Chase, Cole, Hitchcock, Holbrook and Mulvena
received compensation of $11,000, $12,000, $11,000, $12,000, $11,500, and
$12,000 respectively. Each nonemployee director was granted options pursuant to
the 1996 Directors Stock Option Plan to purchase 1,875 shares of common stock
each on March 3, 2000, May 12, 2000, August 25, 2000, and November 17, 2000 with
an exercise price of $19.88 per share, $11.63 per share, $16.50 and $13.13 per
share respectively. Mr. Bell received compensation of $3,000 and 1,875 shares of
common stock on March 3, 2000, and retired shortly thereafter.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors and executive officers, and persons who
own more than ten percent of a registered class of our equity securities, to
file reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with
the Securities and Exchange Commission and the National Association of
Securities Dealers. Such officers, directors and ten percent shareholders are
also required by Securities and Exchange Commission rules to furnish our company
with copies of all Section 16(a) forms that they file.
Based solely on our review of copies of such reports received or written
representations from certain reporting persons, we believe that, during 2000,
there has been no failure by any of our officers, directors or ten percent
shareholders to file on a timely basis any reports required by Section 16(a).
41
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation received for services rendered to our company during 1998, 1999 and
2000 by the Chief Executive Officer of our company and each of the four
additional most highly compensated executive officers (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
ALL OTHER
LONG-TERM COMPENSATION
COMPENSATION -----------------------
------------ LIFE INSURANCE
ANNUAL COMPENSATION SECURITIES PREMIUMS
------------------------------------- UNDERLYING PAID BY THE
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER(1) OPTIONS(#) COMPANY(3) OTHER
--------------------------- ---- -------- -------- -------- ------------ -------------- ------
D. Keith Grossman(2)............... 2000 $239,904 $224,798 $-- 90,000 $568 $5,100
Chief Executive Officer, 1999 214,362 107,569 -- 120,000 617 2,400
President and Director 1998 192,750 131,070 -- 100,000 216 2,400
Thomas E. Burnett, Jr.(2).......... 2000 188,750 141,528 -- 60,000 426 5,100
Senior Vice President, 1999 158,318 57,614 -- 70,000 451 1,204
Chief Operating Officer 1998 139,778 83,167 -- 52,500 216 861
David J. Farrar(2)(4).............. 2000 168,300 98,649 -- 47,000 403 5,100
Vice President -- Research 1999 152,598 58,674 -- 60,000 439 2,400
and Development 1998 136,856 73,287 -- 52,500 216 2,400
Cheryl D. Hess(2).................. 2000 170,250 106,299 -- 46,500 407 5,100
Chief Financial Officer and 1999 156,588 57,108 -- 60,000 451 2,400
Secretary 1998 139,778 76,930 -- 52,500 216 2,400
Donald A. Middlebrook(2)(4)........ 2000 165,445 89,694 -- 45,000 396 5,100
Vice President -- Regulatory 1999 152,473 43,437 -- 60,000 439 2,400
Affairs/Quality Assurance 1998 137,808 66,417 -- 52,500 216 2,400
---------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other annual compensation in the form of perquisites and other personal
benefits has been omitted where the aggregate amount of such perquisites and
other personal benefits constituted less than the lesser of $50,000 or 10%
of the total annual salary and bonus for the Named Executive Officer for the
fiscal year.
(2) Other compensation in 1998, 1999, and 2000 represents employer contributions
to a 401(k) retirement plan.
(3) Amount represents premiums we paid for term life insurance for the benefit
of the Named Executive Officer.
(4) In accordance with the rules of the Securities and Exchange Commission,
although this person was not an executive officer at the end of fiscal year
2000, this person is included as one of the Named Executive Officers because
he would have been one of the Named Executive Officers but for the fact that
he was not an executive officer at the end of fiscal year 2000.
42
OPTION GRANTS
The following table provides information concerning grants of options to
purchase our stock made to each of the Named Executive Officers during 2000. No
stock appreciation rights were granted to these individuals during 2000.
OPTION GRANTS IN 2000
POTENTIAL REALIZED
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF STOCK
------------------------------------------------------------------ PRICE APPRECIATION FOR
NUMBER OF PERCENT OF TOTAL EXERCISE OPTION TERM(1)
SECURITIES UNDERLYING OPTIONS GRANTED TO PRICE EXPIRATION -----------------------
NAME OPTIONS GRANTED EMPLOYEES IN 2000 ($/SH) DATE 5% 10%
---- --------------------- ------------------ -------- ---------- --------- -----------
D. Keith Grossman...... 90,000 9.8% $10.563 04/24/10 $598,000 $1,515,000
Thomas E. Burnett,
Jr. ................. 60,000 6.5 10.563 04/24/10 399,000 1,010,000
David J. Farrar........ 45,000 4.9 10.563 04/24/10 299,000 758,000
2,000 .2 15.125 07/31/10 19,000 48,000
Cheryl D. Hess......... 45,000 4.9 10.563 04/24/10 299,000 758,000
1,500 .2 15.125 07/31/10 14,000 36,000
Donald A.
Middlebrook.......... 45,000 4.9 10.563 04/24/10 299,000 758,000
---------------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of the future common stock price of our stock.
OPTION EXERCISES AND HOLDINGS
The following table sets forth the certain information regarding the value
of exercised options and unexercised stock options held by each of the Named
Executive Officers as of December 30, 2000.
2000 OPTION EXERCISES AND YEAR-END OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END(2) AT FISCAL YEAR END(3)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------------- ----------- ------------- ----------- -------------
D. Keith Grossman....... -- -- 373,333 270,000 $1,957,956 $892,623
Thomas E. Burnett,
Jr.................... 19,000 158,385 129,750 133,750 309,241 367,031
David J. Farrar......... -- -- 120,333 115,000 630,461 323,655
Cheryl D. Hess.......... 15,417 157,321 58,583 115,000 205,409 323,655
Donald A. Middlebrook... -- -- 142,500 115,000 403,823 323,655
---------------
(1) Value realized is based on the fair market value of our stock on the date of
exercise (the closing sales price reported on The NASDAQ National Market,
minus the exercise price, and does not necessarily indicate that the
optionee sold such stock).
(2) Options vest over periods of two to four years from the date of the grant.
(3) Represents the difference between the option exercise price and the closing
price of our stock as reported on The NASDAQ National Market at December 30,
2000.
43
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
During 2000, management compensation issues were reviewed by the
Compensation and Option Committee, which consisted of Messrs. Holbrook, Mulvena
and Dr. Hill. The function of the Compensation and Option Committee is to review
and recommend management compensation to the Board. The Compensation and Option
Committee met four times in 2000.
We believe that our ability to achieve the objectives of obtaining
regulatory approval for and commercializing our circulatory support and graft
products, and becoming profitable, is dependent largely upon our ability to
recruit and retain qualified executives with substantive experience in the
development, regulatory approval, manufacture, marketing and sale of new medical
devices. We are competing for experienced executives within the San Francisco
Bay Area, where over 100 biotechnology/biomedical/pharmaceutical companies are
located.
We have a policy designed to control the base salaries of our executives
while providing sufficient incentives to attract and retain qualified personnel.
In accordance with this policy, we strive to set executive base salaries by
considering relative contribution of the position to achievement of our goals
and objectives, "market value" as defined by salaries of executives within the
Bay Area with comparable experience in similar positions, and job-related
responsibilities with respect to size of budget, number of subordinates and
scope of activities. In general, we strive to set base salaries of new
executives at market, which is defined as the average base salary of incumbents
in comparable positions, and use our 1993, 1996 and 1997 Stock Option Plans to
facilitate recruiting and to retain qualified executives by providing long-term
incentives. Typically, new executives are granted stock options as part of their
initial employment package.
During 1993, the Internal Revenue Code of 1986 was amended to include a
provision that denies a deduction to publicly held corporations for compensation
paid to "covered employees" (defined as the chief executive officer and the next
four most highly compensated officers as of the end of the taxable year) to the
extent that compensation paid to any "covered employee" exceeds $1 million in
any taxable year of the corporation beginning after 1993. Certain
"performance-based" compensation qualified for an exemption from the limits on
deductions. It is our policy to attempt to qualify compensation paid to our top
executives for deductibility in order to maximize our income tax deductions, to
the extent that so qualifying the compensation is consistent with our
fundamental compensation policies. Based upon the Internal Revenue Service's
proposed regulations and compensation paid to our "covered employees" for the
2000 tax year, all compensation paid by our Company in 2000 to such covered
employees was deductible to us.
Stock Options. We have determined that stock options are an important
incentive for attracting and retaining qualified personnel, including
executive-level personnel.
Corporate Performance Criteria. Management presents to us a set of
corporate goals for a succeeding period, generally ranging from 12 to 18 months,
as part of the annual plan and budget process. These goals establish benchmarks
for assessing overall corporate performance. Given the dynamic nature of the new
medical device development process, progress toward the achievement of corporate
goals is reviewed with us periodically together with a description of any change
in circumstances that management believes may warrant an update to or revisions
of these goals. The principal corporate goals for 2000 were to achieve revenue
and net income targets, successfully re-launch a product in Europe, and complete
several clinical trials and regulatory submissions.
Periodic Salary Adjustments. Generally, executive salaries are reviewed
annually, and salary adjustments may be awarded on the basis of increased
responsibilities of individual executives over a period of time or the
outstanding performance of individual executives as exhibited by consistently
high standards in the execution of established duties, as described by the Chief
Executive Officer to the Board. Company performance as a whole is a major
consideration in our decision to award any salary increases and, to a lesser
extent, we also consider general economic conditions and trends. The base
salaries of our Company executives were increased by between three and four
percent effective the first day of July 2000, based on performance and execution
of duties.
44
Chief Executive Officer. Generally, the nonemployee members of the Board
meet with the Chief Executive Officer to discuss the performance of the other
executive officers and of our Company as a whole. The nonemployee members of the
Board then meet in the absence of the Chief Executive Officer to discuss the
performance of the Chief Executive Officer. Based on his leadership and
achievements of key strategic and regulatory objectives for the year, Mr.
Grossman's base salary was increased four percent effective the first day of
July 2000. In addition, based on achievement of certain bonus-related objectives
such as the corporate goals mentioned above, Mr. Grossman was awarded a bonus of
$224,798 for the 2000 fiscal year.
Summary. We believe that we have established a program for compensation of
our executives which is fair and which aligns the financial incentives for
executives with the interests of our shareholders.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2000, none of our executive officers served on the board of
directors or compensation committee of another company that had an executive
officer serve on our Board of Directors or our Compensation and Option
Committee.
45
STOCK PRICE PERFORMANCE GRAPH
The Securities and Exchange Commission requires that we include a
line-graph representation comparing five-year, cumulative shareholder returns
for our common stock with a broad-based market index and either a nationally
recognized industry standard or an index of peer companies selected by us.
The following line graph illustrates a five-year comparison of the
cumulative total shareholder return on our common stock against the cumulative
total return of The Nasdaq Stock Market (U.S.) Index and the Peer Group Index,
assuming $100 invested in our common stock and the two indexes on December 31,
1995.
In this report we compare the return on our common stock to the Nasdaq
Stock Market Index (U.S. Companies only) and the Peer Group Index. Our company
is included in the Nasdaq Stock Market Index (U.S. Companies only) and is
similar in size and stage of commercialization as the other companies in the
Peer Group.
The Peer Group Index consists of the following 14 Nasdaq companies:
Abiomed, Inc., Advanced Neuromodulation Systems, Inc. (formerly Quest Medical,
Inc.), Angeion Corporation, Arrow International, Inc., Atrion Corporation,
Bio-Vascular, Inc., Cardiotech International, Inc., Datascope Corp., Eclipse
Surgical Technologies, Inc., Fusion Medical Technologies, Inc., Gish Biomedical,
Inc., Heartport, Inc., Possis Medical, Inc., and Thermo Cardiosystems Inc.
Innerdyne was acquired by Tyco International Limited and has been removed from
the peer group as their successor company is not of a similar size with our
company.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG THORATEC CORPORATION,
THE NASDAQ STOCK MARKET (U.S.) INDEX AND A PEER GROUP
[PERFORMANCE GRAPH]
* $100 INVESTED ON 12/31/95 IN STOCK OR INDEX --
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
--------------------------------------------------------------------------------
12/95 12/96 12/97 12/98 12/99 12/00
--------------------------------------------------------------------------------
Thoratec
Corporation 100.00 63.33 44.17 47.50 65.00 73.33
PEER GROUP 100.00 68.98 66.91 41.35 47.60 47.33
NASDAQ STOCK MARKET
(U.S.) 100.00 123.04 150.69 212.51 394.94 237.68
--------------------------------------------------------------------------------
46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 9, 2001 (i) by each of our directors,
(ii) by each Named Executive Officer, (iii) by all directors and executive
officers as a group, and (iv) by each person who is known by us to own
beneficially more than 5% of our common stock.
NUMBER OF SHARES PERCENT OF SHARES
NAME AND ADDRESS(1) BENEFICIALLY OWNED(2) BENEFICIALLY OWNED(2)
------------------- --------------------- ---------------------
Thermo Electron Corporation............................ 19,418,344 35.5%
Gambro (formerly COBE Laboratories, Inc.).............. 3,133,077 5.7
J. Donald Hill(3)...................................... 1,416,120 2.6
D. Keith Grossman(4)................................... 652,333 1.2
George W. Holbrook, Jr.(5)............................. 468,892 *
Bradley Resources Company(5)........................... 433,059 *
James R. McGoogan(5)................................... 433,059 *
William M. Hitchcock(6)................................ 389,573 *
Thomas E. Burnett, Jr.(7).............................. 272,500 *
Don A. Middlebrook(8).................................. 258,500 *
David J. Farrar(9)..................................... 242,189 *
Cheryl D. Hess(10)..................................... 230,381 *
J. Daniel Cole(11)..................................... 77,500 *
Howard E. Chase(12).................................... 64,152 *
Daniel M. Mulvena(13).................................. 37,500 *
Theo-Melas Kyriazi(14)................................. 16,700 *
Directors and Executive Officers as a Group (12
persons)(15)......................................... 4,126,340 7.3
---------------
* Less than one percent
(1) The address of the persons set forth above is the address of our company
appearing elsewhere in this 10-K.
(2) Applicable percentage ownership for each shareholder is based on 54,727,616
shares of common stock outstanding as of March 9, 2001, together with
applicable options for such shareholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission, and
includes voting and investment power with respect to the shares. Beneficial
ownership also includes shares of stock subject to options and warrants
exercisable or convertible within 60 days of March 9, 2001. Shares of
common stock subject to outstanding options are deemed outstanding for
computing the percentage of ownership of the person holding such options,
but are not deemed outstanding for computing the percentage ownership of
any other person. Except pursuant to applicable community property laws or
as indicated in the footnotes to this table, to our knowledge, each
shareholder identified in the table possesses sole voting and investment
power with respect to all shares of common stock shown as beneficially
owned by such shareholder.
(3) Includes 104,722 shares issuable upon exercise of options exercisable
within 60 days of March 9, 2001.
(4) Includes 643,333 shares issuable upon exercise of options exercisable
within 60 days of March 9, 2001.
(5) Bradley Resources Company is an investment partnership which owns 433,059
shares. George W. Holbrook, Jr., a director of our company, is a general
partner of Bradley Resources Company and is deemed to share beneficial
ownership of such shares with Mr. James R. McGoogan, a general partner of
Bradley Resources Company. Includes, in Mr. Holbrook's number only, 35,833
shares issuable upon exercise of options exercisable within 60 days of
March 9, 2001.
(6) Includes 35,833 shares issuable upon exercise of options exercisable within
60 days of March 9, 2001.
(7) Includes 263,500 shares issuable upon exercise of options exercisable
within 60 days of March 9, 2001.
(8) Includes 257,500 shares issuable upon exercise of options exercisable
within 60 days of March 9, 2001.
47
(9) Includes 217,833 shares issuable upon exercise of options exercisable
within 60 days of March 9, 2001.
(10) Includes 173,583 shares issuable upon exercise of options exercisable
within 60 days of March 9, 2001.
(11) Includes 37,500 shares issuable upon exercise of options exercisable within
60 days of March 9, 2001.
(12) Includes 64,152 shares issuable upon exercise of options exercisable within
60 days of March 9, 2001.
(13) Includes 37,500 shares issuable upon exercise of options exercisable within
60 days of March 9, 2001.
(14) Includes 16,700 shares issuable upon exercise of options exercisable within
60 days of March 9, 2001.
(15) Includes 1,908,789 shares issuable upon exercise of options exercisable
within 60 days of March 9, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1992 we entered into an agreement to sell common stock, representing 26%
of the Company, to COBE Laboratories, Inc., or COBE, which included several
provisions including a standstill agreement. We also finalized a licensing,
manufacturing, and distribution agreement which provides for a royalty-bearing
license to our biomaterial technology for use in certain of COBE's products,
among other items. The licensing agreement was amended in 1999 to split the
license into two separate agreements at the time of the sale of a portion of
COBE's cardiovascular business. One is retained by COBE Laboratories, now called
Gambro, Inc., a major shareholder of the company, and the other was granted to
Sorin COBE Cardiovascular when that division of Gambro was sold to Sorin. In
1997, our obligation to manufacture biomaterials and distribute products through
COBE terminated.
In the first quarter of 2000, we amended the license granted to Gambro,
Inc. to be a fully paid-up, world-wide, irrevocable field-of-use license and
sublicense, with the right to sublicense others. The original license 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. No additional consideration was granted in connection with this
amendment. We have no continuing obligation to Gambro under this license
agreement.
On February 14, 2001 we completed a merger with Thermo Cardiosystems, a
Massachusetts-based manufacturer of cardiac assist, blood coagulation and skin
incision devices. A merger agreement, a shareholder agreement and a registration
rights agreement were entered into between Thoratec and Thermo Electron pursuant
to the merger transaction. The transaction was a stock-for-stock transaction,
accounted for as a reverse acquisition purchase in which Thermo Cardiosystems is
treated as the acquirer of Thoratec for financial reporting purposes, and will
be treated as a tax-free exchange. Under the terms of the merger agreement, each
outstanding share of Thermo Cardiosystems stock was exchanged for 0.835 shares
of newly issued Thoratec stock. Former Thoratec shareholders own approximately
43 percent of the shares outstanding. Thermo Electron Corporation, the parent
company of Thermo Cardiosystems, received shares representing approximately 36
percent of the shares outstanding, which is subject to certain contractual
lock-up provisions. In addition, we agreed to appoint a nominee of Thermo
Electron to fill one of the seats on our Board of Directors until such time that
Thermo Electron ceases to beneficially own at least 10% of the voting power of
Thoratec.
We currently lease approximately 34,000 square feet of space from Thermo
Electron, who is the beneficial holder of more than 5% of our voting securities,
in Woburn, Massachusetts. This space is utilized for manufacturing, regulatory,
research and development and administrative activities primarily associated with
the Company's HeartMate products. The monthly rental is approximately $15,000
per month.
Thermo Cardiosystems had subordinated convertible debentures outstanding
prior to the merger with Thoratec, which were guaranteed by Thermo Electron. In
connection with the merger, we obtained a letter of credit to guarantee Thermo
Electron's obligations on the debentures. We also entered into a collateral and
security agreement with the bank that issued the letter of credit for the pledge
of cash and short term instruments of $45.0 million to support the letter of
credit. After the merger, the debentures became convertible into shares of
Thoratec common stock, at a conversion price of $37.62. Thermo Electron
continues to guarantee the debentures.
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:
1. Financial Statements and Independent Auditors Report
Reference is made to the Index to Financial Statements under Item 8 of
Part II of this report, where these documents are included.
2. Financial Statement Schedules
Financial Statement Schedules are not included because they are not
required or the information is otherwise shown in the financial
statements or notes thereto.
3. Exhibits filed with this Report on Form 10-K (numbered in accordance
with Item 601 of Regulation S-K)
EXHIBIT
NUMBER EXHIBIT
------- -------
1.1 Thoratec Corporation's Certificate of Incorporation, as
amended.(1)
1.2 Thoratec Corporation's By-Laws, as amended.(1)
4.1 Form of Convertible Secured Promissory Note.(2)
10.1 Our amended 1984 Incentive Stock Option Plan.(3)
10.2 Our 1993 Stock Option Plan.(4)
10.3 Agreement for the acquisition of Th. Goldschmidt AG of
Certain of the Assets of Thoratec Laboratories Corporation
dated March 29, 1989.(5)
10.4 Common Stock Purchase Agreement between COBE Laboratories,
Inc. dated November 23, 1992.(6)
10.5 License Agreement between COBE Laboratories, Inc. and us
dated November 23, 1992.(6)
10.6 Lease Agreement dated July 25, 1996, between Main Street
Associates and us, as amended.(7)
10.7 Our 1996 Stock Option Plan.(8)
10.8 Our amended 1996 Nonemployee Directors Stock Option Plan.(9)
10.9 First Amendment to Lease Agreement originally between
Mainstream Associates and us dated July 25, 1996.(10)
10.10 Our 1997 Stock Option Plan.(9)
10.11 Second Amendment to Lease Agreement originally between
Mainstreet Associates and us dated July 25, 1996.(11)
10.12 Distribution Agreement between Guidant Corporation and us
dated January 13, 1999.(12)
10.13 Credit Agreement between us as Borrower, and Guidant
Corporation as Lender dated January 13, 1999.(12)
10.14 Agreement and plan of merger by and among Thoratec
Laboratories Corporation (since renamed Thoratec
Corporation), Lightening Acquisition Corporation, Thermo
Cardiosystems, Inc, and Thermo Electron Corporation dated
October 3, 2000.(13)
10.15 Registration Rights Agreement by and between Thoratec
Laboratories Corporation (since renamed to Thoratec
Corporation) and Thermo Electron Corporation dated October
3, 2000.(13)
10.16 Shareholder Agreement by and between Thoratec Laboratories
Corporation (since renamed to Thoratec Corporation) and
Thermo Electron Corporation dated October 3, 2000.(13)
21 Subsidiaries of the Thoratec Corporation.
49
EXHIBIT
NUMBER EXHIBIT
------- -------
23.1 Independent Auditors' Consent -- Deloitte & Touche LLP.
24 Power of Attorney -- Reference is made to page 55 hereof.
The following exhibits filed by Thermo Cardiosystems (now Thoratec
Cardiosystems) are incorporated herein by reference:
4.2 Form of Guarantee Agreement between the Thoratec
Cardiosystems and Thermo Electron
(filed as Exhibit 4(b) to the Thoratec Cardiosystems
Registration Statement on Form S-1 [Reg. No. 33-25144] and
incorporated herein by reference).
4.3 Form of Amendment Number 1 to Guarantee Agreement between
Thoratec Cardiosystems and Thermo Electron (filed as Exhibit
4(e) to the Thoratec Cardiosystems Registration Statement on
Form S-1 [Reg. No. 33-34737] and incorporated herein by
reference).
4.4 Fiscal Agency Agreement dated January 5, 1993, among Thermo
Electron, the Thoratec Cardiosystems, and Chemical Bank
(filed as Exhibit 4.11 to the Thoratec Cardiosystems' Annual
Report on Form 10-K for the fiscal year ended January 1,
1994 [File No. 1-10114] and incorporated herein by
reference).
4.5 Guarantee Reimbursement Agreement dated February 7, 1994,
among Thermo Cardiosystems, Thermo Voltek Corp., Thermedics,
and Thermo Electron (filed as Exhibit 4.4 to Thermedics'
Annual Report on Form 10-K for the fiscal year ended January
1, 1994 [File No. 1-9567] and incorporated herein by
reference).
4.6 Fiscal Agency Agreement dated as of May 14, 1997, among
Thoratec Cardiosystems, Thermo Electron Corporation, and
Bankers Trust Company as fiscal agent relating to $70
million principal amount of 4 3/4% Convertible Subordinated
Debentures due 2004 (filed as Exhibit 4 to Thoratec
Cardiosystems' Quarterly Report on Form 10-Q for the quarter
ended June 28, 1997 [File No. 1-10114] and incorporated
herein by reference).
10.17 Amended and Restated Corporate Services Agreement dated
January 3, 1993, between Thermo Electron and Thoratec
Cardiosystems (filed as Exhibit 10(b) to the Thoratec
Cardiosystems' Annual Report on Form 10-K for the year ended
January 2, 1993 [File No. 1-10114] and incorporated herein
by reference).
10.18 Sublease dated August 19, 1988, between the Thoratec
Cardiosystems and Thermedics, as amended by Amendment No. 1
dated January 1, 1990 (filed as Exhibit 10(c) to the
Thoratec Cardiosystems' Annual Report on Form 10-K for the
fiscal year ended December 30, 1989 [File No. 1-10114] and
incorporated herein by reference).
10.19 Form of Indemnification Agreement between the Thoratec
Cardiosystems and its officers and directors (filed as
Exhibit 10(d) to the Thoratec Cardiosystems' Registration
Statement on Form S-1 [Reg. No. 33-25144] and incorporated
herein by reference).
10.20 Intellectual Property Cross-license Agreement between
Thermedics and the Thoratec Cardiosystems dated August 19,
1988 (filed as Exhibit 10(i) to the Thoratec Cardiosystems'
Registration Statement on Form S-1 [Reg. No. 33-25144] and
incorporated herein by reference).
10.21 Agreement dated May 26, 1993, between The Polymer Technology
Group Incorporated and the Thoratec Cardiosystems (filed as
Exhibit 10(cc) to the Thoratec Cardiosystems' Quarterly
Report on Form 10-Q for the quarter ended July 3, 1993 [File
No. 1-10114] and incorporated herein by reference).
10.22 Amended and Restated Master Repurchase Agreement dated July
2, 1996, between the Thoratec Cardiosystems and Thermo
Electron (filed as Exhibit 10.7 to the Thoratec
Cardiosystems' Annual Report on Form 10-K for the fiscal
year ended December 28, 1996 [File No. 1-10114] and
incorporated herein by reference).
50
EXHIBIT
NUMBER EXHIBIT
------- -------
10.23 Incentive Stock Option Plan of the Thoratec Cardiosystems
(filed as Exhibit 10(f) to the Thoratec Cardiosystems'
Registration Statement on Form S-1 [Reg. No. 33-25144] and
incorporated herein by reference).
10.24 Restated Stock Holdings Assistance Plan and Form of
Promissory Note (filed as Exhibit 10.23 to the Thoratec
Cardiosystems' Annual Report on Form 10-K for the year ended
January 3, 1998 [File No. 1-10114] and incorporated herein
by reference).
10.25 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 18, 1997, between Thermo
Electron and the Thoratec Cardiosystems (filed as Exhibit
10.24 to the Thoratec Cardiosystems' Annual Report on Form
10-K for the year ended January 3, 1998 [File No. 1-10114]
and incorporated herein by reference).
10.26 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 18, 1997, between Thermedics
and the Thoratec Cardiosystems (filed as Exhibit 10.25 to
the Thoratec Cardiosystems' Annual Report on Form 10-K for
the year ended January 3, 1998 [File No. 1-10114] and
incorporated herein by reference).
10.27 Master Cash Management, Guarantee Reimbursement, and Loan
Agreement dated as of June 1, 1999, between the Thoratec
Cardiosystems and Thermo Electron Corporation (filed as
Exhibit 10.1 to the Thoratec Cardiosystems' Quarterly Report
on Form 10-Q for the quarter ended July 3, 1999 [File No.
1-10114] and incorporated herein by reference).
10.28 Amended and Restated Directors Stock Option Plan of the
Company (filed as Exhibit 10.2 to the Thoratec
Cardiosystems' Quarterly Report on Form 10-Q for the quarter
ended July 3, 1999 [File No. 1-10114] and incorporated
herein by reference).
10.29 Amended and Restated Deferred Compensation Plan for
Directors of the Company (filed as Exhibit 10.3 to the
Thoratec Cardiosystems' Quarterly Report on Form 10-Q for
the quarter ended July 3, 1999 [File No. 1-10114] and
incorporated herein by reference).
10.30 Amended and Restated Equity Incentive Plan of the Company
(filed as Exhibit 10.4 to the Thoratec Cardiosystems'
Quarterly Report on Form 10-Q for the quarter ended July 3,
1999 [File No. 1-10114] and incorporated herein by
reference).
10.31 Amended and Restated Nonqualified Stock Option Plan of the
Company (filed as Exhibit 10.5 to the Thoratec
Cardiosystems' Quarterly Report on Form 10-Q for the quarter
ended July 3, 1999 [File No. 1-10114] and incorporated
herein by reference).
10.32 Transition Agreement dated February 18, 2000, between R.
Michael Kleine and Thermo Electron Corporation relating to
the proposed sale of the Thoratec Cardiosystems (filed as
Exhibit 10.27 to the Thoratec Cardiosystems' Annual Report
on Form 10-K for the year ended January 1, 2000 [File No.
1-10114] and incorporated herein by reference).
10.33 Transition Agreement dated February 18, 2000, between Victor
L. Poirier and Thermo Electron Corporation relating to the
proposed sale of the Thoratec Cardiosystems (filed as
Exhibit 10.28 to the Thoratec Cardiosystems' Annual Report
on Form 10-K for the year ended January 1, 2000 [File No.
1-10114] and incorporated herein by reference).
10.34 Retention Agreement dated February 16, 2000, between Timothy
Krauskopf and Thermo Electron Corporation relating to the
Thoratec Cardiosystems (filed as Exhibit 10.29 to the
Thoratec Cardiosystems' Annual Report on Form 10-K for the
year ended January 1, 2000 [File No. 1-10114] and
incorporated herein by reference).
10.35 Retention Agreement dated February 16, 2000, between Jay
Caplan and Thermo Electron Corporation relating to the
Thoratec Cardiosystems (filed as Exhibit 10.30 to the
Thoratec Cardiosystems' Annual Report on Form 10-K for the
year ended January 1, 2000 [File No. 1-10114] and
incorporated herein by reference).
51
EXHIBIT
NUMBER EXHIBIT
------- -------
10.36 Addendum to Transition Agreement dated February 18, 2000,
between R. Michael Kleine and Thermo Electron Corporation
(filed as Exhibit 10.1 to the Thoratec Cardiosystems'
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 [File No. 1-10114] and incorporated
herein by reference).
10.37 Addendum to Transition Agreement dated February 18, 2000,
between Victor L. Poirier and Thermo Electron Corporation
(filed as Exhibit 10.2 to the Thoratec Cardiosystems'
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 [File No. 1-10114] and incorporated
herein by reference).
---------------
(1) Filed as an Exhibit with corresponding exhibit number to Thoratec's
Registration Statement on Form S-1 (Registration No. 2-87293) and
incorporated herein by reference. Amendment filed with the SEC on February
28, 2001 as Exhibit 3.1 to the Company's current report filed on Form 8-K
(File No. 033-72502) and incorporated herein by reference.
(2) Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 filed with the SEC on April 13, 1995, and
incorporated herein by reference.
(3) Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year
ended December 29, 1990 filed with the SEC on March 28, 1991, and
incorporated herein by reference.
(4) Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year
ended January 1, 1994 filed with the SEC on March 22, 1994, and
incorporated herein by reference.
(5) Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year
ended December 30, 1989 filed with the SEC on March 30, 1990, and
incorporated herein by reference.
(6) Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year
ended January 2, 1993 filed with the SEC on March 22, 1993, and
incorporated herein by reference.
(7) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the fiscal
quarter ended June 29, 1996, filed with the SEC on August 13, 1996, and
incorporated herein by reference.
(8) Filed as an Exhibit to our Registration Statement on Form S-8 filed with
the SEC on September 12, 1996, (Registration No. 333-11883) and
incorporated herein by reference.
(9) Filed as an Exhibit to our Registration Statement on Form S-8 filed with
the SEC on February 26, 2001 (Registration No. 333-56212), and incorporated
herein by reference.
(10) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the fiscal
quarter ended June 28, 1997, filed with the SEC on July 30, 1997, and
incorporated herein by reference.
(11) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the fiscal
quarter ended September 27, 1997 filed with the SEC on November 12, 1997,
and incorporated herein by reference.
(12) Filed as an Exhibit to our Annual Report on Form 10-K, for the fiscal year
ended January 2, 1999, filed with the SEC on March 24, 1999, and
incorporated herein by reference.
(13) Filed as an Annex to our Registration on form S-4 filed with the SEC on
December 29, 2000 (Registration No. 333-49120).
(b) REPORTS ON FORM 8-K
(1) The following items were filed with the SEC on February 28, 2001 as
exhibits to the current report on Form 8-K (File No. 033-72502) and are
incorporated by reference:
-- Exhibit 3.1: certificate of Amended Restated Articles of
Incorporation filed with the State of California on or about February
14, 2001
-- Exhibit 99.1: press release dated February 14, 2001 announcing
closing of merger with Thermo Cardiosystems.
52
(2) Thermo Cardiosystems press release dated January 31, 2000 announcing
that its parent plans to seek a buyer for the Company (filed as Exhibit
99 to Thermo Cardiosystems, Inc. Current Report on Form 8-K dated
February 1, 2000 (File No. 001-10114) and incorporated herein by
reference.)
(3) Thermo Cardiosystems press release dated February 6, 2001 announcing
2000 year-end financial results (filed as Exhibit 99 to Thermo
Cardiosystems, Inc. Current Report on Form 8-K dated February 6, 2001
(File No. 001-10114) and incorporated herein by reference.)
53
SIGNATURES
In accordance with Section 13 or Section 15(d) of the Exchange Act, the
Thoratec Corporation caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THORATEC LABORATORIES CORPORATION
By: /s/ D. KEITH GROSSMAN
------------------------------------
D. Keith Grossman
Chief Executive Officer
Date: January 23, 2002
POWER OF ATTORNEY
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Thoratec Corporation and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ D. KEITH GROSSMAN Chief Executive Officer, January 23, 2002
----------------------------------------------------- President and Director
D. Keith Grossman
/s/ HOWARD E. CHASE Director January 23, 2002
-----------------------------------------------------
Howard E. Chase
/s/ J. DANIEL COLE Director January 23, 2002
-----------------------------------------------------
J. Daniel Cole
/s/ J. DONALD HILL Director and Chairman of the January 23, 2002
----------------------------------------------------- Board of Directors
J. Donald Hill
/s/ WILLIAM M. HITCHCOCK Director January 23, 2002
-----------------------------------------------------
William M. Hitchcock
/s/ GEORGE W. HOLBROOK, JR. Director January 23, 2002
-----------------------------------------------------
George W. Holbrook, Jr.
/s/ DANIEL M. MULVENA Director January 23, 2002
-----------------------------------------------------
Daniel M. Mulvena
/s/ M. WAYNE BOYLSTON Senior Vice President, Chief January 23, 2002
----------------------------------------------------- Financial Officer and
M. Wayne Boylston Secretary (Principal Financial
and Accounting Officer)
/s/ THEO MELAS-KYRIAZI Director January 23, 2002
-----------------------------------------------------
Theo Melas-Kyriazi
/s/ D. KEITH GROSSMAN Chief Executive Officer, January 23, 2002
----------------------------------------------------- President and Director
D. Keith Grossman
*(Attorney-in-fact)
54
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Comprehensive Loss............... F-5
Consolidated Statements of Shareholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Thoratec Corporation:
We have audited the accompanying consolidated balance sheets of Thoratec
Corporation and Subsidiary as of December 30, 2000 and January 1, 2000, and the
related consolidated statements of operations, comprehensive loss, shareholders'
equity and cash flows for the fiscal years ended December 30, 2000, January 1,
2000, and January 2, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Thoratec Corporation and
Subsidiary as of December 30, 2000 and January 1, 2000 and the results of their
operations and their cash flows for the fiscal years ended December 30, 2000,
January 1, 2000, and January 2, 1999 in conformity with accounting principles
generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 14, 2001
F-2
THORATEC CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
FISCAL YEAR END
----------------------------
2000 1999
------------ ------------
Current Assets:
Cash and cash equivalents................................. $ 3,405,733 $ 1,696,522
Short-term investments available-for-sale (Note 2)........ 12,650,233 276,464
Receivables, net of allowance for doubtful accounts of
$6,108 in 2000 and $32,795 in 1999 (Note 9)............ 8,915,265 5,453,187
Inventories (Note 3)...................................... 8,710,005 6,611,487
Prepaid expenses and other................................ 563,617 425,317
------------ ------------
Total current assets.............................. 34,244,853 14,462,977
Equipment and Improvements -- Net (Notes 4 and 5)........... 9,309,294 9,560,814
Other Assets (Note 5)....................................... 1,167,224 1,036,647
------------ ------------
Total Assets...................................... $ 44,721,371 $ 25,060,438
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,069,774 $ 1,703,089
Accrued compensation...................................... 2,894,076 1,466,147
Deferred distributor revenue (Note 6)..................... 692,761 284,765
Other..................................................... 642,755 475,870
------------ ------------
Total current liabilities......................... 7,299,366 3,929,871
Long-term deferred distributor revenue (Note 6)............. 2,063,968 854,294
------------ ------------
Total liabilities................................. 9,363,334 4,784,165
------------ ------------
Commitments (Notes 5, 8, 9, 13 and 15)
Shareholders' Equity: (Notes 7, 8, and 9)
Preferred shares -- none issued and outstanding........... -- --
Common shares, 100,000,000 authorized; issued and
outstanding: 22,421,375 in 2000; and 20,466,326 in
1999................................................... 89,799,261 72,911,638
Additional capital........................................ 2,541,223 2,541,223
Accumulated deficit....................................... (56,919,784) (55,191,216)
Accumulated other comprehensive income (loss):
Cumulative translation adjustment...................... (62,663) 14,628
------------ ------------
Total accumulated other comprehensive income (loss)....... (62,663) 14,628
------------ ------------
Total shareholders' equity........................ 35,358,037 20,276,273
------------ ------------
Total Liabilities and Shareholders' Equity........ $ 44,721,371 $ 25,060,438
============ ============
See notes to consolidated financial statements.
F-3
THORATEC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Product sales (Notes 9 and 11)...................... $30,429,424 $22,507,884 $16,319,531
Cost of product sales............................... 10,918,980 9,738,946 6,503,986
----------- ----------- -----------
Gross profit........................................ 19,510,444 12,768,938 9,815,545
----------- ----------- -----------
Operating Expenses:
Research and development.......................... 7,244,885 5,792,635 5,096,110
Selling, general and administrative............... 10,969,070 9,360,587 7,655,819
Merger related expenses (Note 15)................. 4,169,560 -- --
----------- ----------- -----------
Total operating expenses.................. 22,383,515 15,153,222 12,751,929
Other operating income (Notes 1 and 6).............. 613,933 284,764 --
----------- ----------- -----------
Loss from operations................................ (2,259,138) (2,099,520) (2,936,384)
Interest and other income, net...................... 713,416 323,485 660,269
----------- ----------- -----------
Loss before taxes................................... (1,545,722) (1,776,035) (2,276,115)
Income tax expense (note 10)........................ (182,846) (13,075) (44,437)
----------- ----------- -----------
Net loss............................................ $(1,728,568) $(1,789,110) $(2,320,552)
=========== =========== ===========
Basic and diluted loss per share (Note 1)........... $ (0.08) $ (0.09) $ (0.11)
=========== =========== ===========
Shares used to compute basic and diluted loss per
share............................................. 21,830,723 20,445,837 20,339,816
See notes to consolidated financial statements.
F-4
THORATEC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE FISCAL YEARS ENDED
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Net Loss............................................ $(1,728,568) $(1,789,110) $(2,320,552)
Other comprehensive income (loss):
Unrealized gain (loss) on investments............. -- (8) 7,547
Foreign currency translation adjustments.......... (77,291) 27,852 16,742
----------- ----------- -----------
Comprehensive Loss.................................. $(1,805,859) $(1,761,266) $(2,296,263)
=========== =========== ===========
See notes to consolidated financial statements.
F-5
THORATEC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
COMMON ADDITIONAL ACCUMULATED INCOME SHAREHOLDERS'
STOCK CAPITAL DEFICIT (LOSS) EQUITY
----------- ---------- ------------ ------------- -------------
BALANCE, FISCAL YEAR ENDED
1997......................... $72,664,107 $2,482,229 $(51,081,554) $(37,505) $24,027,277
Exercise of 292,535 common
stock options for cash and
exchange for 42,028 shares of
common stock which were
canceled..................... 146,343 146,343
Other comprehensive income:
Unrealized gain on
investments............... 7,547 7,547
Foreign currency translation
adjustments............... 16,742 16,742
Net Loss....................... (2,320,552) (2,320,552)
----------- ---------- ------------ -------- -----------
BALANCE, FISCAL YEAR ENDED
1998......................... 72,810,450 2,482,229 (53,402,106) (13,216) 21,877,357
Exercise of 49,116 common stock
options for cash and exchange
for 5,742 shares of common
stock which were canceled.... 101,188 101,188
Issuance of common stock
options for nonemployee
services..................... 58,994 58,994
Other comprehensive income:
Unrealized loss on
investments............... (8) (8)
Foreign currency translation
adjustments............... 27,852 27,852
Net Loss....................... (1,789,110) (1,789,110)
----------- ---------- ------------ -------- -----------
BALANCE, FISCAL YEAR ENDED
1999......................... 72,911,638 2,541,223 (55,191,216) 14,628 20,276,273
Exercise of 243,277 common
stock options for cash and
exchange for 13,228 shares of
common stock which were
canceled..................... 1,194,493 1,194,493
Issuance of 1,725,000 common
shares, net of costs......... 15,693,130 15,693,130
Other comprehensive income:
Foreign currency translation
adjustments............... (77,291) (77,291)
Net Loss....................... (1,728,568) (1,728,568)
----------- ---------- ------------ -------- -----------
BALANCE, FISCAL YEAR ENDED
2000......................... $89,799,261 $2,541,223 $(56,919,784) $(62,663) $35,358,037
=========== ========== ============ ======== ===========
See notes to consolidated financial statements.
F-6
THORATEC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
-------------------------------------------
2000 1999 1998
------------ ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $ (1,728,568) $(1,789,110) $ (2,320,552)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of deferred distributor
revenue..................................... (282,330) (284,764) --
Common stock options granted for services
(Note 8).................................... -- 58,994 --
Depreciation and amortization................. 1,342,722 1,020,634 679,669
Changes in assets and liabilities:
Receivables................................. (3,588,239) (1,344,479) (2,827,077)
Prepaid expenses and other.................. (139,243) (21,904) (133,525)
Inventories................................. (2,171,476) (1,349,296) (1,380,538)
Other assets................................ (130,933) (35,898) 472,389
Accounts payable and other liabilities...... 3,153,216 462,939 36,469
Deferred distributor revenue, net of fees... 1,900,000 1,423,823 --
------------ ----------- ------------
Net cash used in operating activities.... (1,644,851) (1,859,061) (5,473,165)
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments
available-for-sale............................ (95,529,586) (7,829,477) (16,176,045)
Maturities of short-term investments
available-for-sale............................ 82,871,602 6,354,000 18,620,000
Sales of short-term investments
available-for-sale............................ 284,215 3,231,112 922,148
Capital expenditures............................. (1,153,263) (988,860) (4,800,285)
------------ ----------- ------------
Net cash provided by (used in) investing
activities............................. (13,527,032) 766,775 (1,434,182)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued in public placement -- net... 15,711,057 -- --
Common stock issued upon exercise of options..... 1,194,493 101,188 146,343
------------ ----------- ------------
Net cash provided by financing
activities............................. 16,905,550 101,188 146,343
------------ ----------- ------------
Effect of exchange rate changes on cash............ (24,456) (25,066) 4,379
------------ ----------- ------------
Net decrease in cash and cash equivalents.......... (1,709,211) (1,016,164) (6,756,625)
Cash and cash equivalents at beginning of year..... 1,696,522 2,712,686 9,469,311
------------ ----------- ------------
Cash and cash equivalents at end of year........... $ 3,405,733 $ 1,696,522 $ 2,712,686
============ =========== ============
NONCASH INVESTING TRANSACTIONS:
Capital expenditures in accounts payable......... $ 34,082 $ 54,386 $ 71,828
============ =========== ============
Costs of financing in accounts payable........... $ 17,927
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for taxes.............. $ 68,240 $ 13,075 $ 44,437
============ =========== ============
See notes to consolidated financial statements.
F-7
THORATEC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Operations -- Thoratec Corporation and our subsidiary manufactures and
markets medical devices utilizing specialty polymers and is engaged in ongoing
research and development. Our products are marketed worldwide.
We report on a 52 - 53 week fiscal year, which ends on the Saturday closest
to December 31. The fiscal years ended January 2, 1999 (fiscal 1998), January 1,
2000, (fiscal 1999), and December 30, 2000, (fiscal 2000) all include 52 weeks.
Principles of Consolidation -- The consolidated financial statements
include Thoratec Corporation (a California corporation) and our subsidiary
company, Thoratec Europe Limited (a corporation organized under the laws of the
United Kingdom). All significant intercompany balances and transactions are
eliminated in consolidation.
Use of Estimates -- The preparation of our consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the consolidated balance sheet dates and the reported
amounts of revenues and expenses for the periods presented. Actual results could
differ from these estimates.
Cash and Cash Equivalents -- Cash and cash equivalents include money market
securities stated at cost, which approximates market value.
Investments -- Our short-term investments are classified as
available-for-sale and reported at fair value. Net unrealized gains and losses
are excluded from earnings and reported as a separate component of shareholders'
equity. As of the end of 2000, short-term investments were comprised primarily
of money market funds and municipal government auction bonds having maturity of
35 days or less from the date of investment.
Inventories -- Inventories are stated at the lower of first-in, first-out
cost or market. We rent certain medical devices to customers on a month-to-month
basis and include them in inventory, net of amortization when the devices are
expected to be sold to customers within one year. Amortization expense of all
rental equipment included in our rental program is recognized ratably over no
longer than 36 months and is recorded in cost of product sales. The
straight-line method is used for amortization.
Equipment and Improvements -- Equipment and improvements are stated at
cost. Equipment is depreciated over estimated useful lives which range from two
to eight years. Leasehold improvements are amortized over the term of the lease
or over the estimated useful life of the improvements, whichever is shorter.
Equipment and improvements includes certain medical devices rented to customers
on a long-term basis. Amortization expense of all rental equipment included in
our rental program is recognized ratably over no longer than 36 months and is
recorded in cost of product sales. The straight-line method is used for
depreciation and amortization.
We review for the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of that asset may not
be recoverable. An impairment loss would be recognized when the sum of the
undiscounted future net cash flows expected to result from the use of the asset
and its eventual disposal is less than carrying amount.
Income Taxes -- We follow an asset and liability approach for financial
accounting and reporting of income taxes. Under this approach, we compute our
tax liability at each consolidated financial statement date by applying
provisions of current tax laws to temporary differences between consolidated
financial statement and income tax bases. Changes in tax law may result in an
adjustment to deferred tax assets.
F-8
THORATEC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value of Financial Instruments -- Financial instruments include cash
and cash equivalents, customer receivables, accounts payable, and certain other
accrued liabilities. The carrying amounts of these items are a reasonable
estimate of their fair values.
Foreign Currency Translation -- All assets and liabilities of our
non-United States operations are translated into United States dollars at fiscal
period-end exchange rates, and, except as follows, the resulting translation
adjustments are included in comprehensive income. Income items are translated at
actual or average monthly rates of exchange. Exchange rate fluctuations
resulting from the period-end translation of the current portion of the
intercompany obligation of 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 other non-operating expenses.
Revenue Recognition and Product Warranty -- We recognize product sales upon
shipment of the related product. A provision for estimated future costs relating
to warranty expense is recorded when products are shipped. We rent certain
medical devices to customers on a month-to-month basis. Rental income is based
on utilization and is included in income as earned. Included in product sales
for 2000, 1999, and 1998 are approximately $1,311,000, $1,082,000, and
$1,064,000 respectively, for income earned from the rental of these medical
devices. Sales related to training provided to customers are recognized as the
services are provided.
We recognize distributor revenue ratably over the life of the related
distributor agreement. Amortized distribution revenue is included in other
operating income and was approximately $282,000 in 2000 and 285,000 in 1999 (See
Note 6). Also included in other operating income in 2000 is a one-time payment
of approximately $330,000 in conjunction with an amendment to a license granted
to Gambro, Inc., formerly known as COBE Laboratories. (See Note 9).
Accounting for Stock-Based Compensation -- We account for stock-based
awards to employees using the intrinsic value method in accordance with
Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Proforma disclosures of net earnings and earnings per share
consistent with the method of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" are included in Note 8.
Loss Per Share -- Basic earnings per share are computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. Diluted earnings per share for 2000, 1999, and 1998
exclude any effect from such securities as their inclusion would be
antidilutive, therefore, diluted earnings per share is the same as basic
earnings per share for all periods presented.
Comprehensive Loss -- Comprehensive loss includes net loss and is defined
as the change in net assets during the period from non-owner sources, unrealized
gains and losses on investments and foreign currency translation adjustments.
Operating Segments -- We are organized as a single operating segment,
whereby our chief operating decision maker assesses the performance of and
allocates resources to the business as a whole. (See Note 11).
Other Assets -- Other assets principally include deposits on our building
lease and interest earned on those deposits.
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 completed our analysis of this standard
and believe that it will not have a material impact on our financial statements.
F-9
THORATEC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Presentation -- Certain 1999 and 1998 amounts have been reclassified to
conform to the presentation in the 2000 financial statements.
2. SHORT-TERM INVESTMENTS
Short-term investments available-for-sale are summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
Fiscal 1999
Corporate debt instruments....... $ 276,464 $-- $-- $ 276,464
=========== == == ===========
Fiscal 2000
Municipal government agency
bonds......................... $12,650,233 $-- $-- $12,650,233
=========== == == ===========
The Company classifies those investments which mature in less than one year
as short-term investments.
3. INVENTORIES
Inventories consist of the following:
FISCAL YEAR
------------------------
2000 1999
---------- ----------
Finished goods.............................................. $3,536,822 $2,172,493
Rental drivers.............................................. 1,590,913 990,562
Work-in-process............................................. 1,740,536 2,033,194
Raw materials............................................... 1,841,734 1,415,238
---------- ----------
Total............................................. $8,710,005 $6,611,487
========== ==========
Rental drivers in the inventory are those rental units that we expect may
be subject to purchase by customers.
4. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following:
FISCAL YEAR
--------------------------
2000 1999
----------- -----------
Equipment................................................. $ 5,584,308 $ 4,568,466
Leasehold Improvements.................................... 7,587,197 7,540,866
Construction in Progress.................................. 110,843 119,473
----------- -----------
Total........................................... 13,282,348 12,228,805
Accumulated depreciation and amortization................. (3,973,054) (2,667,991)
----------- -----------
$ 9,309,294 $ 9,560,814
=========== ===========
Included in equipment for 2000 and 1999 is product used in our rental
program of approximately $1,062,000 and $647,000 of cost, respectively, and
$456,000 and $261,000 of accumulated amortization, respectively.
5. LEASES
We lease offices, laboratory and manufacturing space under noncancelable
operating leases. In 1996 we entered into a lease agreement for a new facility
located in Pleasanton, California, which accommodates all of
F-10
THORATEC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
our manufacturing, engineering and administrative activities. The administrative
and engineering portion of the building was completed and occupied in late 1997.
The manufacturing portion was completed in 1998 and occupied in 1999 after
receiving clearance from the FDA. We have invested approximately $9 million in
equipment and leasehold improvements to the building. Annual payments under the
lease are approximately $781,000 for a lease term of 15 years and commenced in
August 1997. The lease includes provisions, among others, for annual cost of
living adjustments to the lease payments, two five-year renewal options, a
purchase option, and a security deposit of $1,058,324 which is included in other
assets. A significant portion ($750,000) of the remaining security deposit can
be reduced or eliminated before the end of the initial lease term if we meet
certain criteria as specified by the contract. Future minimum lease payments as
of the end of fiscal year 2000 are noted below:
FISCAL YEAR:
------------
2001............................................. $ 803,399
2002............................................. 803,399
2003............................................. 803,399
2004............................................. 803,399
2005............................................. 803,399
Thereafter....................................... 5,217,344
----------
Total............................................ $9,234,339
==========
Rent expense for all operating leases was $790,859 in 2000, $871,162 in
1999, $911,609 in 1998.
6. DEFERRED DISTRIBUTOR REVENUE
During the first quarter of 1999, we entered into a distribution agreement
with Guidant Corporation. Under the terms of the agreement, Guidant receives
exclusive worldwide marketing and distribution rights to the Company's Vectra
vascular access graft product line, except in Japan. In exchange for these
rights, Guidant has made $3.5 million in non-refundable payments which we have
been recognizing as revenue over the estimated life of the agreement. $1.5
million was recognized as deferred distributor revenue at the time the agreement
was signed and $2.0 million was recognized as deferred distributor revenue in
December 2000 upon receiving FDA approval to market Vectra in the U.S.
Other operating income in 2000 and 1999 includes approximately $282,000 and
$285,000, respectively, of the amortization of deferred distributor revenue. The
remaining deferred distributor revenue of $2,757,000 at the end of 2000 will be
recognized into income ratably over the remaining four year term of the
agreement.
7. COMMON AND PREFERRED STOCK AND WARRANTS
The Company has authorized 100,000,000 no par common shares, and 2,500,000
shares of preferred stock, of which 540,541 shares have been designated Series A
and 500,000 shares designated Series B.
The Series A preferred stock is entitled to cumulative annual dividends of
$1.30 per share and has a liquidation preference of $9.25 plus cumulative unpaid
dividends. The Company may redeem the Series A preferred stock at any time for
its liquidation preference. Each share of preferred stock is convertible into
one-third of a share of common stock, after adjusting for earned but unpaid
dividends. At December 30, 2000, no shares of Series A preferred stock were
outstanding.
Series B preferred stock is senior to Series A in all preferences. Series B
is entitled to cumulative annual dividends of $.96 per share and has a
liquidation preference of $8.00 plus cumulative unpaid dividends. The Series B
preferred stock is redeemable by the Company five years after issuance for $8.00
per share plus cumulative unpaid dividends. Each share of Series B preferred
stock is convertible at any time into three and
F-11
THORATEC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
one-third shares of common stock and has certain anti-dilution provisions.
Series B preferred votes on an as-converted basis. At December 30, 2000, no
shares of the Series B preferred stock were outstanding.
In April 2000, 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. In addition, the underwriters exercised a 30-
day option to purchase from us and Gambro 300,000 shares of common stock to
cover any over-allotments, of which the proceeds from 225,000 shares were
received by us. After deducting underwriting discounts of approximately
$983,000, we received a total of $16,267,000, from which approximately $574,000
in offering-related costs have been paid. Underwriting discounts and the other
estimated offering-related costs were recorded as an offset to common stock at
the closing of the offering. 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.
In November 1997, the Company sold through a public offering 2,000,000
shares of common stock at $5.00 per share. Net cash proceeds received by the
Company related to this offering were approximately $8,809,000 after placement
agents' fees and approximately $491,000 of other costs.
In July 1996, the Company sold, through an underwritten public offering,
1,644,000 shares of common stock at $12.00 per share. In connection with the
public offering the underwriters were issued five-year warrants to purchase
164,400 shares of the Company's common stock at $14.40 per share. The warrants
are currently exercisable and include a net exercise provision. Net cash
proceeds received by the Company related to this offering were approximately
$17,591,000. Underwriters' commissions, the fair value of warrants issued to the
underwriters, and approximately $1,050,000 of other estimated costs have been
recorded as a deduction to the proceeds received from the sale of the common
stock. In February 2001, subsequent to the end of 2000, the warrants were
cancelled as a result of the merger with Thermo Cardiosystems pursuant to the
original terms of the warrants.
For other common stock information, see Note 8.
8. OPTIONS
In 1993, the Directors approved the 1993 Stock Option Plan ("1993 SOP"),
which permits us to grant options to purchase up to 666,667 shares of common
stock. During 2000 and 1998, 24,347 and 52,500 options, respectively, were
granted under this plan. No options were granted under this plan in 1999.
In 1996, the Directors adopted the 1996 Stock Option Plan ("1996 SOP") and
the 1996 Nonemployee Directors Stock Option Plan ("Directors Option Plan"). The
1996 SOP consists of two parts. Part One permits the Company to grant options to
purchase up to 500,000 shares of common stock. During 2000, 1999, and 1998,
69,552, 6,000, and 132,500 options, respectively, were granted at fair market
value under this Part of the Plan. Part Two related to the Chief Executive
Officer (CEO) and permits the Company to grant non-qualified options to the CEO
to purchase up to 333,333 shares of common stock. During 1996, 333,333 options
were granted at fair market value under this Part of the Plan. In November 1997,
these options were repriced to the then fair market value of $5.00 per share.
All other options of the CEO were canceled in conjunction with the repricing.
The Directors Option Plan was amended by approval by a vote of the Company's
shareholders in May 1999 for all option grants going forward. The amendments
include increasing the number of shares granted to the Board of Directors in the
initial grants from 10,000 to 15,000 shares (granted in four equal installments,
once when elected to the Board then quarterly thereafter), and the annual grants
from 5,000 to 7,500 shares (granted in four equal installments after
re-election). Provisions were also made for immediate vesting of both initial
and annual grants, and for changing the term of the options from ten to five
years. In addition, the number of shares reserved for issuance under The
Director's Option Plan was increased
F-12
THORATEC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from 150,000 to 350,000 and the plan administrator has been provided with the
discretion to impose any repurchase rights in favor of the Company on any
optionee. The Company currently has six non-employee directors who are eligible
to participate in the Directors Option Plan. During 2000, 1999, and 1998,
46,875, 39,375, and 35,000 options, respectively, were granted at fair market
value under this plan.
In 1997, the Directors adopted the 1997 Stock Option Plan ("1997 SOP"). The
1997 SOP was amended by approval of a vote of our Company's shareholders in
February 2001. During 2000, 1999, and 1998, 777,389, 1,038,276, and 718,960
options, respectively, were granted at fair market value under this plan. As of
December 30, 2000, prior to the February amendment, 365,091 options remained
available for grant under this plan. The amendment increased the number of
shares of our common stock reserved for issuance for options granted under this
plan by 6,400,000. This increase is to enable the company to assume the options
to purchase shares of Thermo Cardiosystems common stock that were outstanding
upon closure of the Thermo Cardiosystems merger and also to grant additional
shares, over time after the merger, to an expanded employee base.
Including the 1993 SOP, the 1996 SOP, the Directors Option Plan, the 1997
SOP, and several older plans, we had eight common stock option plans. Options
may be granted by the Board of Directors at fair market value at the date of
grant. Options under closure plans generally become exercisable immediately to
within five years of grant and expire between five and ten years from date of
grant. At December 30, 2000, options to purchase 581,758 common shares remain
available for grant under all the plans.
Agreements have been entered into with selected consultants whereby options
to purchase our common stock were accepted by these consultants as full or
partial payment for the services rendered to the Company. The fair market value
of the consulting service is the basis for recording the fair market value of
the transaction in the Company's financial records and is recognized as the
related services are performed. Options issued under these agreements totaled
500 in 2000 and 17,341 in 1999, and are included in the grant activity
previously discussed.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its employee stock-based compensation plans. Accordingly, no
compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock-based plans been determined based on
the fair value at the grant dates for awards under those plans consistent with
the method of FASB Statement 123, the Company's net loss and net loss per share
would have been increased to the proforma amounts indicated in the following
table. As 1996 was the initial phase-in period for applying this Statement, the
proforma results indicated are not necessarily representative of the effects on
proforma disclosures of net income for future periods as they exclude options
that were granted prior to January 1, 1995, with vesting periods in 1995 and
later.
FISCAL YEAR
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Net Loss
As reported............................... $(1,728,568) $(1,789,110) $(2,320,552)
Pro forma................................. (7,025,505) (5,230,110) (4,565,552)
Basic and diluted loss per share
As reported............................... $ (0.08) $ (0.09) $ (0.11)
Pro forma................................. (0.32) (0.26) (0.22)
The fair value of each option grant is estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants made in 2000, 1999, and 1998: risk-free interest
rates of 6.04% in 2000, 5.71% in 1999, and 5.09% in 1998; expected volatility of
86% in 2000, 77% for 1999, and 81% for 1998; expected lives of one year in 2000,
and two years in 1999 and 1998 beyond each incremental vesting period (total
life of one to six years), depending upon each grant's individual vesting
schedule. No dividends are assumed for any plan in any year.
F-13
THORATEC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Option activity is summarized as follows:
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
---------- --------------
Outstanding at fiscal year end 1997 (844,747 exercisable at
$3.56 weighted average exercise price per share).......... 1,795,119 $ 4.98
Granted ($4.08 weighted average fair value per share)..... 938,960 6.44
Canceled and expired...................................... (143,288) 4.45
Exercised(1).............................................. (292,535) 1.50
---------
Outstanding at fiscal year end 1998 (790,934 exercisable at
$5.60 weighted average exercise price per share).......... 2,298,256 $ 6.05
Granted ($5.01 weighted average fair value per share)..... 1,083,651 8.11
Canceled and expired...................................... (192,967) 6.44
Exercised(2).............................................. (49,116) 3.11
---------
Outstanding at fiscal year end 1999 (1,220,699 exercisable
at $6.09 weighted average exercise price per share)....... 3,139,824 $ 6.78
Granted ($5.96 weighted average fair value per share)..... 918,163 11.54
Canceled and expired...................................... (189,768) 8.84
Exercised(3).............................................. (243,277) 5.76
---------
Outstanding at fiscal year end 2000 (1,796,988 exercisable
at $7.18 weighted average exercise price per share)....... 3,624,942 $ 7.94
=========
---------------
(1) Includes 68,893 options exercised for $146,343 cash and 223,642 options
exercised by exchange for 42,028 shares of common stock, which were
canceled.
(2) Includes 36,402 options exercised for $101,188 cash and 12,714 options
exercised by exchange for 5,742 shares of common stock, which were canceled.
(3) Includes 211,193 options exercised for $1,194,493 cash and 32,084 options
exercised by exchange for 13,228 shares of common stock, which were
canceled.
The status of options outstanding as of the end of fiscal 2000 is
summarized as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICE CATEGORY OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
-------------- ----------- ---------------- -------------- ----------- --------------
$ 0.75 38,870 .26 years $ 0.75 37,499 $ 0.75
$ 1.14 to $ 2.25 173,011 2.56 years 2.18 173,011 2.18
$ 4.38 to $ 6.00 888,360 6.82 years 5.43 585,702 5.35
$ 6.06 to $ 7.13 517,124 7.11 years 6.44 275,511 6.45
$ 7.16 to $ 8.25 709,591 8.33 years 8.20 177,513 8.18
$ 8.44 to $10.25 363,849 7.15 years 8.99 212,954 9.09
$10.50 to $13.13 746,885 8.91 years 10.65 238,024 10.64
$13.13 to $15.88 101,758 7.75 years 14.99 64,275 14.99
$16.00 to $21.00 75,495 7.95 years 17.97 22,500 18.19
$30.00 9,999 5.43 years 30.00 9,999 30.00
--------- ---------
$ 0.75 to $30.00 3,624,942 7.39 years 7.94 1,796,988 7.18
========= =========
In conjunction with the merger between Thoratec and Thermo Cardiosystems,
options to purchase 887,621 shares of Thoratec stock became fully vested at the
close of the merger transaction on February 14,
F-14
THORATEC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2001. This acceleration of vesting was provided in the terms of the original
grants. Of the 887,621 options that accelerated, waiver and retention agreements
involving options to purchase 868,750 shares were entered into whereby the
option holders agreed not to sell or transfer any of their shares for a period
of up to 18 months in exchange for a retention bonus if the option holder
continues in the employ of Thoratec during the period ending 12 months after the
effective date of the merger transaction. See note 14.
9. RELATED PARTIES
In 1992 we entered into an agreement to sell common stock, representing 26%
of the Company, to COBE Laboratories, Inc., "COBE", which included several
provisions including a standstill agreement. The Company and COBE also finalized
a licensing, manufacturing, and distribution agreement which provides for a
royalty-bearing license to our biomaterial technology for use in certain of
COBE's products, among other items. The licensing agreement was amended in 1999
to split the license into two separate agreements at the time of the sale of a
portion of COBE's cardiovascular business. One is retained by COBE Laboratories,
now called Gambro, Inc., a major shareholder of the Company, and the other was
granted to Sorin COBE Cardiovascular when that division of Gambro was sold to
Sorin. In 1997, the Company's obligation to manufacture biomaterials and
distribute products through COBE terminated.
In the first quarter of 2000, we amended the license granted to Gambro,
Inc., to be a fully paid-up, world-wide, irrevocable field-of-use license and
sublicense. The original license 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. We have no
continuing obligation to Gambro under this license agreement.
Sales to COBE and its affiliates for 2000, 1999, and 1998 were nil,
$167,000, and $145,000, respectively. Receivables from COBE and its affiliates
were nil at the end of fiscal year 2000 and $17,100 at the end of fiscal year
1999.
For other related party transactions, see Notes 12 and 15.
10. TAXES ON INCOME
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards.
Significant components of the Company's net deferred taxes are as follows:
FISCAL YEAR
---------------------------
2000 1999
----------- ------------
Deferred tax assets:
Federal tax loss carryforward (as adjusted for the
limitation on change in ownership).................. $ 5,751,000 $ 6,920,000
State tax loss carryforward............................ 49,000 375,000
Deferred revenue....................................... 295,000 450,000
Foreign................................................ 1,093,000 750,000
Credits (research and manufacturing)................... 1,192,000 970,000
Other, net............................................. 992,000 685,000
----------- ------------
Total.......................................... 9,372,000 10,150,000
Less: Valuation allowance.............................. (9,372,000) (10,150,000)
----------- ------------
$ -- $ --
=========== ============
F-15
THORATEC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At the end of fiscal 2000, the Company had net operating loss ("NOL")
carryforwards of approximately $18.5 million. The majority of such carryforwards
expire from 2003 through 2018. Use of the $7.4 million NOL which arose prior to
the greater than 50% change in ownership which occurred in 1992 is limited to
approximately $440,000 per year due to such change.
Due to these limitations and due to the fact that the Company has sustained
cumulative losses, the potential future benefit from these deferred assets are
fully reserved by means of a valuation allowance and will therefore produce a
financial statement benefit if and when utilized.
A reconciliation between the effective tax rate and the statutory federal
rate follows:
FISCAL YEAR
-----------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
Income tax benefit at statutory
rate............................ $(526,000) 34.0% $(608,000) (34.0)% $(789,000) (34.0)%
State taxes....................... 280,000 (18.1) (85,000) (4.8) (26,000) (1.1)
Increase in tax credit
carryforwards................... (100,000) 6.5 (115,000) (6.4) (96,000) (4.1)
Increase in valuation allowance... (778,000) 50.3 725,000 40.5 975,000 42.0
Nondeductible merger expenses..... 1,418,000 (91.7) -- --
Other, net........................ (112,000) 7.2 96,000 5.4 (20,000) (.9)
--------- ----- --------- ----- --------- -----
$ 182,000 (11.8)% $ 13,000 (.7)% $ 44,000 (1.9)%
========= ===== ========= ===== ========= =====
11. ENTERPRISE AND RELATED GEOGRAPHIC INFORMATION
We manage our business on the basis of one reportable operating segment.
(See Note 1 for a brief description of the Company's business.) Net sales by
geographic area are presented by attributing revenues from external customers or
distributors on the basis of where the products are sold. Long-lived assets by
geographic area and information about products and services are included as
enterprise-wide disclosures.
Receivables in 2000 include a $2 million receivable due from Guidant
related to the milestone payment generated by the FDA approval of the Vectra
graft. No other customer accounted for greater than 10% of trade receivables in
2000 or 1999. No customer accounted for greater than 10% of product sales in
2000, 1999 or 1998. Export product sales accounted for 18%, 23%, and 26% of our
total product sales in 2000, 1999, and 1998 respectively.
GEOGRAPHIC AREAS
FISCAL YEAR
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Product Sales:
International Europe...................... $ 3,413,921 $ 3,597,973 $ 2,718,794
All Other International................... 2,081,501 1,606,447 1,497,584
----------- ----------- -----------
Subtotal International............ 5,495,422 5,204,420 4,216,378
Domestic.................................. 24,934,002 17,303,464 12,103,153
----------- ----------- -----------
Total............................. $30,429,424 $22,507,884 $16,319,531
=========== =========== ===========
F-16
THORATEC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEAR
------------------------
2000 1999
---------- ----------
Long-lived assets:
International -- Europe................................... $ 489,009 $ 377,958
Domestic.................................................. 8,820,285 9,182,856
---------- ----------
Total............................................. $9,309,294 $9,560,814
========== ==========
CLASSES OF SIMILAR PRODUCTS
FISCAL YEAR
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Product Sales:
Circulatory Support....................... $29,374,316 $21,768,089 $15,637,756
Vascular Graft............................ 1,055,108 739,795 681,775
----------- ----------- -----------
Total............................. $30,429,424 $22,507,884 $16,319,531
=========== =========== ===========
12. UNAUDITED QUARTERLY INFORMATION FOR FISCAL YEAR 2000 AND 1999
FIRST SECOND THIRD FOURTH
------ ------ ------- ------
FISCAL YEAR 2000
Revenues....................................... $7,606 $7,261 $ 6,194 $9,368
Gross profit................................... 4,674 4,700 3,973 6,163
Net income (loss).............................. 648 354 (1,869) (862)
Basic earnings per share....................... .03 .05 (.13) (.08)
Diluted earnings per share..................... .03 .04 (.13) (.08)
FISCAL YEAR 1999
Revenues....................................... $5,375 $4,892 $ 5,076 $7,165
Gross profit................................... 3,027 3,231 2,751 3,760
Net loss....................................... (336) (53) (902) (498)
Basic and diluted earnings per share........... (.02) (.00) (.04) (.02)
13. COMMITMENTS
In October 1997, we executed a four-year agreement with Arrow
International, Inc. ("Arrow") to supply the mechanical valves for the disposable
blood pump used in the Company's VAD System. As of December 30, 2000, the
remaining long-term purchase commitment associated with this agreement was
approximately $1.2 million.
In July 1998, we established an Executive Officer Severance Benefits Plan
and an Employee Severance Benefits Plan as part of the employee benefits
package. The plans provide severance benefits to certain employees whose
employment is terminated, other than for cause. An Executive Officer's standard
severance pay benefit is equal to one times annualized base salary. An
employee's severance pay benefit is equal to an amount based on job level and
length of service.
In January 2000, we entered into a four-year employment agreement with a
key executive officer. This employment agreement provides for, among other
provisions, a minimum base salary, an annual bonus based on performance, and a
severance package. In September 2000, we entered into a three-year employment
agreement with another key executive officer. This employment agreement provides
for, among other provisions, a minimum base salary, an annual bonus based on
performance, and a severance package.
F-17
THORATEC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We are not party to any legal proceedings other than ordinary routine
litigation incidental to our business. We believe that the ultimate resolution
of these matters will not have a material adverse effect on our consolidated
financial statements taken as a whole.
See Notes 6, 8, 9, and 14 for additional commitments.
14. RETIREMENT SAVINGS PLAN
Effective January 1997, we implemented a 401(k) Plan, or the Plan, covering
all employees who have met certain eligibility requirements. Under the Plan,
employees may elect to contribute up to 18% of their eligible compensation to
the Plan, subject to certain limitations. In 1998 and 1999 we matched employee
contributions at 25% up to the first 6% of employees' compensation. In 2000 the
Company match was changed to 50% up to the first 6% of employee contributions.
Employees vest at the rate of 25% per year, with full vesting after four years
of service with the Company. For fiscal years 2000, 1999, and 1998 we made
contributions to the Plan of approximately $251,000, $91,000, and $54,000,
respectively.
15. SUBSEQUENT EVENT
On February 14, 2001 the Company completed a merger with Thermo
Cardiosystems, a Massachusetts-based manufacturer of cardiac assist, blood
coagulation and skin incision devices. A merger agreement, a shareholder
agreement and a registration rights agreement were entered into between Thoratec
and Thermo Electron Corporation, the parent company of Thermo Cardiosystems,
pursuant to the merger transaction. The transaction was a stock-for-stock
transaction, accounted for as a reverse acquisition purchase in which Thermo
Cardiosystems is treated as the acquirer of Thoratec for financial reporting
purposes. The transaction will be treated as a tax-free exchange. Under the
terms of the agreement, each outstanding share of Thermo Cardiosystems stock was
exchanged for 0.835 shares of newly issued Thoratec stock. The estimated
purchase price of $348 million has been assigned to the tangible and intangible
assets acquired and liabilities assumed of Thoratec. Current Thoratec
shareholders own approximately 43 percent of the shares outstanding. Thermo
Electron received shares representing approximately 36 percent of the proforma
shares outstanding, which is subject to certain contractual lock-up provisions.
In addition, Thoratec agreed to appoint a nominee of Thermo Electron to fill one
seat on Thoratec's Board until such time that Thermo Electron ceases to
beneficially own at least 10% of the voting power of Thoratec. A nominee of
Thermo Electron was appointed to Thoratec's Board in February 2001.
As part of the merger with Thermo Cardiosystems, subordinated debentures
(4 3/4%) with a face value of approximately $54 million at December 30, 2000,
became convertible into shares of Thoratec common stock. The debentures are due
May 15, 2004, and continue to be guaranteed by Thermo Electron, the former
parent of Thermo Cardiosystems. We have issued a standby letter of credit for
$45 million as surety for the debentures with securities received in the merger
pledged in an amount equal to the face value of the letter of credit.
F-18