<PAGE> 1
PROSPECTUS FILED PURSUANT TO
RULE 424(B)(4)
ON REGISTRATION
NO. 333-36685
3,000,000 SHARES
LOGO
COMMON STOCK
-----------------------------
Of the 3,000,000 shares (the "Shares") of common stock, no par value per
share (the "Common Stock"), offered hereby, 2,000,000 shares are being sold by
Thoratec Laboratories Corporation ("Thoratec" or the "Company") and 1,000,000
shares are being sold by a selling shareholder (the "Selling Shareholder"). See
"Principal and Selling Shareholders." The Common Stock is quoted on the Nasdaq
National Market under the symbol "THOR." On November 4, 1997, the last reported
sale price of the Common Stock, as quoted on the Nasdaq National Market, was
$5.63 per share. See "Price Range of Common Stock."
-----------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
-----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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PRICE TO PLACEMENT AGENT PROCEEDS TO PROCEEDS TO
PUBLIC FEES(1) COMPANY(2)(3) SELLING SHAREHOLDER(2)(3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $5.00 $0.35 $4.65 $4.65
- ----------------------------------------------------------------------------------------------------------------------
Total....................... $15,000,000 $1,050,000 $9,300,000 $4,650,000
==================================================================================================================
</TABLE>
(1) The Common Stock is being offered on an all or none basis by the Company and
the Selling Shareholder primarily to selected institutional investors.
Vector Securities International, Inc. and Cruttenden Roth Incorporated (the
"Placement Agents") have been retained to act, on a best efforts basis, as
exclusive co-agents for the Company and the Selling Shareholder in
connection with the arrangement of this transaction. The Company and the
Selling Shareholder have agreed to pay the Placement Agents a fee in
connection with the arrangement of this transaction and the Company has
agreed to reimburse the Placement Agents for certain out-of-pocket expenses.
The Company and the Selling Shareholder have agreed to indemnify the
Placement Agents against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). See "Plan of
Distribution."
(2) The termination date of the offering is November 10, 1997, subject to
extension by mutual agreement of the Company, the Selling Shareholder and
the Placement Agents. Prior to the closing date of this best efforts, all or
nothing offering, all investor funds will promptly be placed in escrow with
Citibank, N.A., as escrow agent for funds collected in connection with the
offering (the "Escrow Agent"), in an escrow account established for the
benefit of the investors. Upon receipt of notice from the Escrow Agent that
investors have affirmed purchase of the Common Stock and deposited the
requisite funds in the escrow account, the Company and the Selling
Shareholder will deposit with The Depository Trust Company ("DTC") the
shares of Common Stock to be credited to the accounts of the investors and
will collect the investor funds from the Escrow Agent. In the event that
investor funds are not received in the full amount necessary to satisfy the
requirements of the offering, all funds deposited with the Escrow Agent will
promptly be returned to the investors. See "Plan of Distribution."
(3) Before deducting expenses payable by the Company estimated at $450,000.
-----------------------------
Vector Securities International, Inc. Cruttenden Roth
Incorporated
The date of this Prospectus is November 5, 1997
<PAGE> 2
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which are intended to be
covered by the safe harbors created thereby. Those statements include, but may
not be limited to, the discussions of the Company's operating and growth
strategy, including its development plans and possible acquisitions. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties including, without limitation, the factors set forth under the
caption "Risk Factors" in this Prospectus. Actual results, events or performance
may differ materially from those anticipated in any forward-looking statements.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
28, 1996, the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 29, 1997, the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 28, 1997 and the Company's Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on May 18, 1981 are
hereby incorporated by reference in this Prospectus except as superseded or
modified herein or therein.
All documents filed with the Securities and Exchange Commission by the
Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after
the date of this Prospectus and prior to the termination of the offering shall
be deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date of filing of such documents. Any statement contained in any
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
a part of this Prospectus. The Company will provide without charge to each
person, including any beneficial owner, to whom this Prospectus is delivered,
upon written or oral request of such person, a copy of any and all of the
documents that have been or may be incorporated by reference herein (other than
exhibits to such documents which are not specifically incorporated by reference
into such documents). Such requests should be directed to the Chief Financial
Officer at the Company's principal executive office at 6035 Stoneridge Drive,
Pleasanton, California 94588, telephone number (510) 847-8600.
Thoratec(R), TLC-II(TM), Thoralon(TM) and the Thoratec logo are trademarks of
the Company.
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus, including information under "Risk
Factors."
THE COMPANY
Thoratec Laboratories Corporation ("Thoratec" or the "Company") develops,
manufactures and markets medical devices for circulatory support and vascular
graft applications. The Company's first product, the Thoratec Ventricular Assist
Device System ("VAD System"), is being marketed in the U.S. and internationally
for use as a bridge to heart transplant and is currently the only device
approved by the U.S. Food and Drug Administration (the "FDA") that can provide
left, right or biventricular support for this indication. The Company believes
that the VAD System provides a number of significant advantages over other
ventricular assist devices. The Company is pursuing additional indications for
the VAD System and is developing other circulatory support products for patients
suffering from heart failure. The Company is also developing vascular grafts for
hemodialysis and coronary artery bypass surgery. All of the Company's products
utilize its proprietary biomaterial, Thoralon, which provides improved
thromboresistance, biocompatibility, patency and durability.
CIRCULATORY SUPPORT PRODUCTS. Cardiac failure is the leading cause of death
in the U.S. Deaths associated with cardiac failure fall into two broad
categories: chronic congestive heart failure ("CHF"), a slow, degenerative
process leading to cardiac insufficiency; and acute cardiac failure resulting
from heart attacks, open heart surgery and various disorders, such as infections
of the heart muscle. There are approximately four to five million patients with
CHF in the U.S., approximately 85% of whom die within eight to twelve years of
diagnosis. Conventional drug therapy may delay the progress of CHF but is not
curative, and the only currently available method of treating end-stage CHF is a
heart transplant. Although heart transplants have been very successful, too few
donor hearts are available to address the 30,000 to 50,000 CHF patients that
could benefit from some form of permanent cardiac assist in the U.S. each year.
In addition, approximately 15,000 to 18,000 patients die annually in the U.S.
from heart failure following open heart surgery when the heart, weakened by
disease and the additional trauma of surgery, fails to maintain adequate blood
circulation.
The VAD System is a mechanical device used to assist cardiac function and
can be used to support one or both sides of the patient's heart until a donor
heart can be found or the patient's heart recovers its normal function. In
December 1995, the Company received FDA clearance to market the VAD System as a
bridge to heart transplant. In October 1997, the Company submitted a pre-market
approval ("PMA") Supplement to the FDA for use of the VAD System for
postcardiotomy recovery of the natural heart. The VAD System is currently being
marketed in Europe as a bridge to heart transplant and is CE marked to be in
conformance with all European electrical safety standards. The VAD System is
also marketed in certain international countries including Canada and has been
certified in conformance with Canadian Standards Association requirements for
safety. As of August 1997, the VAD System had been used in more than 840
patients and had been placed in 68 heart transplant centers worldwide. Thoratec
believes that the VAD System has a number of competitive advantages which will
make it available to a broader patient population and will enable it to better
serve the existing patient population. These advantages include (i) providing
biventricular support, which is necessary in 20% to 40% of patients receiving
ventricular assistance, (ii) placing the pump paracorporeally (worn on the
outside of the body), enabling it to support patients of varying sizes,
including very small patients, (iii) providing the surgeon with multiple options
in positioning the cannulae and in the size and shape of the cannulae used,
potentially reducing damage to the heart, (iv) incorporating Thoratec's
proprietary biomaterial, Thoralon, in most blood contacting parts, potentially
reducing or eliminating the risks of certain adverse reactions by the body and
permitting the system to be used for potentially extended periods and (v)
providing circulatory support for both bridge to transplant and, subject to
regulatory approval, postcardiotomy recovery of the natural heart. The Company
believes that if it receives clearance for the postcardiotomy recovery
indication, the VAD System will be the only device cleared to provide
circulatory
3
<PAGE> 4
support for both indications. To date, the VAD System has been used to support
patients for periods ranging from a few hours to over one year.
Thoratec recently completed clinical trials of the VAD System in patients
who were unable to regain normal heart function following open heart surgery. In
October 1997, the Company submitted a PMA Supplement to the FDA for use of the
VAD System for postcardiotomy recovery of the natural heart. The Company
believes that the VAD System is well-suited for this indication since it does
not require abdominal surgery to implant and/or remove the pump, provides
options for either short-term or long-term support and provides biventricular
support, which is often required by patients in recovery. If the Company
receives FDA clearance to market the VAD System for this indication, the Company
plans to expand the number of U.S. hospitals it targets for potential VAD System
sales from the 130 hospitals that perform heart transplants to include the
hospitals that perform open heart surgery, increasing the market to
approximately 800 hospitals.
In addition, the Company is developing the TLC-II Portable VAD Driver
("TLC-II"), a compact, lightweight, portable device which may enable patients to
return home while on the VAD System. The Company expects to receive regulatory
authority to begin sales in Europe in late 1997, with full commercial launch
planned for the first quarter of 1998. The Company plans to submit data to the
FDA by late 1997 in support of an Investigational Device Exemption ("IDE")
application to begin clinical trials of the TLC-II in the U.S. The Company
believes that the TLC-II may also allow the VAD System to be used as an
alternative to heart transplant. The Company is also developing a
fully-implantable version of the current VAD System and a Muscle-Powered VAD
("MVAD"), an untethered, implantable, muscle-powered circulatory support device
designed to serve as an alternative to heart transplant.
VASCULAR GRAFT PRODUCTS. The Company is utilizing its proprietary
biomaterials and polymer fabrication expertise to develop vascular graft
products with properties that more closely resemble those of natural arteries
and have significant advantages over currently available synthetic grafts.
Thoratec's first graft product, the Thoratec Vascular Access Graft ("VAG"), is
currently being marketed in Japan, Australia, Canada and other countries outside
of the U.S. for hemodialysis applications. Published data of experience in 221
patients indicate that the use of the VAG results in reduced inflammatory
response, reduced bleeding complications due to the VAG's self-sealing
properties, early access, superior patency and improved handling and
suturability. These studies have also shown that patients implanted with the VAG
can begin hemodialysis within one to three days after implantation, in contrast
to the several week delay associated with other vascular access grafts. The
Company submitted data in support of an IDE application to the FDA in May 1997
to commence clinical trials of the VAG in the U.S. The Company estimates that
approximately 200,000 new and existing hemodialysis patients per year worldwide
undergo vascular access procedures, with approximately 50% to 60% of these
patients receiving synthetic grafts.
The Company is also developing the Thoratec Coronary Artery Bypass Graft
("CABG"), designed for use in coronary artery bypass surgery patients with few
or no suitable native vessels. No synthetic graft is currently available for
this indication due to the difficulty of producing a small diameter graft that
remains patent (unobstructed). To date, 27 patients in Canada and Germany have
received Thoratec's CABG grafts, ranging in size from 2.0 to 3.5 mm, on a
compassionate use basis. Follow-up data in a small number of these patients have
demonstrated that some CABG grafts remained patent up to one year after surgery.
All 22 surviving patients were asymptomatic as of August 1997, with the longest
term patient implanted for over four years. None of the remaining five patients
are known to have died from causes related to the graft. Long-term test results
from a controlled clinical trial on a much larger patient population are
required before the capabilities of this graft can be demonstrated. The Company
is conducting preclinical testing of the CABG graft in the U.S. Thoratec
estimates that in 1996 there were approximately 500,000 coronary artery bypass
surgery procedures performed in the U.S. and approximately 250,000 performed
outside the U.S. The Company estimates that on average, three bypasses are
performed in each such surgical procedure.
The Company was incorporated in California in 1976. The Company's executive
offices are located at 6035 Stoneridge Drive, Pleasanton, California 94588 and
its telephone number is (510) 847-8600.
4
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..... 2,000,000 shares
Common Stock offered by the Selling
Shareholder........................... 1,000,000 shares
Common Stock to be outstanding after the
offering.............................. 20,153,555 shares(1)
Use of proceeds......................... For scale-up and validation of a new manufacturing
facility, clinical trials and other research and
development activities, expansion of sales and
marketing capabilities, working capital and other
general corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol........... THOR
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED DECEMBER ENDED JUNE
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenue:
Product sales -- net.................. $3,439 $3,791 $ 2,764 $ 3,489 $ 7,503 $ 3,489 $ 4,674
Other................................. 294 142 24 59 584 77 391
------ ------ ------- ------- ------- ------- -------
Total revenue.................... 3,733 3,933 2,788 3,548 8,087 3,566 5,065
Costs and expenses:
Cost of products sold................. 1,667 2,033 1,576 1,972 3,254 1,640 2,075
Research and development.............. 1,007 1,478 1,360 1,984 3,724 1,471 2,314
Selling, general and administrative... 1,125 1,147 1,456 1,298 3,952 1,532 2,835
Interest, debt conversion and other
expenses............................ 394 -- 43 188 420 424 --
------ ------ ------- ------- ------- ------- -------
Total costs and expenses......... 4,193 4,658 4,435 5,442 11,350 5,067 7,224
------ ------ ------- ------- ------- ------- -------
Net income (loss)....................... $1,430(2) $ (725) $(1,647) $(1,894) $(3,263) $(1,501) $(2,159)
====== ====== ======= ======= ======= ======= =======
Net income (loss) per share............. $ .25(2) $ (.05) $ (.12) $ (.13) $ (.20) $ (.10) $ (.12)
====== ====== ======= ======= ======= ======= =======
Shares used in computing net income
(loss) per share...................... 5,771 14,122 14,193 14,429 16,694 15,482 17,992
</TABLE>
<TABLE>
<CAPTION>
JUNE 28, 1997
---------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......................... $ 12,134 $ 20,984
Working capital........................................................... 12,620 21,470
Total assets.............................................................. 20,951 29,801
Accumulated deficit....................................................... (48,838) (48,838)
Total shareholders' equity................................................ 17,216 26,066
</TABLE>
- ---------------
(1) Based upon the number of shares outstanding as of August 31, 1997. Excludes
(i) 1,971,466 shares issuable upon exercise of options outstanding as of
August 31, 1997 at a weighted average exercise price of $6.81 per share, and
(ii) 164,400 shares issuable upon exercise of warrants outstanding as of
August 31, 1997, at an exercise price of $14.40 per share. See "Description
of Capital Stock" and Note 9 of Notes to Consolidated Financial Statements.
(2) Includes an extraordinary gain on debt restructuring of approximately
$1,890,000.
(3) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered
by the Company hereby at the offering price of $5.00 per share and the
receipt of the estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
5
<PAGE> 6
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CAREFULLY CONSIDERED BY POTENTIAL INVESTORS IN EVALUATING AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. THESE FACTORS MAY CAUSE
ACTUAL RESULTS, EVENTS OR PERFORMANCE TO DIFFER MATERIALLY FROM THOSE EXPRESSED
IN ANY FORWARD-LOOKING STATEMENTS MADE BY THE COMPANY IN THIS PROSPECTUS.
LACK OF PROFITABILITY; EXPECTED FUTURE LOSSES
The Company was formed in 1976 and has reported a loss from operations in
all but one year of its existence. As of June 28, 1997, the Company's
accumulated deficit was approximately $48,838,000. Thoratec expects to continue
to incur additional losses until it can achieve substantial product revenues.
Furthermore, the Company expects that its expenses will increase as a result of
increased research and development, preclinical and clinical testing, and
selling, general and administrative expenses. Although sales of the VAD System
as a bridge to heart transplant have commenced in the U.S., sales of the
Company's other products in the U.S. cannot begin until the products have
received FDA approval, which may not occur for several years, if at all. There
can be no assurance that any other products of the Company will be approved, can
be successfully commercialized or that the Company will achieve significant
revenues from sales of such products. In addition, there can be no assurance
that the Company will achieve profitability in the future. Failure to achieve
significant revenues or profitability would have a material adverse effect on
the Company's business, financial condition and results of operations, and would
require the Company to seek additional funds primarily through public or private
offerings of debt or equity securities. There can be no assurance that
additional financing will be available on acceptable terms, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE
The Company anticipates that the net proceeds of this offering, together
with its working capital, will be sufficient to meet its present operating and
capital requirements for the next year, but that it will need substantial
additional funds to expand operations thereafter. The Company's future liquidity
and capital requirements will depend upon numerous factors, including the
progress of clinical trials, the timing and cost of future filings with, and
obtaining approval from, the FDA and foreign government authorities, the timing
and cost of product introductions, the cost of developing marketing and
distribution capabilities assuming the required regulatory approvals are
received, and market acceptance of the Company's products. The Company
anticipates that it will seek additional funds primarily through public or
private offerings of debt or equity securities. There can be no assurance that
additional financing will be available on acceptable terms, if at all. The
unavailability of such financing could delay research and development,
regulatory approval, manufacturing or marketing of some or all of the Company's
products and would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON THIRD PARTIES FOR SUPPLIES
Thoratec depends on single source suppliers for certain of the raw
materials used in the manufacture of its products. The Company also utilizes
materials and component parts supplied by third parties in its products. In the
event the Company must obtain alternative sources for key raw materials or
component parts, there can be no assurance that such materials or component
parts will be available for purchase from alternative suppliers, that
alternative suppliers will agree to supply the Company, that the Company's use
of such suppliers would be approved by the FDA, or if unavailable, that the
Company would have the expertise or resources necessary to produce such
materials or component parts internally. As such, any interruption in supply of
raw materials or component parts could have a material adverse effect on the
Company's ability to manufacture its products until a new source of supply is
located and, therefore, could have a material adverse effect on its business,
financial condition and results of operations.
6
<PAGE> 7
In 1995, the supplier of mechanical valves for the VAD System stopped
production. The Company has a supply of these valves that it believes will
satisfy its needs through October 1998. In October 1997, the Company executed an
agreement with Arrow International, Inc. ("Arrow") to supply these valves for a
four-year term. Arrow was, until June 1997, the Company's distributor for
certain European countries of its VAD System, may also be a future competitor of
the Company in the circulatory support market and is currently the single source
of supply for such valves. The Company will need to qualify Arrow under rules
prescribed by the FDA. If the Company is unable to qualify this supplier, the
Company would have to cease manufacturing and selling its VAD System when its
current supply of valves is exhausted. Sales of the VAD System accounted for
substantially all of the Company's revenue in 1996 and in the first six months
of 1997 and are expected to account for substantially all of the Company's
revenue for at least the next year. Cessation or interruption of VAD System
sales would have a material adverse effect on the Company's business, financial
condition and results of operations.
LIMITED MANUFACTURING CAPABILITY
The Company currently manufactures its biomaterials, the VAD System and the
VAG at its Berkeley, California facility. The Company is leasing a build-to-suit
62,000 square foot corporate headquarters and manufacturing plant in Pleasanton,
California, the first phase of which is scheduled for completion in 1997, with
manufacturing to follow in mid-1998. To date, the Company's manufacturing
activities have consisted primarily of manufacturing limited quantities of the
VAD System and the VAG. Although the Company believes that it currently has the
ability to produce sufficient quantities of the VAD System and the VAG to
support its current needs and its needs for early-stage clinical trials of the
TLC-II, MVAD and certain of its graft products, it will need to complete the
move to the new Pleasanton production facility and improve its manufacturing
technology in order to meet the volume and cost requirements for significant
commercial sales of these products. In addition, the Company does not have
experience in manufacturing its products in the commercial quantities that might
be required if the Company successfully receives FDA approval of several or all
of the products currently under development. The failure to commence
manufacturing at the Pleasanton facility or to develop the necessary
manufacturing expertise would have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the manufacture of the Company's products is complex and
costly, involving a number of separate processes and components. Certain
manufacturing processes of the VAD System are labor intensive, and achieving
significant cost reductions will depend in part upon reducing the time required
to complete these processes. There can be no assurance that the Company will be
able to achieve cost reductions in the manufacture of its products. In addition,
manufacturers often encounter difficulties in scaling up manufacturing of new
products, including problems involving product yields, quality control and
assurance, component and service availability, adequacy of control policies and
procedures and lack of qualified personnel. The Company has and will continue to
consider as appropriate the internal manufacture of components currently
provided by third parties, as well as the implementation of new production
processes. There can be no assurance that Thoratec will be able to obtain or
manufacture such products in a timely fashion at acceptable quality and prices,
that it can comply with the FDA's current Quality System ("cGMP") or Good
Laboratory Practice ("GLP") requirements, or that it or its suppliers will be
able to manufacture an adequate supply of products.
NO ASSURANCE OF MARKET ACCEPTANCE
The commercial success of the Company's current and future products will
require acceptance by cardiovascular and vascular surgeons and interventional
cardiologists. Such acceptance will depend on clinical results and the
conclusion by these physicians that the Company's products are safe,
cost-effective and acceptable alternative methods of treatment. There can be no
assurance that the Company's products will provide benefits considered adequate
by providers of cardiovascular and vascular treatments or that a sufficient
number of such providers will use the Company's products for commercial success
to be achieved. In addition, because the Company's products are based on
innovative technologies and, in some cases, represent new
7
<PAGE> 8
methods of treatment, there may be greater reluctance to accept these products
than would occur with products utilizing established technologies or methods of
treatment. Even if the safety and efficacy of these products are established,
physicians may elect not to use them for a number of reasons, including the high
cost of equipment and training associated with the use of the Company's products
or unfavorable reimbursement from health care payors. Failure of the Company's
products to achieve significant market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.
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. The Company has
developed working relationships with cardiac surgeons and cardiologists at a
number of leading medical centers in connection with the development of the VAD
System. In addition, surgical teams at these medical institutions have performed
clinical trials to support the Company's applications to be filed with the FDA.
A continuing working relationship with these and other physicians and medical
centers will be important to the commercial acceptance of the VAD System and
future circulatory support and graft products. No assurance can be given that
existing relationships and arrangements can be maintained or that new
relationships will be established in support of the Company's circulatory
support and graft technology. Furthermore, economic, psychological, ethical and
other concerns may limit general acceptance of ventricular assist devices.
SUBSTANTIAL DEPENDENCE ON LIMITED PRODUCT LINE; DEPENDENCE ON DEVELOPMENT AND
INTRODUCTION OF NEW PRODUCTS
To date, substantially all of the Company's revenues have resulted from
sales of the VAD System. The Company expects sales from the VAD System worldwide
and limited sales of the VAG products in certain markets outside of the U.S. to
account for a significant portion of the Company's near-term revenues. As a
result, factors adversely affecting the pricing of or demand for such products,
such as market acceptance, competition or technological change, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's future financial performance will depend,
in significant part, on the successful development, introduction and customer
acceptance of its products under development. Existing preclinical and clinical
data relating to the Company's products under development are very limited.
Prior to any commercial use, the products and technologies currently under
development by the Company will require significant additional research and
development efforts, extensive preclinical and clinical testing and regulatory
approval. New product development is highly uncertain and unanticipated
developments, clinical and regulatory delays, adverse or unexpected side effects
or inadequate therapeutic efficacy could slow or prevent the successful
completion of the Company's product and technology development efforts. There
can be no assurance that the Company will not experience difficulties that could
delay or prevent the successful development, regulatory approval, introduction
or market acceptance of these products.
LIMITED SALES AND MARKETING EXPERIENCE; DEPENDENCE UPON DISTRIBUTORS
The Company currently has limited sales and marketing capabilities, and
expects to expend substantial resources in 1998 to increase its sales and
marketing capabilities in the U.S. and Europe. There can be no assurance that
the Company will be able to recruit and train adequate sales and marketing
personnel or that such sales and marketing efforts will be successful. In
addition, Thoratec competes with other companies that have extensive and
well-funded sales and marketing organizations. There can be no assurance that
Thoratec's sales and marketing staff will compete successfully against such
other companies. The Company sells the VAD System in foreign markets (other than
Canada and Europe) through distributors. In addition, Thoratec sells its graft
products in foreign markets through distributors and intends to rely on
distributors for sales of the VAG in the U.S., if regulatory approval is
received. To the extent the Company relies on distributors, its success will
depend upon the efforts of others, over which it may have little control. The
loss of, or lack of performance by, distributors could have a material adverse
effect on the Company's business, financial condition and results of operations.
8
<PAGE> 9
COMPETITION
Competition from medical device companies and medical device subsidiaries
of health care and pharmaceutical companies is intense and expected to increase.
Many of the Company's competitors have substantially greater financial,
technical, distribution and marketing resources than the Company. In addition,
many of these competitors have significantly greater experience than the Company
in obtaining regulatory approvals for medical devices. Accordingly, the
Company's competitors may succeed in obtaining regulatory approval for products
more rapidly than the Company. 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 the Company and,
therefore, offer comparable products at a lower cost. Any product developed by
the Company 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, the relative
speeds with which the Company can develop products, complete clinical testing,
receive regulatory approval and manufacture and sell commercial quantities of
products are expected to be important competitive factors. The Company believes
that the primary competitive factors in the market for ventricular assist
devices are impact on patient outcomes, product performance, quality and
cost-effectiveness, and that the primary competitive factors for vascular graft
products are biocompatibility, patency, reliability, cost, suturability and ease
of use. The Company also believes that physician relationships and customer
support are important competitive factors.
U.S. GOVERNMENT REGULATIONS
The research and development, manufacturing, marketing and distribution of
the Company's products in the U.S. are governed by the Federal Food, Drug, and
Cosmetic Act and the regulations promulgated thereunder (the "FDC Act and
Regulations"). The FDA administers the FDC Act and Regulations, and the Company
is subject to inspection by the FDA for compliance with such regulations and
procedures. The process of obtaining FDA approval is lengthy and uncertain. In
order for the Company to market future products in the U.S., the Company must
obtain clearance from the FDA of a 510(k) premarket notification or approval of
a more extensive submission known as a PMA. The Company is also subject to the
FDA's cGMP and GLP regulations. These regulations require that the Company
manufacture its products and maintain its records in a prescribed manner. The
FDA periodically inspects the Company's facilities for compliance with cGMP.
Under FDA requirements, if a manufacturer can establish that a newly
developed device is "substantially equivalent" to a device marketed prior to
1976, the manufacturer may seek marketing clearance by filing a 510(k) premarket
notification with the FDA. The 510(k) premarket notification must be supported
by data establishing the claim of substantial equivalence to the satisfaction of
the FDA. The process of obtaining a 510(k) clearance typically can take several
months to a year or longer. If substantial equivalence cannot be established, or
if the FDA determines that the device requires a more rigorous review, the FDA
will require that the manufacturer submit a PMA application that must be
reviewed and approved by the FDA prior to sale and marketing of the device in
the U.S. The process of obtaining approval for a PMA can be expensive, uncertain
and lengthy, frequently requiring anywhere from one to several or more years
from the date of FDA submission. Both a 510(k) and a PMA, if accepted or
approved, may include significant limitations on the indicated uses for which a
product may be marketed. FDA enforcement policy strictly prohibits the promotion
of approved medical devices for unapproved indications. In addition, product
approvals can be withdrawn for failure to comply with regulatory requirements or
the occurrence of unforeseen problems following initial marketing.
In December 1995, the Company received FDA approval to market the VAD
System in the U.S. as a bridge to heart transplant. The same system is also sold
in the U.S. for controlled clinical use under an IDE for recovery of the natural
heart. In October 1997, the Company submitted a PMA Supplement to the FDA for
final review for the postcardiotomy recovery indication, and the Company may
file other PMA Supplements. The Company also plans to submit data supporting an
IDE application for the TLC-II in late 1997. All of the Company's other
circulatory support products are in preclinical development. The Company
submitted data supporting an IDE application for the VAG in May 1997 and expects
to file a 510(k) premarket notification
9
<PAGE> 10
after the clinical data is gathered. However, submissions of data do not
constitute filings, and there can be no assurance that filings will be made or
that the filings will be accepted or products will be approved by the FDA. The
Company will need to complete its preclinical testing before an IDE application
can be filed for the CABG graft. The PMA application required for the CABG graft
will need to include the results of extensive clinical studies and manufacturing
information.
There can be no assurance that the FDA will act favorably or quickly in its
review of the Company's 510(k) submissions or PMA applications, and significant
difficulties and costs may be encountered by the Company in its efforts to
obtain FDA clearance that could delay or preclude the Company from selling its
graft or additional circulatory support products in the U.S. Furthermore, there
can be no assurance that the FDA will not limit the intended use of the
Company's products as a condition of 510(k) acceptance or PMA approval. Further,
if the Company proposes modifications to a product after FDA clearance of a
510(k) premarket notification or approval of a PMA, including changes in
indications (as is the case with the VAD System) or other significant
modifications to labeling or manufacturing, the Company will be required to
obtain additional approvals from the FDA. Failure to receive or delays in
receipt of FDA clearances or approvals, including the need for extensive
clinical trials or additional data as a prerequisite to clearance or approval,
or any FDA limitations on the intended use of the Company's products, would have
a material adverse effect on the Company's business, financial condition and
results of operations.
INTERNATIONAL REGULATIONS
A significant percentage of the Company's product revenues are derived from
sales outside the U.S., and distribution of the Company's products outside the
U.S. is subject to extensive government regulation. These regulations, including
the requirements for approvals or clearance to market, and the time required for
regulatory review and the sanctions imposed for violations, vary from country to
country. There can be no assurance that the Company will obtain regulatory
approvals in such countries or that it will not be required to incur significant
costs in obtaining or maintaining its foreign regulatory approvals. In addition,
the export by the Company of certain of its products which have not yet been
cleared for domestic commercial distribution may be subject to FDA export
restrictions. Failure to obtain necessary regulatory approvals, the restriction,
suspension or revocation of existing approvals or any other failure to comply
with regulatory requirements would have a material adverse effect on the
Company's business, financial condition and results of operations.
To position itself for access to European and other international markets,
Thoratec has obtained certification under the International Standards
Organization (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. Commencing in mid-1998,
all companies will be required to obtain CE marking for medical devices sold or
distributed in the European Community. The CE mark is an international symbol of
quality and with it, medical devices can be distributed within the population of
over 360 million people in the European Community. A prerequisite for the
Company obtaining authority to CE mark its products is to achieve full quality
system certification in accordance with ISO 9001 and EN 46001. These are quality
standards that cover design, production, installation and servicing of medical
devices. The Company received its ISO 9001/EN 46001 certification in September
1997. The Company plans to obtain authority to CE mark the TLC-II, other VAD
System accessories, as well as the VAG, in 1997. Failure to receive a CE mark
certification for subsequently developed products will prohibit the Company from
selling such products in Europe and would have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will be successful in meeting such certification
requirements for its future products.
RISK OF TECHNOLOGICAL OBSOLESCENCE
There can be no assurance that third parties will not succeed in developing
or marketing technologies and products that are more effective than those
developed or marketed by the Company or that would render the Company's
technology and products obsolete or noncompetitive. Additionally, new surgical
procedures and medications could be developed that replace or reduce the
importance of current procedures that use the Company's products. Accordingly,
the Company's success will depend in part on its ability to respond quickly
10
<PAGE> 11
to medical and technological changes through the development and introduction of
new products, or modification of existing products. There can be no assurance
that the Company will be successful in these efforts.
UNCERTAINTY RELATED TO THIRD PARTY REIMBURSEMENT FOR THE VAD SYSTEM
Significant uncertainty exists as to the reimbursement status of newly
approved health care products such as the VAD System. Government and other third
party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement of new therapeutic
products and 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, the Health Care Financing Administration
("HCFA"), the federal agency responsible for determining whether, and to what
extent, medical products and procedures are reimbursable under Medicare and
Medicaid, and some private insurers, have determined to reimburse the costs of
the VAD System. The Company cannot predict whether the VAD System will continue
to be approved for reimbursement and cannot predict the effect that changes in
the health care system may have on the reimbursability of future products.
Failure to obtain such reimbursement could have a material adverse effect on the
Company's business, financial condition and results of operations.
PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively with other companies will
depend, in part, on its ability to maintain the proprietary nature of its
technology, products and manufacturing processes. The Company relies on patents,
trade secrets and know-how to maintain its competitive position. The Company has
been issued or has licensed a number of U.S. and foreign patents covering its
core biomaterials technology and its graft technologies. In addition, many other
U.S. and foreign patent applications have been filed. Aside from the
biomaterials patents mentioned above, which are utilized in the VAD blood pump
and cannulae, the VAD System is not protected by any patents. The Company does
not believe that this lack of patent protection will have a material adverse
effect on the Company or its ability to sell the VAD System because of the
lengthy regulatory period required to obtain approval of a ventricular assist
device. The Company is not aware of any ventricular assist devices currently
approved by the FDA or undergoing clinical trials based on the Company's product
design. There can be no assurance that any existing or future patent
applications by the Company will result in issued patents or that any current or
future issued or licensed patents, trade secrets or know-how will afford
sufficient protection against competitors with similar technologies or
processes, or that any patents issued will not be infringed upon or designed
around by others. In addition, there can be no assurance that others will not
independently develop proprietary technologies and processes which are the same
as or substantially equivalent to those of the Company. Further, there can be no
assurance that the Company will not infringe prior or future patents owned by
others, that the Company will not need to acquire licenses under patents
belonging to others for technology potentially useful or necessary to the
Company, or that such licenses will be available to the Company, if at all, on
terms acceptable to the Company. The Company could incur substantial costs in
defending itself in suits brought against it on such patents or in bringing
suits to protect the Company's patents or patents licensed by the Company
against infringement. The Company also protects its proprietary technology and
processes in part by confidentiality agreements with its licensees, employees
and consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or independently
discovered by competitors.
EXPOSURE TO CLAIMS
The Company's business exposes it to an inherent risk of potential product
liability claims related to the manufacturing, marketing and sale of human
medical devices. The Company maintains only a limited amount of product
liability insurance but will seek to obtain additional product liability
insurance as its products are commercialized. The Company also maintains
commercial general and property insurance. The Company's insurance policies
generally must be renewed on an annual basis. There can be no assurance that the
Company will be able to maintain or increase such insurance on acceptable terms
or at reasonable costs, or that such
11
<PAGE> 12
insurance will provide the Company with adequate coverage against potential
liabilities. A successful claim brought against the Company in excess of, or
outside of, its insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations. Claims
against the Company, regardless of their merit or potential outcome, may also
have a material adverse effect on the Company's ability to obtain physician
endorsement of its products or expand its business.
ATTRACTION AND RETENTION OF KEY EMPLOYEES
The Company's future business and operating results will depend in
significant part on the continued contributions of principal members of its
management and scientific staff, the loss of any of whose services might
adversely impact the achievement of planned development and product introduction
objectives. In addition, the Company's anticipated growth and product
introductions will require additional expertise in the areas of clinical
testing, government approvals, finance, engineering and marketing, all of which
will place increased demand on the Company's resources. These demands are
expected to require the addition of new management personnel and the development
of additional expertise by existing management personnel. Recruiting and
retaining qualified personnel to perform these functions will be critical to the
Company's success. Competition for such personnel is intense and there can be no
assurance that the Company will be able to recruit and retain such individuals
on acceptable terms given the competition for experienced personnel from
numerous medical device, health care and pharmaceutical companies and academic
and other research institutions. The loss of key employees, the Company's
inability to attract and retain skilled employees, as needed, or the failure to
acquire or develop necessary expertise could have a material adverse effect on
the Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICE
The price of the Common Stock has been, and is likely to continue to be,
highly volatile. Future announcements concerning the Company or its competitors,
quarterly variations in operating results, introduction of new products or
changes in product pricing policies by the Company or its competitors,
acquisition or loss of significant customers, partners, distributors and
suppliers, changes in earnings estimates by analysts, regulatory developments,
or fluctuations in the economy or general market conditions, among other
factors, could cause the market price of the Common Stock to fluctuate
substantially. 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 the Common Stock. There can be no
assurance that the market price of the Common Stock will not decline below its
current price or that it will not experience significant fluctuations in the
future, including fluctuations that are unrelated to the Company's performance.
CONTROL BY EXISTING SHAREHOLDERS
Following this offering, the Company's executive officers, directors and
their affiliates will beneficially own or control approximately 20.0% of the
outstanding Common Stock (based on the number of shares of Common Stock
outstanding on August 31, 1997 and assuming issuance of shares upon the exercise
of options vested or vesting within 60 days of August 31, 1997), and COBE
Laboratories, Inc. ("COBE") will own approximately 18.4% of the outstanding
Common Stock (computed on the same basis). As a result, the Company's executive
officers, directors and their affiliates as a group and COBE will each have the
ability to exert significant influence over the Company's Board of Directors,
and exert substantial influence over the Company and its affairs and business.
Such concentration of ownership may also have the effect of delaying, deferring
or preventing a change in control of the Company. See "Principal and Selling
Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of the Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. Several of the Company's principal shareholders hold a significant
portion of the outstanding Common Stock, and a decision by one or more of
12
<PAGE> 13
these shareholders to sell their shares could adversely affect the market price
of the Common Stock. Immediately after the offering, 20,153,555 shares of Common
Stock, including the 3,000,000 shares of Common Stock offered hereby, will be
freely tradeable without restriction (unless subject to a "lock-up" agreement as
described below or unless subject to restrictions on resale by affiliates under
Rule 144). Certain shareholders of the Company, including the officers,
directors, affiliates and the Selling Shareholder, have agreed to enter into
contractual "lock-up" agreements with respect to an aggregate of 8,466,025
shares of Common Stock generally providing that they will not, directly or
indirectly, sell, offer to sell, solicit an offer to buy, contract to sell,
grant an option to purchase or right to acquire any option to dispose of or
otherwise transfer or dispose of the shares of Common Stock or any securities
exercisable or exchangeable for Common Stock owned by them (excluding those
shares being sold pursuant to this offering) for a period of 90 days after the
date of this Prospectus without the prior written consent of Vector Securities
International, Inc. Upon expiration or early termination of such lock-up
agreements, all of such shares will be eligible for sale subject to certain
volume, manner of sale and other limitations under Rule 144. The holders of
warrants to purchase 164,400 shares of Common Stock issued to the underwriters
in the Company's July 1996 offering of Common Stock are entitled to certain
rights with respect to the registration of such shares under the Securities Act.
As of August 31, 1997, there were outstanding options and warrants to purchase
2,135,866 shares of Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation allow the Company to issue up to
2,500,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights of such
Preferred Stock without any further vote or action by the shareholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
transactions, may also have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Common Stock at a
premium over the market price of the Common Stock and may adversely affect the
market price of and the voting or other rights of the holders of the Common
Stock. The Company has no present plans to issue shares of Preferred Stock. See
"Description of Capital Stock -- Preferred Stock" and "-- Provisions of Articles
of Incorporation Affecting Shareholders."
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends and does not anticipate paying
cash dividends on the Common Stock in the foreseeable future. See "Dividend
Policy."
DILUTION
The offering price per share is substantially higher than the net tangible
book value per share of the Common Stock. Investors purchasing shares of Common
Stock in this offering will, therefore, incur immediate and substantial net
tangible book value dilution. Additional dilution may result from the exercise
of outstanding options or warrants. See "Dilution."
13
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$8,850,000, based on the public offering price of $5.00 per share, and after
deducting the Placement Agents' fees and the estimated expenses of the offering.
The Company intends to use approximately $3.5 million of the net proceeds to
scale-up and validate its new manufacturing facility, $2.0 million to expand
clinical trials and other research and development activities on the TLC-II and
graft products and $1.0 million to expand sales and marketing capabilities. The
remaining net proceeds are expected to be used for working capital and general
corporate purposes, including possible future acquisitions of businesses, or
acquisitions or licenses of technologies or products that expand or complement
the business of the Company. No such transactions are being negotiated as of the
date of this Prospectus. The Company will receive no proceeds from the sale of
1,000,000 shares of Common Stock by the Selling Shareholder.
The actual amounts of the net proceeds of the offering expended for each
purpose may vary significantly depending upon many factors, including the status
of the development of the Company's products, the time and costs involved in
obtaining regulatory approvals, and competing technological and market
developments. Pending application of the net proceeds as described above, the
Company intends to invest the net proceeds of the offering in short-term,
interest-bearing investment grade securities or in short-term bank deposits. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.
PRICE RANGE OF COMMON STOCK
The Common Stock is currently traded on the Nasdaq National Market under
the symbol "THOR." The following table sets forth, for the periods indicated,
the high and low bid prices per share for the Common Stock as reported prior to
June 27, 1996 by the Boston Stock Exchange or the Nasdaq SmallCap Market, and
since June 27, 1996 the high and low closing sales price per share of the Common
Stock, as reported on the Nasdaq National Market. On November 4, 1997, the last
reported sale price of the Common Stock, as quoted on the Nasdaq National
Market, was $5.63 per share.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter.......................................... $ 6.75 $ 4.88
Second Quarter......................................... 6.75 5.25
Third Quarter.......................................... 10.50 5.63
Fourth Quarter......................................... 15.75 10.50
1996
First Quarter.......................................... $21.75 $14.63
Second Quarter......................................... 31.00 12.00
Third Quarter.......................................... 13.50 9.00
Fourth Quarter......................................... 11.50 9.00
1997
First Quarter.......................................... $11.00 $ 8.00
Second Quarter......................................... 8.13 4.88
Third Quarter.......................................... 8.75 6.75
Fourth Quarter (through November 4, 1997).............. 7.25 5.63
</TABLE>
On August 4, 1997, there were approximately 800 registered holders of the Common
Stock.
14
<PAGE> 15
CAPITALIZATION
The following table sets forth as of June 28, 1997 (i) the actual
capitalization of the Company and (ii) such capitalization as adjusted to give
effect to the sale of the 2,000,000 shares of Common Stock offered by the
Company hereby (at the offering price of $5.00 per share) and the receipt of the
estimated net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 28, 1997
-----------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Shareholders' equity:
Preferred Stock, no par value, 2,500,000 shares authorized;
none issued and outstanding.............................. $ -- $ --
Common Stock, no par value, 100,000,000 shares authorized;
18,043,236 shares issued and outstanding, actual;
20,043,236 shares issued and outstanding, as
adjusted(1).............................................. 63,581,412 72,431,412
Additional capital............................................ 2,481,469 2,481,469
Accumulated deficit........................................... (48,838,105) (48,838,105)
Unrealized gain on investments -- net......................... 362 362
Cumulative translation adjustment............................. (8,870) (8,870)
------------ ------------
Total shareholders' equity.......................... $ 17,216,268 $ 26,066,268
============ ============
</TABLE>
- ---------------
(1) Excludes: (i) 2,009,415 shares issuable upon exercise of options outstanding
as of June 28, 1997, at a weighted average exercise price of $6.50 per
share; and (ii) 164,400 shares issuable upon exercise of warrants
outstanding as of June 28, 1997, at an exercise price of $14.40 per share.
See "Description of Capital Stock" and Note 9 of Notes to the Consolidated
Financial Statements.
15
<PAGE> 16
DILUTION
The net tangible book value of the Company at June 28, 1997 was
$17,213,000, or $0.95 per share. Net tangible book value per share is equal to
the Company's net tangible assets (tangible assets of the Company less total
liabilities) divided by the number of shares of Common Stock outstanding. After
giving effect to the sale by the Company of the 2,000,000 shares of Common Stock
offered by the Company hereby (based on the public offering price of $5.00 per
share and after deducting the Placement Agents' fees and the estimated expenses
of the offering), the net tangible book value of the Company as of June 28, 1997
would have been approximately $26,063,000, or $1.30 per share. This represents
an immediate increase in net tangible book value of $0.35 per share to existing
shareholders and immediate dilution of net tangible book value of $3.70 per
share to new investors. The following table sets forth the per share dilution to
new investors in the offering:
<TABLE>
<S> <C> <C>
Offering price per share............................................. $5.00
Net tangible book value per share as of June 28, 1997.............. $0.95
Increase per share attributable to new investors................... 0.35
-----
Net tangible book value per share after the offering................. 1.30
-----
Dilution per share to new investors.................................. $3.70
=====
</TABLE>
The foregoing computations assume no exercise of outstanding options or
warrants after June 28, 1997. As of June 28, 1997, options to purchase 2,009,415
shares of Common Stock were outstanding at a weighted average exercise price of
$6.50 per share and warrants to purchase 164,400 shares of Common Stock were
outstanding at an exercise price of $14.40 per share. In addition, 937,039
shares of Common Stock were reserved for issuance upon exercise of options that
may be granted in the future under the Company's 1993 Stock Option Plan, 1996
Stock Option Plan and 1997 Stock Option Plan, and 88,335 shares of Common Stock
were reserved for issuance upon exercise of options that may be granted under
the Company's 1996 Nonemployee Directors Stock Option Plan. The exercise of such
options and warrants will result in further dilution to new investors. See Note
9 of Notes to Consolidated Financial Statements.
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<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the five
fiscal years ended December 28, 1996 are derived from the audited financial
statements of the Company. The Company has a 52-53 week fiscal year that ends on
the Saturday closest to December 31. The consolidated financial statements as of
the fiscal years ended 1995 and 1996, and for each of the years in the
three-year period ended December 28, 1996, and the independent auditors' report
thereon, are included elsewhere in this Prospectus. The selected consolidated
financial data for December 1992, 1993 and 1994 are derived from audited
consolidated financial statements not included in this Prospectus. The
consolidated financial statements as of June 28, 1997, and for the six-month
periods ended June 29, 1996 and June 28, 1997 are included elsewhere in this
Prospectus. The consolidated financial statements as of June 28, 1997, and for
the six-month periods ended June 29, 1996 and June 28, 1997, are unaudited. The
unaudited consolidated financial statements include all adjustments, consisting
of only normal recurring adjustments which the Company considers necessary for a
fair presentation of the financial position and results of operations for these
periods. Operating results for the six months ended June 28, 1997 are not
necessarily indicative of the results that may be expected for the year ending
January 3, 1998. The data set forth below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements (the "Financial
Statements") and related Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED DECEMBER ENDED JUNE
------------------------------------------------------ -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenue:
Product sales -- net............... $ 3,439 $ 3,791 $ 2,764 $ 3,489 $ 7,503 $ 3,489 $ 4,674
Other.............................. 294 142 24 59 584 77 391
------ ------- ------- ------- ------- ------- -------
Total revenue................. 3,733 3,933 2,788 3,548 8,087 3,566 5,065
Costs and expenses:
Cost of products sold.............. 1,667 2,033 1,576 1,972 3,254 1,640 2,075
Research and development........... 1,007 1,478 1,360 1,984 3,724 1,471 2,314
Selling, general and administrative 1,125 1,147 1,456 1,298 3,952 1,532 2,835
Interest, debt conversion and other
expenses......................... 394 -- 43 188 420 424 --
------ ------- ------- ------- ------- ------- -------
Total costs and expenses...... 4,193 4,658 4,435 5,442 11,350 5,067 7,224
------ ------- ------- ------- ------- ------- -------
Net income (loss).................... $ 1,430(1) $ (725) $ (1,647) $ (1,894) $ (3,263) $ (1,501) $ (2,159)
====== ======= ======= ======= ======= ======= =======
Net income (loss) per share.......... $ .25(1) $ (.05) $ (.12) $ (.13) $ (.20) $ (.10) $ (.12)
====== ======= ======= ======= ======= ======= =======
Shares used in computing net income
(loss) per share................... 5,771 14,122 14,193 14,429 16,694 15,482 17,992
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR END DECEMBER
------------------------------------------------------ JUNE 28,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................ $ 2,675 $ 1,215 $ 1,026 $ 1,646 $ 15,980 $ 12,134
Working capital...................... 2,962 2,106 2,025 2,808 17,266 12,620
Total assets......................... 4,188 3,599 3,605 4,380 21,970 20,951
Long-term debt....................... -- -- 1,675 1,675 -- --
Accumulated deficit.................. (39,150) (39,875) (41,522) (43,416) (46,679) (48,838)
Total shareholders' equity........... 3,309 2,637 1,057 1,663 19,330 17,216
</TABLE>
- ---------------
(1) Includes an extraordinary gain on debt restructuring of approximately
$1,890,000.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the related Notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
Thoratec develops, manufactures and markets medical devices for circulatory
support and vascular graft applications. The Company's first product, the VAD
System, is being marketed in the U.S. and internationally for use as a bridge to
heart transplant and is currently the only device approved by the FDA that can
provide left, right or biventricular support for this indication. The Company is
pursuing additional indications for the VAD System and is developing other
circulatory support products for patients suffering from heart failure. The
Company is also developing vascular grafts for hemodialysis and coronary artery
bypass surgery. All of the Company's products utilize its proprietary
biomaterial, Thoralon, which provides improved thromboresistance,
biocompatibility, patency and durability.
Thoratec has experienced operating losses in all but one year since its
inception in 1976. The Company incurred a net loss of $2,159,000 in the first
six months of 1997 and incurred net losses of $3,263,000, $1,894,000 and
$1,647,000 for the fiscal years ended December 1996, 1995 and 1994,
respectively. As of June 28, 1997, the Company had an accumulated deficit of
$48,838,000. The Company expects to continue to incur substantial additional
losses until it can achieve substantial product revenues.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 28, 1997 AND JUNE 29, 1996
Product Sales. Product sales in the first six months of 1997 were
$4,674,000 compared to $3,489,000 in the first six months of 1996. The
$1,185,000, or 34%, increase was primarily the result of increased sales of the
Company's VAD System in the United States, the establishment of a domestic sales
and marketing organization in 1996, and an increase in the number of hospitals
using the Company's VAD System. In addition, in June 1996, the Company
implemented a rental program whereby hospitals can rent certain of the Company's
products on a short-term basis. Rental income in the first six months of 1997
was $238,000 compared to $25,000 in the first six months of 1996. Partially
offsetting these increases was a decrease in European VAD product sales of
$593,000 in the first six months of 1997 compared to the first six months of
1996 as a result of the Company's largest European VAD products distributor
reducing its orders in preparation for the termination of the distribution
agreement with the Company effective July 1997. In February 1997, the Company
notified this distributor that it intended to expand its marketing efforts in
Europe and begin distributing its VAD products directly to hospitals.
Interest and Other Income. Interest and other income increased $314,000 to
$391,000 due to higher cash balances, primarily as a result of proceeds received
from the Company's public stock offering in July 1996.
Cost of Products Sold. Cost of products sold in 1997 increased $435,000, or
27%, as a result of higher sales volume. Gross margins increased from 53% in
1996 to 56% in 1997 due to increases in the average selling prices of many of
the Company's products in the second quarter of 1996, partially offset by
proportionately more drivers being sold in 1997 than in 1996.
Research and Development Expenses. Research and development expenses for
the first six months of 1997 increased $843,000, or 57%, compared to the first
six months of 1996 due to increased costs associated with the development of the
Company's portable VAD driver, the TLC-II, and its graft products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the first six months of 1997 increased $1,303,000, or
85%, compared to the first six months of 1996, due to expanded domestic and
international marketing and sales efforts, including costs associated with
direct sales in Europe, corporate and legal expenses associated with trademark
and patent submissions as well as general corporate
18
<PAGE> 19
activities, investor relations and annual report preparation, and general
support needed for expected growth, including increased personnel.
Interest and Debt Conversion Expenses. Debt conversion expense and interest
expense declined to zero in the first six months of 1997 as a result of the
conversion into Common Stock of the Company's previously outstanding convertible
notes in the first quarter of 1996.
FISCAL YEARS ENDED DECEMBER 1996, 1995 AND 1994
Product Sales. Product sales in 1996 were $7,503,000 compared to $3,489,000
in 1995. The 115% increase is primarily the result of increased sales of the VAD
System in the U.S. following FDA approval of the System in late 1995 and efforts
of a direct sales organization established in late 1995 and early 1996. Domestic
sales increased $3,943,000, or 258%, in 1996. Product sales in 1995 were 26%
higher than product sales in 1994. This is the net result of a 58% increase in
international sales of the VAD System due primarily to the start up of new
centers and a $35,000 decrease in sales of grafts. Domestic sales of VAD Systems
were up 6%, representing increased usage at existing IDE sites. No new centers
were started in the United States in 1995, pending the receipt of approval of
the VAD System by the FDA, which was received on December 20, 1995. In June
1996, the Company implemented a rental program whereby hospitals can rent
certain of the Company's products on a short-term basis. Rental income in 1996
was approximately $251,000. There was no rental income in 1995 or 1994.
Interest and Other Income. Interest and other income increased $525,000, to
$584,000, in 1996 due principally to higher cash balances primarily as a result
of proceeds received from the Company's public stock offering in July 1996.
Interest and other income was $59,000 in 1995 and $24,000 in 1994. The $35,000
increase in 1995 was due to higher cash balances from the issuance of long-term
debt late in 1994 and from a private placement of Common Stock in 1995.
Cost of Products Sold. Cost of products sold increased $1,282,000, or 65%,
in 1996 compared to 1995 as a result of the higher sales volume in 1996 and
approximately $200,000 incurred to upgrade existing investigational center
equipment. Cost of sales increased $396,000, or 25% in 1995 compared to 1994
principally as a result of higher international sales associated with a new
international distributor. Gross margins increased from 43% in 1995 to 57% in
1996 due to the ability of the Company to raise selling prices of its VAD pumps
beginning in the second quarter of 1996, partially offset by the $200,000
upgrade charge. Gross margins in 1995 remained relatively unchanged at 43%
compared to gross margins in 1994.
Research and Development Expenses. Research and development expenses for
1996 increased $1,740,000, or 88%, compared to 1995 due to increased costs
associated with the development of the Company's portable VAD driver, the
TLC-II, and its graft products and preparation for a PMA supplement for a new
indication for use for its existing VAD System. Research and development
expenses increased 46% in 1995 compared to 1994 due to increased spending on the
TLC-II, the Company's new portable driver for its VAD System.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1996 increased $2,654,000, or 204%, compared to 1995
principally as a result of establishing the domestic sales and marketing
organization, increased recruiting costs for both marketing and administrative
personnel, corporate and legal expenses associated with trademark and patent
submissions and general support needed for expected growth. Marketing expenses
increased in 1995 in preparation for the commercial introduction of the VAD
System. Administrative expenses decreased in 1995 from 1994 due to decreased
spending on outside professional services used for various corporate projects.
Interest and Debt Conversion Expenses. Interest expense in 1996 was $46,000
compared to $185,000 in 1995 due to conversion of $1,675,000 of convertible
notes in the first quarter of 1996 into 342,537 shares of Common Stock. In
addition, the Company recorded a $378,000 noncash debt conversion expense in the
first quarter of 1996, representing the amount of value given up by the Company
in order to induce early exercise of the related warrants. Interest expense
increased $141,000 in 1995 compared to 1994 due to the convertible notes placed
in October 1994.
19
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
As of June 28, 1997, the Company had working capital of $12,620,000,
compared with $17,266,000 at the end of 1996. This decrease in working capital
was due primarily to planned expenditures related to the construction of the
Company's new manufacturing facility. In addition, ongoing losses from
operations contributed to the decrease in working capital. Receivables increased
principally as a result of higher sales in 1997 compared to 1996. Prepaid
expenses and other decreased primarily from amortization of insurance premiums.
Accounts payable increased as a result of costs related to the above-mentioned
facility construction. Other operating assets and liabilities did not fluctuate
significantly from the end of 1996.
At the end of 1996, the Company had working capital of $17,266,000 compared
with $2,808,000 at the end of 1995. The increase in working capital was due to
proceeds received from the public offering of the Common Stock discussed below,
proceeds received upon the exercise of warrants to purchase Common Stock in the
first quarter of 1996 and proceeds received from option exercises, partially
offset by increased losses from operations and capital expenditures, including
deposits on leased facilities. Concurrent with the above noted warrant exercise,
all outstanding convertible notes were converted into Common Stock. Receivables
increased principally due to increasing sales. Inventory increased in
preparation for planned increases in sales activity. Accounts payable and
accrued liabilities increased due to capital asset purchases made near year end
and costs associated with increased research and development activity, increased
personnel costs, and increased patent, FDA and legal costs.
In July 1996, the Company sold, through an underwritten public offering,
1,644,000 shares of Common Stock at $12.00 per share. The net proceeds received
by the Company related to such offering were approximately $17,591,000 after
underwriters' commissions and approximately $1,050,000 of other costs.
Also in July 1996, the Company entered into a lease agreement on a new
manufacturing facility to be located in Pleasanton, California, within 50 miles
of its current facility. This building, when completed, will accommodate all of
the Company's manufacturing, engineering and administrative activities. The
administrative and engineering portion of the building is scheduled to be
completed and ready for occupancy in late 1997 and the manufacturing portion by
mid-1998. The Company will invest approximately $9 million in equipment and
leasehold improvements to the building, approximately $3 million of which had
been invested at June 28, 1997. Annual payments under the amended lease are
approximately $699,000 for a lease term of 15 years and commenced in August
1997. The lease includes provisions, among others, for annual cost of living
adjustments to the lease payments, two five-year renewal options, a purchase
option, and a security deposit of $885,600, which the Company paid in July 1996,
and an additional $500,000 paid in 1997. A significant portion ($1,250,000) of
the security deposit can be reduced or eliminated and returned to the Company
before the end of the initial lease term if the Company meets certain criteria
as specified by the contract. See Note 5 of Notes to the Financial Statements.
With the proceeds of this offering, the Company believes that it has
sufficient funds to increase its marketing efforts, to increase manufacturing
efficiencies through construction of its new manufacturing facility and to
develop new sources of revenue, including new products. However, the Company
expects that its operating expenses will increase in future periods as the
Company expends increased amounts on product manufacturing and marketing and on
research and development of new product lines. The Company expects that its
profitability will continue to be adversely impacted by various fixed costs
until additional products have received pre-market approval in the U.S. and
approval for sale in its major international markets. As a result, the Company
expects to incur net losses for at least the next twelve months. There can be no
assurance that the Company will achieve profitability or positive cash flow.
The Company does not expect that inflation will have a material impact on
its operations.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statements of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). The Company is required to adopt SFAS 128 in the fourth
quarter of fiscal 1997 and will restate at that time earnings per share ("EPS")
20
<PAGE> 21
data for prior periods to conform with SFAS 128. Earlier application is not
permitted. SFAS 128 replaces current EPS reporting requirements and requires a
dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior periods, basic EPS
and diluted EPS would not have been different than primary EPS and fully diluted
EPS currently reported for such periods. Fully diluted EPS, as with diluted EPS,
is not reported due to its antidilutive effect on EPS.
During June 1997, the FASB issued Statements of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which requires that an
enterprise report the change in its net assets from nonowner sources by major
components and as a single total. The FASB also issued Statements of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes annual and interim standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of these Statements
will not impact the Company's consolidated financial position, results of
operations or cash flows, and any effect will be limited to the form and content
of its disclosures. Both such Statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
RECENT DEVELOPMENTS
The Company's third fiscal quarter ended on September 27, 1997. During such
period product revenues were $2,159,000, representing an increase of 8% from
$2,002,000 in the same period in the previous fiscal year. The net loss for the
third fiscal quarter of 1997 was $1,231,000, or $0.07 per share, compared with a
net loss of $672,000, or $0.04 per share, in the same quarter in the previous
fiscal year.
21
<PAGE> 22
BUSINESS
GENERAL
Thoratec develops, manufactures and markets medical devices for circulatory
support and vascular graft applications. The Company's first product, the VAD
System, is being marketed in the U.S. and internationally for use as a bridge to
heart transplant and is currently the only device approved by the FDA that can
provide left, right or biventricular support for this indication. The Company
believes that the VAD System provides a number of significant advantages over
other ventricular assist devices. The Company is pursuing additional indications
for the VAD System and is developing other circulatory support products for
patients suffering from heart failure. The Company is also developing vascular
grafts for hemodialysis and coronary artery bypass surgery. All of the Company's
products utilize its proprietary biomaterial, Thoralon, which provides improved
thromboresistance, biocompatibility, patency and durability.
BACKGROUND
CIRCULATORY SUPPORT PRODUCTS
Cardiac failure is the leading cause of death in the U.S., accounting for
more deaths than all forms of cancer combined. Deaths associated with cardiac
failure fall into two broad categories: CHF, which is a slow, degenerative
process leading to cardiac insufficiency; and acute cardiac failure resulting
from heart attacks and various infections of the heart muscle (myocarditis).
CHF is a chronic disorder that occurs when the pumping power of the heart
is reduced by a weakening of the heart muscle. This results 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
and it is estimated that more than 85% of patients die within eight to twelve
years of diagnosis. CHF is estimated to be the most common cause of
hospitalization in patients over 65 years of age. According to the American
Heart Association, there are approximately four to five million CHF patients in
the U.S., and approximately 400,000 newly diagnosed patients each year. Most
patients suffering from CHF are initially treated with medication and, while
conventional drug therapy may delay the progress of CHF, it is not curative. 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 address adequately 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 U.S. in 1996, 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 average wait for a donor heart by patients on a heart transplant
waiting list is approximately eight 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 1996, approximately 20% of such patients died while waiting for a
donor heart.
Ventricular assist devices are mechanical systems used to assist the
heart's function, and, when other therapies are unsuccessful, they can be used
to support one or both sides of the patient's heart until a donor heart can be
found. In patients awaiting heart transplants, the decision to use a ventricular
assist device is made when death appears imminent. In addition to providing a
bridge to heart transplant, ventricular assist devices have potential usefulness
for other applications. It is estimated that out of approximately 600,000 open
heart surgeries performed annually in the U.S., some 15,000 to 18,000 patients
die following such procedures. Many of these deaths are caused by heart failure
when the heart, weakened by disease and the additional trauma of surgery, fails
to maintain adequate blood circulation. The use of a ventricular assist device
after surgery can provide support to the heart until it can recover. In
addition, ventricular assist devices may also be useful in assisting the
recovery of the heart in a small portion of patients suffering from acute
cardiac failure that may result from myocardial infarction, myocarditis or other
acute cardiomyopathies.
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<PAGE> 23
While there is significant demand for effective ventricular assist devices,
most systems available today or under development have certain limitations.
Certain systems cannot be used in smaller patients because the blood pump must
be implanted in the abdomen and is too large to fit in such patients. Other
systems require large incisions at the apex of the heart muscle, making recovery
of the heart more difficult if too large an incision is made. Some systems
cannot be used for more than a few days because their blood contacting parts
cause an adverse reaction in the body, resulting in clotting which clogs the
system or can cause a stroke. In addition, much of the development work on
ventricular assist devices has historically been in the area of left ventricular
support, and most systems available today or under development only provide left
ventricular support. While many patients do well with isolated left ventricular
support, some patients supported with systems designed solely for isolated left
ventricular assist also have or can develop right ventricular failure and
require right ventricular device support with another system. Mortality and
morbidity are extremely high for this patient group. It has been reported that
20% to 40% of patients supported by a left ventricular assist device either died
of right heart failure or required the placement of a right heart ventricular
assist device. The one available system that provides biventricular assistance
for postcardiotomy recovery confines the patient to the bed and is recommended
for short term use only. There are no risk factors that allow a surgeon to
predict reliably which patients will require biventricular support.
Thoratec believes that the VAD System is able to make ventricular support
available to a broader patient population and to better serve the existing
patient population by (i) providing biventricular support, which is necessary in
20% to 40% of patients receiving ventricular assistance, (ii) placing the pump
paracorporeally (worn on the outside of the body), enabling it to support
patients of varying sizes, including very small patients, (iii) providing the
surgeon with multiple options in positioning the cannulae and in the size and
shape of the cannulae used, potentially reducing damage to the heart, (iv)
incorporating proprietary Thoralon in most blood contacting parts, potentially
reducing or eliminating the risks of certain adverse reactions by the body and
permitting the system to be used for potentially extended periods, and (v)
providing circulatory support for both bridge to transplant and, subject to
regulatory approval, postcardiotomy recovery of the natural heart.
VASCULAR GRAFTS
Vascular Access. The principal use of vascular access grafts is for
hemodialysis. Severe acute and chronic diseases, including kidney disease,
diabetes and hypertension, may destroy normal kidney function, resulting in
acute renal failure. End stage renal disease is irreversible and currently
approximately 60% of all patients suffering from this disease are maintained by
hemodialysis. According to the U.S. Renal Data Systems database, there were
187,000 patients in the U.S. at the end of 1995 undergoing hemodialysis. The
Company estimates that the U.S. represents less than one-half of the worldwide
hemodialysis patient population.
Hemodialysis removes blood from the body and routes it to an artificial
kidney machine where it is cleansed and returned to the patient. Patients
undergoing hemodialysis require easy, routine access to the blood stream at a
high flow rate, which generally requires the attachment of a high pressure
artery to a low pressure vein. Two different methods are typically used. The
first, called an autologous arterio-venous ("A/V") fistula, involves cutting one
of the arteries in the patient's arm and sewing the artery to an adjacent vein.
The second method uses a prosthetic vascular graft, most often an ePTFE graft,
which is surgically connected between an artery and a vein. A hemodialysis
technician inserts two large needles into either the vein of the A/V fistula or
the synthetic graft. One needle removes the blood and routes it to the
artificial kidney machine and the second returns the blood to the patient. This
procedure is generally repeated three times per week.
Vascular access methods currently available for hemodialysis applications
have certain limitations. Both natural and ePTFE access grafts must mature for
three to four weeks before use and therefore patients receiving such grafts
require temporary routes of access. These temporary access procedures entail
additional cost and risk to the patient. ePTFE grafts are relatively inflexible,
which often leads to kinking and a higher risk of thrombosis. ePTFE grafts also
lose integrity after repeated punctures, which renders the patient susceptible
to bleeding and infection. If prosthetic grafts bleed profusely when needles
used for hemodialysis
23
<PAGE> 24
are removed, a technician may need to apply pressure to the graft for up to 20
minutes to permit clotting. Such problems associated with currently available
vascular grafts sometimes require them to be surgically replaced or modified on
a periodic basis. The Company estimates that approximately 200,000 new and
existing hemodialysis patients per year worldwide undergo vascular access
procedures. The Company estimates that approximately 50% to 60% of these
patients receive prosthetic grafts.
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. Autologous
grafts using saphenous veins (from the leg) or the internal mammary artery 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. The Company
estimates that in 1996 there were approximately 500,000 coronary artery bypass
surgery procedures performed in the U.S. and approximately 250,000 performed
outside of the U.S. The Company estimates 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 for autologous 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 autologous vessels as a result of previous
bypass surgeries, or their vessels are of inferior quality due to trauma or
disease. The Company estimates that these patients may represent as much as 20%
of the total. No synthetic graft is currently commercially available in the U.S.
for coronary artery bypass surgery, but the Company believes 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 mm) necessary for this
indication generally do not remain patent.
THORATEC BIOMATERIALS -- THORALON
The Company has developed expertise in the design and production of
proprietary biomaterials that are highly biocompatible (i.e., they do not cause
adverse reactions within the body), strong and flexible. This technology is
critical to the successful performance of all of Thoratec's products that come
into contact with human tissue. All of the Company's current products and those
under development incorporate these proprietary biomaterials in order to
minimize clotting and inflammatory responses. In addition, these products must
maintain their strength and flexibility. A VAD System blood pump, for instance,
must contract and expand approximately 40 million times per year without a
decrease in performance or failure. The two major components of Thoralon are
surface modifying additives ("SMAs") and BPS-215 polyurethaneurea ("BPS-215"), a
high flex life elastomer.
SMAs are proprietary multipolymers designed to enhance the biocompatibility
of the surface of a device that comes into contact with blood or other tissues.
SMAs are added to the base polymer component of the biomaterial in the bulk
fabrication stage. A unique property of SMAs is their ability to concentrate at
the surface of any finished part, thus determining its surface properties
independent of the base polymer. This SMA-based surface layer is not a coating
but a fully integrated part of the polymer which is not soluble in water or
blood. The result is a biocompatible, thromboresistant surface. BPS-215 is the
base component that provides the bulk properties of strength and flexibility to
Thoralon.
The combination of bulk and surface properties provided by SMAs and BPS-215
provides Thoralon with the critical properties necessary for implantable
cardiovascular and other medical devices. In 1992, Thoratec granted COBE a
royalty-bearing license and sublicense to use Thoratec's SMAs in certain COBE
medical devices.
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<PAGE> 25
THORATEC PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The following table summarizes the Company's current products and products
under development. The table should be read together with the more detailed
discussion of the products and products under development that follows.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT APPLICATION/INDICATION STATUS(1)
----------------------------------- --------------------------- ------------------------
<S> <C> <C>
CIRCULATORY SUPPORT PRODUCTS
VAD System (consisting of Bridge to heart transplant - FDA clearance in
paracorporeal VAD Blood Pump, December 1995
Dual Drive Console and cannulae) - Currently marketed
worldwide
Recovery of the natural - Clinical trials
heart completed; PMA
Supplement submitted
in October 1997
TLC-II Alternative to Dual Drive - Preclinical in the
Console in VAD System for U.S.
bridge to heart transplant,
recovery of the natural
heart and alternative to
heart transplant
Implantable VAD Bridge to heart transplant, - Preclinical
long-term recovery of the
natural heart and
alternative to heart
transplant
Muscle-Powered VAD (MVAD) Implantable alternative to - Research
heart transplant
VASCULAR GRAFT PRODUCTS
Vascular Access Graft (VAG) Hemodialysis - Approved for sale in
Canada, Japan and
certain other
countries
- Preclinical testing
completed in the U.S.
- Data for IDE submitted
in May 1997
Coronary Artery Bypass Graft Coronary artery bypass - Preclinical in the
(CABG) surgery U.S.
- Some compassionate use
cases in Europe and
Canada
</TABLE>
------------------
(1) "Clinical" denotes a human clinical trial intended to support filing
of a PMA application or 510(k) premarket notification with the FDA for
approval to market a product. "Preclinical" denotes in vitro and in
vivo studies intended to support an IDE application to the FDA for
approval to commence human clinical trials. "Research" denotes product
development prior to initiation of preclinical studies.
- --------------------------------------------------------------------------------
There can be no assurance that the Company can successfully develop any
potential products or, if successfully developed, that such products will obtain
regulatory approval or market acceptance or can be manufactured and sold on
commercially acceptable terms. See "Risk Factors -- Limited Manufacturing
Capability," "-- No Assurance of Market Acceptance," "-- Substantial Dependence
on Limited Product Line; Dependence on Development and Introduction of New
Products" and "-- U.S. Government Regulations."
25
<PAGE> 26
CIRCULATORY SUPPORT PRODUCTS
Thoratec received FDA clearance in December 1995 to market the VAD System
as a bridge to heart transplant in patients suffering from heart failure, and
began marketing the VAD System in the U.S. in January 1996. The VAD System has
also received regulatory clearance and is currently being marketed in major
European countries, Canada and certain other major international markets.
Building on the proprietary technologies contained in the VAD System, Thoratec
is attempting to develop a broad line of circulatory support products to meet
the wide range of needs of patients suffering from heart failure.
OVERVIEW OF THE VAD SYSTEM. The VAD System consists of three major
components: the blood pump, a type of artificial heart; the Thoratec Dual Drive
Console (the "Dual Drive Console"), which pneumatically activates the blood
pump; and cannulae which connect the blood pump to the heart and vessels. 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.
LOGO
The above figure depicts some of the cannulation options available with the
VAD System: left univentricular support (Panel A) and biventricular support
(Panels B and C). Note that the blood pumps in Panel C are turned over to
accommodate a different cannulation option. (Ao = aorta, LA = left atrial
appendage, PA = pulmonary artery, RA = right atrium, Apex = left ventricular
apex, IAG = interatrial groove).
ADVANTAGES OF THE VAD SYSTEM. Compared to other ventricular assist devices,
Thoratec believes that the VAD System has the following principal advantages:
- Biventricular Support. Development of ventricular assist devices evolved
from the concept that most patients could be successfully supported with
a left ventricular assist device ("LVAD"). While many patients do well
with isolated left ventricular support, some patients supported with
systems designed solely for isolated left ventricular assist also have or
can develop right ventricular failure and require right ventricular
assist device ("RVAD") support with another system. Mortality and
morbidity are extremely high for this patient group if not adequately
supported. Most systems available today provide only left ventricular
support and the only system other than the VAD System that provides
26
<PAGE> 27
biventricular support is indicated for temporary use in postcardiotomy
recovery and post-transplant patients and severely limits patient
mobility. 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 VAD System. In situations where there are no physiologic markers
of right heart failure, an LVAD can be used. An RVAD can be used in
addition to an LVAD if right heart failure is evident or subsequently
occurs. Biventricular support is also indicated in patients with
potentially lethal arrhythmias, or severe right ventricular infarction
that could result in death during univentricular support. With the VAD
System, RVAD support may be employed at the time of LVAD placement, thus
eliminating the need for reoperation to insert an RVAD. Isolated RVAD
support may also be suitable for patients with right heart failure only.
- Paracorporeal Attachment. In the VAD System, the pump is worn outside of
the body, allowing the system to support patients of varying sizes,
including very small patients such as small women and adolescents. To
date, the VAD System has been used in patients as small as 49 pounds. 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. The
other benefit derived from paracorporeal attachment is that it does not
require invasive abdominal surgery. 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. Finally,
the attachment of the pump to the body facilitates patient movement,
allowing patients to walk, exercise and move around the hospital.
- 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 canenulae in
different parts of the heart. Other commercially available systems have
only limited cannula shape and size. The small size of the Thoratec
cannulae, compared to other systems, could make it easier for the heart
to recover when the cannulae are removed. Variations of the Thoratec
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 system) when heart shape or disease state
make apex cannulation undesirable.
- Thoratec Biomaterials. Thoratec's proprietary biomaterials are used in
most portions of the VAD System that contact blood or are implanted in
the body, providing biocompatibility, thromboresistance, flex life and
strength.
- Multiple Indications. The Company believes that if it receives clearance
for the postcardiotomy recovery indication, the VAD System will be the
only device cleared to provide circulatory support for both indications.
To date, the VAD System has been used to support patients for periods
ranging from a few hours to over one year.
CURRENT AND POTENTIAL INDICATIONS. Thoratec has identified three basic
clinical needs for circulatory support products: as a bridge to heart
transplant; for recovery of the natural heart weakened or damaged by surgery or
disease; and as permanent support as an alternative to heart transplant.
Bridge to Heart Transplant
The Company commenced marketing the VAD System in the U.S. in January 1996
for use as a bridge to heart transplant in patients suffering from heart failure
following receipt of PMA approval from the FDA in December 1995. As of June
1997, approximately 132 Dual Drive Consoles were placed in heart transplant
centers worldwide and, in the first six months of 1997, the Company sold 114
pumps. As of August 1997, the VAD System had been used in more than 840 patients
worldwide ranging in age from 8 to 77 years and in weight from 49 to 316 pounds
(22 to 144 kg). The Company's submission to the FDA included clinical results in
375 patients (299 males, 76 females), all of whom were awaiting donor hearts and
were in imminent risk of dying without ventricular assistance. In spite of the
extreme illness and the zero percent survival rate expected
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with the use of conventional therapy alone for these patients, the VAD System
was successful in assisting 233 (62%) of the 375 patients to survive until a
donor heart was available. Of the 233 patients who received a heart transplant,
85% survived the transplant and were discharged from the hospital, and the
longest duration of VAD System support was 247 days. Sixty-five percent of the
375 patients received biventricular ("BiVAD") support and 34% received LVAD-only
support. The large percentage of patients needing BiVAD support reflects the
greater severity of disease in patients selected for biventricular support with
the VAD System. As a result, LVAD and RVAD patients showed correspondingly
improved survival rates: 92% for LVAD and RVAD and 82% for BiVAD
post-transplant. The PMA approval was granted based on an in-depth analysis
performed in 71 of the 375 patients. Of these patients, 49 (69%) survived to
receive a heart transplant and 44 of those (90%) were discharged. None of the
control patients survived to receive a heart transplant. Based on these clinical
results, the FDA determined that the VAD System was safe and effective in
restoring hemodynamic stability to patients awaiting heart transplant.
Recovery of the Natural Heart
A certain portion 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 6 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. The
Company has completed clinical trials in this indication and submitted a PMA
Supplement to the FDA in October 1997 for approval to market the VAD System for
postcardiotomy recovery of the natural heart. In addition, ventricular assist
devices may also be useful in assisting the recovery of hearts in patients
suffering from acute heart failure, such as myocardial infarction and
myocarditis, or other acute cardiomyopathies.
Thoratec believes that since the Thoralon used in the blood-contacting
parts of the VAD System may not cause an adverse reaction by the body, the VAD
System may be used for both short-term and long-term support. In contrast, the
one system that is currently approved for the post-cardiotomy recovery
indication can only be used for temporary circulatory support and requires that
the patient remain bed-ridden. Thoratec believes that other ventricular assist
devices currently available or under development are not suitable for recovery
of the natural heart because (i) they require surgical implantation and removal
of the blood pump from the abdomen, which adds greater surgical trauma to
critically ill patients, (ii) they cannot be used in smaller patients due to
their size, (iii) the large incision required to be made at the apex of the
heart may make recovery of the natural heart more difficult, leaving heart
transplant or chronic ventricular assist device support as the only alternatives
and (iv) they do not provide biventricular support, which is often required by
patients in recovery.
As of August 1997, the VAD System had been used in 147 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. Of the 147 patients who have been placed
on the VAD System, 38% (56 patients) recovered sufficiently to be weaned from
the heart/lung machine, and of those patients, 57% were discharged from the
hospital. Duration of patient cardiac support ranged from one to 80 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.
Alternative to Heart Transplant
Given the shortage of donor hearts for patients requiring heart transplant,
the Company believes that ventricular assist devices may become a long-term
solution for many patients who would otherwise require a heart transplant. To
address this need, the Company is currently developing the TLC-II, a compact and
lightweight portable driver to substitute for the Dual Drive Console currently
used with the VAD System. The Company believes that this product may enable
patients to eventually return home and to work and receive long-term ventricular
support without undergoing a heart transplant.
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PRODUCTS UNDER DEVELOPMENT. Thoratec currently has under development the
circulatory support products described below. There can be no assurance that the
Company will successfully develop any of these products, or if successfully
developed, that these products will obtain regulatory approval or market
acceptance or can be manufactured and sold on commercially acceptable terms.
TLC-II Portable VAD Driver ("TLC-II")
Although patients supported with the Dual Drive Console can ambulate
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.
Thoratec is developing the TLC-II, a compact and lightweight (8kg), battery or
line-operated biventricular pneumatic drive unit designed to promote greater
mobility and self-care. It is intended to allow the patient to more easily
exercise and move freely around the hospital grounds, and eventually away from
the medical facility. This device provides several portability options, either
by hand-carrying the driver or by using a shoulder strap or a small custom
trolley. This portable device will connect with a central system cart, which
will house a battery charger and the external monitoring computer.
Thoratec intends to submit data in support of an IDE application to the FDA
in late 1997 to begin a clinical trial of this device in the U.S. for use in
conjunction with the approved VAD System. Thoratec is also pursuing a CE mark
for this product. The Company believes that the regulatory path to approval for
this device will be facilitated by the fact that it activates the same VAD
System blood pumps that have received FDA approval.
Implantable VAD
While the paracorporeal placement of the VAD System has certain advantages,
especially for small patients and patients in whom additional abdominal surgery
presents a high risk, Thoratec is developing an implantable version of its
existing VAD blood pump and cannulae to provide additional options for surgeons.
Thoratec believes that the regulatory process for this product may be
facilitated, in part, by the fact that the VAD System has already undergone
preclinical testing in the implantable configuration prior to being introduced
for clinical use in the paracorporeal configuration.
Muscle-Powered VAD ("MVAD")
Thoratec is in the early stage of developing an implantable, muscle-powered
circulatory support device to serve as an alternative to heart transplant. The
MVAD utilizes conventional pacemaker technology, along with a linear
mechanical-to-hydraulic energy converter, to harness the power available in a
patient's latissimus dorsi muscle to drive an implanted ventricular assist
device. This system is designed to operate without batteries, electrical power
transmission systems and other bulky hardware required with electromechanical
systems. The MVAD is undergoing laboratory testing, and the Company has received
a $100,000 Phase I grant from the Small Business Technology Transfer Program of
the National Institutes of Health to support research and development of the
energy converter. Extensive technical development and laboratory testing will be
required before clinical trials could begin, and this project could be
discontinued at any time if feasibility is not demonstrated. There can be no
assurance that this product can be successfully developed.
VASCULAR GRAFT PRODUCTS
Thoratec is developing small diameter vascular graft products intended
initially to address the vascular access and coronary artery bypass surgery
markets. Both products utilize the Company's proprietary biomaterial, Thoralon,
and are protected by several patents covering Thoralon as well as the graft
design and manufacturing processes. Thoratec believes that its vascular grafts
are highly compliant, have excellent handling and suturing properties and have
the "feel" of a natural vessel. The fabrication process creates a structure in
which the three different layers in the 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 thromboresistance, the
solid middle layer gives the graft its strength and self sealing properties, and
the outer textured layer is designed to promote tissue ingrowth to promote graft
stability.
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Vascular Access Graft ("VAG"). 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 VAG
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. The Company believes that the VAG
may provide significant advantages over existing synthetic vascular access
grafts and may encourage its use by surgeons who are currently using natural
vessels for vascular access. The VAG received marketing approval from the
Canadian Ministry of Health in March 1996 and from the Japanese Ministry of
Health in May 1997. The VAG is also marketed in Australia, Taiwan and South
America. Thoratec is conducting preclinical testing and submitted data in
support of an IDE application to the FDA in May 1997 to commence clinical trials
in the U.S. The Company believes that these clinical trials will be necessary to
support the submission of a 510(k) premarket notification to the FDA.
To date, more than 1,500 patients outside of the U.S. have been implanted
with the VAG. In one retrospective study of the VAG in Australia, 134 patients
who were implanted by 31 different surgeons were evaluated. Based on data
obtained in this study as well as other clinical trials conducted outside the
U.S., the Company believes that the VAG offers the following advantages: (i)
reduced inflammatory response after implantation; (ii) the ability to begin
hemodialysis within one to three days after implantation, as opposed to several
weeks for ePTFE grafts; (iii) reduced bleeding complications during routine use
because of the VAG's self-sealing properties; and (iv) improved handling and
suturability. In the Australian study, the median hospital stay was four days
and initial use of the VAG for dialysis was performed with a median time after
implant of three days. The median follow-up period was 306 days. The patency at
both one and two years of dialysis use was comparable to or better than ePTFE
grafts, notwithstanding that 73% of the patients who received the Thoratec graft
previously demonstrated that they could not tolerate ePTFE grafts. In the second
phase of a Japanese 87-patient study, the current model of the Thoratec VAG was
implanted in 51 hemodialysis patients. These patients had a three-month
cumulative patency rate (unobstructed grafts) of 100% and a 12-month cumulative
patency rate of 91%. In contrast, a recent review of literature reporting
patency rates for standard ePTFE grafts in 13 different studies demonstrated
one-year weighted-average patency of 69.7%. A form of Teflon, ePTFE is the
material used in products currently marketed in the U.S.
Coronary Artery Bypass Graft ("CABG"). Coronary artery bypass surgery
requires the insertion of substitute vessels to bypass one or more blocked
arteries in the heart. These substitute vessels typically require either
harvesting the patient's saphenous veins or using the internal mammary artery.
These procedures, however, can involve significant trauma and expense, and are
sometimes not an option for patients who have undergone previous bypass surgery
or who have vessels of inferior quality. The CABG graft is designed for use in
coronary artery bypass surgery patients who have no suitable vessels of their
own. To date, a total of 27 patients in Canada and Germany have received
Thoratec's CABG grafts, ranging in size from 2.0 to 3.5mm. 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). Follow-up data in a small number of these patients have
demonstrated that some CABG grafts remained patent up to one year after surgery.
All 22 surviving patients were asymptomatic as of August 1997, with the longest
term patient implanted for over four years. None of the remaining five patients
are known to have died from causes related to the graft. Long-term test results
from a controlled clinical trial on a much larger patient population are
required before the capabilities of this graft can be demonstrated.
The potential for improved long-term patency in small diameter grafts is
the most unique aspect of the CABG graft. The Company believes 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 is
currently in preclinical testing of the CABG graft in the U.S. The Company
believes this product will require submission of a PMA application to the FDA.
Peripheral Graft Applications. In addition to the VAG and CABG graft,
Thoratec's graft products 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.
While the Company is not currently pursuing development of these applications,
it has performed limited early stage preclinical work in this area and believes
its graft products could be developed for these applications.
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SALES AND MARKETING
Circulatory Support Products. The potential customers for Thoratec's
circulatory support products are hospitals that perform open heart surgery
procedures and heart transplants. Based on published sources, the Company
estimates that 130 of the approximately 800 hospitals in the U.S. that perform
open heart surgery also perform heart transplants. The Company is initially
targeting these 130 heart transplant hospitals plus an additional 110 heart
transplant hospitals in Europe.
Thoratec has recruited and trained a direct sales force that is comprised
of seven experienced cardiovascular salespeople to sell the VAD System in the
United States, Canada, Germany and France. The sales effort is complemented by
four 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. Thoratec also partners 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 as well as transplant cardiologists, perfusionists and the
transplant nursing staff. In addition to its direct selling effort, Thoratec has
established a network of international distributors that cover those markets
that represent the majority of ventricular assist device potential. The
Company's internal marketing staff includes a product manager, a marketing
communications manager and an administrator. Thoratec employs 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. Thoratec has
also assembled a Medical Advisory Board consisting of opinion leaders who
provide clinical input and direction on product development, marketing and
market issues.
Hospitals or other medical institutions that acquire the VAD System
generally purchase two Dual Drive Consoles (to ensure that a back up Console is
available), VADs, related disposables and training. The time from the initial
contact with the cardiac surgeon until purchase is generally between nine and
eighteen months, due to the expense of the product and common hospital capital
equipment acquisition procedures. Upon receipt of a purchase order, the Company
will usually ship the products within thirty days.
The introduction of a new system requires training of the appropriate
personnel. Thoratec provides initial training for the surgical as well as the
clinical support teams when a center purchases and takes delivery of the VAD
System. As a follow-up to the initial training, Thoratec provides clinical
support at the first implant whenever possible. The Company also provides
24-hour access to clinically trained personnel. The Thoratec sales force also
assists customers with obtaining reimbursement from third-party payors.
Vascular Graft Products. The Company intends to market the VAG through
distributors both domestically and internationally and to market the CABG graft
through a direct sales force in the U.S. and Europe and through distributors in
other international markets. The Company envisions the market positioning of the
VAG as one which replaces an existing product used in an accepted procedure, and
at a comparable price. The Company plans to commission studies comparing its
products to ePTFE grafts. The Company believes the VAG 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. The Company also believes that more clinicians using natural A/V
fistulas will utilize a synthetic option when presented with these benefits, and
intends to target these users as well.
The CABG graft will be positioned initially as a preferable clinical option
for patients who lack suitable native vessels. The Company believes that more
clinician education will be required for the CABG graft in terms of patient
indications, product use, and product capabilities. This may be accomplished
through Company-sponsored educational programs, video educational tools, and
scientific lecture programs. The Company also anticipates a much larger domestic
sales force structure to effectively market the CABG graft, which may overlap or
work with the VAD System sales force. Finally, the Company recognizes the impact
of clinical thought-leaders in any surgical specialty, and will begin
cultivating these relationships during the clinical trials of the graft.
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MANUFACTURING
Thoratec manufactures specialty polymers for use in the grafts, VAD blood
pumps and cannulae, fabricates the grafts, VAD blood pumps and cannulae, and
assembles and tests the VAD System at its Berkeley, California facility. This
facility is cGMP-approved for the U.S. market and has received ISO 9001
certification.
The Company's manufacturing processes for the VAD System consist of the
assembly of standard and custom component parts, including blood-contacting
components fabricated from Thoratec's proprietary biomaterials, and the testing
of completed products. The Company relies on single sources of supply for
several components of the VAD System. The Company is aware of alternative
suppliers for all single-sourced items other than the mechanical valves, and
believes the loss of any one supplier would have only a short-term impact on its
production schedule. The supplier of mechanical valves for the VAD System
stopped production in 1995. The Company negotiated a contract for supply of the
valves that it believes will satisfy its needs at least through October 1998,
during which time it must qualify a replacement valve or qualify a new vendor
for the current valve. In October 1997, the Company executed a four-year supply
agreement with Arrow. See "Risk Factors -- Dependence on Third Parties for
Supplies."
The Company devotes significant attention to quality control. Its quality
control measures begin at the manufacturing level where components are assembled
in a "clean-room" environment designed and maintained to reduce product exposure
to particulate matter. Products are tested throughout the manufacturing process
for adherence to specifications. Finished components are shipped to outside
processors for sterilization through radiation or treatment with ethylene oxide
gas. After sterilization, the products are quarantined and tested before they
are shipped to customers.
The Company believes its Berkeley facility is capable of supplying the
Company's expected sales of VAD Systems through 1998. The Company plans to
relocate to a larger facility in Pleasanton, California, in the San Francisco
Bay Area, starting in 1997 with the corporate, research and development, and
sales offices. A lease was executed in 1996 for this new 62,000 square foot
facility. The scale-up and validation of a new manufacturing facility and the
purchase of necessary equipment at the new facility will require significant
expenditures in 1998. See "Risk Factors -- Limited Manufacturing Capability."
PATENTS AND PROPRIETARY RIGHTS
The Company has adopted a policy of seeking to patent certain aspects of
its technology. The Company holds, or has exclusive rights to, 16 U.S. patents
and has four U.S. patent applications currently in prosecution. Except for the
biomaterials patents mentioned below, which are utilized in the VAD blood pump
and cannulae, the VAD System is not protected by any patents. The Company does
not believe that this lack of patent protection will have a material adverse
effect on the Company or its ability to sell the VAD System because of the
lengthy regulatory period required to obtain approval of a ventricular assist
device. The Company is not aware of any ventricular assist devices currently
approved by the FDA or undergoing clinical trials based on the Company's product
design. Thoratec's proprietary biomaterials technology is covered by seven
patents. Five of these were sold to Th. Goldschmidt AG ("Goldschmidt"), a German
chemical manufacturer, in 1989, but the Company has retained worldwide,
royalty-free, exclusive rights to these patents for most medical applications.
The Company's vascular graft products are covered by three manufacturing process
patents. The MVAD is currently covered by three U.S. patents, two of which are
held by the Company, and one of which is owned by Dr. Hill, Chairman of the
Board of Directors of the Company, and the Company currently has a nonexclusive
right to use that patent. Of the two patents held by the Company, one covers the
overall MVAD system design and operation, while the other covers a component of
the MVAD energy conversion system. Dr. Hill's patent also covers the overall
design of the device. Four of the Company's 16 patents are for products which
are not commercially pertinent to Thoratec today.
The Company holds, or has exclusive rights to, 35 international patents,
with 31 applications currently in prosecution. All 35 international patents
apply to products for which patents have been applied for or issued under U.S.
patent law. Twenty-six biomaterial patents, valid in 13 countries, are licensed
from Goldschmidt. The three graft patents held by the Company are valid in
Canada, France and the U.K., and one of these
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patents is valid in Japan. Of the 31 currently pending patent applications, one
is a design patent for the TLC-II and most of the other applications relate to
biomaterials.
The validity of any patents issued to the Company may be challenged by
others, and the Company could encounter legal and financial difficulties in
enforcing its patent rights against alleged infringers. In addition, there can
be no assurance that other technologies cannot or will not be developed or that
patents will not be obtained by others which would render the Company's patents
obsolete. Although the Company does not believe the patents are the sole
determinant in the commercial success of its products, the loss of a significant
percentage of its patents or its patents relating to its graft products could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has developed significant technical knowledge which, although
nonpatentable, is considered by the Company to be significant in enabling it to
compete. However, the proprietary nature of such knowledge may be difficult to
protect. The Company has entered into an agreement with each key employee
prohibiting such employee from disclosing any confidential information or trade
secrets of the Company. In addition, these agreements also provide that any
inventions or discoveries relating to the business of the Company by these
individuals will be assigned to the Company and become the Company's sole
property.
Claims by competitors and other third parties that the Company's products
allegedly infringe the patent rights of others could have a material adverse
effect on the Company. 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 to the Company and
significant diversion of the efforts of the Company's technical and management
personnel. An adverse determination in any such proceeding could subject the
Company to significant liabilities or require the Company to seek licenses from
third parties or pay royalties that may be substantial. Furthermore, there can
be no assurance 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
the Company from manufacturing or selling certain of its products, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Patents and Protection
of Proprietary Technology."
COMPETITION
Principal competitors of the VAD System include Thermo Cardiosystems Inc.,
which manufactures and markets an implantable left ventricular assist device
approved only for bridge to heart transplant in the U.S., and ABIOMED, Inc.,
which manufactures and markets an FDA-cleared biventricular assist device for
temporary circulatory support of patients in postcardiotomy shock and treatment
of cardiogenic shock following heart transplants. In addition, Novacor, a
division of Baxter International, Inc., is developing a left ventricular assist
device currently in clinical trials in the U.S. The Company believes that the
principal competitive factors in the ventricular assist device market are impact
on patient outcomes, product performance, size and portability, quality,
cost-effectiveness and customer service. The Company believes that its principal
competitive advantages are the fact that the VAD System can provide left, right
or biventricular support, the smaller size and paracorporeal placement of the
system that allows its use with a greater range of patients than competitive
devices, the greater range of cannulation options available and the quality of
its biomaterials. Although Thoratec believes that these attributes of the VAD
System offer certain advantages over existing ventricular assist devices,
current competitors can be expected to defend their market positions vigorously.
The principal competitors in the vascular access graft market are W.R.
Gore, Inc., IMPRA, Inc. (C.R. Bard) and Meadox (Boston Scientific), which
manufacture and market ePTFE grafts, Corvita Corporation (Pfizer) and Cardiotech
International, Inc., which are developing polyurethene grafts, and Possis
Medical, Inc. ("Possis"), which is developing spun polyester grafts. In
addition, Possis is developing coronary artery bypass grafts. There are
currently no coronary artery bypass graft products approved for use in the U.S.
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The Company believes that the principal competitive factors in the graft market
are biocompatibility, patency, reliability, cost, suturability and ease of use.
The Company expects that significant competition in the synthetic vascular graft
market will continue.
There are many companies focusing on the development of circulatory support
devices or vascular grafts that have substantially greater financial resources,
have substantially larger and more experienced sales and marketing organizations
and engage in substantially greater research and development efforts than the
Company. One or more of these or other companies could design and develop
products that compete directly with the Company's products, in which case the
Company would face intense competition. Moreover, certain academic institutions,
government agencies and other research organizations are conducting research in
areas in which the Company is 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 the Company in recruiting highly qualified
scientific personnel. Competition from commercial or other institutions or
organizations could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk
Factors -- Competition."
GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. and foreign countries is
a significant factor in the manufacture and marketing of the Company's current
and future products and in its ongoing product research and development
activities. All of the Company's 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 U.S., the FDA regulates the manufacture, distribution and promotion
of medical devices pursuant to the FDC Act and Regulations. The VAD System,
TLC-II, MVAD and graft products are, or will be regulated as medical devices. To
obtain FDA approval to market medical devices similar to those under development
by the Company, the FDA requires proof of safety and efficacy in human clinical
trials performed under an IDE. An IDE application must contain preclinical test
data demonstrating the safety of the product for human investigational use,
information on manufacturing processes and procedures, and proposed clinical
protocols. If the IDE application is accepted, human clinical trials may begin.
The 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 U.S.
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 responded to 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 device, the
manufacturer may seek marketing clearance from the FDA to market the device by
filing a 510(k) premarket notification with the FDA. The 510(k) premarket
notification must be supported by data establishing the claim of substantial
equivalence to the satisfaction of the FDA. The process of obtaining a 510(k)
clearance typically can take several months to a year or longer. If substantial
equivalence cannot be established, or if the FDA determines that the device
requires a more rigorous review, the FDA will require that the manufacturer
submit a PMA application that must be reviewed
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and approved by the FDA prior to sale and marketing of the device in the U.S.
Both a 510(k) and a PMA, if granted, may include significant limitations on the
indicated uses for which a product may be marketed. FDA enforcement policy
strictly prohibits the promotion of approved medical devices for unapproved
uses. In addition, product approvals can be withdrawn for failure to comply with
regulatory requirements or the occurrence of unforeseen problems following
initial marketing.
In December 1995, the Company received FDA approval of its PMA for the
bridge to heart transplant indication for the VAD System. The same system
continues to be sold in the U.S. for controlled clinical use under an IDE for
recovery of the natural heart. The VAD System is classified as a Class III
medical device under the FDC Act. Prior to approval by the FDA, this device was
marketed pursuant to an IDE for use in clinical trials under controlled
conditions by a limited number of qualified medical institutions. The process of
obtaining FDA approval for the VAD System required 13 years after approval of
the IDE.
The Company expects that its graft products will be classified as either
Class II or Class III medical devices. The Company submitted data supporting an
IDE for its VAG in May 1997, but believes that it will then be able to file a
510(k) after the clinical data is gathered. The Company has limited clinical
experience with its CABG graft product, all outside the U.S. Substantial
additional preclinical testing will need to be completed in the U.S. before
commencement of clinical trials on the CABG grafts in the U.S.
The approval process for any of the Company's products is expensive and
time consuming and no assurance can be given that any regulatory agency will
grant its approval. The inability to obtain, or delays in obtaining, such
approval would adversely affect the Company's ability to commence marketing
therapeutic applications of its products. There can be no assurance that the
Company will have sufficient resources to complete the required testing and
regulatory review processes. Furthermore, the Company is unable to predict the
extent of adverse governmental regulation which might arise from future United
States or foreign legislative or administrative action.
In addition, any products distributed by the Company 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 Quality System (cGMP) and GLP regulations.
Labeling and promotional activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. The failure to comply with
the FDA's regulations can result in enforcement action, including seizure,
injunction, prosecution, civil penalties, recall and suspension of FDA approval.
The export of devices also is subject to regulation in certain instances. See
"Risk Factors -- U.S. Government Regulations."
International Regulations
The Company is also subject to regulation in each of the foreign countries
in which it sells its products with regard to product standards, packaging
requirements, labelling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of the regulations applicable to the Company's
products in such countries are similar to those of the FDA. The national health
or social security organizations of certain countries require the Company's
products to be qualified before they can be marketed in those countries.
To position itself for access to European and other international markets,
Thoratec 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. The Company obtained certification and was registered
as an ISO 9002 compliant company in January 1995. Commencing in mid 1998, all
companies will be required to obtain CE marking for medical devices sold or
distributed in the European Community. The CE mark is an international symbol of
quality and with it, medical devices can be distributed within the European
Community which is comprised of fifteen European countries representing a
population of over 360 million people. A prerequisite for the Company obtaining
authority to CE mark its products is to achieve full quality system
certification in accordance with ISO 9001 and EN 46001. These are quality
standards that cover design, production, installation and servicing of medical
devices. The Company received its
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<PAGE> 36
ISO 9001/EN 46001 certification in September 1997. The Company plans to obtain
authority to CE mark the TLC-II, other VAD System accessories, as well as the
VAG, in 1997. See "Risk Factors -- International Regulations."
Other Regulations
The Company is 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 the Company's research
and development work. Specifically, the manufacture of the Company's
biomaterials is subject to compliance with federal environmental regulations and
by various state and local agencies. Although the Company believes it is in
compliance with these laws and regulations in all material respects, there can
be no assurance that the Company will not be required to incur significant costs
to comply with environmental laws or regulations in the future.
THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT
The Company's 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 insurance
companies and managed care organizations, reimburse part or all of the costs and
fees associated with the procedures performed with these devices.
Medicare and Medicaid reimbursement for hospitals is based on a fixed
amount for admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method, hospitals have incentives to use less costly methods in
treating Medicare and Medicaid patients, and will frequently make capital
expenditures to take advantage of less costly treatment technologies.
Frequently, reimbursement is reduced to reflect the availability of a new
procedure or technique, and as a result hospitals are generally willing to
implement new cost saving technologies before these downward adjustments take
effect. Likewise, because the rate of reimbursement for certain physicians who
perform certain procedures has been and may in the future be reduced in the
event of further changes in the resource-based relative value scale method of
payment calculation, physicians may seek greater cost efficiency in treatment to
minimize any negative impact of reduced reimbursement. 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. Changes in reimbursement
policies and practices of third party payors could have a substantial and
material impact on sales of certain of the Company's products. The development
or increased use of more cost-effective treatment could cause such payors to
decrease or deny reimbursement to favor these treatments. To date, HCFA and some
private insurers have determined to reimburse the costs of the VAD System. It is
uncertain what legislative proposals will be adopted or what actions federal,
state or private payors for health care goods and services may take to limit
their payments for such goods and services. The Company cannot predict whether
the VAD System will be approved for reimbursement and cannot predict the effect
the changes in the health care system may have on its business. As a result, no
assurance can be given that any such changes will not have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors -- Uncertainty Related to Third Party Reimbursement for the
VAD System."
EMPLOYEES
As of August 23, 1997, the Company had 92 full-time employees, 27 of whom
worked in manufacturing, 15 in engineering, 11 in quality control and regulatory
affairs, 16 in marketing and sales support, 12 in administration and finance and
11 in other support functions (including personnel, management information,
purchasing, facility). None of the Company's employees are covered by a
collective bargaining agreement. The Company believes that its relations with
its employees are good.
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<PAGE> 37
FACILITIES
Thoratec occupies a leased facility in Berkeley, California, totaling
approximately 28,000 square feet where its research and development, marketing,
engineering, and manufacturing activities are carried out. 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 lease on this building will expire in August
1999. The Company also has small leased facilities in the United Kingdom.
In July 1996, the Company entered into a lease agreement on a new
manufacturing facility to be located within 50 miles of its current facility.
This building, when completed, will accommodate all of the Company's
manufacturing, engineering and administrative activities. The administrative and
engineering portion of the building is scheduled to be completed and ready for
occupancy in late 1997. The Company will invest approximately $9 million in
equipment and leasehold improvements to the building, approximately $3 million
of which had been invested at June 28, 1997. Annual payments under the amended
lease are approximately $699,000 for a lease term of 15 years and commenced in
August 1997. The lease includes provisions, among others, for annual cost of
living adjustments to the lease payments, two five-year renewal options, a
purchase option, and a security deposit of $885,600, which the Company paid in
1996, and an additional $500,000 paid in 1997. A significant portion
($1,250,000) of the security deposit can be reduced or eliminated before the end
of the initial lease term if the Company meets certain criteria as specified by
the contract.
LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
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<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning executive
officers and directors of the Company as of September 15, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
D. Keith Grossman............ 37 President, Chief Executive Officer and Director
Cheryl D. Hess............... 50 Vice President -- Finance, Chief Financial Officer and Secretary
Thomas E. Burnett, Jr. ...... 34 Vice President -- Sales and Marketing
David J. Farrar, Ph.D. ...... 49 Vice President -- Research and Development
Donald A. Middlebrook........ 46 Vice President -- Regulatory Affairs/Quality Assurance
Joseph G. Sharpe............. 37 Vice President -- Operations
Christy W. Bell.............. 75 Director
Howard E. Chase.............. 61 Director
J. Daniel Cole............... 51 Director
J. Donald Hill, M.D. ........ 60 Director and Chairman of the Board of Directors
William M. Hitchcock......... 58 Director
George W. Holbrook, Jr. ..... 66 Director
Daniel M. Mulvena............ 49 Director
</TABLE>
There are no family relationships between any of the directors or executive
officers of the Company.
D. KEITH GROSSMAN joined Thoratec as President and Chief Executive Officer
in January 1996. He was elected to the Board of Directors in February 1996.
Prior to joining Thoratec, 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.
CHERYL D. HESS joined the Company as Vice President -- Finance and Chief
Financial Officer in December 1983 and became Secretary in 1994. Prior to
joining Thoratec, 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 for Thoratec, as well as certain administrative and
operational activities. Ms. Hess is a Certified Public Accountant.
THOMAS E. BURNETT, JR. joined the Company as Vice President - Sales and
Marketing in August 1996. Prior to joining Thoratec, Mr. Burnett was Vice
President of Sales and Marketing at Calcitek, Inc. from June 1992 to August
1996, where he was responsible for global sales and marketing which included a
direct domestic sales force and an international network encompassing 30
countries as well as new business development, strategic and operational
planning. Prior thereto, Mr. Burnett held various other positions at Calcitek,
including Director of Sales from January 1991 to June 1992 and National Sales
Manager from June 1990 to January 1991. Prior to Calcitek, Mr. Burnett held a
variety of sales and sales management positions for Kendall McGaw Laboratories,
a producer of intravenous solutions, infusion equipment and parenteral
pharmaceuticals.
DAVID J. FARRAR, PH.D. joined the 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.
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<PAGE> 39
DONALD A. MIDDLEBROOK joined the Company as Vice President -- Regulatory
Affairs/Quality Assurance in September 1996. Before joining Thoratec, 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 this, Mr. Middlebrook spent fifteen years with
Baxter International, Inc. in a number of progressing positions, including Vice
President of Regulatory Affairs and Quality Assurance for the CardioVascular
Group, a producer of a wide range of cardio, critical care, vascular, and
less-invasive cardiovascular products.
JOSEPH G. SHARPE joined the Company as Vice President -- Operations in
September 1997. Prior to joining Thoratec, 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. and Honeywell Information Systems.
CHRISTY W. BELL became a Director of the Company in April 1988 and is a
significant shareholder of the Company. Mr. Bell is President and CEO of
Electro-Petroleum Inc. ("EPI"), Electro-Pyrolysis Inc., and Arc Technologies
Inc. Prior to joining EPI, Mr. Bell had been Chairman and Chief Executive
Officer of Chem-Clear, located in Wayne, Pennsylvania, until February 1988, when
the Company was sold. Mr. Bell serves as a member of the Board of Directors of
Clean Harbors, Inc.
HOWARD E. CHASE became a Director of the Company in November 1986. Mr.
Chase has served as President and Chief Executive Officer of DeTomaso
Industries, Inc. since September 1995. From 1984 to August 1995, Mr. Chase was a
partner in the law firm of Morrison Cohen Singer & Weinstein in New York City.
He acted as an advisor and as special counsel to the Company from 1979 to 1995.
J. DANIEL COLE became a Director of the Company in July 1997. Mr. Cole is a
general partner of the Spray Venture Fund of Boston. Mr. Cole was President and
Chief Operating Officer of SciMed Life Systems Corporation from April 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 Cambridge Heart, Inc. and SurVivalink.
J. DONALD HILL, M.D. has been a Director of the Company since its inception
in March 1976 and is a significant shareholder of the Company. In January 1995,
Dr. Hill became Chairman of the Board of Directors. Dr. Hill is Chairman of the
Department of Cardiac Surgery 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 the Company in September 1996. In
December 1994, Mr. Hitchcock became President and director of Avalon Financial,
Inc. From May 1992 to December 1995, Mr. Hitchcock was President of Plains
Resources International Inc., a wholly owned subsidiary of Plains Resources Inc.
Since 1977, Mr. Hitchcock has been a member of the Board of Directors of Plains
Resources Inc. and Oshman's Sporting Goods, Inc.
GEORGE W. HOLBROOK, JR. became a Director of the Company in July 1995.
Since 1984, Mr. Holbrook has been the Managing Partner of Bradley Resources
Company, a private investment partnership. Mr. Holbrook is also a director of
Merrill Lynch Institutional Intermediate Fund and other associated funds, and a
director of Canyon Resources Corporation.
DANIEL M. MULVENA became a Director of the 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, and prior thereto 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.
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<PAGE> 40
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of August 31, 1997, and as adjusted to reflect
the sale of the 3,000,000 Shares offered hereby by (i) each of the Company's
directors, (ii) each executive officer, (iii) all directors and executive
officers as a group and (iv) each person who is known by the Company to own
beneficially more than 5% of the Common Stock. Excluded from the table are two
persons who were among the five most highly compensated officers of the Company
in 1996, but who were no longer employed by the Company as of August 31, 1997.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED(2)
NUMBER OF SHARES -----------------------
BENEFICIALLY OWNED(2) NUMBER OF PRIOR TO AFTER
NAME AND ADDRESS(1) PRIOR TO OFFERING SHARES OFFERED OFFERING OFFERING
- -------------------------------------- --------------------- -------------- --------- ---------
<S> <C> <C> <C> <C>
COBE Laboratories, Inc. .............. 3,708,077 -- 20.4% 18.4%
1185 Oak Street
Lakewood, CO 80215
Sulzer Intermedics, Inc. ............. 2,074,074 1,000,000 11.4 5.3
4000 Technology Drive
Angleton, TX 77515
State of Wisconsin Investment Board... 1,549,800 -- 8.5 7.7
P.O. Box 7842
Madison, WI 53702
J. Donald Hill(3)..................... 1,396,953 -- 7.7 6.9
George W. Holbrook, Jr.(4)............ 1,284,555 -- 7.1 6.4
Bradley Resources Company(4).......... 1,281,222 -- 7.1 6.4
P.O. Box 1938
Palm City, Florida 34990
James McGoogan(4)..................... 1,281,222 -- 7.1 6.4
Bradley Resources Company
P.O. Box 1938
Palm City, Florida 34990
Christy W. Bell(5).................... 772,377 -- 4.2 3.8
William M. Hitchcock(6)............... 337,073 -- 1.9 1.7
D. Keith Grossman(7).................. 88,334 -- * *
Howard E. Chase(8).................... 86,555 -- * *
Cheryl D. Hess(9)..................... 60,804 -- * *
David J. Farrar(10)................... 52,522 -- * *
Thomas E. Burnett, Jr.(11)............ 15,000 -- * *
Donald A. Middlebrook(12)............. 15,000 -- * *
J. Daniel Cole(13).................... -- -- * *
Daniel M. Mulvena(14)................. -- -- * *
Joseph G. Sharpe(15).................. -- -- * *
All directors and executive officers
as a group (13 persons)(16)......... 4,109,173 -- 22.1% 20.0%
</TABLE>
- ---------------
* Less than one percent.
(1) Except as set forth herein, the address of the persons set forth above is
the address of the Company appearing elsewhere in this Prospectus.
(2) Applicable percentage ownership for each shareholder is based on 18,153,555
shares of Common Stock outstanding as of August 31, 1997. 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 Common Stock
subject to options and warrants exercisable or convertible within 60 days
of August 31, 1997. Shares of Common Stock subject to outstanding options
are deemed outstanding for computing the percentage of ownership of the
person
40
<PAGE> 41
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
the Company's 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 85,555 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of August 31, 1997.
(4) Bradley Resources Company is an investment partnership which owns 1,281,222
shares. George W. Holbrook, Jr., a director of the Company, is a general
partner of Bradley Resources Company and is deemed to share beneficial
ownership of such shares of Common Stock with Mr. James McGoogan, a general
partner of Bradley Resources Company. Includes, in Mr. Holbrook's number
only, 3,333 shares of Common Stock issuable upon exercise of options within
60 days of August 31, 1997.
(5) Includes 86,889 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of August 31, 1997.
(6) Includes 3,333 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of August 31, 1997.
(7) Includes 83,334 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of August 31, 1997.
(8) Includes 85,555 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of August 31, 1997.
(9) Includes 10,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of August 31, 1997.
(10) Includes 37,300 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of August 31, 1997.
(11) Includes 15,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of August 31, 1997.
(12) Includes 15,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of August 31, 1997.
(13) Mr. Cole joined the Board in June 1997 and was granted options to purchase
10,000 shares of Common Stock, none of which are exercisable within 30 days
of August 31, 1997.
(14) Mr. Mulvena joined the Board in May 1997 and was granted options to
purchase 10,000 shares of Common Stock, none of which are exercisable
within 30 days of August 31, 1997.
(15) Mr. Sharpe joined the Company in September 1997 and was granted options to
purchase 60,000 shares of Common Stock, none of which are exercisable
within 60 days of August 31, 1997.
(16) Includes 425,299 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of August 31, 1997.
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<PAGE> 42
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, no par value, and 2,500,000 shares of Preferred Stock, no par
value. Upon completion of this offering, 20,153,555 shares of Common Stock and
no shares of Preferred Stock will be outstanding. As of August 31, 1997, there
were 18,153,555 shares of Common Stock outstanding held of record by
approximately 800 shareholders.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the shareholders of the Company. Subject to the preferences
that may be applicable to any outstanding shares of Preferred Stock, the holders
of Common Stock are entitled to receive ratably such dividends, if any, as may
be declared by the Board of Directors out of funds legally available therefor.
In the event of liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to the prior liquidation rights of any
outstanding shares of Preferred Stock. The holders of Common Stock have no
preemptive, redemption, conversion or other subscription rights. The outstanding
shares of Common Stock are, and the Shares offered by the Company in the
offering will be, when issued and paid for, fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of Preferred Stock which the Company may designate and issue in the
future.
PREFERRED STOCK
The Board is authorized, without shareholder approval, to issue up to
2,500,000 shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to, or imposed upon, any
unissued shares of Preferred Stock and to fix the number of shares constituting
any series and the designations of such series. The issuance of Preferred Stock
may have the effect of delaying or preventing a change in control of the
Company. The issuance of Preferred Stock could decrease the amount of earnings
and assets available for distribution to the holders of Common Stock or could
adversely affect the rights and powers, including voting rights, of the holders
of the Common Stock. In certain circumstances, such issuance could have the
effect of decreasing the market price of the Common Stock. As of the closing of
the offering, no shares of Preferred Stock will be outstanding and the Company
currently has no plans to issue any shares of Preferred Stock.
WARRANTS
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 that
offering, the Company issued to Vector Securities International, Inc. and
Cruttenden Roth Incorporated five-year warrants to purchase 164,400 shares of
the Common Stock at $14.40 per share. The warrants are currently exercisable and
include a net exercise provision. The holders of the warrants have no voting,
dividend or other shareholder rights until the warrants are exercised. The
holders of the shares issuable upon exercise of the warrants are entitled to
certain demand and piggy-back registration rights.
PROVISIONS OF ARTICLES OF INCORPORATION AFFECTING SHAREHOLDERS
The existence of the authorized but unissued Preferred Stock could have the
effect of making it more difficult for a third party to effect a change in the
control of the Board of Directors and therefore may discourage another person or
entity from making a tender offer for the Common Stock, including offers at a
premium over the market price of the Common Stock, and might result in a delay
in changes in control of management. In addition, these provisions could have
the effect of making it more difficult for proposals favored by the shareholders
to be presented for shareholder consideration.
The Company has also included in its Articles of Incorporation provisions
to eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the extent
42
<PAGE> 43
permitted by the California Corporations Code and to indemnify its directors and
officers to the fullest extent permitted by Section 317 of the California
Corporations Code.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American
Securities Transfer, Inc.
PLAN OF DISTRIBUTION
The Common Stock is being offered for sale by the Company and the Selling
Shareholder on a best efforts, all or nothing, basis primarily to selected
institutional investors. Vector Securities International, Inc. and Cruttenden
Roth Incorporated, the Placement Agents, have been retained pursuant to a
placement agency agreement to act as the exclusive co-agents for the Company and
the Selling Shareholder in connection with the arrangement of offers and sales
of the Common Stock on a best efforts basis.
The Placement Agents are not obligated to and do not intend to themselves
take (or purchase) any of the Shares offered hereby. It is anticipated that the
Placement Agents will obtain indications of interest from potential investors
for the amount of the offering and that effectiveness of the Registration
Statement will not be requested until indications of interest have been received
for the amount of the offering. No investor funds will be accepted until
indications of interest have been received for the amount of the offering, and
no investor funds will be accepted prior to effectiveness of the Registration
Statement. Confirmations and definitive prospectuses will be distributed to all
investors at the time of pricing, informing investors of the closing date, which
will be scheduled for three business days after pricing. After the Registration
Statement is declared effective and prior to the closing date, all investor
funds will promptly be placed in escrow with Citibank, N.A., as Escrow Agent, in
an escrow account established for the benefit of the investors. The Escrow Agent
will invest such funds in accordance with Rule 15c2-4 promulgated under the
Exchange Act. Prior to the closing date, the Escrow Agent will advise the
Company and the Selling Shareholder that payment for the purchase of the Shares
offered hereby has been affirmed by the investors and that the investors have
deposited the requisite funds in the escrow account at the Escrow Agent. Upon
receipt of such notice, the Company and the Selling Shareholder will deposit
with DTC the shares of Common Stock to be credited to the respective accounts of
the investors. Investor funds, together with interest thereon, if any, will be
collected by the Company and the Selling Shareholder through the facilities of
the Escrow Agent on the scheduled closing date. The offering will not continue
after the closing date. In the event that investor funds are not received in the
full amount necessary to satisfy the requirements of the offering, all funds
deposited in the escrow account will promptly be returned.
The Company and the Selling Shareholder have agreed (i) to pay to the
Placement Agents 7.0% of the proceeds of the Shares being sold by each of them
in this offering as the selling commission, and (ii) to indemnify the Placement
Agents against certain liabilities, including liabilities under the Securities
Act. In addition, the Company has agreed to reimburse the Placement Agents up to
$150,000 for certain expenses incurred by them in connection with the offering.
The Placement Agents intend to retain Fahnestock & Co. Inc. ("Fahnestock") as a
sub-placement agent, and Fahnestock will be paid a fee equal to $0.21 per share
placed by Fahnestock.
The Company has agreed not to issue, and certain officers, directors and
affiliates of the Company and the Selling Shareholder have agreed that they will
not, directly or indirectly, offer, sell, contract to sell, or grant any option,
right or warrant to purchase or otherwise dispose of any shares of Common Stock
or any securities convertible into or exercisable for, or any rights to purchase
or acquire, Common Stock (excluding those shares being sold pursuant to this
offering) for a period of 90 days from the date of this Prospectus, without the
prior written consent of the Placement Agents.
Vector Securities International, Inc. and Cruttenden Roth Incorporated have
from time to time provided, and expect to continue to provide, investment
banking services to the Company. See "Description of Capital Stock -- Warrants."
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<PAGE> 44
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company by Heller Ehrman White & McAuliffe, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Placement Agents by Stroock & Stroock & Lavan LLP, Los
Angeles, California.
EXPERTS
The consolidated financial statements as of December 28, 1996 and December
30, 1995 and for each of the three years in the period ended December 28, 1996,
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein. Such
consolidated financial statements have been included herein in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The statements in this Prospectus under the captions "Risk
Factors -- Patents and Protection of Proprietary Technology" and
"Business -- Patents and Proprietary Rights" have been reviewed by Fish &
Richardson P.C., outside intellectual property counsel for the Company, as
experts on such matters, and are included herein in reliance upon that review
and approval.
ADDITIONAL INFORMATION
Thoratec is subject to the reporting requirements of the Exchange Act, and
in accordance therewith files annual and quarterly reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). The Company has filed a registration statement on Form S-3
(herein, together with all amendments and exhibits referred to as the
"Registration Statement") with the Commission under the Securities Act. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information, exhibits and schedules set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock, reference is hereby made to the
Registration Statement, exhibits and schedules thereto. Statements contained in
this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete and, in each instance, if such contract
or document is filed as an exhibit to the Registration Statement, each such
statement is qualified in all respects by such reference to such exhibit. Copies
of such materials may be inspected, without charge, at the offices of the
Commission, or obtained at prescribed rates from the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and at Seven World Trade Center (13th Floor), New York, New York 10048. The
Commission maintains a World Wide Web Site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with the
Commission. The Common Stock is currently traded on the Nasdaq National Market.
Reports, proxy statements and other information concerning the Company may also
be inspected at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
44
<PAGE> 45
THORATEC LABORATORIES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of the Fiscal Years Ended 1995 and 1996 and
June 28, 1997 (unaudited)........................................................... F-3
Consolidated Statements of Operations for the Fiscal Years Ended 1994, 1995 and 1996
and for the Six Months Ended June 29, 1996 (unaudited) and June 28, 1997
(unaudited)......................................................................... F-4
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended 1994,
1995 and 1996 and for the Six Months Ended June 28, 1997 (unaudited)................ F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended 1994, 1995 and 1996
and for the Six Months Ended June 29, 1996 (unaudited) and June 28, 1997
(unaudited)......................................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Thoratec Laboratories Corporation:
We have audited the accompanying consolidated balance sheets of Thoratec
Laboratories Corporation and Subsidiary (the "Company") as of December 30, 1995
and December 28, 1996 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the fiscal years ended December 31,
1994, December 30, 1995 and December 28, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 30,
1995 and December 28, 1996, and the results of its operations and its cash flows
for the fiscal years ended December 31, 1994, December 30, 1995 and December 28,
1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
February 14, 1997
F-2
<PAGE> 47
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS OF
JUNE 28,
FISCAL YEAR ENDED DECEMBER 1997
----------------------------- ------------
1995 1996
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 1,645,523 $ 5,348,000 $ 5,915,984
Short-term investments available-for-sale....... 10,631,990 6,217,607
Receivables (Note 10)........................... 581,298 833,700 1,419,834
Inventories (Note 4)............................ 1,374,164 2,826,220 2,716,778
Prepaid expenses and other (Note 6)............. 249,048 266,519 84,923
----------- ----------- ------------
Total current assets.................... 3,850,033 19,906,429 16,355,126
Equipment and improvements -- at cost:
Equipment....................................... 1,333,521 1,714,407 1,938,257
Leasehold improvements.......................... 785,564 794,692 797,298
Construction in process (Note 5)................ 534,089 2,921,983
----------- ----------- ------------
Total equipment and improvements -- at
cost.................................. 2,119,085 3,043,188 5,657,538
Accumulated depreciation and amortization......... (1,725,726) (1,908,667) (2,000,922)
----------- ----------- ------------
Equipment and improvements -- net................. 393,359 1,134,521 3,656,616
Other assets (Notes 5 and 6)...................... 136,645 929,495 939,739
----------- ----------- ------------
Total assets............................ $ 4,380,037 $ 21,970,445 $ 20,951,481
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 598,100 $ 1,352,732 $ 2,552,553
Accrued compensation............................ 101,006 527,497 684,453
Product sales advances.......................... 217,708 267,128 268,393
Accrued warranty................................ 63,595 184,881 79,254
Other........................................... 61,957 308,317 150,560
----------- ----------- ------------
Total current liabilities............... 1,042,366 2,640,555 3,735,213
Long-term debt (Note 7)........................... 1,675,000
Commitments (Note 13)
Shareholders' equity: (Notes 2, 7, 8, 9 and 10)
Preferred shares, 2,500,000 authorized; none
issued and outstanding
Common shares, 100,000,000 authorized;
issued and outstanding 14,933,136 in 1995,
17,942,117 in 1996 and 18,043,236 in 1997....... 42,746,421 63,519,139 63,581,412
Additional capital................................ 2,333,689 2,471,877 2,481,469
Accumulated deficit............................... (43,416,454) (46,679,195) (48,838,105)
Unrealized gain on investments -- net............. 5,651 362
Cumulative translation adjustment................. (985) 12,418 (8,870)
----------- ----------- ------------
Total shareholders' equity.............. 1,662,671 19,329,890 17,216,268
----------- ----------- ------------
Total liabilities and shareholders'
equity................................ $ 4,380,037 $ 21,970,445 $ 20,951,481
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 48
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER SIX MONTHS ENDED
--------------------------------------- -------------------------
1994 1995 1996 JUNE 29, JUNE 28,
----------- ----------- ----------- 1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales -- net (Notes
10 and 12)............... $ 2,763,632 $ 3,488,599 $ 7,502,536 $3,489,239 $4,674,377
Interest and Other.......... 24,357 59,326..... 584,406 77,230 390,491
----------- ----------- ----------- ----------- -----------
Total revenue............ 2,787,989 3,547,925 8,086,942 3,566,469 5,064,868
----------- ----------- ----------- ----------- -----------
Cost and expenses:
Cost of products sold....... 1,575,524 1,972,467 3,253,626 1,639,820 2,075,247
Research and development.... 1,360,253 1,984,101 3,723,713 1,471,525 2,313,788
Selling, general and
administrative........... 1,455,714 1,297,815 3,952,277 1,532,226 2,834,743
Debt conversion expense
(Note 7)................. 378,295 378,295
Interest expense (Note 7)... 43,396 184,886 45,811 45,811
Foreign currency expense.... 2,822 (4,039)
----------- ----------- ----------- ----------- -----------
Total costs and
expenses............... 4,434,887 5,442,091 11,349,683 5,067,677 7,223,778
----------- ----------- ----------- ----------- -----------
Net loss................. $(1,646,898) $(1,894,166) $(3,262,741) $(1,501,208) $(2,158,910)
=========== =========== =========== =========== ===========
Primary and fully diluted loss
per common and common
equivalent share............ $ (0.12) $ (0.13) $ (0.20) $ (0.10) $ (0.12)
=========== =========== =========== =========== ===========
Primary and fully diluted
weighted average number of
common and common equivalent
shares outstanding.......... 14,192,621 14,428,539 16,693,820 15,481,950 17,992,435
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 49
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED CUMULATIVE TOTAL
COMMON ADDITIONAL ACCUMULATED GAIN (LOSS) TRANSLATION SHAREHOLDERS'
STOCK CAPITAL DEFICIT ON INVESTMENTS ADJUSTMENT EQUITY
----------- ---------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994.............. $40,178,536 $2,333,689 $(39,875,390) $ 2,636,835
Exercise of COBE common stock
options for cash.................. 13,120 13,120
Exercise of 91,846 common stock
options for cash and exchange for
2,065 shares of common stock which
were canceled..................... 54,147 54,147
Net loss............................ (1,646,898) (1,646,898)
----------- ---------- ------------ ------- -------- ------------
Balance, December 31, 1994............ 40,245,803 2,333,689 (41,522,288) 1,057,204
Exercise of 49,329 common stock
options for cash and exchange for
832 shares of common stock which
were canceled..................... 59,053 59,053
Issuance of 641,029 shares of common
stock for cash.................... 2,441,565 2,441,565
Foreign currency translation
adjustments....................... $ (985) (985)
Net loss............................ (1,894,166) (1,894,166)
----------- ---------- ------------ ------- -------- ------------
Balance, December 30, 1995............ 42,746,421 2,333,689 (43,416,454) (985) 1,662,671
Issuance of 342,537 shares of common
stock for conversion of notes
payable........................... 1,675,000 1,675,000
Exercise of 880,304 common stock
warrants for cash and exchange for
83 shares of common stock which
were canceled..................... 1,340,034 1,340,034
Issuance of 1,644,000 shares of
common stock for cash............. 17,591,204 17,591,204
Exercise of 146,185 common stock
options for cash and exchange for
3,518 shares of common stock which
were canceled..................... 166,480 166,480
Issuance of common stock options for
nonemployee services.............. 138,188 138,188
Unrealized gain on investments...... $ 5,651 5,651
Foreign currency translation
adjustments....................... 13,403 13,403
Net loss............................ (3,262,741) (3,262,741)
----------- ---------- ------------ ------- -------- ------------
Balance, December 28, 1996............ 63,519,139 2,471,877 (46,679,195) 5,651 12,418 19,329,890
Exercise of 107,978 common stock
options for cash and exchange for
6,859 shares of common stock which
were canceled (unaudited)......... 62,273 62,273
Issuance of common stock options for
nonemployee services
(unaudited)....................... 9,592 9,592
Unrealized loss on investments
(unaudited)....................... (5,289) (5,289)
Foreign currency translation
adjustments (unaudited)........... (21,288) (21,288)
Net loss (unaudited)................ (2,158,910) (2,158,910)
----------- ---------- ------------ ------- -------- ------------
Balance, June 28, 1997 (unaudited).... $63,581,412 $2,481,469 $(48,838,105) $ 362 $ (8,870) $17,216,268
=========== ========== ============ ======= ======== ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 50
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER SIX MONTHS ENDED
---------------------------------------- --------------------------
1994 1995 1996 JUNE 29, JUNE 28,
----------- ----------- ------------ 1996 1997
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(1,646,898) $(1,894,166) $ (3,262,741) $(1,501,208) $ (2,158,910)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Debt conversion expense (Note 7).... 378,295 378,295
Common stock options granted for
services (Note 9)................. 138,188 59,980 9,592
Depreciation and amortization....... 108,687 119,400 195,441 62,003 101,093
Changes in assets and liabilities:
Receivables......................... 306,789 (273,115) (252,402) (633,253) (586,134)
Prepaid expenses and other.......... 30,887 (188,582) (17,471) 192,844 181,596
Inventories......................... (356,469) 128,835 (1,452,056) (299,260) 109,442
Other assets........................ (239,425) 149,413 (791,947) 1,372 (16,494)
Accounts payable and other
liabilities....................... (89,291) 169,562 1,311,765 325,264 (160,386)
----------- ----------- ------------ ----------- ------------
Net cash used in operating
activities........................ (1,885,720) (1,788,653) (3,752,928) (1,413,963) (2,520,201)
----------- ----------- ------------ ----------- ------------
Cash flows from investing activities:
Purchases of short-term investments
available-for-sale................ (69,738,523) (37,207,536)
Maturities of short-term investments
available-for-sale................ 47,560,000 36,295,000
Sales of short-term investments
available-for-sale................ 11,552,184 5,321,630
Capital expenditures................ (45,365) (92,671) (637,679) (108,693) (1,383,182)
----------- ----------- ------------ ----------- ------------
Net cash provided by (used in)
investing activities.............. (45,365) (92,671) (11,264,018) (108,693) 3,025,912
----------- ----------- ------------ ----------- ------------
Cash flows from financing activities:
Common stock issued in private
placement -- net.................. 2,441,565
Common stock issued upon exercise of
warrants.......................... 961,739 961,739
Common stock issued in public
placement -- net.................. 17,591,204
Proceeds from issuance of long-term
debt.............................. 1,675,000
Common stock issued upon exercise of
options........................... 67,267 59,053 166,480 151,551 62,273
Deferred financing charges -- net... (183,206)
----------- ----------- ------------ ----------- ------------
Net cash provided by financing
activities........................ 1,742,267 2,500,618 18,719,423 930,084 62,273
----------- ----------- ------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents........................... (188,818) 619,294 3,702,477 (592,572) 567,984
Cash and cash equivalents at beginning
of period............................. 1,215,047 1,026,229 1,645,523 1,645,523 5,348,000
----------- ----------- ------------ ----------- ------------
Cash and cash equivalents at end of
period................................ $ 1,026,229 $ 1,645,523 $ 5,348,000 $ 1,052,951 $ 5,915,984
=========== =========== ============ =========== ============
Noncash financing transaction:
Conversion of notes into common stock
(Note 7)............................ $ 1,675,000 $ 1,675,000
Noncash investing transactions:
Construction costs in accounts payable
(Note 5)............................ $ 286,424 $ 1,520,180
Other cash flow information:
Interest paid....................... $ 43,396 $ 184,886 $ 45,811 $ 45,811
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 51
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Operations -- Thoratec Laboratories Corporation and its subsidiary (the
"Company") manufactures and markets medical devices utilizing specialty polymers
and is engaged in ongoing research and development. Thoratec's products are
marketed worldwide.
The Company reports on a 52-53 week fiscal year, which ends on the Saturday
closest to December 31. The fiscal years ended December 31, 1994 (fiscal 1994),
December 30, 1995 (fiscal 1995) and December 28, 1996 (fiscal 1996) include 52
weeks.
Principles of Consolidation -- The consolidated financial statements
include Thoratec Laboratories Corporation (a California corporation) and its
subsidiary company. All significant intercompany balances and transactions are
eliminated in consolidation.
Inventories are stated at the lower of first-in, first-out cost or market.
Depreciation and Amortization -- Equipment is depreciated over estimated
useful lives which range from two to eight years. Leasehold improvements are
amortized over the remaining period of the lease or over the estimated useful
life of the improvement, whichever is shorter. The straight-line method is used
for depreciation and amortization.
Foreign Currency Translation -- All assets and liabilities of the Company's
non-United States operations are translated into United States dollars at fiscal
period-end exchange rates, and the resulting translation adjustments are
recorded as cumulative translation adjustments in shareholders' equity. Income
items are translated at actual or average monthly rates of exchange. The
Company's sales are substantially all denominated in U.S. dollars.
Income Taxes -- The Company follows an asset and liability approach for
financial accounting and reporting of income taxes. Under this approach, the
Company computes its tax liability at each consolidated financial statement date
by applying provisions of current tax laws to temporary differences between
consolidated financial statement and income tax bases. Changes in tax law may
result in an adjustment to deferred tax assets.
Loss Per Share -- Loss per common and common equivalent share are computed
by dividing net loss by the weighted average number of common and common
equivalent shares outstanding during the period. Both primary and fully diluted
loss per common share for 1994, 1995, 1996 and 1997 assume no conversions
because any such conversion would be antidilutive.
Statement of Cash Flows -- Cash equivalents consist of money market funds
carried at cost which is equal to market value. Significant non-cash investing
and financing activities are discussed in Notes 7 and 9.
Investments -- The Company's short-term investments are classified as
available-for-sale and reported at fair value. Net unrealized gains and losses
are excluded from earnings and reported as a separate component of shareholders'
equity.
A portion of the funds provided by a public offering of the Company's
common stock in 1996 are currently being held for investment until such time
that the funds are needed by the Company for operations and capital
expenditures. As of the end of 1996 and June 1997, short-term investments were
comprised primarily of certificates of deposit, commercial paper, corporate
notes and U.S. government treasury and agency notes with maturity dates within
12 months of the date of investment.
Fair Value of Financial Instruments -- The Company's financial instruments
include cash and equivalents, customer receivables, accounts payable, and
certain other accrued liabilities. The carrying amounts of these items are a
reasonable estimate of their fair values.
F-7
<PAGE> 52
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition -- The Company recognizes product revenues upon
shipment of the related product. The Company provides a reserve for its estimate
of warranty costs at the time of shipment.
Use of Estimates -- The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the consolidated balance sheet dates and the reported
amounts of revenues and expenses for the periods presented.
Recently Issued Accounting Standards -- The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation for the fiscal year ended December 28, 1996. SFAS No. 123
establishes accounting and disclosure requirements using a fair value based
method of accounting for stock based employee compensation plans. As allowed
under the provisions of SFAS No. 123 the Company has chosen to continue the
intrinsic value based method and provide pro forma disclosures of net earnings
and earnings per share as if the accounting provisions of SFAS No. 123 had been
adopted. The Company has elected to adopt only the disclosure requirements of
SFAS No. 123; therefore, such adoption will have no effect on the Company's
consolidated net loss or cash flows.
The Company also adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, effective for the
fiscal year ended December 28, 1996. This statement requires the Company to
review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recovered. Implementation did not have a material impact on the Company's
financial statements.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128"). The Company is required to adopt SFAS 128 in the fourth quarter of fiscal
1997 and will restate at that time earnings per share ("EPS") data for prior
periods to conform with SFAS 128. Earlier application is not permitted. SFAS 128
replaces current EPS reporting requirements and requires a dual presentation of
basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing
net income available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into commons stock. If SFAS 128 had been in effect
during the current and prior periods, basic EPS and diluted EPS would not have
been significantly different than primary EPS and fully diluted EPS currently
reported for the periods. Fully diluted EPS, as with diluted EPS, is not
reported due to its antidilutive effect on EPS.
During June 1997, the FASB issued Statements of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which requires that an
enterprise report the change in its net assets from nonowner sources by major
components and as a single total. The FASB also issued Statements of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes annual and interim standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas, and major customers. Adoption of these Statements
will not impact the Company's consolidated financial position, results of
operations or cash flows, and any effect will be limited to the form and content
of its disclosures. Such Statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted.
Unaudited Interim Information -- The financial information with respect to
the periods ended June 29, 1996 and June 28, 1997 is unaudited. In the opinion
of management, the unaudited information contains all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results of such periods. The results of operations for the six months ended June
28, 1997 are not necessarily indicative of the results to be expected for the
full year. All information presented in the consolidated financial statements
for the periods ended June 29, 1996 and June 28, 1997 is unaudited.
F-8
<PAGE> 53
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. FINANCIAL POSITION AND LIQUIDITY
In July 1996, the Company sold, through an underwritten public offering,
1,644,000 shares of common stock at $12.00 per share. Included in the 1,644,000
shares are 144,000 shares sold pursuant to an underwriters' over-allotment
option. Also issued to the underwriters in connection with the public offering
were 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 an offset to common stock at the
closing of the offering.
With the proceeds of this offering, the Company believes that it has
sufficient funds to increase its marketing efforts and to develop new sources of
revenue, including new products. However, the Company expects that its operating
expenses will increase in future periods as the Company expends increased
amounts on product manufacturing and marketing and on research and development
of new product lines. The Company expects that its profitability will continue
to be adversely impacted by various fixed costs until additional products have
received pre-market approval in the U.S. and approval for sale in its major
international markets. As a result, the Company expects to incur net losses for
at least the next year. There can be no assurance that the Company will achieve
profitability or positive cash flow.
3. SHORT-TERM INVESTMENTS
Short term investments available-for-sale are summarized as follows as of
December 28, 1996:
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------------- ---------------- -----------
<S> <C> <C> <C> <C>
Debt instruments issued
by:
Federal government and
its agencies........ $ 636,715 $ 997 $ 0 $ 637,712
Corporations........... 9,989,624 5,072 (418) 9,994,278
----------- ------ ----- -----------
Short-term investments... $ 10,626,339 $6,069 $ (418) $10,631,990
=========== ====== ===== ===========
</TABLE>
The Company classifies those investments which mature in less than one year
as short-term investments.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
FISCAL YEAR END DECEMBER
------------------------- AS OF JUNE 28,
1995 1996 1997
---------- ---------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods........................ $ 397,462 $1,639,444 $1,503,796
Work-in-process....................... 540,673 648,622 577,807
Raw materials......................... 436,029 538,154 635,175
---------- ---------- ----------
Total....................... $1,374,164 $2,826,220 $2,716,778
========== ========== ==========
</TABLE>
5. LEASES
The Company leases offices, laboratory and manufacturing space under
noncancelable operating leases. In July 1996, the Company entered into a lease
agreement on a new manufacturing facility to be located within 50 miles of its
current facility. This building, when completed, will accommodate all of the
Company's manufacturing, engineering and administrative activities. The
administrative and engineering portions of the building are scheduled to be
completed and ready for occupancy in late 1997. The Company will invest
F-9
<PAGE> 54
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
approximately $9 million in equipment and leasehold improvements to the
building, approximately $3 million of which had been invested at June 28, 1997.
Annual payments under the amended lease are $699,000 for a lease term of 15
years and commenced in August 1997. The lease includes provisions, among others,
for annual cost of living adjustments to the lease payments, two five-year
renewal options, a purchase option, and a security deposit of $885,600, which
the Company paid in 1996 and an additional $500,000 paid in 1997 and is reported
in other assets at the end of 1996. A significant portion ($1,250,000) of the
security deposit can be reduced or eliminated before the end of the initial
lease term if the Company meets certain criteria as specified by the contract.
Future minimum lease payments as of December 28, 1996, including payments for
the new manufacturing facility, are noted below:
<TABLE>
<S> <C>
Fiscal Year:
1997............................................ $ 445,000
1998............................................ 859,000
1999............................................ 805,000
2000............................................ 699,000
2001............................................ 699,000
Thereafter...................................... 7,424,000
-----------
Total................................. $10,931,000
===========
</TABLE>
Rent expense for all operating leases was $200,121 in 1996, $180,324 in 1995 and
$165,019 in 1994.
6. OTHER ASSETS
Thoratec depends on single source suppliers for certain of the raw
materials used in the manufacture of its products. As of December 28, 1996, the
Company had a long-term purchase commitment for mechanical valves for its VAD of
approximately $1,200,000 from a supplier who stopped production of these valves
in 1995 but will continue to ship its existing stock to the Company. As of
December 30, 1995, deposits related to this agreement were $192,000 included in
current assets and $98,000 included in other assets. All of these deposits were
applied to purchases made in 1996. The Company anticipates this supply will be
sufficient to satisfy its needs for at least the next twelve months. The Company
must qualify a replacement valve or qualify a new vendor for the current valves.
In October 1997, the Company executed a four-year supply agreement with Arrow
International, Inc.
7. LONG-TERM DEBT
In 1994, the Company placed $1.675 million of convertible secured debt with
private lenders. The notes were convertible into common stock at rates ranging
from $4.92 to $6.38 per share, bore interest at 11% and were due in three years.
The debt was secured by the royalties payable pursuant to the Licensing
Agreement with COBE Laboratories, Inc. ("COBE") (see Note 10), all accounts
receivable, equipment and inventory. Five-year warrants to purchase 210,201
shares of Thoratec common stock at $6.38 per share were also issued with the
convertible notes.
In the first quarter of 1996, all $1.675 million of these notes were
converted into 342,537 shares of common stock, according to the terms of the
original transaction. In connection with this conversion, the Company reduced
the exercise price of the related five-year warrants to $4.50 per share for a
thirty day period. All warrants issued in connection with the above noted
convertible secured debt (representing 213,720 shares as adjusted for
antidilutive provisions) were exercised for a total of approximately $960,000.
As all warrants were exchanged and the exercise price reduced, $378,000 of
noncash debt conversion expense was recorded.
F-10
<PAGE> 55
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMON AND PREFERRED STOCK
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. On April 26, 1996, the Board of
Directors authorized a one-for-three reverse split of the Company's common stock
which was approved by the shareholders on June 3, 1996. All references in the
consolidated financial statements to number of shares, per share amounts and
prices of the Company's common stock have been retroactively restated to reflect
the decreased number of common shares outstanding. For other common stock
transactions, see Note 2.
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 shares of common stock, after adjusting for earned but unpaid
dividends. At December 28, 1996, no shares of Series A preferred stock were
outstanding.
Series B preferred stock is senior to Series A in all preferences. Series B
is entitled to cumulative annual dividends of $.96 per share and has a
liquidation preference of $8.00 plus cumulative unpaid dividends. The Series B
preferred stock is redeemable by the Company five years after issuance for $8.00
per share plus cumulative unpaid dividends. Each share of Series B preferred
stock is convertible at any time into three and one-third shares of common stock
and has certain anti-dilution provisions. Series B preferred votes on an as-
converted basis. At December 28, 1996, no shares of the Series B preferred stock
were outstanding.
9. OPTIONS AND WARRANTS
In 1993, the Directors approved the 1993 Stock Option Plan ("1993 SOP"),
which permits the Company to grant options to purchase up to 666,667 shares of
common stock. During 1996, 1995, and 1994, 69,693, 66,667 and 45,000 shares,
respectively, were granted under this plan.
In the first quarter of 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 1996, 184,333 options were granted at fair market value under this Part
of the Plan. Part One of the 1996 SOP was approved by Shareholders at the Annual
Meeting of Shareholders held on June 3, 1996. In September of 1996, certain of
these options were repriced to $12 per share from prices that ranged between
$16.125 and $17.625 per share. 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. Part Two of the 1996
SOP required Director approval only. The Directors Option Plan permits the
Company to grant options to purchase up to 150,000 shares of common stock. The
Company currently has five non-employee directors who are eligible to
participate in the Directors Option Plan. During 1996, 16,665 options were
granted at fair market value. The Directors Option Plan was approved by
Shareholders at the Annual Meeting of Shareholders held on June 3, 1996.
Including the 1993 SOP, the 1996 SOP, the Directors Option Plan, and
several older plans, the Company had eight common stock option plans. Options
may be granted by the Board of Directors at fair market value at the date of
grant. Options under plans become exercisable within four or five years of grant
and expire between five and ten years from date of grant. At December 28, 1996,
572,042 common shares remain available for grant.
Agreements have been entered into with selected consultants whereby options
to purchase the Company's common stock were accepted by these consultants as
partial payment for the services they render to the Company. The fair market
value of the consulting service is the basis for recording the transaction in
the
F-11
<PAGE> 56
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's financial records and is recognized as the related services are
performed. Options issued under these agreements totaled 61,358 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. The proforma results indicated are not necessarily representative of the
effects on proforma disclosures of net income for future periods as they exclude
options that were granted prior to January 1, 1995 with vesting periods in 1995
and later.
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED DECEMBER
---------------------------
1995 1996
----------- -----------
<S> <C> <C> <C>
Net Loss............................ As reported $(1,894,166) $(3,262,741)
Pro Forma... (1,944,166) (5,182,741)
Primary and fully diluted loss per
common and common equivalent share
.................................. As reported $ (.13) $ (.20)
Pro Forma (.13) (.31)
</TABLE>
The fair value of each option grant is estimated as of the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants made in 1995 and 1996 under the 1993 SOP, the 1996
SOP and the Directors Option Plan: risk-free interest rates of 6.14% in 1995 and
5.81% in 1996; expected volatility of 67% for both years; expected lives in both
years of two years beyond each incremental vesting period (total life of 2 1/2
to 7 years, depending upon each grant's individual vesting schedule). No
dividends are assumed for any plan in either year.
F-12
<PAGE> 57
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Option activity is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVG.
OPTIONS EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at fiscal year end 1993
(672,306 exercisable)............................. 1,360,945 $ 1.44
Granted........................................... 45,000 7.13
Canceled.......................................... (16,533) 1.56
Exercised(1)...................................... (91,846) 0.75
--------- ------
Outstanding at fiscal year end 1994
(721,891 exercisable at $1.20 weighted average
exercise price)................................ 1,297,566 $ 1.68
Granted ($3.81 weighted average fair value per
share)......................................... 66,667 6.28
Canceled.......................................... (14,079) 1.49
Exercised(2)...................................... (49,329) 1.31
--------- ------
Outstanding at fiscal year end 1995
(807,468 exercisable at $1.37 weighted average
exercise price)................................ 1,300,825 $ 1.94
Granted ($7.71 weighted average fair value per
share)......................................... 604,024 14.14
Canceled and expired.............................. (183,473) 6.06
Exercised(3)...................................... (146,185) 1.47
--------- ------
Outstanding at fiscal year end 1996
(783,396 exercisable at $2.18 weighted average
exercise price)................................ 1,575,191 $ 6.18
========= ======
</TABLE>
- ---------------
(1) Includes 79,032 options exercised for $54,147 cash and 12,814 options
exercised by exchange for 2,065 shares of common stock which were canceled.
(2) Includes 44,290 options exercised for $59,053 cash and 5,039 options
exercised by exchange for 832 shares of common stock, which were canceled.
(3) Includes 110,204 options exercised for $166,480 cash and 35,981 options
exercised by exchange for 3,518 shares of common stock, which were canceled.
The status of options outstanding as of December 28, 1996 is summarized as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------------------------------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.18 to $.75................................. 393,444 1.9 years $ .63 377,539 $ .64
$1.14 to $2.625.............................. 522,724 5.4 years 2.15 355,432 2.15
$6.00 to $7.125.............................. 111,666 8.3 years 6.62 31,334 6.77
$9.00 to $12.00.............................. 172,667 9.5 years 10.34 0 0
$15.00 to $17.625............................ 361,358 9.0 years 15.05 5,759 15.75
$30.00....................................... 13,332 9.4 years 30.00 13,332 30.00
----------- --------- -------- ----------- --------
$.18 to $30.00............................... 1,575,191 6.1 years $ 6.18 783,396 $ 2.18
========= ======== ======= ======== =======
</TABLE>
F-13
<PAGE> 58
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the second quarter of 1996 the Company amended the terms of an
outstanding warrant to purchase 666,667 shares of the Company's common stock at
$.003 per share to add a net exercise provision. Subsequently, the warrant was
exercised using this provision and the Company issued 666,584 shares of stock to
the warrant holder and withheld 83 shares to effect the exercise. For other
warrant transactions, see Note 2.
10. RELATED PARTIES
In 1992 the Company entered into an agreement to sell common stock,
representing 26% of the Company, to COBE, which included several provisions,
including two seats on the Company's Board of Directors for COBE designees, a
standstill agreement, and a participation agreement for future financings. The
Company and COBE also finalized a licensing, manufacturing, and distribution
agreement which provides for a royalty-bearing license to the Company's
biomaterial technology for use in certain of COBE's products, the right for the
Company to manufacture these biomaterials for a period of time before the
royalty provisions become effective, a provision that COBE and the Company
negotiate for COBE to be the distributor of certain future products of the
Company, and a right of COBE to first negotiation on certain future licensing
rights. For the fiscal years 1994, 1995 and 1996, COBE purchases of materials
from the Company under the manufacturing agreement totaled $90,000, $87,000 and
$99,000, respectively.
Receivables at the end of fiscal 1995 included $92,000 from COBE
affiliates. There were no receivables outstanding from COBE affiliates at the
end of fiscal 1996.
For other related party transactions, see Note 12.
11. TAXES ON INCOME
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards.
Significant components of the Company's net deferred taxes are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR END DECEMBER
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Federal tax loss carryforward (as adjusted for
the limitation on change in ownership)....... $ 4,198,000 $ 5,400,000
State tax loss carryforward..................... 585,000 325,000
Other, net...................................... 19,000 60,000
----------- -----------
Total................................... $ 4,802,000 $ 5,785,000
Less: Valuation allowance....................... $(4,802,000) $(5,785,000)
----------- -----------
-- --
=========== ===========
</TABLE>
At December 28, 1996, the Company had net operating loss ("NOL")
carryforwards of approximately $15,900,000. The majority of such carryforwards
expire from 2002 through 2011. Use of the $7.4 million NOL which arose prior to
the greater than 50% change in ownership which occurred in 1992 is limited to
approximately $440,000 per year due to such change.
Due to these limitations and due to the fact that the Company has sustained
cumulative losses, the potential future benefit from these deferred assets are
fully reserved by means of a valuation allowance and will therefore produce a
financial statement benefit if and when utilized.
F-14
<PAGE> 59
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
The Company's sales for each year are shown in the table below for each
major geographic area:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER
----------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Export Sales:
Europe............................... $ 777,446 $1,524,080 $1,731,642
All Other............................ 550,055 438,462 302,170
---------- ---------- ----------
Subtotal..................... 1,327,501 1,962,542 2,033,812
Domestic Sales......................... 1,436,131 1,526,057 5,468,724
---------- ---------- ----------
Total........................ $2,763,632 $3,488,599 $7,502,536
========== ========== ==========
</TABLE>
Included in European sales for 1994, 1995 and 1996 are $729,566, $688,610
and $116,674, respectively, of sales to COBE and its affiliates, which began
distributing the Company's Thoratec VAD System in several European markets in
late 1992. In the Spring of 1995, Thoratec signed an agreement with Arrow
International, Inc. ("Arrow") to take over the distribution in most of the COBE
territories. Included in European sales for 1995 and 1996 are $632,639 and
$1,476,253, respectively, of sales to Arrow.
Included in domestic sales for 1996 are approximately $251,000 of income
earned from the rental of certain Company products.
13. COMMITMENTS
In January 1996, the Company entered into a four-year employment agreement
with a key executive officer. This employment agreement provides for, among
other provisions, a minimum base salary, an annual bonus based on performance, a
severance package and the issuance of 333,333 non-qualified stock options.
See also Notes 5, 6 and 9.
14. SUBSEQUENT EVENT
Effective January 1997, the Company introduced a 401(k) plan for its
employees. Subject to certain limitations, employees may elect to set aside up
to 18% of earnings in tax-deferred accounts. In addition, the Company may
provide matching contributions on up to 6% of the employee's compensation
according to plan provisions.
F-15
<PAGE> 60
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, sales representative or any other person is authorized in
connection with any offering made hereby to give any information or to make any
representation not contained herein and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or the Placement Agents. This Prospectus does not constitute an offer to sell or
a solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which it is unlawful to make such an offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Forward-Looking Statements............ 2
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 14
Dividend Policy....................... 14
Price Range of Common Stock........... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Consolidated Financial
Data................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Recent Developments................... 21
Business.............................. 22
Management............................ 38
Principal and Selling Shareholders.... 40
Description of Capital Stock.......... 42
Plan of Distribution.................. 43
Legal Matters......................... 44
Experts............................... 44
Additional Information................ 44
Index to Consolidated Financial
Statements.......................... F-1
=============================================
</TABLE>
======================================================
3,000,000 SHARES
LOGO
COMMON STOCK
-------------------
PROSPECTUS
-------------------
Vector Securities International, Inc.
Cruttenden Roth
Incorporated
November 5, 1997
======================================================
