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Filed pursuant to rule424(b)4
Registration number 333-32684
PROSPECTUS
2,000,000 Shares
[LOGO]
Common Stock
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We are offering 1,500,000 shares of our common stock, and the selling
shareholder is offering 500,000 shares. We will not receive any of the proceeds
from the sale of shares being sold by the selling shareholder.
Our common stock is listed on the Nasdaq National Market under the symbol
"THOR." On April 13, 2000, the last reported sale price of the common stock on
the Nasdaq National Market was $10.25 per share.
INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 4.
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PER
SHARE TOTAL
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Public Offering Price....................................... $10.00 $20,000,000
Underwriting Discount....................................... $ 0.57 $ 1,140,000
Proceeds to Thoratec........................................ $ 9.43 $14,145,000
Proceeds to Selling Shareholder............................. $ 9.43 $ 4,715,000
</TABLE>
We and the selling shareholder have granted the underwriters a 30-day option to
purchase up to 300,000 additional shares of common stock to cover
over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Lehman Brothers expects to deliver the shares on or about April 19, 2000.
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LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
ADAMS, HARKNESS & HILL, INC.
FIDELITY CAPITAL MARKETS
a division of National Financial
Services Corporation
APRIL 14, 2000
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The TLC-II Portable VAD Driver allows patients to more easily ambulate and
rehabilitate, and to ultimately go home, improving the quality of life for our
patients.
[Photograph of VAD System patient using dual drive console and
TLC-II Portable VAD Driver]
The Thoratec ventricular assist device blood pump is the only U.S. approved
device that provides total mechanical circulatory support, i.e., left, right or
biventricular.
[Photograph of Thoratec VAD System blood pump]
The Thoratec implantable ventricular assist device, or IVAD, which weighs less
than one pound.
[Photograph of prototype of the Thoratec Implantable VAD]
[Photograph of patient]
Kim Farias and daughter Karley. After Karley's birth, Kim was supported for 23
days by our Thoratec VAD System. Today, both are world travelers.
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TABLE OF CONTENTS
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Prospectus Summary................... 1
Risk Factors......................... 4
Use of Proceeds...................... 12
Dividend Policy...................... 12
Price Range of Common Stock.......... 13
Capitalization....................... 14
Dilution............................. 15
Selected Consolidated Financial
Data............................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 17
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Business............................. 21
Management........................... 41
Principal Shareholders and Selling
Shareholder........................ 43
Description of Capital Stock......... 45
Underwriting......................... 47
Legal Matters........................ 49
Experts.............................. 49
Where You Can Find More
Information........................ 49
Index to Consolidated Financial
Statements......................... F-1
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FORWARD LOOKING STATEMENTS
This prospectus, including the documents incorporated by reference in this
prospectus, includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. Our actual results could differ materially from those discussed
in, or implied by, these forward-looking statements. Forward-looking statements
are identified by words such as "believe," "anticipate," "expect," "intend,"
"plan," "will," "may" and other similar expressions. In addition, any statements
that refer to expectations, projections or other characterizations of future
events or circumstances are forward-looking statements. Forward-looking
statements include, but are not necessarily limited to, those relating to:
- our ability to obtain and maintain regulatory approval of our products in
the United States and internationally;
- the other competing therapies that may in the future be available to
heart failure patients;
- our plans to develop and market new products; and
- our ability to improve our financial performance.
Factors that could cause actual results or conditions to differ from those
anticipated by these and other forward-looking statements include those more
fully described in the "Risk Factors" section and elsewhere in this prospectus.
We are not obligated to update or revise these forward-looking statements to
reflect new events or circumstances.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer to sell these securities in any jurisdiction where the offer or
sale is not permitted. You should assume that the information appearing in this
prospectus is accurate as of the date on the front cover of this prospectus
only. Our business, financial condition, results of operations and prospects may
have changed since that date.
Thoratec, the Thoratec logo and Thoralon are registered trademarks, and
TLC-II, Vectra and Aria are trademarks of Thoratec Laboratories Corporation.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, including the "Risk Factors"
section and our financial statements and the related notes contained herein.
Unless otherwise indicated, the information in this prospectus assumes that the
underwriters do not exercise their over-allotment option.
OUR COMPANY
OUR PRODUCTS
We develop, manufacture and market proprietary medical devices used for
circulatory support and for vascular graft applications. We currently market the
Thoratec Ventricular Assist Device System (the VAD System) in the United States
and internationally for use as a bridge to heart transplant and for use in the
recovery of the heart after open-heart surgery. Our VAD System is currently the
only device approved by the FDA that can provide left, right or biventricular
support for both of these indications. At March 14, 2000, the VAD System had
been used in more than 1,200 patients worldwide ranging in age from seven to 77
years and in weight from 38 to 316 pounds (17 to 144 kg). We are also pursuing
additional indications for the VAD System and developing other circulatory
support products for patients suffering from heart failure.
We have also developed small diameter vascular grafts for use in
hemodialysis access and coronary artery bypass surgery. Our hemodialysis access
graft, which we call the Vectra, is undergoing clinical trials in the United
States and is currently marketed in Europe. Unlike current grafts, which require
up to several weeks of patient recovery prior to use, the Vectra's self-sealing
design allows patient use as soon as 24 hours after surgical implantation.
We are applying the same technological expertise used in the Vectra for use
in coronary artery bypass surgery through development of our Aria graft. This
small diameter graft is designed for use by patients who have too few suitable
blood vessels of their own. We believe that in as many as 20% of the 900,000
bypass surgeries performed worldwide, the unavailability of any or sufficient
suitable vessels creates a treatment problem. We expect to commence clinical
trials in the United States of our Aria coronary graft in the first half of
2000.
All of our products that come into contact with human tissue or blood
incorporate Thoralon, our proprietary biomaterial. Thoralon is a unique
biomaterial that provides strength and flexibility to our products with surface
properties designed to minimize patient blood clotting and inflammatory
response.
OUR STRATEGY
Our goal is to be a leading developer and manufacturer of medical devices
for the congestive heart failure, cardiac surgery and vascular graft markets.
Our key strategies to achieve this goal are:
- increase the market penetration for our VAD System;
- obtain U.S. approval and support for the market launch of our Vectra
product;
- attain global approval to commercialize our Aria product for use in
coronary artery bypass surgery;
- explore the use of Thoralon for additional medical products; and
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- explore the acquisition of, or partnership with, companies that possess
complementary products or technologies.
We are a California corporation. Our principal offices are located at 6035
Stoneridge Drive, Pleasanton, California 94588. Our telephone number is (925)
847-8600, and our fax number is (925) 847-8625.
THE OFFERING
Common stock offered by our
company............................. 1,500,000 shares
Common stock offered by the selling
shareholder....................... 500,000 shares
Common stock outstanding after the
offering............................ 21,966,326 shares
Use of proceeds..................... We intend to use the proceeds from this
offering for:
- clinical trials of products under
development;
- expansion of our sales and marketing
capabilities;
- research, development and potential
acquisitions of complementary
technology; and
- working capital and other general
corporate purposes.
Nasdaq National Market symbol....... "THOR"
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The common stock outstanding after this offering is based on the number of
shares outstanding at January 1, 2000, which was the end of our 1999 fiscal
year, and excludes:
- 3,139,824 shares of common stock reserved for issuance upon the exercise
of outstanding stock options at a weighted average exercise price of
$6.78 per share; and
- 164,400 shares of common stock issuable upon exercise of warrants
outstanding at an exercise price of $14.40 per share.
See "Capitalization" and Notes 7 and 8 to our financial statements.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary of consolidated financial data is derived from and
qualified by reference to our financial statements and accompanying notes
included elsewhere in this prospectus. You should read the following summary
consolidated financial data in conjunction with our financial statements and
accompanying notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
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FISCAL YEAR
(OUR FISCAL YEAR ENDS ON THE SATURDAY CLOSEST TO DECEMBER 31)
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1995 1996 1997 1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Product sales........................ $ 3,489 $ 7,503 $ 9,441 $16,320 $22,508
Gross profit......................... 1,517 4,249 5,436 9,816 12,769
Loss from operations................. (1,768) (3,423) (5,156) (2,981) (2,196)
Net loss............................. (1,894) (3,263) (4,402) (2,321) (1,789)
Basic and diluted loss per share..... $ (0.13) $ (0.20) $ (0.24) $ (0.11) $ (0.09)
Shares used to compute basic and
diluted loss per share............. 14,429 16,694 18,360 20,340 20,446
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JANUARY 1, 2000
(FISCAL YEAR-END 1999)
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ACTUAL AS ADJUSTED
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ 1,697 $ 15,192
Working capital............................................. 10,533 24,028
Total assets................................................ 25,060 38,555
Total liabilities........................................... 4,784 4,784
Accumulated deficit......................................... (55,191) (55,191)
Shareholders' equity........................................ 20,276 33,771
</TABLE>
The as adjusted column of the balance sheet data at fiscal year end 1999
reflects our sale of 1,500,000 shares of common stock under this prospectus at
an assumed public offering price of $10.00 per share and the application of the
net proceeds, after deducting the estimated fees of the underwriters and our
estimated offering expenses. See "Use of Proceeds" and "Capitalization."
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RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should consider each of the risks and uncertainties described in
this section and all of the other information in this prospectus before deciding
to invest in our common stock. Our business, financial condition and results of
operations could be severely harmed by any of the following risks. The trading
price of our common stock could decline if any of these risks and uncertainties
develop into actual events. You may lose all or part of the money you paid to
buy our common stock.
WE HAVE A HISTORY OF NET LOSSES, AND WE MAY NOT ACHIEVE OR MAINTAIN
PROFITABILITY.
We were founded in 1976 and have incurred a loss from operations in all but
one of the years of our existence. At the end of fiscal year 1999, our
accumulated deficit was approximately $55.2 million. We expect to continue to
incur additional losses until we achieve substantial product revenues. Even if
we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis. In addition, we anticipate that
our expenses will increase as a result of increased preclinical and clinical
testing, research and development and selling, general and administrative
expenses. We have commenced sales in the United States of our ventricular assist
device, which we call the Thoratec VAD System, for use as a bridge to heart
transplant and for recovery after open-heart surgery. Sales of our other
products in the United States, however, cannot begin until the products have
received FDA approval. We may not receive FDA approval for several years, if at
all.
WE ARE SUBSTANTIALLY DEPENDENT ON A LIMITED PRODUCT LINE, AND WE MAY NEED TO
DEVELOP AND INTRODUCE NEW PRODUCTS TO ACHIEVE PROFITABILITY.
To date, substantially all of our revenue has resulted from sales of the
Thoratec VAD System. We expect worldwide sales from the Thoratec VAD System and
limited sales of our Vectra vascular access graft products in markets outside of
the United States to account for a significant portion of our near-term revenue.
As a result, factors adversely affecting the pricing of or demand for such
products could have a material adverse effect on our financial condition and
results of operations. These factors include market acceptance, competition and
technological change.
Our future financial performance will depend, in significant part, on our
successful development, introduction and customer acceptance of products under
development. We have very little preclinical and clinical data relating to our
products under development. Prior to any commercial use, our products currently
under development will require significant additional research and development
efforts, extensive preclinical and clinical testing and regulatory approval. New
product development is highly uncertain. The factors that could slow or prevent
the successful completion of our product and technology development efforts
include clinical and regulatory delays, adverse or unexpected side effects and
inadequate therapeutic efficacy.
PHYSICIANS MAY NOT ACCEPT OR CONTINUE TO ACCEPT OUR PRODUCTS AND PRODUCTS UNDER
DEVELOPMENT.
The success of our current and future products will require acceptance or
continued acceptance by cardiovascular and vascular surgeons and interventional
cardiologists. Such acceptance will depend on clinical results and the
conclusion by these physicians that our products are safe, cost-effective and
acceptable alternative methods of treatment. Our products may not provide
benefits considered adequate by providers of cardiovascular and vascular
treatments or a sufficient number of such providers may not use our products. In
addition, because our products are based on innovative technologies and, in some
cases, represent new methods of treatment, there may be greater reluctance
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to accept these products than would occur with products utilizing established
technologies or methods of treatment. Even if the safety and efficacy of our
products are established, physicians may elect not to use them for a number of
reasons. These reasons could include the high cost of equipment and training
associated with the use of our Thoratec VAD System or unfavorable reimbursement
from health care payors. If our products do not achieve significant market
acceptance, we will not achieve profitability.
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. We have developed
working relationships with cardiac surgeons and cardiologists at a number of
leading medical centers in connection with developing our Thoratec VAD System.
In addition, surgical teams at these medical institutions have performed
clinical trials to support our applications to be filed with the FDA. A
continuing working relationship with these and other physicians and medical
centers will be important to the commercial acceptance of the Thoratec VAD
System and future circulatory support and graft products. We may fail to
maintain existing relationships and arrangements and we may fail to establish
new relationships in support of our circulatory support and graft technology.
Furthermore, economic, psychological, ethical and other concerns may limit
general acceptance of ventricular assist and graft devices.
WE RELY ON SINGLE SOURCE SUPPLIERS. OUR BUSINESS WILL BE HARMED IF OUR SUPPLIERS
INTERRUPT THE SALE OF MATERIALS TO US.
We depend on single source suppliers for most of the critical components
and materials used in the manufacture of our products. If we need alternative
sources for key raw materials or component parts for any reason, such materials
or component parts may not be available. For example, Arrow International, Inc.
is currently the single source of supply for valves used in the blood pump
portion of our VAD System. Sales of the VAD System accounted for substantially
all of our revenue in 1998 and 1999, and we expect those sales to account for
substantially all of our revenue for at least the next year. Cessation or
interruption of VAD System sales would have a material adverse effect on our
business, financial condition and results of operations.
Alternative suppliers may not agree to supply us. In addition, we may need
to obtain FDA approval before using new suppliers. If alternative suppliers are
not available, we may not have the expertise or resources necessary to produce
such materials or component parts internally. For example, in 1999 we decided to
change manufacturers for a valve in our portable driver for the VAD System,
which we call our TLC-II. We experienced delays in shipping the TLC-II while we
qualified a new component manufacturer for these valves. As a result of this
delay, we put a voluntary hold on further enrollment in U.S. clinical trials for
the TLC-II portable driver and on shipments of this device to new centers in
Europe. Any interruption in supply of raw materials or component parts could
have a material adverse effect on our ability to manufacture products until a
new source of supply is located.
WE MAY ENCOUNTER PROBLEMS MANUFACTURING OUR PRODUCTS.
In 1999, we moved our manufacturing headquarters to a 62,000 square foot
leased facility in Pleasanton, California. We believe that we currently have the
ability to produce sufficient quantities of the Thoratec VAD System and the
Vectra to support our current needs, and our needs for early-
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stage clinical trials of the TLC-II portable driver and Aria coronary artery
bypass graft. We may, however, encounter difficulties manufacturing our products
for the following reasons:
- we do not have experience in manufacturing our products in the commercial
quantities that might be required if we receive FDA approval of several
or all of the products currently under development;
- the manufacture of our products is complex and costly, involving a number
of separate processes and components; and
- certain manufacturing processes for our products are labor intensive, and
achieving significant cost reductions will depend in part upon reducing
the time required to complete these processes.
In addition, manufacturers often encounter difficulties in scaling up
manufacturing of new products. These difficulties include, for example:
- problems involving product yields, quality control and assurance;
- component and service availability;
- adequacy of control policies and procedures; and
- lack of qualified personnel.
We will continue to consider whether we should internally manufacture
components that are currently provided by third parties. We will also continue
to consider the implementation of new production processes, some of which may
require prior FDA approval. We may not be able to obtain or manufacture such
products in a timely fashion at acceptable quality and prices. In addition, we
may not be able to comply with the FDA's current good manufacturing practices,
also called cGMP. We and our suppliers may not be able to manufacture an
adequate supply of products.
INTENSE COMPETITION COULD HARM OUR FINANCIAL PERFORMANCE.
Competition from medical device companies and medical device subsidiaries
of health care and pharmaceutical companies is intense and expected to increase.
Many of our competitors have substantially greater financial, technical,
distribution and marketing resources than we do. In addition, many of these
competitors have significantly greater experience than we do in obtaining
regulatory approvals for medical devices. Accordingly, our competitors may
succeed in obtaining regulatory approval for products more rapidly than we can.
Furthermore, many of these competitors have superior manufacturing capabilities,
and such competitors may be able to manufacture products more efficiently and at
a lower cost than we can. Our competitors may therefore offer competitive
products at a lower cost than our products. Any product we develop that gains
regulatory approval will have to compete for market acceptance and market share.
An important factor in such competition may be the timing of market introduction
of competitive products. Accordingly, we expect that competitive factors will
include the relative speeds with which we can:
- develop products;
- complete clinical testing;
- receive regulatory approval; and
- manufacture and sell commercial quantities of products.
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OUR COMPETITORS MAY DEVELOP MORE EFFECTIVE PRODUCTS AND RENDER OUR PRODUCTS
OBSOLETE.
Our competitors may succeed in developing and marketing technologies and
products that are more effective than ours. Any such products may render our
technology and products obsolete or noncompetitive. Additionally, new surgical
procedures and medications could be developed that replace or reduce the
importance of current procedures that use our products. Accordingly, our success
will depend in part on our ability to respond quickly to medical and
technological changes by developing and introducing new products, or modifying
existing products.
IF WE FAIL TO OBTAIN APPROVAL FROM THE FDA AND FROM FOREIGN REGULATORY
AUTHORITIES, WE CANNOT MARKET AND SELL OUR PRODUCTS UNDER DEVELOPMENT IN THE
UNITED STATES AND IN OTHER COUNTRIES.
Before we can market new products in the United States we must obtain
clearance from the FDA. This process is lengthy and uncertain. In the United
States, one must obtain clearance from the FDA of a 510(k) premarket
notification or approval of a more extensive submission known as a premarket
approval (PMA) application. If the FDA concludes that any of our products do not
meet the requirements to obtain clearance under Section 510(k) of the Federal
Food, Drug and Cosmetic Act, then we would be required to file a PMA
application. The process for a PMA application is lengthy, expensive and
typically requires extensive preclinical and clinical trial data. Preclinical
data may need to comply with FDA good laboratory practices.
We may not obtain clearance of a 510(k) notification or approval of a PMA
application with respect to any of our products on a timely basis, if at all. If
we fail to obtain timely clearance or approval for our products, we will not be
able to market and sell our products, which will limit our ability to generate
revenue. We may also be required to obtain clearance of a 510(k) notification or
PMA application from the FDA before we can market products which have been
cleared that we have now modified or for which we wish to make new claims.
The FDA also requires us to adhere to cGMP regulations, which include
production design controls, testing, quality control, storage and documentation
procedures. The FDA may at any time inspect our facilities to determine whether
we have adequately complied. Compliance with cGMP regulations for medical
devices is difficult and costly. In addition, we may not be found to be
compliant as a result of future changes in, or interpretations of, regulations
by the FDA or other regulatory agencies. If we do not achieve compliance, the
FDA may withdraw marketing clearance, require product recall or take other
enforcement action. Any change or modification in a device is required to be
made in compliance with cGMP regulations, which may cause interruptions or
delays in the marketing and sale of our products.
Sales of our products outside the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain approvals from foreign countries may be longer or shorter than that
required for FDA approval, and requirements for foreign licensing may differ
from FDA requirements.
The federal, state and foreign laws and regulations regarding the
manufacture and sale of our products are subject to future changes, as are
administrative interpretations and policies of regulatory agencies. If we fail
to comply with applicable federal, state or foreign laws or regulations, we
could be subject to enforcement actions. Enforcement actions could include
product seizures, recalls, withdrawal of clearances or approvals, and civil and
criminal penalties.
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OUR INABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGIES COULD HARM OUR COMPETITIVE
POSITION.
Our success will depend, in part, on our ability to maintain the
proprietary nature of our technology, products and manufacturing processes. We
rely on trade secrets, know-how and patents to maintain our competitive
position. We have been issued or have licensed a number of U.S. and foreign
patents covering our core biomaterials technology and our graft technologies. In
addition, we have filed many other U.S. and non-U.S. patent applications. Aside
from the biomaterials patents mentioned above, which are utilized in our VAD
System blood pump and cannulae, and one TLC-II patent, our VAD System is not
protected by any patents. We do not believe that this lack of patent protection
will have a material adverse effect on our ability to sell our VAD System
because of the lengthy regulatory period required to obtain approval of a
ventricular assist device. We are not aware of any ventricular assist devices
that are based on our product design currently approved by the FDA or undergoing
clinical trials.
Any existing or future patent applications may not result in issued
patents. In addition, current or future trade secrets, know-how or issued or
licensed patents may not sufficiently protect us from competitors with similar
technologies or processes. Others may independently develop proprietary
technologies and processes which are the same as or substantially equivalent to
ours. Any patents issued may be infringed upon or designed around by others.
Our products may be found to infringe prior or future patents owned by
others. We may need to acquire licenses under patents belonging to others for
technology potentially useful or necessary, and such licenses may not be
available to us. We could incur substantial costs in defending suits brought
against us on such patents or in bringing suits to protect our patents or
patents licensed by us against infringement.
We also protect our proprietary technology and processes in part by
confidentiality agreements with our licensees, employees and consultants. These
measures may not provide adequate protection for our trade secrets or other
proprietary information. Employees and consultants may still disclose our
proprietary information, and we may not be able to meaningfully protect our
trade secrets.
WE HAVE LIMITED SALES AND MARKETING CAPABILITY, AND WE MAY NOT BE ABLE TO
SUCCESSFULLY MARKET OUR PRODUCTS.
We have limited sales and marketing capabilities. Although we expect to
increase our sales and marketing forces, we may not be able to recruit and train
adequate sales and marketing personnel. We compete with other companies that
have extensive and well-funded sales and marketing organizations. Our sales and
marketing staff may not compete successfully against such other companies.
SINCE WE DEPEND UPON DISTRIBUTORS, IF WE LOSE A DISTRIBUTOR OR A DISTRIBUTOR
FAILS TO PERFORM, OUR OPERATION WOULD BE HARMED.
With the exception of Canada and Europe, we sell our VAD System in foreign
markets through distributors. In addition, we sell our vascular access graft
products through Goodman Co. Ltd., our distributor in Japan, and through Guidant
Corporation in the rest of the world. We will rely on Guidant for sales of the
Vectra in the United States, if we receive regulatory approval. To the extent we
rely on distributors, our success will depend upon the efforts of others, over
which we may have little control. If we lose a distributor or a distributor
fails to perform, our revenues will be adversely affected.
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SINCE WE DEPEND ON THIRD PARTY REIMBURSEMENT TO OUR CUSTOMERS, IF THIRD PARTY
PAYORS FAIL TO PROVIDE APPROPRIATE LEVELS OF REIMBURSEMENT FOR OUR PRODUCTS, OUR
OPERATION WOULD BE HARMED.
Significant uncertainty exists as to the reimbursement status of
newly-approved health care products such as our VAD System and our vascular
grafts. Government and other third party payors are increasingly attempting to
contain health care costs. Payors are attempting to contain costs by, for
example, limiting coverage and the level of reimbursement of new therapeutic
products. Payors are also attempting to contain costs by refusing in some cases
to provide any coverage of uses of approved products for disease indications
other than those for which the FDA has granted marketing approval.
To date, some private insurers, Medicare and Medicaid have determined to
reimburse the costs of our VAD System. Our VAD System may not continue to be
approved for reimbursement. In addition, changes in the health care system may
affect the reimbursability of future products. If we fail to obtain such
reimbursement or if the reimbursement levels are reduced, our revenues would be
reduced.
PRODUCT LIABILITY CLAIMS COULD DAMAGE OUR REPUTATION AND HURT OUR FINANCIAL
RESULTS.
Our business exposes us to an inherent risk of potential product liability
claims related to the manufacturing, marketing and sale of human medical
devices. We maintain only a limited amount of product liability insurance. We
also maintain general commercial and property insurance. Our insurance policies
generally must be renewed on an annual basis. We may not be able to maintain or
increase such insurance on acceptable terms or at reasonable costs, and such
insurance may not provide us with adequate coverage against potential
liabilities. A successful claim brought against us in excess of, or outside of,
our insurance coverage could have a material adverse effect on our financial
condition and results of operations. Claims against us, regardless of their
merit or potential outcome, may also reduce our ability to obtain physician
endorsement of our products or expand our business.
ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF HAZARDOUS
CHEMICALS AND BIOMATERIALS COULD BE TIME CONSUMING AND COSTLY.
Producing our proprietary biomaterial, Thoralon, requires the use of
hazardous materials, including chemicals and biomaterials. We cannot eliminate
the risk of accidental contamination or discharge and any resultant injury from
these materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials.
We could be subject to civil damages in the event of an improper or
unauthorized release of, or exposure of individuals to, hazardous materials. In
addition, claimants may sue us for injury or contamination that results from our
use or the use by third parties of these materials, and our liability may exceed
our total assets. Compliance with environmental laws and regulations may be
expensive, and current or future environmental regulations may impair our
research, development or production efforts.
IF WE MAKE ACQUISITIONS, WE COULD ENCOUNTER DIFFICULTIES THAT HARM OUR BUSINESS.
We may acquire companies, products or technologies that we believe to be
complementary to our business. If we do so, we may have difficulty integrating
the acquired personnel, operations, products or technologies. Acquisitions may
dilute our earnings per share, disrupt our ongoing business, distract our
management and employees and increase our expenses, which could hurt our
business.
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OUR STOCK PRICE HAS BEEN VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES
AT OR ABOVE THE OFFERING PRICE.
The price of our common stock has been, and is likely to continue to be,
highly volatile. The price of our common stock could fluctuate significantly for
the following reasons:
- future announcements concerning us or our competitors;
- quarterly variations in operating results;
- introduction of new products or changes in product pricing policies by us
or our competitors;
- acquisition or loss of significant customers, distributors and suppliers;
- changes in earnings estimates by analysts;
- changes in third party reimbursement practices;
- regulatory developments; or
- fluctuations in the economy or general market conditions.
In addition, stock markets in general, and the market for shares of health
care stocks in particular, have experienced extreme price and volume
fluctuations in recent years which have frequently been unrelated to the
operating performance of the affected companies. These broad market fluctuations
may adversely affect the market price of our common stock. The market price of
our common stock could decline below its current price and the market price of
our stock may fluctuate significantly in the future. These fluctuations may be
unrelated to our performance.
In the past, shareholders have often instituted securities class action
litigation after periods of volatility in the market price of a company's
securities. If a shareholder files a securities class action suit against us, we
would incur substantial legal fees and our management's attention and resources
would be diverted from operating our business in order to respond to the
litigation.
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
Future sales of substantial amounts of our common stock in the public
market, including the shares covered by this prospectus, or the perception that
these sales could occur, could adversely affect the market price of our common
stock. After giving effect to the offering, we will have 21,966,326 shares of
common stock outstanding, plus 3,139,824 shares of common stock reserved for
issuance upon exercise of outstanding options and 164,400 shares issuable upon
exercise of warrants. Holders of 7,030,502 shares of common stock and options to
purchase 1,795,025 shares of common stock have agreed not to sell, transfer or
otherwise dispose of their shares of common stock for a period of 90 days from
completion of this offering. All other outstanding shares of our common stock
are freely saleable except shares held by our affiliates, which are subject to
limitations on sales imposed by Rule 144 under the Securities Act.
MANAGEMENT MAY INVEST OR SPEND THE PROCEEDS OF THE OFFERING IN WAYS YOU MAY NOT
AGREE WITH AND IN WAYS THAT MAY NOT YIELD A RETURN.
Our management will have broad discretion as to how the net proceeds of
this offering will be used. Investors will be relying on the judgment of
management regarding the application of the proceeds of this offering. The
results and effectiveness of the application of the proceeds are uncertain.
10
<PAGE> 14
THE OCCURRENCE OF A CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR FACILITIES
AND EQUIPMENT, WHICH WOULD REQUIRE US TO CEASE OR CURTAIL OPERATIONS.
We have only one facility in the United States, which is located in
Pleasanton, California. We are vulnerable to damage from various types of
disasters, including earthquake, fire, flood, power loss, communications
failures and similar events. For example, in October 1989 a major earthquake
that caused significant property damage and a number of fatalities struck near
the area in which we are located. If any disaster were to occur, we may not be
able to operate our business at our facilities. The insurance we maintain may
not be adequate to cover our losses resulting from disasters or other business
interruptions.
WE DO NOT ANTICIPATE PAYING DIVIDENDS.
We intend to retain all of our earnings for the future operation and
expansion of our business. We do not anticipate paying cash dividends on our
common stock at any time in the foreseeable future.
AS A NEW INVESTOR, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase shares of our common stock in this offering, you will incur
immediate and substantial dilution of $8.46 per share in pro forma net tangible
book value based on an assumed price to the public of $10.00 per share. If the
holders of outstanding options or warrants exercise those options or warrants,
you will incur further dilution. See "Dilution."
11
<PAGE> 15
USE OF PROCEEDS
We estimate net proceeds to our company from the sale of the 1,500,000
shares of common stock of approximately $13.5 million, assuming a public
offering price of $10.00 per share and after deducting the estimated
underwriting discounts and offering expenses. See "Underwriting." We will not
receive any proceeds from the sale of 500,000 shares by the selling shareholder.
We intend to use the net proceeds for:
- clinical trials of products under development;
- expansion of our sales and marketing capabilities;
- research, development and potential acquisitions of complementary
technology; and
- working capital and other general corporate purposes.
Although we may also use a portion of the net proceeds to acquire or invest
in businesses, products and technology that are complementary to our own, no
acquisitions are planned or being negotiated as of the date of this prospectus,
and no portion of the net proceeds has been allocated for any specific
acquisition. Pending these uses, the net proceeds will be invested in
investment-grade interest-bearing securities.
The principal purposes of the offering are to increase our capitalization,
financial flexibility and the liquidity for our common stock. As of the date of
this prospectus, we cannot specify with certainty all of the particular uses for
the net proceeds we will have upon completion of the offering. Accordingly, our
management will have broad discretion in the application of net proceeds.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock and do
not plan to pay any cash dividends in the foreseeable future. Our current policy
is to retain all of our earnings to finance future growth.
12
<PAGE> 16
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"THOR." The following table sets forth, for the periods indicated, the high and
low closing sales prices per share of our common stock, as reported by the
Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year 1998
First Quarter............................................. $ 7.50 $ 5.56
Second Quarter............................................ 9.63 7.38
Third Quarter............................................. 9.06 6.13
Fourth Quarter............................................ 7.50 4.00
Fiscal Year 1999
First Quarter............................................. $ 8.63 $ 6.25
Second Quarter............................................ 11.00 6.50
Third Quarter............................................. 11.63 6.38
Fourth Quarter............................................ 9.75 5.50
Fiscal Year 2000
First Quarter............................................. $19.88 $ 8.50
Second Quarter (through April 13, 2000)................... 13.63 10.25
</TABLE>
The last reported sale price of our common stock on the Nasdaq National
Market on April 13, 2000 was $10.25 per share. At April 6, 2000, there were
approximately 670 holders of record of our common stock, including multiple
beneficial holders at depositories, banks and brokers listed as a single holder
in the "street" name of each respective depository, bank or broker.
13
<PAGE> 17
CAPITALIZATION
The following table sets forth our capitalization at January 1, 2000 on an
actual basis, and on an as adjusted basis to reflect our receipt of the
estimated net proceeds of $13.5 million from the sale of common stock in this
offering, after deducting estimated fees of the underwriters and estimated
offering expenses. This table should be read in conjunction with our financial
statements and accompanying notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
JANUARY 1, 2000
(FISCAL YEAR-END 1999)
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Shareholders' equity:
Preferred stock, 2,500,000 shares authorized; no shares
issued and outstanding................................. -- --
Common stock, 100,000,000 shares authorized; 20,466,326
shares issued and outstanding; and 21,966,326 shares
issued and outstanding as adjusted..................... $ 72,911 $ 86,406
Additional capital........................................ 2,541 2,541
Accumulated deficit....................................... (55,191) (55,191)
Accumulated translation adjustment........................ 15 15
-------- --------
Total shareholders' equity............................. $ 20,276 $ 33,771
======== ========
Total capitalization................................... $ 20,276 $ 33,771
======== ========
</TABLE>
The number of shares of our issued and outstanding common stock shown in
the table above excludes:
- 3,139,824 shares of common stock reserved for issuance upon the exercise
of stock options outstanding at a weighted average exercise price of
$6.78 per share; and
- 164,400 shares issuable upon exercise of warrants outstanding at an
exercise price of $14.40 per share.
See "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and notes thereto included in this prospectus.
14
<PAGE> 18
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the as adjusted net tangible book value per share of our common
stock after this offering.
Our net tangible book value at January 1, 2000 was $20.3 million, or $0.99
per share of common stock. Net tangible book value per share represents total
tangible assets less total liabilities divided by the number of outstanding
shares of common stock on January 1, 2000. Our net tangible book value at
January 1, 2000, after giving effect to the sale of the 1,500,000 shares of
common stock at an assumed public offering price of $10.00 per share, and after
deducting estimated underwriting discounts and offering expenses would be $33.8
million or $1.54 per share. This represents an immediate increase in tangible
book value of $0.55 per share to existing shareholders and an immediate dilution
of $8.46 per share to new investors, or approximately 85% of the assumed
offering price of $10.00 per share. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $10.00
Net tangible book value per share at January 1, 2000...... $ 0.99
Increase in net tangible book per share attributable to
this offering.......................................... 0.55
------
Net tangible book value per share after this offering....... 1.54
------
Dilution in net tangible book per share to new investors.... $ 8.46
======
</TABLE>
The following table shows at January 1, 2000, the number of shares of
common stock purchased from us, the total consideration paid to us and the
average price paid per share by existing shareholders and by new investors
purchasing common stock in this offering at an assumed public offering price of
$10.00 per share, before deducting estimated underwriting discounts and
estimated offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 20,466,326 93% $75,453,000 83% $ 3.69
New investors........... 1,500,000 7 15,000,000 17 10.00
---------- --- ----------- ---
Total................. 21,966,326 100% $90,453,000 100% 4.12
========== === =========== ===
</TABLE>
-------------------------
The computations in the table above assume no exercise of any outstanding
stock options or warrants outstanding after January 1, 2000. At January 1, 2000
there were:
- options outstanding to purchase a total of 3,139,824 shares of common
stock at a weighted average exercise price of $6.78 per share and, if any
of these options or warrants are exercised, there will be further
dilution to new public investors; and
- 164,400 shares issuable upon exercise of warrants outstanding at an
exercise price of $14.40 per share.
15
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the five
fiscal years ended January 1, 2000 is derived from our audited financial
statements. We have a 52 or 53 week fiscal year that ends on the Saturday
closest to December 31. Our consolidated financial statements at the fiscal
years ended January 1, 2000 and January 2, 1999 and for each of the years in the
three-year period ended January 1, 2000, and the independent auditors' report
thereon, are included elsewhere in this prospectus. Our selected consolidated
financial data for fiscal 1997, 1996 and 1995 are derived from audited
consolidated financial statements not included in this prospectus. You should
read the data set forth below in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and related notes thereto appearing elsewhere in this prospectus. The
selected data in this section is not intended to replace our financial
statements.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Product sales........................... $ 3,489 $ 7,503 $ 9,441 $ 16,320 $ 22,508
Cost of product sales................... 1,972 3,254 4,005 6,504 9,739
Research and development................ 1,984 3,724 4,583 5,096 5,793
Selling, general and administrative..... 1,301 3,948 6,009 7,701 9,457
Other operating income.................. -- -- -- -- 285
-------- -------- -------- -------- --------
Loss from operations.................... (1,768) (3,423) (5,156) (2,981) (2,196)
Interest and other income (expense),
net................................... (126) 160 754 660 407
-------- -------- -------- -------- --------
Net loss................................ $ (1,894) $ (3,263) $ (4,402) $ (2,321) $ (1,789)
======== ======== ======== ======== ========
Basic and diluted loss per share........ $ (0.13) $ (0.20) $ (0.24) $ (0.11) $ (0.09)
======== ======== ======== ======== ========
Weighted average shares used in
computing basic and diluted loss per
share................................. 14,429 16,694 18,360 20,340 20,446
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities............................ $ 1,646 $ 5,348 $ 9,469 $ 2,713 $ 1,697
Working capital......................... 2,808 17,266 15,885 11,251 10,533
Total assets............................ 4,380 21,847 28,477 25,208 25,060
Long-term obligations and deferred
revenue............................... 1,675 -- -- -- 854
Accumulated deficit..................... (43,416) (46,679) (51,082) (53,402) (55,191)
Total shareholders' equity.............. 1,663 19,330 24,027 21,877 20,276
</TABLE>
16
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that relate to future plans, events or
performance are forward-looking statements which involve risks and
uncertainties. Actual results, events or performance may differ materially from
those anticipated in these forward-looking statements as a result of a variety
of factors, including those set forth under "Risk Factors" and elsewhere in this
prospectus. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. We undertake
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be needed to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
OVERVIEW
We develop, manufacture and market medical devices for circulatory support
and vascular applications. We market our first product, the Thoratec VAD System,
in the United States and internationally for use as a bridge to heart transplant
and for recovery of the heart after heart surgery. We are pursuing additional
indications for the VAD System and developing other circulatory support products
for patients suffering from heart disease. We are also developing vascular
grafts for hemodialysis and coronary artery bypass surgery. All of our products
utilize our proprietary biomaterial, Thoralon, with surface properties designed
to minimize patient blood clotting and inflammatory response.
We have experienced operating losses in all but one year since inception in
1976. We incurred net losses of $1.8 million in 1999, $2.3 million in 1998 and
$4.4 million in 1997. At January 1, 2000, we had an accumulated deficit of $55.2
million. We operate in a single business segment with different products in
circulatory support and vascular grafts. We expect to continue to incur
substantial additional losses until we can achieve substantial product revenues.
We conduct business both domestically and internationally. Our domestic business
comprises the United States, and our international operations comprise Europe
and the rest of the world.
RESULTS OF OPERATIONS
PRODUCT SALES
Product sales in 1999 were $22.5 million compared to $16.3 million in 1998,
an increase of approximately $6.2 million, or 38%. This increase is attributable
to sales of the VAD System disposable blood pump which increased to
approximately $16.2 million in 1999 from $11.0 million in 1998, an increase of
approximately $5.2 million, or 47%. The growth of sales in VAD pumps was
primarily attributable to an increase of approximately 33% in the quantity of
VAD pumps sold, which resulted from the growth in the number of new centers
using our VAD System. An increase in the average selling price of the VAD pumps
also contributed to the increase in revenue.
Product sales in 1998 were $16.3 million compared to $9.4 million in 1997,
an increase of approximately $6.9 million, or 73%. Product sales from the sales
of VAD pumps increased to approximately $11.0 million in 1998 from $6.6 million
in 1997, an increase of approximately $4.4 million, or 67%. The growth of sales
in VAD pumps was primarily attributable to an increase of approximately 54% in
the quantity of VAD pumps sold, which resulted from the growth in the number of
centers using our VAD System. An increase in the average selling price of the
VAD pumps also contributed to the increase in revenue.
17
<PAGE> 21
GROSS PROFIT
Gross profit was $12.8 million, representing approximately 57% of product
sales in 1999 compared to a gross profit of $9.8 million, representing
approximately 60% of product sales in 1998. The decrease in the gross profit
percentage in 1999 as compared to 1998 was due to approximately $400,000 of
higher inventory scrap and rework costs associated with a component part used in
the TLC-II portable driver, approximately $400,000 associated with higher
overall manufacturing and service overhead costs associated with the new
Pleasanton facility, and approximately $200,000 of costs associated with the
move to the Pleasanton facility. We expect gross profit to increase as a
percentage of product sales as we increase the number of devices manufactured
and improve the efficiency with which we manufacture.
Gross profit was $9.8 million, representing approximately 60% of product
sales in 1998 compared to a gross profit of $5.4 million, representing
approximately 58% of product sales in 1997. The increase in the gross profit
percentage in 1998 as compared to 1997 was primarily due to our ability to raise
selling prices in the VAD blood pumps and cannulae faster than our costs have
increased.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $5.8 million in 1999,
representing 26% of sales, from $5.1 million in 1998, representing 31% of sales,
an increase of $697,000, or approximately 14%. Of the total increase in research
and development expenses, $372,000 was associated with the implantable VAD,
which we call IVAD, $251,000 was associated with graft products, and $210,000
was associated with the TLC-II. Partially offsetting the above increases was a
decrease of approximately $216,000 in manufacturing support overhead applied to
research and development activities. Expenses for the graft products increased
primarily from the clinical trials for the Vectra. Expenses for the TLC-II
included costs to upgrade a component part. Expenses for the IVAD included
product prototype and testing costs. We expect research and development expenses
to increase in 2000 principally as a result of clinical trial costs for our
graft products and our TLC-II portable driver. We expect research and
development expenses to decrease in 2000 as a percentage of product sales.
Research and development expenses increased to $5.1 million in 1998,
representing 31% of sales, from $4.6 million in 1997, representing 49% of sales,
an increase of $513,000, or approximately 11%. Of the total increase in research
and development expenses, $152,000 was associated with graft products, $133,000
was associated with the VAD blood pump, and $145,000 was associated with the
IVAD.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to $9.5 million in
1999, representing 42% of sales, from $7.7 million in 1998, representing 47% of
sales, an increase of $1.8 million, or approximately 23%. Of the total increase
in selling, general and administrative expenses, $1.3 million is associated with
higher payroll and related costs associated with the continued development and
expansion of our domestic sales and marketing organization. We expect selling,
general and administrative expenses to increase in 2000 as we continue to build
our sales and marketing organization and as salaries for all personnel increase.
We expect selling, general and administrative expenses to decrease in 2000 as a
percentage of product sales.
Selling, general and administrative expenses increased to $7.7 million in
1998, representing 47% of sales, from $6.0 million in 1997, representing 64% of
sales, an increase of $1.7 million, or approximately 28%. Of the total increase
in selling, general and administrative expenses, $726,000 was
18
<PAGE> 22
associated with the continued development and expansion of our domestic sales
and marketing organization, $420,000 was associated with higher costs of the
Pleasanton facility, $163,000 was associated with the development and expansion
of our European sales organization, and $141,000 was associated with advertising
costs associated with new product introductions.
OTHER OPERATING INCOME
Other operating income includes amortization of deferred revenue from the
1999 Guidant agreement and was approximately $285,000. We expect other operating
income to remain the same or increase if the Vectra receives FDA clearance and
Guidant pays us $2.0 million under to our distribution agreement with them.
INTEREST AND OTHER INCOME
Interest and other income includes interest earned on cash income and
marketable securities and income from government research grants. Interest and
other income decreased to $407,000 in 1999 representing 2% of sales, from
$661,000 in 1998 representing 4% of sales, a decrease of $254,000, or
approximately 38%. The decrease in interest and other income was primarily
attributable to lower interest income earned on lower cash balances.
Interest and other income decreased to $661,000 in 1998 representing 4% of
sales, from $753,000 in 1997 representing 8% of sales, a decrease of $92,000, or
approximately 12%. The decrease in interest and other income was primarily
attributable to lower interest income earned on lower cash balances partially
offset by higher income from government research grants.
NET LOSS
Our net loss decreased $531,000 to approximately $1.8 million in 1999 from
$2.3 million in 1998, a decrease of approximately 23%, as a result of the
factors discussed above.
Our net loss decreased $2.1 million to approximately $2.3 million in 1998
from $4.4 million in 1997, a decrease of approximately 47%, as a result of the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We had cash, cash equivalents and short term investments at the end of 1999
of $2.0 million compared with $4.7 million at the end of 1998. The decrease in
cash was due principally to the loss from continuing operations and capital
expenditures associated with our new manufacturing facility. Accounts receivable
increased $1.3 million in 1999 principally due to increased sales in the fourth
quarter. Inventory increased $1.3 million in 1999 in preparation for planned
increases in sales activity and the introduction of a new product. Accounts
payable and accrued liabilities increased principally due to higher inventory
balances in anticipation of increased production to meet higher planned sales,
overall higher operating costs and the short-term portion of deferred
distributor revenue associated with the Guidant agreement discussed below.
In 1999, we entered into a distribution agreement with Guidant Corporation.
Under the terms of the agreement, Guidant receives exclusive worldwide marketing
and distribution rights to the Vectra product line, except in Japan. In exchange
for these rights, Guidant has paid us $1.5 million, and will pay up to an
additional $2.0 million when the Vectra product line receives FDA approval for
use in the United States. Guidant also issued a four-year, unsecured line of
credit in the amount of $10.0 million to us, which may be used, if needed, for a
variety of business purposes. We have not utilized this line of credit to date.
We will recognize the $1.5 million ($1.4 million net of expenses)
19
<PAGE> 23
contract payment received in the first quarter of 1999 as revenue ratably over
the five year life of the contract.
In 1996, we entered into a lease agreement on a new manufacturing facility
in Pleasanton, California which accommodates all of our manufacturing,
engineering and administrative activities. The administrative and engineering
portion of the building was completed and occupied in late 1997. The
manufacturing portion was completed in 1998 and occupied in April 1999. We
invested approximately $9.0 million in equipment and leasehold improvements to
the building. Annual payments under the lease are approximately $751,000 for a
lease term of 15 years beginning August 1997. The lease includes provisions,
among others, for annual cost of living adjustments to the lease payments, two
five-year renewal options, a purchase option, a security deposit of $885,600,
which we paid in 1996, and an additional $500,000, which we paid in 1997. The
1997 payment was returned to us in 1998. We can reduce or eliminate a
significant portion ($750,000) of the remaining security deposit before the end
of the initial lease term if we meet the criteria specified in the lease.
We believe that current cash and short term investments together with
expected cash flow from operations and the net proceeds of this offering, will
be sufficient to fund our operation for at least the next two years.
YEAR 2000 COMPLIANCE
We have completed our goal of an uninterrupted transition to the Year 2000.
We assessed all of our affected systems, our products and the readiness of our
third parties. We have not experienced significant Year 2000 issues subsequent
to 1999's fiscal year end. Although we believe we have taken the appropriate
steps to address our Year 2000 readiness, there is no guarantee that our efforts
will prevent a material adverse impact on the results of operations and
financial condition.
Through fiscal year end 1999, we have incurred less than $35,000 of Year
2000 costs. All costs associated with Year 2000 compliance were funded with cash
flow generated from operations and existing cash balances and were expensed as
incurred.
DISCLOSURE ABOUT MARKET RISK
We do not use derivative financial instruments in our operations or
investment portfolio. We do not have material exposure to market risk associated
with changes in interest rates, as we have no long-term debt obligations or
long-term investments outstanding. Our investment portfolio consists of
short-term corporate debt instruments and Federal government agency debt
instruments that are classified as available-for-sale. The weighted average
maturity of our investment portfolio was less than 90 days in both 1998 and
1999. Accordingly, we do not expect to be subject to material interest rate risk
with respect to our short-term investments. We do not believe we have any other
material exposure to market risk associated with interest rates.
Although we conduct business in foreign countries, our international
operations consist primarily of sales and service personnel for our VAD System.
These employees report into our U.S. sales and marketing group and are
internally reported as part of that group. Additionally, foreign currency
transaction gains and losses were not material to our results of operations for
1999. Accordingly, we do not expect to be subject to material foreign currency
risk with respect to future costs or cash flows from our foreign operations. To
date, we have not entered into any significant foreign currency forward exchange
contracts or other derivative financial instruments to hedge the effects of
adverse fluctuations in foreign currency exchange.
20
<PAGE> 24
BUSINESS
GENERAL
We began our business in March 1976 and are incorporated in the State of
California. Our initial public offering of common stock occurred in 1981.
We develop, manufacture and market proprietary medical devices used for
circulatory support and for vascular graft applications. We currently market the
Thoratec Ventricular Assist Device System (which we call the Thoratec VAD System
or the VAD System) in the United States and internationally for use as a bridge
to heart transplant and for use in the recovery of the heart after open-heart
surgery. We have also developed small diameter vascular grafts for use in
hemodialysis access and coronary artery bypass surgery. All of our products that
come into contact with human tissue or blood incorporate Thoralon, our
proprietary biomaterial. Thoralon is a unique biomaterial that provides strength
and flexibility to our products with surface properties designed to minimize
patient blood clotting and inflammatory response.
Our VAD System is currently the only device approved by the FDA that can
provide left, right or biventricular support for both bridge to heart transplant
and for recovery of the heart after open-heart surgery. We are also pursuing
additional indications for the VAD System and developing other circulatory
support products for patients suffering from heart failure. At March 14, 2000,
our VAD System had been used in more than 1,200 patients worldwide ranging in
age from seven to 77 years and in weight from 38 to 316 pounds (17 to 144 kg).
Our hemodialysis access graft product, which we call the Vectra, is
undergoing clinical trials in the United States and is currently marketed in
Europe through Guidant Corporation and in Japan through Goodman Co., Ltd. We
believe this graft offers significant advantages over currently available
prosthetic grafts used in hemodialysis. Unlike current grafts, which require up
to several weeks of patient recovery prior to use, the Vectra's self-sealing
design allows patient use as soon as 24 hours after surgical implantation. We
are applying the same technological expertise used in the Vectra for use in
coronary artery bypass surgery through our development of our Aria CABG
(coronary artery bypass graft) product. This small diameter graft is designed
for use by patients who have no or too few suitable blood vessels of their own.
We expect to commence clinical trials in the United States of our Aria coronary
graft in the first half of 2000.
OUR STRATEGY
Our goal is to be a leading developer and manufacturer of medical devices
to the congestive heart failure, cardiac surgery and vascular graft markets. Our
key strategies to achieve this goal are:
Increase VAD System Market Penetration. The Thoratec VAD System is the only
ventricular assist device with approvals for both bridge-to-transplant and
recovery after open-heart surgery indications. Our VAD System can be used to
treat both ventricles for patients of all sizes, and in a less invasive manner.
We intend to utilize our existing sales channels throughout the world to
continue to gain acceptance and adoption by both transplant and non-transplant
open heart centers, and to treat a greater number and variety of patients within
our current customer base. In addition, in order to further expand the clinical
utility of the VAD System, we intend to pursue:
- the U.S. launch of the TLC-II Portable VAD Driver, which weighs
approximately 20 pounds and operates interchangeably with current
products. The TLC-II improves patient mobility, and is designed to allow
patients to be discharged from the hospital while still using the VAD
System;
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<PAGE> 25
- the development of our implantable ventricular assist device, which we
call the IVAD, for use in longer term bridge-to-transplant patients as
well as some alternative-to-transplant patients;
- the education of cardiac surgeons and heart failure cardiologists as to
the benefits of the Thoratec VAD System; and
- the regulatory approval of a therapeutic recovery indication.
The therapeutic use of the Thoratec VAD System in treating specific types
of end-stage heart failure patients could represent a significant market
expansion opportunity for us. We estimate there are as many as 160,000 late
stage CHF patients in the United States whose cardiac recovery may potentially
be facilitated by the use of our VAD System.
Obtain U.S. Approval and Support European and the U.S. Market Launch of
Vectra. We believe the clinical use of synthetic grafts for dialysis access is
an established clinical practice. However, existing commercial graft
technologies have significant shortcomings that are widely recognized. We
believe the Vectra device will address some of the most significant of those
shortcomings. We have completed patient enrollment in our U.S. clinical trial
and intend to submit a 510(k) to the FDA this year for U.S. approval to market
the Vectra. We have established distribution partnerships for the Vectra product
line, the most significant of which is Guidant. We will continue to identify and
pursue opportunities for product line extensions that enhance the Vectra product
offering.
Attain Global Approval to Commercialize the Aria Coronary Artery Bypass
Graft. We intend to initiate and complete Aria coronary artery bypass clinical
trials and seek approvals in all major medical device markets. Through clinical
trials, we expect to demonstrate the efficacy of the Aria as an option for
completing the revascularization of coronary artery bypass patients. These
patients' only other option may be very poor quality veins, or even no available
veins at all. Therefore, our objective in these clinical trials is to show that
the Aria has similar or superior patency rates as compared to poor quality
veins. We believe that in as many as 20% of the 900,000 bypass surgeries
performed worldwide, the unavailability of any or enough suitable vessels
creates a treatment problem.
Explore the Use of Thoralon for Additional Medical Products. Thoralon was
developed for safe and effective use in long-term cardiovascular implants, with
properties designed to provide:
- excellent blood and tissue compatibility;
- thromboresistance, which means resistance to blood clotting;
- durability; and
- stability.
These properties allow Thoralon biomaterials to be configured and applied
in a variety of ways and may allow its use for other medical device applications
as a coating or stand-alone material. We intend to apply our biomaterials
technologies to those applications where our high-value, critical care
implantable medical devices are desired.
Explore the Acquisition of, or Partnership with, Companies that Possess
Complementary Products or Technologies. We expect to leverage our expertise and
technologies with other products and technologies being developed by other firms
or research centers. We have established a strong direct sales presence with
some of the world's largest heart centers. We believe other companies, product
lines or technologies may benefit from this sales and distribution capability.
We intend to pursue opportunities to acquire products or technologies that
complement our products and allow us to leverage our competencies in selling and
marketing, regulatory affairs and manufacturing.
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CIRCULATORY SUPPORT MARKET
Cardiac failure is the leading cause of death in the United States,
accounting for more deaths than all forms of cancer combined. Deaths associated
with cardiac failure fall into two broad categories:
- congestive heart failure, which is a chronic disorder that occurs when a
weakening of the heart muscle reduces the pumping power of the heart; and
- acute cardiac failure resulting from heart attacks and various infections
of the heart muscle.
CONGESTIVE HEART FAILURE
CHF is a slow, degenerative process leading to cardiac insufficiency
resulting in a decreased supply of oxygen and nutrient rich blood to various
vital organs such as the lungs, brain and kidneys. CHF tends to be progressive
and is associated with profound symptoms that limit daily activities. Long-term
survival rates are low. We estimate that more than 85% of patients die within
eight to twelve years of diagnosis. CHF is the most common cause of
hospitalization in patients over 65 years of age. According to the American
Heart Association, there are currently four million to five million CHF patients
in the United States, and approximately 550,000 newly diagnosed patients each
year. While most patients suffering from CHF are initially treated with
medication, which may delay the progression of CHF, conventional drug therapy
cannot cure the disease. The only available method of treating end-stage CHF is
a heart transplant.
Although heart transplants have been very successful, there are too few
donor hearts available to adequately address the problem of cardiac failure. The
United Network for Organ Sharing reported that there were only approximately
2,400 hearts available for transplant in the United States in 1998, a level that
has remained relatively unchanged for the last several years. However, published
government sources estimate that the number of patients suffering from CHF who
could benefit from some form of permanent cardiac assist is 30,000 to 50,000 per
year. The median wait for a donor heart by patients on a heart transplant
waiting list is approximately seven months, and many patients have to wait as
long as one to two years before receiving one of the few donor hearts available
each year. In 1998, approximately 19% of such patients died while waiting for a
donor heart.
When other therapies are unsuccessful, ventricular assist devices can be
used to support one or both sides of the patient's heart until a donor heart can
be found. Ventricular assist devices are mechanical systems used to assist the
heart's function. In patients awaiting heart transplants, physicians decide to
use a ventricular assist device when the death of the patient appears imminent.
ACUTE CARDIAC FAILURE
In addition to providing a bridge to heart transplant, ventricular assist
devices have other potential applications. It is estimated that out of
approximately 800,000 open-heart surgeries performed annually in the United
States, some 15,000 to 20,000 patients die following such procedures, resulting
in a total market potential of over $300 million. We believe that only
approximately ten percent of the potential market is currently being treated
with VAD devices. Many of these deaths are caused by heart failure when the
heart, weakened by disease and the additional trauma of surgery, fails to
maintain adequate blood circulation. The use of a ventricular assist device
after surgery can 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 heart attack and various infections of the
heart muscle.
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<PAGE> 27
There is significant demand for effective ventricular assist devices.
However, most systems available today or under development have 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 can
cause an adverse reaction in the body. This adverse reaction results in blood
clotting which clogs the system or can cause a stroke in the patient.
THORATEC CIRCULATORY SUPPORT PRODUCTS
We received FDA approval in December 1995 to market the Thoratec VAD System
as a bridge to heart transplant in patients suffering from heart failure, and
began marketing the VAD System in the United States in January 1996. The VAD
System has also received regulatory clearance and is currently being marketed in
major European countries, Canada and certain other major international markets.
At March 14, 2000, our VAD System had been used in more than 1,200 patients
worldwide ranging in age from seven to 77 years and in weight from 38 to 316
pounds (17 to 144 kg). Building on the proprietary technologies contained in the
VAD System, we are 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 THORATEC VAD SYSTEM
The VAD System consists of three major components:
- the single-use blood pump, a type of artificial ventricle;
- the single-use cannulae, which connect the blood pump to the heart and
vessels; and
- the Thoratec Dual Drive Console, a multi-use device which pneumatically
activates the blood pump.
Also available in international markets is the TLC-II Portable VAD Driver,
a small lightweight unit which can be used interchangeably with the Dual Drive
Console and is designed to allow the patient to move around the hospital or
return home. 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.
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[Illustration showing placement of
left and right ventricular assist devices]
ADVANTAGES OF THE THORATEC VAD SYSTEM
Compared to other ventricular assist devices, we believe that the VAD
System has the following principal advantages:
- Biventricular Support. Most longer-term systems available today provide
only left ventricular support. While many patients do well with only a
left ventricular assist device ("LVAD"), we estimate that at least 20-30%
of these patients also have or can develop right ventricular failure and
require a right ventricular assist device ("RVAD"). Death and morbidity
rates are extremely high for this patient group if not adequately
supported. Since there are no risk factors that allow a surgeon to
predict reliably which patients will require biventricular support, the
decision for univentricular or biventricular support is simplified with
the Thoratec VAD System, as RVAD support may be 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. With the Thoratec VAD System, the blood pump is
worn outside the body. This placement facilitates patient movement and
allows patients to walk, exercise and move around the hospital. This
paracorporeal placement allows the system to support patients of varying
sizes, including very small patients such as small women, adolescents and
children. To date, our VAD System has been used in patients as small as
38 pounds and as young as seven years old. In contrast, other
commercially available ventricular assist devices
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<PAGE> 29
for bridge to heart transplant must be implanted and can only be used in
patients large enough to accommodate the device within their abdomen. In
addition, unlike implantable VAD's, paracorporeal attachment does not
require two invasive abdominal surgeries. This makes the VAD System more
suitable for critically ill patients who may potentially recover normal
function of the heart without this additional surgical trauma.
- Multiple Indications. Our VAD System is the only device approved in the
United States to provide circulatory support for both post open heart
surgery recovery and bridge to transplant indications. To date, the VAD
System has been used to support patients for periods ranging from a few
hours to well over one year. This unique flexibility to treat multiple
patient groups allows hospitals to invest in a single product line and,
therefore, make a smaller investment in inventory as one product line can
be used with two patient groups. In addition, the surgical training
required for our device can apply to a broader patient population. Also,
for those post open heart surgery patients who become transplant
candidates, use of our VAD System can eliminate the need for a second
surgery to remove a device designed or approved for recovery only.
- Thoratec Biomaterials. Our proprietary biomaterials are used in most
surfaces of the VAD System that contact blood or are implanted in the
body, providing biocompatibility, resistance to blood clotting, flex life
and strength. These materials have been used in cardiovascular products
for over 14 years. We have also licensed these biomaterials to health
care manufacturers Gambro, Inc. and Cobe Cardiovascular for use in
non-competing applications.
- Multiple Cannulation Options. Cannulae for the VAD System come in a
number of shapes and sizes, allowing the surgeon to fit the size of the
cannulae to the size of the patient and to place the cannulae in
different parts of the heart. Other commercially available systems have
only limited cannula shape and size. The small size of our cannulae,
compared to other systems, could make it easier for the heart to recover
when the cannulae are removed. Variations of our cannulae also allow the
surgeon to place the cannulae in places other than the apex of the heart
(the only place used by the currently available left ventricular-only
systems).
CURRENT AND POTENTIAL INDICATIONS
We have identified the following three basic clinical needs for our
circulatory support products:
- Bridge to Heart Transplant. We commenced marketing the Thoratec VAD
System in the United States in January 1996 for use as a bridge to heart
transplant in patients suffering from heart failure following receipt of
pre-market approval from the FDA in December 1995. In 1999, we sold 534
VAD pumps to heart centers worldwide. We maintain a record of all
patients reported treated with the VAD System, which we call the
Voluntary Registry. Since FDA approval, this registry has relied upon
strictly voluntary input from our customers. As of March 14, 2000, our
Voluntary Registry included 912 patients treated with the VAD System for
bridge to transplant. At any given time, there are approximately 4,000 to
5,000 patients on the waiting list for a heart transplant in the United
States, and we believe a comparable number are waiting in Europe. We
believe that the percentage of these patients bridged to transplant will
continue to increase, as surgeons' level of comfort with the technology
increases, particularly for longer-term support cases.
- Recovery of the Natural Heart. Approximately 2% 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
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surgery for a limited period of time (generally less than six hours), and if
they are unable to regain normal heart function, they will not survive without
ventricular support. The use of a ventricular assist device after surgery can
provide support to the heart until the heart can recover. We received FDA
approval for this indication in May 1998.
As of March 14, 2000, our voluntary registry reported that the VAD System
had been used in 215 patients who were unable to regain normal heart
function following surgery requiring cardiopulmonary bypass and were,
therefore, unable to be removed from the heart/lung machine following
surgery. Normally, patients who cannot be weaned from the heart/lung
machine die. Of the 215 patients who have been placed on the VAD System,
35% (75 patients) survived following removal from the heart/lung machine.
Of those patients, 61% were discharged from the hospital. Duration of
patient cardiac support ranged from one to 118 days. Although most
patients were supported less than ten days, several required support for
between one and three months before they successfully recovered cardiac
function.
- Therapeutic Recovery as an Alternative to Heart Transplant. We believe
that for most patients recovery of their own heart is a better
alternative than either heart transplantation or permanent implantation
of a blood pumping device. Based on recently reported cases of recovery
in heart failure patients, we believe that the VAD System is a potential
therapy to reverse the complications of late-stage heart failure in
certain patients.
While this therapeutic recovery indication is not yet approved for our
device, we are actively investigating the worldwide experience with the
Thoratec VAD System and the requirements for pursuing regulatory approval
for this indication. We estimate that there are as many as five million
Americans with congestive heart failure each year, and we believe the use
of the VAD System for therapeutic recovery could represent a therapeutic
opportunity for many of these patients. We are working with physicians at
some of the leading cardiovascular centers to track the experience of all
patients who recover while being treated with the VAD System and are
formulating a regulatory and clinical strategy both in the United States
and abroad.
CIRCULATORY SUPPORT PRODUCTS UNDER DEVELOPMENT
In addition to our commercially available VAD System, we currently have
under development or in the final stages of U.S. regulatory approval the
circulatory support products described below. We may be unable to successfully
develop any of these products, or if successfully developed, these products may
not obtain regulatory approval or market acceptance or be manufactured and sold
on commercially acceptable terms.
- TLC-II Portable VAD Driver. Although patients supported with the Dual
Drive Console can walk throughout the hospital and transfer from critical
care units to general wards, they usually cannot leave the hospital
because of the size of the console. We have developed the TLC-II, a
compact and lightweight (approximately 20 pounds), battery or
line-operated biventricular pneumatic drive unit designed to promote
greater mobility and self-care. It is designed to allow the patient to
exercise more easily and move freely around the hospital grounds and
eventually leave the medical facility. This device provides several
portability options, either by hand-carrying the driver or by using a
shoulder strap or mobility cart. This
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portable device connects with a docking station, which houses a battery charger
and the external monitoring computer.
[Picture of patient walking with
Thoratec's TLC-II on a mobility cart]
We received authority to CE Mark (an international symbol of quality
required for products to be distributed in the European Community) this
product in March 1998 and introduced the TLC-II in Europe in the middle of
that year. We received approval for an IDE from the FDA in November 1998
to begin a clinical trial of this device in the United States for use in
conjunction with the approved VAD System. We believe that the regulatory
path to approval for this device may be facilitated by the fact that it
activates the same VAD System blood pumps that have received FDA approval.
In 1999, we notified the FDA that we were putting a voluntary hold on
further enrollment in U.S. clinical trials for the TLC-II and on shipments
of the device to new centers in Europe, pending completion of a certain
component upgrade. In March 2000, we completed testing of that component
and have applied to resume patient enrollment in our U.S. clinical trial.
We expect to resume patient enrollment in our U.S. clinical trial and
shipments of this device to Europe in the first half of 2000.
- Implantable VAD ("IVAD"). While the placement of the current VAD System
outside the body of the patient has the advantages described above, we
are developing an implantable version of our existing VAD blood pump and
cannulae to provide additional options for surgeons. The Thoratec IVAD is
designed for patients who require long-term VAD support. It is also
significantly smaller than the other commercially available implantable
LVAD devices. Our IVAD weighs less than a pound, which is 50% lighter
than these competing devices. Because of its small size, the IVAD can be
used in not only smaller patients, but also, through the use of two
IVADs, in some biventricular patients, a capability unique to any
commercially available implanted VAD device. Prototypes have been
developed, and a pre-IDE filing was made in 1999. We successfully
completed the first animal implant in January 2000. We believe that the
regulatory process for the IVAD 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.
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VASCULAR GRAFT MARKET
VASCULAR ACCESS FOR HEMODIALYSIS
The principal use of vascular access grafts is for hemodialysis for
patients with end stage renal disease ("ESRD"), a debilitating disorder
characterized by gradual erosion of kidney function. ESRD is irreversible, and
the majority of all patients suffering from this disease worldwide are
maintained by hemodialysis. According to the U.S. Renal Data System's 1999
Annual Data Report, hemodialysis is the primary treatment for approximately 87%
of all end stage renal disease patients in the United States, an estimated
195,000 patients at the end of 1997. Market estimates suggest that approximately
200,000 prosthetic vascular access grafts used for hemodialysis were implanted
worldwide in 1999, representing an annual market approaching $120 million. We
estimate that the United States represents less than one-half of the worldwide
hemodialysis patient population.
Hemodialysis removes toxins and excess fluid from a patient's blood by
circulating the blood through a dialyzer, or so-called "artificial kidney." This
procedure is generally performed three times per week and lasts three to four
hours. Patients undergoing hemodialysis require easy, routine access to the
blood stream at a high flow rate. This access to the patient's blood stream is
achieved using one of three methods: creation of an arterio-venous ("A/V") shunt
from the patient's blood vessels, inserting a central venous catheter, or
implanting an artificial vascular access graft (VAG). The majority of
hemodialysis patients in the United States depends on the use of a VAG that is
surgically connected between the patient's artery and vein. The vast majority of
available VAG's are made from expanded polytetrafluorethylene (ePTFE). The graft
is accessed using needles connected to tubing that carries the patient's blood
to the dialyzer and returns it back cleansed to the patient.
Vascular access methods currently available for hemodialysis applications
have certain limitations. Both A/V shunts and ePTFE grafts must mature for two
to six weeks before use and therefore require the use of a temporary central
venous catheter until the graft is ready for use. Such catheters entail
additional cost, including those associated with catheter insertion, maintenance
and treatment for complications, and risk to the patient such as infection,
thrombosis and venous stenosis. Additionally, ePTFE VAGs are usually accompanied
by profuse and prolonged bleeding, often up to 20 minutes, when the needles used
for hemodialysis are removed, increasing patient treatment time at the dialysis
center.
CORONARY ARTERY BYPASS SURGERY
Currently, obstructed coronary arteries are either partially cleared
through the use of angioplasty or related procedures or treated surgically
through coronary artery bypass surgery. Coronary artery bypass surgery involves
connecting one or more new vessels from the aorta to the heart to re-route blood
around blockages in the coronary arteries. Grafts using saphenous veins (from
the leg) or the internal mammary artery of the patient have been successfully
used in bypass procedures for a number of years and have shown a relatively high
patency with no risk of tissue rejection. We estimate that in 1997 there were
approximately 600,000 coronary artery bypass surgery procedures performed in the
United States and approximately 300,000 performed outside the United States. We
estimate that on average three bypasses are performed in each surgical
procedure.
While the use of natural vessels is the standard of care in coronary artery
bypass surgery, the harvesting of vessels from the patient for grafts involves
significant trauma and expense. Use of these vessels requires additional time in
surgery and results in patient morbidity associated with removal of the blood
vessel. In addition, a significant number of patients requiring coronary artery
bypass surgery have insufficient vessels as a result of previous bypass
surgeries, or their vessels are of inferior quality due to trauma or disease. We
estimate that these patients may represent as much as 20% of the total patients
undergoing bypass surgery. No artificial graft currently has full market
approval or is being
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marketed in the United States for coronary artery bypass surgery, but we believe
a significant market opportunity for such grafts exists. The major reason for
the unavailability of a synthetic graft for this indication has been that
synthetic grafts configured in small diameters (less than five millimeters)
necessary for this indication generally do not remain patent.
THORATEC VASCULAR GRAFT PRODUCTS
We are developing small diameter vascular graft products intended initially
to address the vascular access and coronary artery bypass surgery markets. Both
products utilize our proprietary Thoralon biomaterial, and are protected by
several patents covering Thoralon as well as the graft design and manufacturing
processes. We believe that our vascular grafts are highly compliant, have
excellent handling and suturing properties and have the "feel" of a natural
blood vessel. Our manufacturing process creates a structure in which the three
different layers in the graft wall have different properties which make the
graft closely resemble natural blood vessels. The inner textured layer is
designed for contact with blood and provides improved resistance to blood clots.
The solid middle layer gives the graft its strength and self-sealing properties.
The outer textured layer is designed to promote tissue ingrowth to promote graft
stability.
VECTRA VASCULAR ACCESS GRAFT
Currently available vascular access grafts are commonly made out of ePTFE,
which can lose integrity after repeated punctures and render the patient
susceptible to bleeding and infection. The Vectra is designed for use as a shunt
between an artery and a vein, primarily to provide access to the bloodstream for
renal hemodialysis patients requiring frequent needle punctures during
treatment. We believe that the Vectra may provide significant advantages over
existing synthetic vascular access grafts that may encourage its use by surgeons
who are currently using natural vessels for vascular access. The Vectra received
marketing approval from the Canadian Ministry of Health in March 1996, from the
Japanese Ministry of Health in May 1997, and authority to CE Mark the product in
January 1998. We received approval for an IDE from the FDA in mid-1998 to
commence clinical trials in the United States. Enrollment in that study was
completed in 1999 and patients are now in the six-month to one year follow-up
period. We believe that these clinical trials will be necessary to support the
submission of a 510(k) premarket notification to the FDA.
Based upon published data obtained in clinical trials outside the United
States and the early results of a prospective, randomized U.S. trial, we believe
that the Vectra offers the following advantages:
- reduced inflammatory response after implantation;
- the ability to begin hemodialysis as soon as 24 hours after implantation,
as opposed to several weeks for ePTFE grafts;
- reduced bleeding complications during routine use because of the Vectra's
self-sealing properties; and
- improved handling and suturability.
In one retrospective study of the Vectra in Australia, 134 patients who
were implanted by 30 different surgeons were evaluated. In nearly one-third of
the patients, initial use of the Vectra for hemodialysis was performed within
one day of implantation. The median time for initial access was three days after
implantation. Early results of the U.S. clinical trial have also been presented
with the data supporting allowance for early access, as soon as 24 hours after
implantation, without the need for temporary central venous catheters and
similar patency rates to the ePTFE control. Lastly, the
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preliminary results illustrated a statistically significant improvement in the
time required to seal the graft, with bleeding cessation following needle
removal averaging only three minutes with the Vectra.
In January 1999, we entered into a distribution agreement with Guidant
Corporation. Under the terms of this agreement, Guidant receives exclusive
worldwide marketing and distribution rights to the Thoratec Vectra product line,
except in Japan. In exchange for these rights, Guidant has paid us $1.5 million,
and will pay us up to an additional $2.0 million when the Vectra product line
receives FDA approval for use in the United States.
ARIA CORONARY ARTERY BYPASS GRAFT
We have developed from our proprietary Thoralon biomaterials a small
diameter graft for use in coronary artery bypass surgery patients who have no
suitable vessels of their own. A total of 27 patients in Canada and Germany
received our Aria coronary artery bypass grafts, ranging in internal size from
2.0 to 3.5 millimeters. All patients were extremely ill at the time of surgery,
and the grafts were implanted on a compassionate use basis (i.e., the patients
were found to have no other viable therapeutic options). All 22 surviving
patients were asymptomatic at follow-up points ranging from 2.5 to 5 years after
surgery. Of the five patients who did not survive, none is known to have died
from causes related to the graft. We need long-term test results from a
controlled clinical trial on a much larger patient population before we can
demonstrate the capabilities of this graft.
The potential for improved long-term patency in small diameter grafts is
the most unique aspect of the Aria. We believe that to date no other suitable
small diameter graft has been developed which will remain patent over long
periods of time when used in this critical application. In January 1999, we
submitted data to the Canadian Health authorities supporting the request to
begin a 330 patient study of the Aria graft. In January 2000, we announced that
four patients had been implanted in our AlternativE Graft Investigational Study
(AEGIS/Canada trial) at a hospital in British Columbia. The first perfusion scan
on the first patient was done and the results were normal. These scans are
designed to be done at one month and six months following implant, although that
timing is at the discretion of the surgeon. We now have permission from two
additional hospitals in British Columbia to enroll patients in this study.
We submitted an IDE for the Aria to the FDA in December 1999. Our plan is
to conduct the AEGIS/U.S. trial at up to 15 centers and with fewer patients than
the AEGIS Canada trial. Given the similarity to its Canadian effort, we are
hopeful that we can combine data from the two trials, potentially reducing the
number of patients and time required to complete both of them. We believe this
product will require submission of a PMA application to the FDA. We received
questions from the FDA on this IDE submission and in April 2000 we filed an
amendment to our IDE responding to these comments. If the FDA approves the
amended IDE, the AEGIS/U.S. trial could begin enrolling patients in the first
half of 2000.
Peripheral Graft Applications. In addition to the Vectra and Aria, our
graft products and biomaterial technologies may potentially be used in other
applications such as peripheral vascular grafts for patients who require
restoration of circulation to their arms or legs due to blockages caused by
certain disease processes, or for use as a patch material in cardiovascular or
peripheral vascular repair procedures. While we are not currently pursuing
development of these applications, we have completed sufficient early stage
preclinical work in the graft area to believe our graft products could be
developed for these applications. Guidant has a right to negotiate for these
applications for a short period if we decide to develop them during the term of
the Vectra distribution agreement.
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THORATEC BIOMATERIALS -- THORALON
We have developed a proprietary biomaterials technology that is used in all
of our products and licensed to other health care manufacturers.
Our Thoralon biomaterials technology is critical to the successful
performance of all of our products that come into contact with human blood or
tissue. All of our current products and those under development incorporate
these proprietary biomaterials, which are designed to minimize blood clotting
and inflammatory response. In addition, these products must maintain their
strength and flexibility. A VAD System blood pump, for instance, must contract
and expand approximately 40 million times per year without a decrease in
performance or failure. The two major components of Thoralon are surface
modifying additives ("SMAs") and BPS-215 polyurethaneurea ("BPS-215"), a high
flex-life elastomer.
SMAs are proprietary multipolymers designed to enhance the biocompatibility
of the surface of a device that comes into contact with blood or other tissues.
SMAs are added to the base polymer component of the biomaterial in the bulk
fabrication stage. A unique property of SMAs is their ability to concentrate at
the surface of any finished part, thus determining its surface properties
independent of the base polymer. This SMA-based surface layer is not a coating
but a fully integrated part of the polymer which is not soluble in water or
blood. The result is a biocompatible, thromboresistant surface. BPS-215 is the
base component that provides the bulk properties of strength and flexibility to
Thoralon. The combination of bulk and surface properties provided by SMAs and
BPS-215 provides Thoralon with the critical properties necessary for implantable
cardiovascular and other medical devices.
In 1992, we granted COBE a royalty-bearing license and sublicense to use
Thoratec's SMAs in certain COBE medical devices. In 1999, this license was
divided into two separate licenses. One is retained by COBE Laboratories, now
called Gambro, Inc., one of our major shareholders, and the other was granted to
Sorin COBE Cardiovascular when that division of Gambro was sold to Sorin.
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SUMMARY OF EXISTING PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The table below summarizes our existing products and products under
development.
<TABLE>
<S> <C> <C> <C>
------------------------------------------------------------------------------------------
CIRCULATORY SUPPORT INDICATIONS MARKETING STATUS
PRODUCTS
------------------------------------------------------------------------------------------
Thoratec VAD System, - Bridge to transplant - Currently marketed in
which consists of a the United States and
single-use blood pump - Recovery after heart internationally for bridge
and cannulae, and a surgery to transplant and recovery
multi-use drive console of the heart after heart
which pneumatically - Therapeutic recovery as surgery
activates the blood pump an alternative to heart - We intend to submit in
transplantation 2000 a PMA Supplement to
seek FDA approval for
therapeutic recovery
------------------------------------------------------------------------------------------
TLC-II Portable VAD - Designed to improve - Currently marketed
Driver, which is a patient mobility and internationally; U.S.
battery or line operated facilitate hospital clinical trial initiated
pneumatic mobile drive discharge but currently on hold
unit weighing until approval of an IDE
approximately 20 pounds amendment
------------------------------------------------------------------------------------------
IVAD, implantable VAD - Designed to support - Pre-IDE filing complete,
weighing less than one longer term bridge to with successful completion
pound transplant and of first animal implant
alternative to in January 2000
transplant patients
------------------------------------------------------------------------------------------
VASCULAR ACCESS PRODUCTS INDICATIONS MARKETING STATUS
------------------------------------------------------------------------------------------
Vectra, small diameter - ESRD patients needing - Currently marketed
graft for patients hemodialysis internationally;
needing hemodialysis enrollment in U.S.
clinical trial completed
and 510(k) to be
submitted in 2000
------------------------------------------------------------------------------------------
Aria, small diameter - CABG patients needing - Canadian clinical trial
graft for patients with vessels for underway; IDE submitted
blocked arteries and revascularization to the FDA to initiate
inadequate vessels of trial in United States
their own
------------------------------------------------------------------------------------------
</TABLE>
SALES AND MARKETING
We operate in a single business segment with different products in
circulatory support and vascular grafts. We present our business geographically
as our domestic operation, which comprises our business in the United States,
and our international operation, which comprises our business in Europe and the
rest of the world. For further enterprise and related geographic information,
see Note 11 to our financial statements.
CIRCULATORY SUPPORT PRODUCTS
The potential customers for our circulatory support products are hospitals
that perform open-heart surgery procedures and heart transplants. Based upon
published sources, we estimate that 140 of
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<PAGE> 37
the approximately 900 hospitals in the United States that perform open-heart
surgery also perform heart transplants. We are initially targeting these 140
heart transplant hospitals and the largest of the remaining 900 hospitals plus
an additional 110 heart transplant hospitals in Europe.
We have recruited and trained a direct sales force that, as of February 26,
2000, is comprised of 12 experienced cardiovascular sales specialists to sell
the VAD System in the United States, Canada, France, Germany, Spain, United
Kingdom, Austria, Switzerland, Netherlands, Portugal and South Africa.
The sales effort is complemented by six direct clinical specialists that
conduct clinical educational seminars, assist with a new open heart center's
first VAD implant and resolve clinical questions or issues. We also partner with
universities, experienced clinicians and opinion leaders to assist with
expanding clinical educational needs. The sales team focuses on cardiac surgeons
that perform heart transplantation and transplant cardiologists, perfusionists
and the transplant nursing staff. In addition to our direct selling effort, we
have established a network of international distributors that cover those
markets that represent the majority of ventricular assist device potential. We
employ sales and marketing tactics commonly found within the cardiovascular
capital equipment device market such as direct mail, clinical education
seminars, symposia, equipment purchase and lease programs, and journal
advertisement. We have also assembled a Medical Advisory Board consisting of
opinion leaders who provide clinical input and direction on product development,
marketing and market issues.
Hospitals or other medical institutions that acquire the VAD System
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, we will
usually ship the products within thirty days.
The introduction of a new system requires training of the appropriate
personnel. We provide initial training for the surgical and clinical support
teams when a center purchases and takes delivery of the VAD System. As a
follow-up to the initial training, we provide clinical support at the first
implant whenever possible. We also provide 24-hour access to clinically trained
personnel. Our sales force also assists customers with obtaining reimbursement
from third-party payors.
VASCULAR GRAFT PRODUCTS
We intend to market the Vectra through our distributor in Japan and through
Guidant in the rest of the world, and to market the Aria CABG device through a
direct sales force in the United States and Europe and potentially through
distributors in other international markets.
We envision the market positioning of the Vectra as one that replaces an
existing product used in an accepted procedure, and at a comparable or premium
price. We plan to commission additional studies comparing our products to ePTFE
grafts. We believe the Vectra will have significant advantages over these
existing products and will therefore offer significant benefits to users and
patients, without the need for additional clinical training. We also believe the
demand for prosthetic VAGs will continue to grow. The worldwide hemodialysis
patient population continues to grow and is older and living longer, increasing
the requirement for multiple access procedures over many years. Additionally,
this population is increasingly made up of sicker patients, such as diabetics,
who have exhausted the number of sites available for A/V fistula creation,
thereby necessitating the need for a prosthetic VAG.
34
<PAGE> 38
We intend to initially position the Aria CABG device as a preferable
clinical option for patients who lack suitable native vessels. We believe that
more clinician education will be required for the Aria CABG device in terms of
patient indications, product use, and product capabilities. We may accomplish
this education by sponsoring educational programs, video educational tools, and
scientific lecture programs. We also anticipate that we will need a larger
domestic sales force structure to effectively market the Aria CABG device.
MANUFACTURING
We manufacture all of our products at our 62,000 square foot leased
facility in Pleasanton, California. This facility was inspected by the FDA under
cGMP regulation prior to entering into production and has received the
International Standards Organization ("ISO") 9001 certification.
Our manufacturing processes for the VAD System consist of the assembly of
standard and custom component parts, including blood-contacting components
fabricated from our proprietary biomaterials, and the testing of completed
products. We rely on single sources of supply for several components of the VAD
System. We are aware of alternative suppliers for all single-sourced items other
than the mechanical valves. In October 1997, we executed a four-year supply
agreement with Arrow International Inc. for the mechanical valves for the VAD
System.
PATENTS AND PROPRIETARY RIGHTS
We seek to patent certain aspects of our technology. We hold, or have
exclusive rights to, 20 U.S. patents and have one U.S. patent application
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 other than one patent pertaining to the TLC-II. We do
not believe that this lack of patent protection will have a material adverse
effect on our ability to sell the VAD System because of the lengthy regulatory
period required to obtain approval of a ventricular assist device. We are not
aware of any ventricular assist devices that are based on our product design
currently approved by the FDA or undergoing clinical trials. Our proprietary
biomaterials technology are covered by eight patents. Four of these were sold to
Th. Goldschmidt AG ("Goldschmidt"), a German chemical manufacturer, in 1989, but
we have retained worldwide, royalty-free, exclusive rights to these patents for
most medical applications. Our vascular graft products are covered by three
manufacturing process patents. Four of our 20 patents are for products which are
not commercially pertinent to us today.
We hold, or have exclusive rights to, 38 international patents, with 18
applications currently in prosecution. All 38 international patents apply to
products for which patents have been applied for or issued under U.S. patent
law. We license 12 biomaterial patents, valid in eight countries, from
Goldschmidt. Our three graft patents are valid in Canada, France and the U.K.,
and one of these patents is valid in Japan. Of the 18 currently pending patent
applications, all are related to biomaterials.
The validity of any of our patents may be challenged by others, and we
could encounter legal and financial difficulties in enforcing our patent rights
against alleged infringers. In addition, others could develop technologies or
obtain patents which would render our patents obsolete. Although we do not
believe patents are the sole determinant in the commercial success of our
products, the loss of a significant percentage of our patents or the patents
relating to our graft products could have a material adverse effect on our
business.
We have developed technical knowledge which, although nonpatentable, we
consider to be significant in enabling us to compete. However, the proprietary
nature of such knowledge may be
35
<PAGE> 39
difficult to protect. We have entered into an agreement with each key employee
prohibiting such employee from disclosing any confidential information or trade
secrets. In addition, these agreements provide that any inventions or
discoveries relating to our business by these individuals will be assigned to us
and become our sole property.
Claims by competitors and other third parties that our products allegedly
infringe the patent rights of others could have a material adverse effect on our
business. The medical device industry is characterized by frequent and
substantial intellectual property litigation. The cardiovascular device market
is characterized by extensive patent and other intellectual property claims.
Intellectual property litigation is complex and expensive and the outcome of
this litigation is difficult to predict. Any future litigation, regardless of
outcome, could result in substantial expense and significant diversion of the
efforts of our technical and management personnel. An adverse determination in
any such proceeding could subject us to significant liabilities or require us to
seek licenses from third parties or pay royalties that may be substantial.
Furthermore, we cannot assure you that necessary licenses would be available on
satisfactory terms, or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent us from manufacturing or selling certain of our products, any of
which could have a material adverse effect on our business.
COMPETITION
Principal competitors of the VAD System include:
- Thermo Cardiosystems Inc., and Novacor, a division of Edwards Life
Sciences (formerly Baxter International, Inc.), which manufacture and
market implantable left ventricular assist devices approved only for
bridge to heart transplant in the United States; and
- ABIOMED, Inc., which manufactures and markets an FDA-cleared
biventricular assist device for temporary circulatory support of patients
in post heart surgery shock and other recovery indications.
We believe that the principal competitive factors in the ventricular assist
device market are patient outcomes, product performance, size and portability,
quality, cost-effectiveness and customer service. We believe that our principal
competitive advantages are:
- the VAD System can provide left, right or biventricular support;
- the smaller size and placement of the system outside the body, which
allows its use with a greater range of patients than competitive devices;
- the greater range of cannulation options available; and
- the quality of our biomaterials.
Although we believe that these attributes of the VAD System offer certain
advantages over existing ventricular assist devices, we expect our current
competitors to defend their market positions vigorously.
Our principal competitors in the vascular access graft market are W.R.
Gore, Inc., C.R. Bard, Boston Scientific/Vascular, and Baxter Corporation, who
manufacture and market ePTFE grafts worldwide. Smaller competitors include
CardioTech International, Inc., which manufactures and markets a polyurethane
graft that is available for sale outside of the United States. Finally, Possis
Medical, Inc. manufactures a self-sealing silicone rubber graft marketed with
limited indications in the U.S. through Horizon Medical Products, Inc.
36
<PAGE> 40
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 we do.
One or more of these or other companies could design and develop products that
compete directly with our products, in which case we would face intense
competition. Moreover, certain academic institutions, government agencies and
other research organizations are conducting research in areas in which we are
working. These institutions are becoming increasingly aware of the commercial
value of their findings and are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for use of technology
that they have developed. These institutions may also market competitive
commercial products on their own or through joint ventures and will compete with
us in recruiting highly qualified scientific personnel.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of our
current and future products and in our ongoing product research and development
activities. All of our proposed products will require regulatory approval prior
to commercialization. In particular, medical devices are subject to rigorous
preclinical testing as a condition of approval by the FDA and by similar
authorities in foreign countries.
U.S. REGULATIONS
In the United States, the FDA regulates the manufacture, distribution and
promotion of medical devices pursuant to the Federal Food, Drug, and Cosmetic
Act and the regulations promulgated thereunder (the "FDC Act and Regulations").
The VAD System, TLC-II, IVAD and Vectra and Aria graft products are, or will be
regulated as medical devices. To obtain FDA approval to market medical devices
similar to those under development, the FDA requires proof of safety and
efficacy in human clinical trials performed under an IDE. An IDE application
must contain 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 trials must be conducted in compliance with
FDA regulations. The results obtained from these trials, if satisfactory, are
accumulated and submitted to the FDA in support of either a PMA application or a
510(k) premarket notification. Premarket approval from the FDA is required
before commercial distribution of devices similar to those under development by
the Company is permitted in the United States.
The PMA application must be supported by extensive data, including
preclinical and human clinical data, to prove the safety and efficacy of the
device. By regulation, the FDA has 180 days to review a PMA application and
during that time an advisory committee may evaluate the application and provide
recommendations to the FDA. While the FDA has approved PMA applications within
the allotted time period, reviews more often occur over a significantly
protracted period, usually 18 to 36 months, and a number of devices have never
been cleared for marketing. This is a lengthy and expensive process and there
can be no assurance that such FDA approval will be obtained.
Under the FDA's requirements, if a manufacturer can establish that a newly
developed device is "substantially equivalent" to a legally marketed predicate
device, the manufacturer may seek marketing clearance from the FDA to market the
device by filing a 510(k) premarket notification with the FDA. 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
37
<PAGE> 41
require that the manufacturer submit a PMA application that must be approved by
the FDA prior to marketing the device in the United States.
Both a 510(k) and a PMA, if approved, may include significant limitations
on the indicated uses for which a product may be marketed. FDA enforcement
policy prohibits the promotion of approved medical devices for unapproved uses.
In addition, product approvals can be withdrawn for failure to comply with
regulatory requirements or the occurrence of unforeseen problems following
initial marketing.
In December 1995, we received FDA approval of our PMA for the bridge to
heart transplant indication for the VAD System and in May 1998 received FDA
approval to use the VAD System in the post-heart surgery recovery indication. In
1999 we notified the FDA that we put a voluntary hold on further enrollment in
U.S. clinical trials for the TLC-II and on shipments of the device to new
centers in Europe, pending completion of a component upgrade. We have completed
the testing of that component and have filed an IDE amendment seeking approval
of the component upgrade. Following approval of the IDE amendment, we intend to
resume patient enrollment in the U.S. clinical trial. We expect to recommence
shipment of this device to Europe in the first half of 2000.
We received approval for an IDE for our Vectra in mid-1998 and believe that
we will be able to file a 510(k) after the clinical data is gathered in 2000. We
have begun clinical trials with our Aria graft outside the United States. We
submitted an IDE for the Aria to the FDA in December 1999 and received questions
from the FDA on this IDE in late January 2000. We responded to these questions
in an amendment to our IDE which we submitted in early April 2000. The FDA must
approve this amended IDE before we can begin clinical trials in the United
States.
The approval process for each of our products is expensive and time
consuming and we cannot assure you that any regulatory agency will grant its
approval. Our inability to obtain, or delays in obtaining, such approval would
adversely affect our ability to commence marketing therapeutic applications of
our products. We cannot assure you that we will have sufficient resources to
complete the required testing and regulatory review processes. Furthermore, we
are unable to predict the extent of adverse governmental regulation which might
arise from future U.S. or foreign legislative or administrative action.
In addition, any products distributed pursuant to the above authorizations
are subject to pervasive and continuing regulation by the FDA. Products must be
manufactured in registered establishments and must be manufactured in accordance
with cGMP regulations and adverse events must be reported to the FDA. Labeling
and promotional activities are subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. The failure to comply with the FDA's
regulations can result in enforcement action, including seizure, injunction,
prosecution, civil penalties, recall and suspension of FDA approval. The export
of devices also is subject to regulation in certain instances.
On March 13, we received a warning letter from the FDA stating that our
manufacturing facility did not comply with cGMPs and FDA reporting requirements
in several respects. We believe that we will be able to respond to the FDA
satisfactorily without a material adverse affect on our business.
INTERNATIONAL REGULATIONS
We are also subject to regulation in each of the foreign countries in which
we sell products with regard to product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. Many of the regulations applicable to our products in such
countries are similar to those of the FDA. The national health or social
security organizations of certain countries require our products to be qualified
before they can be marketed in those countries.
38
<PAGE> 42
In order to be positioned for access to European and other international
markets, we sought and obtained certification under the ISO 9000 Series of
Standards. ISO 9000 is a set of integrated requirements, which when implemented,
form the foundation and framework for an effective quality management system.
These standards were developed and published by the ISO, a worldwide federation
of national bodies, founded in Geneva, Switzerland in 1946. ISO has over 92
member countries. ISO certification is widely regarded as essential to enter
Western European markets. We obtained certification and were registered as an
ISO 9002 compliant company in January 1995. Commencing in mid-1998, all
companies are required to obtain CE Marks for medical devices sold or
distributed in the European Community. The CE Mark is an international symbol of
quality. With it, medical devices can be distributed within the European
Community, which is comprised of fifteen European countries representing a
population of over 360 million people. A prerequisite for obtaining authority to
CE Mark products is to achieve full quality system certification in accordance
with ISO 9001 and EN 46001. These are quality standards that cover design,
production, installation and servicing of medical devices. The Company has its
ISO 9001 and EN 46001 certification and has authority to CE Mark the VAD System,
the TLC-II and the Vectra. We are also certified to be in compliance with the
requirements of the European Medical Device Directive, another prerequisite for
applying the CE Mark.
OTHER REGULATIONS
We are also subject to various federal, state and local laws and
regulations relating to such matters as safe working conditions, laboratory and
manufacturing practices and the use, handling and disposal of hazardous or
potentially hazardous substances used in connection with our research and
development work. Specifically, the manufacture of our biomaterials is subject
to compliance with federal environmental regulations and by various state and
local agencies. Although we believe we are in compliance with these laws and
regulations in all material respects, we cannot assure you that we will not be
required to incur significant costs to comply with environmental laws or
regulations in the future.
THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT
Our products are purchased primarily by hospitals and other users, which
then bill various third party payors for the services provided to the patients.
These payors, which include Medicare, Medicaid, private health insurance
companies and managed care organizations, reimburse part or all of the costs and
fees associated with the procedures performed with these devices.
Third party payors are increasingly challenging the prices charged for
medical products and services and may deny reimbursement if they determine that
a device was not used in accordance with cost-effective treatment methods as
determined by the payor, was experimental or was used for an unapproved
application. To date, some private insurers and Medicare and Medicaid have
determined to reimburse the costs of the VAD System. Changes in reimbursement
policies and practices of third party payors could have a material adverse
impact on sales of our products.
EMPLOYEES
As of February 26, 2000, we had 166 full-time employees, 65 of whom worked
in manufacturing, 26 in engineering, 21 in quality control and regulatory
affairs, 29 in marketing and sales support, 10 in administration and finance and
15 in other support functions (including personnel, management information,
purchasing and facility). None of our employees is covered by a collective
bargaining agreement. We consider relations with our employees to be good.
RESEARCH AND DEVELOPMENT
Our research and development expenses in 1997, 1998 and 1999 were $4.6
million, $5.1 million and $5.8 million.
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<PAGE> 43
FACILITIES
We occupy leased facilities in Pleasanton, California totaling
approximately 62,000 square feet. The manufacturing areas have been inspected,
approved, and licensed by the FDA and the State of California Department of
Health Services, Food and Drug Section for the manufacture of medical devices.
We also have small leased facilities in the United Kingdom. We believe our
facilities will be sufficient to meet our needs for the next two years and that
additional space will be available at a reasonable price to satisfy space needs
thereafter.
LITIGATION
The Company is not party to any material legal proceedings.
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<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors at March 10, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
D. Keith Grossman................... 39 President, Chief Executive Officer and Director
Thomas E. Burnett, Jr. ............. 36 Senior Vice President and Chief Operating Officer
Cheryl D. Hess...................... 52 Vice President -- Finance, Chief Financial
Officer
and Secretary
David J. Farrar, Ph.D. ............. 52 Vice President -- Research and Development
Donald A. Middlebrook............... 48 Vice President -- Regulatory Affairs/Quality
Assurance
Joseph G. Sharpe.................... 40 Vice President -- Operations
Howard E. Chase..................... 63 Director
J. Daniel Cole...................... 53 Director
J. Donald Hill, M.D. ............... 63 Director and Chairman of the Board
William M. Hitchcock................ 60 Director
George W. Holbrook, Jr. ............ 68 Director
Daniel M. Mulvena................... 51 Director
</TABLE>
D. KEITH GROSSMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR, joined
our company as President and Chief Executive Officer in January 1996. He was
elected to the Board of Directors in February 1996. Prior to joining us, Mr.
Grossman was a Division President of Major Pharmaceuticals, Inc., from June 1992
to September 1995, at which time it was sold. From July 1988 to June 1992, Mr.
Grossman served as the Vice President of Sales and Marketing for Calcitek, Inc.,
a manufacturer of implantable medical devices, and division of Sulzermedica
(formerly Intermedics, Inc.). Prior to 1988, Mr. Grossman held various other
sales and marketing management positions within the McGaw Laboratories Division
of American Hospital Supply Corporation.
THOMAS E. BURNETT, JR., SENIOR VICE PRESIDENT, CHIEF OPERATING OFFICER,
joined our company as Vice President -- Sales and Marketing in August 1996 and
was promoted to his current position in December 1999. Prior to joining us, Mr.
Burnett was Vice President of Sales and Marketing at Calcitek, Inc. from June
1992 to August 1996, where he was responsible for global sales and marketing
which included a direct domestic sales force and an international network
encompassing 30 countries as well as new business development, strategic and
operational planning.
CHERYL D. HESS, VICE PRESIDENT -- FINANCE, CHIEF FINANCIAL OFFICER AND
SECRETARY, joined our company as Vice President -- Finance and Chief Financial
Officer in December 1983 and became Secretary in 1994. Prior to joining us, Ms.
Hess was a manager with the public accounting firm of Deloitte & Touche LLP,
where she specialized in audit and financial advisory services for
entrepreneurial, rapidly-growing, high technology companies. Ms. Hess is
responsible for the direction of all financial management, control and reporting
activities and a portion of administrative and operational activities. Ms. Hess
is a Certified Public Accountant.
DAVID J. FARRAR, PH.D., VICE PRESIDENT -- RESEARCH AND DEVELOPMENT, joined
our company as Program Manager of the VAD System in January 1980 and became Vice
President -- Circulatory Support Products in 1988, and Vice
President -- Research & Development in 1996. In addition, Dr. Farrar has a
research appointment in the Department of Cardiac Surgery at the California
Pacific Medical Center of San Francisco. Dr. Farrar has over 20 years of
research experience in the cardiovascular and medical device industry.
DONALD A. MIDDLEBROOK, VICE PRESIDENT -- REGULATORY AFFAIRS/QUALITY
ASSURANCE, joined our company as Vice President -- Regulatory Affairs/Quality
Assurance in September 1996. Before
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<PAGE> 45
joining our company, he held the position of Senior Director, Global Regulatory
Affairs and Assurance for Chiron Vision Corporation, a manufacturer of
implantable ophthalmic devices and surgical equipment. Prior to that, Mr.
Middlebrook spent fifteen years with Baxter International in a number of
positions, including Vice President of Regulatory Affairs and Quality Assurance
for the CardioVascular Group, a producer of a wide range of cardiopulmonary,
critical care, vascular and cardiovascular products.
JOSEPH G. SHARPE, VICE PRESIDENT -- OPERATIONS, joined our company as Vice
President -- Operations in September 1997. Prior to joining us, Mr. Sharpe was
Director of Operations for the IV Systems Division of Baxter International, Inc.
from 1992 to September 1997. Prior thereto, Mr. Sharpe held a number of other
positions at Baxter International, Inc. including Director of Engineering of the
Pharmaseal Division, and Honeywell Information Systems.
HOWARD E. CHASE became a director of our company in November 1986. Mr.
Chase has been President and CEO of Carret Holdings, Inc. (formerly Matrix
Global Investments, Inc.) since June 1999. Mr. Chase served as President and CEO
of Trident Rowan Group, Inc. ("TRGI") from September 1995 to March 1998 and
Chairman of the Board of TRGI from March 1998 to December 1999. From 1984 to
August 1995, Mr. Chase was a partner in the law firm of Morrison Cohen Singer &
Weinstein, LLP in New York City. He acted as an advisor and as a special counsel
to our company from 1979 to 1995. Mr. Chase also serves as a member of the board
of directors of Trident Rowan Group, Inc. and Moto Guzzi Corporation.
J. DANIEL COLE became a director of our company in June 1997. Mr. Cole has
been a general partner of the Spray Venture Fund of Boston since March 1997. Mr.
Cole was President and Chief Operating Officer of SciMed Life Systems
Corporation from March 1993 to March 1995, and Senior Vice President and Group
President of Boston Scientific Corporation's vascular business from March 1995
to March 1997. He has also held a number of senior executive positions at Baxter
Healthcare Corporation, including President of its Edwards Less Invasive Surgery
Division and its Critical Care Division. Mr. Cole also serves as a member of the
board of directors of SurVivaLink.
J. DONALD HILL, M.D. has been a director of our company since its inception
and is one of our significant shareholders. In January 1995, Dr. Hill became
Chairman of the Board of Directors. Dr. Hill is the director of the heart
transplant program at California Pacific Medical Center in San Francisco where
he has been a practicing cardiovascular surgeon since 1966.
WILLIAM M. HITCHCOCK became a director of our company in September 1996. In
December 1996, Mr. Hitchcock became President and director of Avalon Financial,
Inc. From May 1992 to December 1996, Mr. Hitchcock was President of Plains
Resources International Inc., a wholly owned subsidiary of Plains Resources Inc.
Mr. Hitchcock also serves as a member of the board of directors of Plains
Resources Inc., Oshman's Sporting Goods, Inc. and Maxx Petroleum Ltd.
GEORGE W. HOLBROOK, JR. became a director of our company in June 1995.
Since 1984 Mr. Holbrook has been the Managing Partner of Bradley Resources
Company, a private investment partnership. Mr. Holbrook is also a director of
Merrill Lynch Institutional Fund, Inc., and several associated funds.
DANIEL M. MULVENA became a director of our company in May 1997. Mr. Mulvena
is the founder and owner of Commodore Associates, a consulting company. Mr.
Mulvena was Group Vice President of the Cardiac/Cardiology Division and a member
of the operating committee for Boston Scientific Corporation from February 1992
to May 1995. Prior to that, he was the President and Chief Executive Officer and
Chairman of Lithox Systems, Inc. Prior to that, Mr. Mulvena held a number of
executive positions, including President of the Implants Division and President
of the Cardiosurgery Division, at C.R. Bard, Inc. Mr. Mulvena also serves as a
member of the board of directors of EchoCath, Inc., Magna-Lab Inc., Zoll Medical
Corporation and Cambridge Heart, Inc.
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<PAGE> 46
PRINCIPAL SHAREHOLDERS AND SELLING SHAREHOLDER
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 10, 2000:
- by each of our directors;
- by each named executive officer;
- by all directors and executive officers as a group;
- by each person who is known by us to own beneficially more than 5% of our
common stock; and
- by the selling shareholder.
<TABLE>
<CAPTION>
OWNERSHIP BEFORE OWNERSHIP AFTER
OFFERING(2) OFFERING(2)
----------------------------- -------------------------------
NUMBER OF PERCENT OF NUMBER NUMBER OF PERCENT OF
SHARES SHARES OF SHARES SHARES
BENEFICIALLY BENEFICIALLY SHARES BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS(1) OWNED OWNED OFFERED OWNED OWNED
------------------- ------------ -------------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Gambro, Inc. (formerly COBE
Laboratories, Inc.)................. 3,708,077 18.0% 500,000 3,208,077 14.5%
Peter R. Kellogg...................... 2,328,450 11.3 2,328,450 10.5
State of Wisconsin Investment Board... 1,549,800 7.5 1,549,800 7.0
J. Donald Hill(3)..................... 1,421,953 6.9 1,421,953 6.4
Sulzer Medica USA Inc................. 1,074,074 5.2 1,074,074 4.9
George W. Holbrook, Jr.(4)............ 461,392 2.2 461,392 2.1
Bradley Resources Company(4).......... 433,059 2.1 433,059 2.0
James McGoogan(4)..................... 433,059 2.1 433,059 2.0
William M. Hitchcock(5)............... 382,073 1.9 382,073 1.7
D. Keith Grossman(6).................. 254,833 1.2 254,833 1.1
Howard E. Chase(7).................... 110,555 * 110,555 *
David J. Farrar(8).................... 103,314 * 103,314 *
Donald A. Middlebrook(9).............. 89,125 * 89,125 *
Cheryl D. Hess(10).................... 74,506 * 74,506 *
Thomas E. Burnett, Jr.(11)............ 73,125 * 73,125 *
J. Daniel Cole(12).................... 70,000 * 70,000 *
Daniel M. Mulvena(13)................. 30,000 * 30,000 *
Directors and Executive Officers as a
Group (12 persons)(14).............. 3,139,001 14.6% 3,139,001 13.6%
</TABLE>
- -------------------------
* Less than one percent
(1) The address of the persons set forth above is our address appearing in
"Prospectus Summary."
(2) Applicable percentage ownership before the offering for each shareholder is
based on 20,623,052 shares of common stock outstanding at March 10, 2000,
together with applicable options for such shareholder. Applicable
percentage ownership after the offering for each shareholder is based on an
estimated 22,123,052 shares of common stock outstanding after the offering,
together with applicable options for such shareholders. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission, and includes voting and investment power with respect
to the shares. Beneficial ownership also includes shares of stock subject
to options and warrants exercisable or convertible within 60 days of March
10, 2000. Shares of common stock subject to outstanding options are deemed
outstanding for computing the percentage of ownership of the
43
<PAGE> 47
person holding such options, but are not deemed outstanding for computing
the percentage ownership of any other person. Except pursuant to applicable
community property laws or as indicated in the footnotes to this table, to
our knowledge, each shareholder identified in the table possesses sole
voting and investment power with respect to all shares of common stock
shown as beneficially owned by such shareholder.
(3) Includes 110,555 shares issuable upon exercise of options exercisable
within 60 days of March 10, 2000.
(4) Bradley Resources Company is an investment partnership which owns 433,059
shares. George W. Holbrook, Jr., a director of our company, is a general
partner of Bradley Resources Company and is deemed to share beneficial
ownership of such shares with Mr. James McGoogan, a general partner of
Bradley Resources Company. Includes, in Mr. Holbrook's number only, 28,333
shares issuable upon exercise of options within 60 days of March 10, 2000.
(5) Includes 28,333 shares issuable upon exercise of options exercisable within
60 days of March 10, 2000.
(6) Includes 245,833 shares issuable upon exercise of options exercisable
within 60 days of March 10, 2000.
(7) Includes 110,555 shares issuable upon exercise of options exercisable
within 60 days of March 10, 2000.
(8) Includes 78,958 shares issuable upon exercise of options exercisable within
60 days of March 10, 2000.
(9) Includes 88,125 shares issuable upon exercise of options exercisable within
60 days of March 10, 2000.
(10) Includes 17,708 shares issuable upon exercise of options exercisable within
60 days of March 10, 2000.
(11) Includes 69,125 shares issuable upon exercise of options exercisable within
60 days of March 10, 2000.
(12) Includes 30,000 shares issuable upon exercise of options exercisable within
60 days of March 10, 2000.
(13) Includes 30,000 shares issuable upon exercise of options exercisable within
60 days of March 10, 2000.
(14) Includes 890,650 shares issuable upon exercise of options exercisable
within 60 days of March 10, 2000.
44
<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common
stock, no par value, and 2,500,000 shares of preferred stock, no par value.
COMMON STOCK
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by our shareholders. 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 our liquidation, dissolution or winding up, 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 are, and the shares offered by us in this
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 we may designated and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, without shareholder approval, to
issue up to 2,500,000 shares of preferred stock in one or more series, 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 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. At the closing of the offering, no shares of
preferred stock will be outstanding and we currently have no plans to issue any
shares of preferred stock.
WARRANTS
In July 1996, we sold, through an underwritten public offering, 1,644,000
shares of common stock at $12.00 per share. In connection with that offering, we
issued to Vector Securities International, Inc. and Cruttenden Roth Incorporated
five-year warrants to purchase 164,400 shares of 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.
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. This 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.
We have also included in our Articles of Incorporation provisions to
eliminate the personal liability of our directors for monetary damages resulting
from breaches of their fiduciary duty to the
45
<PAGE> 49
extent permitted by the California Corporations Code and to indemnify our
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 our common stock is American
Securities Transfer and Trust, Inc.
46
<PAGE> 50
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below, for whom Lehman Brothers Inc., Bear, Stearns & Co. Inc., Adams,
Harkness & Hill, Inc. and Fidelity Capital Markets, a division of National
Financial Services Corporation, are acting as representatives, has agreed to
purchase from us and the selling shareholder the respective number of shares of
common stock shown opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Lehman Brothers Inc......................................... 1,044,000
Bear, Stearns & Co. Inc..................................... 540,000
Adams, Harkness & Hill, Inc................................. 216,000
Fidelity Capital Markets, a division of
National Financial Services Corporation................... 50,000
A.G. Edwards & Sons, Inc. .................................. 50,000
Oscar Gruss & Son, Incorporated............................. 50,000
Sands Brothers & Co. Ltd. .................................. 50,000
---------
Total............................................. 2,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of the common stock depend on the satisfaction of the conditions
contained in the underwriting agreement. It also provides that, if any of the
shares of common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock that the underwriters have
agreed to purchase under the underwriting agreement must be purchased. The
conditions contained in the underwriting agreement include the requirements
that: the representations and warranties made by us and the selling shareholder
to the underwriters are true; there is no material adverse change in our
condition or in the financial markets; and we and the selling shareholder
deliver to the underwriters customary closing documents.
The following table shows the underwriting fees to be paid to the
underwriters by us and the selling shareholder in connection with this offering.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock. This
underwriting fee is the difference between the public offering price and the
amount the underwriters pay to purchase the shares.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Fee Per Share.......................................... $ 0.57 $ 0.57
Total.................................................. $1,140,000 $1,311,000
</TABLE>
We and the selling shareholder have been advised by the representatives
that the underwriters propose to offer the common stock directly to the public
at the public offering price set forth on the cover page of this prospectus and
to dealers (who may include the underwriters) at this public offering price less
a selling concession not in excess of $0.34 per share. The underwriters may
allow, and the dealer may reallow, a concession not in excess of $0.10 per share
to brokers and dealers. After the offering, the representatives may change the
offering price and other selling terms.
We and the selling shareholder have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments that may be required to be made in respect thereof.
47
<PAGE> 51
We and the selling shareholder have granted the underwriters an option to
purchase, on a pro rata basis, up to an aggregate of 300,000 additional shares
of common stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus exercisable to cover
over-allotments. Such option may be exercised at any time until 30 days after
the date of the underwriting agreement. If this option is exercised, each
underwriter will be committed, subject to satisfaction of the conditions
specified in the underwriting agreement, to purchase a number of additional
shares of common stock proportionate to such underwriter's initial commitment as
indicated in the preceding table, and we and the selling shareholder will be
obligated, pursuant to such option, to sell such shares to the underwriters.
Our company, our directors, our named executive officers, the selling
shareholder and two of our other major shareholders have agreed, for a period of
90 days from completion of this offering, not to directly or indirectly, offer,
sell or otherwise dispose of any shares of common stock or any securities
convertible into or exchangeable or exercisable for any such shares of common
stock or enter into any derivative transaction with similar effect as a sale of
common stock, without the prior written consent of Lehman Brothers Inc. The
restrictions described in this paragraph do not apply to the sale of common
stock to the underwriters.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic distribution of information through the Internet,
intranet and other proprietary electronic technology.
Our common stock is quoted on the Nasdaq National market under the symbol
"THOR."
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters to
bid for and purchase shares of common stock. As an exception to these rules, the
representatives are permitted to engage in transactions that stabilize the price
of common stock. These transactions may consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering. This means that they may sell more shares than are
set forth on the cover page of this prospectus. If the underwriters create a
short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representative also may elect to
reduce any short position by exercising all or part of the over-allotment
option.
The representative also may impose a penalty bid on underwriters. This
means that, if a representative purchases shares of common stock in the open
market to reduce the underwriters' short position or to stabilize the price of
the common stock, it may reclaim the amount of the selling concession from the
underwriters that sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we, any of the underwriters or the selling shareholder make any
representation or prediction as to the direction or magnitude of any effect that
the transactions described may have on the price of the common stock. In
addition, neither we, any of the underwriters or the selling shareholder makes
any representation that the representatives will engage in these transactions or
that these transactions, once commenced, will not be discontinued without
notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
48
<PAGE> 52
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the public offering price shown on the
cover page of this prospectus.
As permitted by Rule 103 of Regulation M promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, the underwriters,
if any, that are market makers, referred to as passive market makers, in the
common stock, may make bids for or purchases of the common stock on the Nasdaq
National Market System until such time, if any, when a stabilizing bid for such
securities has been made. Rule 103 generally provides that:
- a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months (or any 60 consecutive days ending
within 10 days) immediately preceding the filing date of the registration
statement of which this prospectus forms a part;
- a passive market marker may not effect transactions or display bids for
the common stock at a price that exceeds the highest independent bid for
the common stock by persons who are passive market makers; and
- bids made by passive market makers must be identified as such.
LEGAL MATTERS
Heller Ehrman White & McAuliffe LLP, Menlo Park, California will pass on
the validity of the common stock offered by this prospectus for us. Clifford
Chance Rogers & Wells LLP, New York, New York, will pass upon certain legal
matters in connection with this offering for the underwriters.
EXPERTS
The financial statements included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and are included 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 -- Our
inability to protect our proprietary technologies could harm our competitive
position," "Business -- Thoratec Biomaterials -- Thoralon," "Business -- Patents
and Proprietary Rights" and the statements in the first paragraph under the
caption "Business -- Thoratec Vascular Graft Products" have been reviewed by
Fish & Richardson P.C., our outside intellectual property counsel, as experts on
such matters, and are included herein in reliance upon that review and approval.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference room at 450 Fifth Street, NW, Washington, D.C., 20549,
and at the SEC's public reference rooms in Chicago, Illinois and New York, New
York. Please call the SEC at 1-800-SEC-0330 for further information concerning
the public reference rooms. Our SEC filings are also available to the public on
the SEC's Website at http://www.sec.gov.
49
<PAGE> 53
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act of 1933 with respect to the common stock offered in connection
with this prospectus. This prospectus does not contain all of the information
set forth in the registration statement. We have omitted certain parts of the
registration statement in accordance with the rules and regulations of the SEC.
For further information with respect to us and the common stock, you should
refer to the registration statement. Statements contained in this prospectus as
to the contents of any contract or other document are not necessarily complete
and, in each instance, you should refer to the copy of such contract or document
filed as an exhibit to or incorporated by reference in the registration
statement. Each statement as to the contents of such contract or document is
qualified in all respects by such reference. You may obtain copies of the
registration statement from the SEC's principal office in Washington, D.C. upon
payment of the fees prescribed by the SEC, or you may examine the registration
statement without charge at the offices of the SEC described above.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934.
(1) Annual Report on Form 10-K, and all amendments thereto, for the
fiscal year ended January 1, 2000;
(2) Proxy Statement to be used for our annual meeting of stockholders
to be held on May 12, 2000; and
(3) the description of our common stock contained in our registration
statement on Form 8-A filed with the SEC on May 18, 1981.
You may request a copy of these filings at no cost, by writing or
telephoning at the following address:
Thoratec Laboratories Corporation
Investor Relations
6035 Stoneridge Drive
Pleasanton, California 94588
(925) 847-8600
50
<PAGE> 54
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Comprehensive Loss............... F-5
Consolidated Statements of Shareholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 55
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 January 1, 2000
and January 2, 1999, and the related consolidated statements of operations,
comprehensive loss, shareholders' equity and cash flows for the fiscal years
ended January 1, 2000, January 2, 1999, and January 3, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 Thoratec Laboratories Corporation
and Subsidiary as of January 1, 2000 and January 2, 1999 and the results of
their operations and their cash flows for the fiscal years ended January 1,
2000, January 2, 1999 and January 3, 1998 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
San Francisco, California
February 18, 2000
F-2
<PAGE> 56
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FISCAL YEAR END
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 2,712,686 $ 1,696,522
Short-term investments available-for-sale (Note 3)....... 2,032,107 276,464
Receivables, net of allowance for doubtful accounts of
$32,795 in 1999 and $47,591 in 1998 (Note 9).......... 4,141,854 5,453,187
Inventories (Note 4)..................................... 5,290,745 6,611,487
Prepaid expenses and other............................... 404,737 425,317
------------ ------------
Total current assets................................ 14,582,129 14,462,977
Equipment and Improvements -- Net (Notes 5 and 6).......... 9,625,390 9,560,814
Other Assets (Note 6)...................................... 1,000,898 1,036,647
------------ ------------
Total Assets........................................ $ 25,208,417 $ 25,060,438
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable......................................... $ 1,307,768 $ 1,703,089
Accrued compensation..................................... 1,613,334 1,466,147
Deferred distributor revenue (Note 2 )................... -- 284,765
Other.................................................... 409,958 475,870
------------ ------------
Total current liabilities................................ 3,331,060 3,929,871
Long-term deferred distributor revenue (Note 2).......... -- 854,294
------------ ------------
Total liabilities................................... 3,331,060 4,784,165
------------ ------------
Commitments (Notes 6, 9 and 12)
Shareholders' Equity: (Notes 7, 8, and 9)
Preferred shares -- none issued and outstanding.......... -- --
Common shares, 100,000,000 authorized; issued and
outstanding: 20,466,326 in 1999; and 20,422,952 in
1998.................................................. 72,810,450 72,911,638
Additional capital....................................... 2,482,229 2,541,223
Accumulated deficit...................................... (53,402,106) (55,191,216)
Accumulated other comprehensive income (loss):
Unrealized gain on investments -- net................. 8 --
Cumulative translation adjustment..................... (13,224) 14,628
------------ ------------
Total accumulated other comprehensive income (loss)...... (13,216) 14,628
------------ ------------
Total shareholders' equity.......................... 21,877,357 20,276,273
------------ ------------
Total Liabilities and Shareholders' Equity.......... $ 25,208,417 $ 25,060,438
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 57
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Product sales (Notes 9 and 11)................. $ 9,441,302 $16,319,531 $22,507,884
Cost of product sales.......................... 4,005,242 6,503,986 9,738,946
----------- ----------- -----------
Gross profit................................... 5,436,060 9,815,545 12,768,938
----------- ----------- -----------
Operating Expenses:
Research and development..................... 4,582,745 5,096,110 5,792,635
Selling, general and administrative.......... 6,009,043 7,701,372 9,457,308
----------- ----------- -----------
Total operating expenses.................. 10,591,788 12,797,482 15,249,943
----------- ----------- -----------
Other operating income (Notes 1 and 2)......... -- -- 284,764
----------- ----------- -----------
Loss from operations........................... (5,155,728) (2,981,937) (2,196,241)
Interest and other income, net................. 753,369 661,385 407,131
----------- ----------- -----------
Net loss....................................... $(4,402,359) $(2,320,552) $(1,789,110)
=========== =========== ===========
Basic and diluted loss per share (Note 1)...... $ (0.24) $ (0.11) $ (0.09)
=========== =========== ===========
Shares used to compute basic and diluted loss
per share.................................... 18,360,336 20,339,816 20,445,837
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 58
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net Loss........................................... $(4,402,359) $(2,320,552) $(1,789,110)
Other comprehensive income (loss):
Unrealized gain (loss) on investments............ (13,190) 7,547 (8)
Foreign currency translation adjustments......... (42,384) 16,742 27,852
----------- ----------- -----------
Comprehensive Loss................................. $(4,457,933) $(2,296,263) $(1,761,266)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 59
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED OTHER TOTAL
COMMON ADDITIONAL ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL DEFICIT INCOME (LOSS) EQUITY
----------- ---------- ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, FISCAL YEAR ENDED 1996... $63,519,139 $2,471,877 $(46,679,195) $ 18,069 $19,329,890
Exercise of 241,937 common stock
options for cash and exchange
for 11,609 shares of common
stock which were canceled....... 335,681 335,681
Issuance of 2,000,000 shares of
common stock for cash........... 8,809,287 8,809,287
Issuance of common stock options
for nonemployee services........ 10,352 10,352
Other comprehensive loss:
Unrealized loss on
investments................... (13,190) (13,190)
Foreign currency translation
adjustments................... (42,384) (42,384)
Net Loss.......................... (4,402,359) (4,402,359)
----------- ---------- ------------ ----------- -----------
BALANCE, FISCAL YEAR ENDED 1997... 72,664,107 2,482,229 (51,081,554) (37,505) 24,027,277
Exercise of 292,535 common stock
options for cash and exchange
for 42,028 shares of common
stock which were canceled....... 146,343 146,343
Other comprehensive income:
Unrealized gain on
investments................... 7,547 7,547
Foreign currency translation
adjustments................... 16,742 16,742
Net Loss.......................... (2,320,552) (2,320,552)
----------- ---------- ------------ ----------- -----------
BALANCE, FISCAL YEAR ENDED 1998... 72,810,450 2,482,229 (53,402,106) (13,216) 21,877,357
Exercise of 49,116 common stock
options for cash and exchange
for 5,742 shares of common stock
which were canceled............. 101,188 101,188
Issuance of common stock options
for nonemployee services........ 58,994 58,994
Other comprehensive income:
Unrealized loss on
investments................... (8) (8)
Foreign currency translation
adjustments................... 27,852 27,852
Net Loss.......................... (1,789,110) (1,789,110)
----------- ---------- ------------ ----------- -----------
BALANCE, FISCAL YEAR ENDED 1999... $72,911,638 $2,541,223 $(55,191,216) $ 14,628 $20,276,273
=========== ========== ============ =========== ===========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 60
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-----------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $ (4,402,359) $ (2,320,552) $(1,789,110)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of deferred distributor
revenue................................. -- -- (284,764)
Common stock options granted for services
(Note 8)................................ 10,352 -- 58,994
Depreciation and amortization............. 262,540 679,669 1,020,634
Changes in assets and liabilities:
Receivables............................. (448,924) (2,827,077) (1,344,479)
Prepaid expenses and other.............. (4,613) (133,525) (21,904)
Inventories............................. (1,185,453) (1,380,538) (1,349,296)
Other assets............................ (553,068) 472,389 (35,898)
Accounts payable and other
liabilities.......................... 898,215 36,469 462,939
Deferred distributor revenue............ -- -- 1,423,823
------------ ------------ -----------
Net cash used in operating
activities........................ (5,423,310) (5,473,165) (1,859,061)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments
available-for-sale........................ (85,482,972) (16,176,045) (7,829,477)
Maturities of short-term investments
available-for-sale........................ 83,400,000 18,620,000 6,354,000
Sales of short-term investments
available-for-sale........................ 7,311,109 922,148 3,231,112
Capital expenditures......................... (4,823,549) (4,800,285) (988,860)
------------ ------------ -----------
Net cash provided by (used in)
investing activities.............. 404,588 (1,434,182) 766,775
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued in public
placement -- net.......................... 8,809,288 -- --
Common stock issued upon exercise of
options................................... 335,681 146,343 101,188
------------ ------------ -----------
Net cash provided by financing
activities........................ 9,144,969 146,343 101,188
------------ ------------ -----------
Effect of exchange rate changes on cash........ (4,936) 4,379 (25,066)
------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents.................................. 4,121,311 (6,756,625) (1,016,164)
Cash and cash equivalents at beginning of
year......................................... 5,348,000 9,469,311 2,712,686
------------ ------------ -----------
Cash and cash equivalents at end of year....... $ 9,469,311 $ 2,712,686 $ 1,696,522
============ ============ ===========
NONCASH INVESTING TRANSACTIONS:
Construction costs and capital assets in
accounts payable.......................... $ 1,402,045 $ 71,828 $ 54,386
============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 61
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 year ended January 3, 1998, (fiscal
1997) includes 53 weeks. The fiscal years ended January 2, 1999, (fiscal 1998)
and January 1, 2000, (fiscal 1999) include 52 weeks.
Principles of Consolidation -- The consolidated financial statements
include Thoratec Laboratories Corporation (a California corporation) and its
subsidiary company, Thoratec Europe Limited (a corporation organized under the
laws of the United Kingdom). All significant intercompany balances and
transactions are eliminated in consolidation.
Use of Estimates -- The preparation of 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. Actual results could
differ from these estimates.
Cash and Cash Equivalents -- Cash and cash equivalents include money market
securities stated at cost, which approximates market value.
Investments -- 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. As of the end of 1999, short-term investments were comprised primarily
of corporate notes with maturity dates within 12 months of the date of
investment.
Inventories -- Inventories are stated at the lower of first-in, first-out
cost or market. The Company rents certain medical devices to customers on a
month-to-month basis and includes them in inventories, net of amortization, when
the devices are expected to be sold to customers within one year.
Equipment and Improvements -- Equipment and improvements are stated at
cost. Equipment is depreciated over estimated useful lives which range from two
to eight years. Leasehold improvements are amortized over the term of the lease
or over the estimated useful life of the improvements, whichever is shorter.
Equipment and improvements includes certain medical devices rented to customers
on a long-term basis. Amortization expense of all rental equipment included in
the Company's rental program is recognized ratably over no longer than 36
months. The straight-line method is used for depreciation and amortization.
The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of that asset may
not be recoverable. An impairment loss would be recognized when the sum of the
undiscounted future net cash flows expected to result from the use of the asset
and its eventual disposal is less than carrying amount.
Income Taxes -- 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
F-8
<PAGE> 62
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Fair Value of Financial Instruments -- The Company's financial instruments
include cash and cash equivalents, customer receivables, accounts payable, and
certain other accrued liabilities. The carrying amounts of these items are a
reasonable estimate of their fair values.
Foreign Currency Translation -- All assets and liabilities of the Company's
non-United States operations are translated into United States dollars at fiscal
period-end exchange rates, and, except as follows, the resulting translation
adjustments are included in comprehensive income. Income items are translated at
actual or average monthly rates of exchange. Exchange rate fluctuations
resulting from the period-end translation of the current portion of the
intercompany obligation of the Company's wholly-owned subsidiary into United
States dollars are recorded in the income statement as foreign currency
translation gains or losses and are included in selling, general and
administrative expenses.
Revenue Recognition and Product Warranty -- The Company recognizes product
sales upon shipment of the related product. A provision for estimated future
costs relating to warranty expense is recorded when products are shipped. The
Company rents certain medical devices to customers on a month-to-month basis.
Rentals are based on utilization and included in income as earned. Included in
product sales for 1997, 1998 and 1999 are approximately $461,000, $1,064,000 and
$1,082,000, respectively, or income earned from the rental of these certain
medical devices. Sales related to training provided to customers are recognized
as services are provided.
The Company recognizes distributor revenue ratably over the life of the
related distributor agreement. Other operating income of approximately $285,000
represents the amortized distribution revenue recognized in 1999 (see Note 2).
Accounting for Stock-Based Compensation -- The Company accounts for
stock-based awards to employees using the intrinsic value method in accordance
with Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Proforma disclosures of net earnings and earnings per share
consistent with the method of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" are included in Note 8.
Loss Per Share -- Basic earnings per share are computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. Diluted earnings per share for 1997, 1998 and 1999
exclude any effect from such securities as their inclusion would be
antidilutive, therefore, diluted earnings per share is the same as basic
earnings per share for all periods presented.
Comprehensive Loss -- Comprehensive loss, as recorded in the financial
statements, includes net loss, unrealized gains and losses on investments and
foreign currency translation adjustments.
Operating Segments -- The Company is organized as a single operating
segment, whereby the chief operating decision maker assesses the performance of
and allocates resources to the business as a whole. See Note 11.
F-9
<PAGE> 63
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recently Issued Accounting Standard -- During June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which defines derivatives, requires that all derivatives be carried
at fair value, and provides for hedging accounting when certain conditions are
met. Such Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet evaluated the impact of
the new standard.
2. FINANCIAL POSITION AND LIQUIDITY
During the first quarter of 1999, the Company entered into a five-year
distribution agreement with Guidant Corporation. Under the terms of the
agreement, Guidant receives exclusive worldwide marketing and distribution
rights to the Company's Vectra vascular access graft product line, except in
Japan. In exchange for these rights, Guidant made a $1.5 million non-refundable
payment, and will pay up to an additional $2 million when the Vectra product
line receives FDA approval for use in the U.S. Guidant also agreed to provide a
four-year, unsecured line of credit in the amount of $10 million to the Company,
which may be used, if needed, for a variety of business purposes. The Company is
recognizing the $1.5 million contract payment received in the first quarter of
1999 as revenue ratably over the five-year life of the contract. Other operating
income in 1999 included approximately $285,000 of such payment amortization.
With the proceeds available from this line of credit, the Company believes
that it has sufficient funds to increase its marketing efforts, to conduct
clinical trials on its new products, and to develop new sources of revenue,
including new products, for at least the next year. However, the Company expects
that its operating expenses will increase in future periods as the Company
expends increased amounts on product manufacturing, marketing, and research and
development of new product lines. 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:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fiscal 1998
Corporate debt instruments............ $1,025,220 $79 $ 0 $1,025,299
Federal government agency............. 1,006,879 0 (71) 1,006,808
---------- --- ---- ----------
Total.............................. $2,032,099 $79 $(71) $2,032,107
========== === ==== ==========
Fiscal 1999
Corporate debt instruments............ $ 276,464 $ 0 $ 0 $ 276,464
========== === ==== ==========
</TABLE>
The Company classifies those investments which mature in less than one year
as short-term investments.
F-10
<PAGE> 64
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Finished goods..................................... $ 2,712,543 $ 3,163,055
Work-in-process.................................... 1,456,784 2,033,194
Raw materials...................................... 1,121,418 1,415,238
----------- -----------
Total.................................... $ 5,290,745 $ 6,611,487
=========== ===========
</TABLE>
Included in finished goods for 1998 and 1999 is rental product inventory of
approximately $819,000 and $951,000, respectively.
5. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Equipment.......................................... $ 3,458,804 $ 4,568,466
Leasehold Improvements............................. 4,875,339 7,540,866
Construction in Progress........................... 4,126,612 119,473
----------- -----------
Total.................................... 12,460,755 12,228,805
Accumulated depreciation and amortization.......... (2,835,365) (2,667,991)
----------- -----------
$ 9,625,390 $ 9,560,814
=========== ===========
</TABLE>
Included in equipment for 1998 and 1999 is product used in the Company's
rental program of approximately $381,000 and $647,000 of cost, respectively, and
$120,000 and $261,000, of accumulated amortization, respectively.
6. LEASES
The Company leases offices, laboratory and manufacturing space under
noncancelable operating leases. In 1996 the Company entered into a lease
agreement for a new facility located in Pleasanton, California, which
accommodates all of the Company's manufacturing, engineering and administrative
activities. The administrative and engineering portion of the building was
completed and occupied in late 1997. The manufacturing portion was completed in
1998 and occupied in 1999 after receiving clearance from the FDA. The Company
has invested approximately $9 million in equipment and leasehold improvements to
the building. Annual payments under the amended lease are approximately $751,000
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 is included in other assets. A significant portion
($750,000) of the remaining security deposit can be reduced or eliminated before
F-11
<PAGE> 65
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the end of the initial lease term if the Company meets certain criteria as
specified by the contract. Future minimum lease payments as of the end of fiscal
year 1999 are noted below:
<TABLE>
<CAPTION>
FISCAL YEAR:
------------
<S> <C>
2000...................................................... $ 774,899
2001...................................................... 774,899
2002...................................................... 774,899
2003...................................................... 774,899
2004...................................................... 774,899
Thereafter................................................ 5,796,372
----------
Total.................................................. $9,670,867
==========
</TABLE>
Rent expense for all operating leases was $473,237 in 1997, $911,609 in
1998, and $871,162 in 1999.
7. COMMON AND PREFERRED STOCK AND WARRANTS
The Company has authorized 100,000,000 no par common shares, and 2,500,000
shares of preferred stock, of which 540,541 shares have been designated Series A
and 500,000 shares designated Series B.
The Series A preferred stock is entitled to cumulative annual dividends of
$1.30 per share and has a liquidation preference of $9.25 plus cumulative unpaid
dividends. The Company may redeem the Series A preferred stock at any time for
its liquidation preference. Each share of preferred stock is convertible into
one-third of a share of common stock, after adjusting for earned but unpaid
dividends. At January 1, 2000, no shares of Series A preferred stock were
outstanding.
Series B preferred stock is senior to Series A in all preferences. Series B
is entitled to cumulative annual dividends of $.96 per share and has a
liquidation preference of $8.00 plus cumulative unpaid dividends. The Series B
preferred stock is redeemable by the Company five years after issuance for $8.00
per share plus cumulative unpaid dividends. Each share of Series B preferred
stock is convertible at any time into three and one-third shares of common stock
and has certain anti-dilution provisions. Series B preferred votes on an
as-converted basis. At January 1, 2000, no shares of the Series B preferred
stock were outstanding.
In November 1997, the Company sold through a public offering 2,000,000
shares of common stock at $5.00 per share. Net cash proceeds received by the
Company related to this offering were approximately $8,809,000 after placement
agents' fees and approximately $491,000 of other costs.
In July 1996, the Company sold, through an underwritten public offering,
1,644,000 shares of common stock at $12.00 per share. In connection with the
public offering the underwriters were issued five-year warrants to purchase
164,400 shares of the Company's common stock at $14.40 per share. The warrants
are currently exercisable and include a net exercise provision. Net cash
proceeds received by the Company related to this offering were approximately
$17,591,000. Underwriters' commissions, the fair value of warrants issued to the
underwriters, and approximately $1,050,000 of other estimated costs have been
recorded as a deduction to the proceeds received from the sale of the common
stock.
F-12
<PAGE> 66
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. OPTIONS
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 1998, 52,500 options were granted under this plan. No
options were granted under this plan in 1999 or 1997.
In 1996, the Directors adopted the 1996 Stock Option Plan ("1996 SOP") and
the 1996 Nonemployee Directors Stock Option Plan ("Directors Option Plan"). The
1996 SOP consists of two parts. Part One permits the Company to grant options to
purchase up to 500,000 shares of common stock. During 1999, 1998 and 1997,
6,000, 132,500 and 319,833 options, respectively, were granted at fair market
value under this Part of the Plan. Part Two related to the Chief Executive
Officer (CEO) and permits the Company to grant non-qualified options to the CEO
to purchase up to 333,333 shares of common stock. During 1996, 333,333 options
were granted at fair market value under this Part of the Plan. In November 1997,
these options were repriced to the then fair market value of $5.00 per share.
All other options of the CEO were canceled in conjunction with the repricing.
The Directors Option Plan was amended by approval by a vote of the Company's
shareholders in May 1999. The amendments include increasing the number of shares
granted to the Board of Directors in the initial grants from 10,000 to 15,000
shares (granted in four equal installments, once when elected to the Board then
quarterly thereafter), and the annual grants from 5,000 to 7,500 shares (granted
in four equal installments after re-election). Provisions were also made for
immediate vesting of both initial and annual grants, and for changing the term
of the options from ten to five years. In addition, the number of shares
reserved for issuance under The Director's Option Plan was increased from
150,000 to 350,000 and the plan administrator has been provided with the
discretion to impose any repurchase rights in favor of the Company on any
optionee. The Company currently has seven non-employee directors who are
eligible to participate in the Directors Option Plan. During 1999, 1998 and
1997, 39,375, 35,000 and 45,000 options, respectively, were granted at fair
market value under this plan.
In 1997, the Directors adopted the 1997 Stock Option Plan ("1997 SOP"). The
1997 SOP was amended by approval of a vote of the Company's shareholders in May
1999. The 1997 SOP, as amended, permits the Company to grant options to purchase
up to 2,800,000 shares of common stock. During 1999, 1998, and 1997, 1,038,276,
718,960 and 294,834 options, respectively, were granted at fair market value
under this plan.
Including the 1993 SOP, the 1996 SOP, the Directors Option Plan, the 1997
SOP, 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 generally become exercisable within six
months to five years of grant and expire between five and ten years from date of
grant. At January 1, 2000, 1,310,153 common shares remain available for grant
under all the plans.
Agreements have been entered into with selected consultants whereby options
to purchase the Company's common stock were accepted by these consultants as
full or partial payment for the services rendered to the Company. The fair
market value of the consulting service is the basis for recording the fair
market value of the transaction in the Company's financial records and is
recognized as the related services are performed. Options issued under these
agreements totaled 17,341 in 1999 and are included in the grant activity
previously discussed.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its employee stock-based compensation plans. Accordingly, no
compensation cost has been recognized for its stock
F-13
<PAGE> 67
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
option plans. Had compensation cost for the Company's stock-based plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the Company's net loss
and net loss per share would have been increased to the proforma amounts
indicated in the following table. As 1996 was the initial phase-in period for
applying this Statement, the proforma results indicated are not necessarily
representative of the effects on proforma disclosures of net income for future
periods as they exclude options that were granted prior to January 1, 1995, with
vesting periods in 1995 and later.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net Loss
As reported.................................. $(4,402,359) $(2,320,552) $(1,789,110)
Pro forma.................................... (6,582,359) (4,565,552) (5,230,110)
Basic and diluted loss per share
As reported.................................. $ (0.24) $ (0.11) $ (0.09)
Pro forma.................................... (0.36) (0.22) (0.26)
</TABLE>
The fair value of each option grant is estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants made in 1999, 1998, and 1997: risk-free interest
rates of 5.71% in 1999, 5.09% in 1998, and 6.32% in 1997; expected volatility of
77% for 1999, 81% for 1998, and 88% for 1997; expected lives in all 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 any year.
F-14
<PAGE> 68
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Option activity is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at fiscal year end 1996 (783,396
exercisable at $2.18 weighted average exercise
price per share).................................. 1,575,191 $ 6.18
Granted ($3.59 weighted average fair value per
share)......................................... 993,000 6.06
Canceled and expired.............................. (531,135) 12.02
Exercised(1)...................................... (241,937) 1.81
---------
Outstanding at fiscal year end 1997 (844,747
exercisable at $3.56 weighted average exercise
price per share).................................. 1,795,119 $ 4.98
Granted ($4.08 weighted average fair value per
share)......................................... 938,960 6.44
Canceled and expired.............................. (143,288) 4.45
Exercised(2)...................................... (292,535) 1.50
---------
Outstanding at fiscal year end 1998 (790,934
exercisable at $5.60 weighted average exercise
price per share).................................. 2,298,256 $ 6.05
Granted ($5.01 weighted average fair value per
share)......................................... 1,083,651 8.11
Canceled and expired.............................. (192,967) 6.44
Exercised(3)...................................... (49,116) 3.11
---------
Outstanding at fiscal year end 1999 (1,220,699
exercisable at $6.09 weighted average exercise
price per share).................................. 3,139,824 $ 6.78
=========
</TABLE>
- -------------------------
(1) Includes 193,371 options exercised for $335,681 cash and 48,566 options
exercised by exchange for 11,609 shares of common stock, which were
canceled.
(2) Includes 68,893 options exercised for $146,343 cash and 223,642 options
exercised by exchange for 42,028 shares of common stock, which were
canceled.
(3) Includes 36,402 options exercised for $101,188 cash and 12,714 options
exercised by exchange for 5,742 shares of common stock, which were canceled.
The status of options outstanding as of the end of fiscal 1999 is
summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICE CATEGORY OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- -------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.75 39,447 1.25 years $ 0.75 38,076 $ 0.75
$ 1.14 to $ 2.25 230,233 3.57 years 2.18 230,233 2.18
$ 4.38 to $ 5.88 697,996 7.70 years 5.23 379,251 5.20
$ 6.00 to $ 7.81 960,415 8.13 years 6.41 309,848 6.43
$ 8.00 to $ 9.75 1,011,708 9.03 years 8.38 119,783 8.74
$10.00 to $12.00 158,668 6.79 years 10.37 103,401 10.34
$15.00 to $15.75 28,025 6.16 years 15.62 26,775 15.65
$30.00 13,332 6.42 years 30.00 13,332 30.00
--------- ---------
$ 0.75 to $30.00 3,139,824 7.81 years 6.78 1,220,699 6.09
========= =========
</TABLE>
F-15
<PAGE> 69
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTIES
In 1992 the Company entered into an agreement to sell common stock,
representing 26% of the Company, to COBE Laboratories, Inc., "COBE" which
included several provisions including a standstill agreement. The Company and
COBE also finalized a licensing, manufacturing, and distribution agreement which
provides for a royalty-bearing license to the Company's biomaterial technology
for use in certain of COBE's products, among other items. The licensing
agreement was amended in 1999 to split the license into two separate agreements
at the time of the sale of a portion of COBE's cardiovascular business. One is
retained by COBE Laboratories, now called Gambro Inc., a major shareholder of
the Company, and the other was granted to Sorin COBE Cardiovascular when that
division of Gambro was sold to Sorin. In 1997, the Company's obligation to
manufacture biomaterials and distribute products through COBE terminated.
Sales to COBE and its affiliates for 1997, 1998 and 1999 were $312,000,
$145,000 and $167,000, respectively. Receivables from COBE and its affiliates
were nil and $17,100 at the end of fiscal years 1998 and 1999, respectively.
For other related party transactions, see Note 12.
10. TAXES ON INCOME
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards.
Significant components of the Company's net deferred taxes are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
Deferred tax assets:
Federal tax loss carryforward (as adjusted for the
limitation on change in ownership)............. $ 7,400,000 $ 6,920,000
State tax loss carryforward....................... 425,000 375,000
Deferred revenue.................................. -- 450,000
Foreign........................................... 410,000 750,000
Credits (research and manufacturing).............. 750,000 970,000
Other, net........................................ 440,000 685,000
----------- ------------
Total..................................... 9,425,000 10,150,000
Less: Valuation allowance......................... (9,425,000) (10,150,000)
----------- ------------
$ -- $ --
=========== ============
</TABLE>
At the end of fiscal 1999, the Company had net operating loss ("NOL")
carryforwards of approximately $20.5 million. The majority of such carryforwards
expire from 2003 through 2018. Use of the $7.4 million NOL which arose prior to
the greater than 50% change in ownership which occurred in 1992 is limited to
approximately $440,000 per year due to such change.
F-16
<PAGE> 70
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Due to these limitations and due to the fact that the Company has sustained
cumulative losses, the potential future benefit from these deferred assets are
fully reserved by means of a valuation allowance and will therefore produce a
financial statement benefit if and when utilized.
A reconciliation between the effective tax rate and the statutory federal
rate follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------------------
1997 1998 1999
------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Income tax benefit at statutory
rate............................... $(1,496,000) (34.0)% $(789,000) (34.0)% $(608,000) (34.0)%
State taxes.......................... (91,000) (2.1) (70,000) (3.0) (98,000) (5.5)
Increase in tax credit
carryforwards...................... (855,000) (19.4) (96,000) (4.1) (115,000) (6.4)
Increase in valuation allowance...... 2,665,000 60.6 975,000 42.0 725,000 40.5
Other, net........................... (223,000) (5.1) (20,000) (.9) 96,000 5.4
----------- ----- --------- ----- --------- -----
$ -- -- $ -- -- $ -- --
=========== ===== ========= ===== ========= =====
</TABLE>
11. ENTERPRISE AND RELATED GEOGRAPHIC INFORMATION
The Company manages its business on the basis of one reportable operating
segment. (See Note 1 for a brief description of the Company's business.) Net
sales by geographic area are presented by attributing revenues from external
customers or distributors on the basis of where the products are sold.
Long-lived assets by geographic area and information about products and services
are included as enterprise-wide disclosures.
In 1997, one domestic customer accounted for slightly over 10% of total
product sales. No receivable was outstanding from this customer at the end of
fiscal 1997. No customer accounted for greater than 10% of product sales or
receivables in 1998 or 1999.
GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Product Sales:
International
Europe............................. $1,094,516 $ 2,718,794 $ 3,597,973
All Other.......................... 793,339 1,497,584 1,606,447
---------- ----------- -----------
Subtotal......................... 1,887,855 4,216,378 5,204,420
Domestic........................... 7,553,447 12,103,153 17,303,464
---------- ----------- -----------
Total............................ $9,441,302 $16,319,531 $22,507,884
========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Long-lived assets:
International -- Europe.............................. $ 318,310 $ 377,958
Domestic............................................. 9,307,080 9,182,856
---------- ----------
Total........................................... $9,625,390 $9,560,814
========== ==========
</TABLE>
F-17
<PAGE> 71
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CLASSES OF SIMILAR PRODUCTS
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Product Sales:
Circulatory Support................... $8,831,455 $15,637,756 $21,768,089
Vascular Graft........................ 300,120 681,775 739,795
Biomaterial Manufacturing............. 309,727 -- --
---------- ----------- -----------
Total............................ $9,441,302 $16,319,531 $22,507,884
========== =========== ===========
</TABLE>
See Note 9 for discussion of Biomaterial Manufacturing.
12. COMMITMENTS
In October 1997, the Company executed a four-year agreement with Arrow
International, Inc. ("Arrow") to supply the mechanical valves for the VAD system
used in the Company's VAD system. As of January 1, 2000, the remaining long-term
purchase commitment associated with this agreement was approximately $1.8
million.
In July 1998, the Company established an Executive Officer Severance
Benefits Plan and an Employee Severance Benefits Plan as part of the employee
benefits package. The plans provide severance benefits to certain employees
whose employment is terminated, other than for cause. An Executive Officer's
standard severance pay benefit is equal to one times annualized base salary. An
employee's severance pay benefit is equal to an amount based on job level and
length of service.
In January 2000, 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,
and a severance package.
The Company is not party to any legal proceedings other than ordinary
routine litigation incidental to the Company's business. The Company believes
that the ultimate resolution of these matters will not have a material adverse
effect on the Company's consolidated financial statements taken as a whole.
See Notes 6 and 9 for additional commitments.
13. RETIREMENT SAVINGS PLAN
Effective January 1997, the Company implemented a 401(k) Plan (the "Plan")
covering all employees who have met certain eligibility requirements. Under the
Plan, employees may elect to contribute up to 18% of their eligible compensation
to the Plan, subject to certain limitations. The Company matches employee
contributions at 25% up to the first 6% of employees' compensation. Employees
vest at the rate of 25% per year with full vesting after four years of service
with the Company. For fiscal years 1997, 1998 and 1999, the Company made
contributions to the Plan of approximately nil, $54,000 and $91,000,
respectively.
F-18
<PAGE> 72
[Picture of Mr. Carr, the first recipient of a
prototype Aria coronary artery bypass graft]
[Angiogram of Aria coronary artery bypass
graft implanted in patient]
Mr. Carr was the first recipient of a prototype Aria CABG graft in 1993. The
Aria was used to complete the revascularization of Mr. Carr's heart in his
second coronary artery bypass surgery. He is symptom-free and doing well to this
day. Shown above is an image, or angiogram, of the Aria that was taken nine
months after his surgery, showing the graft to be open and functional.
[Illustration of Thoratec's Aria coronary artery
bypass graft showing placement in the heart.]
Thoratec's Aria Coronary Artery Bypass Graft.
[Illustration of Thoratec's Vectra Vascular
Access Graft showing placement in the arm.]
The Vectra Vascular Access Graft.
We have developed unique technology to manufacture small diameter vascular
grafts, or prosthetic blood vessels. These devices are designed to address those
pressing clinical needs in which current, large diameter vascular graft
materials have to date been unsuccessful.
<PAGE> 73
2,000,000 Shares
[LOGO]
Common Stock
-------------------------
PROSPECTUS
April 14, 2000
-------------------------
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
ADAMS, HARKNESS & HILL, INC.
FIDELITY CAPITAL MARKETS
a division of National Financial Services Corporation
