U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2001 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
for the transition period from __________ to ___________
COMMISSION FILE NUMBER: 1-8145
THORATEC CORPORATION
----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2340464
---------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6035 Stoneridge Drive, Pleasanton, California 94588
--------------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (925) 847-8600
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No
As of May 11, 2001 registrant had 54,593,899 shares of common stock
outstanding.
THORATEC CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION............................................................... 3
ITEM 1. Condensed Consolidated Financial Statements....................................... 3
Condensed Consolidated Balance Sheets as of March 2001 and Year End 2000 .............. 3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 2001 and March 2000 ....................................................... 5
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 2001 and March 2000 ....................................................... 6
Condensed Consolidated Statements of Comprehensive Income (Loss) for the
Three Months Ended March 2001 and March 2000 .......................................... 7
Notes to Condensed Consolidated Financial Statements................................... 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................................... 14
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk........................... 17
PART II. OTHER INFORMATION................................................................. 18
ITEM 2. Changes in Securities............................................................ 18
ITEM 4. Submission of Matters to a Vote of Security Holders.............................. 18
ITEM 6. Exhibits and Reports on Form 8-K................................................. 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THORATEC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except common shares data)
(Unaudited)
March December
2001 2000
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 2,441 $ 30,236
Short-term available-for-sale investments at quoted market
value, (amortized cost, $87,122 and $98,743) 87,122 98,682
Receivables, net of allowances of $1,241 in 2001 and
$939 in 2000 17,698 15,358
Inventories 27,031 17,381
Deferred tax asset 8,381 3,454
Prepaid expenses and other 1,185 74
-------- --------
Total current assets 143,858 165,185
Equipment and improvements, net 19,350 7,084
Restricted cash 45,279 --
Goodwill 101,444 --
Purchased intangible assets 207,929 --
Other assets 4,955 4,416
-------- --------
TOTAL ASSETS $522,815 $176,685
======== ========
See notes to condensed consolidated financial statements.
3
THORATEC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except common shares data)
(Unaudited)
March December
2001 2000
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,053 $ 3,972
Accrued compensation 4,601 4,976
Accrued merger and restructuring 3,503 1,708
Estimated liabilities for warranty, legal and other 4,026 1,316
Other accrued liabilities 5,068 4,006
--------- ---------
Total current liabilities 25,251 15,978
Subordinated convertible debentures (includes
$1,500 due to Thermo Electron in 2001 and 2000) 54,838 54,838
Long-term deferred tax liability 77,393 --
--------- ---------
Total liabilities 157,482 70,816
Shareholders' equity:
Common shares, 100,000,000 authorized;
issued and outstanding 54,744,538 in 2001
and 33,937,643 in 2000 391,384 4,064
Treasury stock at cost, 1,723,150 shares in 2000 -- (51,869)
Capital in excess of par value -- 96,930
Deferred compensation (841) (251)
Retained earnings (accumulated deficit) (25,170) 57,025
Accumulated other comprehensive income (loss):
Unrealized loss on investments -- (39)
Cumulative translation adjustments (40) 9
--------- ---------
Total accumulated other comprehensive income (40) (30)
--------- ---------
Total shareholders' equity 365,333 105,869
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 522,815 $ 176,685
========= =========
See notes to condensed consolidated financial statements.
4
THORATEC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended
------------------------
March 2001 March 2000
---------- ----------
Product sales $ 21,480 $ 19,929
Cost of product sales 10,040 8,160
-------- --------
Gross margin 11,440 11,769
-------- --------
Operating expenses:
Research and development 5,230 4,106
Selling, general and administrative 7,330 5,855
Amortization of goodwill and purchased
intangible assets 2,281 --
In-process research and development 76,858 --
Merger and restructuring costs 3,540 141
-------- --------
Total operating expenses 95,239 10,102
-------- --------
Income (loss) from operations (83,799) 1,667
Interest and other income -- net 1,144 1,211
-------- --------
Income (loss) before taxes (82,655) 2,878
Income tax expense (benefit) (475) 1,108
-------- --------
Net income (loss) $(82,180) $ 1,770
======== ========
Earnings (loss) per share:
Basic $ (1.88) $ 0.06
Diluted $ (1.88) $ 0.05
Shares used to compute earnings (loss) per share:
Basic 43,719 32,163
Diluted 43,719 32,215
See notes to condensed consolidated financial statements.
5
THORATEC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
-------------------------
March 2001 March 2000
---------- ----------
Cash flows from operating activities:
Net income (loss) $ (82,180) $ 1,770
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,226 747
Write-off of in-process research and development 76,858 --
Noncash compensation 302 52
Provision for losses on accounts receivable 302 --
Other noncash items 95 --
Changes in assets and liabilities:
Receivables 3,006 623
Inventories (2,373) (654)
Prepaid expenses and other current assets (89) 54
Accounts payable and other current liabilities (2,492) 469
Deferred liabilities (558) --
--------- ---------
Net cash provided by (used in) operating
activities (3,903) 3,061
--------- ---------
Cash flows from investing activities:
Advances to affiliate, net -- (3,104)
Purchases of short-term available-for-sale (136,312) (12,283)
investments
Maturities of short-term available-for-sale 107,901 12,652
investments
Sales of short-term available-for-sale investments 52,753 --
Capitalized transaction costs (5,838) --
Expenditures for equipment and improvements (689) (556)
Cash acquired in business acquisition 3,456 --
Reclassification to restricted cash (45,279) --
--------- ---------
Net cash used in investing activities (24,008) (3,291)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 577
Common stock issued upon exercise of options 109 --
Payment of withholding taxes related to
employee stock plans (30) (31)
--------- ---------
Net cash provided by financing activities 79 546
--------- ---------
Effect of exchange rate changes on cash 37 (30)
--------- ---------
Net increase (decrease) in cash and cash equivalents (27,795) 286
Cash and cash equivalents at beginning of period 30,236 418
--------- ---------
Cash and cash equivalents at end of period $ 2,441 $ 704
========= =========
Supplemental Cash Flow Disclosure:
Cash paid for taxes $ 263 $ 966
See notes to condensed consolidated financial statements.
6
THORATEC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
Three Months Ended
----------------------------
March 2001 March 2000
---------- ----------
Net income (loss) $(82,180) $1,770
Other net comprehensive income (loss):
Unrealized gain (loss) on securities 39 (47)
Foreign currency translation adjustments (49) (28)
-------- ------
Comprehensive income (loss) $(82,190) $1,695
======== ======
See notes to condensed consolidated financial statements.
7
THORATEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The merger of Thoratec Corporation ("Thoratec" or the "Company") with Thermo
Cardiosystems Inc. (now called Thoratec Cardiosystems Inc. and referred to in
this report as "Cardiosystems") was completed on February 14, 2001. The interim
condensed consolidated financial statements presented have been prepared in
accordance with accounting principles generally accepted in the United States of
America without audit and, in our opinion, reflect all adjustments necessary
(consisting only of normal recurring adjustments) to present fairly the
financial position at March 31, 2001 and the results of operations and cash
flows for the three month periods ended March 31, 2001 (first quarter 2001 or
March 2001) and April 1, 2000 (first quarter 2000 or March 2000). The merger of
Thoratec with Cardiosystems was accounted for as a reverse acquisition because
former shareholders of Cardiosystems owned a majority of the outstanding stock
of Thoratec subsequent to the merger. For accounting purposes, Cardiosystems is
deemed to have acquired Thoratec.
All 2000 financial information presented herein represents the financial
position and results of operations and cash flows of Cardiosystems. The 2001
financial information presented herein includes the financial results of
Cardiosystems for the full three-month period ended March 31, 2001 and the
financial results of Thoratec for the post-merger period from February 14, 2001
through March 31, 2001. The operating results of the quarter ended March 31,
2001 are not necessarily indicative of the results that may be expected for any
future period.
The Condensed Consolidated Financial Statements included here have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted. The accompanying financial
statements should be read in conjunction with the fiscal 2000 consolidated
financial statements of Thoratec filed with the SEC in our Annual Report on
Form 10-K on March 29, 2001 and the fiscal 2000 consolidated financial
statements of Cardiosystems filed with the SEC on Form 8-K/A on March 30, 2001.
The preparation of our condensed consolidated financial statements included
herein necessarily requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the consolidated balance sheet dates and the reported amounts
of revenues and expenses for the periods presented.
We have made certain reclassifications to the 2000 amounts to conform to the
2001 presentation.
2. MERGER OF THORATEC AND CARDIOSYSTEMS
On February 14, 2001, Thoratec completed its merger with Cardiosystems. Pursuant
to the merger agreement between Thoratec and Cardiosystems dated October 3,
2000, Thoratec issued 32,226,074 newly issued shares of its common stock to the
shareholders of Cardiosystems in exchange for all the outstanding common stock
of Cardiosystems (38,594,281 shares outstanding as of February 14, 2001) at an
exchange ratio of 0.835 to 1. After the transaction, Cardiosystems' shareholders
owned 59% of the then outstanding common stock of Thoratec and the former
Thoratec shareholders owned the remaining shares of Thoratec common stock.
Thermo Electron Corporation, the majority shareholder of Cardiosystems prior to
the merger, received 19,312,959 shares of the 32,226,074 newly issued shares.
After the merger, Thermo Electron owned 35% of the then outstanding common stock
of Thoratec.
8
The merger was accounted for under the purchase method of accounting and was
treated as a reverse acquisition because the shareholders of Cardiosystems owned
the majority of Thoratec common stock after the merger. Cardiosystems was
considered the acquiror for accounting and financial reporting purposes. Due to
the reverse acquisition, Thoratec's assets and liabilities were recorded based
upon their estimated fair values at the date of acquisition. The operating
results of Thoratec have been included in the accompanying condensed
consolidated financial statements from the date of acquisition. Approximately
$311.6 million of the total purchase price of $347.8 million has been allocated
to goodwill and other purchased intangible assets. As a result of the merger,
$76.9 million relating to in-process research and development has been expensed
in the first quarter of 2001. The goodwill and other intangibles will be
amortized over estimated useful lives of six to twenty years. The Company has
recorded a liability for the estimated costs associated with evaluating and
restructuring its product distribution networks. Due to uncertainty associated
with negotiations related to the cancellation of contracts with third parties,
an adjustment to the estimated liability recorded in purchase accounting is
possible.
The purchase price and allocation of purchase price are summarized as follows:
Purchase price:
Common stock $ 308,489
Stock options 33,524
Transaction costs 5,780
---------
Total purchase price $ 347,793
=========
Allocation of purchase price:
Tangible assets acquired (primarily cash and short-term
investments, receivables, inventory, and equipment and
improvements) $ 41,018
Fair market valuation of property lease 2,285
Deferred tax asset 4,332
Deferred compensation 841
Intangible net assets acquired:
Patents, trademarks and tradenames, purchased technology and
assembled workforce 209,572
Goodwill 102,024
In-process research and development 76,858
Liabilities assumed (11,744)
Deferred tax liability (77,393)
---------
Total $ 347,793
=========
The unaudited consolidated results of operations on a pro forma basis as if the
merger had occurred as of the beginning of the periods presented are as follows:
Three Months Ended
------------------------
March 2001 March 2000
---------- ----------
Revenue $ 25,004 $ 27,535
Net loss * (86,092) (78,974)
Net loss per share -- basic and diluted $(1.57) $(1.50)
* The three month period ended March 2001 includes $4.9 million of merger and
restructuring costs and the three month period ended ended March 2000 includes
$141,000 of merger and restructuring costs. Each of the three month periods
ended March 2001 and March 2000 includes a $76.9 million write-off of in-process
research and development.
The pro forma financial information is presented for informational purposes only
and is not indicative of the operating results that would have occurred had the
merger been consummated as of the above dates, nor are they necessarily
indicative of future operating results.
9
3. MERGER RELATED EXPENSES
Merger and restructuring costs were $3.5 million in the quarter ended March 2001
and were principally related to employee severance and retention costs and
outside consulting, accounting, and legal expenses related to the merger between
Thoratec and Cardiosystems.
4. EARNINGS (LOSS) PER SHARE
Although Thoratec is the surviving legal entity after the merger, the merger is
treated as an acquisition of Thoratec by Cardiosystems for accounting and
financial reporting purposes. The weighted average number of common shares
previously reported by Cardiosystems has been adjusted for all periods to
reflect the exchange ratio of 0.835.
Basic earnings per share are computed by dividing net 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.
Options to purchase 6,439,794 shares of common stock were not included in the
computation of diluted earnings per share in the first quarter of 2001 because
the loss position renders the additional shares antidilutive. Options to
purchase 279,725 shares of common stock were not included in the computation of
diluted earnings per share in the first quarter of 2000 because their effect
would have been antidilutive due to the options' exercise prices exceeding the
average market price for the common stock.
In addition, the computation of diluted earnings per share for each period
presented excludes the effect of assuming the conversion of our 4 3/4 %
subordinated convertible debentures, convertible at $37.623 per share, because
the effect would be antidilutive. The principle amount of the debentures was
$54.8 million as of March 2001 and $58.0 million as of March 2000.
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended
------------------------
March 2001 March 2000
---------- ----------
Net income (loss) $(82,180) $ 1,770
======== ========
Weighted average number of common shares-basic 43,719 32,163
Dilutive effect of employee stock options 0 52
-------- --------
Weighted average number of common shares-diluted 43,719 32,215
======== ========
Net earnings (loss) per common share-basic $ (1.88) $ 0.06
Net earnings (loss) per common share-diluted $ (1.88) $ 0.05
5. RECENTLY ISSUED ACCOUNTING STANDARDS
Effective December 31, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133, as amended, requires that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded on the balance sheet at its fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. SFAS 133 also
requires that the Company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. Adoption of SFAS
No. 133 did not have any impact on financial results for the first three months
of fiscal 2001.
10
6. INVENTORIES
Inventories consist of the following:
Period Ended
-------------------------
March 2001 December 2000
---------- -------------
Finished goods $ 7,540 $ 3,177
Work in process 13,511 10,261
Raw materials 5,980 3,943
------- -------
Total $27,031 $17,381
======= =======
7. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consists of property, plant and equipment and rental
and support equipment. Rental and support equipment is comprised of drivers and
consoles that are rented or loaned to our customers, and periodically may be
sold to them. Gross sales proceeds are included in product sales and the net
book value of the equipment at the date of sale is removed from equipment and
improvements and included in cost of product sales. Drivers and consoles are
manufactured by us and are used to operate our ventricular assist heart pumps.
This equipment is capitalized at its historical cost to manufacture and is
amortized over its estimated useful life of two to three years.
Equipment and improvements consist of the following:
Period Ended
----------------------
March December
2001 2000
-------- --------
Property, plant and equipment at cost $ 32,987 $ 22,005
Less accumulated depreciation (15,978) (15,324)
-------- --------
Property, plant and equipment, net 17,009 6,681
-------- --------
Rental and support equipment at cost 3,927 1,763
Less accumulated depreciation (1,586) (1,360)
-------- --------
Rental and support equipment, net 2,341 403
-------- --------
Total equipment and improvements, net $ 19,350 $ 7,084
======== ========
8. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
The Company organizes and manages its business by functional operating entity.
The Company's functional entities operate in two segments: (1) ventricular
assist products and grafts and (2) other medical equipment. The Company's
ventricular assist products and grafts segment develops, manufactures, and
markets proprietary medical devices used for circulatory support and vascular
graft applications. The Company's other medical equipment segment develops,
manufactures and markets near-patient, whole-blood coagulation and testing
equipment and related disposables, as well as premium-quality, single-use,
skin-incision devices. The three-month period ended March 2000 includes
Cardiosystems' ventricular assist product segment and other medical equipment
segment. The three-month period ended March 2001 includes Cardiosystems'
ventricular assist product business and other medical equipment business for the
full three-month period and Thoratec's ventricular assist product and graft
business for the post-merger period from February 14, 2001 through March 31,
2001.
11
Business Segments:
Three Months Ended
------------------------
March 2001 March 2000
---------- ----------
Product sales:
Ventricular assist products and grafts $ 11,188 $ 10,173
Other medical equipment 10,292 9,756
-------- --------
Total product sales $ 21,480 $ 19,929
======== ========
Income (loss) before provision for income taxes:
Ventricular assist products and grafts $ (2,313) $ 39
Other medical equipment 1,901 2,009
Corporate (a) (693) (240)
Purchase accounting entries (79,154) --
Merger related expenses (3,540) (141)
-------- --------
Total operating income (loss) (83,799) 1,667
Interest and other income, net 1,144 1,211
-------- --------
Total income (loss) before taxes $(82,655) $ 2,878
======== ========
(a) Represents primarily general and administrative expenses not specifically
identified to any particular business segment.
Geographic Areas:
Three Months Ended
----------------------
March 2001 March 2000
---------- ----------
Product sales:
Domestic $16,944 $16,966
------- -------
Europe 1,577 2,115
All other international 2,959 848
------- -------
Total international 4,536 2,963
------- -------
Total $21,480 $19,929
======= =======
9. RESTRICTED CASH AND CONVERTIBLE DEBENTURES
In May 1997, the Cardiosystems issued $70.0 million worth of 4 3/4% Convertible
Subordinated Debentures due May 2004. The current outstanding balance of $54.8
million reflects repurchases in the open market that have occurred from time to
time. Interest is payable semi-annually in November and May of each year. The
outstanding debentures are convertible into company stock at a price of $37.623
per share. To date, no debentures have been exchanged for shares.
Upon closing of the merger with Cardiosystems in February 2001, $45.3 million
was reclassified to long-term assets from cash and short-term investments to
reflect the pledge of collateral as support for a letter of credit guarantee to
Thermo Electron Corporation related to Thermo Electron's guarantee of the
Company's outstanding subordinated debentures which are due in 2004.
12
10. STOCK OPTIONS
As a result of the merger with Cardiosystems, all options to purchase
Cardiosystems shares that were outstanding at the date of the merger were
exchanged for options to purchase 971,222 Thoratec shares. The balance of the
options granted during the first quarter of 2001 were granted to all employees
and directors of the Company, including former Cardiosystems employees.
Outstanding options at the end of March 2001 are summarized as follows:
Options Outstanding
Weighted
Number Average
Price Category Outstanding Exercise Price
-------------- ----------- --------------
$.75 to $6.38 1,450,691 $5.39
$6.44 to $8.50 929,312 8.15
$8.63 to $9.38 2,047,118 9.35
$9.38 to $13.07 1,432,055 11.32
$13.13 to $33.05 583,480 19.13
---------
$0.75 to $33.05 6,442,656 9.61
=========
Of the 6,442,656 options outstanding, 3,513,819 are exercisable as of March
2001.
11. INCOME TAXES
The effective tax rate was 0.6% in the first quarter of 2001 and 38% in the
first quarter of 2000. The effective tax rate for 2001 differed from the
statutory federal income tax rate primarily due to the nondeductible nature of
expenses related to the Company's merger with Cardiosystems, including the write
off of in-process research and development costs, the amortization of goodwill
and other nondeductible merger transaction expenses. For 2000, the effective tax
rate exceeded the federal statutory income tax rate primarily due to the impact
of state income taxes.
At March 31, 2001, the Company reported a net deferred tax liability of
approximately $66 million, comprised principally of temporary differences
between financial statement and income tax bases of intangible assets. At March
31, 2000, the Company reported a net deferred tax asset of approximately $7
million comprised principally of temporary differences between financial
statement and income tax bases resulting from differences in the timing of
financial statement expense and income tax deductions.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We develop, manufacture and market proprietary medical devices used for
circulatory support, vascular graft, blood coagulation and skin incision
applications. We currently market the Thoratec(R) Ventricular Assist System
(Thoratec VAD System or the VAD System) and the HeartMate(R) Left Ventricular
Assist System (HeartMate LVAS) in the United States and internationally for use
as a bridge to heart transplant. Additionally the Thoratec VAD System is
marketed for use in the recovery of the heart after open-heart surgery. We have
also developed small diameter vascular grafts for use in hemodialysis access and
coronary artery bypass surgery. The components of the VAD System and graft
products that come into contact with human tissue or blood incorporate
Thoralon(R), 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. The
HeartMate products incorporate an exclusive textured surface intended to reduce
the incidence of thromboembolic complications and the need for systemic
anticoagulation.
International Technidyne Corporation (ITC), a wholly-owned subsidiary of
Thoratec after the merger with Cardiosystems on February 14, 2001, is a leading
manufacturer of near-patient, whole-blood coagulation testing equipment and
related disposables, and also manufactures premium-quality, single-use, skin
incision devices. ITC operates in a business segment that we call Other Medical
Equipment.
Acquisition Event
On February 14, 2001, Thoratec completed its merger with Cardiosystems. Pursuant
to the merger agreement between Thoratec and Cardiosystems dated October 3,
2000, Thoratec issued 32,226,074 newly issued shares of its common stock to the
shareholders of Cardiosystems in exchange for all the outstanding common stock
of Cardiosystems (38,594,281 shares outstanding as of February 14, 2001) at an
exchange ratio of 0.835 to 1. After the transaction, Cardiosystems' shareholders
owned 59% of the then outstanding common stock of Thoratec and the former
Thoratec shareholders owned the remaining shares of Thoratec common stock.
Thermo Electron Corporation, the majority shareholder of Cardiosystems prior to
the merger, received 19,312,959 shares of the 32,226,074 newly issued shares.
After the merger, Thermo Electron owned 35% of the then outstanding common stock
of Thoratec.
The merger was accounted for under the purchase method of accounting and was
treated as a reverse acquisition because the shareholders of Cardiosystems owned
the majority of Thoratec common stock after the merger. Cardiosystems was
considered the acquiror for accounting and financial reporting purposes. Due to
the reverse acquisition, Thoratec's assets and liabilities were recorded based
upon their estimated fair values at the date of acquisition. The operating
results of Thoratec have been included in the accompanying condensed
consolidated financial statements from the date of acquisition. Approximately
$311.6 million of the purchase price of $347.8 million has been allocated to
goodwill and other purchased intangible assets. As a result of the merger,
$76.9 million relating to in-process research and development has been expensed
in the first quarter of 2001. The goodwill and other intangibles will be
amortized over estimated useful lives of six to twenty years.
Liquidity and Capital Resources
At the end of March 2001, we had working capital of $118.6 million compared with
$149.2 million at the end of December 2000. Cash, cash equivalents and
short-term investments available-for-sale decreased $39.3 million to $89.6
million principally due to $45.3 million in cash and short-term investments
being reclassified to restricted cash to reflect the pledge of collateral as
support for a letter of credit guarantee to Thermo Electron related to Thermo
Electron's guarantee of the Company's outstanding subordinated debentures which
are due in 2004. Additionally, the decrease is due to the payment of merger
related costs, offset by the addition of Thoratec's cash at the date of the
merger and interest earned on corporate cash investments.
14
The 2001 Statement of Cash Flows was prepared by combining Cardiosystems'
balance sheet as of December 2000 with Thoratec's balance sheet as of the merger
date of February 14, 2001, and comparing it to the consolidated balance sheet as
of March 2001, which included both entities. During the first three months of
2001, $3.9 million of cash was used in operations. Net collections of accounts
receivable provided $3.0 million, primarily from lower sales in the first
quarter of 2001 compared to the fourth quarter of 2000. Uses of cash included
$2.4 million for increased inventory levels following lower than expected sales
in the first quarter and anticipated higher sales in future periods and $2.5
million related to decreased accounts payable and other current liabilities.
During the first three months of 2001, $24 million of cash was used in investing
activities of the Company. Cash in the amount of $24 million was provided from
net maturities, sales and purchases of available-for-sale investments, and $3.5
million was provided from Thoratec's beginning cash balance as of the date of
the merger. Uses of cash included $45.3 million to collateralize a letter of
credit guarantee to Thermo Electron related to Thermo Electron's guarantee of
the Company's outstanding subordinated debentures which are due in 2004, $5.8
million for capitalized merger transaction costs and $689,000 for capital
equipment purchases. The capitalized merger transaction costs consisted of
banking, legal and accounting costs incurred by Cardiosystems and were
capitalized in the purchase consideration (now a component of goodwill).
During the first three months of 2000, less than $100,000 of cash was provided
by the Company's financing activities. These activities were related primarily
to employee purchases of stock under the Company's stock option plans.
On April 12, 2001 we announced that our board of directors authorized a stock
repurchase program under which our common stock with a market value up to $20
million may be acquired in the open market or in privately negotiated
transactions. The number of shares to be purchased and the timing of purchases
will be based on several conditions, including the price of Thoratec stock,
general market conditions and other factors. There were no repurchases of our
common stock in the first quarter of 2001 since the plan was put into place
after the quarter ended.
We believe that on-hand cash, short term available-for-sale investments and
expected cash flow from operations will be sufficient to fund our operations for
at least the next twelve months. We expect that our operating expenses will
increase in future periods as we spend more on product manufacturing, marketing
and research and development of new product lines as well as substantial costs
associated with the combination of Thoratec with Cardiosystems.
The impact of inflation on our financial position and results of operations was
not significant during the three month periods ended March 2001 and March 2000.
Results of Operations
Three months ended March 2001 and 2000
Product sales in the first quarter of 2001 were $21.5 million compared to $19.9
million in the first quarter of 2000, an increase of approximately $1.6 million
or 8%. The increase is attributable to the addition of Thoratec product sales of
$3.5 million since the date of the merger, and an increase of $500,000 in sales
of our blood coagulation testing equipment, partially offset by $2.5 million
lower sales of HeartMate products due to significant distractions and
uncertainties among the Cardiosystems sales force prior to and immediately after
the closing of the merger.
Gross margin was $11.4 million, representing approximately 53% of product sales
for the first quarter of 2001 compared to a gross margin of $11.8 million
representing approximately 59% of product sales for the first quarter of 2000.
The decrease in gross margin percentage was due primarily to a lower proportion
of domestic sales to total product sales. Ventricular assist disposable
products, primarily blood pumps, that are sold in the United States generally
have a higher gross margin than those sold in the rest of the world. In
addition, production costs for the HeartMate product line were higher in the
first quarter of 2001 due to increased inventory reserves for inventory expected
to be used in clinical and research and development activities, employee
post-close merger retention costs and higher scrap levels.
15
Research and development expenses were approximately 24% of product sales in the
first quarter of 2001 and 21% in the first quarter of 2000. These expenses
increased to $5.2 million in the first quarter of 2001 from $4.1 million in the
first quarter of 2000, an increase of $1.1 million, or 27%. The addition of
Thoratec's research and development expenses added $1.3 million to expenses.
HeartMate research and development expenses were relatively unchanged overall
from the prior quarter. Decreases in HeartMate II and III project spending were
offset by increases in spending for projects related to HeartMate I.
Selling, general and administrative expenses increased to $7.3 million in the
first quarter of 2001, from $5.9 million in the first quarter of 2000, an
increase of $1.5 million or 25%. As a percent of sales, these expenses increased
from 29% of product sales in 2000 to 34% of product sales in 2001. The increase
is due to the addition of Thoratec's sales force and administrative staff at the
date of the merger, partially offset by lower Cardiosystems personnel costs from
open positions. Approximately $116,000 of additional merger related expenses are
included in selling, general and administration expenses.
Merger and restructuring costs were $3.5 million in the first quarter of 2001
and were principally related to employee severance and retention costs, and
outside consulting, accounting, and legal expenses related to the merger.
Amortization of purchased intangibles and goodwill was $2.3 million in the first
quarter of 2001. All purchased intangibles and goodwill were generated due to
the merger between Thoratec and Cardiosystems, and are being amortized to
expense on a straight-line basis over periods ranging from six to 20 years
beginning February 14, 2001.
In-process research and development expense was $76.9 million in the first
quarter of 2001 and represents a one-time charge related to acquired in-process
research and development that had not yet reached technological feasibility and
had no alternative future uses. The value assigned to acquired in-process
research and development was determined by an independent appraiser, who
identified research projects in areas for which technological feasibility had
not been established.
Interest and other income, net decreased $67,000, or 5.5%, in the first quarter
of 2001 from the first quarter of 2000. This decrease is due principally to
lower research and development contract revenues.
The effective tax rate was 0.6% in the first quarter of 2001 and 38% in the
first quarter of 2000. The effective tax rate for 2001 differed from the
statutory federal income tax rate primarily due to the nondeductible nature of
expenses related to the Company's merger with Cardiosystems, including the write
off of in-process research and development costs, the amortization of goodwill
and other nondeductible merger transaction expenses. For 2000, the effective tax
rate exceeded the federal statutory income tax rate primarily due to the impact
of state income taxes.
Forward-Looking Statements
The statements in this report that relate to future plans, events or performance
are forward-looking statements which involve risks and uncertainties. These
risks include the results of clinical trials, government regulatory approval
processes, delays in product development and new product introductions,
announcements by our competitors, an intensely competitive market, the ability
to integrate acquired operations and market acceptance of new products.
These factors, and others, are discussed more fully in our annual report on Form
10-K for 2000 and our other filings with the Securities and Exchange Commission.
Actual results, events or performance may differ materially. These
forward-looking statements speak only as of the date hereof.
We undertake no obligation to publicly release the result of any revisions to
these forward-looking statements that may be needed to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
We do not currently use derivative financial instruments in our operations or
investment portfolio. We do not have material exposure to market risk associated
with changes in interest rates. Our subordinated debentures carry a fixed rate
of interest and are currently callable at par value. Our investment portfolio at
the end of the first quarter 2001 consisted of short-term state and municipal
government bonds and money market funds that are classified as
available-for-sale and have maturities of less than 90 days. 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.
We conduct business in foreign countries. Our international operations consist
primarily of sales and service personnel for our ventricular assist products.
These employees report into our U.S. sales and marketing group and are
internally reported as part of that group. All assets and liabilities of our
non-United States operations are translated into United States dollars at the
fiscal period-end exchange rates, and, except as follows, the resulting
translation adjustments are included in comprehensive income. Exchange rate
fluctuations resulting from the period-end translation of the current portion of
the intercompany obligation of our wholly owned subsidiary in the United Kingdom
into United States dollars are recorded in the income statement as foreign
currency exchange gains or losses and are included in interest and other income,
net. Net foreign currency exchange loss was approximately $61,000 in the first
quarter 2001, and zero for first quarter 2000 as the United Kingdom subsidiary
became a part of our operations upon the completion of the merger between
Thoratec and Cardiosystems on February 14, 2001.
Although 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.
17
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On February 14, 2001, Thoratec completed its merger with Cardiosystems. Pursuant
to the merger agreement between Thoratec and Cardiosystems dated October 3,
2000, Thoratec issued 32,226,074 newly issued shares of its common stock to the
shareholders of Cardiosystems in exchange for all the outstanding common stock
of Cardiosystems (38,594,281 shares outstanding as of February 14, 2001) at an
exchange ratio of 0.835 to 1. After the transaction, Cardiosystems' shareholders
owned 59% of the then outstanding common stock of Thoratec and the former
Thoratec shareholders owned the remaining shares of Thoratec common stock.
Thermo Electron Corporation, the majority shareholder of Cardiosystems prior to
the merger, received 19,312,959 shares of the 32,226,074 newly issued shares.
After the merger, Thermo Electron owned 35% of the then outstanding common stock
of Thoratec.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 13, 2001 a meeting of shareholders was held. At the meeting, the
following actions were taken by the shareholders:
1. A proposal for a merger of a subsidiary into Thermo Cardiosystems Inc. as
contemplated by an Agreement and Plan of Merger dated October 3, 2000
among Thoratec, Thermo Cardiosystems, Lighting Acquisition Corp., and
Thermo Electron Corporation. The results of the voting were as follows:
For 15,125,598
Against 419,087
Abstain 11,888
2. A proposal to amend Thoratec's 1997 Stock Option Plan to increase the
authorized number of shares for Thoratec's common stock reserved for
issuance under options granted under the Thoratec option plan by 3,600,000
shares, which is in addition to the increase authorized under proposal 3.
The results of the voting were as follows:
For 13,377,728
Against 2,142,572
Abstain 36,273
3. A proposal to amend the Thoratec option plan to increase the number of
shares of Thoratec common stock reserved for issuance under options
granted under the Thoratec option plan by 2,800,000 shares, which is in
addition to the increase authorized by proposal 2. The results of the
voting were as follows:
For 13,408,008
Against 2,112,304
Abstain 36,261
4. A proposal to vote on an amendment to Thoratec's articles of incorporation
to change the name of Thoratec from "Thoratec Laboratories Corporation" to
"Thoratec Corporation". The results of the voting were as follows:
For 20,098,317
Against 172,128
Abstain 19,393
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
3.1 Amended and Restated Articles of Incorporation (1)
99.1 Press release dated February 14, 2001 announcing closing
of merger with Thermo Cardiosystems Inc. (1)
(b) Reports on Form 8-K
1. Amended Current Report on Form 8-K/A filed with the SEC on
March 30, 2001 as amended on January 24, 2002
(File No. 033-72502) reporting the following
items:
- Item 1: Change in Control
- Item 2: Acquisition or Disposition of Assets
- Item 4: Change in Registrant's Certifying Accountant
- Item 5: Other Events
- Item 7(a): Audited financial statements of Thermo
Cardiosystems Inc. for the year ended December 30,
2000.
- Item 7(b): Unaudited pro forma combined condensed
financial information of Thoratec Corporation and
Thermo Cardiosystems Inc.
2. Current Report on Form 8-K filed with the SEC on February
28, 2001 (File No. 033-72502) reporting the following items:
- Item 1: Change in Control
- Item 2: Acquisition or Disposition of Assets
- Item 5: Other Events
(1) Incorporated by reference to the Registrant's Current Report on
Form 8-K filed with the Securities and Exchange Commission on
February 28, 2001 (File No. 033-72502).
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THORATEC CORPORATION
Date: January 23, 2002 /s/ D. Keith Grossman
-------------------------------------
D. Keith Grossman,
Chief Executive Officer
Date: January 23, 2002 /s/ Wayne Boylston
-------------------------------------
Wayne Boylston,
Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
20