SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
February 14, 2001
Date of Report (Date of earliest event reported)
Thoratec Corporation
(Exact Name of Registrant as Specified in its Charter)
-----------------------------------------------------
CALIFORNIA 1-8145 94-2340464
(State or other (Commission File Number) (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation)
----------------------------------------
6035 STONERIDGE DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: (925) 847-8600
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EXPLANATORY NOTE
This Amendment No. 2 to Current Report on Form 8K/A is filed for the
purpose of filing financial statements of Thermo Cardiosystems, Inc. required by
Item 7(a) of Form 8-K and the pro forma financial information required by Item
7(b) of Form 8-K.
ITEM 1. CHANGE IN CONTROL OF REGISTRANT.
As described in Item 2 below, Thermo Electron Corporation, a majority
stockholder of Thoratec Cardiosystems Inc. (then named Thermo Cardiosystems,
Inc., "TCA"), as a result of the merger (the "Merger") of a newly-formed,
wholly-owned subsidiary of Registrant (then named "Thoratec Laboratories
Corporation" and renamed "Thoratec Corporation") named Lightning Acquisition
Corp. (the "Merger Sub") into TCA, acquired approximately 36% of the
Registrant's outstanding stock.
ITEM 2. ACQUISITION OR DISPOSITION ASSETS.
On October 3, 2000, Registrant entered into an Agreement and Plan of
Merger (the "Merger Agreement") with the Merger Sub, TCA, and Thermo Electron
Corporation that, at the time, owned a majority of the outstanding shares of
TCA. The Merger Agreement called for the Merger of the Merger Sub into TCA. In
separate meetings held February 13, 2001, Registrant's shareholders and TCA's
stockholders approved the Merger Agreement and Merger. The Merger closed
February 14, 2001. As a consequence of the Merger, TCA became a wholly-owned
subsidiary of Registrant. In connection with the Merger, TCA changed its name to
"Thoratec Cardiosystems Inc." In the Merger, each outstanding share of TCA's
common stock was converted into 0.835 of a share of Registrant's common stock,
with Registrant paying cash for aggregated fractions of Registrant's stock
otherwise payable to each TCA shareholder. This exchange ratio was negotiated at
arms-length. Registrant intends to cause TCA and its subsidiaries to continue to
conduct the same businesses after the Merger as they did before the Merger. The
Merger is more fully described in the press release filed as Exhibit 99.1 to the
Registrant's Current Report on Form 8-K filed with the SEC on February 28, 2001,
File No. 333-72502.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
After completion of the Merger, management of the Registrant, together
with the Audit Committee of the Registrant's Board of Directors, evaluated
whether Deloitte & Touche LLP ("D&T"), the Registrant's independent auditors, or
Arthur Andersen LLP ("AA"), TCA's independent auditors prior to the Merger,
should be engaged as the Registrant's independent auditors for the current
fiscal year. The Registrant decided to dismiss AA as the independent auditors
of TCA and decided to continue to engage D&T to audit the Registrant's
financial statements for the current fiscal year. Dismissal of AA was effective
upon completion of AA's work related to the audit of TCA's year 2000 financial
statements. That work was completed on or about the date of this Report. The
decision to dismiss AA and continue to retain D&T as independent auditors was
recommended by the Audit Committee and approved by the Registrant's Board of
Directors.
The reports of AA on TCA's financial statements as of and for the years
ended January 1, 2000 and December 30, 2000, did not contain an adverse opinion
or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit score or accounting principles.
During the fiscal years ended January 1, 2000 and December 30, 2000 and
through the date of this Report, there has not been any disagreement with AA on
any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreement, if not resolved
to the satisfaction of AA would have caused AA to make reference to the subject
matter of the disagreement in connection with any report issued by AA.
During the Registrant's two most recent fiscal years and through the date
of this Report, the Registrant did not consult with D&T regarding: (i) with
respect to the business of TCA, the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on TCA's financial statements, and either a
written report was provided to the Registrant or oral advice was provided that
the Registrant believes D&T concluded was an important factor considered by the
Registrant in reaching a decision as to the accounting, auditing or financial
reporting issue related to the financial statements of TCA; or (ii) any matter
that was either the subject of a disagreement (as defined in paragraph
(a)(1)(iv) of Item 304 of Regulation S-K) or a reportable event (as described in
paragraph (a)(1)(v) of Item 304 of Regulation S-K).
ITEM 5. OTHER EVENTS.
Registrant's shareholders approved an amendment to Registrant's Articles
of Incorporation changing Registrant's name from "Thoratec Laboratories
Corporation" to "Thoratec Corporation" at Registrant's shareholder meeting held
February 13, 2001. This name change became effective on or about February 14,
2001. Registrant's shares continue to trade under the NASDAQ Symbol "THOR"
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statement of Business Acquired.
The financial statements of the business acquired are attached
hereto.
(b) Pro Forma Financial Information.
The pro forma financial information is attached hereto.
(c) Exhibits.
EXHIBIT NO. DESCRIPTION
Exhibit 2.1 Agreement and Plan of Merger among Thoratec Corporation (then named
"Thoratec Laboratories Corporation"), Lightning Acquisition Corp.,
Thoratec Cardiosystems Inc. (then named "Thermo Cardiosystems Inc.")
and Thermo Electron Corporation dated as of October 3, 2000.
(Incorporated by reference to Registrant's Registration Statement on
Form S-4 filed with the SEC on November 1, 2000, File No.
333-49120.)
Exhibit 3.1 Certificate of Amendment of the Amended and Restated Articles of
Incorporation filed with the Secretary of State of the State of
California on or about February 14, 2001. (Incorporated by reference
to Registrant's Current Report on Form 8-K filed with the SEC on
February 28, 2001, File No. 333-72502.)
Exhibit 16.1 Letter from Arthur Andersen LLP
Exhibit 23.1 Consent of Arthur Andersen LLP
Exhibit 99.1 Press Release dated February 14, 2001. (Incorporated by reference
to Registrant's Current Report on Form 8-K filed with the SEC on
February 28, 2001, File No. 333-72502.)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
THORATEC CORPORATION
By: /s/ D. Keith Grossman
----------------------------------------
D. Keith Grossman
President and Chief Executive Officer
Date: January 23, 2002
EXHIBIT INDEX
Exhibit 2.1 Agreement and Plan of Merger among Thoratec Corporation (then
named "Thoratec Laboratories Corporation"), Lightning Acquisition
Corp., Thoratec Cardiosystems Inc. (then named "Thermo
Cardiosystems Inc.") and Thermo Electron Corporation dated as of
October 3, 2000. (Incorporated by reference to Registrant's
Registration Statement on Form S-4 filed on November 1, 2000, File
No. 333-49120.)
Exhibit 3.1 Certificate of Amendment of the Amended and Restated Articles of
Incorporation filed with the Secretary of State of the State of
California on or about February 14, 2001. (Incorporated by
reference to Registrant's Current Report on Form 8-K filed with
the SEC on February 28, 2001, File No. 333-72502.)
Exhibit 16.1 Letter from Arthur Andersen LLP
Exhibit 23.1 Consent of Arthur Andersen LLP
Exhibit 99.1 Press Release dated February 14, 2001. (Incorporated by reference
to Registrant's Current Report on Form 8-K filed with the SEC on
February 28, 2001, File No. 333-72502).
Item 7. (a) Financial Statements of the Business Acquired.
Thermo Cardiosystems Inc.
Consolidated Financial Statements
2000
THERMO CARDIOSYSTEMS, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Thermo Cardiosystems Inc.:
We have audited the accompanying consolidated balance sheet of Thermo
Cardiosystems Inc. (a Massachusetts corporation and 60%-owned subsidiary of
Thermo Electron Corporation) and subsidiaries as of December 30, 2000, and
January 1, 2000, and the related consolidated statements of income, cash flows,
and comprehensive income and shareholders' investment for each of the three
years in the period ended December 30, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermo
Cardiosystems Inc. and subsidiaries as of December 30, 2000, and January 1,
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 30, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 5, 2001 (except with
respect to the matter discussed
in Note 15, as to which the date
is February 14, 2001)
5
THERMO CARDIOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED
(In thousands except per share amounts) 2000 1999 1998
-------- -------- --------
REVENUES (Note 11) $ 83,703 $ 79,090 $ 66,848
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues 35,094 33,739 28,405
Selling, general, and administrative expenses (Note 6) 23,587 22,018 18,960
Research and development expenses 15,926 15,631 10,929
Restructuring and unusual costs (Note 9) 1,831 -- --
-------- -------- --------
76,438 71,388 58,294
-------- -------- --------
Operating Income 7,265 7,702 8,554
Interest Income 7,602 7,086 7,448
Interest Expense (includes $52 to Thermo Electron in 2000) (2,907) (3,551) (3,591)
Other Income (Note 2) 3 -- 28
-------- -------- --------
Income Before Provision for Income Taxes and Extraordinary Item 11,963 11,237 12,439
Provision for Income Taxes (Note 4) 4,630 2,865 4,619
-------- -------- --------
Income Before Extraordinary Item 7,333 8,372 7,820
Extraordinary Item, Net of Provision for Income Taxes of $117 and $743
(Note 5) 191 1,212 --
-------- -------- --------
NET INCOME $ 7,524 $ 9,584 $ 7,820
======== ======== ========
BASIC AND DILUTED EARNINGS PER SHARE (Note 12) $ .20 $ .25 $ .20
======== ======== ========
WEIGHTED AVERAGE SHARES (Note 12)
Basic 38,555 38,443 38,810
======== ======== ========
Diluted 38,574 38,482 38,985
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
THERMO CARDIOSYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
FISCAL YEAR END
(In thousands) 2000 1999
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 30,236 $ 418
Advance to affiliate -- 13,961
Short-term available-for-sale investments, at quoted market value
(amortized cost of $98,743 and $82,767; Note 2) 98,682 82,559
Accounts receivable, less allowances of $939 and $1,009 15,358 14,368
Inventories 17,381 14,945
Deferred tax asset (Note 4) 3,454 4,128
Prepaid expenses and other current assets 74 69
-------- --------
165,185 130,448
-------- --------
Property, Plant, and Equipment, at Cost, Net 7,084 7,359
-------- --------
Long-term Available-for-sale Investments, at Quoted Market Value
(amortized cost of $28,427; Note 2) -- 28,108
-------- --------
Deferred Tax Asset (Note 4) 2,619 2,611
-------- --------
Other Assets 1,797 1,402
-------- --------
$176,685 $169,928
======== ========
7
THERMO CARDIOSYSTEMS, INC.
CONSOLIDATED BALANCE SHEET (CONTINUED)
FISCAL YEAR END
(In thousands except share amounts) 2000 1999
--------- ---------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 3,972 $ 4,235
Accrued payroll and employee benefits 3,999 3,788
Accrued retention costs (Note 9) 1,708 --
Accrued warranty expenses 970 1,420
Accrued income taxes 305 1,067
Other accrued expenses 4,048 3,754
Due to parent company and affiliated companies 977 713
--------- ---------
15,979 14,977
--------- ---------
Subordinated Convertible Debentures (in 2000, includes $1,500 due to
Thermo Electron; Note 5) 54,838 58,011
--------- ---------
Commitments and Contingency (Notes 6 and 7)
Shareholders' Investment (Notes 3 and 8):
Common stock, $.10 par value, 100,000,000 shares authorized;
40,643,884 and 40,531,130 shares issued 4,064 4,053
Capital in excess of par value 96,930 96,006
Retained earnings 57,024 49,500
Treasury stock at cost, 2,063,653 and 2,054,669 shares (51,869) (51,807)
Deferred compensation (251) (521)
Accumulated other comprehensive items (Note 13) (30) (291)
--------- ---------
105,868 96,940
--------- ---------
$ 176,685 $ 169,928
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
8
THERMO CARDIOSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
(In thousands) 2000 1999 1998
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 7,524 $ 9,584 $ 7,820
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,840 2,880 2,987
Provision for losses on accounts receivable 24 120 120
Extraordinary item, net of income taxes (Note 5) (191) (1,212) --
Gain on sale of investments (3) -- (28)
Deferred income tax expense (benefit) -- (780) 887
Other noncash items 270 104 (69)
Changes in current accounts:
Accounts receivable (1,024) (2,252) (981)
Inventories (2,444) (3,012) 2,584
Other current assets (7) 640 (69)
Accounts payable (263) (119) 2,065
Other current liabilities 2,008 708 1,550
--------- --------- ---------
Net cash provided by operating activities 8,734 6,661 16,866
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale investments 131,515 131,943 175,619
Proceeds from sale of available-for-sale investments 287 8,000 5,900
Purchases of available-for-sale investments (119,626) (160,755) (213,775)
Purchases of property, plant, and equipment (2,360) (2,540) (1,599)
Advances to affiliate, net 13,961 (13,961) --
Other (376) 33 173
--------- --------- ---------
Net cash provided by (used in) investing activities 23,401 (37,280) (33,682)
--------- --------- ---------
FINANCING ACTIVITIES
Purchases of Company common stock and subordinated
convertible debentures (Note 5) (2,825) (10,910) (12,114)
Net proceeds from issuance of Company common stock 601 193 525
Payment of withholding taxes related to stock option exercises (47) (290) (729)
--------- --------- ---------
Net cash used in financing activities (2,271) (11,007) (12,318)
--------- --------- ---------
Exchange Rate Effect on Cash (46) 18 2
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents 29,818 (41,608) (29,132)
Cash and Cash Equivalents at Beginning of Year 418 42,026 71,158
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 30,236 $ 418 $ 42,026
========= ========= =========
CASH PAID FOR
Interest $ 2,918 $ 3,382 $ 3,325
Income taxes $ 4,691 $ 4,670 $ 2,961
The accompanying notes are an integral part of these consolidated financial
statements.
9
THERMO CARDIOSYSTEMS, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME AND SHAREHOLDERS' INVESTMENT
FISCAL YEAR END
(In thousands) 2000 1999 1998
-------- -------- --------
COMPREHENSIVE INCOME
Net Income $ 7,524 $ 9,584 $ 7,820
-------- -------- --------
Other Comprehensive Items (Note 13):
Foreign currency translation adjustment (38) 18 3
Unrealized gain (loss) on available-for-sale investments, net of
reclassification adjustment 299 (458) 20
-------- -------- --------
261 (440) 23
-------- -------- --------
$ 7,785 $ 9,144 $ 7,843
======== ======== ========
SHAREHOLDERS' INVESTMENT
Common Stock, $.10 Par Value:
Balance at beginning of year $ 4,053 $ 4,052 $ 4,052
Issuance of stock under employees' and directors' stock plans 5 1 --
Issuance of stock due to exercise of stock warrant 6 -- --
-------- -------- --------
Balance at end of year 4,064 4,053 4,052
-------- -------- --------
Capital in Excess of Par Value:
Balance at beginning of year 96,006 98,489 98,252
Issuance of stock under employees' and directors' stock plans 261 (2,483) 11
Tax benefit related to employees' and directors' stock plans 319 -- 226
Issuance of stock due to exercise of stock warrant 344 -- --
-------- -------- --------
Balance at end of year 96,930 96,006 98,489
-------- -------- --------
Retained Earnings:
Balance at beginning of year 49,500 39,916 32,096
Net income 7,524 9,584 7,820
-------- -------- --------
Balance at end of year 57,024 49,500 39,916
-------- -------- --------
Treasury Stock:
Balance at beginning of year (51,807) (53,892) (41,563)
Activity under employees' and directors' stock plans (62) 3,010 (215)
Purchases of Company common stock -- (925) (12,114)
-------- -------- --------
Balance at end of year (51,869) (51,807) (53,892)
-------- -------- --------
Deferred Compensation (Note 3):
Balance at beginning of year (521) -- --
Activity under employees' stock plans 82 (625) --
Amortization of deferred compensation 188 104 --
-------- -------- --------
Balance at end of year $ (251) $ (521) $ --
-------- -------- --------
10
THERMO CARDIOSYSTEMS, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME AND
SHAREHOLDERS' INVESTMENT (CONTINUED)
FISCAL YEAR END
(In thousands) 2000 1999 1998
--------- --------- ---------
Accumulated Other Comprehensive Items (Note 13):
Balance at beginning of year $ (291) $ 149 $ 126
Other comprehensive items 261 (440) 23
--------- --------- ---------
Balance at end of year (30) (291) 149
--------- --------- ---------
$ 105,868 $ 96,940 $ 88,714
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
11
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
NATURE OF OPERATIONS
Thermo Cardiosystems Inc. (the Company) operates in two business segments:
Left Ventricular-assist Systems (LVAS) and Other Medical Equipment. The Company
is a leader in the research, development, and manufacture of two implantable
LVAS: a pneumatic, or air-driven, system and an electric version. Its
HeartMate(R) devices are designed to perform substantially all or part of the
pumping function of the left ventricle of the natural heart for patients
suffering from cardiovascular disease. This segment includes Nimbus Inc., which
is involved in the research and development of ventricular-assist devices and
total artificial hearts. The Company's Other Medical Equipment segment consists
of International Technidyne Corporation, a leading manufacturer of near-patient,
whole-blood coagulation testing equipment and related disposables, as well as
premium-quality, single-use, skin-incision devices. In February 2001, the
Company merged with Thoratec Corporation (Note 15).
RELATIONSHIP WITH THERMEDICS INC. AND THERMO ELECTRON CORPORATION
The Company was incorporated in 1988 as a wholly owned subsidiary of
Thermedics Inc. Subsequently, the Company raised capital in an initial public
offering of its common stock. On June 30, 2000, Thermo Electron Corporation
repurchased all of the outstanding shares it did not already own in Thermedics
and, as a result, the Company became a direct subsidiary of Thermo Electron. As
of December 30, 2000, Thermo Electron owned 23,129,293 shares of the Company's
common stock, representing 60% of such stock outstanding (Note 15).
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
FISCAL YEAR
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 2000, 1999, and 1998 are for the fiscal years ended December
30, 2000, January 1, 2000, and January 2, 1999, respectively.
REVENUE RECOGNITION
The Company recognizes the majority of its revenues upon shipment of its
products. The Company provides a reserve for its estimate of warranty costs at
the time of shipment. Revenues and profits on long-term research and development
contracts are recognized using the percentage-of-completion method. Revenues
recorded under the percentage-of-completion method were $306,000 and $479,000 in
2000 and 1999, respectively. The percentage-of-completion is determined by
relating the actual costs incurred to date to management's estimate of total
costs to be incurred on each contract. If a loss is indicated on any contract in
process, a provision is made currently for the entire loss. Contracts generally
provide for the billing of customers on a cost-plus-fixed-fee basis as costs are
incurred. First time sales of LVAS to hospitals of transplant centers include a
training effort that may take place after the shipment of the related products.
In certain instances the revenues and related costs are deferred until the
training is complete. In those limited instances, Cardiosystems would record
revenue upon shipment only if it was determined that the surgical team at the
hospital possessed or had direct access to the knowledge necessary to perform a
VAD surgical procedure and only to the extent that such revenues included
products and services that had actually been delivered or performed. If such
experience was not present or readily available, Cardiosystems would defer the
related revenues associated with the products and training until training had
been conducted. As of the balance sheet dates presented, no revenues were
deferred on transactions where product was shipped prior to the completion of
training and no revenues were recognized during the periods presented where
product was shipped prior to the completion of training.
STOCK-BASED COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans (Note 3). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
12
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
EARNINGS PER SHARE
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the year. Except where the
effect would be antidilutive, diluted earnings per share have been computed
assuming the conversion of the Company's convertible debentures and the
elimination of the related interest expense, and the exercise of stock options,
as well as their related income tax effects.
CASH AND CASH EQUIVALENTS
The Company's cash equivalents include investments in commercial paper
with an original maturity of three months or less. The Company's cash and cash
equivalents also includes cash held in a deposit account in the United Kingdom.
Cash equivalents are carried at cost, which approximates market value.
ADVANCE TO AFFILIATE
The Company participated in a domestic cash management arrangement with
Thermo Electron. Under the arrangement, amounts advanced to Thermo Electron by
the Company for domestic cash management purposes bore interest at the 30-day
Dealer Commercial Paper Rate plus 50 basis points, set at the beginning of each
month. Thermo Electron was contractually required to maintain cash, cash
equivalents, and/or immediately available bank lines of credit equal to at least
50% of all funds invested under this cash management arrangement by all Thermo
Electron subsidiaries other than wholly-owned subsidiaries. The Company had the
contractual right to withdraw its funds invested in the cash management
arrangement upon 30 days' prior notice. Effective August 2000, the Company no
longer participates in the domestic cash management agreement. Amounts
previously invested in this arrangement are included in cash and cash
equivalents and available-for-sale investments in the accompanying 2000 balance
sheet.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market value and include materials, labor, and manufacturing overhead.
The components of inventories are as follows:
(In thousands) 2000 1999
------- -------
Raw Materials $ 3,943 $ 3,863
Work in Process 10,261 7,859
Finished Goods 3,177 3,223
------- -------
$17,381 $14,945
======= =======
The Company periodically reviews its quantities of inventories on hand and
compares these amounts to expected usage of each particular product or product
line. The Company records as a charge to cost of revenues any amounts required
to reduce the carrying value of inventories to net realizable value.
13
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
PROPERTY, PLANT, AND EQUIPMENT
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property, as follows: buildings, 30 years; machinery and
equipment, 2 to 7 years; and leasehold improvements, the shorter of the term of
the lease or the life of the asset. Property, plant, and equipment consists of
the following:
(In thousands) 2000 1999
------- -------
Land $ 341 $ 341
Buildings 2,445 2,445
Machinery, Equipment, and Leasehold Improvements 20,981 18,634
------- -------
23,767 21,420
Less: Accumulated Depreciation and Amortization (16,683) (14,061)
------- -------
$ 7,084 $ 7,359
======= =======
OTHER ASSETS
Other assets in the accompanying balance sheet include the cost of
acquired patents and trademarks and deferred debt expense relating to the
Company's issuance of subordinated convertible debentures. These assets are
being amortized using the straight-line method over their estimated useful
lives, which range from 7 to 40 years. These assets were $1,179,000 and
$1,350,000, net of accumulated amortization of $1,237,000 and $981,000, at
year-end 2000 and 1999, respectively.
FOREIGN CURRENCY
All assets and liabilities of the Company's foreign subsidiary are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment
(Note 13). Foreign currency transaction gains and losses are included in the
accompanying statement of income and are not material for each of the three
years presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRESENTATION
Certain amounts in 1999 and 1998 have been reclassified to conform to the
presentation in the 2000 financial statements.
14
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Available-for-sale Investments
The Company's debt securities are considered available-for-sale
investments in the accompanying balance sheet and are carried at market value,
with the difference between cost and market value, net of related tax effects,
recorded in the "Accumulated other comprehensive items" component of
shareholders' investment. The aggregate market value, cost basis, and gross
unrealized gains and losses of short- and long-term available-for-sale
investments by major security type are as follows:
Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
-------- -------- ---------- --------
2000
Government-agency Securities $ 92,644 $ 92,724 $ 18 $ (98)
Corporate Bonds 4,991 4,989 2 --
Other 1,047 1,030 62 (45)
-------- -------- -------- --------
$ 98,682 $ 98,743 $ 82 $ (143)
======== ======== ======== ========
1999
Government-agency Securities $108,318 $108,831 $ 19 $ (532)
Other 2,349 2,363 110 (124)
-------- -------- -------- --------
$110,667 $111,194 $ 129 $ (656)
======== ======== ======== ========
Short- and long-term available-for-sale investments in the accompanying
2000 balance sheet include $98,237,000 with contractual maturities of one year
or less and $445,000 with contractual maturities of more than five years through
ten years. Actual maturities may differ from contractual maturities as a result
of the Company's intent to sell these securities prior to maturity and as a
result of call options that enable the issuer to redeem these securities at an
earlier date.
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains recorded in the
accompanying statement of income. Gain on sale of investments resulted from
gross realized gains of $3,000 and $28,000 in 2000 and 1998, respectively,
relating to the sale of available-for-sale investments.
3. Employee Benefit Plans
STOCK-BASED COMPENSATION PLANS
Stock Option Plans
The Company maintains stock-based compensation plans for its key
employees, directors, and others. Two of these plans permit the grant of
nonqualified and incentive stock options. Two other plans permit the grant of a
variety of stock and stock-based awards as determined by the human resources
committee of the Company's Board of Directors (the Board Committee), including
restricted stock, stock options, stock bonus shares, or performance-based
shares. The option recipients and the terms of options granted under these plans
are determined by the Board Committee. Generally, options granted to date are
exercisable immediately, but are subject to certain transfer restrictions and
the right of the Company to repurchase shares issued upon exercise of the
options at the exercise price, upon certain events. The restrictions and
repurchase rights generally lapse ratably over a one- to ten-year period,
15
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Employee Benefit Plans (continued)
depending on the term of the option, which may range from five to twelve years.
Nonqualified options may be granted at any price determined by the Board
Committee, although incentive stock options must be granted at not less than the
fair market value of the Company's stock on the date of grant. To date, all
options have been granted at fair market value. The Company also has a
directors' stock option plan that provides for the grant of stock options to
outside directors pursuant to a formula approved by the Company's shareholders.
Options awarded under this plan are exercisable six months after the date of
grant and expire three or seven years after the date of grant. In addition to
the Company's stock-based compensation plans, certain officers and key employees
may also participate in the stock-based compensation plans of Thermedics and
Thermo Electron.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 719,000 shares at a weighted average exercise price of $27.99 per share
elected to participate in this exchange and, as a result, received options to
purchase 360,000 shares of Company common stock at $10.91 per share, which are
included in the 1998 grants in the table below. The other terms of the new
options are the same as the exchanged options except that the holders may not
sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.
In June 1999, the Company awarded 67,000 shares of restricted Company
common stock to certain key employees. The shares had an aggregate value of
$625,000 and vest three years from the date of award, assuming continued
employment, with certain exceptions. The Company has recorded the fair value of
the restricted stock as deferred compensation in the accompanying balance sheet
and is amortizing such amount over the vesting period. At the time of the merger
with Thoratec Corporation in February 2001, all options fully vested and all
such restrictions on restricted stock awards lapsed. See Note 15.
A summary of the Company's stock option activity is as follows:
2000 1999 1998
--------------------- ------------------- --------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Options Outstanding, Beginning of Year 1,405 $ 13.82 1,468 $ 13.99 1,646 $ 20.41
Granted 54 9.73 120 9.51 761 12.25
Exercised (39) 6.93 (68) 4.51 (159) 4.17
Forfeited (249) 17.26 (115) 16.91 (61) 26.14
Canceled due to exchange -- -- -- -- (719) 27.99
----- ----- -----
Options Outstanding, End of Year 1,171 $ 13.13 1,405 $13.82 1,468 $ 13.99
===== ======= ===== ======= ===== =======
Options Exercisable 1,171 $ 13.13 1,405 $13.82 1,464 $ 13.96
===== ======= ===== ======= ===== =======
Options Available for Grant 1,210 1,015 1,087
===== ===== =====
16
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Employee Benefit Plans (continued)
A summary of the status of the Company's stock options at December 30,
2000, is as follows:
Options Outstanding and Exercisable
------------------------------------------------------
Number Weighted Weighted
of Average Average
Shares Remaining Exercise
Range of Exercise Prices (In thousands) Contractual Life Price
------------ ---------------- --------
$ 7.83 - $12.77 913 4.5 years $10.91
12.78 - 17.72 135 2.6 years 15.31
17.73 - 22.67 4 0.4 years 22.28
22.68 - 27.62 119 7.5 years 27.40
-----
$ 7.83 - $27.62 1,171 4.6 years $13.13
=====
Employee Stock Purchase Program
Substantially all of the Company's full-time employees are eligible to
participate in an employee stock purchase program sponsored by the Company and
Thermo Electron. Under this program, shares of the Company's and Thermo
Electron's common stock may be purchased at 85% of the lower of the fair market
value at the beginning or end of the period, and shares purchased are subject to
a one-year resale restriction. Prior to the 1998 program year, the applicable
shares of common stock could be purchased at the end of a 12-month period at 95%
of the fair market value at the beginning of the period, and the shares
purchased were subject to a six-month resale restriction. Shares are purchased
through payroll deductions of up to 10% of each participating employee's gross
wages. During 2000 and 1999, the Company issued 17,800 and 9,100 shares,
respectively, of its common stock under this program. No shares were issued
under this program during 1998.
PRO FORMA STOCK-BASED COMPENSATION EXPENSE
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
after 1994 under the Company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method set forth
under SFAS No. 123, the effect on the Company's net income and earnings per
share would have been as follows:
(In thousands except per share amounts) 2000 1999 1998
------- ------- -------
Net Income:
As reported $ 7,524 $ 9,584 $ 7,820
Pro forma 6,187 7,209 5,911
Basic and Diluted Earnings per Share:
As reported .20 .25 .20
Pro forma .16 .19 .15
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
17
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Employee Benefit Plans (continued)
The weighted average fair value per share of options granted was $5.34,
$3.81, and $5.61 in 2000, 1999, and 1998, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
2000 1999 1998
-------- -------- --------
Volatility 61% 54% 52%
Risk-free Interest Rate 4.9% 5.6% 4.6%
Expected Life of Options 4.8 years 3.1 years 4.4 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) SAVINGS PLAN
Substantially all of the Company's full-time employees are eligible to
participate in Thermo Electron's 401(k) savings plan. Contributions to the plan
are made by both the employee and the Company. Company contributions are based
upon the level of employee contributions. For these plans, the Company
contributed and charged to expense $804,000, $726,000, and $584,000 in 2000,
1999, and 1998, respectively.
4. Income Taxes
The components of income before provision for income taxes and
extraordinary item are as follows:
(In thousands) 2000 1999 1998
-------- -------- --------
Domestic $ 12,081 $ 11,302 $ 12,506
Foreign (118) (65) (67)
-------- -------- --------
$ 11,963 $ 11,237 $ 12,439
======== ======== ========
18
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Income Taxes (continued)
The components of the provision for income taxes are as follows:
(In thousands) 2000 1999 1998
------- ------- -------
Currently Payable:
Federal $ 3,747 $ 2,702 $ 3,450
State 352 943 282
------- ------- -------
4,099 3,645 3,732
------- ------- -------
Net Deferred (Prepaid):
Federal 465 (643) 754
State 66 (137) 133
------- ------- -------
531 (780) 887
------- ------- -------
$ 4,630 $ 2,865 $ 4,619
======= ======= =======
The Company receives a tax deduction upon exercise of nonqualified stock
options by employees for the difference between the exercise price and the
market price of the Company's common stock on the date of exercise. The
provision for income taxes that is currently payable does not reflect $319,000
and $226,000 of such benefits that have been allocated to capital in excess of
par value in 2000 and 1998, respectively.
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income before provision for income taxes and extraordinary
item due to the following:
(In thousands) 2000 1999 1998
------- ------- -------
Provision for Income Taxes at Statutory Rate $ 4,187 $ 3,933 $ 4,354
Increases (Decreases) Resulting From:
Federal research and development credit claim from prior years -- (1,508) --
State income taxes, net of federal tax 272 524 270
Foreign sales corporation benefit (134) (116) (110)
Other 305 32 105
------- ------- -------
$ 4,630 $ 2,865 $ 4,619
======= ======= =======
During 1999, the Company received a favorable resolution of a claim for
prior-year research and development tax credits, which reduced the tax provision
by $1,508,000.
19
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Income Taxes (continued)
Short- and long-term deferred tax assets in the accompanying balance sheet
consist of the following:
(In thousands) 2000 1999
------- -------
Write-off of acquired technology $ 1,427 $ 1,556
Reserves and accruals 1,662 1,121
Depreciation and amortization 1,179 1,173
Inventory basis difference 958 1,071
Accrued compensation 568 983
Allowance for doubtful accounts 346 340
State tax loss and credit carryforwards 1,492 613
Other, net (67) 495
------- -------
7,565 7,352
Valuation allowance 1,492 613
------- -------
$ 6,073 $ 6,739
======= =======
The valuation allowance relates to the realizability of state net
operating loss carryforwards of $2,100,000, which expire in 2001 through 2005,
and state tax credit carryforwards of $1,290,000, which expire in 2001 through
2012.
5. Subordinated Convertible Debentures
During 2000, the Company purchased $3,173,000 principal amount of its 4
3/4% subordinated convertible debentures, convertible at $31.415 per share and
due 2004, for $2,825,000 in cash, resulting in an extraordinary gain of
$191,000, net of taxes of $117,000.
During 1999, the Company purchased $11,989,000 principal amount of its 4
3/4% subordinated convertible debentures for $9,985,000 in cash, resulting in an
extraordinary gain of $1,212,000, net of taxes of $743,000.
See Note 10 for the fair value information pertaining to the Company's
subordinated convertible debentures.
6. Related-party Transactions
CORPORATE SERVICES AGREEMENT
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company pays Thermo Electron annually an amount equal to 0.8% of the
Company's revenues. In addition, the Company uses data processing services of a
majority-owned subsidiary of Thermo Electron, and accounting, personnel, and
administrative services of Thermedics. For these services, as well as the
administrative services provided by Thermo Electron, the Company was charged
$980,000, $837,000, and $768,000 in 2000, 1999, and 1998, respectively. The fee
is reviewed and adjusted annually by mutual agreement of the parties. Management
believes that the service fees charged by Thermo Electron, its majority-owned
subsidiary, and Thermedics are reasonable and that such fees are representative
of the expenses the Company would have incurred on a stand-alone basis. The
corporate services agreement is renewed annually but can be terminated upon 30
days' prior notice by the Company or upon the Company's withdrawal from the
Thermo Electron Corporate Charter (the Thermo Electron Corporate Charter defines
the relationship among Thermo Electron and its majority-owned subsidiaries). For
additional items such as employee benefit plans, insurance coverage, and other
identifiable costs, Thermo Electron charges the Company based upon costs
attributable to the Company.
20
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related-party Transactions (continued)
OPERATING LEASES
The Company subleases office and research facilities from Thermo Electron
and is charged for actual square footage occupied at approximately the same rent
paid per square foot by Thermo Electron under its prime lease. The sublease
expires in February 2004. The accompanying statement of income includes expenses
from the sublease of $177,000, $171,000, and $151,000 in 2000, 1999, and 1998,
respectively.
The Company subleases a portion of an office and research facility from
Thermo Electron and is charged for actual square footage occupied at
approximately the same rent paid per square foot by Thermo Electron under its
prime lease. The sublease was terminated in May 2000 and the Company currently
rents the same space from a third party. The accompanying statement of income
includes expenses from the sublease with Thermo Electron of $36,000, $65,000,
and $50,000 in 2000, 1999, and 1998, respectively.
Future minimum payments due under these noncancellable lease arrangements
at December 30, 2000, are $168,000 in 2001 through 2003, and $28,000 in 2004.
Total future minimum lease payments are $532,000.
RELATED-PARTY PURCHASES
Thermo Electron's Tecomet division provides metal fabrication services in
connection with the manufacture of the heart-assist devices sold by the Company.
The Company paid $3,283,000, $3,651,000, and $1,717,000 for these services in
2000, 1999, and 1998, respectively.
CASH MANAGEMENT
The Company has, from time to time, invested excess cash in arrangements
with Thermo Electron as discussed in Note 1.
7. Commitment and Contingency
OPERATING LEASES
In addition to the related-party operating leases described in Note 6, the
Company leases manufacturing, office, and research facilities under various
operating lease agreements. The accompanying statement of income includes
expense from these leases of $410,000, $245,000, and $355,000 in 2000, 1999, and
1998, respectively. Future minimum payments due under noncancelable operating
leases at December 30, 2000, are $362,000 in 2001, $255,000 in 2002, and $13,000
in 2003 and 2004. Total future minimum lease payments are $643,000.
CONTINGENCY
The Company has received correspondence alleging that the textured surface
of the LVAS housing infringed the intellectual property rights of another party.
In general, an owner of intellectual property can prevent others from using such
property without a license and is entitled to damages for unauthorized past
usage. The Company has investigated the bases of the allegation and, based upon
an evaluation of all the facts and circumstances, believes that if the Company
were sued on these bases, it would have meritorious defenses. Given the inherent
uncertainties in dispute resolution, it is reasonably possible that the
Company's results of operations could be materially adversely affected. The
Company cannot estimate the range of possible loss exposure associated with an
unfavorable outcome.
21
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock Purchase Warrant and Common Stock
In May 1993, in connection with an agreement to develop a material to be
used in the Company's LVAS, the Company granted to a third party the right to
purchase from the Company 60,000 shares of the Company's common stock at a price
of $5.83 per share, which was the fair market value of the Company's common
stock on the date of grant. This warrant is exercisable immediately and expires
ten years after the date of grant. In February 2000, 60,000 shares of the
Company's common stock were purchased under this warrant.
9. Restructuring and Unusual Costs
During 2000, the Company recorded restructuring and unusual costs of
$1,831,000 for employee retention costs in connection with the sale of the
Company (Note 15). The retention costs are being recorded ratably over the
period through which the employees must remain employed to qualify for the
payment. Of the total costs incurred during 2000, $1,182,000 was recorded in the
LVAS segment and $649,000 was recorded in the Other Medical Equipment segment.
As a result of the Company's merger with Thoratec (Note 15), the payment date of
the retention costs totalling $3.5 million will be accelerated and the Company
will record a charge of an additional $1.8 million in the first quarter of 2001
for the portion of the payment that had not been accrued at December 30, 2000.
A summary of the changes in the liability for retention costs follows:
(In thousands)
BALANCE AT JANUARY 1, 2000 $ --
Costs incurred in 2000 1,831
Payments (123)
-------
BALANCE AT DECEMBER 30, 2000 $ 1,708
=======
The Company expects to make the remaining payments for employee retention
during 2001.
10. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, advance to affiliate, available-for-sale investments, accounts
receivable, accounts payable, due to parent company and affiliated companies,
and subordinated convertible debentures. The carrying amounts of these financial
instruments, with the exception of available-for-sale investments and
subordinated convertible debentures, approximate fair value due to their
short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on quoted
market prices. See Note 2 for fair value information pertaining to these
financial instruments.
The fair value of the Company's subordinated convertible debentures, based
on quoted market prices, was $50,385,000 and $47,540,000 in 2000 and 1999,
respectively. The fair value is less than the carrying amount in both periods,
primarily due to a decrease in the market price of the Company's common stock
relative to the conversion price of the debentures.
22
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Significant Customer, Export Sales, Concentrations of Risk, and Segment
Information
SIGNIFICANT CUSTOMER
Sales to one customer accounted for 17%, 21%, and 22% of the Company's
total revenues in 2000, 1999, and 1998, respectively.
EXPORT SALES
Export revenues accounted for 16%, 16%, and 15% of the Company's total
revenues in 2000, 1999, and 1998, respectively.
CONCENTRATIONS OF RISK
Certain raw materials used in the manufacture of the Company's LVAS are
available from only one or two suppliers. The Company is making efforts to
minimize the risks associated with sole sources and ensure long-term
availability, including qualifying alternative materials and components or
developing alternative sources for materials or components supplied by a single
source. Although the Company believes that it has adequate supplies of materials
and components to meet demand for the LVAS for the foreseeable future, no
assurance can be given that the Company will not experience shortages of certain
materials or components in the future that could delay shipments of the LVAS.
The Company sells its products to customers in the healthcare industry.
The Company does not normally require collateral or other security to support
its accounts receivable. Management does not believe that this concentration of
credit risk has, or will have, a significant negative impact on the Company.
SEGMENT INFORMATION
The Company organizes and manages its business by functional operating
entity. The Company's functional entities operate in two segments: Left
Ventricular-assist Systems (LVAS) and Other Medical Equipment. The Company's
LVAS segment researches, develops, and manufactures an implantable pneumatic
LVAS that is powered by an external electrically driven air-pump and an electric
LVAS that is driven by an implanted electric motor and powered by a lightweight
battery pack worn by the patient. The Company's Other Medical Equipment segment
develops, manufactures, and markets near-patient, whole-blood coagulation
testing equipment and related disposables, as well as premium-quality,
single-use, skin-incision devices.
(In thousands) 2000 1999 1998
------- ------- -------
BUSINESS SEGMENT INFORMATION
Revenues:
Left Ventricular-assist Systems $43,356 $40,289 $30,303
Other Medical Equipment 40,347 38,801 36,545
------- ------- -------
$83,703 $79,090 $66,848
======= ======= =======
Income Before Provision for Income Taxes and
Extraordinary Item:
Left Ventricular-assist Systems(a) $ 624 $ (250) $ 344
Other Medical Equipment(b) 7,621 8,789 8,978
Corporate(c) (980) (837) (768)
------- ------- -------
Total operating income 7,265 7,702 8,554
Interest and other income, net 4,698 3,535 3,885
------- ------- -------
$11,963 $11,237 $12,439
======= ======= =======
23
THERMO CARDIOSYSTEMS. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Significant Customer, Export Sales, Concentrations of Risk, and Segment
Information (continued)
(In thousands) 2000 1999 1998
-------- -------- --------
Total Assets:
Left Ventricular-assist Systems $ 30,124 $ 28,078 $ 23,735
Other Medical Equipment 19,679 17,935 16,638
Corporate(d) 126,882 123,915 131,990
-------- -------- --------
$176,685 $169,928 $172,363
======== ======== ========
Depreciation and Amortization:
Left Ventricular-assist Systems $ 1,394 $ 1,432 $ 1,312
Other Medical Equipment 1,446 1,448 1,675
-------- -------- --------
$ 2,840 $ 2,880 $ 2,987
======== ======== ========
Capital Expenditures:
Left Ventricular-assist Systems $ 1,243 $ 1,103 $ 961
Other Medical Equipment 1,117 1,437 638
-------- -------- --------
$ 2,360 $ 2,540 $ 1,599
======== ======== ========
(a) Includes restructuring and unusual costs of $1,182,000 in 2000.
(b) Includes restructuring and unusual costs of $649,000 in 2000.
(c) Primarily general and administrative expenses.
(d) Primarily cash, cash equivalents, available-for-sale investments, and, in
1999, advance to affiliate.
12. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 2000 1999 1998
------- ------- -------
BASIC
Net Income $ 7,524 $ 9,584 $ 7,820
------- ------- -------
Weighted Average Shares 38,555 38,443 38,810
------- ------- -------
Basic Earnings per Share $ .20 $ .25 $ .20
======= ======= =======
DILUTED
Net Income $ 7,524 $ 9,584 $ 7,820
------- ------- -------
Basic Weighted Average Shares 38,555 38,443 38,810
Effect of Stock Options 19 39 175
------- ------- -------
Weighted Average Shares, as Adjusted 38,574 38,482 38,985
------- ------- -------
Diluted Earnings per Share $ .20 $ .25 $ .20
======= ======= =======
24
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Earnings per Share (continued)
Options to purchase 927,000, 1,426,000, and 1,052,000 shares of common
stock were not included in the computation of diluted earnings per share for
2000, 1999, and 1998, respectively, 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 excludes the
effect of assuming the conversion of the Company's 4 3/4% subordinated
convertible debentures, convertible at $31.415 per share, because the effect
would be antidilutive. The principal amount of the debentures was $54,838,000,
$58,011,000, and $70,000,000 at year-end 2000, 1999, and 1998, respectively.
During 2000 and 1999, the Company recorded extraordinary gains in
connection with the repurchase of its 4 3/4% subordinated convertible debentures
(Note 5). The extraordinary gains had no effect on reported earnings per share
in 2000 and increased basic and diluted earnings per share by $.03 in 1999.
13. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments.
Accumulated other comprehensive items in the accompanying balance sheet
consist of the following:
(In thousands) 2000 1999
----- -----
Cumulative Translation Adjustment $ 9 $ 47
Net Unrealized Loss on Available-for-sale Investments (39) (338)
----- -----
$ (30) $(291)
===== =====
Unrealized gains (losses) on available-for-sale investments, a component
of other comprehensive items, in the accompanying statement of comprehensive
income and shareholders' investment, includes the following:
(In thousands) 2000 1999 1998
----- ----- -----
Unrealized Holding Gains (Losses) Arising During the Year (net
of income tax (provision) benefit of $(168), $257, and $(21)) $ 301 $(458) $ 38
Reclassification Adjustment for Gains Included in Net Income
(net of income tax provision of $1, $0, and $10) (2) -- (18)
----- ----- -----
Net Unrealized Gains (Losses) (net of income tax (provision)
benefit of $(167), $257, and $(11)) $ 299 $(458) $ 20
===== ===== =====
25
THERMO CARDIOSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Unaudited Quarterly Information
(In thousands except per share amounts)
2000 First(a) Second(b) Third(c) Fourth(d)
------- -------- ------- --------
Revenues $20,082 $22,762 $19,391 $21,468
Gross Profit 11,790 13,230 11,092 12,497
Income Before Extraordinary Item 1,770 2,448 1,494 1,621
Net Income 1,770 2,639 1,494 1,621
Basic and Diluted Earnings per Share .05 .07 .04 .04
1999 First Second Third Fourth(e)
------- ------- ------- -------
Revenues $19,461 $20,215 $19,738 $19,676
Gross Profit 11,094 11,699 11,170 11,388
Income Before Extraordinary Item 1,773 2,010 2,845 1,744
Net Income 1,773 2,010 2,845 2,956
Basic and Diluted Earnings per Share .05 .05 .07 .08
(a) Reflects restructuring and unusual costs of $0.1 million.
(b) Reflects an extraordinary gain of $0.2 million, net of taxes of $0.1
million, and restructuring and unusual costs of $0.6 million.
(c) Reflects restructuring and unusual costs of $0.4 million.
(d) Reflects restructuring and unusual costs of $0.7 million.
(e) Reflects an extraordinary gain of $1.2 million, net of taxes of $0.7
million.
15. Subsequent Event
On February 14, 2001, the Company merged with Thoratec pursuant to an
agreement under which the Company's shareholders received 0.835 shares of
Thoratec common stock for each share of Company common stock owned. The
Company's 4 3/4% subordinated convertible debentures were assumed by Thoratec
and became convertible into shares of Thoratec.
26
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operation under
the heading "Forward-looking Statements."
OVERVIEW
The Company's businesses operate in two segments: Left Ventricular Assist
Systems (LVAS) and Other Medical Equipment. The LVAS segment researches,
develops, and manufactures two implantable heart-assist devices: a pneumatic, or
air-driven, system, and an electric version. Its HeartMate(R) devices are
designed to perform substantially all or part of the pumping function of the
left ventricle of the natural heart for patients suffering from cardiovascular
disease. This segment includes the Company's Nimbus Inc. subsidiary. Nimbus has
been involved in artificial heart technology for over 20 years and has carried
out research in two primary fields: ventricular-assist devices and total
artificial hearts. Nimbus was instrumental in developing the basic technology
for the high-speed rotary blood pump that is the basis for the HeartMate II, the
next generation of the Company's LVAS. Because of its smaller size, the
HeartMate II may potentially be used to provide cardiac support in small adults
and in children. The Other Medical Equipment segment consists of International
Technidyne Corporation, a leading manufacturer of near-patient, whole-blood
coagulation testing equipment and related disposables, as well as
premium-quality, single-use, skin-incision devices. In general, a profit cannot
be earned from the sale of an LVAS in the United States until approval of the
device has been received from the U.S. Food and Drug Administration (FDA) for
commercial sale. Until such approval was obtained, only the direct and indirect
costs of the LVAS could be recovered, which were included in the Company's
revenues. With the FDA's approval of the air-driven LVAS, the Company began
earning a profit on the sale of such systems in 1994. In September 1998, the FDA
granted approval for commercial sale in the U.S. of the electric LVAS as a
bridge to transplant. As a result, the Company earns a profit on the sale of
that device. Following FDA approval of the electric LVAS, the Company increased
the price of the electric LVAS by approximately 13%, effective November 1998.
On February 14, 2001, the Company merged with Thoratec Corporation
pursuant to an agreement under which the Company's shareholders received 0.835
shares of Thoratec common stock for each share of Company common stock.
RESULTS OF OPERATIONS
2000 COMPARED WITH 1999
Total revenues increased to $83.7 million in 2000 from $79.1 million in
1999. LVAS segment revenues increased to $43.4 million in 2000 from $40.3
million in 1999, primarily due to an increase in revenues from the Company's
electric LVAS, principally due to higher demand.
Other Medical Equipment segment revenues increased to $40.3 million in
2000 from $38.8 million in 1999, primarily due to a $2.0 million increase in
revenues from ProTime(R) Microcoagulation Systems due to increased demand and
the introduction of new products, offset in part by a decrease in revenues from
skin-incision devices due to lower demand caused by competitive pricing
pressures.
27
2000 COMPARED WITH 1999 (CONTINUED)
The gross profit margin increased to 58% in 2000 from 57% in 1999 due to
gross profit margin improvement in the LVAS segment. This improvement was
primarily due to an increase in the average sales price for the electric LVAS,
which improved the gross margin by approximately $0.4 million, as well as
improved volume. The gross profit margin for the Other Medical Equipment segment
decreased slightly, principally as a result of changes in product mix.
Selling, general, and administrative expenses as a percentage of revenues
were 28% in 2000 and 1999. Selling, general, and administrative expenses
increased to $23.6 million in 2000 from $22.0 million in 1999, primarily due to
an increase in selling and marketing expenses in support of higher revenues.
Research and development expenses increased to $15.9 million in 2000 from
$15.6 million in 1999, primarily due to an increase in expenses in the LVAS
segment, principally for the development of the HeartMate II and continuing
expenses related to a clinical trial being conducted to evaluate the electric
LVAS as an alternative to medical therapy. Research and development expenses
were 19% and 20% of revenues in 2000 and 1999, respectively.
Restructuring and unusual costs of $1.8 million were recorded by the
Company in 2000 for employee retention costs in connection with the sale of the
Company (Notes 9 and 15).
Interest income increased to $7.6 million in 2000 from $7.1 million in
1999, primarily due to an increase in interest rates. Interest expense decreased
to $2.9 million in 2000 from $3.6 million in 1999, due to the purchase by the
Company of $15.2 million principal amount of its 4 3/4% subordinated convertible
debentures in 2000 and 1999 (Note 5).
The effective tax rate was 39% and 25% in 2000 and 1999, respectively. The
effective tax rate exceeded the statutory federal income tax rate in 2000
primarily due to the impact of state income taxes. The effective tax rate was
below the statutory federal income tax rate in 1999 as a result of a favorable
resolution of a Company claim for prior-year research and development tax
credits. The effect of the credit decreased the tax provision recorded in 1999
by $1.5 million.
The Company recorded an extraordinary gains of $0.2 million and $1.2
million in 2000 and 1999, respectively, as a result of the purchase by the
Company of its 4 3/4% subordinated convertible debentures (Note 5).
1999 COMPARED WITH 1998
Total revenues increased to $79.1 million in 1999 from $66.8 million in
1998. LVAS segment revenues increased to $40.3 million in 1999 from $30.3
million in 1998. The increase in LVAS segment revenues was primarily due to a
$17.1 million increase in revenues from the Company's electric LVAS due to an
increase in demand as a result of FDA approval for commercial sale, which was
granted in September 1998 and, to a lesser extent, a 13% price increase for the
electric LVAS, effective November 1998. These increases in revenues were offset
in part by a $7.4 million decrease in revenues from the Company's air-driven
LVAS due to a shift to the electric LVAS and a $1.1 million decrease in revenues
at Nimbus due to the expiration of several government research and development
contracts.
Other Medical Equipment segment revenues increased to $38.8 million in
1999 from $36.5 million in 1998, primarily due to a $2.0 million increase in
revenues from the Company's skin-incision devices and ProTime, due to an
increase in demand.
The gross profit margin decreased slightly to 57.3% in 1999 from 57.5% in
1998. The gross profit margin in the Other Medical Equipment segment decreased
primarily due to changes in product mix and pricing strategies. This decrease
was offset in part by an increase in the gross profit margin in the LVAS segment
primarily due to an increase in demand resulting in higher overhead absorption
and, to a lesser extent, a decrease in lower-margin revenues from government
contracts at Nimbus. The increase in the gross profit margin, related to a 13%
price increase for the electric LVAS, was offset by lower sales of the higher
margin air-driven LVAS.
28
1999 COMPARED WITH 1998 (CONTINUED)
Selling, general, and administrative expenses as a percentage of revenues
remained unchanged at 28% in 1999 and 1998. Selling, general, and administrative
expenses increased to $22.0 million in 1999 from $19.0 million in 1998,
primarily due to a $1.5 million increase in costs for sales and marketing staff
in the LVAS segment and, to a lesser extent, higher advertising costs relating
to the electric LVAS, which was approved by the FDA for commercial sale in
September 1998.
Research and development expenses increased to $15.6 million, or 20% of
revenues, in 1999 from $10.9 million, or 16% of revenues, in 1998, primarily due
to a $2.7 million increase in expenses in the LVAS segment relating to a
clinical trial that is currently being conducted to evaluate the electric LVAS
as an alternative to medical therapy. To a lesser extent, research and
development expenses increased due to increased product development activities
in the Other Medical Equipment segment.
Interest income decreased to $7.1 million in 1999 from $7.4 million in
1998, primarily due to a decrease in interest rates and, to a lesser extent,
lower average invested balances. Interest expense was $3.6 million in both
periods.
The effective tax rate of 25% in 1999 resulted from a favorable resolution
of the Company's claim for prior-year research and development tax credits. The
effect of the credit decreased the tax provision recorded in 1999 by $1.5
million. The effective tax rate of 37% in 1998 exceeded the statutory federal
income tax rate primarily due to the impact of state income taxes.
The Company recorded an extraordinary gain of $1.2 million in 1999 as a
result of the purchase by the Company of $12.0 million principal amount of its 4
3/4% subordinated convertible debentures (Note 5).
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $149.2 million at December 30, 2000,
compared with $115.5 million at January 1, 2000. Cash, cash equivalents, advance
to affiliate, and short- and long-term available-for-sale investments were
$128.9 million at December 30, 2000, compared with $125.0 million at January 1,
2000. During 2000, $8.7 million of cash was provided by operating activities.
Cash of $2.4 million was used to fund an increase in inventories, primarily in
the LVAS segment in anticipation of higher sales. Cash of $1.0 million was used
to fund an increase in accounts receivable, primarily due to an increase in
fourth quarter revenues over the comparable period last year. Cash of $2.0
million was provided by an increase in other current liabilities, primarily
accrued retention costs.
During 2000, the Company's primary investing activity, excluding advance
to affiliate and available-for-sale investments activity, was the purchase of
property, plant, and equipment for $2.4 million.
During 2000, the Company used $2.8 million of cash to purchase
subordinated convertible debentures pursuant to authorizations by the Company's
Board of Directors. In addition, the Company sold 60,000 shares of Company
common stock in February 2000 for $0.3 million in connection with the exercise
of a warrant previously granted to a third party.
The Company believes that it has adequate resources to meet its financial
needs for the foreseeable future.
MARKET RISK
The Company is exposed to market risk from changes in interest rates and
equity prices, which could affect its future results of operations and financial
condition. The Company manages its exposure to these risks through its regular
operating and financing activities.
Interest Rates
The Company's available-for-sale investments and subordinated convertible
debentures are sensitive to changes in interest rates. Interest rate changes
would result in a change in the fair value of these financial instruments due to
the difference between the market interest rate and the rate at the date of
purchase of the financial instrument. A 10% decrease in year-end 2000 and 1999
market interest rates would result in a negative impact to the Company of $0.6
29
MARKET RISK (CONTINUED)
million and $0.4 million, respectively, on the net fair value of its
interest-sensitive financial instruments. The change in the net fair value from
1999 to 2000 is primarily due to an increase in the market interest rate
relative to the interest rate of the convertible debentures.
Equity Prices
The Company's subordinated convertible debentures are sensitive to
fluctuations in the price of the Company's common stock into which the
debentures are convertible. Changes in equity prices would result in changes in
the fair value of the Company's subordinated convertible debentures due to the
difference between the current market price and the market price at the date of
issuance of the debentures. A 10% increase in the year-end 2000 and 1999 market
equity prices would result in a negative impact to the Company of $0.1 million
and $29,000, respectively, on the net fair value of its subordinated convertible
debentures. The change in the net fair value from 1999 to 2000 is primarily due
to a decrease in the market price of the Company's common stock relative to the
conversion price of the debentures.
30
Item 7. (b) Pro Forma Financial Information.
UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENT OVERVIEW
When the merger closed, Thoratec issued 0.835 of a share of Thoratec
common stock for each share of Thermo Cardiosystems, Inc. (Cardiosystems) common
stock outstanding. The following tables set forth certain historical financial
information of Thoratec and Cardiosystems on an unaudited pro forma basis after
giving effect to the merger as a "reverse acquisition" (i.e., as if
Cardiosystems had acquired Thoratec). The accompanying unaudited pro forma
combined condensed balance sheet assumes the merger took place on December 30,
2000. The unaudited pro forma combined condensed balance sheet combines the
consolidated balance sheet of Thoratec as of December 30, 2000 and the
consolidated balance sheet of Cardiosystems as of December 30, 2000. The
accompanying unaudited pro forma combined condensed statements of operations
present the consolidated results of operations of Thoratec for the fiscal year
ended December 30, 2000 combined with the consolidated results of operations of
Cardiosystems for the fiscal year ended December 30, 2000. The unaudited pro
forma combined condensed statements of operations give effect to the merger as
if it had occurred on January 2, 2000.
The unaudited pro forma condensed combined financial information is
presented for illustrative purposes only and is not necessarily indicative of
the future financial position or future results of operations of Thoratec after
the merger or of the financial position or results of operations of Thoratec
that would have actually occurred had the merger been effected as of the dates
described above.
The unaudited pro forma combined condensed financial information should be
read in conjunction with the audited consolidated financial statements and
related notes of Thoratec and Cardiosystems incorporated by reference into this
report or found elsewhere in this report.
31
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
PRO FORMA COMBINED
CARDIOSYSTEMS THORATEC ADJUSTMENTS PRO FORMA
------------- -------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues .................................. $ 83,703 $ 30,429 $ 114,132
Cost of Revenues .......................... 35,094 10,919 $ 112(1) 46,125
--------- --------- --------- ---------
Gross Profit .............................. 48,609 19,510 (112) 68,007
--------- --------- --------- ---------
Operating Expenses:
Selling, general, and administrative
expenses ............................. 23,587 10,969 54(2) 34,610
Research and development expenses ....... 15,926 7,245 42(3) 23,213
Restructuring and unusual costs ......... 1,831 4,169 6,000
Amortization of goodwill and other
intangible assets .................... -- -- 17,988(4) 17,988
--------- --------- --------- ---------
Total Operating Expenses .................. 41,344 22,383 18,084 81,811
Other Operating Income .................... -- 614 614
--------- --------- --------- ---------
Operating Income (Loss) ................... 7,265 (2,259) (18,196) (13,190)
--------- --------- --------- ---------
Interest Income ........................... 7,602 866 8,468
Other Non-Operating Income (Expense) ...... 3 (153) (150)
Interest Expense .......................... (2,907) -- (2,907)
--------- --------- --------- ---------
Income (Loss) Before Provision for Income
Taxes and Extraordinary Item ............ 11,963 (1,546) (18,196) (7,779)
Provision (Benefit) for Income Taxes ...... 4,630 183 (4,313)(5) 500
--------- --------- --------- ---------
Income (Loss) Before Extraordinary Item ... $ 7,333 $ (1,729) $ (13,883) $ (8,279)
========= ========= ========= =========
Basic and Diluted Earnings (Loss) Per Share
Before Extraordinary Item ............... $ 0.19 $ (0.08) $ (0.15)
Weighted Average Shares:
Basic ................................... 38,555 21,831 (6,362)(6) 54,024(6)
Diluted ................................. 38,574 21,831 (6,381)(6) 54,024(6)
See Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements.
32
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 30, 2000
PRO FORMA COMBINED
CARDIOSYSTEMS THORATEC ADJUSTMENTS PRO FORMA
------------- -------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ASSETS
Current Assets:
Cash and cash equivalents .......... $ 30,236 $ 3,406 $ 33,642
Short-term available-for-sale
investments at market value ..... 98,682 12,650 $ (45,977)(7) 65,355
Accounts receivable, net ........... 15,358 8,915 24,273
Inventories ........................ 17,381 8,710 26,091
Deferred tax asset ................. 3,454 -- 4,332(9) 7,786
Other current assets ............... 74 564 638
---------- --------- --------- ---------
Total Current Assets ................. 165,185 34,245 (41,645) 157,785
---------- --------- --------- ---------
Property, Plant, and Equipment, at
Cost, Net .......................... 7,084 9,309 2,285(8) 18,678
Deferred Tax Asset ................... 2,619 -- 2,619
Intangible and Other Assets .......... 1,797 1,167 254,572(10) 257,536
Goodwill ............................. -- -- 102,024(11) 102,024
--------- --------- --------- ---------
$ 176,685 $ 44,721 $ 317,236 $ 538,642
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................... $ 3,972 $ 3,070 $ 11,864(13) $ 18,906
Accrued payroll and employee
benefits ........................ 3,999 2,894 6,893
Accrued warranty expenses .......... 970 61 1,031
Accrued income taxes ............... 305 124 429
Accrued retention costs ............ 1,708 -- 1,708
Accrued interest ................... 339 -- 339
Deferred distributor revenue ....... -- 693 693
Other accrued expenses ............. 3,709 457 4,166
Due to parent company and affiliated
companies ....................... 977 -- (977)(14) --
---------- --------- --------- ---------
Total Current Liabilities ............ 15,979 7,299 10,887 34,165
---------- --------- --------- ---------
Deferred Tax Liability ............... -- -- 77,393(12) 77,393(12)
Long-Term Deferred Distributor
Revenue ............................ -- 2,064 2,064
Subordinated Convertible Debentures .. 54,838 -- 54,838
Shareholders' Equity
Common stock ....................... 4,064 89,799 297,275(15) 391,138
Capital in excess of par
value/Additional capital ........ 96,930 2,541 (99,471)(16) --
Retained earnings .................. 57,024 (56,920) (19,938)(17) (19,834)
Treasury stock at cost ............. (51,869) -- 51,869(18) --
Deferred compensation .............. (251) -- (841)(18) (1,092)
Accumulated other comprehensive
items ........................... (30) (62) 62(18) (30)
---------- --------- --------- ---------
Total Shareholders' Equity ........... 105,868 35,358 228,956 370,182
---------- --------- --------- ---------
Total Liabilities and Shareholders'
Equity ............................. $ 176,685 $ 44,721 $ 317,236 $ 538,642
========== ========= ========= =========
Other Data:
Shares outstanding ................. 38,580 22,421 (6,366)(19) 54,635
Book value per share ............... $ 2.74(20) $ 1.58(20) $ 6.78(20)
See Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements.
33
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The merger is being treated as a reverse acquisition purchase in which
Cardiosystems is treated as the acquirer of Thoratec for financial accounting
purposes. Under that method, the fair market value of the outstanding Thoratec
common stock, determined using volume-weighted average stock trading prices
beginning two days before and ending two days after the announcement of the
merger, is used to establish the purchase price for accounting purposes. The pro
forma figures appearing here use $13.74 per share which results in an estimated
purchase price of $348 million.
The unaudited pro forma combined condensed balance sheet and statements of
operations are not necessarily indicative of the financial position and
operating results that would have been achieved had the merger been completed as
of the beginning of the earliest periods presented. They should not be construed
as being a representation of financial position or future operating results of
the combined companies. In addition, the unaudited pro forma combined condensed
financial information gives effect only to the adjustments set forth in the
accompanying notes and does not reflect any restructuring or merger related
costs, or any potential cost savings or other synergies that management expects
to realize as a result of the merger.
The fair values of Thoratec's net assets have been estimated for the
purpose of allocating the purchase price of the deemed acquisition of Thoratec
and determining the pro forma effect of the acquisition on the combined
financial statements. The estimated purchase price of $348 million has been
assigned to the tangible and intangible assets acquired and liabilities assumed
as follows (in thousands):
Net current and other assets at February 14, 2001 ............. $ 41,018
FAIR VALUE ADJUSTMENTS:
Property lease (property, plant, and equipment) -- 11 year
life ..................................................... 2,285
Patents -- 8 year life ...................................... 23,292
Trademarks and tradenames -- 20 year life ................... 14,186
Acquired in-process research and development -- expensed
at closing ............................................... 76,858
Assembled work force -- 6 year life ......................... 2,612
Developed technology -- 20 year life ........................ 169,482
Goodwill -- 20 year life .................................... 102,024
Deferred tax asset .......................................... 4,332
Deferred compensation -- 1 to 4 year life ................... 841
---------
436,930
Less: Liabilities assumed at February 14, 2001 ................ (11,744)
Deferred tax liability .................................. (77,393)
---------
$ 347,793
=========
34
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the merger, approximately $77 million of the purchase
price will be allocated to in-process research and development or IPR&D.
The fair value assigned to purchased IPR&D was estimated by discounting,
to present value, the cash flows expected to result from each Thoratec research
and development project once it has reached technological feasibility. A
discount rate consistent with the risks of each such project was used to
estimate the present value of cash flows. In estimating future cash flows,
consideration was given to other tangible and intangible assets required for the
successful development of the technology resulting from each purchased IPR&D
project and future cash flows adjusted for a charge reflecting the contribution
of these assets to each project. The estimated future cash flows resulting from
IPR&D were further adjusted for the contribution of core and current technology
to the value of each purchased IPR&D project. Based upon these cash flows the
value assigned to purchased research and development was the amount attributable
to the efforts of Thoratec up to the time of acquisition. This amount was
estimated through application of the "stage of completion" calculation by
multiplying the estimated present value of future cash flows excluding costs of
completion by the percentage of completion of each purchased research and
development project at the time of acquisition.
The nature of the efforts to develop the purchased IPR&D into commercially
viable products principally relates to the completion or acceleration of
existing development programs, including the required completion of several
phases of clinical trials and the expenditure of those general and
administrative costs necessary to manage the projects and trials. Assuming the
approval of such products by the FDA, costs related to the full-scale
manufacturing, distribution and marketing of the products are included in the
cash flow projection upon which the IPR&D value is based. The resulting net cash
flows from such projects were based on Thoratec's estimates of revenues, cost of
sales, research and development costs, sales and marketing, general and
administrative, and the anticipated income tax effect.
The discounting of net cash flows back to their present value is based on
a discount derived in part from the weighted average cost of capital for
Thoratec and from comparable rates of return for similar technologies. The
discount rates used in discounting the net cash flows from purchased in-process
research and development projects ranged from 42% to 55%. These discount rates
are higher than the implied overall rate of return on the Thoratec acquisition
due to the inherent uncertainties surrounding the successful development of the
IPR&D.
The forecast data employed in the analyses were based upon product level
forecast information obtained by Thoratec from numerous internal and external
sources. Thoratec management has reviewed and challenged the forecast data and
related assumptions and has used the information in calculating IPR&D. The
forecast data and assumptions are inherently uncertain and unpredictable.
However, based upon the information available at this time, Thoratec believes
the forecast data and assumptions to be reasonable. These assumptions may be
incomplete or inaccurate, and no assurance can be given that unanticipated
events and circumstances will not occur. Accordingly, actual results may vary
from the
35
forecasted results. Any such variance may result in a material adverse effect on
the future financial condition and results of operations of Thoratec after the
merger.
In the allocation of purchase price to the IPR&D, the concept of
alternative future use was specifically considered for each of the programs
under development. The acquired IPR&D consists of Thoratec's completed work
on each of the identified programs at the time of acquisition. The programs are
each very specific to the disease condition and market for which they are
intended. There are no identified alternative uses for the in-process programs
if the programs fail in clinical trials or are otherwise deemed unfeasible. The
development effort for the acquired IPR&D does not possess an alternative future
use for Thoratec after the merger as defined by generally accepted accounting
principles.
Set out below is a brief description of IPR&D projects including an
estimate of when Thoratec believes it may realize revenues from the sale of
these products in the respective application.
PVAD (Discharge and Therapeutic Recovery)
PVAD is a paracorporeal ventricular assist device intended to be used to
support patients before and after hospital discharge, as a bridge-to-transplant
or as a bridge-to-recovery for patients undergoing open-heart surgery or
suffering from acute cardiac failure or various infections. Thoratec has
undertaken a series of clinical studies and trials designed to demonstrate the
system's role as a support or alternative to transplant. Clinical trials are
scheduled for completion in 2000 and 2001 for these various indications.
Future costs for these programs are estimated at approximately $2.3
million. Discount rates of 42% to 48% were applied to the estimated cash flows
associated with these programs.
TLC-II Driver
The TLC-II driver is a lightweight portable pneumatic drive unit for use
with Thoratec's VAD pump, promoting greater patient mobility and self-care.
Thoratec is in the final stages of obtaining FDA approval. A PMA Supplement has
been filed with the FDA and it is expected that approval to market this product
in the U.S. will be obtained in 2001.
The future cost of this program is estimated to be approximately $1.2
million. A discount rate of 42% was applied to these estimated cash flows.
IVAD and MVAD
The implantable VAD, or IVAD, is a ventricular assist device intended to
provide the option for implantation within the body. Thoratec has obtained
conditional approval to start clinical trials in the U.S. and estimates that
approval for the commercial sale of the product in the U.S. will be received
in 2002.
The muscle-powered implantable VAD, or MVAD, is a ventricular assist
device intended to hydraulically power a VAD pump. Thoratec is developing
working prototypes and conducting animal studies, and estimates that approval
to market this device in the U.S. will be obtained in 2010.
The future cost of these programs are estimated to be approximately $2.5
million for the IVAD and $6.4 million for the MVAD. Discount rate of 45% to 55%
were applied to these estimated cash flows.
36
Aria
The Aria graft is a small diameter prosthetic graft for use in coronary
artery bypass surgery. The graft is currently in clinical trials. Product launch
is anticipated in the U.S. in 2003.
The future cost of this program is estimated to be approximately $4.7
million. A discount rate of 48% was applied to these estimated cash flows.
The Thoratec research and development programs currently in process were
valued as follows:
PVAD (Discharge and Therapeutic Recovery)................... $12,211
TLC-II...................................................... 1,742
IVAD and MVAD............................................... 1,034
Aria Graft.................................................. 61,871
-------
$76,858
=======
DEVELOPED TECHNOLOGY
Developed technology of $169.5 million includes (a) Thoratec's core
technology, a proprietary biomaterial product called Thoralon, which is used to
support the VAD systems and graft products, (b) the VAD system which is approved
for use both as a bridge to transplant and recovery following cardiac surgery,
and (c) the Vectra graft, which is approved for use by hemodialysis patients.
Thoratec's developed technologies were valued based on the present value of
projected earnings that will be generated by each technology after taking into
account the revenue and expenses of the technology, the relative risk of the
products, and an appropriate discount rate. The estimated life of the
significant developed technology is 20 years. This estimate is based upon, among
other factors, the presence of significant regulatory and technological barriers
to market entry by competitors, the long product life cycles observed in similar
products and technologies, the growing customer base using the Company's
products, the increasing scope of use for the VAD system and the relative
infancy of some of the Company's key markets.
37
ADJUSTMENTS TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The adjustments to the unaudited pro forma combined condensed balance
sheet as of December 30, 2000 and the pro forma combined condensed statement of
operations for the year ended December 30, 2000 in connection with the merger
are presented below:
(1) Adjustment to cost of revenues:
Allocation of depreciation expense related to the fair value
adjustment of the property lease (depreciation period 11
years)...................................................... $ 112
(2) Adjustment to selling, general, and administrative expenses:
Allocation of depreciation expense related to the fair value
adjustment of the property lease (amortization period 11
years)...................................................... $ 54
(3) Adjustment to research and development expenses:
Allocation of depreciation expense related to the fair value
adjustment of the property lease (amortization period 11
years)...................................................... $ 42
(4) Adjustments to amortization of goodwill and other intangible
assets:
Amortization of other intangible assets (amortization period
20 years)................................................... $ 9,183
Amortization of other intangible assets (amortization period
8 years).................................................... 2,912
Amortization of other intangible assets (amortization period
6 years) .................................................... 435
Amortization of goodwill (amortization period 20 years)..... 5,101
Amortization of deferred compensation....................... 357
-------
$17,988
=======
(5) Adjustments to provision (benefit) for income taxes:
Record tax provision for Thoratec due to change in valuation
allowance on deferred tax asset............................. $ 677
Record deferred tax benefit related to amortization of
intangible assets........................................... (4,990)
--------
$(4,313)
========
(6) The pro forma per share net income (loss) before extraordinary item is
computed by dividing the pro forma net income (loss) before
extraordinary item by the pro forma weighted average number of shares
outstanding, assuming Thoratec and Cardiosystems had merged at the
beginning of the earliest period presented. The pro forma weighted
average number of shares outstanding, and required pro forma adjustment
to the weighted shares outstanding, are calculated as follows for the
year ended December 30, 2000:
BASIC DILUTED
------ -------
For the year ended December 30, 2000:
Cardiosystems weighted average shares.................... 38,555 38,574
Multiplied by exchange ratio of 0.835.................... 0.835 0.835
------ ------
Equivalent Thoratec shares............................... 32,193 32,209
Add Thoratec weighted average shares..................... 21,831 21,831
------ ------
54,024 54,040
Anti-dilutive correction................................. -- (16)
------ ------
Pro forma combined weighted average shares outstanding... 54,024 54,024
Less combined weighted average shares before exchange
ratio effects......................................... 60,386 60,405
------ ------
Required pro forma adjustment............................ (6,362) (6,381)
====== ======
38
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
(7) Adjustments to short-term available-for-sale investments (assumes that
short-term investments will be sold and purchased to provide required
cash):
Segregation of cash in connection with the guaranty of the
subordinated convertible debentures......................... $ (45,000)
Payment of cash in settlement of intercompany payable...... (977)
----------
$ (45,977)
==========
(8) Adjustment to leasehold improvements (property, plant &
equipment):
Adjust property lease to estimated fair value............... $ 2,285
(9) Adjustment to deferred tax asset:
Adjust valuation allowance on Thoratec current deferred tax
asset....................................................... $ 4,332
(10) Adjustment to intangible and other assets:
Segregation of cash in connection with the guaranty of the
subordinated convertible debentures......................... $ 45,000
Record other intangible assets -- 20 year life.............. 183,668
Record other intangible assets -- 8 year life............... 23,292
Record other intangible assets -- 6 year life............... 2,612
---------
$ 254,572
=========
(11) Adjustment to goodwill:
Record goodwill arising from merger......................... $ 102,024
(12) Adjustment to deferred tax liability:
Record deferred tax liability on intangible assets.......... $ 77,393
(13) Adjustment to accounts payable:
To record estimated additional merger related liabilities for
accounting, investment banking, legal, advisory and other
liabilities related to merger on intangible assets.......... $ 11,864
(14) Adjustment to due to parent company and affiliated companies:
Payment of cash in settlement of intercompany payable....... $ (977)
(15) Adjustments to common stock:
Purchase price -- net of transaction costs.................. $ 342,013
Retirement of Cardiosystems treasury stock.................. (51,869)
Elimination of Thoratec common stock........................ (89,799)
Reclassification of Cardiosystems capital in excess of par
to common stock............................................. 96,930
---------
$ 297,275
=========
(16) Adjustments to capital in excess of par/additional capital:
Reclassification of Cardiosystems capital in excess of par
to common stock............................................. $ (96,930)
Elimination of Thoratec additional capital.................. (2,541)
---------
$ (99,471)
=========
(17) Adjustments to retained earnings:
Adjustment to record IPR&D at estimated fair value at date
of merger................................................... $ (76,858)
Elimination of Thoratec retained earnings................... 56,920
---------
$ (19,938)
=========
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
(18) Adjustments to other shareholders' equity items:
Retirement of Cardiosystems treasury stock.................. $ 51,869
Record deferred compensation................................ (841)
Elimination of Thoratec's accumulated other comprehensive
items....................................................... 62
(19) The adjustment to common shares outstanding at December 30,
2000, is calculated as follows: As of December 30, 2000:
Cardiosystems shares outstanding (net of treasury shares)... 38,580
Multiplied by exchange ratio of 0.835....................... 0.835
---------
Equivalent Thoratec shares.................................. 32,214
Add Thoratec shares outstanding............................. 22,421
---------
Pro forma combined shares outstanding....................... 54,635
Less combined shares outstanding before exchange ratio
effect...................................................... 61,001
---------
Required pro forma adjustment to shares outstanding......... (6,366)
=========
(20) The book value per share is computed by dividing total shareholders'
equity by the number of shares outstanding.