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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Amendment No. 3)
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended March 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number : 0-20584
ABIOMED, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-2743260
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
22 CHERRY HILL DRIVE 01923
DANVERS, MASSACHUSETTS (Zip Code)
(Address of Principal Executive Offices)
(978) 777-5410
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of July 10, 2002 was $103,475,112 based on the closing price
of $6.633 on that date as reported on the Nasdaq Stock Market's National Market.
As of July 10, 2002, 20,956,587 shares of the registrant's Common Stock, $.01
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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The Undersigned Registrant hereby amends its Annual Report on Form 10-K
to include audited consolidated financial statements for its fiscal years
ended March 31, 2000, 2001 and 2002. The Registrant's prior filing of its
Form 10-K had excluded audited consolidated financial statements as a result
of the Registrant's replacement, as announced on June 6, 2002, of Arthur
Andersen LLP as its independent accountants and time required to make certain
restatements of its previously audited financial statements.
In conjunction with the completion of the above described audits, and
with the benefit of subsequent information, we have made certain
modifications to the Registrant's unaudited financial statements. The largest
of these modifications was a $443,000 reduction in accrued incentive
compensation as of March 31, 2002, which based upon subsequent information,
will not be paid in conjunction with the year ended March 31, 2002. We also
increased product revenues by $96,000 and $103,000 for the fiscal years ended
March 31, 2000 and 2002, respectively, reduced product revenues by $190,000
for the fiscal year ended March 31, 2001 and reduced accumulated deficit as
of March 31, 1999 by $211,000. We also made certain reclassifications of
information in our consolidated balance sheets.
These modifications of reported financial information are discussed
further under the section entitled Restatement of Prior Year's Financial
Statements under Item 7 of this Annual Report on Form 10-K. The Registrant's
audited consolidated financial statements and supplemental schedules of
quarterly results of operations, as modified hereunder, are presented in Item
14 of this Annual Report. Also updated in this report is Management's
Discussion and Analysis of Financial Conditions and Results of Operations in
Item 7 to reflect these audited results as well as other sections of the Form
10-K that either referred to the Registrant's consolidated financial
statements or indicated that the consolidated financial statements presented
in this Form 10-K were unaudited.
While this amendment also includes modifications to certain parts of
other Items within this Annual Report, Registrant has not undertaken in this
amendment to update all information, particularly non-financial information,
in this Annual Report from its original presentation on July 16, 2002.
INTRODUCTORY NOTE
THIS REPORT, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS
REPORT, INCLUDES FORWARD-LOOKING STATEMENTS. WE HAVE BASED THESE FORWARD-LOOKING
STATEMENTS ON OUR CURRENT EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN, OR IMPLIED BY,
THESE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS ARE IDENTIFIED BY
WORDS SUCH AS "BELIEVE," "ANTICIPATE," "EXPECT," "INTEND," "PLAN," "WILL," "MAY"
AND OTHER SIMILAR EXPRESSIONS. IN ADDITION, ANY STATEMENTS THAT REFER TO
EXPECTATIONS, PROJECTIONS OR OTHER CHARACTERIZATIONS OF FUTURE EVENTS OR
CIRCUMSTANCES ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN
THESE DOCUMENTS INCLUDE, BUT ARE NOT NECESSARILY LIMITED TO, THOSE RELATING TO:
- OUR PLANS REGARDING THE TIMING AND OUTCOME OF INITIAL CLINICAL TRIALS
FOR OUR ABIOCOR IMPLANTABLE REPLACEMENT HEART;
- OUR INTENTION TO EXPAND THE MARKET FOR OUR BVS PRODUCT LINE;
- OUR ABILITY TO OBTAIN AND MAINTAIN REGULATORY APPROVAL OF OUR PRODUCTS
IN THE U.S. AND INTERNATIONALLY;
- THE OTHER COMPETING THERAPIES THAT MAY IN THE FUTURE BE AVAILABLE TO
HEART FAILURE PATIENTS; AND
- OUR PLANS TO DEVELOP AND MARKET NEW PRODUCTS AND IMPROVE EXISTING
PRODUCTS.
FACTORS THAT COULD CAUSE ACTUAL RESULTS OR CONDITIONS TO DIFFER FROM THOSE
ANTICIPATED BY THESE AND OTHER FORWARD-LOOKING STATEMENTS INCLUDE THOSE MORE
FULLY DESCRIBED IN THE "RISK FACTORS" SECTION AND ELSEWHERE IN THIS REPORT. WE
ARE NOT OBLIGATED TO UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT NEW EVENTS OR CIRCUMSTANCES.
PART I
ITEM 1. BUSINESS
OVERVIEW
ABIOMED is a leading developer, manufacturer and marketer of medical
products designed to safely and effectively assist or replace the pumping
function of the failing heart. In July, 2001, initial human clinical trials
commenced in the U.S. for our AbioCor Implantable Replacement Heart. The AbioCor
is the world's first battery-powered implantable replacement heart system. The
AbioCor, the development of which follows decades of fundamental and applied
research, development and testing, is intended to extend life and provide an
improved quality of life for end-stage heart failure patients. The initial
clinical trial of the AbioCor in the U.S. has commenced at four (4) among six
(6) initial medical teams approved by the U.S. Food and Drug Administration,
known as the FDA. Clinical testing of the AbioCor is anticipated to commence at
select medical centers in Europe during 2002, subject to applicable regulatory
approvals. We currently manufacture and sell the BVS, a FDA approved heart
assist device. The BVS is the most widely used advanced heart assist device for
the temporary treatment of all patients with failing but potentially recoverable
hearts in the U.S.. We are also engaged in research and development relating to
other devices to replace or support the pumping function of the heart. One such
focused effort is towards further developing replacement heart technology
acquired by us in 2000 from The Pennsylvania State University, the Penn State
Heart. The Penn State Heart has a drive mechanism that is different than the
AbioCor design. The Penn State Heart is, in addition to the AbioCor, the only
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other implantable heart system to survive the rigor of the replacement heart
development program funded by the U.S. National Heart Lung and Blood Institute,
the NHLBI. Development of the AbioCor and the Penn State Heart reinforces our
commitment to providing the best solutions for end-stage heart failure patients
in need of a replacement heart.
Our AbioCor is a heart replacement device that replaces the failing
ventricles of a patient's diseased heart and takes over the heart's blood
pumping function. It is designed for use in patients at risk of imminent death
due to irreparably damaged hearts, but whose other vital organs remain viable.
We believe the AbioCor will provide a much-needed treatment option for those
patients in the U.S. for whom there is currently no effective therapy available.
If and when approved by applicable U.S. and international regulatory
authorities, we anticipate that we should be able to sell the first generation
AbioCor systems for approximately $100,000 each, subject to the establishment of
reimbursement levels by third-party payers. To date, more than $80 million have
been invested in the development and testing of the AbioCor, including over $20
million in funding from the NHLBI. We have built a pilot-scale manufacturing
facility for the AbioCor. We have over 130 employees working on the AbioCor
program, including over 90 engineers, scientists and other technically educated
personnel. We are collaborating with leading medical centers and healthcare
professionals.
Our BVS is a "bridge-to-recovery" device that can temporarily assume the
full pumping function of the heart for patients with potentially reversible
heart failure. It is intended for use in patients whose hearts can recover
within a period of up to fourteen days. In 1992, the BVS became the first heart
assist device capable of providing full circulatory support to be approved by
the FDA. The BVS is the most widely used FDA-approved temporary heart assist
device, and to date has been used to support thousands of patients at over 600
medical centers worldwide. The BVS, which primarily consists of single-use
external blood pumps, cannulae and drive and control consoles, has been a
profitable product line since fiscal 1995. We believe our experience in
developing, manufacturing and selling the BVS will provide us with a competitive
advantage in commercializing the AbioCor, as well as other future products.
Our Penn State Heart is intended to serve end-stage heart failure patients
similar to those addressed by the AbioCor. We have designed the current version
of the Penn State Heart to be smaller than the current clinical version of the
AbioCor. The Penn State Heart is in a pre-clinical development and testing
stage.
Our focused research and development related to the AbioCor, BVS and the
Penn State Heart has provided us with the proprietary technology, know-how and
experience to develop additional products. We believe we are the only company in
the world with technical background and expertise in the full range of
technology to support the pumping function of the heart. We believe that there
are many opportunities to apply our expertise to address the needs of heart
failure patients. We seek to be first to market with high-quality and
cost-effective technologies for heart failure patients who currently lack
adequate therapies.
ABIOMED is a Delaware corporation. We commenced operation in 1981. As used
herein, ABIOMED includes ABIOMED, Inc. together with our subsidiaries. ABIOMED,
the ABIOMED logo and BVS are our registered trademarks. AbioCor and Angioflex
are our trademarks. This Report may also include trademarks of companies other
than ABIOMED.
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INDUSTRY OVERVIEW
THE HUMAN HEART
The human heart is the pump for the body's circulatory system. The heart
has four chambers: the left and the right atria and the left and the right
ventricles. The two atria serve as the inflow chambers of the heart, collecting
blood for delivery to the ventricles. The ventricles are the pumping chambers of
the heart, pumping blood to the lungs and the rest of the body.
The right ventricle of the heart pumps oxygen-depleted blood returning from
the body to the lungs where it is re-oxygenated. The left ventricle receives
oxygen-rich blood returning from the lungs and pumps it back to the rest of the
body. The chambers of the heart are formed of muscle tissue known as myocardium.
The coronary arteries, a specialized network of blood vessels within the heart,
provide oxygen and other nutrients to the heart itself.
The human heart has four valves that help ensure that blood flows in the
proper direction into and out of the ventricles as they are repeatedly filled
and then discharged with the pumping of blood. The timing and rate at which the
heart beats, referred to as its rhythm, is controlled by electrical impulses in
the conduction system of the heart.
HEART DISEASE
Heart disease has been responsible for more than 700,000 deaths per year in
the U.S. It is the number one cause of death in the U.S., responsible for more
deaths than all forms of cancer combined. Illnesses and deaths from heart
disease create an immense burden to many individuals and their families.
Patients frequently experience extended suffering, and the economic cost is
substantial. While a number of therapies exist for the treatment of patients in
early stages of heart disease, limited therapies exist today for most patients
with severe, end-stage, heart failure.
The majority of deaths from heart disease can be attributed to coronary
heart disease, or CHD, and congestive heart failure, or CHF. Other types of
heart disease include rhythm disorders and diseases of the valves.
CHD is a disease of the coronary arteries causing reduced blood flow and
insufficient oxygen delivery to the affected portion of the heart. CHD can lead
to a heart attack, also known as an acute myocardial infarction, resulting in
permanent damage to the heart muscle. In severe heart attacks, death can occur
suddenly or gradually over days and weeks.
CHF is a condition resulting from the progressive deterioration of the
heart over extended periods of time. The patient's heart cannot provide adequate
blood flow and oxygen to meet the needs of the body. CHF may be initiated and
aggravated by a variety of factors, including high blood pressure, defective
heart valves, CHD, infections of the heart muscle or the valves and heart
problems resulting from heart defects. Due to the progressive nature of CHF,
medical interventions often take place over periods of months or years.
In general, heart failure is progressive. While approximately 60% of all
heart failure patients experience sudden death as a result of cardiac arrest,
the remaining patients who die from heart failure typically do so in
hospitals or long-term care facilities.
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PREVALENCE AND MORTALITY
The number of patients both suffering and dying from heart disease has been
rising on an annual basis. Statistics indicate that there are over 12 million
people with CHD and over 4 million people with CHF in the U.S., with similar
incidence outside the U.S.
Approximately 60% of the approximate 700,000 deaths from heart disease
in the US were sudden deaths. Of the deaths that did not occur suddenly, most
were associated with CHD and approximately 10% with CHF. Current therapies to
support these patients are inadequate because they cannot stop the
progression of the disease. We believe that a significant number of such CHD
and CHF patients could benefit from our AbioCor and our Penn State Heart.
THERAPIES FOR HEART DISEASE
A broad spectrum of treatment is available for heart failure patients.
Treatments include drug therapies, cardiological interventions, including closed
chest procedures and rhythm management therapies, or surgical corrections, such
as coronary bypass surgery and valve replacement. For patients with end-stage
heart disease, however, these treatments are typically inadequate. Patients with
severe heart disease frequently are in need of heart replacement. Because the
supply of available donor hearts is limited, with fewer than 2,500 per year
available in the U.S., heart assist and replacement treatments have been and
continue to be developed with the goal of extending and improving the lives of
these patients.
DEVICES FOR CIRCULATORY SUPPORT TREATMENTS
Circulatory support treatments can be divided into two categories: (a)
destination therapies, including heart replacement and permanent heart assist
devices, and (b) temporary heart assist devices.
DESTINATION THERAPY. Devices intended to be within or attached to patients for
their remaining lives are classified as destination therapies. Destination
therapy devices consist of replacement hearts and permanent assist devices,
including quality-of-life support devices that provide partial support to the
heart on a permanent basis.
HEART REPLACEMENT. The goal of heart replacement, whether with a donor
heart or a mechanical device, is to replace the failing human heart with a
viable alternative. Patients with irreparably damaged hearts who are facing
imminent death due to CHD or severe CHF are potential candidates for heart
replacement provided that their other vital organs remain viable. The supply of
human donor hearts is currently inadequate to meet the needs of these patients
and no device is yet approved for use in these patients.
We believe that tens of thousands of patients per year, out of more than
100,000 potential patients, might eventually benefit from an implantable
replacement heart once it is proven safe, effective and reliable. The fewer than
2,500 patients saved by heart transplant in the U.S. annually represent a
fraction of those that might be returned to a normal life if a greater supply of
donor hearts or alternative therapy were available. In addition, a significant
portion of heart transplant patients must endure a long waiting period before a
suitable donor heart is identified, if at all. The development of an implantable
mechanical heart could help alleviate this long and difficult wait. No heart
replacement device has yet been approved for commercial use as a destination
device. The AbioCor is the first heart replacement device to commence clinical
trials for this purpose.
PERMANENT HEART ASSIST. Permanent assist devices are being developed to
supplement the function of the diseased heart or to stop or slow the progression
of the disease, while leaving the diseased
5
heart in place. These devices contrast with replacement hearts, which are
intended to replace a severely and irreversibly damaged heart. A number of
companies are developing permanent heart assist devices, some of which are in
clinical trials in the U.S. and overseas. Certain of these assist devices are in
advanced stages of clinical testing and pursuing regulatory approval. One
implantable left ventricular assist device has received recommendation from a
FDA Advisory Panel as approvable, subject to certain conditions, but no assist
device has yet been approved in the U.S. for commercial use as a destination
device. Permanent assist devices under development can be grouped into two
categories: those that pump blood directly, known as ventricular assist devices
or VADs, and less invasive devices that are intended to help the heart without
the risk of directly contacting flowing blood. The less invasive devices include
those that wrap around the heart, either to help the heart pump blood or to
inhibit deterioration of the heart by preventing its further enlargement, and
those that attempt to synchronize the actions of the heart ventricles with
electrical impulses. We believe that all types of permanent heart assist devices
potentially may be used to treat certain heart failure patients who are near
death as well as those patients who are not at imminent risk of death but whose
daily activities are significantly restricted due to their weakened hearts.
VADs, the more invasive of the two categories, may prove the most
appropriate permanent heart assist devices for certain end-stage CHF patients.
Implantable VADs are intended primarily for patients with severe left
ventricular failure. We believe that VADs are being primarily developed for CHF
patients and that VADs would not be appropriate for long-term support of a very
large fraction of heart failure patients, including those with massive heart
damage, severe rhythm disorders, blood clots in the ventricles, severe lung
disease, ventricular rupture, chronic right ventricular failure or heart
transplant rejection.
TEMPORARY HEART ASSIST. Candidates for temporary heart assist devices
include patients with severe but potentially reversible heart failure and
patients whose hearts need help pumping blood while they await transplantation
or other therapies. Temporary heart assist devices typically consist of a
specialized pump that is attached to a patient's heart and driven by a console
or powered by an external battery pack. Such devices are intended to be removed
from a patient's body once the patient's heart has had the opportunity to
recover its normal function or the heart is replaced. Temporary heart assist
devices can be grouped into three categories:
BRIDGE-TO-RECOVERY. Bridge-to-recovery devices are used to support patients
with potentially reversible failing hearts. These devices are most frequently
used to support patients whose hearts do not fully restart following open-heart
surgery, and who cannot be weaned off the heart-lung machine. Of the patients
who experience such complications, many thousands die each year whose lives
could potentially be saved with a temporary assist device as a "bridge to
recovery". Bridge-to-recovery devices temporarily assume the pumping function of
the heart, while allowing the heart to rest, heal and recover its normal
function. These devices can also be used for patients who have not undergone
surgery but whose lives are threatened by viral infections that attack the heart
muscle. In addition, bridge-to-recovery devices may prove beneficial to certain
patients who have suffered from a recent heart attack.
BRIDGE-TO-TRANSPLANT. Bridge-to-transplant devices are used to support
patients who have experienced life-threatening heart disease and are awaiting
heart transplantation. We believe that the market for this category of device is
limited by the availability of qualified donor hearts.
STAGING. Staging devices are used to support patients before or during
application of other therapies and to support patients with failing hearts being
transported to other facilities. At present, for reasons of specialized care,
patients are transported between medical centers with the assistance of such
devices under hospital guidelines. In the future, staging devices may be used to
support heart failure patients prior to implantation of a permanent heart assist
device or a heart replacement. These devices
6
could help stabilize the patient and provide the medical team with time to
better assess the patient's condition before selecting an appropriate therapy.
In addition, while bridge-to-recovery devices are approved and used today to
assist heart transplant patients when rejection occurs, in the future staging
devices may be used with transplant patients who have rejected their donor heart
and need life support before receiving an implantable replacement heart.
ABIOMED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
Our current commercial product line is the BVS. Our primary products under
development are the AbioCor system and the Penn State Heart. Each of these
products are systems, or product lines, that consist of various component
products. In addition, we are in the early stages of research and development of
other potential products for heart failure patients.
THE ABIOCOR IMPLANTABLE REPLACEMENT HEART
The AbioCor is a battery-powered totally implantable replacement heart
system. The AbioCor is referred to as totally implantable because it has been
designed to operate primarily on portable external battery power, without wires
or any other material penetrating the patient's skin. The AbioCor is referred to
as a replacement heart because it has been designed for implantation in the
space vacated by the removal of a patient's diseased ventricles, where it will
take over the full pumping function of the heart. The AbioCor is intended for
use as destination therapy by patients with irreparably damaged hearts who are
at risk of imminent death due to CHD or severe CHF but whose other vital organs
remain viable.
In 1988, we began to receive funding for AbioCor development from the
National Heart, Lung and Blood Institute, known as the NHLBI, to support our
development and testing of the AbioCor. We have maintained this support through
the research phase of our AbioCor development program by achieving various
designated milestones. The NHLBI has provided over $20 million of the more than
$80 million that has been invested to date for the development of the AbioCor.
DESIGN OF THE ABIOCOR. The following diagram illustrates the principal
components of the AbioCor.
[GRAPHIC]
7
The AbioCor system consists of the following principal components:
- A thoracic unit, or "replacement heart," which includes two artificial
ventricles with their associated valves and a hydraulic pumping
system. The unit weighs approximately two pounds and provides complete
blood circulation to the lungs and the rest of the body. The
ventricles and their associated valves have seamless surfaces made
from our blood-contacting material, Angioflex, and special geometries
with flow patterns designed to reduce the risk of blood cell damage
and blood clots. Our current configuration of the thoracic unit is
sized for patients with relatively large chest cavities. If our
testing of this configuration is successful, we plan to develop
thoracic units of different sizes to fit a larger portion of the
patients who might benefit from a replacement heart.
- A rechargeable internal battery, that is implanted beneath the skin in
the abdomen of AbioCor recipients and allows the AbioCor to operate
without any external power supply for limited periods of time.
- A microprocessor-based internal electronic device, or "controller",
that is implanted beneath the skin in the abdomen of AbioCor
recipients and controls and monitors the thoracic unit and provides
radio communication with an external monitor affording patients and
caregivers the opportunity for real-time information on its operating
status.
- An across-the-skin, or transcutaneous, energy transmission system,
which eliminates the need for wires penetrating the patient's skin and
the inherent associated risks of infection. It transfers the power to
operate the AbioCor system and to recharge the implantable battery
without tethering the patient to an external drive console. This
system includes an internal energy coil that is implanted beneath the
skin and an external coil that is aligned in proximity to the internal
coil but resides outside the skin. The external coil emits power that
is received by the internal coil.
- An external rechargeable battery pack and monitor designed to be worn
by the patient. These components supply primary power to the system,
allow patient mobility, provide system diagnostic information, and
recharge the implanted back-up battery as needed.
The AbioCor design is intended to preserve life and to restore the
quality of a patient's life to an acceptable level. Restoration of the
quality of a patient's life means that the patient should be able to return
to a comfortable lifestyle, free from pain, with good mental acuity and an
ability to carry out everyday activities. Among the quality-of-life features
of the AbioCor design are quiet heart valves, no penetration of the skin, no
tethering to a large external drive console and no need for
immuno-suppression therapies. The AbioCor system is designed for both low
maintenance and low patient involvement. However, during our ongoing initial
clinical trial of the first generation AbioCor, patients have largely
remained under sustained medical supervision in the hospital and have more
frequently used a portable monitoring device in lieu of the patient-carried
external battery pack and electronics until such time as their health has
recovered and a greater degree of independence has been demonstrated. In
addition, except when clinical factors dictate otherwise, we are using a
conservative anti-coagulation regimen and imposing greater limits on patient
activities until we gain more clinical experience, especially in the home
setting.
We have also created tools and methods intended to make the AbioCor system
easier to implant. These tools include quick-connectors for relatively easy
attachment of the AbioCor to the human anatomy and a virtual surgery software
tool to allow for the simulated implant of the AbioCor into a
8
three-dimensional anatomical computerized model of a particular patient prior to
opening that patient's chest.
INITIAL CLINICAL TRIAL. In our initial clinical trial we are seeking to
determine whether the first generation AbioCor can effectively and safely extend
life with acceptable quality of life for patients who are otherwise likely to
die within thirty days and who have no other life-saving option. The results of
this initial fifteen patient trial will allow us to better assess our status
with regard to obtaining regulatory approval to commercially market and sell the
AbioCor for an initial subset of patients in the U.S.
In January 2001, we received FDA permission under an Investigational Device
Exemption (IDE) to begin the initial human clinical trial in five patients.
Under the terms of the IDE, our initial trial consists of a total of fifteen
patients divided into three groups of five each with expansion to each
successive group of five patients if the 60-day experience of patients with the
AbioCor is satisfactory to the FDA. Patients can be included in this initial
clinical trial only if they have bi-ventricular heart failure, are more than
eighteen years old, have a predictably high likelihood of dying within the next
30 days, are unresponsive to maximum existing therapies, are ineligible for
heart transplantation and are sufficiently large physiologically for the AbioCor
to fit and operate adequately. Patients are to be excluded from the clinical
trial if their heart failure has a significant potential of being reversible, if
they are pregnant, have serious psychiatric illness or an inadequate social
support system. Patients may also be excluded if they are suffering from other
serious non-cardiac medical ailments.
In July 2001, doctors at Jewish Hospital in Louisville, Kentucky performed
the world's first implantation of our AbioCor Implantable Replacement Heart. As
of July 15, 2002 seven implantations of the AbioCor had been attempted in
critically ill patients meeting the criteria for the clinical trial. Five of
these implantations were successful with four of the five patients living on
AbioCor support for more than the initial goal of 60 days (i.e. more than twice
their expected life expectancy without the AbioCor), three of the patients
recovered well enough to take excursions outside the hospitals, two of the
patients were discharged from the hospital to intermediate facilities and one of
these was discharged and released to his home. As of July 15, 2002, two of these
patients are alive. One of these two is living comfortably at home with his
family with routine, weekly check-up visits at the hospital. He has been
supported by the AbioCor for over ten months (implanted on September 13, 2001).
The second of these two patients has been readmitted to the hospital and is
being treated for a recurring respiratory condition. He has been supported for
over eight months (implanted on November 5, 2001).
In November 2001, under the terms of the FDA approval for the trial, we
were allowed to proceed with the second group of five patients. We also have
been preparing to commence clinical testing of the AbioCor in a few selected
clinical sites in Europe. We are focusing on learning as much as possible from
the experience of each patient to benefit successive patients. Considerable
amounts have been learned about the implant of the AbioCor and the subsequent
care of these patients. We are also ensuring that prospective patients are well
informed about the risks of the clinical trial. This process has contributed to
all of the patients thus far enrolled in the trial being patients with various
forms of CHF as opposed to patients dying from more acute events such CHD.
Although pre-existing non-cardiac conditions have made the care of these
patients more challenging and their hospital stays longer, the AbioCor's ability
to provide normal bi-ventricular blood circulation appears to have helped
alleviate some of these conditions in some of these patients.
While we do not yet have a sufficient number of patients to draw
statistically meaningful conclusions, we are very encouraged by the early
results of the AbioCor clinical trial. As of July 15, 2002, the duration of
support for the five patients supported by the AbioCor have ranged from 56 to
305 days, including 305 and 242 days for the two patients who remain alive on
AbioCor support. In a cumulative total of approximately 2.4 patient-years of
support, the mechanical operation of the AbioCor system has
9
been highly reliable, providing appropriate circulatory support without any
clinically significant malfunction. All of the patients supported by the AbioCor
have lived beyond what would otherwise have been predicted, and the majority
have made reference to improved quality of life despite ups and downs during
their post-operative recovery course. None of the patients experienced
device-related infection or sepsis. Three patients have experienced strokes of
uncertain origin. Two of these strokes were serious and one was relatively minor
that led to recovery. Among the potential causes of those strokes could be: (1)
contact of atrial tissue with a structural element on the surgical cuff used to
surgically attach the patients' atria to the AbioCor, (2) the inability to
maintain target anticoagulation regimens in some of these patients because of
their severely compromised pre-operative status or a combination of the two.
Both of these potential issues are being addressed to help mitigate the
likelihood of stroke for future patients. Post-mortem examination of the AbioCor
thoracic units explanted from the three deceased patients that had been
supported with the AbioCor did not exhibit evidence of clinically significant
thrombus formation within the device itself, suggesting, we believe, that the
blood pumps have performed as designed and were likely not contributing factors
for those patients who experienced strokes.
Success of the initial clinical trial will be evaluated based upon periodic
review of the survival of AbioCor patients and their quality of life as measured
by a variety of assessment criteria. As we gain clinical experience with the
most seriously ill patients and demonstrate clinical efficacy and safety, we
expect to enhance the performance range, durability and reliability of AbioCor
systems and plan to seek regulatory approval for current and subsequent
generations of the AbioCor for use in imminently dying patients and in
increasingly broad patient populations and with longer intended durations. Such
regulatory approval will likely require clinical data and trials beyond this
initial trial. This regulatory plan is consistent with our experience with the
BVS system.
While the AbioCor is designed as a permanent replacement for the failing
heart, the AbioCor today is a first generation device that will likely require
improvement over time to incorporate feedback from its clinical use. The
patients that will be initially treated with the AbioCor will be relatively
large framed adults who are near death and for whom the AbioCor represents the
only potential viable alternative to death. We have tested the AbioCor
extensively. The results of such testing were part of our IDE submission to the
FDA from which we gained permission to commence initial clinical trials. We
believe that for patients ill enough to qualify for the initial clinical trial,
the first generation AbioCor presents the best alternative to potentially extend
their lives and to provide them with an acceptable quality of life. However, we
understand that this patient category represents only a fraction of the
potential patients who might benefit annually from the AbioCor. Our clinical and
regulatory strategy of continuing to improve the AbioCor based on clinical
experience is intended to allow us to demonstrate that the AbioCor can provide
patients with a reasonable quality of life for sustained periods of time. We
believe that demonstration of this capability is needed for eventual use of the
product in end-stage heart failure patients who are not as ill as is required to
qualify for our initial clinical trial.
SUBSEQUENT INFORMATION REGARDING INTITIAL CLINICAL TRIAL. As of August 28,
2002, one AbioCor supported patient remains alive having been supported by
the AbioCor for 349 days. The second AbioCor supported patient referenced
above died after 293 days of support.
COST EFFECTIVENESS. We are developing the AbioCor with the intent to eventually
offer a cost-effective treatment for end-stage heart failure patients. In
addition, the AbioCor has the potential to allow patients an opportunity to
return to productive lives. This would allow the medical system to save money by
discharging the patient from the hospital and allowing the person to become
productive and lead a reasonably normal life.
If the safety, effectiveness and durability of the AbioCor are clinically
demonstrated for multiple-year durations, it has the potential to be less
expensive than heart transplantation over a five-year period. One reason for
this reduced cost is that recipients of a mechanical replacement heart are not
expected to need immuno-suppression drugs. The blood and tissue contacting
portions of the AbioCor are constructed of inert materials, which are not
expected to elicit a response from a patient's immune system. Other cost savings
could result because the patients can receive a replacement heart sooner and
would not
10
require extensive tests and biopsies to assess donor heart compatibility. While
recipients of the AbioCor will need to purchase new batteries periodically, we
anticipate that the annual comparative cost of battery purchases will be
significantly less than the cost of immuno-suppression drugs required by donor
heart recipients.
While developing the AbioCor, we introduced the BVS, a temporary
heart-assist device, which is currently being sold in the U.S. and international
markets. Certain key elements of the technology developed for the AbioCor,
especially the blood contacting material, Angioflex, have been clinically tested
in the BVS and are currently in commercial use. In addition, the BVS has enabled
us to develop significant experience in areas such as research and development,
manufacturing, regulatory compliance, clinical support and sales and marketing.
We believe our experience with the BVS in these areas will provide us with a
competitive advantage in commercializing the AbioCor.
THE BVS 5000 TEMPORARY HEART ASSIST DEVICE
The BVS was the first heart assist device capable of assuming the full
pumping function of the heart to be approved by the FDA, and is the most widely
used heart assist device today, with thousands of patients supported to date. It
is a bridge-to-recovery device designed to provide a patient's failing heart
with full circulatory assistance while allowing the heart to rest, heal and
recover its function. The BVS can support the left, right or both ventricles of
the heart. The average age of patients supported with the BVS is 53, however the
BVS has been used to support patients as young as 8 and as old as 86 years old.
The BVS is the only device that the FDA has approved for the temporary
treatment of all categories of patients with failing but potentially recoverable
hearts. The BVS is most frequently used in patients whose hearts fail to recover
function immediately following heart surgery. The FDA approved the BVS through
its rigorous pre-market approval process for use with these post-surgical
patients in November 1992. In 1996, the FDA approved use of the BVS for all
other categories of post-surgical patients with potentially reversible heart
failure. In 1997, the FDA approved use of the BVS on patients who, prior to BVS
insertion, are non-surgical patients with abrupt heart failure as a result of
viral attack of the heart or certain heart attacks, expanding its use to the
temporary treatment of all patients with potentially reversible heart failure.
We market and sell the BVS system in Europe under a CE mark and in 2001 we
received regulatory approval to market and sell the BVS in Japan.
The following diagram illustrates the principal components of the BVS.
[GRAPHIC]
11
The BVS system consists of the following components:
- Single-use external blood pumps, which provide pumping of blood for
the left, right or both sides of a patient's heart and are designed to
emulate the function of the natural heart;
- Cannulae, which are specially designed tubes used to connect the blood
pumps to a patient's heart; and
- A computer-controlled pneumatic drive and control console, which
automatically adjusts the pumping rate to meet the basic needs of the
patient.
The integration of the cannulae, blood pumps and console creates an "external
heart" system with the ability to reduce the load on the heart, provide
pulsatile blood flow to vital organs and allow the heart muscles time to rest
and recover. The BVS is designed to be easy to use and does not require a
specially trained technician constantly to monitor or adjust the pumping
parameters.
The BVS is designed to facilitate the recovery of patients' hearts as
quickly as possible. Patients who recover under BVS support typically stabilize
in a period of less than one week. It generally takes three to five days for the
damaged but recoverable heart muscle to restore its function in a
post-cardiotomy patient. While the BVS has been used to support some patients
for weeks or months, the BVS is not intended nor approved for long-term use. The
BVS, although it is an external VAD, serves a different function than
bridge-to-transplant devices, which are intended for long-term use by patients
awaiting a heart transplant.
The BVS is most frequently used to support patients who have undergone
open-heart surgery, when the heart cannot be successfully restarted and weaned
off the heart-lung machine used in surgery. The BVS can assume the full pumping
function of the heart for these patients while reducing certain risks associated
with extended support on the heart-lung machine, including bleeding, strokes and
blood cell damage. The traditional therapy for these patients has been the
combined use of drugs and intra-aortic balloon pumps. Intra-aortic balloon pumps
are capable of providing limited enhancement to the pumping function of a
failing heart. Despite the availability of such therapy, many thousands of these
patients die each year.
Other categories of patients who can be supported by the BVS include those
suffering from viral myocarditis, a viral infection of the heart. For these
patients, the BVS assumes the full pumping function of the heart, allowing the
patient's immune system to defend against the virus. Other uses of the BVS
include supporting patients following failed heart transplants and supporting
the right ventricle of a patient's heart in conjunction with the implantation of
a device to assist the left ventricle. The BVS is typically used when the
patient's chances for survival are small. We are also exploring other potential
applications of the BVS, including its use as a staging device to support heart
failure patients prior to a permanent heart assist device or heart replacement.
Any hospital performing open-chest heart surgery may use the BVS. There are
approximately 900 of these hospitals in the U.S. and more than 1,000 such
hospitals outside the U.S. As of March 31, 2002, more than 500 medical centers
in the U.S. had purchased the BVS, including 70% of the major U.S. centers that
perform more than 500 heart surgeries annually. In marketing the BVS, we are
focusing on
12
selling additional consoles and disposable blood pumps to existing customers
with significant but less emphasis on adding new customers. Approximately 70% of
current BVS revenues are derived from sales of BVS single-use blood pumps to
existing customers. Our U.S. list prices for the BVS system are $12,400 for a
BVS single-use blood pump and cannulae set and $64,500 for a BVS console.
Since the BVS received its initial FDA approval, we have made various
improvements to the BVS system, primarily to make it easier to use. We continue
to enhance the BVS product line and are developing improved blood pumps,
cannulae and consoles. In May 2000, we received pre-market supplemental approval
from the FDA to begin selling our BVS 5000t Transport/Backup console. This new
console allows for transport of a patient by ambulance or aircraft between
hospitals as necessary in order to expand patient care. We believe this and
other pending improvements may permit use of the BVS for additional patient
conditions.
THE PENN STATE HEART
The Penn State Heart, like the AbioCor, is a battery-powered totally
implantable replacement heart system intended for use as destination therapy by
patients with irreparably damaged hearts who are at risk of imminent death due
to CHD or severe CHF but whose other vital organs remain viable. We acquired the
technology rights to the Penn State Heart in 2000, subject to reversion to The
Pennsylvania State University on or before September 2003 if we do not make a
reasonable effort to commercialize this technology. Similar to the AbioCor, the
development of the Penn State Heart was supported by significant funding from
the NHLBI. The AbioCor and the Penn State Heart were the only two replacement
heart programs that achieved the technological progress needed to qualify for
the final pre-clinical rounds of funding from the NHLBI. The Penn State Heart is
currently in an advanced stage of pre-clinical development. We are developing
this device in collaboration with the scientific team at The Pennsylvania State
University.
The Penn State Heart, like the AbioCor, consists of various subsystems
including a thoracic unit, rechargeable implantable battery,
microprocessor-based implantable electronic device, transcutaneous energy
transmission system and external rechargeable battery pack and monitor. The key
differentiation between the current design of the AbioCor and the Penn State
Heart is in the thoracic unit. In areas other than the thoracic unit, effort has
been made to utilize AbioCor subsystems where possible. The pumping mechanism in
the Penn State Heart's thoracic unit consists of two artificial ventricles but
is constructed and actuated differently than in the AbioCor. We believe that the
Penn State Heart and the AbioCor each has its unique advantages. The combination
strengthens ABIOMED's position to continue to lead in the introduction of heart
replacement technologies. It is our intention to continue to develop the Penn
State Heart in an effort to determine which device is more suitable for the
different classes of end-stage heart failure patients in need of heart
replacement. We may find that each is best for certain subsets of patients or
that certain features of the two technologies should be combined to produce a
better device.
OTHER PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT
We are using the technology and know-how derived from the AbioCor and the
BVS in the research and development of other potential cardiovascular products.
We are also using our experience and commitment to this field to evaluate
potential collaborative arrangements relating to third-party technologies and
products.
Other new technologies are in various stages of research, development or
evaluation, and include passive and active heart wraps as well as specialized
implantable and external heart assist devices. In addition, research and
development activities under our product development programs incorporate
certain technologies that have potential as separate spin-off products. Examples
include implantable
13
monitoring systems with remote transmission capability software for virtual
surgery, non-invasive power transmission systems, and external monitoring
systems.
RESEARCH AND PRODUCT DEVELOPMENT
As of March 31, 2002, our research and development staff consisted of 166
professional and technical personnel, including 13 with PhDs, and 48 engineers,
many with advanced degrees, covering disciplines such as electronics, mechanics,
software, reliability engineering, fluid mechanics, physics, materials and
physiology. Included among the 166 employees are 52 employees engaged in the
pilot manufacturing and quality testing of AbioCor systems. All of the AbioCor
systems manufactured are being used for our ongoing initial clinical trial,
testing and other investigational purposes. None of the AbioCor systems
manufactured are available currently nor approved for commercial sale.
Our research and development efforts are focused on mechanical heart assist
and heart replacement, and the continued enhancement of the BVS and related
technologies. Interaction continues with the FDA and corresponding foreign
regulatory agencies to obtain the necessary clearances and approvals for our
products. Sophisticated but established tools, such as three-dimensional
computer-aided design systems are used to permit smooth transition of new
designs from research to product development and into manufacturing. We have
substantial expertise in electro-mechanical systems, cardiac physiology and
experimental surgery, blood-material interactions, fluid mechanics and
hemodynamics, internal and external electronic hardware, battery technology,
software, plastics processing, lasers, and optical physics. Our expertise has
been primarily focused on addressing challenges associated with the safe and
effective pumping of blood.
We expended $15.6, $28.7 and $27.1 million on research and development
in fiscal 2000, 2001 and 2002, respectively. These amounts included $11.5,
$16.6 and $21.0 million, respectively, for AbioCor development and testing
and $6.4 million in fiscal 2001 for the Company's acquisition of patented
technology and marketing rights to the Penn State Heart. Since our inception,
U.S. government agencies, particularly the NHLBI, have provided significant
support to our product development efforts when such products are in their
early stages of research and development. As of March 31, 2002, our total
backlog of research and development contracts and grants was $0.7 million.
All of these contracts and grants contain provisions making them terminable
at the convenience of the government.
SALES, CLINICAL SUPPORT, MARKETING AND FIELD SERVICE
We believe that the sales, clinical support, marketing and field service
teams established for the BVS product line and the relationships developed with
existing customers will be instrumental not only in continuing to expand BVS
usage and sales, but also in launching new products such as the AbioCor and the
Penn State Heart.
The BVS is sold in the U.S. through direct sales and clinical support
teams. As of March 31, 2002, our worldwide BVS sales, clinical support,
marketing and field service teams included 47 full-time employees. Our sales
force primarily focuses on increasing sales from expanded usage of BVS
disposable blood pumps by our large installed base of customers as well as from
initial and upgrade sales to new and existing customers. Our clinical support
group focuses on training and educating new and existing customers in order to
help improve clinical outcomes. We believe that the efforts of our clinical
support group contribute significantly to the number of lives saved by
physicians using the BVS. This in turn promotes usage and reorders of BVS
single-use blood pumps. Approximately 70% of BVS revenues in fiscal 2002 were
derived from sales of BVS single-use blood pumps to existing customers. We
believe that the reputation and customer relationships of our sales and support
teams will be key assets for the
14
introduction of future products such as the AbioCor, the Penn State Heart and
BVS product extensions and other products under development.
Building on our experience in the U.S., we have expanded our international
sales efforts, both for the BVS and in preparation for the AbioCor. Our
international BVS product sales increased by $1.3 million, or 188%, during the
fiscal year ended March 31, 2002. In October 2001 we received approval from the
Japanese Ministry of Health, Labor and Welfare to market and sell the BVS system
in Japan. We conduct our international sales efforts through distributors and by
selling directly in selected European markets through ABIOMED B.V., our
wholly-owned subsidiary located in The Netherlands.
MANUFACTURING
We have over 10 years of experience in the manufacture of the BVS console,
BVS blood pumps, certain cannulae and related accessories. As of March 31, 2002,
our BVS manufacturing and quality assurance team consisted of 47 people. The
manufacture of our BVS blood pumps and consoles includes assembly, testing and
quality control. Key blood-contacting components for the BVS blood pumps,
including valves and bladders are manufactured from our proprietary Angioflex
polymer. We purchase a majority of the raw materials, parts and peripheral
components used in the BVS consoles. Depending on the size and design of the
cannulae, they are either purchased or manufactured by us.
As of March 31, 2002, 52 people in our research and development group were
engaged in AbioCor pilot manufacturing, process improvement and related quality
assurance. The production of the AbioCor is based on some processes that are
similar to the processes used for the BVS. We produce the majority of the
AbioCor blood contacting components in our facility and all such components are
assembled in-house. A majority of the metallic mechanical parts, electronic
components and batteries used to produce the AbioCor are purchased. We contract
with third parties to manufacture certain of the electronic systems used in the
AbioCor and we are increasingly moving such manufacturing to third parties.
In 2000, we moved our AbioCor pilot manufacturing to a new facility that
includes a state-of-the-art cleanroom area dedicated to AbioCor production. We
also moved our BVS console manufacturing to a dedicated area in this new
facility in 2000. In 2001, we completed moving all of our manufacturing
operations to this new facility, including moving our BVS blood pump and
cannulae manufacturing operations to a new state-of-the-art cleanroom
manufacturing area. We believe this new facility gives us the physical capacity
to produce sufficient quantities of AbioCor systems throughout the period of our
clinical trials as well as produce sufficient quantities of BVS disposable blood
pumps and cannulae to meet market demand for the foreseeable future. Our BVS
manufacturing area is ISO 9001 certified and operates under the FDA's current
Quality Systems Regulations and Good Manufacturing Practices, known as QSR/GMP.
Our AbioCor manufacturing areas are ISO 9001 certified and we are taking steps
towards ensuring that our AbioCor manufacturing area is QSR/GMP compliant for
purposes of eventual commercial distribution of AbioCor, subject to regulatory
approvals.
PROPRIETARY RIGHTS, PATENTS AND KNOW-HOW
We have developed significant know-how and proprietary technology, upon
which our business depends. To protect our know-how and proprietary technology,
we rely on trade secret laws, patents, copyrights, trademarks, and
confidentiality agreements and contracts. However, these methods afford only
limited protection. Others may independently develop substantially equivalent
proprietary information, gain access to our trade secrets or disclose such
technology without our approval.
15
A substantial portion of our intellectual property rights relating to the
AbioCor, the Penn State Heart and the BVS is in the form of trade secrets,
rather than patents. We protect our trade secrets and proprietary knowledge in
part through confidentiality agreements with employees, consultants and other
parties. We cannot assure that our trade secrets will not become known to or be
independently developed by our competitors.
As of July 15, 2002, we own 42 U.S. issued patents, including 12 related to
the AbioCor, 5 related to the Penn State Heart, and 2 related to the BVS. We
also own a number of corresponding patents in a limited number of foreign
countries. Our patents may not provide us with competitive advantages. They may
also be challenged by third parties. Our pending or future patent applications
may not be approved. The patents of others may render our patents obsolete or
otherwise have an adverse effect on our ability to conduct business. Because
foreign patents may afford less protection than U.S. patents, they may not
adequately protect our proprietary information.
The medical device industry is characterized by a large number of patents
and by frequent and substantial intellectual property litigation. Our products
and technologies could infringe on the proprietary rights of third parties. If
third parties successfully assert infringement or other claims against us, we
may not be able to sell our products. In addition, patent or intellectual
property disputes or litigation may be costly, result in product development
delays, or divert the efforts and attention of our management and technical
personnel. If any such disputes or litigation arise, we may seek to enter into a
royalty or licensing arrangement. However, such an arrangement may not be
available on commercially acceptable terms, if at all. We may decide, in the
alternative, to litigate the claims or to design around the patented or
otherwise proprietary technology.
The government may obtain certain rights to use or disclose technical data
developed under government contracts that supported the development of some of
our products. We retain the right to obtain patents on any inventions developed
under those contracts (subject to a non-exclusive, non-transferable,
royalty-free license to the government), provided we follow prescribed
procedures.
COMPETITION
Competition among providers of treatments for the failing heart is intense
and subject to rapid technological change and evolving industry requirements and
standards. Many of the companies developing or marketing cardiovascular products
have substantially greater or broader financial, product development, sales and
marketing resources and experience than ABIOMED. These competitors may develop
superior products or products of similar quality at the same or lower prices.
Moreover, improvements in current or new technologies may make them technically
equivalent or superior to our products in addition to providing cost or other
advantages. Other advances in medical technology, biotechnology and
pharmaceuticals may reduce the size of the potential markets for our products or
render those products obsolete.
No implantable replacement heart is commercially available today. We are
aware of other heart replacement device development efforts in the U.S., Canada,
Europe and Japan but are not aware of any plans for any other totally
implantable replacement heart to commence clinical trials in the U.S. or
anywhere in the world. We believe that if and when other implantable replacement
hearts are available, our AbioCor and Penn State Heart will compete with them
based on quality-of-life advantages, cost effectiveness, device reliability,
clinical support and customer relationships.
In addition to the developers of implantable replacement hearts, there are
a number of companies, including Arrow International, Thoratec Corporation and
World Heart Corporation which are developing permanent heart assist products,
including implantable LVADs and miniaturized rotary ventricular assist
16
devices, that may address markets that overlap with certain segments of the
markets targeted by AbioCor, the BVS and the Penn State Heart. AbioCor and the
Penn State Heart may compete with those devices for some patient groups, notably
patients with severe CHF due to predominant left ventricular heart failure. We
believe that implantable replacement hearts, LVADs and other VADs, if developed
and proven effective for destination therapy, will generally be used to address
the needs of different patient populations, with an overlap for certain segments
of the heart failure population. We believe that there is a need for both
implantable LVADs and implantable replacement hearts as destination therapies,
and that when both technologies demonstrate the required reliability, surgeons
will favor implantable replacement hearts for most CHD patients and a
significant fraction of CHF patients.
In addition to devices being developed for patients in need of heart
replacement, several companies and institutions have been for many years
investigating xenotransplantation, the transplantation of a heart from another
species, as a potential therapy. Most notably, some developers are investigating
the use of genetically engineered pig hearts as an alternative source of donor
hearts. This technology remains in its formative stage and subject to a number
of significant scientific challenges, including controlling elevated immunologic
reactions leading to heightened rejection problems between cross-species
grafting and concerns for cross-species disease transmission to the recipient
and the public at large. We believe that this technology will not achieve
practical application for heart replacement for decades, if ever.
The BVS is a device that can assume the full pumping function of the heart.
The FDA has approved the BVS as a bridge-to-recovery device for the treatment of
all patients with potentially reversible heart failure. The BVS competes with a
temporary cardiac assist device from Thoratec Corporation, which is also capable
of assuming the full pumping function of the heart and is today approved for
post-cardiotomy support. The Thoratec device was originally approved for
bridge-to-transplant and bridge-to-transplant continues to be the primary use of
the device. In addition, the BVS competes with blood pumps, such as intra-aortic
balloon pumps and centrifugal pumps, that are used in medical centers for a
variety of applications but which are limited to providing partial pumping
support of failing hearts, are non-pulsatile, or are not recommended for the
duration of support generally required for bridge-to-recovery. We are not aware
of any other company that has applied for FDA approval of a device that is
directly competitive with the BVS. Approval by the FDA of products that compete
directly with the BVS could increase competitive pricing and other pressures. We
believe that we can compete with such products based on cost, clinical utility
and customer relations.
Our customers frequently have limited budgets. As a result, our products
compete against a broad range of medical devices and other therapies for these
limited funds. Our success will depend in large part upon our ability to enhance
our existing products, to develop new products to meet regulatory and customer
requirements, and to achieve market acceptance. We believe that important
competitive factors with respect to the development and commercialization of our
products include the relative speed with which we can develop products,
establish clinical utility, complete clinical trials and regulatory approval
processes, obtain reimbursement, and supply commercial quantities of the product
to the market.
THIRD-PARTY REIMBURSEMENT
We sell our BVS product and intend to sell most of our potential products
under development to medical institutions. Medical institutions and their
physicians typically seek reimbursement for the use of these products from
third-party payers, including Medicare, Medicaid, and private health insurers
and managed care organizations. As a result, market acceptance of our current
and proposed products may depend in large part on the extent to which
reimbursement is available to medical institutions and physicians for use of our
products.
17
Coverage and the level of payment provided by U.S. and foreign third-party
payers varies according to a number of factors, including the medical procedure,
payer, location, outcome and cost. In the U.S., many private health care
insurance carriers follow the recommendations of the Centers for Medicare and
Medicaid Services (CMS), which establishes guidelines for the coverage of
procedures, services and medical equipment and the payment of health care
providers treating Medicare patients. Internationally, healthcare reimbursement
systems vary significantly. In certain countries, medical center budgets are
fixed regardless of levels of patient treatment. In other countries, such as
Japan, reimbursement from government or third party payers must be applied for
and approved. As of the date of this report, the amount that Medicare generally
pays a medical institution for in-patient care of Medicare patients is based on
a number of considerations, including a patient's diagnosis regardless of the
services that are provided. Physicians however bill separately for the
procedures that they perform. Medicare does not currently reimburse medical
institutions for the incremental cost of using the BVS. Certain private health
insurers and managed care providers provide incremental reimbursement to both
the medical institutions and their physicians.
The U. S. Department of Health and Human Services has proposed, among other
potential changes to the Medicare Hospital Inpatient Prospective Payment System
published as a Notice of Proposed Rulemaking in the Federal Register on May 9,
2002, creation of a new Diagnosis Related Group (DRG) for hospital discharges
involving implantation of external or implantable advanced mechanical cardiac
assist devices. If this proposal, which is subject to public comment and
administrative review, is incorporated as proposed into the Final Rule effective
October 1, 2002, Medicare program reimbursement to hospitals for patient cases
involving the BVS would be increased by approximately 40% over the current
level.
No reimbursement levels have been established for our products under
development, including the AbioCor. Prior to approving coverage for new medical
devices, most third-party payers require evidence that the product has received
FDA approval, European Union approval, or clearance for marketing, is safe and
effective and not experimental or investigational, and is medically necessary
and appropriate for the specific patient for whom the product is being used.
Increasing numbers of third-party payers require evidence that the procedures in
which the products are used, as well as the products themselves, are
cost-effective. Heart transplantation currently qualifies for reimbursement, as
does bridge-to-transplant treatment with implantable VADs. Comparatively, we
believe that when the AbioCor product reaches maturity, it should cost less over
a five-year period than heart transplantation today. We believe that these
factors should benefit the AbioCor when our customers begin to seek
reimbursement for it from third-party payers. However, we cannot assure that the
AbioCor or our other products under development will meet the criteria for
coverage and reimbursement or that third-party payers will reimburse physicians
and medical institutions at levels sufficient to encourage the widespread use of
the products. If the AbioCor receives such coverage, it will likely be
reimbursed as an implantable prosthetic device, with payments subject to rules
and limitation specific to such devices.
GOVERNMENT REGULATION
Clinical trials, manufacture and sale of our products and products under
development, including the BVS, AbioCor and Penn State Heart are, or will be,
subject to regulation by the FDA and corresponding state and foreign regulatory
agencies. Noncompliance with applicable regulatory requirements can result in,
among other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, refusal of the government
to grant marketing approval for devices, withdrawal of marketing approvals, and
criminal prosecution. The FDA also has the authority to request repair,
replacement or refund of the cost of any device manufactured or distributed by
ABIOMED.
18
U.S. CLINICAL USE REGULATIONS. The BVS is classified as a Class III medical
device under FDA rules, as will be the AbioCor and the Penn State Heart. In the
U.S., medical devices are classified into one of three classes (i.e., Class I,
II or III) based on the controls deemed necessary by the FDA to reasonably
ensure their safety and effectiveness. Class III medical devices are subject to
the most rigorous regulation. Class III devices, which are typically
life-sustaining, life-supporting or implantable devices, or new devices that
have been found not to be substantially equivalent to legally marketed devices,
must generally receive pre-market approval by the FDA to ensure their safety and
effectiveness. Class III devices are also subject to some of the requirements
applicable to Class I and Class II devices, including general controls, such as
labeling, pre-market notification, performance standards, post-market
surveillance, patient registries and adherence to QSR/GMP requirements, which
include testing, control and documentation requirements.
A PMA application must be filed if a proposed device is a Class III device
for which the FDA has required PMAs in order to obtain permission to market and
sell the device in the U.S. for a particular indication (patient issue). A PMA
application must be supported by valid scientific evidence, which typically
includes extensive information including relevant bench tests, laboratory and
animal studies and clinical trial data to demonstrate the safety and
effectiveness of the device. The PMA application also must contain a complete
description of the device and its components, a detailed description of the
methods, facilities and controls used to manufacture the device, and the
proposed labeling, advertising literature and training materials. By regulation,
the FDA has 180 days to review the PMA application, and during that time an
advisory committee may evaluate the application and provide recommendations to
the FDA. Advisory committee reviews often occur over a significantly protracted
period, and a number of devices for which FDA approval has been sought have
never been cleared for marketing. In addition, modifications to a device that is
the subject of an approved PMA, or to its labeling or manufacturing process, may
require the submission of PMA supplements or new PMAs and approval by the FDA.
On an exception basis, the FDA also provides that certain devices can be
distributed for humanitarian purposes prior to gaining PMA approval. FDA
approval of a humanitarian device exemption is not broadly available and
requires that no other available therapy exists for such indication and that
adequate data be available to support that the therapy is reasonably safe,
though arguably less data than for a PMA.
If clinical trials of a device are required in order to obtain FDA
approval, the sponsor of the trial will have to file an Investigational Device
Exemption, known as an IDE, application prior to commencing clinical trials. The
IDE application must be supported by data, which typically include the results
of animal testing performed in conformance with Good Laboratory Practices and
formal laboratory testing and documentation in accordance with appropriate
design controls and scientific justification. If the FDA approves the IDE
application, and the institutional review boards or IRBs at the institutions at
which the clinical trials will be performed approve the clinical protocol and
related materials, clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. Sponsors of clinical trials are permitted to charge for investigational
devices distributed in the course of the study provided that compensation does
not exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA before
a sponsor or investigator may make a change to the investigational plan that may
affect its scientific soundness or the rights, safety or welfare of human
subjects.
In November 1992, the FDA approved our PMA for the BVS. In 1996 and 1997,
the FDA approved the use of the BVS for additional indications, expanding its
use to the treatment of all patients with potentially reversible heart failure.
In May 1998, we received notice from the FDA that the BVS had successfully
concluded a required post-market surveillance study. The primary purpose of this
post-market surveillance study was to provide a warning system to alert the
health care community to any potential problems with a device within a
reasonable time of the initial marketing of the device. Post-
19
market surveillance provides clinical monitoring of the experiences with a
device once it is distributed in the general population under actual conditions
of use.
The AbioCor is classified as a Class III device and therefore is subject to
the IDE and PMA processes and QSR/GMP requirements. In January 2001, the FDA
granted an IDE providing us with regulatory permission to commence the initial
clinical trial of the AbioCor. The initial clinical trial, which began on July
3, 2001, when doctors at Jewish Hospital in Louisville, Kentucky, performed the
world's first implantation of our AbioCor Implantable Replacement Heart, is
subject to periodic review and to the readiness of each collaborating medical
center, including training of its surgical and post-operative care teams and
approval of the clinical trial protocol by the hospital's internal review board.
Our clinical trial is being undertaken with patients who, despite all available
therapies, have an extremely high probability of death within thirty days due to
heart failure.
We anticipate seeking initial FDA approval of the AbioCor for a limited
category of indications and patients, and subsequent approval for additional
indications and patient populations. After the initial regulatory approval, we
will need to complete additional clinical testing and request supplemental
approvals for additional indications and broader marketing claims. If we obtain
approval of the AbioCor in this manner, the FDA may initially impose
restrictions on use of the AbioCor. Nevertheless, we believe that this phased
approach will permit us to obtain initial marketing approval for the AbioCor
more quickly than if we were to seek a broader approval from the outset.
U.S. MANUFACTURING AND SALES REGULATION. Any devices, including the BVS,
which we manufacture or distribute pursuant to FDA clearances or approvals, are
subject to continuing regulation by the FDA and other regulatory authorities.
Manufacturers of medical devices for marketing in the U.S. are required to
adhere to QSR/GMP requirements and must also comply with Medical Devices
Reporting, or MDR, which requires that a firm report to the FDA any incident in
which its product may have caused or contributed to a death or serious injury,
or in which its product malfunctioned and, if the malfunction were to recur, it
would be likely to cause or contribute to a death or serious injury. Labeling
and promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved uses. We are
subject to routine inspection by the FDA and other regulatory authorities for
compliance with QSR/GMP and MDR requirements, as well as other applicable
regulations.
INTERNATIONAL REGULATION. We are also subject to regulation in each of the
foreign countries in which we sell our products. Many of the regulations
applicable to our products in these counties are similar to those of the FDA. We
have obtained the requisite foreign regulatory approvals for sale of the BVS in
many foreign countries, including most of Western Europe. We believe that
foreign regulations relating to the manufacture and sale of medical devices are
becoming more stringent. The European Union adopted regulations requiring that
medical devices such as the BVS comply with the Medical Devices Directive, which
includes ISO-9001 and CE certification. In 1998, we received ISO-9001 and CE
certification for the BVS. In 2001 we received ISO-9001 certification for the
AbioCor. Many manufacturers of medical devices, including ABIOMED, have often
relied on foreign markets for the initial commercial introduction of their
products. However, an evolving foreign regulatory environment could make it more
difficult, costly and time consuming for us to pursue this strategy for new
products. In the European Union, implantable devices, such as the AbioCor, must
comply with the Active Implantable Medical Devices Directive, known as AIMDD, in
order to obtain CE certification. We are working toward CE certification of the
AbioCor. Delays in obtaining this certifications for the AbioCor or other
products under development on a timely basis could delay commercial sales of the
products in the European Union.
20
EMPLOYEES
As of June 30, 2002, we had 295 full-time employees, including:
- 152 in research and development (including 52 people engaged in
AbioCor pilot manufacturing);
- 45 in sales, clinical support, marketing and field service; and
- 60 in BVS manufacturing and quality assurance.
Our remaining employees work in a variety of areas, including information
technology, human resources, accounting, facilities, corporate development and
management. We have entered into contractual agreements with all of our
employees, which include confidentiality and non-competition commitments by each
and every employee at all levels. None of our employees is represented by a
union. We consider our employee relations to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The senior management of the Company consists of the following:
NAME AGE POSITION
---- --- --------
David M. Lederman, Ph.D................ 58 Chairman of the Board of Directors, President and
Chief Executive Officer
Anthony W. Bailey...................... 46 Vice President, Business Development
Edward E. Berger, Ph.D................. 57 Vice President, Strategic Planning and Policy
William J. Bolt........................ 50 Senior Vice President - Product Engineering and Pilot
Manufacturing
Robert T.V. Kung, Ph.D................. 58 Senior Vice President - Chief Scientific Officer
Zvi Ladin, Ph.D........................ 50 Vice President, Clinical/Regulatory Affairs and QA
Eugene D. Rabe......................... 46 Senior Vice President - Global Sales and Services
John F. Thero.......................... 41 Senior Vice President - Treasurer and Chief Financial
Officer
Fred Zarinetchi, Ph.D.................. 41 Vice President, Research and Development
DR. DAVID M. LEDERMAN founded ABIOMED in 1981, and has served as Chairman
of the Board and Chief Executive Officer since that time. He has also served as
President of ABIOMED for the majority of time. He was Chairman of the Medical
Research Group at the Everett Subsidiary of Avco Corporation, which he joined in
1972. Dr. Lederman conceived and originated the BVS development program and the
design and development of the ventricles and valves that are integral to the
AbioCor implantable replacement heart. He holds various degrees in Physics and
Engineering, including a Ph.D. degree in Aerospace Engineering from Cornell
University.
MR. ANTHONY W. BAILEY has served ABIOMED since 1997, and has been Vice
President, Business Development since 2000 prior to which he was Vice President,
Engineering. From 1987 to 1997, he was Vice President and General Manager for
Pace Medical, Inc. and from 1982 to 1987, was Manager of
21
Design and Development at Shiley Infusaid, Inc. Prior to that, Mr. Bailey served
in various engineering functions with manufacturers of implantable pacemakers,
data acquisition and control systems and medical monitoring systems. Mr. Bailey
received his Bachelor's degree in Electrical Engineering from the University of
Lowell.
DR. EDWARD E. BERGER has served ABIOMED since 2001. He has been Vice
President Strategic Planning and Policy since 2001, having initially joined
ABIOMED as Vice President, Government and External Relations. From 2000 to 2001
he was Senior Consultant for Reimbursement Strategy at Thermo Cardiosystems,
Inc. From 1998 to 1999 he was Senior Consultant for Public Policy and Regulatory
Affairs for Navix Radiology Services, Inc. From 1983 to 1997 he held various
positions for Fresenius Medical Care, including Vice President and Director of
Government Relations. Prior to 1983, he held various positions, including as a
consultant on healthcare and social service issues for a public health group and
Assistant Professor at Boston University. Dr. Berger received his Ph.D. degree
in Political Science from Boston University.
MR. WILLIAM J. BOLT has served ABIOMED since 1982 and, has been Senior Vice
President, Product Development since August 2000. He is currently responsible
for Product Engineering, and pilot-manufacturing activities in the Company,
including the AbioCor. From 1999 to present, he was responsible for BVS product
development. From 1994 to 1998, he was President of ABIOMED's dental subsidiary,
ABIODENT. From 1982 to 1994, he served in various roles, from Vice President of
Engineering to Vice President of Operations, where he was the engineer in-charge
of the development of the BVS and other systems. Mr. Bolt received his
Bachelor's degree in Electrical Engineering and an MBA from Northeastern
University.
DR. ROBERT T.V. KUNG has served ABIOMED since 1982 and has been Senior Vice
President and Chief Scientific Officer since 1995. He was Vice President of
Research and Development from 1987 to 1995 and Chief Scientist from 1982 to
1987. Prior to joining ABIOMED, Dr. Kung was a Principal Research Scientist at
Schafer Associates from 1978 to 1982 and at the Avco Everett Research Laboratory
from 1972 to 1978. He developed non-linear optical techniques for laser
applications and investigated physical and chemical phenomena in re-entry
physics. Dr. Kung has been Principal Investigator for ABIOMED's National
Institutes of Health-funded AbioCor and AbioBooster programs and has conceived
of and directed the development of ABIOMED's laser-based minimally invasive
technologies. Dr. Kung received a Ph.D. degree in Physical Chemistry from
Cornell University.
DR. ZVI LADIN joined ABIOMED in April of 2002 as Vice President,
Clinical/Regulatory Affairs and QA. From 2001 to 2002 he founded RCR Consulting
serving as a consultant in Regulatory and Clinical affairs. From 1995 to 2001 he
held various positions at ESC Medical Systems, including Corporate Vice
President Clinical and Regulatory Affairs where he was involved with the
clinical introduction and regulatory approval of various medical devices. Prior
to 1995 he was a Science Advisor to the Food and Drug Administration, founder of
OsteoKinetics Corporation and Associate Professor of Biomedical Engineering at
Boston University. Dr. Ladin received his Ph.D. degree in Medical Engineering
from the joint program in Health Sciences and Technology from the Massachusetts
Institute of Technology and Harvard Medical School.
MR. EUGENE D. RABE has served ABIOMED since 1993 and has been Senior Vice
President, Global Sales and Services since 1999. Mr. Rabe assumed responsibility
for international sales in 1996, and was Vice President of Sales from 1993 to
1999. Prior to joining ABIOMED, Mr. Rabe was Vice President, Sales and Marketing
for Endosonics Corporation. Mr. Rabe was employed as a Sales Manager for St.
Jude Medical, Inc. He has been involved in the management of sales and marketing
of cardiovascular/cardiological devices for over fifteen years. Mr. Rabe
received a Bachelor's degree from St. Cloud State University and an MBA from the
University of California.
22
MR. JOHN F. THERO has served ABIOMED since 1994 and is currently Senior
Vice President, Treasurer and Chief Financial Officer. From 1994 to 1999 he was
Vice President of Finance, Treasurer and Chief Financial Officer. Prior to
joining ABIOMED, Mr. Thero was Chief Financial Officer and acting President for
the restructuring of two venture-backed companies from 1992 to 1995. From 1987
to 1992, he was employed in various capacities including Chief Financial
Officer, by Aries Technology, Inc. From 1983 to 1987, he was employed by the
commercial audit division of Arthur Andersen LLP during which time he became a
Certified Public Accountant. Mr. Thero received a Bachelor's degree in
Economics/Accounting from The College of the Holy Cross.
DR. FRED ZARINETCHI has served ABIOMED since 1994 and became Vice President
for Research and Development early in 2002. From 2001 to 2002 he served as
Program Manager for the Company's Penn State Heart development program and from
1994 to 2001 Dr. Zarinetchi served as Project Manager and Principal Staff
Scientist for the NIH-funded AbioCor Implantable Heart development program. From
1992 to 1993 he was Development Manager and co-founder of The Guild, Inc. Mr.
Zarinetchi received his Ph.D. degree in Electrical Engineering and Computer
Sciences from Massachusetts Institute of Technology and was a post-doctoral
fellow at Harvard University.
ITEM 2. PROPERTIES
Our headquarters is located in an industrial office park located 22 miles
north of Boston. This facility, located at 22 Cherry Hill Drive in Danvers,
Massachusetts, consists of approximately 80,000 square feet of space under an
operating lease that expires in 2010. Construction of this building was
completed in fiscal 2001 and it now houses all of our operations, including
research and development, manufacturing, sales and marketing and general and
administrative departments. During fiscal 2001 we completed construction of new
state-of-the-art manufacturing cleanrooms and moved pilot manufacturing and all
BVS production to this new facility. The lease contains provisions to allow
termination by us, subject to a defined termination fee, in 2005 and contains
options to extend beyond 2010 at market rates.
ITEM 3. LEGAL PROCEEDINGS
As of March 31, 2002, we were not party to any material pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2002.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE
Our common stock is traded on the Nasdaq Stock Market National Market under
the symbol "ABMD." The following table sets forth the range of high and low
sales prices per share of common stock, as reported by the Nasdaq National
Market for our two most recent fiscal years:
FISCAL YEAR ENDED MARCH 31, 2001 HIGH LOW
-------------------------------- ---- ---
First Quarter..................................... $ 22.500 $ 12.625
Second Quarter.................................... 34.750 15.594
Third Quarter..................................... 37.750 20.063
Fourth Quarter.................................... 30.000 13.250
FISCAL YEAR ENDED MARCH 31, 2002 HIGH LOW
-------------------------------- ---- ---
First Quarter..................................... $ 27.500 $ 10.500
Second Quarter.................................... 28.230 12.800
Third Quarter..................................... 24.100 14.140
Fourth Quarter.................................... 16.780 8.960
NUMBER OF STOCKHOLDERS
As of July 10, 2002, there were approximately 573 holders of record of our
common stock, including multiple beneficial holders at depositories, banks and
brokers included as a single holder in the single "street" name of each
respective depository, bank, or broker. We estimate that there are more than
14,000 beneficial holders who hold our common stock in street name.
DIVIDENDS
We have never declared or paid any cash dividends on our capital stock and
do not plan to pay any cash dividends in the foreseeable future. Our current
policy is to retain all of our earnings to finance future growth.
SALES OF UNREGISTERED SECURITIES
No sales of unregistered securities occurred during the Company's fiscal
year ended March 31, 2002.
TRANSFER AGENT AND RIGHTS AGENT
In May 2002, American Stock Transfer & Trust Company, 59 Maiden Lane, New
York, NY 10038, became the Company's stock Transfer Agent and Rights Agent.
24
ITEM 6. SELECTED FINANCIAL DATA
Portions of the following selected consolidated financial data has been
derived from the Company's audited Consolidated Financial Statements for the
fiscal years ended March 31, 2000, March 31, 2001 and March 31, 2002, which
are included elsewhere in this report. As discussed in Item 7 of this Annual
Report and in Note 3 to our Consolidated Financial Statements, the Company
has restated its previously audited consolidated statements for the fiscal
years ended March 31, 2000 and 2001. Similar restatements were made by the
Company for its previously audited financial statements for the fiscal years
ended March 31, 1998 and 1999. The effect of these restatements are reflected
in this selected consolidated financial data.
SELECTED CONSOLIDATED FINANCIAL DATA, AS RESTATED
(In thousands, except per share data)
FISCAL YEARS ENDED MARCH 31,
---------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA:
Revenues:
Products ................................ $ 17,028 $ 17,260 $ 18,521 $ 19,724 $ 24,747
Funded research and development ......... 4,088 4,472 4,572 3,142 2,214
-------- -------- -------- -------- --------
Total revenues ................... 21,116 21,732 23,093 22,866 26,961
-------- -------- -------- -------- --------
Costs and expenses:
Cost of product revenues ................ 6,362 6,464 5,870 7,222 7,925
Research and development (1) ............ 9,091 13,450 15,633 28,667 27,108
Selling general and administrative ...... 9,054 9,570 12,562 12,469 16,066
-------- -------- -------- -------- --------
Total costs and expenses ......... 24,507 29,484 34,065 48,358 51,099
-------- -------- -------- -------- --------
Loss from operations ...................... (3,391) (7,752) (10,972) (25,492) (24,138)
Interest and other income, net ............ 1,206 1,192 1,106 6,160 2,945
-------- -------- -------- -------- --------
Loss from continuing operations ........... (2,185) (6,560) (9,866) (19,332) (21,193)
Loss from discontinued operations (2) ..... (1,513) -- -- -- --
-------- -------- -------- -------- --------
Net loss .................................. $ (3,698) $ (6,560) $ (9,866) $(19,332) $(21,193)
======== ======== ======== ======== ========
Loss from continuing operations per share . $ (0.14) $ (0.38) $ (0.56) $ (0.94) $ (1.02)
Loss from discontinued operations per share (0.09) -- -- -- --
-------- -------- -------- -------- --------
Net loss per share ........................ $ (0.23) $ (0.38) $ (0.56) $ (0.94) $ (1.02)
======== ======== ======== ======== ========
Weighted average shares outstanding ....... 16,148 17,238 17,579 20,583 20,869
======== ======== ======== ======== ========
BALANCE SHEET DATA: MARCH 31,
---------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(unaudited) (unaudited)
Cash, cash equivalents and marketable
securities .............................. $ 26,398 $ 18,181 $106,384 $ 92,498 $ 71,321
Working capital ........................... 26,858 20,733 107,438 94,651 74,127
Total assets .............................. 38,401 30,808 120,132 110,961 89,176
Accrued expenses .......................... 4,572 4,887 6,355 4,656 4,906
Deferred revenue .......................... 449 44 35 3,752 2,373
Long-term liabilities ..................... 64 205 715 368 --
Stockholders' equity ...................... 30,592 24,797 111,238 99,814 79,868
(1) Research and development expenses include certain contract costs.
(2) Discontinued operations reflect the results of our dental subsidiary which
was discontinued in fiscal 1998 as we shifted all of our focus to our core
cardiovascular business.
25
The following table presents net increases and (decreases) in our
previously reported operating results for each of the five years ended March
31, 1998 through March 31, 2002 as a result of the aforementioned
restatements (in thousands):
INCREASES AND (DECREASES) IN
SELECTED CONSOLIDATED FINANCIAL DATA
AS A RESULT OF RESTATEMENTS
(In thousands, except per share data)
FISCAL YEARS ENDED MARCH 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA:
Revenues (1):
Products ....................................... $ (233) $ (819) $ 144 $(2,293) $ 2,257
Funded research and development ................ (1,097) 461 432 263 1,119
------- ------- ------- ------- -------
Total revenues .......................... (1,330) (358) 576 (2,030) 3,376
------- ------- ------- ------- -------
Costs and expenses:
Cost of product revenues (1) ................... (140) (308) (12) (153) 630
Research and development:
Internally incurred R&D costs (2) ........... -- -- -- 695 (260)
Acquired technology costs, net (3) .......... -- -- -- 5,301 (2,120)
Selling general and administrative(4) .......... -- (202) -- 58 (130)
------- ------- ------- ------- -------
Total costs and expenses ................ (140) (510) (12) 5,901 (1,880)
------- ------- ------- ------- -------
Income (loss) from operations .................... (1,190) 152 588 (7,931) 5,256
Interest and other income, net ................... -- -- -- -- --
------- ------- ------- ------- -------
Income (loss) from continuing operations ......... (1,190) 152 588 (7,931) 5,256
Income (loss) from discontinued operations ....... -- -- -- -- --
------- ------- ------- ------- -------
Net income (loss) ................................ $(1,190) $ 152 $ 588 $(7,931) $ 5,256
======= ======= ======= ======= =======
Income (loss) from continuing operations per share $ (0.07) $ 0.01 $ 0.03 $ (0.39) $ 0.25
Income from discontinued operations per share .... -- -- -- -- --
------- ------- ------- ------- -------
Net income (loss) per share ...................... $ (0.07) $ 0.01 $ 0.03 $ (0.39) $ 0.25
Weighted average shares outstanding .............. -- -- -- -- --
======= ======= ======= ======= =======
BALANCE SHEET DATA:(5) MARCH 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(unaudited) (unaudited)
Cash, cash equivalents and marketable
securities ....................................... $ -- $ -- $ -- $ -- $ --
Working capital .................................. (2,426) (1,411) (1,560) (3,348) (374)
Total assets (3) ................................. (354) (2,174) (1,656) (7,052) (3,627)
Accrued expenses ................................. 1,869 491 204 (945) (1,062)
Deferred revenue ................................. 203 (391) (174) 2,757 1,053
Long-term liabilities ............................ -- -- -- -- --
Stockholders' equity ............................. (2,426) (2,274) (1,686) (8,864) (3,618)
(1) Changes in revenues and cost of products sold primarily reflect timing
differences resulting from modification of the Company's revenue
recognition policy.
(2) Changes in internal research and development expenses primarily reflect
adjustment for stock-based compensation in fiscal 2001 and a reduction
of incentive compensation paid for fiscal 2002.
(3) Changes in research and development expenses reflect fully writing-off the
acquisition costs of the Penn State Heart in the year of acquisition, net
of previously reported amortization. These costs were reported previously
as Intellectual Property being amortized over the three-year period ending
September 2003.
(4) Decrease in selling, general and administration costs reflect a
reduction of incentive compensation paid for fiscal 2002.
(5) Because these modifications reflect timing of revenues and expenses and
other non-cash related adjustments, certain of the Company's balance sheet
data has changed including accounts receivable, intangible assets,
deferred revenue and accrued expenses. The Company's overall capital
resources, in particular cash and marketable securities, were not changed
as a result of these restatements.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ALL STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION CONTAINED IN THE
FOLLOWING DISCUSSION RELATIVE TO MARKETS FOR OUR PRODUCTS AND TRENDS IN SALES,
GROSS PROFIT AND ANTICIPATED EXPENSE LEVELS, AS WELL AS OTHER STATEMENTS,
INCLUDING WORDS SUCH AS "MAY," "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE,"
"EXPECT," AND "INTEND" AND OTHER SIMILAR EXPRESSIONS CONSTITUTE FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO BUSINESS AND
ECONOMIC RISKS AND UNCERTAINTIES, AND OUR ACTUAL RESULTS OF OPERATIONS MAY
DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW UNDER "RISK FACTORS" AS WELL AS OTHER RISKS
AND UNCERTAINTIES REFERENCED IN THIS REPORT.
OVERVIEW
We are a leading developer, manufacturer and marketer of medical products
designed to safely and effectively assist or replace the pumping function of the
failing heart. In July 2001, in collaboration with leading medical centers, we
commenced initial clinical trials for the world's first implantable,
battery-powered replacement heart, the AbioCor. The AbioCor, which is intended
for end-stage heart failure patients, is designed to replace the failing
ventricles of a patient's diseased heart and take over their pumping function.
The commencement of this initial clinical trial, approved by the FDA under an
IDE, follows nearly three decades of research, development and testing related
to this technology. We currently manufacture and sell the BVS, a temporary heart
assist device which was the first device approved by the FDA as a
bridge-to-recovery device for temporary treatment of all patients with failing
but potentially recoverable hearts. And, we are working to develop other
products to assist or replace the heart, including development of the Penn State
Heart. Our operating results reflect the dual activities of commercial
operations and investments in the research and development of new technologies.
The BVS is a temporary heart assist device designed to assume the full
pumping function of a patient's failing heart while allowing the heart to rest,
heal and recover its function. The BVS consists of single-use external blood
pumps and cannulae and a reusable pneumatic drive and control console. All of
our product revenues are currently derived from the BVS product line. BVS
revenues consist of sales to new customers and reorders from existing customers.
Following commercial introduction of the BVS in the U.S., our focus was on
obtaining market share beginning with the largest medical centers. As of March
31, 2002, more than 500 medical centers in the U.S. had purchased the BVS,
including 70% of all major medical centers that perform more than 500 heart
surgeries annually. While we continue to seek additional new customers for the
BVS, our primary focus is to increase usage and product reorders by existing
customers. Product reorders currently represent approximately 76% of BVS product
revenues. During fiscal 2002, no single customer represented more than 5% of
product revenues.
Research and development is a significant portion of our operations. Our
research and development efforts are focused on the development of new
products, primarily related to heart assist and heart replacement, and the
continued enhancement of the BVS and related technologies. In fiscal 2002, we
incurred $21.0 million in total research and development spending directed at
the AbioCor and $6.1 million in research and development spending directed at
BVS improvements, the Penn State Heart and development of other potential
products. These expenditures were partially offset by revenues from contracts
and grants of $2.2 million, of which the majority were from the NHLBI. We
retain rights to commercialize all technological discoveries and products
resulting from these contracts and grants.
27
RESTATEMENT OF PRIOR YEAR'S FINANCIAL STATEMENTS
We have modified our methods of revenue recognition for certain BVS
sales contracts and funded research and development contracts. Such
modifications result in the shifting of portions of revenues and related
expenses between fiscal quarters and fiscal years. In addition, we have
modified the timing of expenses recorded in connection with our acquisition
in September 2000 of rights to the Penn State Heart and we have recorded
expense for certain non-cash transactions involving stock option exercises
made by employees with the assistance of the Company. Accordingly, we have
restated our previously audited consolidated financial results and have
restated our previously reported deficit at March 31, 1999 below for each of
the two years ended on March 31, 2000 and 2001. Our financial results
presented below for our year ending on March 31, 2002 have been revised from
our previously announced fiscal 2002 results included in our press release on
operating results dated May 16, 2002. Throughout this Management's Discussion
and Analysis of Financial Condition and Operations (MD&A), the term
"previously reported" will be used to refer to our previously filed financial
statements for the two years ending on March 31, 2001 as well as our
previously announced fiscal 2002 results.
The following table presents increases and decreases to our previously
reported operating results for each of the three years ending on March 31,
2002 that resulted in the aforementioned restatements:
CHANGES IN PREVIOUSLY REPORTED AMOUNTS
(THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
2000 2001 2002
Revenues:
Products .......................... $ 144 $(2,293) $ 2,257
Funded research and development ... 432 263 1,119
------- ------- -------
Total revenues ............... 576 (2,030) 3,376
------- ------- -------
Costs and expenses:
Cost of product revenues .......... (12) (153) 630
Research and development:
Internally incurred R&D costs . -- 695 (260)
Acquired technology costs, net -- 5,301 (2,120)
Selling, general and administrative -- 58 (130)
------- ------- -------
Total costs and expenses ..... (12) 5,901 (1,880)
------- ------- -------
Income (loss) from operations .......... 588 (7,931) 5,256
------- ------- -------
Interest and other income, net ......... -- -- --
------- ------- -------
Net income (loss) ...................... $ 588 $(7,931) $ 5,256
======= ======= =======
Net income (loss) per share ............ $ 0.03 $ (0.39) $ 0.25
======= ======= =======
Our previously reported deferred revenues decreased by $0.2 million as
of March 31, 2000 and March 31, 2002 and increased by $2.8 million as of
March 31, 2001, as a result of the aforementioned restatements. The increase
in deferred revenue on March 31, 2002 is scheduled for recognition as revenue
in our fiscal year that ends March 31, 2003 upon the earlier of shipment of
BVS blood pump product or the end of the terms of the relevant contracts. In
addition to these changes in deferred revenues, these modifications also
resulted in $1.6 million, $0.8 million and $0.2 million under accepted
extended-term contracts at March 31, 2000, 2001 and 2002, respectively, that
were added to the Company's backlog on those dates but not recorded as
deferred revenues because they were unbilled.
The majority of our product revenues are derived from our shipment of
products to fulfill customer orders for specified numbers of BVS consoles and
blood pumps at specified prices. We recognize revenues and record costs related
to such sales upon product shipment. A portion of our product revenues are
derived from contracts which provide for the Company to receive a fixed,
non-refundable amount of money over a set period of time in return for our
providing these customers with BVS product
28
at the start of the contract and restocking the customer with BVS blood pumps
during the term of the contract. The exact quantity of such additional BVS blood
pumps, including related cannulae, to be supplied, if any, during the term of
the contract depends upon the actual usage of the product by the customer. The
terms of such contracts are typically one to three years. In many of these
extended-term contracts, the fixed non-refundable amount is paid at the
beginning of the contract while in other contracts payment of the fixed
non-refundable amount is paid over the term of the contract. We must be
satisfied that the contract is supported by a valid order from the customer and
is collectible before any revenue will be recognized.
We group these extended-term contracts into two primary categories. The
first category is comprised of contracts that include substantial up-front
shipments of BVS console(s) and related blood pumps to customers with a
commitment to provide additional blood pumps during the term of the contract if
the customer uses more blood pumps than we originally supplied. The second
category is comprised of contracts that include up-front shipment of blood pumps
with additional blood pumps to be provided during the term of the contract if
the customer uses more blood pumps than we originally supply. In this second
category the primary element of the contract is the blood pumps.
Our timing of revenue recognition for the first category of contracts has
historically been in accordance with sales-type leases. In this previously
reported accounting, we sought to match revenues, costs and, where possible,
cash flow in the same period by recognizing the full value of the contract, less
deferral of the time value of money for multi-year contracts, as revenue upon
the shipment of the BVS console and related initial shipment of BVS pumps. In
the same period, we recorded cost of product revenue for both the cost of
initial console and pump shipments and for an estimate of the cost of additional
pumps that might be shipped during the term of such contract.
In our restated accounting for this first category of contracts, we prorate
revenue between the value of the BVS console(s) and BVS pumps that are shipped
initially and the value of the maximum contractual number of additional pumps
that might be shipped during the contract. If a contractual maximum number of
additional pumps is not specified, we estimate the number of additional pumps
that might be shipped based upon historical experience and input from the
customer. After such prorating of revenues, we recognize revenue for the initial
shipment of each BVS console and pump at the time of shipment. Under this
method, we defer the portion of revenue prorated to the contractual maximum or
otherwise estimated number of additional pumps that might ship over the term of
the contract. This deferred revenue is then recognized ratably over the
remaining term of the contract as BVS pumps are shipped. To the extent that our
deferral of revenues for this potential additional pump usage proves to be too
high, any remaining deferred revenue at the end of the contract term is
recognized at that time. Under this method, cost of product revenue is recorded
upon shipment.
Our timing of revenue recognition for the second category of contracts, our
"extended-term renewal contracts", has since our adoption of Staff Accounting
Bulletin (SAB) No. 101, REVENUE RECOGNITION, for our fiscal year ended March 31,
2001, been ratably over the contract term. We have historically used one of two
methods for the ratable recognition of such revenues. The first method is the
recognition of such revenues on a blood pump units basis. Under this method, the
total contract value was initially deferred. This deferred value was divided by
our estimate of the number of blood pumps to be shipped over the term of a
contract to determine an average price per blood pump under the contract. As
each blood pump ships under the contract, the average price per blood pump under
the contract was recognized as revenue up to, but not in excess of, the total
order value. Costs of blood pumps were recorded upon shipment. To the extent
that our original estimate of additional pump usage proved to be too high, any
remaining deferred revenue at the end of the contract term was recognized at
that time. The second method we used for ratable revenue recognition of certain
of these contracts was based upon elapsed time. Under this method, a pro rata
portion of the total contract value was recognized over the
29
term of the contract based upon the relative elapsed term of the contract to the
total term of the contract. Prior to the adoption of SAB No. 101, we recognized
revenues under extended term renewal contracts in a manner that was consistent
with our recognition for sales-type leases.
In our restated accounting for this second category of contracts, we do not
recognize any revenue based on the time elapsed method but only on a units
basis. Under this units basis we calculate the average price per blood pump
using the maximum number of pumps allowed under the contract, provided that if
no maximum number is provided in the contract, we estimate the anticipated usage
based upon historical experience and input from the customer. We recognize
revenue based upon this calculated average price per blood pump upon shipment of
each pump. To the extent that our deferral of revenues for potential additional
pump usage proves to be too high because the customer uses fewer blood pumps
than the contractual maximum number of additional blood pumps, or, where
applicable, fewer than our estimated number of additional blood pumps, the
remaining deferred revenue at the end of the contract term is recognized at that
time.
The following table presents the amounts of revenue recognized under
extended-term contracts for each of the two categories described above during
each of the three years ended March 31, 2002, as restated (in millions):
YEAR ENDED MARCH 31,
--------------------
2000 2001 2002
---- ---- ----
Revenues by category of contract:
First category ................................. $ 1.4 $ 2.0 $ 1.3
Second category ................................ 1.1 0.8 3.9
------ ------ ------
Total extended-term contracts ............. $ 2.5 $ 2.8 $ 5.2
------ ------ ------
Percent of total extended-term contract revenue from
contracts using:
Contractual maximums to calculate average price
per pump ............ 0% 54% 53%
Estimated usage to calculate average price per
pump .............................................. 100% 46% 47%
As of March 31, 2002, March 31, 2001 and March 31, 2000 deferred
revenues from these contracts totaled $2.6 million $4.0 million and $1.4
million, respectively. Of the Company's 29 contracts with customers at March
31, 2002, 4 were of the first category and 25 were of the second category.
The terms of these contracts are all scheduled to expire during our fiscal
year that ends March 31, 2003 accordingly all of the $2.6 million in revenue
that is deferred as of March 31, 2002 is anticipated to be recognized as
revenue during Fiscal 2003.
We also modified our accounting for our AbioCor development contract. Phase
II of that contract, which commenced in fiscal 1997 and continued into fiscal
2002, provided an aggregate of $10.3 million in funding for the Company's
research and development efforts related to the AbioCor on a cost-plus-fixed-fee
basis. The full amount of the contract was funded through periodic appropriation
by its government sponsors. From the early stages of Phase II of this contract,
our research and development costs for this development project exceeded the
contract amount. We have received payment of the full amount of this contract.
We previously recorded revenue on this contract at the time of government
appropriation provided that the Company had incurred qualified costs under the
contract to support our recognizing that full amount under the contract on a
cost-plus-fixed-fee basis. In periods in which the appropriated amount exceeded
the calculated revenues on a cost-plus-fixed-fee basis, we recognized revenues
based on the cost-plus-fixed fee calculation. Because government appropriations
were made periodically, and generally only once per year, this resulted in
relatively large amounts of revenues recognized in certain fiscal periods and no
revenue recognized from this contract in other fiscal periods over the term of
the contract. In our restated accounting, we have recognized the appropriated
amount of
30
the contract ratably based upon elapsed time resulting in revenue recognized
at a relatively consistent level of revenue recognized over the term of the
contract. Our restated revenues relating to this contract are included as
part of Funded Research and Development in our consolidated statement of
operations. This modification resulting in a changes in the timing of revenue
recognized on this contract but did not change the aggregate amount of
revenue recognized over the term of the contract.
We also restated our accounting for costs that we previously capitalized in
connection with our acquisition in September 2000 of the Penn State Heart and
the company that was incorporated to commercialize the Penn State Heart, BeneCor
Heart Systems, Inc. In our previously reported results, we capitalized the
purchase cost of $6.4 million of this technology and we commenced amortizing
this cost on a schedule ratably over three years from the date of acquisition,
with $2.1 million and $1.1 million of this cost amortized in fiscal 2002 and
2001, respectively. In our restated results, as of the date of acquisition we
fully expensed the $6.4 million in acquisition costs as in-process research and
development expense. The result of this adjustment was to increase our
previously reported research and development expenses for our fiscal year ended
March 31, 2001 by $5.3 million and to decrease the amount of research and
development expenses for our fiscal year ended March 31, 2002 by $2.1 million.
Prior to this adjustment, $3.2 million in net unamortized acquisition costs were
classified on our consolidated balance sheet at March 31, 2002 as Intellectual
Property all of which was scheduled to be amortized ratably over the
eighteen-month period ending September 2003. See Note 5 to our Consolidated
Financial Statements for discussion of the nature of our costs incurred and
rights obtained in our acquisition of the Penn State Heart.
During our fiscal year ended March 31, 2001, the Company's assistance in
connection with the cashless exercises of incentive stock options for 29,500
shares of the Company's common stock by two of its employees triggered a
remeasurement of the value of these incentive stock options in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 44, ACCOUNTING
FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION AN INTERPRETATION OF APB
OPINION NO. 25. In our restated results, we recorded $753,000 as additional
expense for our fiscal year ended March 31, 2001 to reflect the value of the
shares of common stock underlying these stock options upon the remeasurement
date. The net result for the employees in terms of value received was identical
to the result that could have been obtained had they sold the same portion of
the shares in the market at fair value on those dates. The options had
originally been granted to the employees with exercise prices equal to the fair
market value of the stock on the date of grant. See Notes 2 and 9 to our
Consolidated Financial Statements for further discussion of our accounting for
employee stock options.
The Company also reduced certain accrued expenses based upon
expectations that the amounts will not be paid out. The result of these
modifications was to reduce operating expenses by $443,000 for the year ended
March 31 2002 with a corresponding reduction in accrued expenses due to a
revision of the Company's incentive compensation accrual which amount, based
upon subsequent information, will not be paid in conjunction with the year
ended March 31, 2002. Costs associated with the abandonment of patents were
increased by $63,000 in the Company's restated results for its fiscal year
ended March 31, 2002 and certain balance sheet modifications were made at
March 31, 2000 and 2001 to reflect the timing of software purchases and
leasehold improvements in the amounts of $29,000 and $148,000, respectively.
These balance sheet modifications, which represented timing differences, did
not have any effect on the Company's net operating results.
Because the above-described restatements reflect the timing of certain
revenues and expenses and non-cash transactions, our balance sheet was
correspondingly adjusted in various categories, including accounts
receivable, intellectual property, accrued expenses and deferred revenues. In
addition, the Company's accumulated deficit at April 1, 1999 was increased by
$2.5 million to reflect the cumulative effect of our modifications to our
revenue recognition policies on prior years partially offset by a decrease of
$0.2 million to reflect a reduction in accrued expenses. Our capital
resources were not impacted by any of these transactions. These increases and
decreases in operating results and associated balance sheet accounts are
included in the results discussed in our MD&A and presented in our audited
financial statements as filed with this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total revenues:
31
YEAR ENDED MARCH 31,
2000 2001 2002
---- ---- ----
(restated) (restated)
Revenues:
Products .......................... 80.2% 86.3% 91.8%
Funded research and development ... 19.8 13.7 8.2
------- ------- -------
Total revenues ............... 100.0 100.0 100.0
------- ------- -------
Costs and expenses:
Cost of product revenues .......... 25.4 31.6 29.4
Research and development .......... 67.7 125.4 100.5
Selling, general and administrative 54.4 54.5 59.6
------- ------- -------
Total costs and expenses ..... 147.5 211.5 189.5
------- ------- -------
Loss from operations ................... (47.5) (111.5) (89.5)
Interest and other income, net ......... 4.8 26.9 10.9
------- ------- -------
Net loss ............................... (42.7)% (84.6)% (78.6)%
======= ======= =======
FISCAL YEARS ENDED MARCH 31, 2002 AND MARCH 31, 2001 ("FISCAL 2002" AND "FISCAL
2001")
PRODUCT REVENUES. Product revenues increased by $5.0 million, or 25%, to
$24.7 million in fiscal 2002 from $19.7 million in fiscal 2001. The increase
in product revenues was attributable to increased sales of BVS disposable
blood pumps to existing and new customers and including international
customers, increased sales of our BVS 5000t Transport/Backup console. These
increases reflect increases in product shipments, including and the timing of
previously deferred revenue under extended-term contracts. The portion of
product revenues derived from sales of disposable blood pumps and related
accessories and services increased by $4.6 million, or 29%, to $20.7 million
in fiscal 2002 from $16.1 million in fiscal 2001. The portion of product
revenues derived from sales of BVS consoles increased by $0.5 million, or
14%, to $4.1 million in fiscal 2002 from $3.6 million in fiscal 2001.
Domestic product revenues included approximately $5.2 million from
extended-term contracts in fiscal 2002 and $2.8 million in fiscal 2001.
Domestic sales accounted for 92% of total product revenue during the fiscal
2002 and 96% of product revenue for fiscal 2001.
FUNDED RESEARCH AND DEVELOPMENT REVENUES. Contract revenues decreased by
$0.9 million, or 29%, to $2.2 million in fiscal 2002 from $3.1 million in fiscal
2001. Approximately $1.1 million of the contract revenues recognized in fiscal
2002 were derived from our AbioCor government contract compared to $1.8 million
in the prior year as the Company's funding under that contract ended in fiscal
2002. As is typical for research and development programs that have matured to
the stage where they are ready to commence human clinical trials, we do not
anticipate additional government research and development funding for AbioCor.
Included in funded research and development for the year just ended was $0.6
million in revenues recorded in connection with providing specialized training
to medical centers involved with our U.S. and European AbioCor clinical trials.
As of March 31, 2002, our total backlog of research and development
contracts and grants was $0.7 million. All of these contracts and grants contain
provisions that make them terminable at the convenience of the government.
COST OF PRODUCT REVENUES. Cost of product revenues as a percentage of
product revenues decreased to 32% for fiscal 2002 from 37% in the prior fiscal
year. The 5% decrease is primarily due to the
32
expiration of an agreement on August 3, 2000, in which the Company paid
royalties to third parties on certain BVS product revenues and to the
proportionate increase in sales of BVS disposable blood pumps relatively to
sales of lower margin BVS consoles.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased by $1.6 million, or 6%, to $27.1 million in the fiscal 2002, from
$28.7 million in the prior fiscal year. Research and development expenses were
101% of total revenues for the fiscal 2002 and 125% of total revenues in the
prior year. Included in research and development expenses for fiscal 2001 were
$6.4 million in cost incurred with our acquisition of rights to the Penn State
Heart. Excluding these acquisition costs, research and development expenses
increased by $4.8 million, or 22%, in fiscal 2002 from $22.3 million in fiscal
2001. Research and development expenses incurred for the AbioCor increased by
$4.4 million to $21.0 million during the fiscal year ended March 31, 2002 from
$16.6 million for the fiscal year ended March 31, 2001. This increase in AbioCor
expenditures during the fiscal year just ended is primarily attributable to our
clinical trial that began in July 2001 and include costs associated with
increased manufacturing, testing and documentation activities. Research and
development expense for the fiscal year ended March 31, 2002 also included $2.7
million in expenditures related to the development of the Penn State Heart and
$3.4 million in expenditures for other products under development and for
enhancements for the BVS product line.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $3.6 million, or 29%, to $16.1 million in
fiscal year ended March 31, 2002 from $12.5 million in the prior year.
Expenditures increased to 60% of total revenues from 55% of total revenues in
the same period a year earlier as a result of increased staffing, including
creating of a direct sales and clinical support team in Europe, and public
relations activities associated with the commencement of the AbioCor clinical
trial.
INTEREST AND OTHER INCOME. Interest and other income consists primarily of
interest earned on our investment balances, net of interest and other expenses.
Interest and other income decreased by $3.3 million to $2.9 million in fiscal
2002 from $6.2 million in fiscal 2001. This decrease was primarily due to
reduced yields on investments resulting from lower average interest rates and to
lower average fund balances available for investment.
NET LOSS. Net loss for the fiscal year ended March 31, 2002 was
approximately $21.2 million, or $1.02 per share. This compares to a net loss of
approximately $19.3 million, or $0.94 per share, for the prior fiscal year. The
losses for both years are primarily attributable to development and clinical
testing costs associated with the AbioCor and costs of acquiring and developing
other technologies and products.
FISCAL YEARS ENDED MARCH 31, 2001 AND MARCH 31, 2000 ("FISCAL 2001" AND "FISCAL
2000")
PRODUCT REVENUES. Product revenues increased by $1.2 million, or 6%, to
$19.7 million in fiscal 2001 from $18.5 million in fiscal 2000. The increase
in product revenues was primarily attributable to increased sales of BVS
disposable blood pumps to new and existing customers, higher average selling
prices for these blood pumps and sales of our new BVS 5000t Transport/Backup
console. The increased sales of BVS disposable blood pumps reflects increases
in product shipments, including the timing of previously deferred revenue
under extended-term contracts. The portion of product revenues derived from
sales of disposable blood pumps and related accessories and services
increased by $1.0 million, or 7%, to $16.1 million in fiscal 2001 from $15.1
million in fiscal 2000. The portion of product revenues derived from sales of
BVS consoles increased by $0.2 million, or 6%, to $3.6 million in fiscal 2001
from $3.4 million in fiscal 2000. Domestic product revenues included
approximately $2.8 million from extended-term contracts in fiscal 2001 and
$2.5 million in fiscal 2000. Domestic sales accounted for 96% of total
product revenue during the fiscal year ended March 31, 2001 and 2000.
33
FUNDED RESEARCH AND DEVELOPMENT REVENUES. Contract revenues decreased
by $1.5 million, or 33%, to $3.1 million in fiscal 2001 from $4.6 million in
fiscal 2000. Approximately $1.8 million of the contract revenues recorded in
the fiscal year ended March 31, 2001 and $2.2 million recorded in the fiscal
year ended March 31, 2000 were derived from our AbioCor government contract.
The decline in funded research and development revenues is primarily due to
the completion or winding down of research and development work performed
under certain government-sponsored research contracts and grants. As is
typical for research and development programs that have matured to the stage
where they are ready to commence human clinical trials, we do not anticipate
additional government research and development funding for AbioCor and, as a
result, we anticipate that our funded research and development revenues will
decline in our new fiscal year.
As of March 31, 2001, our total backlog of research and development
contracts and grants was $2.3 million, including $1.1 million in revenues not
recognized on the AbioCor contract. All of these contracts and grants contain
provisions that make them terminable at the convenience of the government.
COST OF PRODUCT REVENUES. Cost of product revenues as a percentage of
product revenues increased to 37% for the fiscal year ended March 31, 2001 from
32% in the prior fiscal year. The 5% increase was primarily due to production
inefficiencies associated with the production startup of our new BVS 5000t
Transport/Backup console and transitional costs related to our moving and
qualifying our new BVS blood pump manufacturing facility. These increases to our
cost of product revenues were partly offset by the discontinuation of a royalty
obligation due to the Abiomed Limited Partnership. The royalty obligation, which
on a net basis was approximately 2.1% of the majority of BVS product revenues,
contractually expired for product sold after August 3, 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $13.0 million, or 83%, to $28.7 million in the fiscal 2001, from
$15.6 million in the prior fiscal year. Research and development expenses were
125% of total revenues for the fiscal 2001 and 68% of total revenues in the
prior year. Included in research and development expenses for fiscal 2001 were
$6.4 million in cost incurred in connection with our acquisition of rights to
the Penn State Heart. Excluding these acquisition costs, research and
development expenses in fiscal 2001 were $22.3 million, an increase of $6.7
million, or 43%, over the prior year. Excluding Penn State Heart acquisition
costs, the increase in expenditures during the fiscal year ended March 31, 2001
was due primarily to increased spending for the AbioCor, including preparations
for initial clinical trials and increased cost for further development of the
Penn State Heart and development of other new products and enhancements for the
BVS product line. Research and development expenses during the fiscal year ended
March 31, 2001 included $16.6 million of expenses incurred in connection with
our development activities for the AbioCor, compared to $11.5 million in the
prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $0.1 million, or 1%, to $12.5 million in
fiscal 2001 from $12.6 million in the prior year. These expenditures were
approximately 54% of total revenues in fiscal 2001 and fiscal 2000. Reduced
legal expenses in fiscal 2001 compared with fiscal 2000 were partially offset
by increased costs associated with increased sales and administrative
staffing and related activities.
INTEREST AND OTHER INCOME. Interest and other income consists primarily of
interest earned on our investment balances, net of interest and other expenses.
Interest and other income increased by $5.1 million to $6.2 million in fiscal
2001 from $1.1 million in fiscal 2000. This increase was primarily due to higher
average funds available for investment as a result of the Company's stock
offering in March 2000.
NET LOSS. Net loss for the fiscal year ended March 31, 2001 was
approximately $19.3 million, or $0.94 per share. This compares to a net loss of
approximately $9.9 million, or $0.56 per share, for the prior
34
fiscal year. The losses for both years are primarily attributable to development
and pre-clinical testing costs associated with the AbioCor.
LIQUIDITY AND CAPITAL RESOURCES
We have supported our operations primarily with net revenues from sales of
our BVS product line, government contracts and proceeds from our equity
financings. As of March 31, 2002, our cash, cash equivalents and marketable
securities totaled $71.3 million.
During fiscal 2002, operating activities used $19.6 million of cash. Net
cash used by operating activities in fiscal 2002 reflected a net loss of
$21.2 million, including non-cash depreciation and amortization expense of
$1.8 million and stock-based compensation of $0.2 million, and increases in
inventory and prepaid expenses and other assets of $0.7 million and $0.1
million, respectively. Cash was also used to reduce accounts payable,
deferred revenues and long-term liabilities by $0.2 million, $1.4 million and
$0.1 million, respectively. These uses of cash were partially offset by a
decrease in accounts receivable and an increase in accrued expenses of $1.6
million and $0.3 million, respectively. The decrease in accounts receivable
is attributable to more extensive efforts to reduce BVS trade receivables
during the fiscal year ended March 31, 2002. The increase in inventory is the
result of the Company's effort to maintain greater stocks of BVS disposable
blood pump materials and finished goods in connection with planned shipments.
The decrease in deferred revenues is the result of shipment of BVS blood
pumps under extended-term contracts.
During fiscal 2002, investing activities used $25.7 million of cash.
Approximately $23.6 million in cash was used for the acquisition of
short-term marketable securities, net of sales of similar securities. We also
expended cash for patent additions and capital equipment and leasehold
improvements of $0.4 million and $1.6 million, respectively.
Financing activities generated $0.5 million of cash during fiscal 2002.
Cash used to pay off equipment loans of $0.5 million was offset by $1.0 million
of cash received as a result of stock options exercised during the fiscal year
and the purchase of shares by employees under the Employee Stock Purchase Plan.
Income taxes incurred during fiscal 2002 were not material, and we continue
to have significant net tax operating loss and tax credit carryforwards.
The following table (in thousands) summarizes the Company's contractual
obligations at March 31, 2002 and the effects such obligations are expected to
have on its liquidity and cash flows in future periods.
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN 1 - 3 4 - 5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
----------------------- ----- ------ ----- ----- -----
Capital Lease Obligations $ 55 $ 55 $ - $ - $ -
Operating Lease Obligations 6,301 947 2,333 1,541 1,480
------ ------ ------ ------ ------
Total Contractual Cash Obligations $6,356 $1,002 $2,333 $1,541 $1,480
====== ====== ====== ====== ======
At the Company's election the lease for its primary operating facility may
be terminated in 2005. The lump sum buyout cost for early termination is $1.1
million.
35
We believe that our revenue from product sales and government contracts,
together with existing resources will be sufficient to fund our planned
operations, including the planned expenditures for our internally funded
AbioCor, Penn State Heart and new BVS development and product extension efforts,
for the next twelve months. However, we may require significant additional funds
in order to complete the development, conduct clinical trials, and achieve
regulatory approvals of the AbioCor, Penn State Heart and other products under
development over the next several years. We may also need additional funds for
possible future strategic acquisitions of businesses, products or technologies
complementary to our business. If additional funds are required, we may raise
such funds from time to time through public or private sales of equity or from
borrowings.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based on its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the U.S. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. On an on-going basis, we evaluate our estimates and
judgments, including those related to revenue recognition, bad debts, warranty
obligations, inventory valuations, intellectual property and income taxes. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
REVENUE RECOGNITION. We derive our revenues from two principal sources: (1)
product sales, including maintenance service agreements, and (2) funded research
and development contracts and grants from government and other third party
sources. We follow very specific and detailed guidelines in measuring revenue,
including SEC Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION. The
majority of our product revenues are derived from our shipment of products to
fulfill customer orders for a specified number of BVS consoles and blood pumps
for a specified price. We recognize revenues and record costs related to such
sales upon product shipment. See Item 7 - Management's Discussions and Analysis
of Financial Condition and Results of Operations, Restatement of Prior Year's
Financial Statements.
Other of our product revenues are derived from extended-term contracts with
certain of our customers. These contracts, which typically have terms of one to
three years, provide for the Company to receive a fixed, non-refundable amount
of money over a set period of time in return for our providing these customers
with BVS product at the start of the contract and restocking the customer with
BVS blood pumps during the term of the contract. The exact quantity of such
additional pumps to be supplied, if any, depends upon the actual usage of the
product by the customer to support their patients. Under these contracts, we
recognize revenue, and record related cost of product revenues, ratably over the
term of the contract using an estimated per unit selling price based upon actual
shipments of pumps to customers compared to the maximum number of additional
pumps allowable under the contract, or when a maximum number is not specified,
compared to our estimate of additional pumps that might be required by the
customer. In the majority of contracts that contain contractual limits on the
number of pumps, customers do not use the maximum number of allowable pumps
resulting in our recognition of the remaining deferred revenue at the end of the
contract term, with no associated incremental cost. When we do not have a
contractual maximum number of pumps upon which to rely, we estimate customer
blood
36
pump usage and resulting per unit selling price based upon historical
experience and based on information from our customers. We update these
estimates over the term of a contract based upon significant and quantifiable
changes in customer information and adjust the per unit selling price, as
appropriate. Our estimates of customer blood pump usage and resulting per
unit selling price that we use to determine the timing of revenue recognition
involve risks. For example, when our estimate of customer usage proves to be
higher than our customer's actual usage during the term of a contract, we
recognize as revenue the remaining deferred balance of the contract at the
end of the contract term resulting in revenue recognition in that period
despite no or minimal blood pump usage by our customer during that period.
While such changes in estimated per unit selling prices based on changes in
estimated customer usage have historically not had a material effect on the
aggregate amounts of revenue recognition, no guarantee can be made that the
Company will experience the same level of accuracy in estimateing future
customer usage.
Cash received in advance of revenue in connection with the sale of blood
pumps under extended-term contracts is recorded as deferred revenue and is
classified as a current or long-term liability depending on the expected
shipment dates of the blood pumps.
Maintenance service revenues are recognized ratably over the term of the
service contracts based upon the elapsed term of the service contract.
Government-sponsored research and development contracts and grants
generally provide for payment on a cost-plus-fixed-fee basis. Revenues from
these contracts and grants are recognized as work is performed, provided the
government has appropriated sufficient funds for the work. Under contracts in
which the Company elects to spend significantly more on the development project
during the term of the contract than the total contract amount, the Company
prospectively recognizes revenue on such contracts ratably over the term of the
contract as it incurs related research and development costs, provided the
government has appropriated sufficient funds for the work.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We continuously monitor collections and
payments from our customers and maintain a provision for estimated losses based
upon our historical experience and any specific customer collection issues that
we have identified. While such credit losses have historically been within our
expectations and the provisions established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have in the past. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances would be
required.
WARRANTIES. Our BVS product line is subject to rigorous regulation and
quality standards. While our Company engages in extensive product quality
programs and processes, including monitoring and evaluating the quality of
component suppliers, our warranty obligation is affected by product failure
rates and product recalls. Our operating results could be adversely effected if
the actual cost of product failures, including product recalls, exceeds our
estimated warranty provision.
INVENTORIES. We value our inventory of products held for sale at the lower
of cost or current estimated market value. We regularly review inventory
quantities on hand and record a provision for excess and obsolete inventory
based primarily on our estimated forecast of product demand and production
requirements for the next twelve months. If actual demand or market conditions
are less favorable than our projections, additional inventory write-downs may be
required adversely impacting our financial results for the period in which the
additional excess or obsolete inventory is identified. All of our inventories
related to our BVS product line. We do not currently capitalize any costs
related to AbioCor inventory as such product is part of a clinical trial and not
available for sale.
INCOME TAXES. As part of the process of preparing our consolidated
financial statements we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves us estimating our
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in
37
deferred tax assets and liabilities. In addition, as of March 31, 2002, the
Company had federal tax net operating loss carryforwards of approximately
$75.5 million which begin to expire in 2005. The Company also has research
and development credit carryforwards of approximately $2.9 million which
begin to expire in 2004. We have recorded a valuation allowance of $40.5
million as an offset against these otherwise recognizable net deferred tax
assets due to the uncertainty surrounding the timing of the realization of
the tax benefit. In the event that we determine in the future that the
Company will be able to realize all or a portion of its net deferred tax
benefit, an adjustment to deferred tax valuation allowance would increase net
income in the period such a determination was made.
Risk Factors
An investment in our common stock involves a high degree of risk. Current and
prospective investors should carefully consider each of the risks and
uncertainties described in this section and all of the other information in this
Report. Our business, financial condition and results of operations could be
severely harmed by any of the following risks. The trading price of our common
stock could decline if any of these risks and uncertainties develop into actual
events.
OUR FUTURE SUCCESS IS STRONGLY DEPENDENT ON DEVELOPMENT OF THE ABIOCOR. OUR
DEVELOPMENT EFFORTS MAY NOT BE SUCCESSFUL.
We are currently devoting our principal research and development and
regulatory efforts, and significant financial resources, to the development of
the AbioCor and of the Penn State Heart. Implantable replacement heart systems,
like the AbioCor and the Penn State Heart are complex medical devices and have
never been successfully developed or marketed by any company. The development of
implantable replacement heart devices such as the AbioCor and Penn State Heart,
and other new products, presents enormous challenges in a variety of areas, many
or all of which we may have difficulty in overcoming, including blood compatible
surfaces, blood compatible flow, manufacturing techniques, pumping mechanisms,
physiological control, energy transfer, anatomical fit and surgical techniques.
For many years, we and other parties have been attempting to develop a heart
replacement device, but to date, none of these efforts has been proven
successful. We cannot be sure that we will be successful in our development
efforts, and in the event that we are unable to commercialize the AbioCor, our
business and financial condition would be adversely affected. The markets for
the AbioCor and our other products under development are unproven. Even if the
AbioCor or any other of our products are successfully developed and approved by
the FDA and corresponding foreign regulatory authorities, they may not enjoy
commercial acceptance or success, which would adversely affect our business and
results of operations. Several factors could limit our success, including:
- our need to create a market for an implantable replacement heart, and
possible limited market acceptance among physicians, medical centers,
patients and third party payers;
- the need for surgeons to develop or be trained in new surgical
techniques to use our product effectively;
- limitations on the number of patients who may have access to
physicians and medical centers with adequate training, equipment and
personnel to make use of our products;
- limitations inherent in first generation devices, and the potential
failure to develop successive improvements, including increases in
service life, which would reduce the addressable market for the
AbioCor;
38
- the lifestyle limitations that patients will have to accept, including
traveling with external batteries at all times and potentially
avoiding activities such as air travel or diving that involve
significant pressure changes;
- the timing and amount of reimbursement for these products, if any, by
third party payers;
- the introduction by other companies of new treatments, products and
technologies which compete with our products, and may reduce their
market acceptance, or make them obsolete;
- the reluctance, due to ethical considerations, of physicians, patients
and society as a whole to accept medical devices that replace the
heart; and
- the reluctance of physicians, patients and society as a whole to
accept the finite life and risk of mechanical failure of devices that
replace the heart.
The commercial success of the AbioCor and other heart assist products will
require acceptance by cardiovascular surgeons and interventional and heart
failure cardiologists, a limited number of whom significantly influence medical
device selection and purchasing decisions. We may achieve our business
objectives only if the AbioCor and our other products are accepted and
recommended by leading physicians, which is likely to be based on a
determination by these physicians that our products are safe, cost-effective and
represent acceptable methods of treatment. Although we have developed
relationships with leading cardiac surgeons and cardiologists, we cannot assure
that these existing relationships and arrangements can be maintained or that new
relationships will be established in support of the AbioCor and our other
products. If cardiovascular surgeons and cardiologists do not consider our
products to be adequate for the treatment of our target cardiac patient
population or if a sufficient number of physicians recommend and use competing
products, it would seriously harm our business.
TESTING OF OUR NEW PRODUCTS WILL INVOLVE UNCERTAINTIES AND RISKS WHICH
COULD DELAY OR PREVENT NEW PRODUCT INTRODUCTIONS, REQUIRE US TO INCUR
SUBSTANTIAL ADDITIONAL COSTS OR RESULT IN OUR FAILURE TO BRING OUR PRODUCTS TO
MARKET.
If we cannot demonstrate through clinical testing on humans that the
AbioCor or other new products are safe and effective, we will not be able to
obtain regulatory approvals in the U.S. or other countries for the commercial
sale of these products. Our clinical testing of the AbioCor is in its early
stages. Delays, budget overruns, and project terminations are not uncommon even
after promising pre-clinical and clinical trials of medical products. We intend
to conduct clinical testing for the AbioCor and other heart assist and heart
replacement products with critically ill patients, and these patients may die or
suffer other adverse medical results for reasons which may or may not be related
to the product being tested. Those outcomes could seriously delay the completion
of clinical testing, as could the unavailability of suitable patients for
clinical trials, both of which are outside our control. We cannot assure that
the rate of patient enrollment in our clinical trials will be consistent with
our expectations or be sufficient to allow us to complete our clinical trials
for the AbioCor or our other products under development in a timely manner, if
at all. Delays could defer the marketing and commercial sale of our products,
require further funding, and possibly result in failure to bring the products to
market.
Development and testing of design changes to the AbioCor and other products
under development is often extensive, expensive and time consuming. Some of the
tests for our products may require months or years to perform, and we could be
required to begin these tests again if we modify one of our products to correct
a problem identified in testing. Even modest changes to certain components of
39
our products can take months or years to complete and test. If results of
pre-clinical or clinical testing of the AbioCor or other products under
development indicate that design changes are required, such changes could cause
serious delays that would adversely affect our results of operations. A number
of companies in the medical industry have suffered delays, cost overruns and
project terminations despite achieving promising results in pre-clinical testing
or early clinical testing. In the event that we suffer setbacks in the
pre-clinical or clinical testing of the AbioCor or other heart assist products,
these products may be delayed, require further funding, and possibly may not be
brought to market.
IF WE FAIL TO OBTAIN APPROVAL FROM THE FDA AND FROM FOREIGN REGULATORY
AUTHORITIES, WE CANNOT MARKET AND SELL THE ABIOCOR OR OTHER NEW HEART ASSIST
PRODUCTS IN THE U.S. AND IN OTHER COUNTRIES.
Obtaining required regulatory approvals may take several years to complete
and consume substantial capital resources. We cannot assure that the FDA or any
other regulatory authority will act quickly or favorably on our requests for
product approval, or that the FDA or any other regulatory authority will not
require us to provide additional data that we do not currently anticipate in
order to obtain product approvals. We cannot apply for FDA approval to market
the AbioCor and our other products under development until the product
successfully completes its clinical trials. Several factors could prevent
successful completion or cause significant delays of these trials, including an
inability to enroll the required number of patients or failure to demonstrate
adequately that the product is safe and effective for use in humans. If safety
problems develop, the FDA could stop our trials before completion. In addition,
we are planning to conduct phased clinical trials for the AbioCor tailored to
specific patient populations with different life expectancies. If we are
successful in obtaining FDA approvals for the AbioCor based on this phased
approach, the initial approvals are likely to include conditions or limitations
to particular indications that would limit the available market for these
products. If we are not able to obtain regulatory approvals for use of the
AbioCor or our other products under development, or if the patient populations
for which they are approved are not sufficiently broad, the commercial success
of these products could be limited.
We intend to market the AbioCor and our other new products in international
markets, including the European Union and Japan. We must obtain separate
regulatory approvals in order to market our products in other jurisdictions. The
approval process may differ among those jurisdictions and approval in the U.S.
or in any other jurisdiction does not ensure approval in other jurisdictions.
Obtaining foreign approvals could result in significant delays, difficulties and
costs for us, and require additional trials and additional expense.
IF WE OBTAIN REGULATORY APPROVAL OF OUR NEW PRODUCTS, THE PRODUCTS WILL BE
SUBJECT TO CONTINUING REVIEW AND EXTENSIVE REGULATORY REQUIREMENTS, WHICH COULD
AFFECT THE MANUFACTURING AND MARKETING OF OUR PRODUCTS.
The FDA continues to review products even after they have received initial
approval. If and when the FDA approves the AbioCor or our other products under
development, the manufacture and marketing of these products will be subject to
continuing regulation, including compliance with current Quality Systems
Regulations and Good Manufacturing Practices, known as QSR/GMP, adverse event
reporting requirements and prohibitions on promoting a product for unapproved
uses.
We will also be required to obtain additional approvals in the event we
significantly modify the design of an approved product or the product's labeling
or manufacturing process. Modifications of this type are common with new
products, and we anticipate that the current first generation of the AbioCor
will undergo a number of changes, refinements and improvements over time. For
example, the current configuration of the AbioCor's thoracic unit, or
"replacement heart," is sized for patients with relatively
40
large chest cavities, and we anticipate that we will need to obtain regulatory
approval of thoracic units of other sizes. If we are not able to obtain
regulatory approval of modifications to our current and future products, the
commercial success of these products would be limited.
We and our third-party suppliers of product components are also subject to
inspection and market surveillance by the FDA for QSR/GMP and other
requirements. Enforcement actions resulting from failure to comply with
government requirements could result in fines, suspensions of approvals, recalls
of products, operating restrictions and criminal prosecutions, and affect the
manufacture and marketing of our products. The FDA could withdraw a previously
approved product from the market upon receipt of newly discovered information,
including a failure to comply with regulatory requirements, the occurrence of
unanticipated problems with products following approval, or other reasons, which
could adversely affect our operating results.
THE COST OF DEVELOPING AND MANUFACTURING THE ABIOCOR AND OUR OTHER PLANNED
NEW PRODUCTS IS SUBSTANTIAL FOR A COMPANY OF OUR SIZE AND WILL EXERT A STRAIN ON
OUR AVAILABLE RESOURCES.
In recent years we have significantly increased our research and
development expenditures for the AbioCor, and we expect that this trend will
continue in the future. We will also need to make significant expenditures to
begin to manufacture and market the AbioCor and our other planned new products
in commercial quantities for sale in the U.S. and other countries, if and when
we obtain regulatory approval to do so. We cannot be sure that our estimates of
capital expenditures for the AbioCor and the development of our other new
products will be accurate. We could have significant cost overruns, which could
reduce our ability to commercialize our products. Any delay or inability to
commercialize our products under development could adversely affect our business
prospects and results of operations. We do not operate at a profit and do not
expect to be profitable for some time. We had a net loss of $21.2 million in
fiscal 2002 and a net loss of $19.3 million in fiscal 2001. We are committed to
making large expenditures for the AbioCor and, to a lesser extent, other new
products, in fiscal 2003 and subsequent fiscal years, which may result in losses
in future periods. These expenditures include costs associated with performing
clinical trials for the AbioCor, continuing our research and development
relating to the AbioCor and other new products, seeking regulatory approvals for
the AbioCor and, if we receive these approvals, commencing commercial
manufacturing and marketing of the AbioCor. The amount of these expenditures is
difficult to forecast accurately, and cost overruns may occur. We plan to fund a
portion of these expenditures from our limited existing financial resources and
revenues from BVS sales, which are variable and uncertain. We cannot be sure
that we will have the necessary funds to develop and commercialize our new
products, or that additional funds will be available on commercially acceptable
terms, if at all. In the event that we are unable to obtain the necessary
funding to develop and commercialize our products, our business may be adversely
affected.
41
OUR OPERATING RESULTS MAY FLUCTUATE UNPREDICTABLY.
Our annual and quarterly operating results have fluctuated historically and
we expect these fluctuations to continue. Among the factors that may cause our
operating results to fluctuate are:
- costs we incur in developing and testing the AbioCor and other new
products or product enhancements;
- the timing of regulatory actions, such as product approvals or
recalls;
- costs we incur in anticipation of future sales, such as inventory
purchases, expansion of manufacturing facilities, or establishment of
international sales offices;
- the timing of customer orders and deliveries for BVS blood pumps and
consoles to current and new customers and the timing of revenue
deferred and recognized under extended-term contracts;
- competitive changes, such as price changes or new product
introductions that we or our competitors may make;
- economic conditions in the health care industry and the state of cost
containment efforts, including reimbursement policies.
We believe that period-to-period comparisons of our historical and future
results will not necessarily be meaningful, and that investors should not rely
on them as an indication of future performance. To the extent we experience the
factors described above, our future operating results may not meet the
expectations of securities analysts or investors from time to time, which may
cause the market price of our common stock to decline.
THE BVS PRODUCT LINE, OUR PRINCIPAL PRODUCT AND CURRENT PRIMARY SOURCE OF
REVENUES, IS VULNERABLE TO COMPETITIVE PRESSURES, DISRUPTIONS IN SALES,
CONTINUING REVIEW AND EXTENSIVE REGULATORY REQUIREMENTS.
All of our product revenues to date have come from sales of the BVS line of
products. We believe that we will continue to be dependent on our BVS product
line for at least the next several years, unless and until we are able to
successfully develop or acquire, obtain regulatory approval for, and sell new
products. In the event that a competitor were to introduce new treatments,
products and technologies which compete with our products, add new features to
their existing products or reduce their prices to make their products more
financially attractive to customers, our revenue from our BVS products could
decline. For example, in the event of the expansion of technologies, which allow
heart surgical procedures to be performed without stopping the heart, a
reduction in the market for the BVS could potentially result. Further, the BVS
is subject to stringent and continuing FDA and other regulatory requirements,
including compliance with QSR/GMP, adverse event reporting, prohibitions on
promoting the BVS for unapproved uses, and continued inspection and market
surveillance by the FDA. If BVS products are recalled or otherwise withdrawn
from the market, our revenues would likely decline, which would hurt our
business. In addition, variations in the quantity and timing of sales of BVS
consoles have a disproportionate effect on our revenues, because the price of
the console is substantially greater than the price of our disposable blood
pumps. If we cannot maintain and increase our revenues from our BVS product
line, our overall business and financial condition could be adversely affected.
42
Revenues from our BVS product line in fiscal 2002 increased by 25%
from revenues in fiscal 2001, and in fiscal 2001 our BVS revenues increased
by 6% from revenues in fiscal 2000. A significant portion, $5.2 million in
fiscal 2002 compared to $2.8 million in fiscal 2001 and $2.5 million in
fiscal 2000, were derived from extended-term contracts. All of the Company's
existing extended-term contracts at March 31, 2002, the terms of which were
one to three years, are scheduled to expire in fiscal 2003. To maintain or
increase revenues from sales of our BVS products, we may be required to adopt
new sales and marketing strategies, some of which may require expending
additional capital resources, or execute on existing strategies. The new
strategies we may adopt or execute on include:
- promoting increased use of the BVS by existing customers in order to
increase disposable blood pump sales to those customers;
- selling the BVS to smaller hospitals and medical centers in the U.S.;
- regularly introducing enhancements to the BVS;
- expanding sales of our BVS product line in international markets, some
of which require separate regulatory approvals;
- seeking new categories of patients to support with the device; and
- renew extended-term contracts, or alternative arrangements at
customers for which these contracts are scheduled to expire.
In the event that we are unsuccessful in carrying out these new strategies,
our revenues may decline.
WE MAY NOT BE SUCCESSFUL IN EXPANDING OUR SALES ACTIVITIES INTO
INTERNATIONAL MARKETS.
We are seeking to expand our international sales of the BVS and prepare
for commercialization of the AbioCor by recruiting direct sales and support
teams for selected countries in Europe and pursuing regulatory approval of
the BVS in Japan. To date we have limited experience in selling the BVS
internationally. In fiscal 2002, approximately 8%, and in fiscal 2001,
approximately 4%, of our revenues from the BVS product line were derived from
international sales. Our international operations will be subject to a number
of risks, which may vary from the risks we experience in the U.S., including:
- the need to obtain regulatory approvals in foreign countries before
our products may be sold or used;
- longer sales cycles;
- dependence on local distributors;
- limited protection of intellectual property rights;
- difficulty in collecting accounts receivable;
- fluctuations in the values of foreign currencies; and
- political and economic instability.
If we are unable to effectively expand our sales activities in
international markets, our results of operations could be negatively impacted.
43
WE DEPEND ON THIRD PARTY REIMBURSEMENT TO OUR CUSTOMERS FOR MARKET
ACCEPTANCE OF OUR PRODUCTS. IF THIRD PARTY PAYERS FAIL TO PROVIDE APPROPRIATE
LEVELS OF REIMBURSEMENT FOR PURCHASE AND USE OF OUR PRODUCTS, OUR PROFITABILITY
WOULD BE ADVERSELY AFFECTED.
Sales of medical products largely depend on the reimbursement of patients'
medical expenses by government health care programs and private health insurers.
The cost of our BVS system is substantial, and we anticipate that the cost of
implanting the AbioCor in a patient will also be substantial. Without the
financial support of the government or third party insurers, the market for our
products will be limited. Medical products and devices incorporating new
technologies are closely examined by governments and private insurers to
determine whether the products and devices will be covered by reimbursement, and
if so, the level of reimbursement which may apply. We cannot be sure that third
party payers will reimburse sales of our products now under development, or
enable us to sell them at profitable prices. We also cannot be sure that third
party payers will continue the current level of reimbursement to physicians and
medical centers for use of the BVS. Any reduction in the amount of this
reimbursement could harm our business.
The federal government and private insurers have considered ways to change,
and have changed, the manner in which health care services are provided and paid
for in the U.S. In the future, it is possible that the government may institute
price controls and further limits on Medicare and Medicaid spending. These
controls and limits could affect the payments we collect from sales of our
products. Internationally, medical reimbursement systems vary significantly,
with some medical centers having fixed budgets, regardless of levels of patient
treatment, and other countries requiring application for, and approval of,
government or third party reimbursement. Even if we succeed in bringing our new
products to market, uncertainties regarding future health care policy,
legislation and regulation, as well as private market practices, could affect
our ability to sell our products in commercially acceptable quantities at
profitable prices.
Prior to approving coverage for new medical devices, most third party
payers require evidence that the product has received FDA approval, is not
experimental, and is medically necessary for the specific patient. Increasingly,
third party payers require evidence that the devices being used are
cost-effective. The AbioCor and our other products under development may not
meet these or future criteria, which could hurt our ability to market and sell
these products.
IF WE FAIL TO ACHIEVE AND MAINTAIN THE HIGH MANUFACTURING STANDARDS THAT
OUR PRODUCTS REQUIRE OR IF WE ARE UNABLE TO DEVELOP ADDITIONAL MANUFACTURING
CAPACITY, WE WILL NOT BE SUCCESSFUL.
Our products require precise, high quality manufacturing. Our failure to
achieve and maintain these high manufacturing standards, including the incidence
of manufacturing errors, design defects or component failures, could result in
patient injury or death, product recalls or withdrawals, delays or failures in
product testing or delivery, cost overruns or other problems that could
seriously hurt our business. We have from time to time voluntarily recalled
certain products. Despite our very high manufacturing standards, we cannot
completely eliminate the risk of errors, defects or failures. If we are not able
to manufacture the BVS in accordance with necessary quality standards, our
business and results of operations may be negatively affected.
The AbioCor involves even greater manufacturing complexities than the BVS.
The AbioCor must be significantly more durable and meet different standards,
which may be more difficult to achieve, than those that apply to our current BVS
product line. If we are unable to manufacture the AbioCor or other future
products on a timely basis at acceptable quality and cost and in commercial
quantities, or if we experience unanticipated technological problems or delays
in production, our business will suffer.
44
The manufacture of our products is and will continue to be complex and
costly, requiring a number of separate processes and components. Achieving
precision and quality control requires skill and diligence by our personnel.
Further, to be successful, we believe we will need to increase our manufacturing
capacity. We may experience difficulties in scaling up manufacturing of our new
products, including problems related to product yields, quality control and
assurance, component and service availability, adequacy of control policies and
procedures, and lack of skilled personnel. If we cannot hire, train and retain
enough experienced and capable scientific and technical workers, we may not be
able to manufacture sufficient quantities of our current or future products at
an acceptable cost and on time, which could limit market acceptance of our
products or otherwise damage our business.
IF OUR SUPPLIERS CANNOT PROVIDE THE COMPONENTS WE REQUIRE, OUR ABILITY TO
MANUFACTURE OUR PRODUCTS COULD BE HARMED.
We rely on third party suppliers to provide us with certain components used
in the AbioCor, Penn State Heart, BVS and our other products under development.
Relying on third party suppliers makes us vulnerable to component part failures
and to interruptions in supply, either of which could impair our ability to
conduct clinical tests or to ship our products to our customers on a timely
basis. Using third party vendors makes it difficult and sometimes impossible for
us to test fully certain components, such as components on circuit boards,
maintain quality control, manage inventory and production schedules and control
production costs. Vendor lead times to supply us with ordered components vary
significantly and can exceed six months or more. Both now and as we expand our
manufacturing capacity, we cannot be sure that our suppliers will furnish us
with required components when we need them. These factors could make it more
difficult for us to effectively and efficiently manufacture our products, and
could adversely impact our results of operations.
Some suppliers may be the only source for a particular component, which
makes us vulnerable to cost increases and supply interruptions. Vendors may
decide to limit or eliminate sales of certain products to the medical industry
due to product liability or other concerns, and we might not be able to find a
suitable replacement for those products. Manufacturers of our product components
may be required to comply with FDA or other regulatory manufacturing regulations
and to satisfy regulatory inspections in connection with the manufacture of the
components. If we cannot obtain a necessary component, we may need to find, test
and obtain regulatory approval for a replacement component, produce the
component ourselves or redesign the related product, which would cause
significant delay and could increase our manufacturing costs. Any of these
events could adversely impact our results of operations.
INTENSE COMPETITION COULD HARM OUR FINANCIAL PERFORMANCE.
Intense competition, rapid technological change and evolving industry
requirements and standards in the heart assist markets could decrease demand for
our products or make them obsolete. Some of the companies, universities and
research organizations developing competing products have greater resources and
experience than we have. Our competitors could commence and complete clinical
testing of their products, obtain regulatory approvals and begin
commercial-scale manufacturing of their products faster than we are able to for
our products. They could develop superior products or products of similar
quality at the same or lower prices. In addition, our customers often have
limited budgets. Consequently, our products compete against a broad range of
medical devices and therapies for these limited funds. If we do not use
reasonable efforts to further develop the Penn State Heart, certain rights to
that technology could revert back to The Pennsylvania State University and be
used to compete against us. We cannot be sure that we will be able to compete
effectively and successfully in the markets in which we participate.
45
WE OWN PATENTS, TRADEMARKS, TRADE SECRETS, COPYRIGHTS AND OTHER
INTELLECTUAL PROPERTY AND KNOW-HOW THAT WE BELIEVE GIVES US A COMPETITIVE
ADVANTAGE. IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY, COMPETITION COULD
FORCE US TO LOWER OUR PRICES, WHICH COULD HURT OUR PROFITABILITY.
Our intellectual property rights are and will continue to be a critical
component of our success. A substantial portion of our intellectual property
rights relating to the AbioCor, BVS, Penn State Heart and other products under
development is in the form of trade secrets, rather than patents. In order to
preserve certain proprietary information as trade secrets, we are required to
restrict disclosure of information intended to constitute trade secrets to third
parties. We protect our trade secrets and proprietary knowledge in part through
confidentiality agreements with employees, consultants and other parties.
Certain of our consultants and third parties with whom we have business
relationships may also provide services to other parties in the medical device
industry, including companies, universities and research organizations that are
developing competing products. In addition, some of our former employees may
seek employment with, and become employed by, our competitors. We cannot assure
that confidentiality agreements with our employees, consultants and third
parties will not be breached, that we will have adequate remedies for any such
breach, or that our trade secrets will not become known to or be independently
developed by our competitors. The loss of trade secret protection for
technologies or know-how relating to the AbioCor, BVS or Penn State Heart could
adversely affect our business prospects.
Our business position will also depend in part on our ability to defend our
existing and future patents and rights and conduct our business activities free
of infringement claims by third parties. We intend to seek additional patents,
but our pending and future patent applications may not be approved, may not give
us a competitive advantage, and could be challenged by others. Patent
proceedings in the U.S. and in other countries may be expensive and time
consuming. In addition, patents issued by foreign countries may afford less
protection than is available under U.S. patent law, and may not adequately
protect our proprietary information. Our competitors may independently develop
proprietary technologies and processes that are the same as or substantially
equivalent to ours, or design around our patents.
Companies in the medical device industry typically obtain patents and
frequently engage in substantial intellectual property litigation. Our products
and technologies could infringe on the rights of others. If a third party
successfully asserts a claim for infringement against us, we may be liable for
substantial damages, be unable to sell products using that technology, or have
to seek a license or redesign the related product. These alternatives may be
uneconomical or impossible. Patent litigation could be costly, result in product
development delays, and divert the efforts and attention of management from our
business.
IF WE CANNOT ATTRACT AND RETAIN THE MANAGEMENT, SALES AND OTHER PERSONNEL
WE NEED, WE WILL NOT BE SUCCESSFUL.
We depend heavily on the contributions of the principal members of our
technical, sales and support, regulatory and clinical, operating and
administrative management and staff, many of whom would be difficult to replace.
Competition for skilled and experienced management, scientific personnel and
sales personnel in the medical devices industry is intense. If we lose the
services of any of the principal members of our management and staff, or if we
are unable to attract and retain qualified personnel in the future, especially
scientific and sales personnel, our business could be adversely affected.
We expect to grow rapidly if the AbioCor and our other products under
development advance through the approval process. The expansion of personnel and
facilities will strain our management and our financial and other resources. If
we cannot manage this growth successfully, our business will likely suffer.
46
PRODUCT LIABILITY CLAIMS COULD DAMAGE OUR REPUTATION AND HURT OUR FINANCIAL
RESULTS.
The clinical use of medical products, even after regulatory approval, poses
an inherent risk of product liability claims. We maintain limited product
liability insurance coverage, subject to deductibles and exclusions. We cannot
be sure that product liability insurance will be available in the future or will
be available on acceptable terms or at reasonable costs, or that such insurance
will provide us with adequate coverage against potential liabilities. Claims
against us, regardless of their merit or potential outcome, may also hurt our
ability to obtain physician endorsement of our products or expand our business.
Many patients using the BVS do not survive. There are many factors beyond
our control that could result in patient death, including the condition of the
patient prior to use of the product, the skill and reliability of physicians and
hospital personnel using and monitoring the product, and product maintenance by
customers. However, the failure of the BVS or other life support products we
distribute for clinical test or sale could give rise to product liability claims
and negative publicity.
The risk of product liability claims could increase as we introduce new
products like the AbioCor that are intended to support a patient until the end
of life. The AbioCor will have a finite life and could cause unintended
complications to other organs and may not be able to successfully support all
patients. Its malfunction could give rise to product liability claims whether or
not it has extended or improved the quality of the patient's life. We cannot be
sure that we can obtain liability insurance to cover the BVS, the AbioCor or
other new products at a reasonable cost, if at all. If we have to pay product
liability claims in excess of our insurance coverage, our financial condition
will be adversely affected.
OUR RIGHTS DISTRIBUTION, CERTIFICATE OF INCORPORATION AND DELAWARE LAW
COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US AND MAY PREVENT OUR
STOCKHOLDERS FROM REALIZING A PREMIUM ON OUR STOCK.
Our rights distribution and provisions of our certificate of incorporation
and of the Delaware General Corporation Law may make it more difficult for a
third party to acquire us, even if doing so would allow our stockholders to
receive a premium over the prevailing market price of our stock. Our rights
distribution and those provisions of our certificate of incorporation and
Delaware law are intended to encourage potential acquirers to negotiate with us
and allow our Board of Directors the opportunity to consider alternative
proposals in the interest of maximizing stockholder value. However, such
provisions may also discourage acquisition proposals or delay or prevent a
change in control, which could negatively affect our stock price.
THE MARKET VALUE OF OUR COMMON STOCK COULD VARY SIGNIFICANTLY, BASED ON
MARKET PERCEPTIONS OF THE STATUS OF OUR DEVELOPMENT EFFORTS.
The perception of securities analysts regarding our product development
efforts could significantly affect our stock price. As a result, the market
price of our common stock could change substantially when we or our competitors
make product announcements, particularly announcements relating to the AbioCor
or competing products. Many factors affecting our stock price are industry
related and beyond our control.
IF WE MAKE ACQUISITIONS, WE COULD ENCOUNTER DIFFICULTIES THAT HARM OUR
BUSINESS.
We may acquire companies, products or technologies that we believe to be
complementary to our business. If we do so, we may have difficulty integrating
the acquired personnel, operations, products or
47
technologies. These difficulties may disrupt our ongoing business, distract our
management and employees and increase our expenses, which could hurt our
business.
48
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We do not use derivative financial instruments for speculative or trading
purposes. However, we are exposed to market risk related to changes in interest
rates. We maintain an investment portfolio consisting mainly of federal agency
obligations, state and municipal bonds, and U.S. Treasury notes with maturities
of one year or less. These held-to-maturity securities are subject to interest
rate risk and will fall in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10 percent from
levels at March 31, 2002 the fair market value of the portfolio would decline by
an immaterial amount. We have the ability to hold our fixed income investments
until maturity, and therefore we would not expect our operating results or cash
flows to be affected to any significant degree by the effect of a change in
market interest rates on our securities portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and Supplementary Data are listed
under Part IV, Item 14, in this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Our audit committee recommended and our board of directors unanimously
voted (i) to dismiss Arthur Andersen LLP, and (ii) to engage
PricewaterhouseCoopers LLP as its independent accountants, effective on June 6,
2002.
During our fiscal years ended March 31, 2002 and March 31, 2001, and the
subsequent interim period prior to June 6, 2002, Arthur Andersen LLP did not
have any disagreement with us 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 Arthur Andersen LLP, would
have caused it to make reference to the subject matter of the disagreement in
connection with its reports on our financial statements.
The reports of Arthur Andersen LLP on our financial statements for the
period from April 1, 2000 through March 31, 2001 did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles. During the period from April
1, 2000 through June 6, 2002, there were no "reportable events" within the
meaning of Item 304(a)(1)(v) of Regulation S-K promulgated under the Securities
Act of 1933, as amended.
Pursuant to Item 304(a)(3) of Regulation S-K, we requested that Arthur
Andersen LLP furnish us with a letter addressed to the SEC stating whether or
not Arthur Andersen LLP agrees with the above statements. A copy of such letter,
dated June 6, 2002, is attached as Exhibit 16(a) to this Annual Report on Form
10-K.
During the period from April 1, 2000 through June 6, 2002, we did not
consult with PricewaterhouseCoopers LLP regarding either the application of
accounting principles to a specified transaction, the type of audit opinion that
might be rendered on our financial statements, or any matter that was the
subject of a disagreement or reportable event with Arthur Andersen LLP.
The report of PricewaterhouseCoopers LLP on our consolidated financial
statements for the Company's past three fiscal years is presented in Item 14
of this Annual Report on Form 10-K.
49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
Set forth below is certain biographical information with respect to the
Company's directors.
YEAR TERM IS
SCHEDULED TO
DIRECTOR EXPIRE
NAME AGE POSITION SINCE AND CLASS
------ ----- -------- -------- ------------
David M. Lederman, Ph.D.......... 58 Chairman of the Board of Directors, 1981 2002-Class I
President and Chief Executive Officer
Desmond H. O'Connell, Jr......... 66 Director 1995 2002-Class I
John F. O'Brien.................. 59 Director 1989 2003-Class II
Henri A. Termeer................. 56 Director 1987 2003-Class II
W. Gerald Austen, M.D............ 72 Director 1985 2004-Class III
Paul B. Fireman.................. 58 Director 1987 2004-Class III
DR. DAVID M. LEDERMAN founded ABIOMED in 1981, and has served as Chairman
of the Board and Chief Executive Officer since that time. He has also served as
President of ABIOMED for the majority of time. He was Chairman of the Medical
Research Group at the Everett Subsidiary of Avco Corporation, which he joined in
1972. Dr. Lederman conceived and originated the BVS development program and the
design and development of the ventricles and valves that are integral to the
AbioCor implantable replacement heart. He holds various degrees in Physics and
Engineering, including a Ph.D. degree in Aerospace Engineering from Cornell
University.
MR. DESMOND H. O'CONNELL, JR. has served as Director of the Company since
1995. He is currently the Chairman and a Director of Serologicals Corporation
and is also an independent management consultant. From December 1992 until
December 1993, he served as the Chairman, Management Committee, of Pharmakon
Research International, Inc. During 1991, he briefly served as Chairman of the
Board and Chief Executive Officer of Osteotech, Inc. Mr. O'Connell was with the
BOC Group, PLC in senior management positions from 1983 to 1990. From April 1990
until September 1990, Mr. O'Connell was President and Chief Executive Officer of
BOC Health Care. From 1986 to April 1990, he was Group Managing Director of BOC
Group, PLC. Prior to joining BOC, Mr. O'Connell held various positions at Baxter
Laboratories, Inc., including Chief Executive of the Therapeutic and Diagnostic
Division and Vice President, Corporate Development. Mr. O'Connell had been a
Director of Chryslais International Corporation from 1991 through May 1999.
MR. JOHN F. O'BRIEN has served as a Director of the Company since 1989.
Since August 1989 he has been the President and Chief Executive Officer and a
Director of First Allmerica Financial Life Insurance Company (formerly State
Mutual Life Assurance Company of America). Since January 1995 he has been
President, Chief Executive Officer and a Director of Allmerica Financial
Corporation. Mr. O'Brien is also Chairman of the Board and a Director of
Allmerica Property & Casualty Companies, Inc. and a Trustee and Chairman of the
Board of Allmerica Securities Trust and Allmerica Investment Trust. From 1972
until 1989, Mr. O'Brien was employed by Fidelity Investments in various
capacities, including as Group Managing Director of FMR Corp. Mr. O'Brien is
also a Director of Cabot Corporation and TJX Companies, Inc.
MR. HENRI A. TERMEER has served as a Director of the Company since 1987.
Mr. Termeer has served as President and a Director of Genzyme Corporation since
1983, as its Chief Executive Officer since 1985, and as its Chairman of the
Board since 1988. Mr. Termeer is also a past Chairman and a current Director of
the Board of Genzyme
50
Transgenics Corporation. He is also a Director of AutoImmune, Inc., GelTex
Pharmaceuticals, Inc. and Diacrin, Inc. and serves as a Trustee of Hambrecht &
Quist Healthcare Investors and Hambrecht & Quist Life Sciences Investors.
DR. W. GERALD AUSTEN, M.D., has served as a Director of the Company since
1985. Since 1974 he has been the Edward D. Churchill Professor of Surgery at
Harvard Medical School and at Massachusetts General Hospital. From 1969 to 1997,
Dr. Austen was Chief of the Surgical Services at Massachusetts General Hospital.
Dr. Austen is the former President of the American College of Surgeons, the
American Association for Thoracic Surgery, the American Surgical Association and
the Massachusetts and American Heart Associations. Dr. Austen is a member of the
Institute of Medicine of the National Academy of Sciences, a Fellow of the
American Academy of Arts and Sciences, a life member of the corporation of the
Massachusetts Institute of Technology and Chairman of the Board of Trustees of
the John S. and James L. Knight Foundation.
MR. PAUL B. FIREMAN has served as a Director of the Company since 1987. Mr.
Fireman has served as Chief Executive Officer and as a Director of Reebok
International Ltd., which he founded, from 1979 to the present. He has served as
Reebok's Chairman of the Board of Directors from 1985 to the present. He has
also served as Reebok's President from 1989 to the present, after initially
serving as President from 1979 to 1987. Mr. Fireman has served as the Chairman
of the Entrepreneurial Advisory Board of Babson College since 1995.
IDENTIFICATION OF EXECUTIVE OFFICERS
The information required by this Item 10 (b) is hereby incorporated by
reference to the information under Part I, Item 1--Business under the caption
"Executive Officers of the Registrant" in this Report.
REPORTING UNDER SECTION 16(A) OF THE SECURITIES AND EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who own more than 10% of the
Company's Common Stock, to file reports of ownership and changes of ownership on
Forms 3, 4 and 5 with the Securities and Exchange Commission, and furnish the
Company with copies of such Forms.
Based solely upon review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company with respect to the fiscal year ended March 31, 2002
and on written representations from certain reporting persons that were not
required to file Forms 5 with respect to the Company's most recent fiscal year,
the Company believes that all Section 16(a) filing requirements applicable to
its officers, directors and greater-than-10% stockholders were fulfilled in a
timely manner.
51
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation during the last three
fiscal years of (i) the Chief Executive Officer of the Company and (ii) the four
most highly compensated executive officers other than the Chief Executive
Officer who were serving as executive officers at the end of the last fiscal
year, whose annual salary and bonus exceeded $100,000 for services in all
capacities to the Company during the last fiscal year (the "named executive
officers").
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
FISCAL YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION ENDED 3/31 ($) ($) ($) (#) ($)(1)
--------------------------- ----------- -------- ----- ------------ ------------ ------------
Dr. David M. Lederman.......... 2002 $300,000 $137,500(2) --- 50,000 $37,619
Chairman of the Board, 2001 300,000 100,000 --- 100,000 36,444
President and Chief 2000 281,250 200,000 --- 130,000 35,058
Executive Officer
Dr. Robert T.V. Kung........... 2002 $195,000 $ 50,000 --- 20,000 $11,337
Senior Vice President - 2001 186,250 200,000 --- 40,000 9,000
Research and Chief Scientific 2000 172,500 87,500 --- 20,000 5,894
Officer
Eugene D. Rabe................. 2002 $177,500 $ 20,000 --- 20,000 $ 6,369
Senior Vice President - 2001 167,500 100,000 --- 40,000 5,544
Chief Sales Officer 2000 155,000 90,000 --- 30,000 4,145
John F. Thero................. 2002 $195,000 $ 20,000 --- 20,000 $ 6,296
Senior Vice President - 2001 182,500 100,000 --- 50,000 5,471
Chief Financial Officer and 2000 155,000 100,000 --- 40,000 3,947
Treasurer
William J. Bolt............... 2002 $167,500 $ 30,000 --- 25,000 $ 6,293
Senior Vice President - 2001 155,000 100,000 --- 40,000 5,399
Product Engineering 2000 137,500 65,000 --- 20,000 3,592
(1) Includes for the fiscal year ended March 31, 2002 (a) the following
matching contributions to the ABIOMED Retirement Savings Plan for
fiscal 2002: Dr. Lederman - $1,500; Dr. Kung - $1,500; Mr. Rabe -
$1,500; Mr. Thero - $1,500; and Mr. Bolt - $1,500; (b) the following
profit sharing allocations under the ABIOMED Retirement Savings Plan
contributions paid in fiscal 2002, subject to applicable vesting based
on years of service: Dr. Lederman - $3,640; Dr. Kung - $3,640; Mr. Rabe
- $3,640; Mr. Thero - $3,640; and Mr. Bolt - $3,640; (c) the following
life insurance premiums paid for term life insurance in excess of
$50,000 in fiscal 2002: Dr. Lederman - $30,239; Dr. Kung - $1,812; Mr.
Rabe - $564; Mr. Thero - $421; and Mr. Bolt - $526; (d) the following
long-term disability insurance premiums for fiscal 2002: Dr. Lederman -
$1,140; Dr. Kung - $735; Mr. Rabe - $665; Mr. Thero - $735; and Mr.
Bolt - $627; and (e) the following awards paid in fiscal 2002 in
connection with newly issued patents: Dr. Lederman - $1,100 and Dr.
Kung - $3,650.
(2) $100,000 of the bonus paid to Dr. Lederman during fiscal 2002
represents an amount deferred at his request from the amount that would
have been paid, and was provided for, in fiscal 2001. At the request of
Dr. Lederman, the compensation committee had deferred Dr. Lederman's
receipt of a portion of his bonus until the first patient participating
in the AbioCor clinical trials had survived for more than sixty days
after receipt of the AbioCor. The bonus granted to Dr. Lederman for
fiscal 2002 also includes $37,500 granted to Dr. Lederman for his
performance during the past year.
52
The following tables set forth certain information with respect to option
grants and exercises to the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION FOR
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION OPTION TERM(2)
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
--------------- ------------ ----------- ------------- ----- ------
Dr. David M. Lederman.......... 50,000 13.3% $24.120 06/22/11 $758,447 $1,922,053
Dr. Robert T.V. Kung........... 20,000 5.3% $24.120 06/22/11 $303,379 $ 768,821
Eugene D. Rabe................. 20,000 5.3% $24.120 06/22/11 $303,379 $ 768,821
John F. Thero................. 20,000 5.3% $24.120 06/22/11 $303,379 $ 768,821
William J. Bolt................ 25,000 6.6% $24.120 06/22/11 $379,223 $ 961,027
----------
(1) The options granted to Dr. Lederman, Dr. Kung, Mr. Rabe, Mr. Thero and
Mr. Bolt were granted under the 2000 Stock Incentive Plan and become
exercisable in three annual installments of 30%, 30% and 40% commencing
two years from the date of grant such that they will be fully
exercisable four years after the date of grant.
(2) The assumed rates are compounded annually for the full term of the
options.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT 3/31/02 OPTIONS AT 3/31/02
ON EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME (#) ($) (#) ($)(1)
----------- -------------- ------------------------- ------------------------
Dr. David M. Lederman............ --- --- 32,500/247,500 $133,250/$399,750
Dr. Robert T.V. Kung............. 30,000 $205,500 246,500/96,500 $1,415,212/$160,883
Eugene D. Rabe................... --- --- 152,750/102,250 $835,768/$187,738
John F. Thero.................... 3,600 $ 42,966 152,372/120,500 $822,499/$222,651
William Bolt..................... 5,000 $ 34,000 133,000/79,000 $816,209/$61,768
--------
(1) Based upon the $11.100 closing price of the Company's Common Stock on
March 28, 2002 on the Nasdaq National Market minus the respective
option exercise price.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive an annual retainer
of $15,000 or an equivalent value of the Company's Common Stock, at the
individual's option, and $1,000 for attendance at each meeting of the Board of
Directors or a committee thereof or consultation at the offices of the Company.
The Company has a 1989 Non-Qualified Stock Option Plan for Non-Employee
Directors (the "Directors Plan"). Under the Directors Plan, options to purchase
Common Stock are granted to directors of the Company who are not employees of
the Company and who do not own or are not affiliated with any person who owns,
directly or indirectly, more than fifteen percent (15%) of the Company's
outstanding voting stock (the "Eligible Directors"). The Current Eligible
Directors, are Dr. Austen and Messrs. Fireman, O'Brien, Termeer and O'Connell.
Each of these Eligible Directors was granted 5,000 options under the Directors
Plan on August 8, 2001. These granted options have an exercise price of $18.40
per share and vest fully on August 8, 2002.
53
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee consists of Paul B. Fireman, John F. O'Brien and
Henri A. Termeer. No member of the Compensation Committee is a former or current
officer or employee of the Company. Dr. Lederman, while not a member of the
Compensation Committee, makes recommendations to the Compensation Committee
regarding executive officer compensation, including the awards of stock options,
and often participates in the Committee's deliberations but does not vote on
such matters. None of the Company's executive officers serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving as members of the Company's Board of Directors or
Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of July 1, 2002
with respect to the beneficial ownership of the Company's Common Stock of
each director, each named executive officer in the Summary Compensation Table
under "Executive Compensation," below, all directors and current executive
officers of the Company as a group, and each person known by the Company to
be the beneficial owner of five percent or more of the Company's common
stock. This information is based upon information received from or on behalf
of the individuals named therein.
SHARES OF STOCK
NAME BENEFICIALLY OWNED(1) PERCENT OF CLASS
----- --------------------- ----------------
Dr. David M. Lederman (2)(3)........................................... 2,327,250 11.1%
c/o ABIOMED, Inc.
22 Cherry Hill Drive
Danvers, MA 01923
Genzyme Corporation.................................................... 2,307,692 11.0%
One Kendall Square
Cambridge, MA 02139
Dr. W. Gerald Austen (3)............................................... 78,200 *
Paul B. Fireman (3).................................................... 430,155 2.0%
John F. O'Brien (3).................................................... 194,887 *
Desmond H. O'Connell, Jr. (3).......................................... 87,887 *
Henri A. Termeer (3)(4)................................................ 2,397,243 11.4%
William J. Bolt (3).................................................... 151,000 *
Dr. Robert T.V. Kung (3)(5)............................................ 489,228 2.3%
Eugene D. Rabe (3)..................................................... 186,250 *
John F. Thero (3)...................................................... 195,562 *
All Current Executive Officers and Directors........................... 6,537,662 29.5%
As a group (10 persons) (2)(3)(4)(5)
--------------------
* Less than 1%.
(1) Unless otherwise noted, each person identified possesses sole voting
and investment power over the shares listed.
(2) Includes 1,141,196 shares held by the wife of Dr. Lederman, as to which
Dr. Lederman disclaims beneficial ownership.
(3) Includes the following shares subject to currently exercisable options
(includes options that will become exercisable within 60 days of July
1, 2002): Dr. Lederman--95,000; Dr. Austen--55,000; Mr.
Fireman--60,000; Mr. O'Brien--60,000; Mr. O'Connell--45,000; Mr.
Termeer--60,000; Mr. Bolt--151,000; Dr. Kung--277,000; Mr.
Rabe--186,250; and Mr. Thero--191,872.
(4) Includes 2,307,692 shares held by Genzyme Corporation, as to which Mr.
Termeer disclaims beneficial ownership. Mr. Termeer is the Chief
Executive Officer of Genzyme.
(5) Includes 108,200 shares held by the wife of Dr. Kung and 104,028
shares held in trust for the benefit of certain relatives of Dr.
Kung, as to which Dr. Kung disclaims beneficial ownership.
54
EQUITY COMPENSATION PLANS
The following table provides information as of March 31, 2002 regarding
securities authorized for issuance under the Company's equity compensation
plans, including individual compensation arrangements. The equity compensation
plans of the Company include the 1989 Non-Qualified Stock Option Plan for
Non-Employee Directors, the 1992 Combination Stock Option Plan, the 1998 Equity
Incentive Plan, the 2000 Stock Incentive Plan and the Employee Stock Purchase
Plan. All of these equity compensation plans have been approved by the Company's
stockholders.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SHARES
NUMBER OF SHARES TO REMAINING FOR
BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE
EXERCISE OF EXERCISE PRICE OF UNDER EQUITY
PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS COMPENSATION PLANS
-------------- ------------------- ------------------- ------------------
Equity compensation plans
approved by stockholders:
Stock option plans 2,810,637 $10.09 1,649,396(1)
Employee Stock Purchase Plan - - 100,518
Equity compensation plans not
approved by stockholders - - -
------------- -----------
Total 2,810,637 $10.09 1,749,914
============= ===========
---------------
(1) Our 1992 Combination Stock Option Plan authorizes the issuance of incentive
stock options, nonqualified stock options, stock appreciation rights,
performance share awards, restricted stock awards and stock unit awards. On
March 31, 2002, there were 355,996 shares of common stock available for future
grants under the 1992 Combination Stock Option Plan all of which expired on May
1, 2002. Our 1989 Non-Qualified Stock Option Plan for Non-Employee Directors
authorizes the issuance of nonqualified stock options to non-employee Directors.
On March 31, 2002, there were 55,000 shares of common stock available for future
grants under the 1989 Non-Qualified Stock Option Plan for Non-Employee
Directors. Our 1998 Equity Incentive Plan authorizes the issuance of incentive
stock options, nonqualified stock options, stock appreciation rights,
performance share awards, restricted stock awards and stock unit awards. On
March 31, 2002, there were 138,100 shares of common stock available for future
grants under the 1998 Equity Incentive Plan. Our 2000 Stock Incentive Plan
authorizes the issuance of incentive stock options, nonqualified stock options,
restricted stock awards, unrestricted stock awards, stock appreciation rights
and performance share awards. On March 31, 2002, there were 1,100,300 shares of
common stock available for future grants under the 2000 Stock Incentive Plan.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Our Chief Executive Officer and Chief Financial Officer have furnished
to the SEC the certification with respect to this Report that is required by
Section 906 of the Sarbanes-Oxley Act of 2002.
(A) (1) FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants.................................................................. F-1
Consolidated Balance Sheets as of March 31, 2001 and 2002.......................................... F-2
Consolidated Statements of Operations for the Fiscal Years Ended March 31, 2000, 2001 and
2002............................................................................................. F-3
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended March 31, 2000,
2001 and 2002.................................................................................... F-4
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 2000,
2001 and 2002.................................................................................... F-5
Notes to Consolidated Financial Statements......................................................... F-6 - F-25
(A) (2) FINANCIAL STATEMENT SCHEDULES
(a) Unaudited Quarterly Results of Operations, as previously reported
and as restated, for each of the fiscal quarters in the fiscal years ending
March 31, 2000, 2001 and 2002.
(b) Except for the schedules of unaudited Quarterly Results of
Operations, supplemental schedules are not provided because of the absence of
conditions under which they are required or because the required information is
given in the financial statements or notes thereto.
(A) (3) EXHIBITS
(3) Articles of Incorporation and By-Laws.
(a) Restated Certificate of Incorporation - filed as Exhibit 3.1
to our Registration Statement on Form S-3 (Registration No.
333-36657) (the "1997 Registration Statement").*
(b) Restated By-Laws - filed as Exhibit 3.02 to our Quarterly
Report on From 10-Q for the quarter ended September 30, 1996.*
(c) Certificate of Designations of Series A Junior Participating
Preferred Stock - filed as Exhibit 3.3 to the 1997
Registration Statement.*
(d) Amendment to the Company's Restated Certificate of
Incorporation to increase the authorized shares of Common
Stock from 25,000,000 to 100,000,000 - filed in conjunction
with the Company's 2000 definitive proxy statement.*
(4) Instruments defining the rights of security holders, including
indentures.
(a) Specimen Certificate of Common Stock - filed as Exhibit 4.1 to
our Registration Statement on Form S-1 (Registration No.
33-14861) (the "1987 Registration Statement").*
56
(b) Description of Capital Stock (contained in the Restated
Certificate of Incorporation filed as Exhibit 3.1 to the 1997
Registration Statement and in the Certificate of Designations
of Series A Junior Participating Preferred Stock filed as
Exhibit 3.3 to the 1997 Registration Statement).*
(c) Rights Agreement between ABIOMED and its transfer agent, as
Rights Agent dated as of August 13, 1997 (including Form of
Rights Certificate attached thereto as Exhibit A) - filed as
Exhibit 4 to our Current Report on Form 8-K, dated August 13,
1997.*
(10) Material Contracts.
(a) Form of Indemnification Agreement for Directors and Officers -
filed as Exhibit 10.13 to the 1987 Registration Statement.*
(b) 1992 Combination Stock Option Plan, as amended - filed as
Exhibit 10.2 to our Form 10-Q for the fiscal quarter ended
September 30, 1997 (the "September 1997 10-Q").*
(c) 1988 Employee Stock Purchase Plan, as amended - filed as
Exhibit 10.1 to our September 1997 10-Q.*
(d) 1989 Non-Qualified Stock Option Plan for Non-Employee
Directors - filed as Exhibit 10.1 to our Form 10-Q for the
fiscal quarter ended September 30, 1995.*
(e) Facility Lease dated January 8, 1999 for the premises at 22
Cherry Hill Drive - filed as Exhibit 10 to our Form 10-Q for
the fiscal quarter ended December 31, 1998.*
(f) 1998 Equity Incentive Plan - filed as Exhibit 10 to our Form
10-Q/A for the fiscal quarter ended September 30, 1998.*
(g) Form of Change of Control Agreement - filed as Exhibit 10 to
our Form 10-Q for the fiscal quarter ended September 30,
1999.*
(h) Schedule related to Change of Control Agreement - filed as
Exhibit 10 to our Form 10-Q for the fiscal quarter ended
September 30, 1999.*
(11) Statement re computation of Per Share Earnings - see Note 1(j),
Notes to Consolidated Financial Statements.
(16)
(a) Arthur Andersen LLP letter dated June 6, 2002 regarding the
change in the registrant's certifying accountants filed as
Exhibit 16.1 to our current report on Form 8-K dated June
6, 2002 (previously filed).
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Accountants.
57
(B) REPORTS ON FORM 8-K
On December 6, 2001, the Company filed a report on Form 8-K under Item
5. No financial statements were included with this filing.
On June 6, 2002, the Company filed a report on Form 8-K under Item 4. No
financial statements were included with this filing.
----------
* In accordance with Rule 12b-32 under the Securities Exchange Act of 1934
reference is made to the documents previously filed with the Securities and
Exchange Commission, which documents are hereby incorporated by reference.
58
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ABIOMED, Inc.
Dated: August 28, 2002 By: /s/ John F. Thero
--------------------------------
JOHN F. THERO
SENIOR VICE PRESIDENT
CHIEF FINANCIAL OFFICER
AND TREASURER
KNOW ALL BY THESE PRESENTS that each individual whose signature appears
below hereby constitutes and appoints John F. Thero and Charles B. Haaser, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to execute in the name of each such person, and to file with the
Securities and Exchange Commission, together with any exhibits thereto and other
documents therewith, any and all amendments to this Annual Report on Form 10-K
necessary and advisable to enable ABIOMED, Inc. to comply with the rules,
regulations and requirements of the Securities Exchange Act of 1934, as amended,
in respect thereof, which amendments may make such changes in the Annual Report
on Form 10-K as the aforesaid attorneys-in-fact executing the same deem
appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board, August 28, 2002
-------------------------- Chief Executive Officer
DAVID M. LEDERMAN President and Director
(Principal Executive Officer)
/s/ John F. Thero Senior Vice President-Finance, August 28, 2002
-------------------------- Chief Financial Officer and
JOHN F. THERO Treasurer (Principal Financial
Officer)
* Director August 28, 2002
--------------------------
W. GERALD AUSTEN
* Director August 28, 2002
--------------------------
PAUL B. FIREMAN
59
* Director August 28, 2002
--------------------------
JOHN F. O'BRIEN
* Director August 28, 2002
--------------------------
DESMOND O'CONNELL
* Director August 28, 2002
--------------------------
HENRI A. TERMEER
*By /s/ John F. Thero
--------------------------
JOHN F. THERO
As attorney-in-fact
60
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2001 AND 2002
INDEX
PAGE
REPORT OF INDEPENDENT ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2001 AND 2002 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED MARCH 31, 2000, 2001 AND 2002 F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000, 2001 AND 2002 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED MARCH 31, 2000, 2001 AND 2002 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 - F-25
REPORT OF INDEPENDENT ACCOUNTANTS
To Board of Directors and
Shareholders of ABIOMED, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, statements of stockholders' equity and
statements of cash flows present fairly, in all material respects, the
financial position of ABIOMED, Inc. and its subsidiaries at March 31, 2002
and 2001, and the results of their operations and their cash flows for each
of the three years in the period ended March 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United States
of America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As discussed in Note 3, the Company has restated its consolidated financial
statements for the years ended March 31, 2001 and 2000, previously audited by
other independent accountants.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
August 27, 2002
F-1
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
-------------------
2001 2002
RESTATED
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 90,462 $ 45,667
Short-term marketable securities 2,036 25,654
Accounts receivable, net of allowance for doubtful accounts of
approximately $184 and $139 at March 31, 2001 and 2002, respectively 8,622 7,056
Inventories 3,544 4,233
Prepaid expenses and other current assets 766 825
-------- --------
Total current assets 105,430 83,435
PROPERTY AND EQUIPMENT, AT COST:
Machinery and equipment 7,546 8,749
Furniture and fixtures 807 963
Leasehold improvements 3,528 2,041
-------- --------
11,881 11,753
Less--Accumulated depreciation and amortization 7,129 7,046
-------- --------
4,752 4,707
-------- --------
INTELLECTUAL PROPERTY AND OTHER ASSETS, NET 779 1,034
-------- --------
$110,961 $ 89,176
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,129 $ 1,975
Accrued expenses 4,656 4,906
Deferred revenue 3,752 2,373
Current portion of long-term liabilities 242 54
-------- --------
Total current liabilities 10,779 9,308
LONG-TERM LIABILITIES 368 -
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY:
Class B Preferred Stock, $.01 par value-
Authorized--1,000,000 shares; Issued and outstanding--No shares - -
Common Stock, $.01 par value-
Authorized--100,000,000 shares; Issued and outstanding-- 20,770,714
shares and 20,950,933 shares at March 31, 2001 and 2002, respectively 208 210
Additional paid-in capital 162,313 163,558
Accumulated deficit (62,707) (83,900)
-------- --------
Total stockholders' equity 99,814 79,868
-------- --------
$110,961 $ 89,176
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
YEARS ENDED MARCH 31,
-----------------------------------------------
2000 2001 2002
RESTATED RESTATED
REVENUES:
Products $ 18,521 $ 19,724 $ 24,747
Funded research and development 4,572 3,142 2,214
------------ ------------ ------------
23,093 22,866 26,961
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of product revenues 5,870 7,222 7,925
Research and development 15,633 28,667 27,108
Selling, general and administrative 12,562 12,469 16,066
------------ ------------ ------------
34,065 48,358 51,099
------------ ------------ ------------
LOSS FROM OPERATIONS (10,972) (25,492) (24,138)
Other income, net (Note 14) 1,106 6,160 2,945
------------ ------------ ------------
NET LOSS $ (9,866) $ (19,332) $ (21,193)
============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.56) $ (0.94) $ (1.02)
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 17,578,522 20,583,363 20,869,160
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL TOTAL
NUMBER $.01 PAID-IN ACCUMULATED STOCKHOLDERS'
OF SHARES PAR VALUE CAPITAL DEFICIT EQUITY
Balance, March 31, 1999, as reported 17,301,604 $ 173 $ 58,133 $ (31,235) $ 27,071
Effect of restatement (Note 3) - - - (2,274) (2,274)
---------- ---------- ----------- ----------- ------------
Balance, March 31, 1999, as restated 17,301,604 $ 173 $ 58,133 $ (33,509) $ 24,797
Sales of common stock, net of
offering costs of $6,569 3,000,000 30 95,401 - 95,431
Stock options exercised 132,998 1 701 - 702
Stock issued under employee
stock purchase plan 17,092 1 100 - 101
Stock issued to directors 4,000 - 73 - 73
Net loss - - - (9,866) (9,866)
---------- ---------- ----------- ----------- ------------
Balance, March 31, 2000, as restated 20,455,694 205 154,408 (43,375) 111,238
Issuance of common stock
and warrants to acquire
in-process research and development 110,000 1 6,290 - 6,291
Stock options exercised 192,344 2 670 - 672
Stock-based compensation - - 753 753
Stock issued under employee
stock purchase plan 10,772 - 162 - 162
Stock issued to directors 1,904 - 30 - 30
Net loss - - - (19,332) (19,332)
---------- ---------- ----------- ----------- ------------
Balance, March 31, 2001, as restated 20,770,714 208 162,313 (62,707) 99,814
Stock options exercised 158,752 2 768 - 770
Stock-based compensation - - 240 240
Stock issued under employee
stock purchase plan 20,516 - 222 - 222
Stock issued to directors 951 - 15 - 15
Net loss - - -- (21,193) (21,193)
---------- ---------- ----------- ----------- ------------
Balance, March 31, 2002 20,950,933 $ 210 $ 163,558 $ (83,900) $ 79,868
========== ========== =========== =========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED MARCH 31,
---------------------------------------
2000 2001 2002
RESTATED RESTATED
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,866) $ (19,332) $ (21,193)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,686 1,907 1,771
Bad debt expense 20 - (45)
Net loss on disposition of fixed assets - - 33
Loss on abandonment of patents - - 63
Stock-based compensation - 753 240
Write-off of acquired in-process research and development - 6,291 -
Changes in assets and liabilities:
Accounts receivable, net (153) (3,363) 1,611
Inventories (552) (96) (689)
Prepaid expenses and other current assets (192) (245) (71)
Accounts payable 678 576 (154)
Accrued expenses 1,468 (1,699) 250
Deferred revenue (9) 3,717 (1,379)
Long-term liabilities (36) (105) (64)
--------- --------- ---------
Net cash used in operating activities (6,956) (11,596) (19,627)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the maturity of short-term marketable securities 12,748 11,135 14,391
Purchases of short-term marketable securities (7,513) (9,504) (38,009)
Additions to patents (232) (511) (441)
Purchases of property and equipment (1,477) (2,407) (1,624)
--------- --------- ---------
Net cash provided by (used in) investing activities 3,526 (1,287) (25,683)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 95,431 - -
Proceeds from exercise of stock options and stock issued
under employee stock purchase plan 876 864 1,007
Proceeds from issuance of long-term debt 615 - -
Repayments of long-term debt and capital lease obligations (54) (236) (492)
--------- --------- ---------
Net cash provided by financing activities 96,868 628 515
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 93,438 (12,255) (44,795)
CASH AND CASH EQUIVALENTS, EXCLUDING MARKETABLE SECURITIES, AT
BEGINNING OF YEAR 9,279 102,717 90,462
--------- --------- ---------
CASH AND CASH EQUIVALENTS, EXCLUDING MARKETABLE SECURITIES, AT END
OF YEAR $ 102,717 $ 90,462 $ 45,667
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligation incurred for property and equipment $ 221 $ - $ -
========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-5
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(1) SUMMARY OF OPERATIONS
ABIOMED, Inc. and subsidiaries (the Company) is engaged primarily in the
development, manufacture and marketing of medical products designed to
safely and effectively assist or replace the pumping function of the
failing heart. The Company is currently undergoing clinical trials for its
battery-powered totally implantable replacement heart systems for patients
who would otherwise die from heart failure. The Company currently markets
and sells a ventricular assist device called the BVS(R) for the temporary
support of patients with reversible heart failure.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies described below.
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimated or assumed. The more
significant estimates reflected in these financial statements include
unit pricing of our BVS blood pumps sold under extended-term
contracts, collectibility of accounts receivable, inventory valuation
and judgmental accrued expenses.
(c) REVENUE RECOGNITION FROM PRODUCT SALES
In fiscal 2000, 2001 and 2002, all product revenues were derived from
sales of the Company's BVS and related products. No revenue is
recognized unless we have a customer purchase order and collection is
reasonably assured.
We derive our revenues from two principal sources (1) product sales,
including maintenance service agreements, and (2) funded research and
development contracts and grants from government and other third party
sources. We follow established guidelines in measuring revenue,
including SEC Staff Accounting Bulletin (SAB) No. 101, "REVENUE
RECOGNITION." The majority of our product revenues are derived from
our shipment of products to fulfill customer orders for a specified
number of BVS consoles and/or for a specified number of blood pumps
for a specified price. We recognize revenues and record costs related
to such sales upon product shipment.
F-6
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Continued)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) REVENUE RECOGNITION FROM PRODUCT SALES (CONTINUED)
Other of our product revenues is derived from extended-term contracts
with certain of our customers, which contracts provide the customers
with units of our BVS product under extended-term contracts. These
contracts, which typically have terms of one to three years, provide
for the Company to receive a fixed, non-refundable amount of money
over a set period of time in return for our providing these customers
with BVS product at the start of the contract and restocking the
customer with BVS blood pumps during the term of the contract. The
exact quantity of such additional pumps to be supplied, if any,
is limited to the actual usage of the product by the customer to
support their patients. Under these contracts, we recognize revenue,
and record related cost of product revenues, ratably over the term of
the contract using an estimated per unit selling price based upon
actual shipments of pumps to customers compared to the maximum number
of additional pumps allowable under the contract, or when a maximum
number is not specified, compared to our estimate of additional pumps
that might be required by the customer. In the majority of contracts
that contain contractual limits on the number of pumps, customers do
not use the maximum number of allowable pumps and, as a result,
recognize the remaining deferred revenue at the end of the contract
term with no associated incremental cost at that time. When we do not
have a contractual maximum number of pumps upon which to rely, we
estimate customer blood pump usage and resulting per unit selling
price based upon historical experience and based on information from
our customers. We update these estimates over the term of a contract
based upon significant and quantifiable changes in customer
information.
Cash received in advance of revenue in connection with the sale of
blood pumps under extended-term contracts is recorded as deferred
revenue and is classified as a current or long-term liability
depending on the expected shipment dates of the blood pumps.
Maintenance service revenues, which are not material, are recognized
ratably over the term of the service contracts based upon the elapsed
term of the service contract.
International sales represented 4%, 4% and 8% of product revenues for
the fiscal years ended March 31, 2000, 2001 and 2002, respectively. No
single customer accounted for greater than 5% of product revenues or
accounts receivable during fiscal 2000, 2001 or 2002.
(d) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated losses based upon
historical experience and any specific customer collection issues that
are identified. While such credit losses have historically been within
expectations and the provisions established, no guarantee can be made
that the Company will experience the same credit loss rates that it
has in the past. If the financial condition of customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances would be required.
F-7
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Continued)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) FUNDED RESEARCH AND DEVELOPMENT REVENUES
A portion of the Company's research and development expenses has been
supported by contracts and grants with various government agencies and
other third party sources. The government-sponsored research and
development contracts and grants generally provide for payment on a
cost-plus-fixed-fee basis. The Company recognizes revenues under its
government contracts and grants as work is performed, provided that
the government has appropriated sufficient funds for the work. Under
contracts in which the Company elects to spend significantly more on
the development project during the term of the contract than the total
contract amount, the Company prospectively recognizes revenue on such
contracts ratably over the term of the contract as it incurs related
research and development costs, provided the government has
appropriated sufficient funds for the work. The Company retains rights
to all technological discoveries and products resulting from these
efforts.
(f) WARRANTIES
The Company routinely accrues for estimated future warranty costs
on its product sales at the time of sale. The BVS product line is
subject to rigorous regulation and quality standards. While the
Company engages in extensive product quality programs and
processes, including monitoring and evaluating the quality of
component suppliers, the cost of its warranty obligation is
affected by product failure rates and product recalls. Operating
results could be adversely effected if the actual cost of product
failures, including product recalls, exceeds the estimated warranty
provision. Warranty costs are included in cost of product revenues
on the consolidated statements of operations.
(g) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following (in thousands):
MARCH 31,
2001 2002
------- --------
Raw materials........................ $ 1,418 $ 2,170
Work-in-process...................... 737 709
Finished goods....................... 1,389 1,354
-------- --------
$ 3,544 $ 4,233
======== ========
All of the Company's inventories on the balance sheet relate to the
BVS product line. Because the AbioCor is still in a development and
testing stage and is not yet available for commercial sale,
inventories do not currently include any costs associated with
AbioCor manufactured systems or component parts. Finished goods and
work-in-process inventories consist of direct material, labor and
overhead.
F-8
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) INVENTORY (CONTINUED)
The Company regularly reviews inventory quantities on hand and records
a provision for excess and obsolete inventory based primarily on an
estimated forecast of product demand and production requirements for
the next twelve months. If actual demand or market conditions are less
favorable than projections, additional inventory write-downs may be
required that could adversely impact financial results for the period
in which the additional excess or obsolete inventory is identified.
(h) PROPERTY AND EQUIPMENT
The Company provides for depreciation and amortization on property and
equipment by charges to operations in amounts that allocate the cost
of depreciable assets over their estimated useful lives on a
straight-line basis as follows:
ESTIMATED
CLASSIFICATION USEFUL LIFE
-------------- -----------
Machinery and equipment 3- 5 Years
Furniture and fixtures 5-10 Years
Leasehold improvements Life of lease
Machinery and equipment includes $221,000 related to assets held
under capital leases at March 31, 2002 and 2001. Accumulated
amortization related to these assets is $166,000 and $92,000 at
March 31, 2002 and 2001, respectively. Depreciation and amortization
expense related to property and equipment was $1,491,000, $1,754,000
and $1,636,000 for the fiscal years ended March 31, 2000, 2001 and
2002, respectively.
(i) INTELLECTUAL PROPERTY
The Company capitalizes as intellectual property costs incurred,
excluding costs associated with Company personnel, relating to
patenting its technology. Capitalized costs, the majority of which
represent legal costs, reflect the cost of both awarded patents and
patents pending. The Company amortizes the cost of these patents on a
straight-line basis over a period from seven to twenty years. If the
Company elects to stop pursuing a particular patent application or
determines that a patent application is not likely to be awarded for
a particular patent or elects to discontinue payment of required
maintenance fees for a particular patent, the Company at that time
records as expense the net capitalized amount of such patent
application or patent. The Company does not capitalize maintenance
fees for patents.
(j) NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the fiscal
year. Diluted net loss per share is computed by dividing net loss by
the weighted-average number of dilutive common shares outstanding
during the fiscal year. Diluted weighted-average shares reflect the
dilutive effect, if any, of potential common stock such as options and
warrants based on the treasury stock method. No potential common stock
is considered dilutive in periods in which a loss is reported, such as
the fiscal years ended March 31, 2000, 2001 and 2002, because all such
common equivalent shares would be antidilutive. The calculation of
diluted weighted-average shares outstanding for the years ended March
31, 2000, 2001 and 2002 excludes the options to purchase common stock
as shown below.
F-9
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Continued)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) NET LOSS PER SHARE (CONTINUED)
POTENTIAL DILUTIVE SHARES
FROM EXERCISE OF COMMON STOCK
YEAR ENDED MARCH 31, OPTIONS
-------------------- ------------------------------
2000 1,502,658
2001 1,808,322
2002 1,420,831
The calculation of diluted weighted average shares outstanding for the
years ended March 31, 2001 and 2002 also excludes warrants to purchase
400,000 share of common stock issued in connection with the
acquisition of intellectual property (see Note 5).
(k) CASH AND CASH EQUIVALENTS
The Company classifies any marketable security with a maturity date of
90 days or less at the time of purchase as a cash equivalent.
(l) MARKETABLE SECURITIES
The Company classifies any security with a maturity date of greater
than 90 days at the time of purchase as marketable securities and
classifies marketable securities with a maturity date of greater than
one year from the balance sheet date as long-term investments. Under
Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, securities that
the Company has the positive intent and ability to hold to maturity
are reported at amortized cost and classified as held-to-maturity
securities.
The amortized cost and market value of marketable securities were
approximately $2,036,000 and $2,073,000 at March 31, 2001, and
$25,654,000 and $25,661,000 at March 31, 2002, respectively. At
March 31, 2002 and 2001, these short-term investments consisted
primarily of government securities.
(m) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
As of March 31, 2001 and 2002, the Company's financial instruments
were comprised of cash and cash equivalents, marketable securities,
accounts receivable and accounts payable, the carrying amounts of
which approximated fair market value.
F-10
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Continued)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(n) COMPREHENSIVE INCOME
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires disclosure of
all components of comprehensive income and loss on an annual and
interim basis. Comprehensive income and loss is defined as the change
in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. Other than
the reported net loss, there were no components of comprehensive
income or loss which require disclosure for the years ended March 31,
2000, 2001 and 2002.
(o) SEGMENT INFORMATION
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, requires certain financial and supplementary information
to be disclosed on an annual and interim basis for each reportable
segment of an enterprise. The Company believes that it operates in one
business segment--the research, development and sale of medical
devices to assist or replace the pumping function of the failing
heart.
(p) IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the realizability of long-lived assets in
accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. The Company
reviews its long-lived assets for impairment as events and
circumstances indicate the carrying amount of an asset may not be
recoverable. The Company evaluates the realizability of its long-lived
assets based on profitability and cash flow expectations for the
related asset. As a result of its review, the Company does not believe
that any impairment currently exists related to its long-lived assets.
(q) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method as prescribed by APB No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations.
Accordingly, no compensation expense is recorded for options issued
to employees in fixed amounts and with fixed exercise prices at
least equal to the fair market value of Common Stock at the date of
grant. The Company applies the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, through disclosure only (Note 9). The Company records
compensation expense for certain stock option related events
requiring remeasurement in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION AND
INTERPRETATION OF APB NO. 25. Stock-based awards to non-employees
are accounted for at their fair value in accordance with SFAS No.
123.
F-11
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Continued)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(r) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, BUSINESS COMBINATIONS. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. The adoption of SFAS No. 141 did not
have an impact on the Company's consolidated financial statements.
In July 2001, the FASB also issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. Under SFAS No. 142, goodwill is no longer subject
to amortization over its estimated useful life. Rather, goodwill is
subject to at least an annual assessment for impairment by applying a
fair-value-based test. Also under SFAS No. 142, intangible assets
acquired in conjunction with a business combination should be
separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented or
exchanged, regardless of the acquirer's intent to do so. Intangible
assets will continue to be amortized over their respective lives under
SFAS No. 142. The adoption of SFAS No. 142 did not have an impact on
the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. This statement amends FASB Statement No. 19,
FINANCIAL ACCOUNTING AND REPORTING BY OIL AND GAS PRODUCING COMPANIES.
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The provisions of this
statement are effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company does not believe the
adoption of this statement will have a material impact on the
Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This statement supersedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and
reporting provisions of Accounting Principles Board (APB) Opinion No.
30, REPORTING THE RESULTS OF OPERATIONS - REPORT THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS. Under this statement
it is required that one accounting model be used for long-lived assets
to be disposed of by sale, whether previously held and used or newly
acquired, and it broadens the presentation of discontinued operation
to include more disposal transactions. The provisions of this
statement are effective for financial statements issued for fiscal
years beginning after December 15, 2001, and interim period within
those fiscal years, with early adoption permitted. The Company does
not believe the adoption of this statement will have a material impact
on the Company's consolidated financial statements.
F-12
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Continued)
(3) RESTATEMENT
We have modified our methods of revenue recognition for certain BVS
sales contracts and funded research and development contracts. Such
modifications result in the shifting of portions of revenues and related
expenses between fiscal quarters and fiscal years. In addition, we have
modified the timing of expenses recorded in connection with our
acquisition in September 2000 of rights to the Penn State Heart and we
have recorded expense for certain non-cash transactions involving stock
option exercises made by employees with the assistance of the Company.
Accordingly, we have restated our previously audited consolidated
financial statements for each of the two years ended March 31, 2001 and
have restated our previously reported accumulated deficit at March 31,
1999. These modifications, which are reflected in these consolidated
financial statements, were made to comply with our revised policies. Our
policies with respect to revenue recognition and stock option related
expenses are described in Note 2. In-process research and development
costs that we incurred and expensed in connection with our acquisition of
the Penn State Heart are described in Note 5.
The following table presents increases and decreases to our previously
reported operating results for each of the three years ended March 31, 2002
that result of the aforementioned restatements:
CHANGES IN PREVIOUSLY REPORTED AMOUNTS
(In thousands, except per share data)
YEAR ENDED MARCH 31,
2000 2001 2002
Revenues:
Products .......................... $ 144 $(2,293) $ 2,257
Funded research and development ... 432 263 1,119
------- ------- -------
Total revenues ............... 576 (2,030) 3,376
------- ------- -------
Costs and expenses:
Cost of product revenues .......... (12) (153) 630
Research and development:
Internally incurred R&D costs . -- 695 (260)
Acquired technology costs, net -- 5,301 (2,120)
Selling, general and administrative -- 58 (130)
------- ------- -------
Total costs and expenses ..... (12) 5,901 (1,880)
------- ------- -------
Income (loss) from operations .......... 588 (7,931) 5,256
------- ------- -------
Interest and other income, net ......... -- -- --
------- ------- -------
Net income (loss) ...................... $ 588 $(7,931) $ 5,256
======= ======= =======
Net income (loss) per share ............ $ 0.03 $ (0.39) $ 0.25
======= ======= =======
Our previously reported deferred revenues decreased $0.2 as of March 31,
2000 and March 31, 2002 and increased $2.8 million as of March 31, 2001
as a result of the aforementioned restatements. All of this increment in
deferred revenue at March 31, 2002 is scheduled for recognition as
revenue in our fiscal year that ends March 31, 2003 upon the earlier of
shipment of BVS blood pump product or the end of the terms of the
respective contracts. These modifications also resulted in adjustments
to other balance sheet categories, including accounts receivable,
intellectual property, accrued expenses and accumulated deficit. In
addition, the Company's accumulated deficit at March 31, 1999 was
increased by $2.5 million to reflect the cumulative effect of our
modified revenue recognition policies on prior years partially offset by
$0.2 million to reflect a reduction in accrued expenses. The Company's
capital resources, in particular cash and marketable securities, were not
changed as a result of these restatements.
F-13
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Continued)
(3) RESTATEMENT (CONTINUED)
Our principal restatements are summarized below. Throughout these
consolidated financial statements the term "previously reported" is used to
refer to our previously filed financial statements for the two years ended
March 31, 2001 as well as our previously announced fiscal 2002 results.
Fiscal 2002 results were announced in our press release dated May 16,
2002.
Timing of product revenues and related cost of product sales: A portion
of our product revenues are derived from contracts that provide for the
Company to receive a fixed, non-refundable amount of money over a set
period of time in return for our providing these customers with BVS
product at the start of the contract and restocking the customer with
BVS blood pumps during the term of the contract. The quantity of such
additional BVS blood pumps, including related cannulae, to be supplied,
if any, during the term of the contract depends upon the actual usage of
the product by the customer. The terms of such contracts are typically
one to three years. In our previous accounting, for certain contracts we
recognized revenue for the full value of the contract, less a discount
for cost of money on long-term contracts and we accrued costs for
potential pump shipments at or near the beginning of the contract
provided that the customer had adequate supplies of the products for
their needs. In our restated accounting we defer revenue for the maximum
number of pumps that may be shipped under the contract, based on a
relative per pump value calculated on the maximum number of pumps that
are allowed and that could be required to ship under the contract, and
recognize this revenue as blood pumps are shipped to the customer or at
the end of the contract term if the customer uses fewer pumps than the
maximum allowed. On other such contracts we estimate per pump revenue
based upon our estimates of potential customer pump usage over the term
of the contract and recognize this revenue as blood pumps are shipped to
the customer; we review such estimates throughout the term of the
contract and make appropriate adjustments to revenue. In our restated
accounting, when a contractual maximum number of pumps is specified in a
contract we use the contractual maximum to calculate per pump revenue.
The result of this change in policy was to shift the timing of product
revenues and related costs between periods.
Timing of funded research and development revenue: A portion of our
funding for development of the AbioCor has come from government funding.
In particular, between fiscal 1997 and fiscal 2002 we received $10.3
million in funding from the National Heart, Lung and Blood Institute to
develop the AbioCor. The contract amount was funded through periodic
governmental appropriations. We have received payment for the full
amount of this contract. From the early stages of this contract, our
research and development costs for AbioCor development exceeded the
contract amount. We previously recorded revenue on this contract at the
time of government appropriation provided that the Company had incurred
qualified costs under the contract to support such revenue recognition
on a cost-plus-fixed-fee basis, based on the formula defined in the
contract. In periods in which the appropriated amount exceeded the
calculated revenues on a cost-plus-fixed-fee basis, we recognized
revenues based on the cost-plus-fixed fee formula. Because government
appropriations were made periodically, generally only once per year,
this resulted in relatively large amounts of revenues recognized in
certain fiscal periods and no revenue recognized from this contract in
other fiscal periods over the term of the contract. In our restated
accounting, we have recognized the appropriated amount of the contract
ratably based upon elapsed time over the term of the contract resulting
in a relatively consistent level of revenue recognized between periods.
The result of this change in policy was to shift the timing of funded
research and development revenues between periods.
F-14
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Continued)
(3) RESTATEMENT (CONTINUED)
Write-off of in-process development costs in connection with acquisition of
Penn State Heart: In September 2000, we acquired the exclusive rights to
The Pennsylvania State University implantable replacement heart (referred
to herein as the Penn State Heart) together with ownership of a company
incorporated to commercialize the Penn State Heart, BeneCor Heart Systems,
Inc. In connection with this acquisition, the Company previously
capitalized the purchase cost totaling $6,361,000. See Note 5 to our
Consolidated Financial Statements for discussion of the nature of our costs
incurred and rights obtained in our acquisition of the Penn State Heart.
This previously capitalized purchase cost was being amortized over the
three-year period that began October 2000. In our restated results, we
fully expensed the $6,361,000 acquisition costs on the date of acquisition
in as much as it represented the purchase of an asset to be used in a
single project addressing the development of a future product with no
known use outside of heart replacement. The result of this adjustment was
to increase our previously reported research and development expenses for
our fiscal year ended March 31, 2001 and eliminate amortization costs
which had been scheduled to be incurred through September 2003.
Remeasurement in connection with stock option exercises: During our fiscal
year ended March 31, 2001, the Company's assistance in connection with the
cashless exercises of incentive stock options for 29,500 shares of the
Company's common stock by two of its employees triggered a remeasurement of
the value of these incentive stock options in accordance with Financial
Accounting Standards Board (FASB) Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION AN INTERPRETATION OF APB
OPINION NO. 25. In our restated results, we recorded $753,000 as additional
expense for our fiscal year ended March 31, 2001 to reflect the value of
the shares of common stock underlying these stock options upon the
remeasurement date. The net result for the employees in terms of value
received was identical to the result that could have been obtained had they
sold the same portion of the shares in the market at fair value on those
dates. The stock options had originally been granted to the employees
with exercise prices equal to the fair market value of the stock on the
date of grant.
The Company also reduced certain accrued expenses based upon expectations
that the amounts will not be paid out. The result of these modifications
was to reduce operating expenses by $443,000 for the year ended March 31,
2002 with a corresponding reduction in accrued expenses due to a revision
of the Company's incentive compensation accrual which amount, based upon
subsequent information, will not be paid in conjunction with the year
ended March 31, 2002. Costs associated with the abandonment of patents
were increased by $63,000 in the Company's restated results for its
fiscal year ended March 31, 2002 and certain balance sheet modifications
were made at March 31, 2000 and 2001 to reflect the timing of software
purchases and leaseholder improvements in the amounts of $29,000 and
$148,000, respectively. These balance sheet modifications, which
represented timing differences, did not have any effect on the Company's
net operating results.
These restatements also effected the Company's quarterly results. The
Company's restated quarterly results are reported as supplemental
schedules in Item 14 of the Company's Annual Report on Form 10-K.
(4) INTELLECTUAL PROPERTY AND OTHER ASSETS
Intellectual property and other assets includes costs related to the
Company's awarded and pending patents. The unamortized cost of these
patents approximated $772,000 and $1,015,000 as of March 31, 2001 and 2002,
respectively. Amortization expense for patents totaled $52,000, $95,000 and
$135,000 for the years ending March 31, 2000, 2001 and 2002 respectively.
F-15
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Continued)
(5) CAPITAL STOCK
Each share of common stock has a voting right of one vote per share and
generally has the right to elect, as a class, at least 25% of the Company's
directors.
In March 2000, the Company completed a public offering of 3,000,000 shares
of its common stock. Proceeds to the Company from the stock offering, net
of direct expenses of approximately $6,569,000, totaled approximately
$95,431,000.
In August 2000, the Company's Board of Directors approved a two-for-one
split of the Company's outstanding shares to be effected in the form of a
stock dividend. Each shareholder of record at the close of business on
August 25, 2000 received one additional share of common stock for each
share of common stock held on that date. Shares held for issuance in
connection with all stock option plans and rights plans of the Company were
also split on a two-for-one basis in accordance with the provisions of each
such plan. All share and per share information in these financial
statements have been restated for all years to reflect the effect of this
two-for-one stock split.
The Company has authorized 1,000,000 shares of Class B Preferred Stock,
$0.01 par value, of which the Board of Directors can set the designation,
rights and privileges. No shares of Class B Preferred Stock have been
issued or are outstanding.
In August 1997, the Company declared a dividend of one Preferred Share
Purchase Right (the Right) for each outstanding share of common stock to
its stockholders of record at August 28, 1997. Each right entitles the
registered holder to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock with a par value of
$0.01 per share, at a price of $45.00 per one one-thousandth of a share,
subject to amendment. In accordance with the terms set forth in the Rights
Agreement, the Rights are not exercisable until the occurrence of certain
events, as defined. In addition, the registered holders of the Rights will
have no rights as a common stockholder of the Company until the Rights are
exercised. The Company's Board of Directors may amend the terms of the
Rights. The Rights expire on August 13, 2007.
F-16
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Continued)
(5) CAPITAL STOCK (CONTINUED)
In September 2000, the Company issued common stock and warrants to acquire
the exclusive rights to the Penn State Heart together with complete
ownership of a company incorporated to commercialize the Penn State Heart
called BeneCor Heart Systems, Inc. The terms of this transaction consisted
of payment of 110,000 shares of the Company's common stock, plus the
issuance of warrants to purchase up to 400,000 additional shares of the
Company's common stock at an exercise price of $0.01 per share. Exercise of
the warrants is contingent on the achievement of certain clinical and
regulatory milestones with the Penn State Heart by specified dates, the
last of which is September 30, 2007. Warrants not vested and exercised by
September 30, 2007 expire. The value of the common stock and warrants
issued in connection with the transaction are included in stockholders'
equity at values of $3,145,000 and $3,145,000, respectively, representing
the fair value of the stock and warrants based on the closing market price
for the Company's stock on the closing date for this transaction. Also
included in the value of the warrants is approximately $70,000 of costs
incurred in connection with this acquisition. These amounts have been fully
expensed as in-process research and development on the date of acquisition.
As of March 31, 2002, 400,000 warrants were issued and none were
exercisable.
(6) FINANCING ARRANGEMENTS
In October 1999, the Company entered into equipment term loans with a bank
whereby the Company borrowed $615,000 for the acquisition of manufacturing
equipment and leasehold improvements. As of March 31, 2001, approximately
$417,000 was outstanding under these loans, which was included within
current and long-term liabilities in the accompanying consolidated balance
sheets. No amounts remained outstanding on these loans as of March 31, 2002
as a result of the Company's decision to repay the loans prior to their
scheduled maturity.
(7) INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, ACCOUNTING FOR INCOME TAXES. The asset and liability approach
used under SFAS No. 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of other assets
and liabilities.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to tax benefit carryforwards and to
differences between the financial statement amounts of assets and
liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates. A valuation reserve is
established if it is more likely than not that all or a portion of the
deferred tax asset will not be realized. Accordingly, a valuation
reserve has been established for the full amount of the deferred tax
asset.
F-17
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(CONTINUED)
(7) INCOME TAXES (CONTINUED)
At March 31, 2002, the Company had federal Net Operating Loss
carryforwards of approximately $75.5 million which begin to expire in
2005. Additionally, at March 31, 2002, the Company had research and
development credit carryforwards of approximately $2.9 million which
begin to expire in 2004. Based upon the Internal Revenue Code, certain
changes in Company ownership may subject these carryforwards to an
annual limitation.
The components of the Company's net deferred taxes were as follows at March
31 (in thousands):
(in thousands) 2001 2002
---- ----
Assets
NOL carryforwards and tax credit carryforwards $ 22,629 $ 34,469
Purchased Technology ......................... 2,430 1,329
Nondeductible Reserves ....................... 369 410
Nondeductible Accruals ....................... 1,632 1,846
Deferred Revenue ............................. 1,784 758
Depreciation ................................. 381 740
Other, net ................................... 261 899
-------- --------
29,486 40,451
Valuation Allowance ............................. (29,486) (40,451)
-------- --------
Net deferred taxes .............................. -- --
======== ========
The effective tax rate of zero differs from the statutory rate of 34%
primarily due to the inability of the Company to recognize deferred tax
assets for its operating losses and tax credits. Of the total valuation
allowance, approximately $1.6 million relates to stock option compensation
deductions. The tax benefit associated with the stock option compensation
deductions will be credited to equity when realized.
F-18
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES
As of March 31, 2002, the Company had entered into leases for its
facilities under various operating lease agreements with terms through
fiscal 2010. At the Company's election, the lease for its primary
operating facility in Danvers, Massachusetts may be terminated in 2005
at a lump sum buyout cost of $1.1 million. Total rent expense under these
leases, included in the accompanying consolidated statements of
operations, was approximately $613,000, $893,000 and $856,000 for the
fiscal years ended March 31, 2000, 2001 and 2002, respectively.
During the fiscal year ended March 31, 2000, the Company entered into
36-month operating leases totaling approximately $644,000 for the lease of
office furniture. The initial terms of these leases end in fiscal year
2003. At the end of the initial terms, the Company can either 1) renew the
leases for additional 12-month option periods at the then fair market
rental value 2) purchase the furniture at its then fair market value, but
no greater than 25% of its original purchase cost or 3) return the
furniture to the lessor. Rental expense recorded for these leases during
the fiscal years ended March 31, 2000, 2001 and 2002 was approximately
$89,000, $215,000 and $215,000 respectively.
During fiscal 2000, the Company entered into a 36-month capital lease for
computer equipment and software for approximately $221,000. The initial
term of this lease ends in fiscal year 2003. These assets are being used in
research and development activities and general operations. At the end of
the initial term, the Company can either 1) renew the lease for an
additional 6-month option period at a reduced rental rate 2) purchase the
equipment at its then fair market value, but no greater than 12.5% of its
original purchase cost or 3) return the equipment to the lessor. The
remaining future minimum lease payments are included in current liabilities
in the accompanying consolidated balance sheets.
Future minimum lease payments under all non-cancelable operating and
capital leases as of March 31, 2002 are approximately as follows (in
thousands):
OPERATING CAPITAL
YEAR ENDING MARCH 31, LEASES LEASE
-------------------- ------ -----
2003............................................. $ 947 $ 55
2004............................................. 781 -
2005............................................. 776 -
2006............................................. 776 -
2007............................................. 769 -
Thereafter....................................... 2,252 -
-------- --------
Total future minimum lease payments $ 6,301 $ 55
======== ========
Less - amount representing interest (1)
--------
Present value of future minimum lease payments $ 54
--------
F-19
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
From time to time, the Company is involved in legal and administrative
proceedings and claims of various types. While any litigation contains an
element of uncertainty, management, in consultation with the Company's
general counsel, presently believes that the outcome of each such other
proceedings or claims which are pending or known to be threatened, or all
of them combined, will not have a material adverse effect on the Company.
(9) STOCK OPTION AND PURCHASE PLANS
All stock options granted by the Company under the below-described plans
were granted at the fair value of the underlying common stock at the date
of grant. Outstanding stock options, if not exercised, expire 10 years from
the date of grant.
The 1992 Combination Stock Option Plan (the Combination Plan), as amended,
was adopted in September 1992 as a combination and restatement of the
Company's then outstanding Incentive Stock Option Plan and Nonqualified
Plan. A maximum of 3,100,000 shares of common stock may be awarded under
this plan. Options outstanding under the Combination Plan are held by
Company employees and generally become exercisable ratably over five years.
The 1998 Equity Incentive Plan, (the Equity Incentive Plan), was adopted by
the Company in August 1998. The Equity Incentive Plan provides for grants
of options to key employees, directors, advisors and consultants as either
incentive stock options or nonqualified stock options as determined by the
Company's Board of Directors. A maximum of 1,000,000 shares of common stock
may be awarded under this plan. Options granted under the Equity Incentive
Plan are exercisable at such times and subject to such terms as the Board
of Directors may specify at the time of each stock option grant. Options
outstanding under the Equity Incentive Plan have vesting periods of 3 to 5
years from the date of grant.
The 2000 Stock Incentive Plan, (the 2000 Plan), was adopted by the Company
in August 2000. The 2000 Plan provides for grants of options to key
employees, directors, advisors and consultants to the Company or its
subsidiaries as either incentive or nonqualified stock options as
determined by the Company's Board of Directors. Up to 1,400,000 shares of
common stock may be awarded under the 2000 Plan and are exercisable at such
times and subject to such terms as the Board of Directors may specify at
the time of each stock option grant. Options outstanding under the 2000
Plan generally vested 4 years from the date of grant.
The Company has a nonqualified stock option plan for non-employee directors
(the Directors' Plan). The Directors' Plan, as amended, was adopted in July
1989 and provides for grants of options to purchase shares of the Company's
common stock to non-employee Directors of the Company. Up to 400,000 shares
of common stock may be awarded under the Directors' Plan. Options
outstanding under the Director's Plan have vesting periods of 1 to 5 years
from the date of grant.
F-20
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(CONTINUED)
(9) STOCK OPTION AND PURCHASE PLANS (CONTINUED)
The following table summarizes stock option activity under all of the
Company's stock option plans:
WEIGHTED
AVG. EXERCISE
NUMBER OF EXERCISE PRICE
OPTIONS PRICE PER SHARE
Outstanding, March 31, 1999 2,194,770 $ 2.82 - $ 9.00 $ 5.60
Granted 642,100 $ 4.44 - $ 33.63 8.03
Exercised (132,998) $ 2.82 - $ 9.00 5.28
Canceled (90,176) $ 4.00 - $ 8.50 6.04
---------
Outstanding, March 31, 2000 2,613,696 $ 2.82 - $ 33.63 6.20
Granted 713,000 $ 15.56 - $ 36.53 18.47
Exercised (203,046) $ 2.88 - $ 9.00 4.82
Canceled (235,352) $ 3.75 - $ 33.63 10.03
---------
Outstanding, March 31, 2001 2,888,298 $ 2.81 - $ 36.53 9.05
Granted 376,700 $ 11.56 - $ 24.12 20.10
Exercised (179,961) $ 3.13 - $ 15.34 5.86
Canceled (274,400) $ 5.63 - $ 33.63 15.62
---------
Outstanding, March 31, 2002 2,810,637 $ 2.81 - $ 36.53 $ 10.09
=========
Exercisable, March 31, 2002 1,360,076 $ 2.81 - $ 19.69 $ 6.07
=========
Exercisable, March 31, 2001 1,092,381 $ 2.81 - $ 7.47 $ 5.49
=========
Exercisable, March 31, 2000 898,416 $ 2.81 - $ 7.47 $ 5.16
=========
Shares available for future issuance,
March 31, 2002 1,649,396
=========
During the fiscal years ended March 31, 2001 and 2002, certain
optionholders exercised options in cashless exercises. The total number
of options exercised during these years in this manner was 29,500 and
35,000, respectively, of which 10,702 and 20,940 vested options,
respectively, were exchanged by the optionholders in lieu of a direct cash
purchase. These cashless transactions triggered remeasurement on the date
of exercise for the difference between the fair market value of the
common stock underlying the stock options and exercise price of the stock
options. The Company has recorded expense of $753,000 and $240,000 in
the years ended March 31, 2001 and 2002, respectively, to reflect these
remeasurements. The options had originally been granted to the
optionholders with exercise prices equal to the fair market value of the
stock on the date of grant.
F-21
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(CONTINUED)
(9) STOCK OPTION AND PURCHASE PLANS (CONTINUED)
The following table summarizes certain data for options outstanding and
exercisable under all plans at March 31, 2002.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
OUTSTANDING AVG. WEIGHTED EXERCISABLE WEIGHTED
AS OF REMAINING AVG. AS OF AVG.
RANGE OF MARCH 31, CONTRACTUAL EXERCISE MARCH 31, EXERCISE
EXERCISE PRICES 2002 LIFE PRICE 2002 PRICE
--------------- ---- ---- ----- ---- -----
$ 2.81 - $ 10.96 1,889,437 4.9 $ 5.98 1,325,576 $ 5.73
10.97 - 18.27 482,500 8.2 15.49 9,500 16.05
18.28 - 29.22 422,200 9.1 21.45 25,000 19.69
29.23 - 36.53 16,500 8.5 32.62 - -
----------------- --------- --- ---------- --------- --------
$ 2.81 - $ 36.53 2,810,637 6.1 $ 10.09 1,360,076 $ 6.07
================= ========= === ========== ========= ========
The Company has an Employee Stock Purchase Plan (the Purchase Plan), as
amended. Under the Purchase Plan, eligible employees (including officers
and directors) who have completed six months of employment with the Company
or its subsidiaries who elect to participate in the Purchase Plan instruct
the Company to withhold a specified amount from each paycheck received
during a six-month payment period (the periods April 1 - September 30 and
October 1 - March 31). On the last business day of each payment period, the
amount withheld is used to purchase common stock at an exercise price equal
to 85% of the lower of its market price on the first business day or the
last business day of the payment period. The Company has reserved 200,000
shares of common stock for issuance under the Purchase Plan, of which
100,518 shares are available for future issuance as of March 31, 2002.
During the fiscal years ended March 31, 2000, 2001 and 2002, 17,092, 10,772
and 20,516 shares of common stock, respectively, were sold pursuant to the
Purchase Plan.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
measurement of the fair value of stock options, stock purchase plans and
warrants granted to employees to be included in the statement of operations
or disclosed in the notes to financial statements. The Company has
determined that it will continue to account for stock-based compensation
for employees under APB Opinion No. 25 and elect the disclosure-only
alternative under SFAS No 123. The Company has computed the pro forma
disclosures required under SFAS No. 123 for options granted in fiscal 2000,
2001 and 2002 using the Black-Scholes option pricing model prescribed by
SFAS No. 123. The weighted average information and assumptions are as
follows:
F-22
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(CONTINUED)
(9) STOCK OPTION AND PURCHASE PLANS (CONTINUED)
YEAR ENDED MARCH 31,
--------------------
2000 2001 2002
---- ---- ----
Risk-free interest rate 6.50% 5.20% 5.00%
Expected dividend yield - - -
Assumed life 5 years 5 years 5 years
Assumed volatility 48% 64% 69%
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.
The total fair value of the options granted during fiscal 2000, 2001 and
2002 was computed as approximately $1,036,000, $2,561,000 and $1,407,000,
respectively. Of these amounts, approximately $655,000, $1,145,000 and
$1,480,000 would be charged to operations for the years ended March 31,
2000, 2001 and 2002, respectively. The remaining amounts would be amortized
over the remaining vesting periods of the underlying options. Additionally,
the amounts that would be charged to operations related to stock issued
under the Purchase Plan was computed as approximately $129,000, $29,000 and
$39,000 for fiscal 2000, 2001 and 2002, respectively. The resulting pro
forma compensation expense may not be representative of the amount to be
expected in future years as pro forma compensation expense may vary based
upon the number of options granted and shares purchased.
The pro forma net loss and pro forma net loss per common share presented
below have been computed assuming no tax benefit. The effect of a tax
benefit has not been considered since a substantial portion of the stock
options granted are incentive stock options and the Company does not
anticipate a future deduction associated with the exercise of these stock
options.
The pro forma effect of applying SFAS No. 123 for the years ended March 31,
2000, 2001 and 2002 is as follows:
NET LOSS NET LOSS PER SHARE
------------------------------- ------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
(IN THOUSANDS)
YEAR ENDED MARCH 31,
--------------------
2000, as restated............ $ (9,866) $ (10,650) $ (0.56) $ (0.61)
2001, as restated............ $ (19,332) $ (20,506) $ (0.94) $ (1.00)
2002......................... $ (21,193) $ (22,712) $ (1.02) $ (1.09)
F-23
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(CONTINUED)
(10) RESEARCH AND DEVELOPMENT
Research and development is a significant portion of the Company's
operations. The Company's research and development efforts are focused on
the development of new products, primarily related to cardiac assist and
heart replacement, including the continued enhancement of the BVS and
related technologies. Research and development costs are expensed when
incurred and include direct materials and labor, depreciation, contracted
services and other costs associated with developing new products and
improving existing products, including amortized costs of purchased
technology. Costs associated with government-funded contracts and grants
are recorded in the accompanying consolidated statements of operations as
part of research and development expenses as shown in the table below.
The Company, at its sole discretion, may elect to further develop
government-funded technologies or products by spending resources outside or
above the contract limits. In fiscal 2000, 2001 and 2002, the majority of
the Company's research and development expenditures were directed towards
the development and preparation of the AbioCor(TM) Implantable Replacement
Heart, which is in initial human clinical trials. Future costs for such
development cannot be definitively estimated at this time and are likely to
be highly variable based upon a number of factors, including clinical
results and regulatory requirements.
Research and development costs consist of the following amounts (in
thousands):
YEAR ENDED MARCH 31,
-------------------
2000 2001 2002
---- ---- ----
Internally funded........................................... $ 12,652 $ 20,044 $ 26,703
Incurred under government contracts and grants.............. 2,981 2,262 405
Acquisition of in-process development costs represented by
the Penn State Heart........................................ - 6,361 -
-------- -------- --------
Total research and development $ 15,633 $ 28,667 $ 27,108
======== ======== =========
In connection with the Company's acquisition of exclusive rights to the
Penn State Heart, the Company committed to The Pennsylvania State
University that it would use reasonable efforts to further develop the
underlying patent rights and technology. If the Company does not make such
an effort for at least three years from the date of acquisition, the
technology rights can revert back to the University, excluding all
improvements made thereto by the Company.
F-24
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(CONTINUED)
(11) ROYALTY OBLIGATION
Through August 3, 2000, the Company incurred a royalty to certain third
parties equal on a net basis to approximately 2.1% of certain revenues
derived from the BVS. For the years ended March 31, 2000 and 2001, the
amount of this royalty, net of certain reimbursed expenses, was
approximately $353,000 and $138,000, respectively. These amounts were
reflected as part of the cost of product revenues in the accompanying
consolidated statements of operation and were paid to the third parties
through Abiomed Limited Partnership. The partnership ceased activity after
August 3, 2000 and was subsequently dissolved. Prior to being dissolved,
Abiomed Limited Partnership was majority owned by the Company and was
consolidated in the Company's financial statements.
(12) EMPLOYEE DEFERRED COMPENSATION PROFIT-SHARING PLAN AND TRUST
The Company has an employee deferred compensation profit-sharing plan (the
401(k) Plan) that covers all employees who are at least 20 years of age.
Amounts paid by the Company to match a portion of employees' contributions
and discretionary amounts determined by the Company's Board of Directors
totaled approximately $353,000, $508,000 and $635,000 for the fiscal years
ended March 31, 2000, 2001 and 2002 respectively.
(13) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
MARCH 31,
2001 2002
---- ----
RESTATED
Salaries and benefits........................ $ 3,057 $ 3,204
Contract services............................ 356 575
Warranty..................................... 406 380
Professional fees............................ 338 233
Other........................................ 499 514
-------- --------
$ 4,656 $ 4,906
======== ========
Other accrued expenses as of March 31, 2001 has been reduced by $945,000
as a result of restatement, primarily as a result of reducing accrued
blood pump costs under extended-term contracts to reflect the Company's
change in policy for revenue recognition for product sales and related
cost of product sales. See Note 3 for discussion of these policy changes.
(14) OTHER INCOME, NET
Other income, net consists of the following (in thousands):
YEARS ENDED
---------------------------------
March 31, March 31, March 31,
2000 2001 2002
--------- --------- --------
Investment Income ......................... $ 1,088 $ 6,078 $ 2,938
Foreign Currency Transaction Gain or (Loss) 4 2 (70)
Other, net ................................ 14 80 77
------- ------- -------
Total other income, net ................... $ 1,106 $ 6,160 $ 2,945
======= ======= =======
F-25
SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES
QUARTERLY RESULTS OF OPERATIONS (Unaudited) In thousands, except per share data
The following tables presents the Company's results of operations for each
quarter of our fiscal years ended March 31, 2000, 2001 and 2002.
Restated (Note 1):
FISCAL YEAR ENDED MARCH 31, 2000 (RESTATED)
-------------------------------------------
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
Revenues:
Products............................. $ 3,875 $ 3,906 $ 5,119 $ 5,621 $ 18,521
Funded research and development...... 1,089 1,131 1,306 1,046 4,572
--------- --------- --------- --------- ---------
Total revenues................... 4,964 5,037 6,425 6,667 23,093
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of product revenues............. 1,343 1,226 1,618 1,683 5,870
Research and development............. 3,392 3,450 4,596 4,195 15,633
Selling, general and administrative.. 2,498 2,912 3,524 3,628 12,562
--------- --------- --------- --------- ---------
Total costs and expenses......... 7,233 7,588 9,738 9,506 34,065
--------- --------- --------- --------- ---------
Loss from operations.................... (2,269) (2,551) (3,313) (2,839) (10,972)
--------- --------- --------- --------- ---------
Interest and other income, net.......... 157 240 209 500 1,106
Net loss ........................... $ (2,112) $ (2,311) $ (3,104) $ (2,339) $ (9,866)
========= ========= ========= ========= =========
Net loss per share ..................... $ (0.12) $ (0.13) $ (0.18) $ (0.13) $ (0.56)
========= ========= ========= ========= =========
FISCAL YEAR ENDED MARCH 31, 2001 (RESTATED)
-------------------------------------------
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
Revenues:
Products............................. $ 5,172 $ 4,253 $ 4,576 $ 5,723 $ 19,724
Funded research and development...... 973 829 684 656 3,142
--------- --------- --------- --------- ---------
Total revenues................... 6,145 5,082 5,260 6,379 22,866
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of product revenues............. 1,855 1,408 1,883 2,076 7,222
Research and development............. 4,491 11,966 6,604 5,606 28,667
Selling, general and administrative.. 2,977 2,959 2,919 3,614 12,469
--------- --------- --------- --------- ---------
Total costs and expenses......... 9,323 16,333 11,406 11,296 48,358
--------- --------- --------- --------- ---------
Loss from operations.................... (3,178) (11,251) (6,146) (4,917) (25,492)
--------- --------- --------- --------- ---------
Interest and other income, net.......... 1,559 1,584 1,568 1,449 6,160
Net loss ........................... $ (1,619) $ (9,667) $ (4,578) $ (3,468) $ (19,332)
========= ========= ========= ========= =========
Net loss per share ..................... $ (0.08) $ (0.47) $ (0.22) $ (0.17) $ (0.94)
========= ========= ========= ========= =========
SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES (Continued)
QUARTERLY RESULTS OF OPERATIONS (Unaudited) In thousands, except per share data
Restated (Continued) (Note 1):
FISCAL YEAR ENDED MARCH 31, 2002
--------------------------------
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
Revenues:
Products............................. $ 6,064 $ 5,114 $ 5,898 $ 7,671 $ 24,747
Funded research and development...... 618 480 691 425 2,214
--------- --------- --------- --------- ---------
Total revenues................... 6,682 5,594 6,589 8,096 26,961
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of product revenues............. 2,035 1,478 1,615 2,797 7,925
Research and development............. 6,614 6,641 7,027 6,826 27,108
Selling, general and administrative.. 4,144 3,900 3,883 4,139 16,066
--------- --------- --------- --------- ---------
Total costs and expenses......... 12,793 12,019 12,525 13,762 51,099
--------- --------- --------- --------- ---------
Loss from operations.................... (6,111) (6,425) (5,936) (5,666) (24,138)
--------- --------- --------- --------- ---------
Interest and other income, net.......... 986 809 616 534 2,945
Net loss ........................... $ (5,125) $ (5,616) $ (5,320) $ (5,132) $ (21,193)
========= ========= ========= ========= =========
Net loss per share ..................... $ (0.25) $ (0.27) $ (0.25) $ (0.25) $ (1.02)
========= ========= ========= ========= =========
Previously Reported (Note 2):
FISCAL YEAR ENDED MARCH 31, 2000
--------------------------------
(AS PREVIOUSLY REPORTED)
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
Revenues:
Products............................. $ 4,021 $ 3,595 $ 5,196 $ 5,565 $ 18,377
Funded research and development...... 2,331 573 748 488 4,140
--------- --------- --------- --------- ---------
Total revenues................... 6,352 4,168 5,944 6,053 22,517
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of product revenues............. 1,357 1,115 1,610 1,800 5,882
Research and development............. 3,392 3,450 4,596 4,195 15,633
Selling, general and administrative.. 2,498 2,912 3,524 3,628 12,562
--------- --------- --------- --------- ---------
Total costs and expenses......... 7,247 7,477 9,730 9,623 34,077
--------- --------- --------- --------- ---------
Loss from operations.................... (895) (3,309) (3,786) (3,570) (11,560)
--------- --------- --------- --------- ---------
Interest and other income, net.......... 157 240 209 500 1,106
Net loss................................ $ (738) $ (3,069) $ (3,577) $ (3,070) $ (10,454)
========= ========= ========= ========= =========
Net loss per share...................... $ (0.04) $ (0.18) $ (0.21) $ (0.17) $ (0.60)
========= ========= ========= ========= =========
SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES (Continued)
QUARTERLY RESULTS OF OPERATIONS (Unaudited) In thousands, except per share data
Previously Reported (Continued) (Note 2):
FISCAL YEAR ENDED MARCH 31, 2001
--------------------------------
(AS PREVIOUSLY REPORTED)
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
Revenues:
Products............................. $ 5,504 $ 4,953 $ 5,689 $ 5,871 $ 22,017
Funded research and development...... 355 2,032 260 232 2,879
--------- --------- --------- --------- ---------
Total revenues................... 5,859 6,985 5,949 6,103 24,896
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of product revenues............. 1,935 1,485 1,913 2,042 7,375
Research and development............. 4,491 5,605 6,439 6,136 22,671
Selling, general and administrative.. 2,977 2,959 2,919 3,556 12,411
--------- --------- --------- --------- ---------
Total costs and expenses......... 9,403 10,049 11,271 11,734 42,457
--------- --------- --------- --------- ---------
Loss from operations.................... (3,544) (3,064) (5,322) (5,631) (17,561)
--------- --------- --------- --------- ---------
Interest and other income, net.......... 1,559 1,584 1,568 1,449 6,160
--------- --------- --------- --------- ---------
Net loss................................ $ (1,985) $ (1,480) $ (3,754) $ (4,182) $ (11,401)
========= ========= ========= ========= =========
Net loss per share...................... $ (0.10) $ (0.07) $ (0.18) $ (0.20) $ (0.55)
========= ========= ========= ========= =========
FISCAL YEAR ENDED MARCH 31, 2002
--------------------------------
(AS PREVIOUSLY REPORTED)
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
Revenues:
Products............................. $ 5,747 $ 4,237 $ 5,591 $ 6,915 $ 22,490
Funded research and development...... 245 107 318 425 1,095
--------- --------- --------- --------- ---------
Total revenues................... 5,992 4,344 5,909 7,340 23,585
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of product revenues............. 1,991 1,183 1,530 2,581 7,285
Research and development............. 7,144 7,171 7,557 7,616 29,488
Selling, general and administrative.. 4,144 3,900 3,883 4,269 16,196
--------- --------- --------- --------- ---------
Total costs and expenses......... 13,279 12,254 12,970 14,466 52,969
--------- --------- --------- --------- ---------
Loss from operations.................... (7,287) (7,910) (7,061) (7,126) (29,384)
--------- --------- --------- --------- ---------
Interest and other income, net.......... 986 809 616 534 2,945
--------- --------- --------- --------- ---------
Net loss................................ $ (6,301) $ (7,101) $ (6,445) $ (6,592) $ (26,439)
========= ========= ========= ========= =========
Net loss per share...................... $ (0.30) $ (0.34) $ (0.31) $ (0.32) $ (1.27)
========= ========= ========= ========= =========
Notes to Quarterly Results of Operations:
(1) See MD&A for description of the restatement.
(2) Fourth quarter results for the year ended March 31, 2002 were announced in
a press release dated May 16, 2002. Prior quarters were included in Form
10-Q's filed with the SEC.