424B3 1 d335311d424b3.htm 424B3 424B3
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Filed Pursuant to Rule 424(b)(3)
File No. 333-180988

 

LOGO

4750 Wiley Post Way, Suite 120

Salt Lake City, Utah 84116

Dear Stockholder:

We cordially invite you to attend a special meeting of stockholders of World Heart Corporation, or World Heart, to be held at our offices at 4750 Wiley Post Way, Suite 120, Salt Lake City, Utah 84116 at 10:00 a.m., local time, on August 2, 2012. At the special meeting, we will ask you to consider and vote on a proposal to adopt the Agreement and Plan of Merger and Reorganization we entered into as of March 29, 2012, as it may be amended from time to time, with HeartWare International, Inc., or HeartWare, and its indirect wholly owned subsidiary, Ocean Acquisition Holding Inc., or Merger Subsidiary, pursuant to which Merger Subsidiary will merge with and into World Heart. As a result of the merger, World Heart will become a wholly owned subsidiary of HeartWare.

Upon closing of the merger, each share of World Heart common stock you hold will be converted into the right to receive a pro rata portion of the aggregate $8 million merger consideration to be paid by HeartWare for all the outstanding shares of World Heart common stock, determined by dividing $8 million by the number of shares of World Heart common stock issued and outstanding immediately prior to the effective time of the merger. The merger consideration will be paid in shares of HeartWare common stock. The number of shares of HeartWare common stock you receive will depend on the average of the per share closing prices of HeartWare common stock during the ten consecutive trading days ending on (and including) the trading day that is one calendar day prior to the effective time of the merger. On June 27, 2012, HeartWare had 14,177,471 shares of outstanding common stock, and the average of the per share closing prices of HeartWare common stock on the NASDAQ Stock Market during the ten consecutive trading days ending on (and including) June 29, 2012 was $87.07, which, pursuant to the merger consideration calculation provided in the merger agreement, would result in a maximum of 91,876 HeartWare shares being issued to World Heart stockholders, with the result that former World Heart stockholders would own approximately 0.65% of the shares of HeartWare’s outstanding common stock on the date they received such HeartWare shares.

HeartWare common stock is listed on the NASDAQ Stock Market under the trading symbol “HTWR” and on June 29, 2012, the last practicable date before the date of this proxy statement/prospectus, its closing price was $88.80 per share.

The board of directors of World Heart reviewed and considered the terms and conditions of the merger and those members of the World Heart board of directors present at the meeting unanimously determined that the merger is advisable and fair to and in the best interests of World Heart and its stockholders, approved and adopted the merger agreement, approved the transactions contemplated thereby, including the merger, and recommends that you vote “FOR” adoption of the merger agreement at the World Heart special meeting.

Your vote is very important. Subject to the terms and conditions of separate voting agreements each dated as of March 29, 2012, New Leaf Ventures II, L.P., Austin W. Marxe, Venrock Associates V, L.P., Venrock Partners V, L.P. and Venrock Entrepreneurs Fund V, L.P., have agreed, among other things, to vote an aggregate of 11,666,294 of their shares of World Heart common stock (representing approximately 42% of the shares entitled to vote at the World Heart special meeting as of the record date) “FOR” the adoption of the merger agreement. However, we cannot complete the merger unless the merger agreement is adopted by the affirmative vote of the holders of a majority of the outstanding shares of World Heart common stock entitled to vote at the special meeting. Only stockholders entered in the stock ledger at the close of business on June 25, 2012, the record date for the special meeting, are entitled to notice of and to vote at the special meeting and any adjournment or postponement of it.

Please review the accompanying proxy statement/prospectus carefully. In particular, you should consider the matters described under Risk Factors beginning on page 16 of this proxy statement/prospectus before voting.

Thank you for your support; we appreciate your consideration of this matter.

 

On behalf of the Board of Directors of World Heart Corporation,
Morgan R. Brown
Executive Vice President and Chief Financial Officer

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in connection with the merger or determined if this proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

This proxy statement/prospectus is dated July 2, 2012,

and is first being mailed to stockholders on or about July 5, 2012.

 


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LOGO

WORLD HEART CORPORATION

4750 Wiley Post Way, Suite 120

Salt Lake City, UT 84116

(801) 355-6255

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON AUGUST 2, 2012

Dear Stockholder:

You are cordially invited to attend the Special Meeting of Stockholders of World Heart Corporation, a Delaware corporation, or World Heart, that will be held at our offices at 4750 Wiley Post Way, Suite 120, Salt Lake City, Utah 84116 at 10:00 a.m., local time, on August 2, 2012, or the World Heart special meeting, for the following purposes:

 

  1. to consider and vote upon a proposal to adopt the Agreement and Plan of Merger and Reorganization, dated as of March 29, 2012, among HeartWare, Ocean Acquisition Holding Inc., or Merger Subsidiary, and World Heart, under which Merger Subsidiary will merge with and into World Heart, which will survive the merger and become an indirect wholly owned subsidiary of HeartWare;

 

  2. to consider and vote upon a proposal to approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers; and

 

  3. to consider and vote upon a proposal to adjourn the World Heart special meeting, if necessary, for the purpose of soliciting additional proxies to vote in favor of the adoption of the merger agreement.

HeartWare is a Delaware corporation. Merger Subsidiary is a Delaware corporation and is an indirect wholly owned subsidiary of HeartWare.

World Heart’s board of directors reviewed and considered the terms and conditions of the merger and those members of World Heart’s board of directors present at the meeting unanimously determined that the merger is advisable and fair to and in the best interests of World Heart and its stockholders, unanimously approved and adopted the merger agreement and approved the transactions contemplated thereby, including the merger, and unanimously recommended that World Heart stockholders vote to adopt the merger agreement at the World Heart special meeting. This item of business to be submitted to a vote of the stockholders at the World Heart special meeting is more fully described in this proxy statement/prospectus, which we urge you to read carefully. World Heart’s board of directors also recommends that you expressly grant us the authority to vote your shares to adjourn the World Heart special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the World Heart special meeting to adopt the merger agreement.

Stockholders of record at the close of business on June 25, 2012, or the record date, are entitled to notice of and to vote at the World Heart special meeting and any adjournment or postponement of the World Heart special meeting. This proxy statement/prospectus is dated July 2, 2012 and is first being mailed to stockholders of World Heart on or about July 5, 2012. Your vote is important. Adoption of the merger agreement will require the affirmative vote of the holders of a majority of the shares of World Heart common stock outstanding as of the record date.

If the merger is completed, you will be entitled to receive for each share of World Heart common stock that you own shares of HeartWare common stock, par value $0.001, without interest and less any applicable withholding taxes, in an amount equal to your pro rata portion of the $8 million merger consideration to be paid by HeartWare for all the outstanding shares of World Heart common stock, and you will have no ongoing ownership interest in the continuing business of World Heart.


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You should not send any certificates representing shares of World Heart common stock with your proxy card. Upon the closing of the merger, you will be sent instructions regarding the procedure to exchange your stock certificates for the merger consideration.

THE WORLD HEART BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR”

THE ADOPTION OF THE MERGER AGREEMENT AND “FOR” THE PROPOSAL TO APPROVE, ON AN ADVISORY BASIS, THE MERGER-RELATED COMPENSATION FOR WORLD HEART’S NAMED EXECUTIVE OFFICERS AND “FOR” THE PROPOSAL TO ADJOURN THE SPECIAL MEETING, IF NECESSARY, FOR THE PURPOSE OF SOLICITING ADDITIONAL PROXIES TO VOTE IN FAVOR OF ADOPTING THE MERGER AGREEMENT.

YOUR VOTE IS IMPORTANT.

Your vote is very important, regardless of the number of shares you own. Even if you plan to attend the World Heart special meeting in person, we request that you complete, sign, date and return your proxy card in the enclosed envelope, or appoint a proxy over the Internet or by telephone as instructed in these materials, to ensure that your shares will be represented at the World Heart special meeting if you are unable to attend. If you sign, date and mail your proxy card without indicating how you wish to vote, your proxy will be counted as a vote in favor of the adoption of the merger agreement, in favor of the proposal to approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers and in favor of the proposal to adjourn the World Heart special meeting, if necessary, for the purposes of soliciting additional proxies to vote in favor of adopting the merger agreement. If you fail to return your proxy card or if you fail to appoint a proxy over the Internet or by telephone, and you do not attend the World Heart special meeting in person, your shares will not be counted for purposes of determining whether a quorum is present at the World Heart special meeting and will have the same effect as a vote against the adoption of the merger agreement. If you do attend the World Heart special meeting and wish to vote in person, you may withdraw your proxy and vote in person.

If your shares of World Heart common stock are held in the name of your brokerage firm, bank, trust or other nominee, your brokerage firm, bank, trust or other nominee will be unable to vote your shares of World Heart common stock without instructions from you. You should instruct your brokerage firm, bank, trust or other nominee as to how to vote your shares of World Heart common stock, following the procedures provided by your brokerage firm, bank, trust or other nominee. The failure to instruct your brokerage firm, bank, trust or other nominee to vote your shares of World Heart common stock “FOR” approval of the proposal to adopt the merger agreement will have the same effect as voting against the proposal to adopt the merger agreement. Additionally, if wish to vote shares held in the name of your brokerage firm, bank, trust or other nominee in person at the World Heart special meeting, you must obtain a proxy, executed in your favor, from your brokerage firm, bank, trust or other nominee in order to do so.

If you have any questions or need assistance voting your shares of World Heart common stock, please contact World Heart by electronic mail at investors@worldheart.com or by telephone at (801) 355-6255.

No person has been authorized to give any information or to make any representations other than those set forth in this proxy statement/prospectus in connection with the solicitation of proxies made hereby, and, if given or made, such information must not be relied upon as having been authorized by World Heart or any other person.

By Order of the Board of Directors,

Morgan R. Brown

Executive Vice President and Chief

Financial Officer

July 2, 2012

Salt Lake City, Utah

 

 

In addition to delivering the proxy materials for the World Heart special meeting to be held on August 2, 2012 to stockholders by mail, the proxy statement for such meeting is also is available at www.proxyvoting.com/whrt


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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus incorporates by reference important business and financial information about World Heart from documents filed with the Securities and Exchange Commission, or SEC, that are not included in or delivered with this proxy statement/prospectus. This information is available to you without charge upon your written or oral request. You may obtain the documents incorporated by reference in this proxy statement/prospectus, other than certain exhibits to those documents, by requesting them in writing or by telephone from World Heart at the following address and telephone number:

WORLD HEART CORPORATION

Investor Relations

4750 Wiley Post Way, Suite 120

Salt Lake City, Utah 84116

Attention: Morgan Brown

Telephone: (801) 355-6255

Email: investors@worldheart.com

Investors may also consult HeartWare’s or World Heart’s websites for more information concerning HeartWare and World Heart, respectively. HeartWare’s website is www.heartware.com. World Heart’s website is www.worldheart.com. Information included on any of these websites is not incorporated by reference into this proxy statement/prospectus.

If you would like to request documents, please do so by July 26, 2012 in order to receive them before the World Heart special meeting.

You should rely only on the information contained or incorporated by reference into this proxy statement/prospectus. No one has been authorized to provide you with information that is different from that contained in, or incorporated by reference into, this proxy statement/prospectus. This proxy statement/prospectus is dated July 2, 2012. You should not assume that the information contained in, or incorporated by reference into, this proxy statement/prospectus is accurate as of any date other than that date, except to the extent that such information is contained in an additional document filed with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, between the date of this proxy statement/prospectus and the date of the World Heart special meeting, and is incorporated by reference herein. Neither the mailing of this proxy statement/prospectus to World Heart stockholders nor the issuance by HeartWare of HeartWare common stock in connection with the merger will create any implication to the contrary.

For more information about the information incorporated by reference into this proxy statement/prospectus and where to obtain copies of documents incorporated by reference into this proxy statement/prospectus, see “Where You Can Find More Information” on page 199.

This proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction. Information contained in this proxy statement/prospectus regarding World Heart has been provided by World Heart and information contained in this proxy statement/prospectus regarding HeartWare has been provided by HeartWare.

 

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     Page  

QUESTIONS AND ANSWERS ABOUT THE MERGER

     1   

SUMMARY

     9   

General

     9   

The Merger

     10   

The Merger Agreement

     11   

The World Heart Special Meeting

     12   

Comparative Market Prices

     13   

Comparative Per Share Information

     13   

Selected Historical Consolidated Financial Data of HeartWare

     15   

RISK FACTORS

     16   

Risks Related to the Merger

     16   

Risks Related to HeartWare’s Business and Industry

     19   

Risks Related to HeartWare Common Stock

     37   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     40   

THE WORLD HEART SPECIAL MEETING

     42   

THE MERGER

     46   

Background to the Merger

     46   

World Heart’s Reasons for the Merger and Recommendation of the World Heart Board of Directors

     55   

HeartWare’s Reasons for the Merger

     57   

Interests of World Heart Directors and Executive Officers in the Merger

     59   

Ownership of HeartWare Following the Merger

     61   

Effective Time of the Merger

     61   

Public Trading Markets

     61   

HeartWare’s Dividend Policy

     61   

Material United States Federal Income Tax Consequences of the Merger

     61   

THE MERGER AGREEMENT

     65   

The Merger

     65   

Merger Consideration

     65   

Treatment of Stock Options

     66   

Exchange of Certificates

     66   

The Surviving Corporation

     67   

Representations and Warranties

     68   

Conduct of Business of World Heart

     70   

Conduct of Business of HeartWare

     73   

Stockholder Meeting

     73   

Agreement Not to Solicit Other Offers

     73   

 

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     Page  

Efforts to Complete the Merger

     77   

Benefits Matters

     77   

Indemnification and Insurance

     78   

NASDAQ Listing

     78   

Conditions to the Obligations of Each Party to Consummate the Merger

     79   

Conditions to the Obligations of HeartWare and Merger Subsidiary to Consummate the Merger

     79   

Conditions to the Obligations of World Heart to Consummate the Merger

     80   

Termination

     80   

Effect of Termination

     81   

Effectiveness of License Agreement and Expenses

     81   

Amendments and Waivers

     82   

Governing Law

     82   

THE VOTING AGREEMENTS

     83   

THE LICENSE AGREEMENT

     85   

DISSENTERS’ RIGHTS

     86   

REGULATORY MATTERS

     87   

INFORMATION ABOUT THE COMPANIES

     88   

HeartWare International, Inc.

     88   

Description of HeartWare’s Business

     88   

Description of Properties

     104   

Legal Proceedings

     105   

Market for Registrant’s Common Equity and Related Stockholder Matters

     106   

Supplementary Financial Information (Unaudited)

     109   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     109   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     125   

Controls and Procedures

     125   

Quantitative and Qualitative Disclosures About Market Risk

     127   

World Heart Corporation

     128   

Ocean Acquisition Holding Inc.

     128   

MARKET PRICE AND DIVIDEND INFORMATION

     129   

DESCRIPTION OF CAPITAL STOCK

     130   

COMPARISON OF RIGHTS OF STOCKHOLDERS OF HEARTWARE AND WORLD HEART

     131   

ACCOUNTING TREATMENT OF THE TRANSACTION

     139   

LEGAL MATTERS

     140   

EXPERTS

     141   

OTHER MATTERS

     141   

FUTURE STOCKHOLDER PROPOSALS

     141   

DIRECTORS AND OFFICERS OF HEARTWARE

     142   

HeartWare Board of Directors

     142   

HeartWare Executive Officers

     147   

 

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CORPORATE GOVERNANCE

     149   

DIRECTOR COMPENSATION

     155   

2011 Director Compensation

     157   

EXECUTIVE COMPENSATION

     159   

Compensation Discussion and Analysis

     159   

Determining Executive Compensation

     163   

Detailed Information About Compensation Elements

     168   

Summary Compensation Table

     178   

Additional Information Explaining Summary Compensation

     181   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     191   

Review of Related Party Transactions

     191   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     192   

HeartWare International, Inc.

     192   

World Heart Corporation

     196   

WHERE YOU CAN FIND MORE INFORMATION

     199   

INDEX TO FINANCIAL STATEMENTS

     FS-1   

Consolidated Financial Statements (audited, for the fiscal year ended December 31, 2011)

  

Report of Independent Registered Public Accounting Firm

     FS-2   

Consolidated Balance Sheets

     FS-3   

Consolidated Statements of Operations

     FS-4   

Consolidated Statements of Comprehensive Loss

     FS-5   

Consolidated Statement of Stockholders’ Equity

     FS-6   

Consolidated Statements of Cash Flows

     FS-7   

Notes to Consolidated Financial Statements

     FS-8   

Condensed Consolidated Financial Statements (unaudited, for the quarter ended March 31, 2012)

  

Condensed Consolidated Balance Sheets

     FS-32   

Condensed Consolidated Statements of Operations

     FS-33   

Condensed Consolidated Statements of Comprehensive Loss

     FS-34   

Condensed Consolidated Statement of Stockholders’ Equity

     FS-35   

Condensed Consolidated Statements of Cash Flows

     FS-36   

Notes to Condensed Consolidated Financial Statements

     FS-37   

ANNEXES

  

Annex A — Agreement and Plan of Merger and Reorganization

     A-1   

Annex B — Form of Voting Agreement

     B-1   

Annex C — License Agreement

     C-1   

Annex D — Certificate of Incorporation of HeartWare International, Inc.

     D-1   

Annex E — Bylaws of HeartWare International, Inc.

     E-1   

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER

The following are some questions that you, as a stockholder of World Heart, may have regarding the merger and the special meeting of stockholders of World Heart and brief answers to those questions. We urge you to carefully read the remainder of this proxy statement/prospectus because the information in this section does not provide all the information that might be important to you with respect to the adoption of the merger agreement and the other matters being considered at the World Heart special meeting or the issuance of HeartWare common stock in connection with the merger. Additional important information is also contained in the annexes to, and the documents incorporated by reference in, this proxy statement/prospectus. This information is qualified in its entirety by the more detailed descriptions and explanations contained in this proxy statement/prospectus, including its annexes and the documents incorporated by reference into this proxy statement/prospectus.

Q: Why am I receiving this proxy statement/prospectus?

A: You are a stockholder of World Heart and World Heart has agreed to be acquired by HeartWare under the terms of the merger agreement. Please see the section entitled “The Merger Agreement” beginning on page 65 of this proxy statement/prospectus for a more detailed summary of the terms and conditions contained in the merger agreement. A copy of the merger agreement is attached to this proxy statement/prospectus as Annex A.

In order to complete the merger, World Heart stockholders must adopt the merger agreement and all other conditions to the consummation of the merger must be satisfied or, where legally permissible, waived. World Heart will hold a special meeting of its stockholders, which we refer to as the World Heart special meeting, to obtain the required approval of World Heart stockholders to adopt the merger agreement, to approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers and to approve the adjournment of the World Heart special meeting to a later date, if necessary, to solicit additional proxies in favor of the adoption of the merger agreement.

This document constitutes both a proxy statement of World Heart and a prospectus of HeartWare. It is a proxy statement of World Heart because the board of directors of World Heart is soliciting proxies from World Heart stockholders with respect to the World Heart special meeting. It is a prospectus of HeartWare because HeartWare may use it in connection with the issuance of shares of its common stock in exchange for shares of World Heart common stock in connection with the merger.

Q: What are World Heart stockholders being asked to vote on?

A: World Heart stockholders are being asked to consider and vote on the adoption of the merger agreement, the approval, on an advisory basis, of the merger-related compensation for World Heart’s named executive officers and the adjournment of the World Heart special meeting to a later date, if necessary, to solicit additional proxies to facilitate the adoption of the merger agreement by World Heart stockholders.

Q: What vote is required to adopt the merger agreement?

A: The adoption of the merger agreement requires the affirmative vote of a majority of the outstanding shares of World Heart common stock entitled to vote at the World Heart special meeting. In connection with the transactions contemplated by the merger agreement, New Leaf Ventures II, L.P., Austin W. Marxe, Venrock Associates V, L.P., Venrock Partners V, L.P. and Venrock Entrepreneurs Fund V, L.P., have entered into separate voting agreements dated as of March 29, 2012, to, among other things, vote an aggregate of 11,666,294 of their respective shares of World Heart common stock, which represents approximately 42% of the total outstanding shares of World Heart common stock as of the record date, “FOR” the adoption of the merger agreement with HeartWare, subject to the terms and conditions of the voting agreements. Please see the section entitled “The Voting Agreements” beginning on page 83 of this proxy statement/prospectus for a more detailed summary of the terms and conditions contained in the voting agreements. A copy of the form of the voting agreements is attached to this proxy statement/prospectus as Annex B.

 

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Q: What vote is required to approve, on an advisory basis, the merger-related compensation arrangements for World Heart’s named executive officers?

A: The affirmative vote of the holders of a majority of the shares of World Heart common stock present, in person or by proxy, and entitled to vote at the World Heart special meeting, provided there is a quorum, is required for approval of this proposal on an advisory basis. Because the vote is advisory in nature, whether the proposal is approved or disapproved will not be dispositive of whether World Heart will pay such merger-related compensation.

Q: What vote is required to adopt the proposal to adjourn the World Heart special meeting to a later time, if necessary, to solicit additional proxies?

A: The adoption of the proposal to adjourn the World Heart special meeting to a later time, if necessary, to solicit additional proxies requires either the approval of the chairman of the meeting or the affirmative vote of a majority of shares of World Heart common stock represented in person or by proxy at the World Heart special meeting and entitled to vote thereon, whether or not a quorum is present.

Q: What will happen in the proposed merger?

A: Pursuant to the terms of the merger agreement, Merger Subsidiary will merge with and into World Heart, with World Heart surviving the merger as an indirect wholly owned subsidiary of HeartWare.

Q: What will World Heart stockholders receive in the merger?

A: As a result of the merger, World Heart stockholders will receive shares of HeartWare common stock in exchange for their shares of World Heart common stock.

The number of shares of HeartWare common stock to which each share of World Heart common stock will convert is equal to the per share merger consideration (described below) divided by the average of the closing share prices of HeartWare common stock on the NASDAQ Stock Market during the ten consecutive trading days ending on (and including) the trading day that is one calendar day prior to the effective time of the merger. The per share merger consideration will be determined by dividing $8 million by the number of shares of World Heart common stock outstanding as of immediately prior to the effective time of the merger.

Q: What will happen to World Heart stock options in the merger?

A: All of World Heart’s outstanding stock options that were granted pursuant to World Heart’s 2006 Equity Incentive Plan and are held by then-current employees, consultants or directors of World Heart will vest as of the effective time of the merger. Each outstanding stock option (including the options that will vest in accordance with the preceding sentence) that is not exercised as of the effective time of the merger will terminate for no consideration as of the effective time of the merger.

Q: What will happen to World Heart warrants in the merger?

A: Pursuant to the terms of the merger agreement, each unexercised warrant issued by World Heart pursuant to that certain Securities Purchase Agreement, dated October 13, 2010, by and among World Heart and the purchasers identified therein (the “October Warrants”) issued and outstanding immediately prior to the effective time of the merger will be converted automatically into solely the right of each holder of outstanding October Warrants to elect to receive from the surviving corporation an amount of cash equal to the Black Scholes value of such October Warrant. Assuming a closing date for the merger of August 31, 2012 (for illustrative purposes only), a risk free interest rate of 0.5% and volatility of World Heart’s common stock of 125%, the cash payment to which the holders of October Warrants would be entitled is approximately $1.4 million in the aggregate, or $0.1181 per share of common stock subject to the October Warrants. The cash payment is not expected to change

 

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materially because the volatility used in the Black Scholes calculation was fixed based on volatility during a defined period prior to the execution of the merger agreement. All other unexercised warrants will continue to be outstanding and remain exercisable in accordance with their terms.

Q: Does the World Heart board of directors support the merger?

A: Yes. The World Heart board of directors, by unanimous vote of those present at a meeting duly called, (i) determined that the merger is advisable and fair to and in the best interests of World Heart and its stockholders; (ii) approved and adopted the merger agreement and approved the transactions contemplated by the merger agreement, including the merger, in accordance with the requirements of the General Corporation Law of the State of Delaware, which we refer to as the Delaware General Corporation Law; and (iii) recommends that you vote “FOR” the proposal to adopt the merger agreement. You should read the section entitled “The Merger—World Heart’s Reasons for the Merger and Recommendation of the World Heart Board of Directors” beginning on page 55. The World Heart board of directors also recommends that you vote “FOR” the adoption of the proposal to approve, on an advisory basis, the merger-related compensation arrangements for World Heart’s named executive officers and “FOR” the proposal to adjourn the World Heart special meeting, if necessary, to solicit additional proxies to facilitate the adoption of the merger agreement by World Heart stockholders.

Q: Are there risks involved in undertaking the merger?

A: Yes. In evaluating the merger, World Heart stockholders should carefully consider the factors described in the section of this proxy statement/prospectus entitled “Risk Factors” beginning on page 16 and other information about World Heart included in the documents incorporated by reference in this proxy statement/prospectus.

Q: Where and when is the World Heart special meeting?

A: The World Heart special meeting will be held at World Heart’s offices at 4750 Wiley Post Way, Suite 120, Salt Lake City, Utah at 10:00 a.m., local time, on August 2, 2012.

Q: Who can vote their shares of World Heart common stock in connection with the World Heart special meeting?

A: World Heart stockholders can vote their shares in connection with the World Heart special meeting if they owned World Heart shares of common stock at the close of business on June 25, 2012, the record date for the World Heart special meeting. As of the close of business on that day, 27,517,749 shares of World Heart common stock were outstanding.

Q: What do holders of shares of World Heart common stock need to do now?

A: If you are a World Heart stockholder, after you have carefully read this proxy statement/prospectus, including the annexes and the other documents referred to or incorporated by reference in this proxy statement/prospectus and have decided how you wish to vote your shares, please vote your shares promptly as described below.

Q: How do I vote if I am a holder of record of World Heart common stock?

A: If you are a holder of record of World Heart common stock, after you have carefully read this proxy statement/prospectus and have decided how you wish to vote your shares of common stock, please vote as soon as possible by:

 

   

completing, signing and dating each World Heart proxy card you receive and returning it in the enclosed prepaid envelope by mail;

 

   

using the Internet voting instructions printed on the World Heart proxy card;

 

   

calling the toll-free number printed on the World Heart proxy card; or

 

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voting in person by appearing at the World Heart special meeting.

Votes submitted over the Internet or by telephone must be received by 11:59 p.m., Eastern Time, on August 1, 2012.

Voting via the Internet, by telephone or by mailing in your proxy card will not prevent you from attending the World Heart special meeting. You are encouraged to submit a proxy by mail, via the Internet or by telephone even if you plan to attend the World Heart special meeting in person to ensure that your shares of World Heart common stock are represented at the World Heart special meeting.

If you return your signed proxy card, but do not mark the boxes showing how you wish to vote, your shares of World Heart common stock will be voted “FOR” the proposal to adopt the merger agreement, “FOR” the proposal to approve, on an advisory basis, the merger-related compensation arrangements for World Heart’s named executive officers and “FOR” the adoption of the proposal to adjourn the World Heart special meeting to a later time, if necessary, to solicit additional proxies to facilitate the adoption of the merger agreement by World Heart stockholders.

If you would like to attend the World Heart special meeting, see “Can I attend the World Heart special meeting and vote my shares in person?” below.

Q. What is the difference between being a “stockholder of record” and a “beneficial owner?”

A. If your shares of World Heart common stock are registered directly in your name with World Heart’s transfer agent, Computershare, you are considered, with respect to those shares of common stock, the stockholder of record. In that case, this proxy statement/prospectus, and your proxy card, have been sent directly to you by World Heart.

If your shares of common stock are held through a brokerage firm, bank, trust or other nominee, you are considered the beneficial owner of shares of World Heart common stock held in street name. In that case, this proxy statement/ prospectus has been forwarded to you by your brokerage firm, bank, trust or other nominee which may be, with respect to those shares of common stock, the stockholder of record. As the beneficial owner, you have the right to direct your brokerage firm, bank, trust or other nominee as to how to vote your shares of World Heart common stock by following their instructions for voting.

If you are a current or former employee of World Heart or any of its subsidiaries, please note that the number of shares set forth on your proxy card represents all of the shares of World Heart common stock that you hold of record. When you return the proxy card or when you vote by telephone or through the Internet, you are voting all of such shares as a group.

Q: How do I vote if my shares are held by a brokerage firm, bank, trust or other nominee?

A: If you hold shares of World Heart common stock through a brokerage account or other nominee, such as a bank or trust, after you have carefully read this proxy statement/prospectus and have decided how you wish to vote your shares, please vote your shares promptly. If you hold your shares of World Heart common stock through a brokerage account or another nominee, such as a bank or trust, then the brokerage firm, bank, trust or other nominee is considered to be the stockholder of record with respect to those shares of common stock. However, you are still considered to be the beneficial owner of those shares, with your shares being held in “street name.” “Street name” holders generally cannot vote their shares directly and must instead direct their brokerage firm, bank, trust or other nominee on how to vote their shares. Your brokerage firm, bank, trust or other nominee will only be permitted to vote your shares for you at the World Heart special meeting for the proposal to adopt the merger agreement if you instruct it on how to vote in accordance with the instruction form included with these materials and forwarded to you by your brokerage firm, bank, trust or other nominee. Submitting your proxy card or directing your brokerage firm, bank, trust or other nominee to vote your shares

 

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will ensure that your shares are represented and voted at the World Heart special meeting. Without instructions, your shares will not be voted on the proposal to adopt the merger agreement, which will have the same effect as a vote “against” the proposal to adopt the merger agreement.

In addition, because any shares you may hold in “street name” will be deemed to be held by a different stockholder than any shares you hold of record, shares held in “street name” will not be combined for voting purposes with shares you hold of record. To be sure your shares are voted, you should instruct your brokerage firm, bank, trust or other nominee to vote your shares. Shares held by a corporation or business entity must be voted by an authorized officer of the entity.

Q: Why is my vote as a World Heart stockholder important?

A: If you do not vote by proxy, telephone or Internet or vote in person at the World Heart special meeting, it will be more difficult for World Heart to obtain the necessary quorum to hold its special meeting. In addition, your failure to vote, whether by proxy, telephone, Internet or in person, will have the same effect as a vote “against” the adoption of the merger agreement. The merger agreement must be adopted by the affirmative vote of the holders of a majority of the outstanding shares of World Heart common stock entitled to vote at the World Heart special meeting. The World Heart board of directors recommends that you vote “FOR” the proposal to adopt the merger agreement.

Q: What constitutes a quorum for the World Heart special meeting?

A: The presence, in person or by proxy, of stockholders representing a majority of the shares of World Heart common stock entitled to vote at the World Heart special meeting will constitute a quorum for the World Heart special meeting. If you are a stockholder of record and you submit a properly executed proxy card, vote by telephone or via the Internet or vote in person at the World Heart special meeting, then your shares will be counted as part of the quorum. Abstentions and broker non-votes will be treated as present at the World Heart special meeting for purposes of determining the presence or absence of a quorum. All shares of World Heart common stock held by stockholders that are present in person or represented by proxy and entitled to vote at the World Heart special meeting, regardless of how such shares are voted or whether such stockholders abstain from voting, will be counted in determining the presence of a quorum.

Q: How are votes counted?

A: For the proposal relating to the adoption of the merger agreement, you may vote “for,” “against” or “abstain.” Because the vote on the proposal to approve the merger agreement is based on the total number of shares outstanding, rather than the number of actual votes cast, your failure to vote, or your decision to abstain from voting, on this proposal will have the same effect as a vote “against” the proposal. For the proposal to approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers, you may vote “for,” “against” or “abstain.” If you “abstain,” it will have the same effect as if you vote “against” the proposal to approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers. For a proposal to adjourn the World Heart special meeting, if necessary, to solicit additional proxies, you may vote “for,” “against” or “abstain.” If you “abstain,” it will have the same effect as if you vote “against” an adjournment of the World Heart special meeting. If you sign and return your proxy card and do not indicate how you want to vote, your proxy will be voted “FOR” the proposal to adopt the merger agreement, “FOR” the proposal to approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers and “FOR” the proposal to approve the adjournment of the World Heart special meeting, if necessary, to solicit additional proxies. If you hold your shares in “street name,” follow the instructions from your brokerage firm, bank, trust or other nominee on how to vote your shares. Please note, however, that failing to provide your brokerage firm, bank, trust or other nominee with instructions on how to vote your shares will have the same effect as a vote “against” the proposal to adopt the merger agreement, but will not affect the outcome of the vote on the proposal to approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers or a proposal to adjourn the World Heart special meeting, if necessary, to solicit additional proxies. Please do NOT send in your share certificates with your proxy card.

 

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Q: What happens if I sell my shares of World Heart common stock before the World Heart special meeting?

A: The record date of June 25, 2012 for stockholders entitled to vote at the World Heart special meeting is earlier than the date of the World Heart special meeting and the expected closing date of the merger. If you transfer your shares of World Heart common stock after the record date but before the World Heart special meeting, you will, unless special arrangements are made, retain your right to vote at the World Heart special meeting but will transfer the right to receive the merger consideration to the person to whom you transfer your shares.

Q: Who is soliciting my vote?

A: This proxy solicitation is being made by World Heart and paid for by World Heart and HeartWare. World Heart and HeartWare will generally share the cost and expense of filing, printing and mailing this proxy statement/prospectus. World Heart’s directors, officers and employees may also solicit proxies by personal interview, mail, e-mail, telephone, facsimile or by other means of communication. These persons will not be paid additional remuneration for their efforts. World Heart will also request brokers and other custodians, nominees and fiduciaries to forward proxy solicitation material to the beneficial owners of shares of World Heart common stock that the brokers and other custodians, nominees and fiduciaries hold of record.

Q: Can I attend the World Heart special meeting and vote my shares in person?

A: All holders of World Heart common stock, including stockholders of record and stockholders who hold their shares through brokerage firms, banks, trusts or other nominees or any other holder of record are invited to attend the World Heart special meeting. If you are not a stockholder of record, you must obtain a proxy, executed in your favor, from the record holder of your shares, such as a brokerage firm, bank, trust or other nominee, to be able to vote in person at the World Heart special meeting. If you plan to attend the World Heart special meeting, you must hold your shares in your own name or have a letter from the record holder of your shares confirming your ownership and you must bring a form of personal photo identification with you in order to be admitted. World Heart reserves the right to refuse admittance to anyone without proper proof of share ownership or without proper photo identification.

Q: Will World Heart be required to submit the merger agreement to its stockholders even if the World Heart board of directors has withdrawn, modified or qualified its recommendation?

A: Yes. Unless the merger agreement is terminated before the World Heart special meeting, World Heart is required to submit the merger agreement to its stockholders even if the World Heart board of directors has withdrawn, modified or qualified its recommendation, consistent with the terms of the merger agreement.

Q: Will I be subject to U.S. federal income tax on the HeartWare common stock that I receive?

A: The transactions contemplated by the merger agreement may qualify as a “reorganization” for U.S. federal income tax purposes. If such transactions qualify as a “reorganization,” World Heart stockholders that are U.S. persons will recognize no gain or loss on the disposition of their World Heart common stock, except with respect to cash received, if any, in lieu of a fractional share of HeartWare common stock.

World Heart stockholders that are not U.S. persons, have no presence in the United States and hold their World Heart common stock as capital assets generally will not be subject to U.S. federal income tax with respect to the receipt of HeartWare common stock.

You are urged to carefully read the description under “The Merger—Material United States Federal Income Tax Consequences of the Merger” beginning on page 61, and to consult your tax advisor on the consequences of participation in the transactions contemplated by the merger agreement.

 

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Q: May I change my vote after I have mailed my signed proxy card?

A: Yes. You may change your vote at any time before the shares reflected on your proxy card are voted at the World Heart special meeting. You can do this in one of four ways:

 

   

First, you can send a written, dated notice to World Heart’s corporate secretary stating that you would like to revoke your proxy.

 

   

Second, you can complete, sign, date and submit a new proxy card.

 

   

Third, you can submit a subsequent proxy over the Internet or by telephone.

 

   

Fourth, you can attend the World Heart special meeting and vote in person. Your attendance alone will not revoke your proxy.

Written notices of revocation and other communications with respect to revocation of any proxies should be addressed to: Morgan Brown, 4750 Wiley Post Way, Suite 120, Salt Lake City, Utah 84116.

If you have instructed a brokerage firm, bank, trust or other nominee to vote your shares, you must follow directions received from your brokerage firm, bank, trust or other nominee to change those instructions. You cannot vote shares held in “street name” by returning a proxy card directly to World Heart or by voting in person at the World Heart special meeting, unless you obtain a legal proxy card from your brokerage firm, bank, trust or other nominee.

Q: If I am a World Heart stockholder with shares represented by stock certificates, should I send in my World Heart stock certificates now?

A: No. You should not send in your World Heart stock certificates at this time. After the merger, HeartWare or its agent will send you instructions for exchanging your shares of World Heart common stock for the merger consideration. If your shares are held in “street name” by your brokerage firm, bank, trust or other nominee, you will receive instructions from your brokerage firm, bank, trust or other nominee as to how to effect the surrender of your “street name” shares in exchange for the merger consideration. Please do not send in your stock certificates with your proxy card.

Q: When do you expect to complete the merger?

A: HeartWare and World Heart are working to complete the merger as promptly as practicable. If World Heart stockholders adopt the merger agreement, HeartWare and World Heart currently expect that the merger will be completed during August of 2012. However, it is possible that factors outside our control could require us to complete the merger at a later time or may result in us not completing the merger at all.

For a description of certain matters that could delay or prevent the completion of the merger, please refer to “Risk Factors,” beginning on page 16.

Q: Will the shares of HeartWare common stock to be issued as the merger consideration be listed on the NASDAQ Stock Market?

A: Pursuant to the terms of the merger agreement, HeartWare will use its reasonable best efforts to cause the shares of HeartWare common stock to be issued in connection with the merger to be approved for listing on the NASDAQ Stock Market upon the occurrence of the effective time of the merger, subject to official notice of issuance.

Q: Can I dissent and require appraisal of my shares?

A: No. Holders of World Heart common stock will not have the right to an appraisal of the fair value of their shares. Under Delaware law, appraisal rights are not available for the shares of any class or series if the shares of

 

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the class or series are listed on a national securities exchange or held of record by more than 2,000 holders on the record date, and the consideration to be received with respect to such shares consists of shares of stock of another corporation whose shares are listed on a national securities exchange or held of record by more than 2,000 holders. World Heart’s common stock is listed on the NASDAQ Capital Market and HeartWare’s common stock is listed on the NASDAQ Stock Market; therefore, since holders of World Heart common stock will receive shares of HeartWare common stock as consideration for the merger, such holders will not have rights to an appraisal of the fair value of their shares.

Q: Where can I find more information about HeartWare?

A: You can obtain more information about HeartWare from the various sources described under “Where You Can Find More Information” beginning on page 199.

Q: Whom should I call with questions?

A: For additional questions about the merger, assistance in submitting proxies or voting shares of World Heart common stock, or additional copies of this proxy statement/prospectus or the enclosed proxy card, World Heart stockholders should contact World Heart as follows:

World Heart Corporation

Investor Relations

Attn: Morgan Brown

4750 Wiley Post Way, Suite 120

Salt Lake City, Utah 84116

(801) 355-6255

If your brokerage firm, bank, trust or other nominee holds your shares in “street name,” you should also call your brokerage firm, bank, trust or other nominee for additional information.

 

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SUMMARY

This summary highlights selected information from this proxy statement/prospectus and may not contain all the information that is important to you. To understand the merger fully and for a more complete description of the legal terms of the merger, you should carefully read this entire proxy statement/prospectus and the other documents to which we refer you, including in particular the copies of the merger agreement attached to this proxy statement/prospectus as Annex A. See also “Where You Can Find More Information” beginning on page 199. We have included page references parenthetically to direct you to a more complete description of the topics presented in this summary.

General

The Companies (page 95)

HeartWare International, Inc.

HeartWare develops and manufactures miniaturized implantable heart pumps, or ventricular assist devices, to treat Class IIIB / IV patients suffering from advanced heart failure. The HeartWare® Ventricular Assist System (the “HeartWare System”) features the HVAD® pump, a small full-output circulatory support device (up to 10L/min flow) designed to be implanted next to the heart (the “HVAD Pump”), avoiding the abdominal surgery generally required to implant competing devices. HeartWare common stock is quoted on the NASDAQ Stock Market under the symbol “HTWR.”

HeartWare’s principal executive offices are located at 205 Newbury Street, Suite 101, Framingham, Massachusetts. HeartWare’s office telephone number is (508) 739-0950.

For additional information about HeartWare and its subsidiaries, see “Information About the Companies—HeartWare International, Inc.” beginning on page 88.

World Heart Corporation

World Heart is a Delaware corporation and a developer of mechanical circulatory support systems based in Salt Lake City, Utah. World Heart common stock is quoted on the NASDAQ Capital Market under the symbol “WHRT”.

World Heart’s principal executive offices are located at 4750 Wiley Post Way, Suite 120, Salt Lake City, Utah. World Heart’s office telephone number is (801) 355-6255.

Additional information about World Heart and its subsidiaries is included in documents incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 199.

Ocean Acquisition Holding Inc.

Merger Subsidiary is an indirect wholly owned subsidiary of HeartWare and was incorporated in Delaware in March 2012 solely for the purpose of facilitating the merger.

Merger Subsidiary’s address is c/o HeartWare International, Inc., 205 Newbury Street, Suite 101, Framingham, Massachusetts. Merger Subsidiary has not carried on any activities to date, and does not expect to carry on any activities, except for activities incidental to its formation and activities undertaken in connection with the transactions contemplated by the merger agreement.

 

 

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The Merger (page 46)

Pursuant to the merger agreement, Merger Subsidiary will merge with and into World Heart, with World Heart surviving the merger as an indirect wholly owned subsidiary of HeartWare, which we refer to as the surviving corporation.

What World Heart Stockholders Will Receive in the Merger (page 65)

At the effective time of the merger, each share of World Heart common stock issued and outstanding immediately prior to the effective time of the merger will be converted into shares of HeartWare common stock.

The number of shares of HeartWare common stock to which each share of World Heart common stock will convert is equal to the per share merger consideration divided by the average of the closing share prices of HeartWare common stock on the NASDAQ Stock Market during the ten consecutive trading days ending on (and including) the trading day that is one calendar day prior to the effective time of the merger. The per share merger consideration will be determined by dividing $8 million by the number of shares of World Heart common stock outstanding as of immediately prior to the effective time of the merger. On June 27, 2012, HeartWare had 14,177,471 shares of outstanding common stock, and the average of the per share closing prices of HeartWare common stock on the NASDAQ Stock Market during the ten consecutive trading days ending on (and including) June 29, 2012 was $87.07, which, pursuant to the merger consideration calculation provided in the merger agreement, would result in a maximum of 91,876 HeartWare shares being issued to World Heart stockholders, with the result that former World Heart stockholders would own approximately 0.65% of the shares of HeartWare’s outstanding common stock on the date they received such HeartWare shares.

HeartWare will not issue any fractional shares of HeartWare common stock in the merger. Instead, each World Heart stockholder who otherwise would have received a fraction of a share of HeartWare common stock will receive an equivalent amount in cash.

Dissenters’ Rights (page 86)

Dissenters’ rights are statutory rights that enable stockholders to dissent from an extraordinary transaction, such as a merger, and to demand that the corporation pay the “fair value” for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to stockholders in connection with the extraordinary transaction. Holders of World Heart common stock will not have the right to an appraisal of the fair value of their shares. Under Delaware law, appraisal rights are not available for the shares of any class or series if the shares of the class or series are listed on a national securities exchange or held of record by more than 2,000 holders on the record date, and the consideration to be received with respect to such shares consists of shares of stock of another corporation whose shares are listed on a national securities exchange or held of record by more than 2,000 holders. World Heart’s common stock is listed on the NASDAQ Capital Market and HeartWare’s common stock is listed on the NASDAQ Stock Market; therefore, since holders of World Heart common stock will receive shares of HeartWare common stock as consideration for the merger, such holders will not have rights to an appraisal of the fair value of their shares.

Material United States Federal Income Tax Consequences (page 61)

The transaction will be structured to qualify as a “reorganization” for U.S. federal income tax purposes. If the merger qualifies as a “reorganization,” World Heart stockholders that are U.S. persons will recognize no gain or loss on the disposition of their World Heart common stock, except with respect to cash received, if any, in lieu of a fractional share of HeartWare common stock.

THE U.S. FEDERAL INCOME TAX CONSEQUENCES DESCRIBED ABOVE MAY NOT APPLY TO ALL WORLD HEART STOCKHOLDERS, INCLUDING CERTAIN WORLD HEART STOCKHOLDERS SPECIFICALLY REFERRED TO ON PAGE 62. YOUR TAX CONSEQUENCES, INCLUDING ANY STATE,

 

 

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LOCAL AND NON-U.S. TAX CONSEQUENCES, WILL DEPEND ON YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES OF PARTICIPATION IN THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.

Recommendation of the World Heart Board of Directors (page 55)

The World Heart board of directors recommends that World Heart stockholders vote “FOR” the adoption of the merger agreement, “FOR” the proposal to approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers and “FOR” the adjournment of the World Heart special meeting, if necessary, to solicit additional proxies. See “The Merger—World Heart’s Reasons for the Merger and Recommendation of the World Heart Board of Directors” beginning on page 55.

Interests of World Heart Directors and Executive Officers in the Merger (page 59)

In considering the recommendation of World Heart’s board of directors in favor of the adoption of the merger agreement, you should be aware that there are provisions of the merger agreement that will result in certain benefits to World Heart’s directors and executive officers, including the continuation of certain indemnification and insurance arrangements. See “The Merger—Interests of World Heart Directors and Executive Officers in the Merger” beginning on page 59. In addition, certain of World Heart’s directors and executive officers will receive certain compensation payments relating to the merger, as described under the section entitled “The Merger—Interests of World Heart Directors and Executive Officers in the Merger—Merger Related Compensation,” and the accompanying table entitled “Golden Parachute Compensation,” each beginning on page 59.

As of April 13, 2012, World Heart’s directors and executive officers collectively beneficially held, including shares subject to stock options exercisable within 60 days of April 13, 2012, approximately 76.5% of the outstanding shares of World Heart common stock. Of such shares, 609,228 shares (or approximately 2.2% of the shares held by World Heart’s directors and executive officers collectively) were represented by stock options. None of the outstanding stock options held by World Heart directors and executive officers are “in-the-money” (i.e., all of such outstanding stock options have an exercise price greater than the per-share consideration to be received by World Heart stockholders in the merger), and World Heart expects that such stock options will not be exercised and will be cancelled as of the effective time of the merger. See “Security Ownership of Certain Beneficial Owners and ManagementWorld Heart Corporation” beginning on page 196.

Comparison of Rights of Stockholders of HeartWare and World Heart (page 131)

World Heart stockholders, whose rights are currently governed by the Certificate of Incorporation of World Heart and Bylaws of World Heart, will, upon completion of the merger, become HeartWare stockholders and their rights will be governed by the Certificate of Incorporation of HeartWare and the Bylaws of HeartWare. HeartWare and World Heart are both corporations governed by Delaware law.

For a more complete description of the comparison of rights of stockholders of HeartWare and stockholders of World Heart, see “Comparison of Rights of Stockholders of HeartWare and World Heart” beginning on page 131.

The Merger Agreement (page 65)

The merger agreement is attached as Annex A to this proxy statement/prospectus. We encourage you to read the merger agreement because it is the principal document governing the merger.

Conditions to the Completion of the Merger (page 79)

Currently, the companies expect to complete the merger in August of 2012. As more fully described in this proxy statement/prospectus and in the merger agreement, the completion of the merger depends on a number of

 

 

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conditions being satisfied or, where legally permissible, waived. These conditions include, among others, receipt of the requisite approval of World Heart stockholders and the satisfaction or waiver of other customary closing conditions.

We cannot be certain when, or if, the conditions to the merger will be satisfied or waived, or that the merger will be completed.

For a more complete description of the conditions to completion of the merger, see “The Merger Agreement—Conditions to the Obligations of Each Party to Consummate the Merger,” “The Merger Agreement—Conditions to the Obligations of HeartWare and Merger Subsidiary to Consummate the Merger,” and “The Merger Agreement—Conditions to the Obligations of World Heart to Consummate the Merger” beginning on page 79.

Termination of the Merger Agreement; License Agreement (pages 80 and 85)

The merger agreement contains provisions addressing the circumstances under which HeartWare or World Heart may terminate the merger agreement. In addition, the merger agreement provides that, in certain circumstances, a license agreement may become effective upon a termination of the merger agreement.

For a more complete description, see “The Merger Agreement—Termination”, “The Merger Agreement—Effectiveness of License Agreement and Expenses” and “The License Agreement” beginning on pages 80, 81 and 85, respectively.

The Voting Agreements (page 83)

As a condition to its entering into the merger agreement, HeartWare required certain stockholders of World Heart to each enter into a voting agreement with HeartWare, which we refer to generically as the voting agreements. Under the voting agreements, these stockholders have agreed, with respect to an aggregate of 11,666,294 shares of World Heart common stock, which represents approximately 42% of the outstanding shares of World Heart common stock as of the record date, to vote (or cause to be voted) these shares in favor of the adoption of the merger agreement, and have agreed not to dispose of their shares prior to the date of the World Heart special meeting.

For a more complete description of the voting agreements, see “The Voting Agreements” beginning on page 83.

The World Heart Special Meeting (page 42)

Record Date; Stock Entitled to Vote (page 42)

Only holders of record of World Heart common stock at the close of business on the record date of June 25, 2012 are entitled to notice of and to vote at the World Heart special meeting. Each share of World Heart common stock issued and outstanding on the record date is entitled to one vote at the World Heart special meeting.

Vote Required (page 42)

The voting requirements to approve the proposals subject to a stockholder vote at the World Heart special meeting are as follows:

 

   

To approve the adoption of the merger agreement, stockholders of record as of June 25, 2012 holding a majority of the outstanding shares of World Heart common stock must vote “FOR” the adoption of the merger agreement. There are 27,517,749 outstanding shares of World Heart common stock entitled to be voted at the World Heart special meeting.

 

 

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The approval, on an advisory basis, of the merger-related compensation for World Heart’s named executive officers requires the affirmative vote of the holders of a majority of the shares of World Heart common stock present, in person or by proxy, and entitled to vote at the World Heart special meeting, provided a quorum is present.

 

   

The approval of an adjournment of the World Heart special meeting requires the affirmative vote of the holders of a majority of the shares of World Heart common stock present, in person or by proxy, and entitled to vote at the World Heart special meeting, whether or not a quorum is present.

Comparative Market Prices

HeartWare common stock is quoted on the NASDAQ Stock Market under the symbol “HTWR.” World Heart common stock is quoted on the NASDAQ Capital Market under the symbol “WHRT.” The following table presents the closing sale prices of HeartWare common stock and World Heart common stock, as reported on their respective exchanges on:

 

   

March 29, 2012, the last full trading day prior to the public announcement of the merger agreement; and

 

   

June 29, 2012, the last full trading day prior to the date of this proxy statement/prospectus.

The table also presents the cash equivalent value of the merger consideration proposed for each share of World Heart common stock, which was calculated by dividing $8 million by the number of shares of World Heart common stock outstanding on March 29, 2012. Additionally, the table presents the average of the per share closing prices on the NASDAQ Stock Market during the ten consecutive trading days ending on (and including) March 29, 2012 and June 29, 2012.

 

     HeartWare Common
Stock
     World Heart
Common Stock
     Equivalent Value of
One Share of World
Heart Common  Stock
 

March 29, 2012

   $ 66.72       $ 0.274       $ 0.29   

June 29, 2012

   $ 88.80       $ 0.275       $ 0.29   

Average of the per share closing prices on the NASDAQ Stock Market of HeartWare shares during the ten consecutive trading days ending on (and including)
March 29, 2012

   $ 67.06         —         $ 0.29   

June 29, 2012

   $ 87.07         —         $ 0.29   

These prices will fluctuate prior to the merger. World Heart stockholders are urged to obtain current market quotations for shares of HeartWare common stock prior to voting or providing a proxy with respect to the proposal to adopt the merger agreement.

Comparative Per Share Information

The following table sets forth for the periods presented certain per share data of HeartWare and World Heart on a historical basis and on an unaudited pro forma equivalent basis, which is intended to show how World Heart common stock would have participated in the net income and book value of HeartWare if HeartWare and World Heart had been consolidated for accounting and financial reporting purposes during all periods presented.

The historical per share data of HeartWare has been derived from, and should be read in conjunction with, the historical financial statements of HeartWare and the accompanying notes, which are included in this proxy statement/prospectus beginning on page FS-1. The historical per share data of World Heart has been derived from, and should be read in conjunction with, the historical financial statements of World Heart and the

 

 

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accompanying notes included in World Heart’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which is incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 199 of this proxy statement/prospectus.

The unaudited pro forma equivalent information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the merger had been consummated as of the assumed date, nor is it necessarily indicative of future operating results or the financial position of the combined companies. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable.

 

     HeartWare     World Heart        
     Fiscal Year
Ended
December 31,
2011
    Fiscal Year
Ended
December 31,
2011
    Pro Forma
Combined
Equivalent Data
 

Net income (loss) per share:

      

Basic

   $ (3.94   $ (0.14   $ (4.18)   

Diluted

   $ (3.94   $ (0.14   $ (4.18)   

Book value per share at period end (1)

   $ 8.98      $ 0.33      $ 9.55   

Cash dividends declared per share

   $ 0.00      $ 0.00      $ 0.00   

 

(1) Historical book value per share is computed by dividing stockholders’ equity by the number of shares of HeartWare or World Heart common stock outstanding. Pro forma per share amounts have been calculated by adding the HeartWare and World Heart results and dividing the result by the pro forma number of shares of HeartWare common stock that would have been outstanding as of December 31, 2011 had the merger been consummated as of that day. To calculate the pro forma number of shares of HeartWare common stock that would have been issued in respect of all of the outstanding shares of World Heart common stock as of December 31, 2011, the value of the aggregate merger consideration of $8 million was divided by $68.46, the average trading price of HeartWare common stock in the last ten trading days of 2011, or approximately 116,857 shares of HeartWare common stock.

 

 

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Selected Historical Consolidated Financial Data of HeartWare

The following table sets forth HeartWare’s consolidated financial data for the five (5) fiscal years in the period ended December 31, 2011 derived from HeartWare’s audited consolidated financial statements.

You should read this information together with “Information About The Companies—HeartWare International, Inc.—Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 109 and with the consolidated financial statements and notes to the consolidated financial statements, which are included in this proxy statement/prospectus beginning on page FS-1.

 

     Fiscal Year Ended December 31,  
(In thousands, except per share data)    2011     2010     2009     2008     2007  

Consolidated Statement of Operations

          

Revenue, net

   $ 82,764      $ 55,164      $ 24,172      $ 332      $ —     

Cost of revenue

     32,932        24,441        13,211        78        —     

Selling, general and administrative expenses

     42,314        26,642        16,444        10,981        7,303   

Research and development expenses

     50,149        33,108        15,067        18,644        14,636   

Other (expense) income, net (1)

     (12,424     (370     (359     5,607        —     

Provision for income taxes

     —          —          —          —          —     

Net loss

     (55,055     (29,397     (20,909     (23,764     (21,939

Basic and diluted net loss per share

     (3.94     (2.17     (2.15     (3.00     (3.60

Consolidated Balance Sheet

          

Cash, cash equivalents and short-term investments

   $ 163,182      $ 213,478      $ 50,835      $ 20,804      $ 28,276   

Total assets

     240,732        267,577        77,953        30,338        32,355   

Convertible senior notes, net of discounts (2)

     94,277        88,922        —          —          —     

Total stockholders’ equity

     126,784        167,764        70,983        26,756        29,272   

No cash dividends have been paid during the periods presented above.

 

(1) In the year ended December 31, 2011, other expense includes approximately $10.7 million of interest expense associated with our 3.5% convertible senior notes due December 15, 2017.
(2) At December 31, 2011 and 2010, the aggregate principal amount of HeartWare’s 3.5% convertible senior notes due December 15, 2017 was $143.75 million.

 

 

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RISK FACTORS

In deciding whether to vote in favor of the adoption of the merger agreement, you should consider the matters described below, as well as all of the information that we have included in this proxy statement/prospectus and its annexes and all of the information included in the documents incorporated into this proxy statement/prospectus by reference. See the section entitled “Where You Can Find More Information” beginning on page 199 of this proxy statement/prospectus and the matters addressed in “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 40 of this proxy statement/prospectus.

The risks and uncertainties described below are not the only risks that HeartWare faces. Additional risks and uncertainties not currently known to HeartWare or that HeartWare currently deems immaterial also may impair the business operations of HeartWare or the combined company.

Risks Related to the Merger

Because the market price of HeartWare common stock will fluctuate, World Heart stockholders cannot be certain of the market value of merger consideration that they will receive upon completion of the merger.

The market price of HeartWare common stock will likely vary at the closing of the merger from the price of HeartWare common stock as of the date of this proxy statement/prospectus and the price of HeartWare common stock as of the date of the World Heart special meeting. The number of shares of HeartWare common stock that World Heart stockholders will be entitled to receive upon completion of the merger will depend on the average of the per share closing prices of HeartWare common stock during the ten consecutive trading days ending on (and including) the trading day that is one calendar day prior to the effective time of the merger. Furthermore, the market value of such shares of HeartWare common stock will depend on the per share closing price of HeartWare common stock upon completion of the merger.

Fluctuations in the market price of HeartWare common stock may be the result of general market and economic conditions, changes in the business, operations or prospects of HeartWare, market assessments of the likelihood that the merger will be completed and the timing of closing of the merger and other factors independent of the merger. In addition to the adoption of the merger agreement by World Heart stockholders at the World Heart special meeting, completion of the merger is subject to the satisfaction of other conditions that may not occur until some time after the World Heart special meeting. See “The Merger Agreement—Conditions to the Obligations of Each Party to Consummate the Merger,” “The Merger Agreement—Conditions to the Obligations of HeartWare and Merger Subsidiary to Consummate the Merger,” and “The Merger Agreement—Conditions to the Obligations of World Heart to Consummate the Merger” beginning on page 79 of this proxy statement/prospectus. As a result, at the time of the World Heart special meeting, World Heart stockholders will not know the number of shares of HeartWare common stock they will be entitled to receive as merger consideration, and thus will not know the precise dollar value of the merger consideration they will be entitled to receive upon completion of the merger.

World Heart will incur substantial expenses related to the merger, and the merger might not be completed if World Heart is unable to fulfill all of the closing conditions.

World Heart expects to incur substantial expenses in connection with the merger whether or not the transaction is consummated. Further, the consummation of the merger is conditioned upon the fulfillment of certain conditions by each of the parties, including World Heart’s obligation to have cash or cash equivalents on hand (net of certain liabilities) in an aggregate amount of not less than $4,000,000, (and reduced by $200,000 per month (pro rated daily) for each month between June 30, 2012 and the closing date of the merger) subject to certain adjustments, as of the effective time of the merger. As of March 31, 2012, World Heart had $5,581,552 of cash and cash equivalents, $1,670,113 of investment securities, and $1,459,800 in receivables from the National Institutes of Health (unless the National Institutes of Health notifies World Heart that the receivables will not be paid), all of which are considered cash for the purposes of the cash closing condition in the merger agreement.

 

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Taking into account adjustments permitted by the merger agreement, World Heart’s current projected expenses, and assuming the merger closes prior to August 31, 2012 (for illustrative purposes only), World Heart currently expects that it will satisfy the cash closing condition. Although World Heart intends to operate its business in a manner to meet this closing condition, World Heart may not be able to meet this closing condition. If any closing condition, including the minimum cash condition, is not met, it is possible that HeartWare might not consummate the merger. If World Heart stockholders do not adopt the merger agreement, or if the merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to World Heart will be offered, or that the business, prospects or results of operations of World Heart will not be adversely impacted.

The merger may be fully taxable to World Heart stockholders for U.S. federal income tax purposes.

If the merger fails to qualify as a reorganization for U.S. federal income tax purposes (including if the IRS successfully challenges the treatment of the merger as a reorganization), the receipt of shares of HeartWare common stock in the merger will be fully taxable to World Heart stockholders for U.S. federal income tax purposes.

World Heart stockholders are strongly urged to consult their tax advisors to determine the specific tax consequences to them of the merger, including any U.S. federal, state or local, or non-U.S. or other tax consequences. For more information, see “The Merger—Material United States Federal Income Tax Consequences of the Merger” beginning on page 61 of this proxy statement/prospectus.

Failure to complete the merger could negatively impact the stock price and the future business and financial results of HeartWare and World Heart.

Completion of the merger is subject to a number of closing conditions, including the adoption of the merger agreement by World Heart stockholders, and those closing conditions may not be satisfied on a timely basis or at all. If the merger is not completed, the price of HeartWare and World Heart common stock may decline. In addition, if the merger is not completed, HeartWare and World Heart may be subject to a number of material risks, including the following:

 

   

HeartWare and World Heart may not realize any anticipated benefits from being a part of a combined company;

 

   

World Heart may be required to grant HeartWare a license to certain patents and patent applications if the merger agreement is terminated under certain circumstances (see “The Merger Agreement—Effectiveness of License Agreement and Expenses” and “The License Agreement” beginning on pages 81 and 85 of this proxy statement/prospectus, respectively);

 

   

HeartWare and World Heart may be subject to litigation related to the completion of the merger or the failure to complete the merger, which could require substantial time and resources to resolve;

 

   

the market price of World Heart common stock may be adversely affected to the extent the market price reflects an assumption that the merger will be completed;

 

   

World Heart may not be able to find another buyer willing to pay an equivalent or higher price in an alternative transaction than the price to be paid by HeartWare in the merger;

 

   

HeartWare and World Heart will be required to pay certain costs relating to the merger, such as legal, accounting and printing fees whether or not the merger is completed; and

 

   

matters relating to the merger (including integration planning) require substantial commitments of time and resources by HeartWare and World Heart management, which could otherwise have been devoted to other opportunities that may have been beneficial to HeartWare and World Heart.

 

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Certain directors and executive officers of World Heart may have interests in the merger that differ from the interests of World Heart stockholders that may influence these directors and executive officers to support the merger.

Certain of World Heart’s directors and executive officers may have financial interests in the merger that are different from, or in addition to, the interests of World Heart stockholders. The members of the World Heart board of directors were aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending to World Heart stockholders that the merger agreement be adopted. Please see “The Merger—Interests of World Heart Directors and Executive Officers in the Merger,” beginning on page 59.

The merger agreement limits World Heart’s ability to pursue alternative transactions to the merger.

The merger agreement contains “no shop” provisions that, subject to limited exceptions, limit World Heart’s ability to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of the company, or to license its intellectual property. These provisions might discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of World Heart, or acquiring or licensing its intellectual property, from considering or proposing that transaction even if it were prepared to pay consideration with a higher per share market price than that proposed in the merger, or might result in a potential competing acquiror’s proposing to pay a lower per share price to acquire World Heart than it might otherwise have proposed to pay. World Heart can consider and participate in discussions and negotiations with respect to an alternative proposal so long as such proposal did not arise from any breach of the “no shop” provisions pertaining to World Heart and the World Heart board of directors determines in good faith (after consultation with outside legal counsel) that failure to take such action would be inconsistent with its fiduciary duties to World Heart stockholders under applicable law.

The market price for HeartWare common stock may be affected by factors different from those affecting the market price of World Heart common stock. In addition, holders of HeartWare common stock have different rights as stockholders than holders of World Heart common stock.

If the merger is completed, holders of World Heart common stock will become holders of HeartWare common stock. HeartWare’s business differs from World Heart’s business, and HeartWare’s results of operations and the market price of HeartWare common stock may be affected by factors different from those currently affecting the results of operations of World Heart and the market price of World Heart common stock. In addition, the results of operations of the combined company and the market price of the combined company’s common stock may be affected by factors different from those currently affecting either HeartWare or World Heart. For a description of HeartWare’s business and of certain factors to consider in connection with HeartWare’s business, see “Information About the Companies—HeartWare International, Inc.” beginning on page 88 and “Risk Factors—Risks Related to HeartWare’s Business and Industry” beginning on page 19. For a description of World Heart’s business and of certain factors to consider in connection with World Heart’s business, see the documents incorporated by reference into this proxy statement/prospectus and referred to under “Where You Can Find More Information” beginning on page 199.

In addition, holders of shares of HeartWare common stock issued in connection with the merger will have different rights as HeartWare stockholders than the rights they had as World Heart stockholders before the merger. For a detailed comparison of the rights of HeartWare stockholders compared to the rights of World Heart stockholders, see “Comparison of Rights of Stockholders of HeartWare and World Heart” beginning on page 131 of this proxy statement/prospectus.

 

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World Heart stockholders, as a group, will have significantly reduced ownership and voting interests after the merger and will exercise less influence over management of HeartWare than they currently exercise over management of World Heart.

After the effective time of the merger, World Heart stockholders will own, as a group, in the aggregate, a significantly smaller percentage of HeartWare than they currently own of World Heart. Immediately following the merger, former stockholders of World Heart are expected to own approximately 1% of the outstanding shares of HeartWare common stock, based on the number of shares of HeartWare common stock and World Heart common stock outstanding on the record date. Consequently, as a general matter, World Heart stockholders, as a group, will have significantly reduced ownership and voting interests in HeartWare following the merger than they owned of World Heart prior to the merger and, as a result, they will have less influence over the management and policies of HeartWare than they currently exercise over the management and policies of World Heart.

World Heart will no longer exist as an independent public company following the merger and its stockholders will forego any increase in its value.

If the merger is successful, World Heart will no longer exist as an independent public company and World Heart stockholders will forego any increase in World Heart’s value that might have otherwise resulted from its possible growth.

Upon termination of the merger agreement under specified circumstances, the license agreement will become effective.

If the merger agreement is terminated under certain circumstances involving competing transactions, a change in World Heart’s board of directors’ recommendation of the merger to World Heart stockholders, breaches of representations and warranties in the merger agreement, the failure to meet the minimum cash condition and the merger not having closed by August 31, 2012, World Heart stockholders failing to adopt the merger agreement at the World Heart special meeting and other triggering events, the license agreement will become effective.

Risks Related to HeartWare’s Business and Industry

Unless the context requires otherwise, references in this “Risk Factors—Risks Related to HeartWare’s Business and Industry” section and in the “Risk Factors—Risks Related to HeartWare Common Stock” section of this proxy statement/prospectus to “HeartWare,” “the company,” “HeartWare Group,” “we,” “us” and “our” refer to HeartWare International, Inc. and its consolidated subsidiaries, HeartWare Pty. Limited, HeartWare, Inc., HeartWare GmbH, HeartWare (UK) Limited and HeartWare France.

For a further description of HeartWare’s business, including definitions for terms used but not defined in this section, see “Information About the Companies—HeartWare International, Inc.—Description of HeartWare’s Business” beginning on page 88.

We have incurred operating losses since our inception and anticipate that we will continue to incur operating losses for the foreseeable future.

We have incurred net losses since our inception, including net losses of $55.1 million, $29.4 million and $23.8 million for the fiscal years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011, our accumulated deficit was $182.3 million. Currently, we only have one product approved for sale outside of the U.S. None of our products are approved for commercial sale in the U.S. although we presently derive revenue from reimbursed sales of the HeartWare System for use in clinical trials in the United States. We continue to incur substantial clinical trial expenditures, significant research and development costs and costs related to our operations. We expect to continue to incur significant operating losses for the foreseeable future as we incur costs associated with:

 

   

manufacturing products;

 

   

continuing to conduct multiple clinical trials;

 

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further product research and development for next generation products and peripherals and efforts to sustain and maintain incremental improvements to existing products and peripherals;

 

   

building our service capabilities to meet growing customer demand;

 

   

growing, maintaining and protecting our intellectual property;

 

   

seeking regulatory approvals;

 

   

expanding our sales and marketing capabilities on a global basis, including building a team to support U.S. commercialization should the U.S. Food and Drug Administration (“FDA”) approve our device for marketing in the U.S.;

 

   

increasing our manufacturing operations to meet increasing demand;

 

   

broadening our infrastructure in order to meet the needs of our growing operations; and

 

   

complying with the requirements related to being a public company in both the United States and Australia.

To become and remain profitable, we must succeed in developing and commercializing products with significant market potential. This will require us to succeed in a range of challenging activities, including all of the activities listed above. We may never succeed in these activities, and we may never obtain regulatory approvals in the markets in which we expect to operate or otherwise generate revenue sufficient to achieve profitability. Further, the markets in which we operate may contract or we may not obtain significant market share so as to support our ongoing business operations. If we do achieve profitability, we may not be able to sustain it.

We have a significant amount of indebtedness currently consisting of our convertible senior notes. We may not be able to generate enough cash flow from our operations to service or pay principal on our indebtedness, and we may incur additional indebtedness in the future, which could adversely affect our business, financial condition and results of operations. Upon conversion of our convertible senior notes at the election of the holders, to the extent we settle such conversion in cash, it could impact our liquidity; to the extent we settle in stock it may dilute our existing stockholders.

As of December 31, 2011, our total consolidated indebtedness totaled $94.3 million, net of discounts, all of which constituted indebtedness under our 3.5% Convertible Senior Notes due 2017 in the principal amount of $143.75 million. Our ability to make payments on, and to refinance, our convertible senior notes, any future indebtedness, and to fund planned capital expenditures, research and development efforts, working capital, acquisitions and other general corporate purposes depends on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, clinical and other factors, some of which are beyond our control. If we do not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to pay our indebtedness, including payments of principal upon conversion of the convertible senior notes or on their maturity, or to fund our liquidity needs, we may be forced to refinance all or a portion of our indebtedness, including the convertible senior notes, on or before the maturity thereof, sell assets, reduce or delay capital expenditures, seek to raise additional capital or take other similar actions. We may not be able to affect any of these actions on commercially reasonable terms or at all. Our ability to refinance our indebtedness will depend on our financial condition at the time, the restrictions in the instruments governing our indebtedness and other factors, including market conditions. In addition, in the event of a default with respect to the convertible senior notes, the holders of the convertible senior notes and/or the trustee under the indenture governing these notes may accelerate the payment of our obligations under these notes, which could have a material adverse effect on our business, financial condition and results of operations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would likely have an adverse effect, which could be material, on our business, financial condition and results of operations.

 

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In addition, our significant indebtedness combined with our other financial obligations and contractual commitments could have other important consequences. For example, it could:

 

   

make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and our industry;

 

   

place us at a competitive disadvantage compared to our competitors who have less debt; and

 

   

limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other purposes.

Any of these factors could materially and adversely affect our business, financial condition and results of operations. In addition, if we incur additional indebtedness, which we are not prohibited from doing under the terms of the indenture governing the convertible senior notes, the risks related to our business and our ability to service our indebtedness would increase.

In the event the conditional conversion feature of the notes is triggered, holders of notes will be entitled to convert the notes at any time during specified periods at their option. If one or more holders elect to convert their notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than cash in lieu of any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. The terms of our convertible senior notes permit us to settle them, upon conversion by the holders thereof, in cash, stock, or a combination thereof. To the extent we use stock for settlement, our existing stockholders may be diluted.

We may need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.

Revenue generated from the HeartWare System is currently limited to commercial sales outside of the U.S. (particularly in the EU where we enjoy CE Marking), clinical trials within the United States, and through special access programs in other countries. Depending on a range of outcomes, especially our achievement of regulatory approval of our products and the growth of revenue, we may need to seek additional funding in the future. Additional funding may not be available on terms favorable to us, or at all. If we raise additional funding through the issuance of equity securities, our shares may suffer dilution. If we are unable to secure additional funding, our product development programs and our commercialization efforts would be delayed or reduced or may cease entirely.

Our products have not yet been approved for commercial sale within the United States, and our success will depend heavily on our ability to obtain FDA approval to market our HeartWare System in the U.S. for our initial and any future indications. If we are unable to complete successfully, or experience significant delays in the successful completion of, our U.S. trials, our ability to obtain regulatory approval to commercialize our products within the United States, the largest medical device market in the world, and our ability to generate revenue, will be materially adversely affected. Delays or inability to successfully complete trials outside of the U.S. can also negatively impact our business.

On January 30, 2009, we received approval for CE Marking and subsequently began generating net sales in Europe. However, future revenue will be limited if we do not receive regulatory approval to commercially sell our products in the United States. We submitted a premarket approval application to the FDA for the bridge-to-transplant indication in December 2010, and are currently conducting a U.S. clinical trial for the destination therapy indication. On April 25, 2012, the FDA’s Circulatory System Devices Panel of the Medical Devices Advisory Committee voted 9 to 2 that the benefits outweigh the risks for the use of the HeartWave System as a bridge to heart transplantation in patients with end-stage heart failure.

 

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Completion of any of our clinical trials could be delayed or adverse events during a trial could cause us to amend, repeat or terminate the trial. If this were to happen, our costs associated with the trial will increase, and it will take us longer to obtain regulatory approvals and commercialize the product or we may never obtain such regulatory approvals. Our clinical trials may also be suspended or terminated at any time by regulatory authorities, the data safety and monitoring board, site investigational review boards, or by us including during the closing stages of enrollment of the trial and the subsequent patient data follow-up period in the event that, for example, there should be a series of adverse clinical events such as stroke, bleeding or pump exchanges. Any failure or significant delay in completing clinical trials for our products will harm our financial results and the commercial prospects for our products.

The completion of any of our clinical trials could be substantially delayed or prevented by several factors, including:

 

   

slower than expected rates of patient recruitment and enrollment, including as a result of study inclusion and exclusion criteria and of our competitors undertaking similar clinical trials or having functionally comparable products that have received approval for sale;

 

   

failure of patients to complete the clinical trial;

 

   

physicians or patients preferring to use approved devices or other experimental treatments or devices rather than our HeartWare System;

 

   

prevalence and severity of adverse events and other unforeseen safety issues;

 

   

inability or unwillingness of patients or medical investigators to follow our clinical trial protocols;

 

   

inability to monitor patients adequately during or after treatment;

 

   

risks associated with trial design, which may result in a failure of the trial to show statistically significant results even if the product is effective;

 

   

governmental and regulatory delays or changes in regulatory requirements, policies or guidelines;

 

   

varying interpretation of data by regulatory agencies; and

 

   

perceived lack of product efficacy following clinical trials.

The process of obtaining marketing approval or clearance from the FDA for our HeartWare System, or any future products or enhancements or modifications to any products, could:

 

   

take a significant period of time;

 

   

require the expenditure of substantial resources;

 

   

involve rigorous pre-clinical and clinical testing;

 

   

require changes to our products; and

 

   

result in limitations on the indicated uses of the products.

Assuming we are successful at filing the required FDA regulatory premarket approval applications for indications for our HeartWare System, there can be no assurance that we will receive the required approvals from the FDA or, if we do receive the required approvals, that we will receive them on a timely basis or that we will otherwise be able to satisfy the conditions of such approval, if any. The failure to receive product approval by the FDA, or any significant delay in receipt, will have a material adverse effect on our business, financial condition or results of operations. For example, we submitted a premarket approval application to the FDA for the bridge-to-transplant indication in December 2010, and any failure to obtain an approval of that application, or a delay in receiving approval, could have an adverse impact on our business.

While the U.S. is the largest medical device market in the world, the risks described above concerning U.S. trials and regulatory approval also apply to our foreign clinical trials and regulatory filings. If we cannot timely

 

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conduct foreign trials in our major target markets (to the extent required in order to market our device in such locations) and receive timely approval in such jurisdictions to market our device for a variety of indications, our business will suffer.

We currently rely entirely on sales of our sole product, the HeartWare System, to generate revenue. Our existing and future products may not achieve or sustain market acceptance. In addition, any factors that negatively impact sales of this product will adversely affect our business, financial condition and results of operations.

Our sole product is the HeartWare System, which we introduced to the European market in January 2009 and which does not have regulatory approval in the United States. We expect to continue to derive substantially all of our revenue for several years from the sale of this product and its related devices. Accordingly, our ability to generate revenue is entirely reliant on our ability to market and sell this product.

Even if we obtain the necessary regulatory approvals in all jurisdictions to commercialize the HeartWare System or any other product that we may develop, our products may not gain or sustain market acceptance among physicians, patients, health care payers or the medical community.

The degree of market acceptance of any of the devices that we may develop and commercialize will depend on a number of factors, including:

 

   

the perceived effectiveness of the product;

 

   

the prevalence and severity of any adverse events or side effects especially as it relates to survival, quality of life, stroke, thrombus and bleeding;

 

   

potential advantages over alternative treatments or competitive products;

 

   

the strength of our marketing and distribution support;

 

   

the strength and perceived advantages of our peripherals such as the monitor, controller and batteries; and

 

   

sufficient third-party coverage or reimbursement.

If the HeartWare System, or any other product that we may develop, does not achieve an adequate level of acceptance by physicians, patients, health care payers and the medical community, we may not generate or maintain positive gross margins and we may not become profitable or be able to sustain profitability. If we do achieve market acceptance of our products, we may not be able to sustain it or otherwise achieve it to a degree which would support the ongoing viability of our operations.

If we are unable to manage our expected growth, we may not be able to meet market demand, generate expected benefits from the opportunities available to us, satisfy quality regulations or commercialize our product candidates.

We expect to continue to expand our operations and grow our research and development, product development, quality, regulatory, manufacturing, sales, marketing and administrative operations. This expansion has placed, and is expected to continue to place, a significant strain on our management, infrastructure and operational and financial resources. To manage continued growth and to commercialize our products, we will be required to improve existing operational, quality and financial systems, procedures and controls and expand, train and manage our growing employee base. Specifically, our information technology and back-up systems will need to be upgraded to accommodate our growth. In addition, we will need to manage relationships with various persons and entities participating in our clinical trials, quality systems, manufacturers, suppliers and other organizations, including various regulatory bodies in the United States and other jurisdictions. We may not be able to implement needed improvements in an efficient and timely manner and may discover deficiencies in existing systems and controls. Our failure to accomplish any of these tasks could materially harm our business.

 

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Our ability to achieve profitability from a current net loss level will depend on our ability to increase gross revenue and reduce the per-unit cost of producing the HeartWare System by increasing our customer orders and manufacturing volume.

Currently, gross sales and the gross profit from sales of the HeartWare System are not sufficient to cover our operating expenses. To achieve profitability, we need to, among other things, substantially reduce the per-unit cost of our products. We believe this can be achieved by decreasing our product assembly costs and increasing our manufacturing volume, which may allow for volume purchase discounts to reduce our raw material and component costs and improve absorption of manufacturing overhead costs. If we are unable to increase sales and simultaneously reduce assembly, raw material, component and manufacturing overhead costs, our ability to achieve profitability will continue to be severely constrained. Any increase in manufacturing volumes must be accompanied by a concomitant increase in customer orders. As part of our efforts to prepare for commercialization in the U.S. and expanded sales globally, we have added an additional manufacturing facility in Miami Lakes, Florida. The lease for this facility will increase our operating expenses. The occurrence of one or more factors that negatively impact sales of our products or our ability to forecast future sales may prevent us from achieving our desired increase in manufacturing efficiency, which would prevent us from attaining profitability.

We compete against companies that have longer operating histories, more established or approved products and greater resources than we do, which may prevent us from achieving further market penetration or improving operating results.

Competition in the medical device industry is intense. Our products will compete against products offered by public companies, such as Thoratec Corporation, as well as several private companies, such as Jarvik Heart, Circulite, Evaheart and Terumo Heart, Inc. Some of these competitors have significantly greater financial and human resources than we do and have established reputations or approved products or significantly greater name recognition, as well as distribution channels and sales and marketing capabilities that are significantly larger and more established than ours. For example, Thoratec Corporation has received marketing approval in the United States for HeartMate II for both destination and bridge-to-transplant indications. Additional competitors may enter the market, and we are likely to compete with new companies in the future. We also face competition from other medical therapies which may focus on our target market as well as competition from manufacturers of pharmaceutical treatments and other devices that have not yet been developed. Competition from these companies could adversely affect our business.

In addition, in Europe our customers are geographically dispersed and, at this stage, a significant portion of our revenue is sourced in Germany among a small number of clinical sites, which also use other competing products. If these sites were to cease using our products or use our products on a reduced or inconsistent basis, such events would have a material adverse effect on our financial condition and results of operations.

Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their products. Factors affecting our competitive position include:

 

   

the availability of other products and procedures, such as heart transplants;

 

   

product performance and design;

 

   

product safety;

 

   

sales, marketing and distribution capabilities;

 

   

comparable clinical outcomes;

 

   

success and timing of new product development and introductions; and

 

   

intellectual property protection.

 

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We are still building our sales, marketing and distribution experience.

To develop and increase sales, distribution and marketing capabilities, we will continue to invest significant amounts of financial and management resources. In developing these sales, marketing and distribution functions ourselves, we will face a number of risks, including:

 

   

we may not be able to attract and build a significant, successful or qualified marketing or sales force;

 

   

the cost of establishing, training and providing regulatory oversight for a marketing or sales force may be substantial; and

 

   

there are significant legal and regulatory risks in medical device marketing and sales, and any failure to comply with all legal and regulatory requirements for sales, marketing and distribution could result in enforcement action by the FDA or other authorities that could jeopardize our ability to market the product or could subject us to substantial liability.

We have limited manufacturing capabilities and personnel, and if our manufacturing facilities are unable to provide an adequate supply of products, our growth could be limited and our business could be harmed.

We currently manufacture our HeartWare System at our facilities in Miami Lakes, Florida. If there were a disruption to our manufacturing facilities or the surrounding area, for example, due to a hurricane or climate change, we would have no other means of manufacturing our HeartWare System until we were able to restore the manufacturing capability at our facility or develop alternative manufacturing facilities.

If we are unable to produce sufficient quantities of our HeartWare System for sale or for use in our current and planned clinical trials, or if our manufacturing process yields substandard product, our development and commercialization efforts would be delayed. Further, even if we are able to produce sufficient quantities of our products, we may not be able to attain sufficient profitability on that production or any resultant sales.

We currently have limited resources, facilities and experience to commercially manufacture our products. In order to produce our products in the quantities that we anticipate will be required to meet anticipated market demand, we will need to increase the production process and efficiency over the current level of production. There are significant technical and regulatory challenges to increasing manufacturing capacity and efficiency, and developing commercial-scale manufacturing facilities will require the investment of additional funds and hiring and retaining additional management and technical personnel who have the necessary manufacturing experience. We may not successfully complete any required increase in a timely or economically viable manner or at all. If we are unable to do so, we may not be able to produce the HeartWare System in sufficient quantities to meet future demand.

If we are unable to manufacture a sufficient or consistent supply of the HeartWare System or any other product we are developing, or if we cannot do so efficiently, our revenue, business and financial prospects would be adversely affected.

Fluctuations in foreign currency exchange rates could adversely affect our financial results.

Changes in foreign currency exchange rates can affect the value of our assets, liabilities, costs and revenue. To date, the majority of our revenue has been sourced from international sales, mainly in Europe and denominated in Euros, while most of our expenditures are incurred in U.S. dollars. We presently derive revenue in the United States from our clinical trials but until our products receive regulatory approval in the United States, if ever, our United States sourced revenue will likely constitute less than half of our net revenue.

With limited exceptions, our international sales will be denominated in Euros or in local currencies, not U.S. dollars, and fluctuations in foreign currency exchange rates, especially an appreciation of the U.S. dollar against major international currencies, will materially impact our revenue and earnings. Due to the size and stage of development of our operations and revenue, we do not presently mitigate our exposure to exchange risk to a significant extent other than by holding the majority of our funds in U.S. dollars or U.S. dollar-denominated investments.

 

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We manufacture a Class III device implanted in the heart that subjects us to numerous risks.

There are risks associated with implanting our device in end-stage heart failure patients, including, but not limited to, death, bleeding, stroke, device malfunction and other adverse events; should our customers experience an increase in adverse events, they may reduce their usage or purchase of our device; should our patients experience injury due to these events, they may sue us. Any of these occurrences could have an adverse impact on our operations and financial results and condition.

Our manufacturing facilities and the manufacturing facilities of our suppliers must comply with applicable regulatory requirements. If we fail to achieve regulatory approval for these manufacturing facilities, our business and our results of operations would be harmed.

Completion of our clinical trials and commercialization of our products require access to, or the development of, manufacturing facilities that meet and maintain applicable regulatory standards to manufacture a sufficient supply of our products. In addition, the FDA must approve facilities that manufacture our products for U.S. commercial purposes, as well as the manufacturing processes and specifications for the product, with similar, additional approvals required in order to achieve CE marking in Europe. Suppliers of components of, and products used to manufacture, our products must also comply with FDA and foreign regulatory requirements, which often require significant time, money, resources and record-keeping and quality assurance efforts and subject us and our suppliers to potential regulatory inspections and stoppages. If we or our suppliers fail to comply with the regulatory requirements for our manufacturing operations, our commercialization efforts could be delayed, which would harm our business and our results of operations.

We may not meet regulatory quality standards applicable to our manufacturing and quality processes, which could have an adverse effect on our business, financial condition or results of operations.

Even after products have received marketing approval or clearance, product approvals and clearances by the FDA or other regulatory bodies can be withdrawn due to failure to comply with regulatory standards or the occurrence of problems following initial approval whether identified through a required post-approval study or through medical device reporting. As a device manufacturer, we are required to demonstrate and maintain compliance with a variety of regulatory requirements, including the FDA’s Quality System Regulation, or “QSR.” The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products, including trend analysis and corrective and preventative actions. The FDA enforces the QSR through periodic unannounced site inspections. In addition, the U.S. federal medical device reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. Our failure to comply with the QSR or to take satisfactory corrective action in response to an adverse QSR inspection could result in enforcement actions, including a public warning letter, a shutdown of or restrictions on our manufacturing operations, delays in approving or clearing a product, refusal to permit the import or export of our products, a recall or seizure of our products, fines, injunctions, civil or criminal penalties, or other sanctions, any of which could cause our business and operating results to materially suffer.

In the European Union, we are required to maintain certain ISO certifications in order to sell our products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications. If we fail to continue to comply with ISO regulations, European Union organizations may withdraw clearance to market, require a product recall or take other enforcement action.

 

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Product issues could result in recalls, substantial costs and write-downs; this could also lead to delay or termination of ongoing trials.

Our products are subject to various regulatory guidelines, involve complex technologies and are approved for a specified life. Identified quality problems, such as failure of critical components such as batteries or controllers, or the failure of third parties to supply us with sufficient quantities of these products or components, could lead to adverse clinical events that could cause us to amend, repeat or terminate clinical trials, or impact the availability of our product in the marketplace. In addition, product improvements, product redundancies or failure to sell products before they expire could result in scrapping or expensive rework of products, and our business, financial condition or results of operations could suffer. Quality issues could result in the scrapping, rework, recall or replacement of entire lots of products, substantial costs and write-offs and harm to our business reputation and financial results. Further, such activities could adversely affect our relationships with our customers or affect our reputation, which in turn could materially adversely affect our earnings, results and financial viability.

We plan to operate in multiple regulatory environments that require costly and time consuming approvals.

Even if we obtain regulatory approvals in specific jurisdictions to commercialize the HeartWare System or any other product that we may develop, sales of our products in other jurisdictions will be subject to regulatory requirements that vary from country to country. The time and cost required to obtain approvals from these countries may be longer or shorter than that required for FDA approval, and requirements for licensing may differ from those of the FDA. Some jurisdictions may even require additional trials be conducted. Laws and regulations regarding the manufacture and sale of our products are subject to future changes, as are administrative interpretations and policies of regulatory agencies. If we fail to comply with applicable foreign, federal, state or local market laws or regulations, we could be subject to enforcement actions. Enforcement actions could include product seizures, recalls, withdrawal of clearances or approvals, and civil and criminal penalties, which in each case would harm our business.

If we fail to obtain and maintain adequate levels of reimbursement for our products by third-party payers, there may be no commercially viable markets for our products or the markets may be much smaller than expected.

Although our customers have generally achieved reimbursement for the purchase of our products to date, the availability and levels of reimbursement by governmental and other third-party payers affect the market for our products. Reimbursement and health care payment systems vary significantly by country, and include both government sponsored health care and private insurance. Payers may attempt to limit coverage and the level of reimbursement of new therapeutic products or experimental devices. Government and other third-party payers also continually attempt to contain or reduce the costs of health care by challenging prices charged for health care products and services. Often, reimbursement is determined independently of and only following product approval.

To obtain reimbursement or pricing approval in some countries, we may be required to produce clinical data, which may involve one or more clinical trials, that compares the cost-effectiveness of our products to other available therapies. In addition, the efficacy, safety, performance and cost-effectiveness of our products in comparison to any competing products may determine the availability and level of reimbursement for our products.

We believe that future reimbursement may be subject to increased restrictions both in the United States and in international markets. Future legislation, regulation or reimbursement policies of third-party payers may adversely affect the demand for our existing products as well as products currently under development and limit our ability to sell our products on a profitable basis. We cannot predict how pending or future legislative and regulatory proposals would influence the manner in which medical devices, including ours, are purchased or covered and reimbursed.

If reimbursement for our products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels, market acceptance of our products would be impaired and our future revenue would be

 

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materially adversely affected. Historically, we have been unable to implant a significant number of patients under our investigational device exemption, or IDE, in the United States as the relevant insurance providers refused to provide reimbursement for our products on the basis that our products are “experimental” or “investigational” and do not have the requisite regulatory approval in the United States. Until approval of our products in the United States, this requirement will continue to materially adversely affect our revenue, earnings, business and stock price.

Destination therapy procedures represent an increasing share of ventricular assist device implants. Although we are currently conducting a destination therapy trial, we will be unable to apply for approval of a destination therapy indication for several years.

Hospitals must meet specific regulatory or reimbursement requirements in order to perform destination therapy procedures. If physicians and hospitals do not enroll patients in our current U.S. destination therapy trial, or use our products in the future when we have an approved destination therapy indication, our market opportunities will be diminished. The number of destination therapy procedures actually performed depends on many factors, most of which are out of our direct control, including:

 

   

the number of sites approved for destination therapy by relevant regulatory agencies;

 

   

the clinical outcomes of destination therapy procedures;

 

   

cardiology and referring physician education, and their commitment to destination therapy;

 

   

the economics of the destination therapy procedure for individual hospitals, which includes the costs of the ventricular assist device (“VAD”) and related pre- and post-operative procedures and their reimbursement; and

 

   

the economics of hospitals not conducting a destination therapy procedure, including the costs and related reimbursements of long-term hospitalization and alternative therapies.

The different outcomes of these and other factors, and their timing, may have a material and adverse effect on our future results.

In addition, our primary competitor has received a destination therapy indication for its product. If physicians grow accustomed to that device for destination therapy and become unwilling to use our device for this indication once approved, our ability to participate in and benefit from this opportunity may suffer.

The long and variable sales and deployment cycles for our VAD systems may cause our product sales and operating results to vary significantly from quarter to quarter.

Our VAD systems have lengthy sales cycles and we may incur substantial sales and marketing expenses and expend significant effort without making a sale. Even after making the decision to purchase our VAD systems, our customers often deploy our products slowly, and this time period may be extended if our products are acquired on a consignment basis, as is the case for most of our customers. In addition, cardiac centers that buy the majority of our products are usually led by cardiac surgeons who are heavily recruited by competing centers or by centers looking to increase their profiles. When one of these surgeons moves to a new center, we sometimes experience a temporary but significant reduction in purchases by the departed center while it replaces its lead surgeon. As a result, it is difficult for us to predict the quarter in which customers may purchase our VAD systems and our product sales and operating results may vary significantly from quarter to quarter.

Adverse changes in general economic conditions in the United States and overseas could adversely affect us.

We are subject to the risks arising from adverse changes in general economic conditions. Many global economies remain sluggish as they recover from a severe recession and unprecedented turmoil. The U.S. and other developed economies continue to suffer from market volatility, difficulties in the financial services sector, tight credit markets, softness in the housing markets, concerns of inflation, reduced corporate profits and capital spending, significant job losses or slower than expected job creation, reduced consumer spending and continuing

 

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economic uncertainties. The turmoil and the uncertainty about future economic conditions could negatively impact our current and prospective customers, adversely affect the financial ability of governments and health insurers to pay claims, adversely impact our expenses and ability to obtain financing of our operations, cause delays or other problems with key suppliers and increase the risk of counterparty failures. We cannot predict the timing, strength or duration of the lingering effects of the severe global economic downturn or the timing or strength of the subsequent recovery. Healthcare spending in the United States and foreign jurisdictions has been, and is expected to continue to be, negatively affected by these economic trends. For example, patients who have lost their jobs may no longer be covered by an employer-sponsored health insurance plan and patients reducing their overall spending may eliminate purchases requiring co-payments. Since the sale of the HeartWare System to a new patient is generally dependent on the availability of third-party reimbursement and normally requires the patient to make a significant co-payment, the impact of the recession on our potential customers may reduce the referrals generated and thereby reduce our customer orders. Similarly, the impact of the challenging economy on our existing customers may cause some of them to cease purchasing HeartWare Systems and this will reduce our revenue, which in turn will make it more difficult to achieve the per-unit cost-savings which are expected to be attained through increases in our manufacturing volume.

The severe recession has impacted the financial stability of many private health insurers. As a result, it has been reported that some insurers are scrutinizing claims more rigorously and delaying or denying reimbursement more often. Although VAD procedures occur in relatively limited numbers, the per-procedure reimbursement levels may draw the attention of third party payers. Since the sale of the HeartWare System is generally dependent on the availability of third-party reimbursement, any delay or decline in such reimbursement will adversely affect our revenue.

Healthcare policy changes, including recent federal legislation to reform the U.S. healthcare system, may have a material adverse effect on us.

In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the federal government, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. Certain of these proposals could limit the prices we are able to charge for our products or the amounts of reimbursement available for our products and could limit the acceptance and availability of our products. Moreover, as discussed below, recent federal legislation would impose significant new taxes on medical device makers such as us. The adoption of some or all of these proposals, including the recent federal legislation, could have a material adverse effect on our financial position and results of operations.

On March 23, 2010, the Patient Protection and Affordable Care Act (referred to herein as the “PPACA”) was signed into law by President Obama. On March 30, 2010, a companion bill, the Health Care and Education Reconciliation Act of 2010 (referred to herein as the “Reconciliation Act”), was also signed into law by President Obama. Among other things, the PPACA and the Reconciliation Act (together referred to herein as the “Acts”), when taken together, impose a 2.3% excise tax on the sale of certain medical devices that will take effect in 2013. In addition, it is possible that standard setters or regulators may address certain unique aspects of the accounting for the Acts in the future. In light of the inherent uncertainty of how these Acts and other companion legislation, if any, will be implemented and applied, we are unable to fully predict the actual impact on our financial statements. Other elements of this legislation such as comparative effectiveness research, an independent payment advisory board, transparency requirements, payment system reforms including shared savings pilots and other provisions could meaningfully change the way healthcare is developed and delivered, and may materially impact numerous aspects of our business.

We rely on specialized suppliers for certain components and materials, and we do not have second-source suppliers for all of our components.

We depend on a number of suppliers to successfully manufacture sufficient quantities of the components we use in our products, both our existing commercial products and our products in development. We rely on

 

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suppliers for various critical components including the center post, housing and impeller that are assembled into our primary product, the HeartWare System, as well as finished products that comprise our peripheral and external equipment that is included in the HeartWare System. Lead times for our components are significant and can be up to as long as sixteen weeks and many of our components are manufactured to very tight tolerances and specifications. We do not presently have supply agreements with the vast majority of our key suppliers but have extensive purchase orders in place with these vendors.

We have second-source suppliers for some, but not all, of our components. In particular, we do not have second-source suppliers for our controllers, battery chargers and monitors. Our reliance on third-party suppliers also subjects us to other risks that could harm our business, including:

 

   

we do not believe that we are a major customer of many of our suppliers, in terms of the volume of components and materials that we purchase, and these suppliers may therefore give other customers’ needs higher priority than ours;

 

   

we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms;

 

   

some of our components are extraordinarily complex and must be manufactured to extremely tight tolerances and specifications with the result that our suppliers, especially new suppliers, may make errors in manufacturing that could negatively affect the efficacy or safety of our products or cause our components not to be delivered on time or at all or to be delivered outside of specifications;

 

   

the availability of second-source suppliers may be extremely limited or their implementation as a supplier may be lengthy due to the tight tolerances and specifications in which we typically operate;

 

   

switching components or changes to our components, specifications or designs may require product redesign and submission to the FDA or a Premarket Approval (“PMA”) supplement, which can lead to production interruptions;

 

   

our suppliers manufacture products for a range of customers, and fluctuations in demand for the products these suppliers manufacture for others may affect their ability to deliver products to us in a timely manner; and

 

   

our suppliers may encounter financial hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements.

Any interruption or delay in obtaining products from our third-party suppliers, or our inability to obtain products from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competing products.

While we have identified second-source suppliers for some key components, we have not entered into written agreements with these suppliers and we cannot assure you that we will be able to maintain our manufacturing schedule without undue delay or substantial cost if any of these arrangements is terminated.

Additionally, we may experience problems or delays in our own manufacturing and assembly processes, which may be harmful to our financial status or reputation and therefore make it more difficult or expensive for us to continue with or enter into relationships with specialized suppliers. Our business plan is predicated on maintaining strong relationships and favorable supply arrangements with a series of external parties to manufacture components of our HeartWare System. If we are unsuccessful in this regard or are unable to secure or maintain agreements with these manufacturers on favorable terms or at all, then our ability to commercialize our technology and expand our operations will be dramatically impaired.

We may not be able to effectively protect our intellectual property rights, which could have an adverse effect on our business, financial condition or results of operations.

Our success depends in part on our ability to obtain and maintain protection in the United States and other countries of the intellectual property relating to or incorporated into our technology and products. Our patent

 

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portfolio consists of internally developed technology as well as patents and patent applications which we acquired in 2003 in connection with our purchase in bankruptcy of substantially all the assets of Kriton Medical, Inc. and which pertain to technology used in the HeartWare System. As a result, we may have less complete knowledge and records with respect to the development and ownership of the Kriton technology, patents and intellectual property than we would otherwise have for technology, patents and intellectual property developed internally by us.

Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will provide us with any meaningful protection or any competitive advantage. Even if issued, existing or future patents may be challenged, including with respect to the development and ownership thereof, or narrowed, invalidated or circumvented, which could limit our ability to stop competitors from developing and marketing similar products or limit the length of terms of patent protection we may have for our products. Further, other companies may design around technologies we have patented, licensed or developed. Moreover, changes in patent laws or their interpretation in the United States and other countries could also diminish the value of our intellectual property or narrow the scope of our patent protection. In addition, the legal systems of certain countries do not favor the aggressive enforcement of patents, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. In addition, in November 2005, we entered into a settlement agreement with Ventrassist Pty., Limited, Ventracor Limited (such entities collectively referred to as “Ventracor”) and the University of Technology, Sydney, under which the parties resolved all of the claims and counterclaims filed by the parties in the United States District Court for the Southern District of Florida in 2004 and 2005, and agreed to mutual non-assertion covenants. As part of that agreement, we agreed not to sue Ventracor or the University of Technology, Sydney, or any of their respective successors, assigns, affiliates, customers or suppliers for infringement of 29 of our issued U.S. and worldwide patents existing as of the date of the agreement or any patents that issue from any patent applications existing as of such date (including any type of patent that claims priority or shares common priority to such patents). We also agreed not to sue such parties for infringement of all of our issued patents existing as of September 30, 2005, or any patents that issue from any patent applications existing as of such date, in respect of Ventracor’s blood pump devices existing as of the date of the agreement or any device embodying a modification of such devices which does not give rise to a new independent claim for patent infringement. As a result, Ventracor, the University of Technology, Sydney, or their respective successors or assigns may commercialize competing technology or products that would have otherwise been precluded by our patents subject to the agreement. We understand that Ventracor’s patent portfolio, or certain elements therein, have since been acquired by Thoratec Corporation.

In order to preserve and enforce our patent and other intellectual property rights, we may need to make claims or file lawsuits against third parties. This can entail significant costs to us and divert our management’s attention from developing and commercializing our products. The occurrence of these events may have a material adverse effect on our business, financial condition or results of operations.

In 2011, the America Invents Act was signed into law. The act in part seeks to more closely align patent law in the U.S. with similar laws around the world. The impact of the law is not yet clear and may alter the relative priority of our inventions and require us to act more quickly to seek intellectual property protection.

Claims that our current or future products infringe or misappropriate the proprietary rights of others could adversely affect our ability to sell those products and cause us to incur additional costs.

Substantial litigation over intellectual property rights exists in the medical device industry. We expect that we could be increasingly subject to third-party infringement claims as our revenue increases, the number of competitors grows and the functionality of products and technology in different industry segments overlaps. Third parties may currently have, or may eventually be issued, patents on which our current or future products or technologies may allegedly infringe. For example, we are aware of certain patents and patent applications owned

 

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by third parties that cover different aspects of mechanical circulatory support, methodologies for the pumping of blood and other fluids and the related devices and technologies. Any of these third parties might assert a claim of infringement against us.

In particular, in an August 2008 letter, Jarvik Heart invited us to discuss “an exclusive license” as it relates to a Jarvik patent concerning hybrid blood pumps. The patent referenced by this letter relates to technology that is material to our business. We have not had any substantive discussions with Jarvik Heart concerning this matter since our receipt of this letter and we do not believe that our blood pump infringes this patent. In addition, we received a letter from Abiomed, Inc. in September 2009 in which Abiomed suggested that we “may be interested in licensing Abiomed’s technology” as it relates to an Abiomed patent concerning bearingless blood pumps. Further, in a subsequent letter received in February 2010, it was stated that Abiomed was “concerned that HeartWare’s left ventricular assist rotary blood pump infringes one or more claims” of an Abiomed patent. We have had limited communications with Abiomed, Inc. since receipt of the initial letter. The patent referenced by these letters relates to technology that is potentially material to our business and any litigation in this regard, irrespective of the outcome, may have a material adverse effect on our financial position, liquidity or results of operations. We believe the HeartWare System does not infringe this patent.

There can be no certainty that litigation will not arise in relation to the above or other matters or, if it does arise, there can be no certainty that it will be determined in a manner which is favorable to us. Any litigation, regardless of its outcome, would likely result in the expenditure of significant financial resources and the diversion of management’s time and resources. In addition, litigation in which we are accused of infringement may cause negative publicity, adversely impact prospective customers, cause product shipment delays, prohibit us from manufacturing, marketing or selling our current or future products, require us to develop non-infringing technology, make substantial payments to third parties or enter into royalty or license agreements, which may not be available on acceptable terms or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our revenue may decrease substantially and we could be exposed to significant liability. A court could enter orders that temporarily, preliminarily or permanently enjoin us or our customers from making, using, selling, offering to sell or importing our current or future products, or could enter an order mandating that we undertake certain remedial activities. Claims that we have misappropriated the confidential information or trade secrets of third parties can have a similar negative impact on our reputation, business, financial condition or results of operations.

We may need to initiate lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive and, if we lose, could cause us to lose some of our intellectual property rights, which would harm our ability to compete in the market.

We rely on patents to protect a portion of our intellectual property and our competitive position. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in the medical device industry are generally uncertain. In order to protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. Litigation may be necessary to:

 

   

assert claims of infringement;

 

   

enforce our patents;

 

   

protect our trade secrets or know-how; or

 

   

determine the enforceability, scope and validity of the proprietary rights of others.

Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert claims

 

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against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may have a material adverse effect on our business, financial condition and results of operations.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

In addition to patented technology, we rely on a combination of non-patented proprietary technology, trade secrets, processes, procedures, technical knowledge and know-how accumulated or acquired since inception. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated. We generally seek to protect this information by confidentiality, non-disclosure and assignment of invention agreements with our employees, consultants, scientific advisors and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may be disclosed to or otherwise become known or be independently developed by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. If our intellectual property is disclosed or misappropriated, it would harm our ability to protect our rights and have a material adverse effect on our business, financial condition and results of operations.

We may be subject to claims that our employees or we have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of former employers of our employees.

We employ individuals who were previously employed at other medical device companies, including our competitors or potential competitors. To the extent that our employees are involved in research areas that are similar to those in which they were involved with their former employers, we may be subject to claims that such employees have inadvertently or otherwise used or disclosed the alleged trade secrets or other proprietary information of the former employers. Litigation may be necessary to defend against such claims.

We are subject to federal and state laws prohibiting “kickbacks” and false or fraudulent claims, which, if violated, could subject us to substantial penalties. Foreign jurisdictions in which we operate may have similar laws. Additionally, any challenge to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business. We can be liable for our distributors’ failure to comply with these laws as well.

A federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar state and foreign laws, prohibit payments that are intended to induce physicians or others either to refer patients or to acquire or arrange for or recommend the acquisition of healthcare products or services. These laws constrain our sales, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with hospitals, physicians or other potential purchasers of medical devices. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent, or for items or services that were not provided as claimed. Because we may provide some coding and billing information to purchasers of the HeartWare System and our other products, and because we cannot assure that the government will regard any billing errors that may be made as inadvertent, these laws are potentially applicable to us. In addition, these laws are potentially applicable to us because we provide reimbursement to healthcare professionals for training patients on the use of the HeartWare System and our other products. Anti-kickback and false claims laws prescribe civil and criminal penalties for noncompliance, which can be substantial. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity, and be costly to respond to, and thus could have a material adverse effect on our business, financial condition or results of operations. In addition, under certain circumstances, we may be liable for the actions of our distributors to the extent they do not comply with the laws described above.

 

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If we are found to have violated laws protecting the confidentiality of patient health information, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business.

There are a number of federal and state and foreign laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated patient privacy rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their own health information and limiting most use and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. If we are found to be in violation of the privacy rules under HIPAA or similar laws (to the extent applicable to us), we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material adverse effect on our business, financial condition and results of operations. European privacy laws are generally more stringent than similar laws in the United States. Since a majority of our revenue arises in Europe, we may be at risk should we fail to comply with local requirements even if we have complied with U.S. regulations.

If we fail to successfully introduce next generation products and improvements to our existing product, our future growth may suffer.

As part of our strategy, we intend to develop and introduce a number of next generation products and make enhancements to our existing product. We also intend to develop new indications for our existing products. If we are slow in bringing new products to market or otherwise fail to successfully develop, manufacture, design clinical trials for, introduce or commercialize any of these new products, product improvements and new indications on a timely basis, or if they are not well accepted by the market, our future growth may suffer. For example, we are developing a next generation pump based on our miniaturized ventricular assist device (“MVAD”) technology, designing a new and improved controller and working on a clinical strategy for a bi-ventricular indication, among others. If we are not successful in these efforts, among others, our future business opportunities and growth potential will suffer.

If we choose to license, invest in or acquire new businesses, products or technologies, in addition to or instead of developing them ourselves, these licenses, investments or acquisitions could disrupt our business and could result in the use of significant amounts of equity, cash or a combination of both.

From time to time we may seek to license, invest in or acquire new businesses, products or technologies, in addition to or instead of developing similar technologies ourselves. Licenses, investments and acquisitions involve numerous risks, including:

 

   

the inability to complete the license, investment or acquisition;

 

   

disruption of our ongoing businesses and diversion of the attention of management and other personnel;

 

   

difficulties in integrating the acquired entities, products or technologies;

 

   

risks associated with acquiring intellectual property;

 

   

difficulties in operating the acquired business profitably;

 

   

the inability to achieve anticipated synergies, cost savings or growth;

 

   

potential loss of key employees, particularly those of the acquired business;

 

   

difficulties in transitioning and maintaining key customer, distributor and supplier relationships;

 

   

risks associated with entering markets in which we have no or limited prior experience; and

 

   

unanticipated costs.

 

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In addition, any future licenses, investments or acquisitions may result in one or more of the following:

 

   

dilutive issuances of equity securities, which may be sold at a discount to market price;

 

   

the use of significant amounts of cash;

 

   

the incurrence of debt;

 

   

the assumption of significant liabilities;

 

   

increased operating costs or reduced earnings;

 

   

financing obtained on unfavorable terms;

 

   

large one-time expenses;

 

   

sharing of revenue or profits with third parties; and

 

   

the creation of certain intangible assets, including goodwill, the write-down of which in future periods may result in significant charges to earnings.

Any of these factors could materially harm our stock price, business, financial condition and results of operations.

If we cannot successfully manage the additional business and regulatory risks that result from our expansion into multiple foreign markets, we may experience an adverse impact to our business, financial condition and results of operations.

We have aggressively expanded, and expect to continue to expand, into additional foreign markets. This expansion will subject us to new business and regulatory risks, including, but not limited to:

 

   

failure to fulfill foreign regulatory requirements on a timely basis or at all to market the HeartWare System or other future products;

 

   

availability of, and changes in, reimbursement within prevailing foreign health care payment systems;

 

   

adapting to the differing laws and regulations, business and clinical practices, and patient preferences in foreign countries;

 

   

difficulties in managing foreign relationships and operations, including any relationships that we may establish with foreign partners, distributors or sales or marketing agents as well as compliance with the Foreign Corrupt Practices Act and the United Kingdom’s Bribery Act;

 

   

differing levels of protection for intellectual property rights in some countries;

 

   

difficulty in collecting accounts receivable and longer collection periods;

 

   

costs of enforcing contractual obligations in foreign jurisdictions;

 

   

recessions in economies outside of the United States;

 

   

political instability and unexpected changes in diplomatic and trade relationships;

 

   

currency exchange rate fluctuations; and

 

   

potentially adverse tax consequences, including our ability to interpret local tax rules and implement appropriate tax treatment/collection.

We will be impacted by these additional business risks, which may adversely impact our business, financial condition and results of operations. In addition, expansion into additional foreign markets imposes additional burdens on our small executive and administrative personnel, research and sales department and generally limited managerial resources. Our efforts to introduce our current or future products into additional foreign markets may not be successful, in which case we may have expended significant resources without realizing the expected benefit. Ultimately, the investments required for expansion into additional foreign markets could exceed the returns, if any, generated from this expansion.

 

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The taxation and customs requirements, together with other applicable laws and regulations of certain foreign jurisdictions, can be inherently complex and subject to differing interpretation by local authorities. We are subject to the risk that either we have misinterpreted applicable laws and regulations, or that foreign authorities may take inconsistent, unclear or changing positions on local law, customs practices or rules. In the event that we have misinterpreted any of the above, or that foreign authorities take positions contrary to ours, we may incur liabilities that may differ materially from the amounts accrued in our financial statements.

The competition for qualified personnel is particularly intense in our industry. In addition, we have added or made changes to executive personnel during 2011 and may continue to do so as our needs evolve. If we are unable to retain or hire executive and other key personnel, we may not be able to sustain or grow our business.

Our ability to operate successfully and manage our potential future growth depends significantly upon our ability to attract, retain and motivate highly skilled and qualified research, technical, clinical, regulatory, sales, marketing, managerial and financial personnel. During 2011, we hired and expect to continue to hire a substantial number of employees in these areas and others in order to prepare for U.S. commercialization and the expected growth in our global business. During 2012, we filled one of our key open positions, Vice President, Operations, and expect to fill other key open positions, including Chief Financial Officer. However, we face intense competition for qualified personnel, and we may not be able to attract, retain and motivate these individuals. We compete for talent with numerous companies, as well as universities and non-profit research organizations. Our future success also depends on the personal efforts and abilities of the principal members of our senior management and scientific staff to provide strategic direction, manage our operations and maintain a cohesive and stable environment. Although we have employment and incentive compensation agreements with all of our executive officers and incentive and compensation plans for our other personnel providing them with various economic incentives to remain employed with us, these incentives may not be sufficient to retain them. We do not maintain key man life insurance on the lives of any of the members of our senior management. The loss of key personnel for any reason or our inability to hire, retain and motivate additional qualified personnel in the future could prevent us from sustaining or growing our business.

Product liability claims could damage our reputation or adversely affect our business.

The design, manufacture and marketing of human medical devices, particularly implantable life-sustaining medical devices, carries an inherent risk of product liability claims and other damage claims. Such liability claims may be expensive to defend and may result in large judgments against us. A product liability or other damages claim, product recall or product misuse, regardless of the ultimate outcome, could require us to spend significant time and money in litigation or to pay significant damages and could seriously harm our business. We maintain clinical trial insurance and limited product liability insurance. We cannot be certain that such insurance will be sufficient to cover all claims that may be made against us. Our insurance policies generally must be renewed on an annual basis. We may not be able to maintain or increase such insurance on acceptable terms or at reasonable costs. A successful claim brought against us in excess, or outside, of our insurance coverage could seriously harm our financial condition and results of operations. Generally, our clinical trials will be conducted in (and our commercial sales will be made to sites in respect of) patients with serious life-threatening diseases for whom conventional treatments have been unsuccessful or for whom no conventional treatment exists, and, during the course of treatment, these patients could suffer adverse medical effects or die for reasons that may or may not be related to our medical devices. Any of these events could result in a claim of liability. For example, in 2009 we received a claim in connection with the death of a patient from multiple organ failure participating in our clinical trial in Germany. We may receive similar claims from time to time in the future. Such claims against us, regardless of their merit, could result in significant awards against us that could materially adversely harm our business, financial condition, results of operations and prospects. A product liability or other damages claim, product recall or product misuse involving any type of VAD, but especially involving one of ours, could also materially and adversely damage our reputation and the perception of VADs generally and affect our ability to attract and retain customers, irrespective of whether or not the claim or recall was meritorious.

 

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Investors could lose confidence in our financial reports, and the value of our shares may be adversely affected, if our internal controls over financial reporting are found not to be effective by management or by our independent registered public accounting firm or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls.

Management’s assessment of our internal controls over financial reporting is discussed on page 125 of this proxy statement/prospectus. The company’s management, with the participation of the company’s Chief Executive Officer and Vice President of Finance, evaluated the effectiveness of the company’s disclosure controls and procedures, and internal control over financial reporting as of December 31, 2011. Based on that evaluation, the company’s Chief Executive Officer and Vice President of Finance concluded that the company’s disclosure controls and procedures, and internal control over financial reporting are effective as of December 31, 2011. Our independent registered public accounting firm has issued their attestation report on our internal control over financial reporting, which is also included in the “Information About the Companies—HeartWare International, Inc.—Controls and Procedures” section of this proxy statement/prospectus beginning on page 125.

We continue to evaluate our existing internal controls over financial reporting against the standards adopted by the Public Company Accounting Oversight Board, or PCAOB. During the course of our ongoing evaluation of the internal controls, we may identify areas requiring improvement and will design enhanced processes and controls to address any issues identified through this review. As we continue to commercialize our products, we will need to enhance our accounting and financial controls functions, particularly as they relate to accounting for revenue and inventory, and we will need to add more personnel to our financial reporting group. Remediating any deficiencies, significant deficiencies or material weaknesses that have been or could be identified by us or our independent registered public accounting firm may require us to incur significant costs and expend significant time and management resources. We cannot assure you that any of the measures we implement to remedy any deficiencies will effectively mitigate or remedy deficiencies. The existence of one or more deficiencies or weaknesses could affect the accuracy and timing of our financial reporting. Investors could lose confidence in our financial reports, and the value of our shares may be adversely affected if our internal controls over financial reporting are found not to be effective by management or by our independent registered public accounting firm or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls.

Risks Related to HeartWare Common Stock

The price of our common stock may fluctuate significantly.

The ordinary shares of HeartWare Limited had been traded on the ASX from January 31, 2005 until November 13, 2008, when the shares of common stock of HeartWare International, Inc. started trading on the ASX in the form of CHESS Depositary Interests, or CDIs, each representing one thirty-fifth of a share of our common stock. The trading price of the common stock and the CDIs, as applicable, has been, and is likely to continue to be, volatile, which means that it could decline substantially within a short period of time. In addition, our shares of common stock began trading on the NASDAQ Stock Market on February 24, 2009. Prior to that time, there had been no public market for our common stock in the United States. The closing price of our shares of common stock traded on the NASDAQ Stock Market ranged from U.S. $54.90 to U.S. $97.69 in the period from January 1, 2011 to December 31, 2011. The price of our common shares, whether traded in the form of common stock or CDIs, could fluctuate significantly for many reasons, including the following:

 

   

future announcements or new information concerning us or our competitors, reimbursement or the potential market for our products;

 

   

regulatory developments (such as the status of FDA approval of our device for the bridge-to-transplant indication), enforcement actions bearing on advertising, marketing or sales and disclosure regarding completed, ongoing or future clinical trials;

 

   

quarterly variations in operating results and our liquidity, which we have experienced in the past and expect to experience in the future;

 

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introduction of new products or changes in product pricing policies by us or our competitors;

 

   

acquisition or loss of significant customers, distributors or suppliers;

 

   

technology acquisitions or divestitures;

 

   

changes in third party reimbursement practices;

 

   

fluctuations of investor interest in the medical device sector; and

 

   

fluctuations in the economy, world political events, foreign currency movements or general market conditions.

In addition, stock markets in general, and the market for shares of health care stocks in particular, have experienced extreme price and volume fluctuations in recent years, fluctuations that frequently have been unrelated to the operating performance of the affected companies. These broad market fluctuations may adversely affect the market price of our shares. The market price of our shares could decline below its current price and the market price of our shares may fluctuate significantly in the future. These fluctuations may be unrelated to our performance.

We do not intend to pay cash dividends on our common stock in the foreseeable future.

We have never declared or paid any cash dividends on our shares, and we currently do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any earnings to finance the development and expansion of our products and business. Accordingly, our stockholders will not realize a return on their investment unless the trading price of our shares appreciates.

Anti-takeover provisions in our charter documents and Delaware law may discourage a third party from acquiring us, which could limit our stockholders’ opportunities to sell their shares at a premium.

Certain provisions of our Certificate of Incorporation and Bylaws may be considered as having an anti-takeover effect, such as those provisions establishing a classified board of directors, consisting of three classes of directors, and requiring that directors be removed only for cause, authorizing the board of directors to issue from time to time any series of preferred stock and fix the designation, powers, preferences and rights of the shares of such series of preferred stock, prohibiting stockholders from acting by written consent in lieu of a meeting, requiring advance notice of stockholder intention to put forth director nominees or bring up other business at a stockholders’ meeting and prohibiting stockholders from calling a special meeting of stockholders. We are also subject to Section 203 of the Delaware General Corporation Law, which, in general, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless certain conditions specified therein are satisfied. These provisions could have the effect of depriving our stockholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a tender offer or similar transaction.

We may be subject to arbitrage risks.

Investors may seek to profit by exploiting the difference, if any, in the price of our shares of common stock as reflected by the trading price of our CDIs, each representing one thirty-fifth of a share of our common stock, on the ASX and the trading price of our shares of common stock on the NASDAQ Stock Market. Such arbitrage activities could cause the price of our securities (as adjusted to reflect the fact that each CDI represents one thirty-fifth of a share of common stock) in the market with the higher value to decrease to the price set by the market with the lower value.

 

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We are currently considering the possibility of delisting our CHESS Depositary Interests from the Australian Securities Exchange. If we should decide to pursue delisting, the market for our common stock in the United States could be disrupted, which would have an adverse effect on our stock price.

We are currently considering delisting our CHESS Depositary Interests from the Australian Securities Exchange. Any decision will take into account, among other things, due notification, and a desire to minimize the disruption, to stockholders. The delisting of our CHESS Depositary Interests from the ASX could disrupt the market for our common stock listed on the NASDAQ Stock Market in the United States as a result of the sudden influx onto the NASDAQ Stock Market of the shares of our common stock previously represented by CHESS Depositary Interests, which could have an adverse effect on our stock price. In addition, the delisting of our CHESS Depositary Interests from the ASX could have an adverse effect on our ability to raise capital, if needed, on terms acceptable to us.

We may undergo an “ownership change” for U.S. federal income tax purposes, which would limit our ability to utilize net operating losses from prior tax years.

For U.S. federal income tax purposes, we have incurred net losses since our inception. If we undergo an “ownership change” for U.S. federal income tax purposes, our ability to utilize net operating loss carry-forwards from prior years to reduce taxable income in future tax years might be limited by operation of the Internal Revenue Code, either by limiting the amount of net operating losses that can be utilized to offset taxable income in a given year, or in total over the entire carry-forward period. Certain changes in the ownership of our common stock, including the sale of our common stock by Apple Tree Partners I, L.P., one of our largest holders, may result in such an ownership change.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus and the documents incorporated by reference herein contain a number of statements that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements about the financial condition, results of operations, earnings outlook, prospects, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, the timing and likelihood of the closing of the merger and the plans and objectives of management concerning HeartWare, World Heart and the combined company and may include statements for the period following the completion of the merger. Forward-looking statements are generally identifiable by the use of the words “believes,” “expects,” “could,” “will,” “intends,” “should,” “estimate,” “would,” “may,” “anticipates,” “plans,” “target,” “goal” or the negative of these words or other variations on these words or comparable terminology. Statements that address operating or financial performance, events or developments that are expected or anticipated to occur in the future are forward-looking statements, including without limitation:

 

   

any expectations with respect to regulatory submissions and approvals, such as FDA approval of HeartWare’s premarket approval application for the HeartWare System for a bridge-to-transplant indication;

 

   

any expectations with respect to clinical trials, including enrollment in or completion of clinical trials as well as approval of new clinical trials and continued access protocols with respect to existing clinical trials;

 

   

any expectations with respect to the integrity or capabilities of HeartWare’s or World Heart’s intellectual property position;

 

   

statements regarding the ability and plans to commercialize existing products;

 

   

statements regarding the ability and plans to develop and commercialize new products and the expected features and functionalities and possible benefits of these products; and

 

   

any estimates regarding capital requirements and financial performance, including profitability.

We intend all forward-looking statements to be covered by the safe harbor provided by the Private Securities Litigation Reform Act of 1995.

The forward-looking statements involve certain risks and uncertainties. The ability of either HeartWare or World Heart to predict results or the actual effects of its plans and strategies, or those of the combined company, is subject to inherent uncertainty. Factors that may cause actual results or earnings to differ materially from such forward-looking statements include those beginning on page 16 under the section entitled “Risk Factors,” as well as, among others, the following:

 

   

those described and identified in public filings with the SEC made by HeartWare or World Heart from time to time;

 

   

completion of the merger is dependent on, among other things, receipt of World Heart stockholder approval, the timing of which cannot be predicted with precision and which may not be received at all;

 

   

the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

 

   

the integration of World Heart’s business and operations with those of HeartWare may take longer or be more expensive than anticipated and may not generate the anticipated benefits relating to HeartWare’s or World Heart’s existing businesses;

 

   

responses by competitors of HeartWare and World Heart to the merger;

 

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the risk of new and changing regulations and/or regulatory actions in the U.S. and internationally;

 

   

adverse general domestic and international economic conditions;

 

   

the extent and duration of continued and new economic and market disruptions as well as the effect of governmental regulatory proposals to address these disruptions;

 

   

the ability to obtain or maintain regulatory approval of HeartWare’s and World Heart’s products and technologies for sale in the U.S. and internationally;

 

   

the results and timing of clinical trials;

 

   

reimbursement policies and decisions by government agencies and third party payors;

 

   

competing therapies that may currently, or in the future, be available to heart failure patients;

 

   

plans to develop and market new products and the rate of market penetration of new products;

 

   

risks relating to the protection of, and challenges to, intellectual property rights; and

 

   

the exposure to litigation, including the possibility that litigation relating to the merger agreement and transactions contemplated thereby could delay or impede the completion of the merger.

You should understand that forward-looking statements are subject to assumptions and uncertainties and that various factors unknown to either HeartWare or World Heart at this time, in addition to those described elsewhere in this proxy statement/prospectus and in the documents referred to or incorporated by reference in this proxy statement/prospectus, could affect the future results of the combined company following the merger and could cause results to differ materially from those expressed in or implied by these forward-looking statements. The actual results, performance or achievement of HeartWare following the merger could differ significantly from those expressed in, or implied by, our forward-looking statements. In addition, any of the events anticipated by our forward-looking statements might not occur, and if they do occur, we cannot predict what impact they might have on the results of operations and financial condition of HeartWare following the merger. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this proxy statement/prospectus or the date of any document incorporated by reference in this proxy statement/prospectus.

All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this proxy statement/prospectus and attributable to HeartWare or World Heart or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this proxy statement/prospectus. Except to the extent required by applicable law or regulation, HeartWare and World Heart undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this proxy statement/prospectus or to reflect the occurrence of unanticipated events.

 

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THE WORLD HEART SPECIAL MEETING

This proxy statement/prospectus is being furnished to you as part of the solicitation of proxies by World Heart’s board of directors for use at the World Heart special meeting.

Date, Time and Place

The World Heart special meeting will be held at World Heart’s offices at 4750 Wiley Post Way, Suite 120, Salt Lake City, Utah 84116 at 10:00 a.m., local time, on August 2, 2012.

Purpose of the World Heart Special Meeting

You will be asked at the World Heart special meeting to adopt the merger agreement and approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers. The stockholder advisory vote to approve the merger-related compensation for World Heart’s named executive officers is required in connection with the implementation of Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires a stockholder advisory vote on compensation arrangements for named executive officers that are based on or relate to an acquisition, merger or similar transaction.

The World Heart board of directors has determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable, fair to, and in the best interests of, World Heart and its stockholders and recommends that World Heart stockholders vote to adopt the merger agreement and vote in favor of the proposal to approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers. If necessary, you will also be asked to vote on a proposal to adjourn the World Heart special meeting for the purpose of soliciting proxies to vote in favor of the adoption of the merger agreement.

Record Date; Stock Entitled to Vote; Quorum

Only holders of record of World Heart common stock at the close of business on the record date are entitled to notice of and to vote at the World Heart special meeting. Each share of World Heart common stock issued and outstanding on the record date is entitled to one vote at the World Heart special meeting. On the record date, 27,517,749 shares of World Heart common stock were issued and outstanding and held by 76 holders of record. A quorum will be present at the World Heart special meeting if a majority of the outstanding shares of World Heart common stock entitled to vote on the record date are represented in person or by proxy. In the event that a quorum is not present at the World Heart special meeting, or there are not sufficient votes at the time of the World Heart special meeting to adopt the merger agreement, it is expected that the meeting will be adjourned or postponed to solicit additional proxies if the holders of a majority of the shares of World Heart common stock present, in person or by proxy, and entitled to vote at the World Heart special meeting approve an adjournment. Holders of record of World Heart common stock on the record date are entitled to one vote per share at the World Heart special meeting on each proposal presented.

Vote Required

The adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of World Heart common stock on the record date. If you abstain from voting or do not vote, either in person or by proxy, it will have the same effect as a vote “AGAINST” the adoption of the merger agreement.

The approval, on an advisory basis, of the merger-related compensation for World Heart’s named executive officers requires the affirmative vote of the holders of a majority of the shares of World Heart common stock present, in person or by proxy, at the World Heart special meeting, provided a quorum is present. If you abstain from voting, it will have the same effect as a vote “AGAINST” the approval, on an advisory basis, of the merger-related compensation for World Heart’s named executive officers.

 

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The approval of an adjournment of the World Heart special meeting requires the affirmative vote of the holders of a majority of the shares of World Heart common stock present, in person or by proxy, at the World Heart special meeting, whether or not a quorum is present. If you abstain from voting, it will have the same effect as a vote “AGAINST” the approval of an adjournment of the World Heart special meeting.

Voting of Proxies

All shares represented by properly executed proxies received in time for the World Heart special meeting will be voted at the World Heart special meeting in the manner specified by the holders. Properly executed proxies that do not contain voting instructions will be voted “FOR” the adoption of the merger agreement, “FOR” the proposal to approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers and “FOR” approval of the proposal to adjourn the World Heart special meeting, if necessary.

To vote, please complete, sign, date and return the enclosed proxy card or, to appoint a proxy over the Internet or by telephone, follow the instructions provided below. If you attend the World Heart special meeting and wish to vote in person, you may withdraw your proxy and vote in person. If your shares are held in the name of your brokerage firm, bank, trust or other nominee, you must obtain a proxy, executed in your favor, from the holder of record to be able to vote at the World Heart special meeting.

Shares of World Heart common stock represented at the World Heart special meeting but not voted, including shares of World Heart common stock for which proxies have been received but for which stockholders have abstained, will be treated as present at the World Heart special meeting for purposes of determining the presence or absence of a quorum for the transaction of all business.

Only shares affirmatively voted for the adoption of the merger agreement, including properly executed proxies that do not contain specific voting instructions, will be counted “FOR” that proposal. If you abstain from voting, it will have the same effect as a vote “AGAINST” the adoption of the merger agreement, “AGAINST” the proposal to approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers and “AGAINST” the proposal to adjourn the World Heart special meeting, if necessary. If you do not execute a proxy card, it will have the same effect as a vote “AGAINST” the adoption of the merger agreement, “AGAINST” the proposal to approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers and “AGAINST” the proposal to adjourn the World Heart special meeting, if necessary. Brokers who hold shares in street name for customers have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, brokers are precluded from exercising their voting discretion with respect to approval of non-routine matters, such as the adoption of the merger agreement and, as a result, absent specific instructions from the beneficial owner of such shares, brokers are not empowered to vote those shares, referred to generally as “broker non-votes.” Broker non-votes will be treated as shares that are present at the World Heart special meeting for purposes of determining whether a quorum exists and will have the same effect as votes “AGAINST” the adoption of the merger agreement. Broker non-votes will not affect the outcome of the proposal to approve, on an advisory basis, the merger-related compensation for World Heart’s named executive officers and the proposal to adjourn the World Heart special meeting, if necessary.

No business may be transacted at the World Heart special meeting other than the proposal to adopt the merger agreement and, if necessary, the proposal to adjourn the World Heart special meeting.

Voting over the Internet or by Telephone

You may also grant a proxy to vote your shares over the Internet or by telephone. The law of Delaware, under which World Heart is incorporated, specifically permits electronically transmitted proxies, provided that each such proxy contains or is submitted with information from which the inspector of election can determine that such proxy was authorized by the stockholder.

 

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The Internet and telephone voting procedures described below are designed to authenticate stockholders’ identities, to allow stockholders to grant a proxy to vote their shares and to confirm that stockholders’ instructions have been recorded properly. Stockholders granting a proxy to vote over the Internet should understand that there may be costs associated with electronic access, such as usage charges from Internet access providers and telephone companies, that must be borne by the stockholder.

For Shares of Common Stock Registered in Your Name

Stockholders of record may go to www.proxyvoting.com/whrt to grant a proxy to vote their shares over the Internet. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form. Any stockholder using a touch-tone telephone may also grant a proxy to vote shares by calling 1-866-540-5760 and following the recorded instructions.

For Shares Registered in the Name of a Brokerage Firm, Bank, Trust or Other Nominee

Most beneficial owners whose stock is held in street name receive instructions for authorizing votes by their brokerage firms, banks, trusts or other nominees, rather than from World Heart’s proxy card.

A number of brokers and banks are participating in a program that offers the means to authorize votes over the Internet and by telephone. If your shares are held in an account with a broker or bank participating in such a program, you may authorize a proxy to vote those shares over the Internet at the Internet URL specified on the instruction form received from your broker of bank, or by telephone by calling the telephone number shown on the instruction form received from your broker or bank.

General Information for All Shares Voted over the Internet or by Telephone

Votes submitted over the Internet or by telephone must be received by 11:59 p.m., Eastern Time, on August 1, 2012. Submitting your proxy over the Internet or by telephone will not affect your right to vote in person should you decide to attend the World Heart special meeting.

Revocability of Proxies

The grant of a proxy on the enclosed proxy card or over the Internet or by telephone does not preclude a stockholder from voting in person at the World Heart special meeting. You may revoke your proxy at any time before the shares reflected on your proxy card are voted at the World Heart special meeting by:

 

   

filing with World Heart’s corporate secretary a properly executed and dated revocation of proxy;

 

   

submitting a properly completed, executed and dated proxy card to World Heart’s corporate secretary bearing a later date;

 

   

submitting a subsequent vote over the Internet or by telephone; or

 

   

appearing at the World Heart special meeting and voting in person.

Your attendance at the World Heart special meeting will not in and of itself constitute the revocation of a proxy. If you have instructed your broker to vote your shares, you must follow the directions received from your broker to change these instructions.

Solicitation of Proxies

This proxy solicitation is being made by World Heart and paid for by World Heart and HeartWare. World Heart and HeartWare will generally share the cost of filing, printing and mailing this proxy statement/prospectus. World Heart’s directors, officers and employees may also solicit proxies by personal interview, mail, e-mail,

 

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telephone or facsimile. These persons will not be paid additional remuneration for their efforts. World Heart will also request brokers and other custodians, nominees and fiduciaries to forward proxy solicitation material to the beneficial owners of shares of World Heart common stock that the brokers and other custodians, nominees and fiduciaries hold of record.

You should not send your stock certificates with your proxy. A letter of transmittal with instructions for the surrender of common stock certificates will be mailed to World Heart stockholders as soon as practicable after completion of the merger.

Delivery of this Proxy Statement/Prospectus to Multiple Stockholders with the Same Address

The SEC has adopted rules that permit companies and intermediaries (for example, brokers) to satisfy the delivery requirements for proxy statements with respect to two or more stockholders sharing the same address if we believe the stockholders are members of the same family by delivering a single proxy statement addressed to those stockholders. Each stockholder will continue to receive a separate proxy card or voting instruction card. This process, which is commonly referred to as “householding,” potentially means extra convenience for stockholders and cost savings for companies by reducing the volume of duplicate information.

A number of brokers with account holders who are World Heart stockholders will be “householding” World Heart proxy materials. A single proxy statement/prospectus will be delivered to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker or World Heart that they will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent. If your household received a single proxy statement/prospectus, but you would prefer to receive your own copy, please notify your broker and direct your written request to World Heart Corporation, Attention: Investor Relations, 4750 Wiley Post Way, Suite 120, Salt Lake City, UT 84116, or contact World Heart’s Investor Relations Department at (801) 355-6255.

 

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THE MERGER

Background to the Merger

World Heart is a developer of mechanical circulatory support systems. Historically, World Heart focused on the development and sale of a VAD, known as Levacor.

In August 2009, World Heart received conditional approval of its Investigational Device Exemption, or IDE, from the U.S. Food and Drug Administration, or FDA, to begin a bridge-to-transplant, or BTT, clinical study of the Levacor VAD. In January 2010, World Heart received unconditional IDE approval from the FDA for the BTT study. In July 2010, the FDA approved the expansion of the BTT study by ten additional centers, for a total of 20 centers.

In February 2011, World Heart decided to pause enrollment in the BTT study while refinements were made to its Levacor VAD based on initial clinical experience and in light of ongoing communications with the FDA.

On March 31, 2011, World Heart engaged Barclays Capital Inc., or Barclays, to assist World Heart in exploring the potential sale of World Heart. Barclays, together with management of World Heart, identified a target list of potential acquirers consisting primarily of large cap and mid-small cap medical device companies that offered a potential strategic fit.

Beginning the week of April 4, 2011, Barclays contacted 16 potential buyers. Of the 16 companies, five declined to engage in any review of the opportunity, eight agreed to review the material provided by World Heart internally and three, HeartWare, Company A and Company B, expressed initial interest and a desire to conduct due diligence.

During the weeks of April 4, 2011 through May 23, 2011, Barclays made multiple contacts with the three potential buyers, including HeartWare, that had expressed initial interest and followed up with the eight other potential buyers that were reviewing the opportunity internally.

On April 12, 2011, a representative of Barclays contacted Mr. Douglas Godshall, HeartWare’s President and Chief Executive Officer, to gauge HeartWare’s interest in submitting an indication of interest to acquire World Heart as part of the auction process. On the same day, HeartWare signed a confidentiality agreement containing customary confidentiality, standstill and non-solicit provisions.

On April 15, 2011, the board of directors of World Heart held a telephonic meeting with representatives of World Heart management and a representative of Cooley LLP, or Cooley, outside legal counsel, participating. Management updated the board on the sales process.

On April 26, 2011, representatives of Barclays called Mr. Godshall to discuss the availability of HeartWare representatives to meet in person with World Heart representatives. Mr. Godshall agreed that representatives of HeartWare would meet with representatives of World Heart at the meeting of the American Association for Thoracic Surgery in Philadelphia on May 9, 2011.

On May 9, 2011, Mr. John Alexander Martin, the President and Chief Executive Officer of World Heart, Mr. Morgan R. Brown, the Executive Vice President and Chief Financial Officer of World Heart, Mr. Jal Jasswalla, the Executive Vice President and Chief Technology Officer of World Heart, and representatives of Barclays met with Mr. Godshall and Mr. James Schuermann, Senior Vice President of Sales and Marketing of HeartWare, in Philadelphia. At the meeting, the representatives of World Heart made a corporate presentation to HeartWare.

 

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On May 9, 2011, the World Heart team along with representatives of Barclays also met with representatives of Company A to discuss the potential structure of a joint venture and to review the status of World Heart’s programs.

On May 11, 2011, a representative of Barclays provided Mr. Godshall with a World Heart transaction process letter containing specific details for submission of a preliminary acquisition proposal.

On May 13, 2011, Mr. Jeffrey LaRose, Executive Vice President and Chief Scientific Officer of HeartWare, met with Mr. Jasswalla at World Heart’s Oakland facility in order to review the technical aspects of World Heart’s on-going VAD programs.

That same day, the board of directors of World Heart held a telephonic meeting with representatives of World Heart management and a representative of Cooley participating. Management updated the board on the sales process.

On May 16, 2011, representatives of Barclays had a telephone call with representatives of HeartWare during which call HeartWare expressed an interest in moving forward with its discussions with World Heart and requested access to World Heart’s electronic data room in order to commence diligence.

On May 17, 2011, World Heart provided access to its electronic data room to several HeartWare employees.

On May 23, 2011, World Heart management along with representatives of Barclays met with Company B to provide a corporate update.

On May 31, 2011, representatives of Barclays had a telephone call with Mr. Godshall who communicated that no further information was needed by HeartWare at that time.

In late May 2011, HeartWare conducted a series of internal meetings to discuss the value of the World Heart technology and a possible transaction. Ultimately, HeartWare decided to submit a preliminary non-binding indication of interest.

On June 2, 2011, HeartWare retained Shearman & Sterling LLP, or Shearman, as its legal counsel in connection with the potential transaction with World Heart.

By June 3, 2011, Company A and Company B had informed World Heart that they were not interested in pursuing a structured transaction, acquisition of or joint venture with World Heart. All eight companies that were considering the opportunity internally also declined to pursue further review of the potential transaction by this time.

On June 6, 2011, Barclays received an email from Mr. Lawrence Knopf, HeartWare’s Senior Vice President and General Counsel, with HeartWare’s preliminary non-binding indication of interest to acquire 100% of the fully diluted equity of World Heart for $25 million in cash or stock at the election of HeartWare. Later that day, a Barclays representative asked Mr. Knopf to provide a preliminary bid on a per share basis. Mr. Knopf reaffirmed that HeartWare’s preliminary non-binding indication of interest contemplated a fixed amount to acquire the fully diluted equity of World Heart, including all outstanding stock options, warrants and similar rights.

On June 7, 2011, the board of directors of World Heart held a telephonic meeting with representatives of World Heart management and a representative of Cooley participating. Management updated the board on the sales process and HeartWare’s preliminary non-binding indication of interest and the board instructed management and Barclays to communicate to HeartWare that an adequate offer would need to offer a premium price on a relative basis, accounting for the exercise of outstanding warrants.

 

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On June 9, 2011, a representative of Barclays informed Mr. Godshall that HeartWare’s preliminary non-binding indication of interest was inadequate and that an adequate offer would need to offer a premium price on a relative basis, accounting for the exercise of outstanding warrants. Mr. Godshall told the Barclays representative that HeartWare would need to see more information on World Heart to justify a higher price. The Barclays representative said that he would deliver HeartWare’s message to World Heart’s board of directors.

On June 10, 2011, a Barclays representative advised Mr. Godshall that HeartWare had advanced to the next phase of the auction process and that additional diligence materials would be made available to HeartWare.

From June 10, 2011 through June 14, 2011, representatives of Barclays exchanged email correspondence with Mr. Godshall regarding arranging an in-person meeting between representatives of HeartWare and World Heart and specific dates for such a meeting. Mr. Godshall communicated that an in-person meeting was not necessary at that point in time and that HeartWare would continue to review documents in the electronic data room.

On June 14, 2011, Mr. Martin provided an email update to the board of directors of World Heart on the sales process and next steps with HeartWare.

On June 16, 2011, Barclays provided Mr. Godshall with a second transaction process letter inviting HeartWare to submit an offer to acquire World Heart, outlining certain guidelines for the final proposal and setting a deadline of July 12, 2011.

On June 17, 2011, representatives of World Heart had a telephone call with representatives of HeartWare in order to provide a corporate update.

On June 22, 2011, at a regularly scheduled meeting of HeartWare’s board of directors, Mr. Godshall outlined the status of the World Heart auction process, the rationale underlying submission of a preliminary non-binding indication of interest, the technology under development at World Heart, World Heart’s investor profile and management’s requirements for further participation in the auction. After discussion, the board concurred with management’s approach to the opportunity.

On June 23, 2011, the board of directors of World Heart held a telephonic meeting with representatives of World Heart management, Cooley and Barclays. Representatives of Barclays reviewed the sales process and proposed next steps with HeartWare.

On July 12, 2011, a Barclays representative called Mr. Godshall to remind him of the pending deadline for the final proposal. Mr. Godshall indicated that HeartWare had decided not to make an offer to acquire World Heart due to uncertainty with the Levacor VAD program and the amount of cash required to move the MiFlow and PediaFlow VAD programs forward.

On July 13, 2011, the board of directors of World Heart held a telephonic meeting with representatives of World Heart management and Barclays to discuss HeartWare’s decision and to discuss options, including contacting HeartWare again.

On July 14, 2011, a Barclays representative called Mr. Godshall to solicit an increase to HeartWare’s preliminary non-binding indication of interest. Mr. Godshall declined.

Representatives of Barclays’ Capital contacted Mr. Godshall again on July 26, 2011 and were informed that Mr. Godshall needed additional diligence information regarding World Heart.

On July 27, 2011, Mr. Martin and Mr. Godshall discussed what additional information HeartWare might need to consider making a proposal to acquire World Heart. Mr. Martin also asked Mr. Godshall if HeartWare

 

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would consider a joint development agreement with a potential option to purchase. Mr. Godshall expressed initial interest in the new proposed structure but said HeartWare needed additional time to consider the proposal. Over the course of the next several weeks, World Heart continued to make additional diligence materials available to HeartWare.

On July 29, 2011, World Heart announced that it was ceasing its efforts to commercialize the Levacor VAD technology and intended to focus its resources on developing and commercializing its smaller, next-generation MiFlow VAD. With the lengthening BTT study delay associated with device refinements, World Heart did not believe that the Levacor VAD could be competitively commercialized. In connection with this decision, World Heart also announced that it would reduce its workforce by 42% and that it expected its existing capital resources to be sufficient to allow it to adequately advance the MiFlow VAD through the middle of 2012.

On August 4, 2011, Mr. Martin and Mr. Brown had a telephone call with Mr. Godshall to further discuss the joint development structure. Mr. Godshall expressed interest in exploring this structure.

On August 10, 2011, Mr. Martin, Mr. Brown and Mr. Jeff Arnold, a consultant to World Heart, met with Mr. Godshall at HeartWare’s offices in Boston to discuss potential partnership structuring alternatives.

On August 31, 2011, World Heart terminated its engagement letter with Barclays because the sales process had not yielded any potential buyers and the partnering alternatives being discussed with HeartWare were outside the scope of the original engagement with Barclays.

On September 1, 2011, the board of directors of World Heart held a telephonic meeting with representatives of World Heart management and a representative of Cooley participating. Management updated the board on the sales process and discussions with HeartWare and Company A and contacts with at least seven other companies, including Company C, to discuss potential partnering relationships. Other than Company C, none of the other identified partnering candidates were interested in further discussing a strategic transaction.

On September 9, 2011, Mr. Martin, Mr. Jasswalla and Mr. Gill Bearnson, Vice President of Research and Development of World Heart, met with Mr. Godshall, Mr. LaRose and Mr. Schuermann in Louisville to provide a technical update on World Heart’s programs.

On September 13, 2011, Mr. Brown contacted Mr. Godshall to inform him that certain information about World Heart requested by Mr. Godshall was being made available to HeartWare, including a copy of World Heart’s presentation from the September 9 meeting. Informal conversations continued between Mr. Martin and Mr. Godshall over the following weeks.

On September 14, 2011, World Heart initiated discussions with Company C about acquiring rights to the PediaFlow VAD program and related intellectual property. These discussions continued through February 13, 2012, at which point Company C decided not to continue further discussions.

On September 27, 2011, Mr. Martin had an email exchange with Mr. Godshall regarding next steps, including HeartWare’s further interest in a joint development program. Mr. Godshall said he was still considering the proposal.

On the same day, at a regularly scheduled meeting of HeartWare’s board of directors, Mr. Godshall discussed structuring a business relationship with World Heart to continue development of the World Heart technology subject to an option to acquire World Heart at a later date following satisfaction of specified performance milestones. After discussion, the board authorized Mr. Godshall to proceed on the basis outlined to the board.

 

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On October 25, 2011, Mr. Godshall met with Mr. Martin and Mr. Brown in Salt Lake City to discuss possible alternative transaction structures, including a potential partnership arrangement, and was informed that two of World Heart’s three most significant stockholders would prefer a stock-for-stock acquisition rather than waiting for a potential transaction at a later time.

On October 27, 2011, the board of directors of World Heart held a telephonic meeting with representatives of World Heart management and a representative of Cooley participating. Management updated the board on the sales process and discussions with HeartWare, discussions with Company C about acquiring rights to the PediaFlow VAD program and related intellectual property and partnering discussions with Company A, which World Heart management had re-initiated.

During weeks of November 7, 2011 through January 23, 2012, Mr. Martin had periodic telephone conversations with Mr. Godshall concerning a potential joint venture or partnering arrangement.

On December 7, 2011, Mr. Martin suggested to Mr. Godshall that HeartWare consider the development potential of certain of World Heart’s issued and pending patent applications and other intellectual property.

On December 15, 2011, the board of directors of World Heart held a telephonic meeting with representatives of World Heart management and representatives of Cooley participating. Management updated the board on a potential partnership transaction with HeartWare and discussions with Company C about acquiring rights to the PediaFlow VAD program and related intellectual property. Although Company A and Company B had previously indicated that they might not be able to pursue a joint venture strategic transaction, management had contacted Company A and Company B again to determine if they were interested. Management communicated that Company A and Company B might not be able to pursue a joint venture strategic transaction at that time.

On December 20, 2011, Mr. Brown contacted Company B again to determine if Company B had any interest in acquiring certain non-core intellectual property rights from World Heart.

By the end of December, 2011, Company A had declined to pursue a strategic transaction with World Heart.

On January 4, 2012, a member of World Heart’s board of directors was contacted by a private company about the possibility of entering into a reverse merger with World Heart.

On January 9, 2012, Mr. Martin and Mr. Brown met in person with a representative of Company B at the JP Morgan Healthcare Conference in San Francisco to discuss potential licensing of certain non-core intellectual property of World Heart. Company B subsequently submitted a proposal to acquire a non-exclusive license/sublicense to substantially all of World Heart’s intellectual property not related to magnetic levitation and subject to World Heart licenses or patents and patent applications for $250,000. Subsequently, World Heart contacted Company B to attempt to raise the price and Company B declined to do so.

During the weeks of January 9, 2012 through March 19, 2012, World Heart, its management team and some of its directors discussed potential reverse mergers with two private companies.

On January 26, 2012, Mr. Martin and Mr. Godshall discussed the breadth and depth of World Heart’s intellectual property portfolio in greater detail. At Mr. Godshall’s request, World Heart provided HeartWare with additional diligence materials related to intellectual property matters.

During the week of February 1, 2012, Mr. Martin had telephone conversations with Mr. Godshall communicating that World Heart needed a response from HeartWare on its intentions with respect to a strategic transaction, since World Heart was exploring other alternatives including a company wind-down, a distribution and/or a sale of certain intellectual property and a reverse merger transaction.

 

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Following a series of internal discussions at HeartWare, on February 9, 2012, World Heart received a draft proposal letter from HeartWare, in which HeartWare proposed to acquire 100% of the fully diluted equity of World Heart for $7.5 million or alternatively $3 million for the intellectual property assets of World Heart, in each case payable in HeartWare common stock.

On February 10, 2012, the board of directors of World Heart held a telephonic meeting with representatives of World Heart management and representatives of Cooley. Management updated the board on the sales process, including the draft proposal letter from HeartWare.

On February 14, 2012, Mr. Martin had a telephone conversation with Mr. Godshall to discuss raising the offer price. Subsequent to the call, World Heart received a revised draft proposal letter from HeartWare increasing the offered amounts to $8 million for the full acquisition and $3.5 million for the acquisition of the intellectual property assets, payable in HeartWare common stock.

On February 15, 2012, the board of directors of World Heart met with representatives of management and, with representatives of Cooley participating, reviewed the revised offer letter from HeartWare. During the meeting, representatives of Cooley reviewed the board of directors’ fiduciary duties in the context of considering the HeartWare offer and World Heart’s strategic alternatives. The board of directors also reviewed the alternative of selling the entire company for $8 million rather than selling World Heart’s intellectual property to HeartWare for $3.5 million in HeartWare common stock and then pursuing one of the proposed reverse mergers. In considering these alternatives, the board of directors discussed the risks of reverse mergers, the lack of short term liquidity for the stockholders and the risk that the stockholders would not receive a price per share in excess of the price resulting from the $8 million aggregate price offered by HeartWare. Following these discussions, the World Heart board of directors agreed that World Heart should pursue the sale of the entire company to HeartWare and agreed that World Heart could enter into an exclusivity agreement with HeartWare if required by HeartWare in order to proceed with the negotiation of a merger agreement. The World Heart board of directors understood that discussions with reverse merger candidates would need to terminate if an exclusivity agreement were to be executed. The board of directors also discussed and approved a reduction in force subject to discussions with HeartWare as to the retention of certain employees and completion of HeartWare’s scheduled employee interview process.

That same day, at a special meeting of the board of directors of HeartWare, Mr. Godshall updated the board on the potential strategic initiative involving World Heart and summarized recent developments in respect of World Heart, including its discontinued development of the Levacor VAD, reduction in force, declining market capitalization, and the fact that it had received a third party offer to purchase or license certain of its intellectual property assets. The benefits and risks of a transaction with World Heart were discussed, following which the HeartWare board of directors authorized management to continue negotiations with World Heart on the basis presented to the board for the potential acquisition of World Heart for approximately $8 million in HeartWare common stock, subject to satisfactory completion of due diligence and negotiation of definitive acquisition documentation, and to take all steps deemed necessary or appropriate to consummate such a transaction.

Later that day, Mr. Martin notified Mr. Godshall that World Heart had accepted in principle HeartWare’s proposal to acquire 100% of the fully diluted equity of World Heart in a stock-for-stock acquisition, discussed the next steps to continue the diligence process and proposed a call between representatives of World Heart and HeartWare for the following day. Further, Mr. Godshall put Mr. Martin in touch with Mr. Michael Steinberg, HeartWare’s internal chief intellectual property counsel, so that they could coordinate preparation of a summary of World Heart’s intellectual property to be provided to HeartWare’s board of directors.

On February 16, 2012, Mr. Martin and Mr. Brown had a conference call with Mr. Godshall and Mr. Knopf to discuss the diligence process. Later in the day, Mr. Knopf sent Mr. Brown a preliminary due diligence request list.

On February 17, 2012, representatives of HeartWare visited with representatives of World Heart at World Heart’s Salt Lake City offices to discuss the technical projects, meet and evaluate employees, and inspect facility and equipment.

 

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That same day, representatives of Shearman and Cooley, together with Mr. Knopf, discussed transaction structuring and process on a conference call. Later that day, Shearman sent a draft letter of intent to Cooley and HeartWare sent the same draft to World Heart. The draft letter of intent contained an exclusivity agreement. Discussions concerning anticipated development activities, the draft letter of intent and expected provisions of a merger agreement continued over the next several days.

From February 17, 2012 through March 30, 2012, HeartWare and its representatives continued their due diligence review of World Heart.

On February 22, 2012, World Heart provided Mr. Knopf a revised letter of intent incorporating comments of World Heart’s board of directors and counsel and Mr. Brown had a telephone call with Mr. Godshall and Mr. Knopf to negotiate the letter of intent. Mr. Godshall indicated that HeartWare needed additional protection in the event that the transaction should fail to close and that HeartWare would require a license of certain “non-core” World Heart intellectual property in that circumstance, in exchange for a $500,000 one-time license fee.

That same day, at a regularly scheduled meeting of the board of directors of HeartWare, Mr. Godshall and Mr. Knopf outlined the principal terms of the proposed acquisition of World Heart, the status of current discussions, World Heart’s technology under development and intellectual property portfolio, the primary risks and benefits of the transaction and contemplated deal protections. After discussion among the members of the HeartWare board of directors and management, and taking into account the factors described below in the section entitled “The Merger—HeartWare’s Reasons for the Merger”, the HeartWare board of directors approved the proposed transaction.

On February 23, 2012, World Heart filed a Form 8-K with the SEC announcing a substantial reduction in force. Later that day, Mr. Knopf sent a revised letter of intent to Mr. Martin and Mr. Brown which specified certain patents and patent applications that would be non-exclusively licensed to HeartWare for an upfront fee but royalty free in lieu of a termination fee under the merger agreement. Mr. Martin expressed concern with certain of the revisions to the letter of intent to Mr. Godshall. Mr. Martin also provided Mr. Godshall with an update on the status of certain development activities, World Heart’s reduction in force and the potential integration of World Heart’s operations with those of HeartWare.

That same day, Mr. Martin provided an email update to the board of directors of World Heart on HeartWare’s request for a license in the event that the acquisition should fail to close.

Between February 24 and February 28, 2012, HeartWare and World Heart and their respective legal counsel continued to negotiate the letter of intent and the principals continued discussions about intellectual property diligence.

On February 27, 2012, World Heart sent back a revised draft of letter of intent to HeartWare which reflected the purchase price, in terms of number of shares, to be determined at the closing of the transaction rather than signing and lowered the minimum cash required as a closing condition.

On February 28, 2012, Mr. Godshall met with Mr. Martin and Mr. Brown at World Heart’s offices in Salt Lake City to discuss the status of due diligence efforts, as well as the status of the letter of intent and merger agreement. The group also discussed specific terms in each document and discussed that at this point moving directly to negotiating a merger agreement instead of the letter of intent may be in the best interest of both parties.

On March 2, 2012, HeartWare provided a revised draft of the letter of intent to World Heart that included a collar on the maximum number of shares that would be issued in the event HeartWare’s stock decreased in price before closing. Mr. Martin updated the board of directors of World Heart on the current status of discussions with HeartWare, including the request for a collar. The board instructed Mr. Martin to reject the collar.

 

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Later that day, Mr. Martin informed Mr. Godshall that World Heart’s board of directors determined that HeartWare’s offer to acquire World Heart for $8 million in HeartWare common stock would be acceptable, but asked that the proposed collar be deleted from the proposed terms. Mr. Martin further proposed that the parties discontinue negotiating the letter of intent and instead focus on preparation and negotiation of a definitive merger agreement. Later that day, Shearman sent a draft of a proposed merger agreement to Cooley.

Between March 2, 2012 and March 29, 2012, HeartWare completed its due diligence review of World Heart and representatives of Cooley and Shearman held multiple conference calls to discuss and negotiate definitive transaction documentation, including the proposed collar and the circumstances under which HeartWare would be entitled to a license of certain World Heart intellectual property in the event that the merger agreement was terminated.

On March 8, 2012, Shearman sent Cooley a proposed draft license agreement and on March 12, 2012, Cooley sent a revised draft of the proposed merger agreement to Shearman.

On March 15, 2012, the board of directors of World Heart held a telephonic meeting with representatives of World Heart management and Cooley to discuss open issues in the negotiations and the status of the transaction. A board member also reported on his continuing discussions with one of the possible reverse merger candidates discussed at the February 15, 2012 meeting including the ownership percentages in the combined company proposed by the other party and the board member’s feedback that the percentage ownership for World Heart stockholders would have to increase to make the reverse merger at all attractive. The party with whom preliminary reverse merger discussions were held did not revise its ownership proposal subsequent to this meeting so the World Heart board of directors did not consider this proposed transaction a viable alternative and it decided not to pursue further negotiations.

On March 19, 2012, Shearman circulated an initial draft of a voting agreement containing customary terms agreeing that the World Heart stockholders would vote in favor of the proposed merger and against a competing transaction. Cooley reviewed the draft voting agreement and provided the draft to representatives of certain World Heart stockholders who might sign voting agreements and solicited comments on the voting agreements. HeartWare requested that each of the significant stockholders with representatives on the board sign voting agreements, and each of HeartWare and World Heart agreed that, so as not to render approval of the merger a mathematical certainty and to provide third parties an opportunity to make a competing proposal, the shares to be covered by the voting agreement should be less than as would be required to approve the merger. The parties subsequently agreed to exclude one of the stockholders because of restrictions on the stockholder fund’s ability to enter into a voting agreement with the scope that HeartWare wanted in a timely manner. Two of the stockholders who signed voting agreements had representatives on the World Heart board of directors and the third stockholder who signed a voting agreement with respect to shares of common stock that he personally owns is a member of the World Heart board of directors affiliated with the fund excluded from entering into a voting agreement as described in the previous sentence.

That same day, Shearman and Cooley discussed by conference call Cooley’s changes to the draft merger agreement initially prepared by Shearman. The next day, Shearman sent a revised draft of the merger agreement to Cooley.

On March 21, 2012, Mr. Martin told Mr. Godshall that they were likely near agreement on the material terms of the transaction and that Mr. Martin would further apprise the World Heart board of directors on the following day.

On March 22 and March 23, 2012, Mr. Martin and Mr. Godshall continued to discuss and negotiate the remaining open commercial issues in the merger agreement and Shearman and Cooley continued to discuss by conference call and to exchange drafts of the merger agreement and the voting agreement reflecting the latest status of the negotiations. These conversations between Shearman and Cooley continued on March 26 and March 27.

 

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On March 23, 2012, Mr. Martin had a telephone conversation with Mr. Godshall in which Mr. Godshall indicated that HeartWare wanted the flexibility of paying World Heart stockholders in either stock or cash and that HeartWare would revise the merger agreement to reflect this option. Subsequently, on July 2, 2012, HeartWare filed a Form 8-K with the SEC to announce that HeartWare had irrevocably waived its option under the merger agreement to elect to pay the merger consideration in cash instead of in shares of HeartWare common stock.

On March 27, 2012, Mr. Martin apprised Mr. Godshall of the few remaining open commercial issues and told Mr. Godshall that he would provide an update to the World Heart board of directors that day.

Later that day, the board of directors of World Heart held a telephonic meeting with representatives of management and Cooley participating to discuss the remaining open issues, including the proposed right of HeartWare to elect to pay in stock or cash. On the evening of March 27, 2012, World Heart distributed a draft of the merger agreement, in substantially final form, to the board of directors of World Heart, together with related documents.

On March 28, 2012, Mr. Knopf circulated an electronic written consent to HeartWare’s board of directors confirming its prior approval of the proposed transaction, together with a draft of the merger agreement in its then current form and a proposed joint press release announcing the transaction. After responding to inquiries by telephone and email, Mr. Knopf received unanimous consent from the members of HeartWare’s board of directors by March 29, 2012.

On March 29, 2012, the board of directors of World Heart held a telephonic meeting with representatives of World Heart management to discuss the status of negotiations. Representatives of Cooley then reviewed the key provisions of the merger agreement, including structure and timing considerations, the non-solicitation clause and fiduciary exceptions that would permit World Heart to negotiate and accept a superior unsolicited offer, subject to compliance with the merger agreement and HeartWare’s matching rights, the change in board recommendation section, termination provisions, the license to HeartWare and the circumstances in which the license would become effective. Members of World Heart’s board asked questions and discussed the merger agreement and license agreement and related documentation. World Heart’s board also considered World Heart’s strategic alternatives, including winding down the company and liquidating its remaining assets or selling assets and pursuing a reverse merger transaction with a private company and determined that these alternatives were unlikely to result in the stockholders receiving greater value than the approximately 29 cents per share that would be obtained from the proposed merger. Following this discussion, World Heart’s board (unanimously but for one director who could not attend due to scheduling conflicts) determined that the merger is advisable and fair to and in the best interests of World Heart and its stockholders, unanimously approved and adopted the merger agreement and declared its advisability and approved the transactions contemplated thereby, including the merger, and unanimously recommended that World Heart’s stockholders vote to adopt the merger agreement at the World Heart special meeting. The World Heart director who could not attend the meeting participated in the prior board meeting to consider the proposed merger and supported proceeding with the proposed merger and agrees with the recommendation made by the board of directors.

After the close of business on March 29, 2012, World Heart, HeartWare, Merger Subsidiary (and, in the case of the voting agreements, certain shareholders of World Heart) executed the merger agreement and the other transaction agreements. Shortly thereafter, World Heart and HeartWare issued a joint press release announcing the transaction and the execution of the merger agreement.

Other than as set forth in this proxy statement/prospectus, including in this section, since April 1, 2010, to the best knowledge of HeartWare and World Heart, there have been no negotiations, transactions or material contacts between HeartWare or any of its affiliates and World Heart or any of its affiliates relating to any merger, consolidation, acquisition, tender offer for World Heart’s common stock, election of the directors of World Heart, or any sale or other transfer of a material amount of the assets of World Heart.

 

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World Heart’s Reasons for the Merger and Recommendation of the World Heart Board of Directors

On March 29, 2012, the members of the World Heart board of directors voting at a meeting of the board of directors unanimously (i) determined that the merger is advisable and fair to and in the best interests of World Heart and its stockholders; (ii) approved and adopted the merger agreement and approved the merger and the other transactions contemplated by the merger agreement; and (iii) subject to the right of the World Heart board of directors to withdraw or modify its recommendation in accordance with the terms of the merger agreement, recommended the adoption of the merger agreement by World Heart stockholders and directed that the merger agreement and the merger be submitted for consideration by World Heart stockholders at the World Heart special meeting.

The World Heart board of directors considered the following factors in reaching its conclusion to approve and adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement and to recommend that World Heart stockholders adopt the merger agreement, all of which it viewed as generally supporting its decision to approve the business combination with HeartWare (which are not listed in any relative order or importance):

 

   

the World Heart board of directors’ belief that World Heart had conducted a process to identify and contact viable acquisition partners to obtain the best available value to World Heart stockholders and created an opportunity for other potential interested parties to approach World Heart if such parties were interested in a possible acquisition of World Heart, as well as the fact that no potential interested parties approached World Heart;

 

   

the World Heart board of directors’ and World Heart management’s assessment of World Heart’s ability to remain an independent company considering the fact that World Heart had stopped clinical trials on its lead product, is competing in a changing market with substantial regulatory hurdles and other risks and would require additional financing that might not be attainable in order to advance the development and potential commercialization of its remaining product;

 

   

the belief of the World Heart board of directors, after a thorough review of strategic alternatives, that the value offered to stockholders pursuant to the merger is more favorable to the stockholders of World Heart than the potential value that might have resulted from other strategic opportunities potentially available to World Heart, including a liquidation of the company or pursuing a business combination transaction with another party. The World Heart board of directors considered the value per share that might be attained through a liquidation of World Heart, including the sale of World Heart’s intellectual property assets to HeartWare for $3.5 million, and settlement of its remaining liabilities (including its regulatory obligations with respect to the clinical trial subjects still being supported on the Levacor VAD), the liquidation procedures for a public company organized in Delaware and likely timing for the stockholders’ receipt of a cash distribution and the tax consequences of a liquidation and determined that the liquidation value was likely to be substantially less than the approximately $0.29 per share offered in the merger. As part of this analysis, management analyzed the expenses that World Heart would incur to terminate its existing operations, including severing all employees and terminating its lease and other contractual obligations and presented to the board the projected wind down expenses and net remaining cash. Counsel for the company also prepared an outline of the process for liquidating a public company, including the stockholder approval process, which was presented to the board of directors. The board of directors also considered a potential sale of assets in combination with a stock-for-stock combination with a private company as a means of monetizing the value of World Heart’s public registration and redeploying its remaining cash and after-tax proceeds from any asset sales and determined that the available transactions were unlikely to produce greater net present value than the proposed merger. The board of directors discussed that in a reverse merger the World Heart stockholders were likely to get a relatively small minority stake in a combined company that would not have widely traded shares or provide a liquid market so any return would require that the World Heart stockholders hold their shares in the combined company for an indefinite, potentially significant period of time and would be subject to substantial risks. In the experience of the directors, these characteristics would negatively impact the net present value of a

 

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combined company’s stock. Because discussions with the potential reverse merger candidates did not advance beyond a preliminary stage, the World Heart board of directors did not have a discounted cash flow analysis of a potential combined company performed;

 

   

the fact that the members of the World Heart board of directors, personally or through affiliated entities, own more than 90% of the outstanding shares of World Heart common stock and, therefore, the interests of the World Heart board of directors are aligned with the interests of the other World Heart stockholders;

 

   

the expectation that World Heart would need to raise capital in the near term in order to continue to fund its ongoing operations and the limited financing sources;

 

   

the fact that if HeartWare paid the merger consideration in common stock of HeartWare, the World Heart board of directors’ belief that stockholders would have the choice of selling a more liquid stock or benefitting from the potential future appreciation in the value of HeartWare common stock;

 

   

the opportunity to have HeartWare satisfy the ongoing regulatory obligations of World Heart for the existing Levacor VAD patients and to potentially continue the development of the MiFlow VAD;

 

   

World Heart stockholders’ ability to potentially benefit from the development of the MiFlow VAD through the value of HeartWare common stock; and

 

   

the terms and conditions of the merger agreement which were the product of arm’s length negotiations between the parties, including the following related factors:

 

   

the limited number and nature of the conditions to HeartWare’s obligation to consummate the merger and the limited risk of non-satisfaction of such conditions;

 

   

the conclusion of the World Heart board of directors that the license agreement with HeartWare, and the circumstances in which the license agreement may become effective, are reasonable in light of the benefits of the merger;

 

   

the World Heart board of directors’ ability under the merger agreement to withdraw or modify its recommendation in favor of the adoption of the merger agreement in certain circumstances, including in connection with a superior offer, subject to the effectiveness of the license agreement;

 

   

the likelihood of satisfying the minimum cash condition;

 

   

the right of the World Heart board of directors to approve selected actions by World Heart under the merger agreement, including amendments to the merger agreement, waivers of the merger agreement provisions and the termination of the merger agreement under selected circumstances; and

 

   

the likelihood that the merger will be consummated on a timely basis.

The World Heart board of directors also considered the potential risks of the merger and other potentially negative factors, including the following:

 

   

the inability of World Heart stockholders to realize the long-term value of the successful execution of World Heart’s current strategy as an independent company;

 

   

the possible loss of key management, technical or other personnel of World Heart during the pendency of the merger;

 

   

the fact that, if HeartWare were to elect to pay the merger consideration in cash, the receipt of cash as merger consideration generally would be taxable to World Heart stockholders for U.S. federal income tax purposes (subsequently, on July 2, 2012, HeartWare filed a Form 8-K with the SEC to announce that HeartWare had irrevocably waived its option under the merger agreement to elect to pay the merger consideration in cash instead of in shares of HeartWare common stock);

 

   

the risk of diverting management’s attention from other strategic priorities to implement merger integration efforts;

 

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the negative impact of any customer confusion or delay in purchase commitments after the announcement of the merger;

 

   

the risk that the merger might not be consummated in a timely manner or at all and the trading price of World Heart’s common stock may be adversely affected;

 

   

the risk to World Heart’s business, sales, operations and financial results in the event that the merger is not consummated;

 

   

the fact that, pursuant to the merger agreement, World Heart must generally conduct its business in the ordinary course and that World Heart is subject to a variety of other restrictions on the conduct of its business prior to the closing of the merger or the termination of the merger agreement;

 

   

the effectiveness of the license agreement with HeartWare upon the occurrence of certain events, including the possibility that the license agreement may deter other potential acquirers from proposing an alternative transaction that may be more advantageous to World Heart stockholders; and

 

   

that certain terms of the merger agreement and related voting agreements prohibit World Heart and its representatives from soliciting third party bids and from accepting, approving or recommending third party bids except in limited circumstances, which terms could reduce the likelihood that other potential acquirers would propose an alternative transaction that may be more advantageous to World Heart stockholders.

The World Heart board of directors concluded that the risks, uncertainties, restrictions and potentially negative factors associated with the merger are outweighed by the potential benefits of the merger.

The foregoing description of the World Heart board of directors’ reasons for its recommendation to adopt the merger agreement is not meant to be exhaustive, but addresses the material information and factors considered by the World Heart board of directors in consideration of its recommendation. In view of the wide variety of factors considered by the World Heart board of directors in connection with the evaluation of the merger and the complexity of these matters, the World Heart board of directors did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination and recommendation. Rather, the directors made their determinations and recommendations based on the totality of the information presented to them, and the judgments of individual members of the World Heart board of directors may have been influenced to a greater or lesser degree by different factors. In arriving at their respective recommendations, the members of the World Heart board of directors were aware of the interests of executive officers and directors of World Heart as described under “The Merger—Interests of World Heart Directors and Executive Officers in the Merger” beginning on page 59.

The World Heart board of directors recommends that World Heart stockholders vote “FOR” the adoption of the merger agreement.

HeartWare’s Reasons for the Merger

The HeartWare board of directors approved the merger agreement and the transactions contemplated by the merger agreement. In reaching its decision to approve the merger agreement, the HeartWare board of directors consulted with senior members of HeartWare’s management team and with its legal advisors regarding the results of the due diligence efforts undertaken by management and HeartWare’s legal advisors. In reaching its decision to approve the merger agreement, the HeartWare board of directors considered a variety of factors, including the following:

 

   

Strengthened Business.

 

   

The expansion of HeartWare’s intellectual property and technology portfolio;

 

   

The complementary nature of the technology and products of World Heart; and

 

   

Broader opportunities for the development of technologies and products in the future.

 

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Merger Consideration. The merger agreement provided that each share of World Heart common stock would be converted, at HeartWare’s election (in its sole and absolute discretion), into either (i) the right to receive the number of shares of HeartWare common stock equal to the quotient determined by dividing per share merger consideration by the average of the per share closing prices of HeartWare common stock on the NASDAQ Stock Market during the ten consecutive trading days ending on (and including) the trading day that is one calendar day prior to the date of the closing of the merger or (ii) cash equal to the per share merger consideration. The per share merger consideration will be determined by dividing $8 million by the number of shares of World Heart common stock outstanding as of immediately prior to the effective time of the merger. Subsequently, on July 2, 2012, HeartWare filed a Form 8-K with the SEC to announce that HeartWare had irrevocably waived its option under the merger agreement to elect to pay the merger consideration in cash instead of in shares of HeartWare common stock. See “The Merger Agreement—Merger Consideration” beginning on page 65 of this proxy statement/prospectus.

 

   

HeartWare considered the benefit of the flexibility provided by the ability to determine whether or not to exercise the HeartWare cash election in its sole and absolute discretion.

 

   

The HeartWare board of directors also considered that, pursuant to the merger agreement, World Heart will have an aggregate amount of at least $4 million of cash or cash equivalents on hand (net of certain liabilities) as of the effective time of the merger.

 

   

Terms of the Merger Agreement. The HeartWare board of directors reviewed the terms of the merger agreement, including the provisions in the merger agreement that prohibit World Heart from soliciting other acquisition proposals and the circumstances under which a termination of the merger agreement would result in the license agreement becoming effective.

 

   

Relative Size of the Acquisition. The number of shares of HeartWare common stock that HeartWare expects to issue as the merger consideration is expected to represent only approximately 1% of the total outstanding common stock of HeartWare.

 

   

Voting Agreements. The agreement by New Leaf Ventures II L.P., Venrock Associates V, L.P., Venrock Entrepreneurs Fund V, L.P., Venrock Partners V, L.P., and World Heart director Austin Marxe to each enter into a voting agreement with HeartWare under which each of these stockholders has agreed, with respect to an aggregate of 11,666,294 shares of World Heart common stock, which represents approximately 42% of the outstanding shares of World Heart common stock as of the record date, to vote (or cause to be voted) these shares in favor of the merger and the merger agreement, and to vote (or cause to be voted) their shares against any competing proposal, subject to the terms and conditions of the voting agreements. See “The Voting Agreements” beginning on page 83 of this proxy statement/prospectus.

Potential Negative Considerations. The HeartWare board of directors considered a number of potentially negative factors, as well as related mitigating factors, in its deliberations concerning the merger agreement, including:

 

   

The possibility that the merger might not be completed or might be unduly delayed, and the potential adverse consequences thereof.

 

   

The possibility that World Heart will have an aggregate amount of cash or cash equivalents (net of certain liabilities) on hand at the effective time of the merger that is less than the amount required by the merger agreement.

 

   

The possibility that World Heart’s pending patent applications may not issue as patents or, if issued, may not issue in a form that will provide HeartWare with any meaningful protection or competitive advantage.

 

   

The time and effort incurred in connection with the negotiation and implementation of the merger and involved in integrating the two companies following the closing, including the risk of diverting management’s attention from the operation of HeartWare’s business and from other strategic priorities.

 

   

The other risks of the type and nature described under “Risk Factors—Risks Related to the Merger” beginning on page 16 of this proxy statement/prospectus.

 

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After consideration of these factors, the HeartWare board of directors determined that these risks could be mitigated or managed by HeartWare, World Heart or by the combined company following the merger, were reasonably acceptable under the circumstances or, in light of the anticipated benefits, the risks were unlikely to have a materially adverse impact on the merger or on the combined company following the merger, and that, overall, these risks were significantly outweighed by the potential benefits of the merger.

The HeartWare board of directors considered all of the foregoing factors as a whole and determined to approve the merger agreement and the transactions contemplated by the merger agreement.

The foregoing description of the information and factors considered by the HeartWare board of directors is not exhaustive, but HeartWare believes it includes all the material factors considered by the HeartWare board of directors. In view of the wide variety of factors considered by the HeartWare board of directors in connection with its evaluation of the merger and the complexity of these matters, the HeartWare board of directors did not consider it practical, and did not attempt, to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its decision. Rather, the HeartWare board of directors made its decision based on the totality of information presented to it and the investigation it conducted. In considering the factors described above, individual HeartWare directors may have given different weights to different factors.

Interests of World Heart Directors and Executive Officers in the Merger

In considering the recommendation of World Heart’s board of directors with respect to the merger, you should be aware that some of World Heart’s directors and executive officers have interests in the merger that are different from, or in addition to, the interests of World Heart stockholders generally. These interests may present them with actual or potential conflicts of interest, and these interests, to the extent material, are described below. World Heart’s board of directors was aware of these interests and considered them, among other matters, in approving the merger agreement and the merger.

Merger-Related Compensation

In accordance with Item 402(t) of the SEC’s Regulation S-K, the following table sets forth—for World Heart’s chief executive officer and for its two most highly compensated executive officers, other than the chief executive officer, serving as such at the end of World Heart’s fiscal year ended December 31, 2011, sometimes referred to collectively as the “named executive officers”—certain compensation related to the merger.

Golden Parachute Compensation (1)

 

Name    Cash      Perquisites/Benefits     Total  

John Alexander Martin (2)

   $ 466,099  (4)     $ 19,477  (7)    $ 485,576   

Morgan R. Brown

   $ 260,100  (5)     $ 14,608  (8)    $ 274,708   

Dr. John C. Woodard (3)

   $ 204,680  (6)       —   (9)    $ 204,680   

 

(1) World Heart’s named executive officers will not receive any consideration pursuant to the merger agreement in connection with the cancellation of their options upon the consummation of the merger.
(2) Mr. Martin’s employment with World Heart was terminated effective April 20, 2012.
(3) Dr. Woodard’s employment with World Heart was terminated effective February 24, 2012.
(4) Represents a payment equal to twelve months base salary, 100% of target annual bonus in effect at the date of the merger agreement and 100% of the pro-rata target annual bonus for the four months worked in 2012 prior to employee’s termination.
(5) Represents a payment equal to nine months base salary, 75% of target annual bonus in effect at the date of the merger agreement and 100% of the pro-rata target annual bonus for the period worked in 2012 prior to employee’s termination (estimated at six months based on the anticipated closing date of the merger).
(6) Represents a payment equal to nine months base salary, 75% of target annual bonus in effect at the date of the merger agreement and 100% of the pro-rata target annual bonus for the two months worked in 2012 prior to employee’s termination.

 

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(7) Payments of premiums for continued health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) for twelve months.
(8) Payments of premiums for continued health insurance coverage under COBRA for nine months.
(9) Dr. Woodard did not elect COBRA coverage in connection with his termination from employment.

For additional information on the compensation and benefits described above, see the relevant sections directly below.

Treatment of Stock Options

As of the record date, there were 1,126,247 shares of World Heart common stock subject to stock options granted under World Heart’s 2006 Equity Incentive Plan to World Heart’s current executive officers and directors. All of these outstanding stock options, like all other options granted under World Heart’s 2006 Equity Incentive Plan and held by then-current employees, consultants or directors of World Heart, will vest immediately prior to the effective time of the merger and terminate for no consideration as of the effective time of the merger.

Because none of the outstanding stock options held by World Heart directors and executive officers are “in-the-money” (i.e., all of such outstanding stock options have an exercise price greater than the per-share consideration to be received by World Heart stockholders in the merger), World Heart expects that such stock options will not be exercised and will be cancelled as of the effective time of the merger. World Heart executive officers and directors will not receive any consideration pursuant to the merger agreement in connection with the cancellation of their options upon the consummation of the merger.

Change of Control and Severance Agreements

On September 8, 2009, World Heart entered into a change of control and severance agreement with each of John Alexander Martin and Morgan R. Brown, and on June 14, 2010, World Heart entered into a change of control and severance agreement with Dr. John C. Woodard, or the Change of Control and Severance Agreements. The agreements were previously approved by the Compensation Committee of World Heart’s board of directors. The Change of Control and Severance Agreements provide the executive officers certain severance and change of control benefits. If World Heart terminates the executive officer without Cause or if the executive officer resigns with Good Reason immediately prior to, as of, or within 12 months following a Change of Control, as those terms are defined in the Change of Control and Severance Agreements, then each of these executive officers will be entitled to: (i) a payment equal to a certain number of months of his base salary (twelve months for Mr. Martin and nine months for Mr. Brown and Dr. Woodard) and a certain percentage of his target annual bonus then in effect (100% for Mr. Martin and 75% for Mr. Brown and Dr. Woodard), (ii) vesting acceleration of outstanding stock options or restricted stock awards (100% for Mr. Martin, 75% for Mr. Brown and 50% for Dr. Woodard), and (iii) payments of premiums for continued health insurance coverage under COBRA for up to the same number of months as the severance period, all of which are subject to the executive officer’s execution of a binding release of claims. Dr. Woodard’s employment with World Heart was terminated effective February 24, 2012 and Dr. Woodard did not elect any COBRA benefits. Mr. Martin’s employment with World Heart was terminated effective April 20, 2012.

Indemnification of Directors and Officers; Insurance

Under the merger agreement, HeartWare has agreed that the surviving corporation will assume certain indemnification obligations in favor of current or former directors, officers, employees, fiduciaries or agents of World Heart or any of its subsidiaries for acts or omissions occurring prior to the effective time of the merger. Additionally, HeartWare has agreed that the surviving corporation will maintain World Heart’s current insurance coverage with respect to World Heart’s officer and directors, or, alternatively, obtain new insurance policies with comparable terms.

Please see “The Merger Agreement—Indemnification and Insurance” beginning on page 78, where these matters are described in more detail.

 

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Ownership of HeartWare Following the Merger

Based on the number of outstanding shares of World Heart common stock on the World Heart record date, the number of outstanding shares of HeartWare common stock on June 27, 2012 and given a total merger consideration in the amount of $8 million, we anticipate that the holders of outstanding shares of World Heart common stock will own approximately 1% of the outstanding shares of HeartWare common stock following the merger.

Effective Time of the Merger

The merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware or at such other time as is agreed upon by HeartWare and World Heart and specified as the effective time in the certificate of merger. The filing of the certificate of merger will occur as soon as practicable after satisfaction or waiver of the conditions to the completion of the merger, as described in the merger agreement. As a result of the merger, World Heart will become an indirect wholly owned subsidiary of HeartWare, all of the outstanding shares of World Heart common stock will be cancelled and the former World Heart stockholders will be entitled to receive the merger consideration.

Public Trading Markets

HeartWare common stock trades on the NASDAQ Stock Market under the symbol “HTWR” and HeartWare CDIs trade on ASX under the symbol “HIN.” World Heart common stock trades on the NASDAQ Capital Market under the symbol “WHRT.” Upon completion of the merger, World Heart common stock will be delisted from the NASDAQ Capital Market and deregistered under the Exchange Act. HeartWare will apply to have the shares of HeartWare common stock to be issued in the merger approved for listing on the NASDAQ Stock Market.

HeartWare’s Dividend Policy

The holders of HeartWare common stock receive dividends if and when declared by the HeartWare board of directors. HeartWare has not declared or paid any dividends on its common stock and does not intend to pay dividends in the foreseeable future.

Material United States Federal Income Tax Consequences of the Merger

The following summary describes the material U.S. federal income tax consequences to holders of World Heart common stock upon an exchange of their World Heart common stock for HeartWare common stock in the merger. The following summary is based upon the Internal Revenue Code, existing and proposed Treasury regulations and published administrative rulings and court decisions, all as currently in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect. The following summary does not address the following: (i) the tax consequences of the merger under U.S. federal non-income tax laws or under state, local or non-U.S. tax laws; or (ii) the tax consequences of the ownership or disposition of HeartWare common stock acquired in the merger.

Except as specifically set forth below, this summary addresses only those World Heart stockholders that are U.S. persons for U.S. federal income tax purposes. You are a U.S. person for purposes of this summary if you are:

 

   

a citizen or resident of the United States;

 

   

a corporation (or an entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States or of any state thereof or the District of Columbia;

 

   

an estate the income of which is subject to U.S. federal income tax regardless of its source; or

 

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a trust if (a) (i) a court within the United States is able to exercise primary supervision over the trust, and (ii) one or more U.S. persons have authority to control all substantial decisions of the trust, or (b) the trust has made an election under applicable Treasury regulations to be treated as a U.S. person.

This summary addresses only those World Heart stockholders that hold their World Heart common stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code and does not address all the U.S. federal income tax consequences that may be relevant to particular World Heart stockholders in light of their individual circumstances or to World Heart stockholders that are subject to special rules, such as:

 

   

financial institutions;

 

   

investors in pass-through entities;

 

   

insurance companies;

 

   

tax-exempt organizations;

 

   

dealers in securities or currencies;

 

   

traders in securities that elect to use a mark-to-market method of accounting;

 

   

persons that hold World Heart common stock as part of a straddle, hedge, constructive sale or conversion transaction;

 

   

regulated investment companies;

 

   

real estate investment trusts;

 

   

certain U.S. expatriates and former long-term residents;

 

   

stockholders who are subject to the alternative minimum tax provisions of the Internal Revenue Code;

 

   

persons whose “functional currency” is not the U.S. dollar; and

 

   

stockholders who acquired their World Heart common stock through the exercise of an employee stock option or otherwise as compensation.

If a partnership (or other entity taxed as a partnership for U.S. federal income tax purposes) holds World Heart common stock, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. Partnerships and partners in such a partnership should consult their tax advisers about the tax consequences of the merger to them.

Holders of World Heart common stock are urged to consult their own tax advisors regarding the U.S. federal income tax consequences of the merger in light of their personal circumstances and the consequences of the merger under U.S. federal non-income tax laws and state, local and non-U.S. tax laws.

In General

Pursuant to the merger agreement, the acquisition of World Heart by HeartWare will be effected as a transaction intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code. HeartWare has obtained the opinion of Shearman, and World Heart has obtained the opinion of Cooley, each to the effect that, on the basis of the facts, representations and assumptions set forth or referred to in such opinions, for United States federal income tax purposes the merger will constitute a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code and each of HeartWare, Merger Subsidiary and World Heart will be a party to the reorganization within the meaning of Section 368(b) of the Internal Revenue Code. The tax opinions described in the preceding sentence are based on certain assumptions and on representation letters provided by HeartWare and World Heart. If any of the representations in the representation letters is or becomes inaccurate, then the tax opinions may no longer be valid. Neither of these tax opinions will

 

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be binding on the IRS and will not preclude the IRS from asserting, or a court from sustaining, a contrary conclusion. Neither HeartWare nor World Heart intends to request any ruling from the IRS as to the U.S. federal income tax consequences of the merger.

Treatment as a Reorganization

Assuming that the merger is treated as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code, the following material U.S. federal income tax consequences generally will result:

 

   

HeartWare, Merger Subsidiary and World Heart generally will recognize no gain or loss solely as a result of the merger;

 

   

A World Heart stockholder that exchanges World Heart common stock for HeartWare common stock pursuant to the merger will not recognize gain or loss (other than with respect to any cash received with respect to a fractional share of HeartWare common stock). If a World Heart stockholder receives cash in lieu of fractional shares of HeartWare common stock in connection with the merger, the stockholder generally will recognize capital gain or loss equal to the difference between the amount of cash received in lieu of the fractional shares of HeartWare common stock and the portion of the stockholder’s adjusted tax basis in its World Heart common stock surrendered that is allocable to the fractional shares.

 

   

A World Heart stockholder will have an aggregate initial tax basis in the HeartWare common stock received in the merger equal to the stockholder’s aggregate adjusted tax basis in its World Heart common stock surrendered reduced by the portion of the stockholder’s adjusted tax basis in its World Heart common stock surrendered that is allocable to fractional shares of HeartWare common stock for which cash is received.

 

   

The holding period for HeartWare common stock received by a World Heart stockholder in the merger will include the holding period for the World Heart common stock surrendered.

Any capital gain that is recognized on the exchanges described above will be long-term capital gain if the stockholder’s holding period with respect to its World Heart common stock exceeds one (1) year. Long-term capital gains of non-corporate taxpayers currently are taxed at a maximum U.S. federal income tax rate of 15%. Short-term capital gains are taxed at ordinary income rates.

A World Heart stockholder who receives HeartWare common stock in connection with the merger will be required to retain records pertaining to the merger. In addition, a World Heart stockholder who, immediately before the merger, owned at least 5% (by vote or value) of the total outstanding stock of World Heart is required to attach a statement to its U.S. federal income tax return for the year in which the merger is completed that sets forth such stockholder’s tax basis in its World Heart common stock surrendered and the fair market value of such stock.

Treatment as a Fully Taxable Transaction

If the merger does not qualify as a “reorganization”, the merger will be fully taxable for U.S. federal income tax purposes and World Heart stockholders will recognize gain or loss on the exchange of their World Heart common stock for HeartWare common stock. In general, each World Heart stockholder will recognize capital gain or loss in the merger in an amount equal to the difference between (i) the fair market value of the HeartWare common stock received and (ii) the stockholder’s adjusted tax basis in its World Heart common stock surrendered. The capital gain or loss will be long-term capital gain or loss if the stockholder had held the World Heart common stock surrendered for more than one year. Long-term capital gains of non-corporate taxpayers currently are taxed at a maximum U.S. federal income tax rate of 15%. Short-term capital gains are taxed at ordinary income rates.

 

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If a World Heart stockholder acquired different blocks of World Heart common stock at different times or at different prices, any gain or loss will be determined separately with respect to each block of HeartWare common stock.

Certain Considerations for Non-U.S. Stockholders

This section describes certain considerations for World Heart stockholders that are not U.S. persons, which we will refer to as non-U.S. stockholders.

Any capital gain recognized by a non-U.S. stockholder as a result of the exchange of World Heart common stock in connection with the merger generally will not be subject to U.S. federal income tax unless: (i) the gain is effectively connected with the conduct of a trade or business in the United States and, if an applicable income tax treaty applies, is attributable to a U.S. permanent establishment of the non-U.S. stockholder (in this case, such non-U.S. stockholder will be subject to U.S. federal income tax on the net gain derived from the disposition in the same manner as if the non-U.S. stockholder was a U.S. person, and if the non-U.S. stockholder is a corporation, it may be subject to the additional “branch profits tax” at a 30% rate or a lower rate specified by an applicable income tax treaty); or (ii) the non-U.S. stockholder is an individual present in the United States for 183 days or more in the taxable year in which the disposition occurs and certain other conditions are met (in this case, the individual non-U.S. stockholder will be subject to a flat 30% U.S. federal income tax on the gain derived from the disposition, which tax may be offset by U.S. source capital losses recognized in the same taxable year).

Backup Withholding

Certain World Heart stockholders may be subject to backup withholding of U.S. federal income tax, at a rate of 28%, with respect to the consideration received pursuant to the merger. Backup withholding will not apply, however, to a World Heart stockholder that (i) is a U.S. person and furnishes a correct taxpayer identification number and certifies that it is not subject to backup withholding on IRS Form W-9 or a substantially similar form, (ii) provides a certification of its status as a non-U.S. stockholder on an appropriate IRS Form W-8 or successor form or (iii) is otherwise exempt from backup withholding, such as a corporation, and provides appropriate proof of the applicable exemption. Any amounts withheld from payments to a World Heart stockholder under the backup withholding rules are not an additional tax and will be allowed as a refund or credit against the World Heart stockholder’s U.S. federal income tax liability, if any, provided that the World Heart stockholder timely furnishes the required information to the IRS.

THE FOREGOING SUMMARY IS INTENDED ONLY AS A SUMMARY AND DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR LISTING OF ALL POTENTIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT. WORLD HEART STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT TO THEM.

 

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THE MERGER AGREEMENT

This section of the proxy statement/prospectus describes the material provisions of the merger agreement but does not purport to describe all of the terms of the merger agreement. The following summary is qualified in its entirety by reference to the complete text of the merger agreement, which is attached as Annex A to this proxy statement/prospectus and incorporated herein by reference. We urge you to read the full text of the merger agreement because it is the legal document that governs the merger. The merger agreement and the following description under this heading “The Merger Agreement” have been included to provide you with information regarding the terms of the merger agreement. They are not intended to provide any other factual information about HeartWare or World Heart. That information can be found elsewhere in this proxy statement/prospectus and in the other public filings made by HeartWare or World Heart with the SEC, which are available without charge. See “Where You Can Find More Information” beginning on page 199.

The merger agreement contains representations and warranties the parties made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the contract between HeartWare and World Heart and may be subject to important qualifications and limitations agreed by HeartWare and World Heart in connection with negotiating its terms. Moreover, certain representations and warranties may not be accurate or complete as of any specified date because they are subject to a contractual standard of materiality different from those generally applicable to stockholders or were used for the purpose of allocating risk between HeartWare and World Heart rather than establishing matters as facts. For the foregoing reasons, you should not rely on the representations and warranties in the merger agreement (or the summaries contained herein) as characterizations of the actual state of facts about HeartWare or World Heart. The representations and warranties and other provisions of the merger agreement should not be read alone, but instead should be read together with the information provided elsewhere in this proxy statement/prospectus and in the entirety of public disclosure about HeartWare and World Heart set forth in the companies’ SEC filings, which are available without charge. See “Where You Can Find More Information” beginning on page 199.

The Merger

Pursuant to the merger agreement, Merger Subsidiary will merge with and into World Heart, with World Heart surviving the merger as an indirect wholly owned subsidiary of HeartWare, which we refer to as the surviving corporation.

Merger Consideration

At the effective time of the merger, each share of World Heart common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive the number of shares of HeartWare common stock equal to the quotient determined by dividing the per share merger consideration by the average of the per share closing prices of HeartWare common stock on the NASDAQ Stock Market during the ten consecutive trading days ending on (and including) the trading day that is one calendar day prior to the date of the closing of the transaction. The per share merger consideration will be determined by dividing $8 million by the number of shares of World Heart common stock outstanding as of immediately prior to the effective time of the merger (which consideration we refer to below as the per share consideration), other than shares held in the treasury of World Heart or owned by HeartWare or any direct or indirect subsidiary of HeartWare (including Merger Subsidiary), which shares will be cancelled.

HeartWare will not issue any fractional shares of HeartWare common stock in the merger. Instead, a World Heart stockholder who otherwise would have received a fraction of a share of HeartWare common stock (after taking into account all fractional share interests held by such holder) will receive an amount in cash, without interest, rounded down to the nearest whole cent, and subject to any applicable withholding taxes, in lieu thereof equal to such fractional interest multiplied by the average of the per share closing prices of HeartWare common stock on the NASDAQ Stock Market during the ten consecutive trading days ending on (and including) the trading day that is one calendar day prior to the date of the closing of the transaction.

 

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On July 2, 2012, HeartWare filed a Form 8-K with the SEC to announce that HeartWare had irrevocably waived its option under the merger agreement to elect to pay the merger consideration in cash instead of in shares of HeartWare common stock.

If the number of shares of HeartWare or World Heart capital stock outstanding changes before the merger is completed for any reason, including by reason of any stock split, reverse stock split, stock dividend (including any dividend or distribution of securities of a subsidiary of HeartWare or World Heart or of securities convertible into World Heart common stock or HeartWare common stock), extraordinary cash dividends, reorganization, recapitalization, reclassification, combination, exchange of shares or other like change, then appropriate adjustments to amounts payable in the merger will be made to account for such change.

Each unexercised warrant issued by World Heart pursuant to that certain Securities Purchase Agreement, dated October 13, 2010, by and among World Heart and the purchasers identified therein (the “October Warrants”) issued and outstanding immediately prior to the effective time of the merger will be converted automatically into solely the right of each such warrantholder to elect to receive from the surviving corporation an amount of cash equal to the Black Scholes Value (as defined in the warrant) pursuant to the terms of the warrant (without interest, rounded down to the nearest whole cent and subject to the amount of any applicable withholding taxes). To elect to receive such cash, a warrantholder must deliver the election request to the surviving corporation before the ninetieth (90th) day after the effective time of the merger. Assuming a closing date for the merger of August 31, 2012 (for illustrative purposes only), a risk free interest rate of 0.5% and volatility of World Heart’s common stock of 125%, the cash payment to which the holders of October Warrants would be entitled is approximately $1.4 million in the aggregate, or $0.1181 per share of common stock subject to the October Warrants.

The warrants issued by World Heart pursuant to that certain Securities Purchase Agreement, dated January 21, 2010, by and among World Heart and the purchasers identified therein, as well as the warrants issued by World Heart in connection with that certain Consulting Services Agreement, dated as of April 2, 2007, between World Hearts Inc., a wholly owned subsidiary of World Heart, and Genesis Select Corporation, that are issued and outstanding immediately prior to the effective time of the merger will not be affected by the consummation of the merger and will continue to be governed by their existing terms and conditions.

Treatment of Stock Options

Prior to the effective time of the merger, World Heart will take all necessary action, to: (i) terminate World Heart’s 2006 Equity Incentive Plan, (ii) provide that each outstanding option to purchase shares of World Heart common stock (referred to herein as a stock option) granted under World Heart’s 2006 Equity Incentive Plan that is held by a then current employee, consultant or director of World Heart and that remains outstanding and unexercised as of immediately prior to the effective time of the merger, whether or not vested or exercisable, will become fully vested and exercisable as of the effective time of the merger; and (iii) terminate for no consideration, as of the effective time of the merger, each stock option that is outstanding and unexercised as of the effective time of the merger.

Exchange of Certificates

Prior to the effective time of the merger, HeartWare will appoint an exchange agent for the payment of merger consideration. At the effective time of the merger, HeartWare will deposit with the exchange agent shares in book-entry form, representing shares of HeartWare common stock and cash as required to make payments in lieu of any fractional shares, as described above.

Surrender of Certificates

Promptly following the effective time of the merger, HeartWare has agreed to send World Heart stockholders a letter of transmittal and instructions advising World Heart stockholders how to surrender certificates in exchange for the merger consideration. The exchange agent will pay World Heart stockholders their merger consideration after World Heart stockholders have (i) surrendered their certificates to the exchange

 

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agent, or in the case of book-entry shares, followed the applicable procedures set forth in the letter of transmittal, and (ii) provided to the exchange agent a duly signed and completed letter of transmittal and any other items specified by the letter of transmittal. Interest will not be paid or accrue in respect of the merger consideration.

Stock Transfer Books and Share Transfers

After the effective time of the merger, there will be no further transfers on the stock transfer books of World Heart. If certificates are presented to the exchange agent or HeartWare, or transfer is sought for book-entry shares, such certificates or book-entry shares will be cancelled and exchanged as set forth under this heading “The Merger Agreement—Exchange of Certificates.”

Investment and Return of Exchange Fund

The exchange agent will invest the cash portion of the merger consideration deposited with the exchange agent as directed by HeartWare. Any interest or other income resulting from such investments will be paid to HeartWare.

Any portion of the merger consideration deposited with the exchange agent (including any proceeds of the investment thereof) that remains undistributed to a World Heart stockholder nine months after the effective time of the merger will be delivered to HeartWare upon demand, and any World Heart stockholder that has not complied with the exchange procedure will thereafter look only to HeartWare for payment of the merger consideration.

Lost Certificates

If a certificate for World Heart common stock has been lost, stolen or destroyed, the exchange agent will issue the consideration payable under the merger agreement upon receipt of an affidavit from the applicable World Heart stockholder of that fact and, if required by the surviving corporation, the posting of a bond in an amount as the surviving corporation reasonably directs as indemnity against any claim that may be made with respect to such certificate by the applicable World Heart stockholder.

Dividends on HeartWare Common Stock

No dividends or other distributions with respect to shares of HeartWare common stock constituting part of the merger consideration, and no cash payment in lieu of fractional shares, will be paid to the holder of any certificates not surrendered or of any book-entry shares not transferred until such certificates or book-entry shares are surrendered or transferred in accordance with the exchange procedures.

Withholding

HeartWare, Merger Subsidiary, the surviving corporation and the exchange agent will be entitled to deduct and withhold from any amounts otherwise payable pursuant to the merger agreement in respect of shares of World Heart common stock such amount as it determines, in good faith, is required to be deducted and withheld with respect to the making of such payment under any provision of applicable state, local or foreign tax law or any other law.

The Surviving Corporation

At the effective time of the merger, the certificate of incorporation of the surviving corporation will be amended in its entirety to read the same as the certificate of incorporation of Merger Subsidiary as in effect immediately prior to the effective time of the merger until thereafter amended, provided that Article I thereof will be amended to read: “The name of the corporation is World Heart Corporation.” Unless otherwise determined by HeartWare prior to the effective time of the merger, at the effective time of the merger, the bylaws of the surviving corporation will be amended and restated in their entirety to read the same as the bylaws of Merger

 

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Subsidiary as in effect immediately prior to the effective time of the merger, until thereafter amended. The directors of Merger Subsidiary immediately prior to the effective time of the merger will be the initial directors of the surviving corporation and the officers of Merger Subsidiary immediately prior to the effective time of the merger will be the initial officers of the surviving corporation.

Representations and Warranties

The merger agreement contains representations and warranties made by World Heart to HeartWare and Merger Subsidiary and representations and warranties made by HeartWare and Merger Subsidiary to World Heart. None of the representations and warranties of the parties to the merger agreement will survive the effective time of the merger. As previously described on page 65 of this proxy statement/prospectus, you should not rely on these representations and warranties or the summaries contained herein as characterizations of the actual state of facts about HeartWare or World Heart. These representations and warranties should not be read alone, but instead should be read together with the information provided elsewhere in this proxy statement/prospectus and in the entirety of public disclosure about HeartWare and World Heart set forth in the companies’ SEC filings, which are available without charge. See “Where You Can Find More Information” beginning on page 199.

In the merger agreement, World Heart made representations and warranties relating to, among other things:

 

   

corporate existence and qualification;

 

   

no violation under its certificate of incorporation or bylaws;

 

   

capitalization;

 

   

authorization to enter into and perform its obligations under, and enforceability of, the merger agreement;

 

   

the absence of conflicts with or defaults under its organizational documents, contracts and applicable laws;

 

   

the absence of the need for any consent, approval, authorization or permit of, filing with or notification to any governmental authority;

 

   

compliance with permits, including certain regulations of the FDA and similar laws;

 

   

compliance with SEC requirements and the accuracy of information contained in SEC filings including financial statements, and compliance with the requirements of the Sarbanes-Oxley Act of 2002 and other matters relating to the internal controls of World Heart;

 

   

the absence of certain changes since January 1, 2011;

 

   

the absence of pending or threatened litigation;

 

   

employee and benefits matters, including benefit plans and compliance with the Employee Retirement Income Securities Act of 1974, as amended, and labor matters;

 

   

real property matters and title to assets;

 

   

owned and licensed intellectual property matters;

 

   

tax matters;

 

   

environmental law compliance;

 

   

material contracts;

 

   

insurance policies;

 

   

compliance with the Foreign Corrupt Practices Act of 1977 and other anti-corruption laws;

 

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interested party transactions;

 

   

the absence of a stockholder rights plan; and

 

   

engagement and payment of fees of brokers, finders and investment bankers.

HeartWare and Merger Subsidiary also made representations and warranties relating to, among other things:

 

   

corporate existence;

 

   

no violation under certificate of incorporation or bylaws;

 

   

capitalization;

 

   

authorization to enter into and perform its obligations under, and enforceability of, the merger agreement;

 

   

no requirement for a HeartWare stockholder vote in connection with the merger;

 

   

the absence of conflicts with or defaults under organizational documents, contracts and applicable laws;

 

   

the absence of the need for any consent, approval, authorization or permit of, filing with or notification to any governmental authority;

 

   

compliance with SEC requirements and the accuracy of information contained in SEC filings including financial statements, and compliance with the requirements of the Sarbanes-Oxley Act of 2002 and other matters relating to the internal controls of HeartWare;

 

   

absence of certain changes since January 1, 2011;

 

   

the absence of pending or threatened litigation;

 

   

Merger Subsidiary formation for sole purpose of facilitation of the merger; and

 

   

engagement and payment of fees of brokers, finders and investment bankers.

Many of World Heart’s and HeartWare’s representations and warranties are qualified by a material adverse effect standard. “Material adverse effect” for World Heart is defined to mean any event, circumstance, change or effect that, individually or in the aggregate with all other events, circumstances, changes and effects, (a) is or is reasonably likely to be materially adverse to the business, condition (financial or otherwise), assets, liabilities or results of operations of World Heart and its subsidiaries taken as a whole or (b) would prevent or materially delay consummation of the merger and the other transactions contemplated by the merger agreement and the voting agreements (referred to herein as the transactions) by World Heart or otherwise prevent or materially delay World Heart from performing its obligations under the merger agreement; provided that the following will not be taken into account in determining whether a World Heart material adverse effect has occurred: (i) changes in applicable law or GAAP or in any interpretation thereof that do not disproportionately affect World Heart and its subsidiaries taken as a whole (relative to other participants in the industries in which World Heart and its subsidiaries operate); (ii) changes in the industries in which World Heart and its subsidiaries conduct their respective businesses that do not disproportionately affect World Heart and its subsidiaries taken as a whole (relative to other participants in the industries in which World Heart and its subsidiaries operate); (iii) any event, circumstance, change or effect arising directly or indirectly from the public announcement of the merger agreement or pendency of the transactions; (iv) any change in the market price or trading volume of the shares of World Heart common stock (but not the underlying cause of such change); (v) any event, circumstance, change or effect arising directly or indirectly from any act of terrorism, war or any other similar event that does not disproportionately affect World Heart and its subsidiaries taken as a whole (relative to other participants in the industries in which World Heart and its subsidiaries operate); and (vi) any adverse effect arising directly from or otherwise directly relating to any action taken by World Heart or its subsidiaries at the written direction of HeartWare or the failure of World Heart or its subsidiaries to take any action that World Heart or its subsidiaries are specifically prohibited from taking pursuant to the merger agreement and were not consented to by HeartWare.

 

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“Material adverse effect” for HeartWare is defined to mean any event, circumstance, change or effect that, individually or in the aggregate with all other events, circumstances, changes and effects, (a) is or is reasonably likely to be materially adverse to the business, condition (financial or otherwise), assets, liabilities or results of operations of HeartWare and its subsidiaries taken as a whole or (b) would prevent or materially delay consummation of the transactions by HeartWare or otherwise prevent or materially delay HeartWare from performing its obligations under the merger agreement; provided that the following will not be taken into account in determining whether a HeartWare material adverse effect has occurred: (i) changes in applicable law or GAAP or in any interpretation thereof that do not disproportionately affect HeartWare and its subsidiaries taken as a whole (relative to other participants in the industries in which HeartWare and its subsidiaries operate); (ii) changes in the industries in which HeartWare and its subsidiaries conduct their respective businesses that do not disproportionately affect HeartWare and its subsidiaries taken as a whole (relative to other participants in the industries in which HeartWare and its subsidiaries operate); (iii) any event, circumstance, change or effect arising directly or indirectly from the public announcement of the merger agreement or pendency of the transactions; (iv) any change in the market price or trading volume of the HeartWare common stock (but not the underlying cause of such change); (v) any event, circumstance, change or effect arising directly or indirectly from any act of terrorism, war or any other similar event that does not disproportionately affect HeartWare and its subsidiaries taken as a whole (relative to other participants in the industries in which HeartWare and its subsidiaries operate); (vi) any adverse effect arising directly from or otherwise directly relating to any action taken by HeartWare or its subsidiaries at the written direction of World Heart or the failure of HeartWare or its subsidiaries to take any action that HeartWare or its subsidiaries are specifically prohibited from taking pursuant to the merger agreement and were not consented to by World Heart; and (vii) any event, circumstance, change or effect arising directly from the decision of the FDA Circulatory System Devices Panel in its review of the Pre-Market Application for the HeartWare System for the bridge-to-transplant indication, submitted to the FDA in December 2010 (but not any underlying cause for the decision that constitutes a breach of a representation or warranty of HeartWare under the merger agreement (without giving effect to any material adverse effect qualifier)).

Conduct of Business of World Heart

World Heart has agreed that until the effective time of the merger, except as expressly permitted by the merger agreement or consented to in writing by HeartWare (which consent HeartWare will not unreasonably withhold or delay), the businesses of World Heart and its subsidiaries will be conducted only in, and World Heart and its subsidiaries will not take any action except in, the ordinary course of business and in a manner consistent with past practice and World Heart and each of its subsidiaries will use commercially reasonable efforts to preserve substantially intact their existing assets, preserve substantially intact their business organization, keep available the required services of their current officers, employees and consultants, maintain and preserve intact their current relationships with suppliers, creditors and other persons with which World Heart or any of its subsidiaries has significant business relations and comply in all material respects with applicable law.

World Heart has also agreed that, between the date of the merger agreement and the effective time of the merger, except as expressly permitted by the merger agreement or consented to in writing by HeartWare (which consent HeartWare will not unreasonably withhold or delay), World Heart and its subsidiaries will not:

 

   

amend or otherwise change its certificate of incorporation or bylaws or equivalent organizational documents;

 

   

(i) issue, sell, pledge or dispose of, (ii) grant an encumbrance on or permit an encumbrance to exist on, or (iii) authorize the issuance, sale, pledge or disposition of, or granting or placing of an encumbrance on, any shares of any class of capital stock, or other ownership interests, of World Heart or any of its subsidiaries, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock, or any other ownership interest (including any phantom interest) of World Heart or any of its subsidiaries (except for the issuance of up to a maximum of 1,534,363 shares of World Heart common stock issuable pursuant to company stock awards outstanding on the date of the merger agreement, of which 1,534,363 are issuable pursuant to company stock options);

 

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(i) sell, pledge or dispose of, (ii) grant an encumbrance on or permit an encumbrance, other than, in each case, a permitted encumbrance, to exist on, or (iii) authorize the sale, pledge or disposition of, or granting or placing of an encumbrance, other than a permitted encumbrance on, any material assets, in the amount of $20,000 individually or $75,000 in the aggregate, of World Heart or any of its subsidiaries;

 

   

declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock, except for dividends by any of World Heart’s direct or indirect wholly owned subsidiaries to World Heart or any of its other wholly owned subsidiaries;

 

   

adjust, reclassify, combine, split, subdivide or redeem, or purchase or otherwise acquire, directly or indirectly, any of its capital stock;

 

   

(i) acquire (including by merger, consolidation or acquisition of stock or assets or any other business combination) any other business or any material amount of assets; (ii) incur any indebtedness or issue any debt securities or assume, guarantee or endorse, or otherwise become responsible for, the obligations of any person, or make any loans or advances or capital contribution to, or investment in, any person; (iii) authorize, or make any commitment with respect to, any single capital expenditure which is in excess of $20,000 or capital expenditures which are, in the aggregate, in excess of $75,000 for World Heart and its subsidiaries taken as a whole; or (iv) enter into or amend any contract, agreement, commitment or arrangement with respect to any matter set forth in this paragraph;

 

   

hire any employees or terminate the employment of any employees other than for “cause”;

 

   

(i) increase the compensation payable to or the benefits provided to any current or former service provider (other than salary or wages in the ordinary course of business consistent with past practice), except as required under applicable law or the terms of any benefits plan in effect on the date of the merger agreement; (ii) grant any severance, retention or termination pay to, or enter into any employment, bonus, change in control, retention or severance agreement with, any current or former service provider; or (iii) establish, adopt, enter into or amend any collective bargaining agreement, bonus, profit sharing, thrift, compensation, company stock award, pension, retirement, deferred compensation, employment, termination, change in control, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any service provider; loan or advance any money or property to any service provider; or grant any equity or equity-based awards;

 

   

exercise discretion with respect to or otherwise voluntarily accelerate the lapse of restriction or vesting of any equity or equity-based awards as a result of the merger, any other change of control of World Heart or otherwise; or exercise its discretion with respect to or otherwise amend, modify or supplement any employee stock purchase plan;

 

   

terminate, discontinue, close or dispose of any plant, facility or other business operation, or implement any early retirement or separation program, or any program providing early retirement window benefits or announce or plan any such action or program for the future;

 

   

take any action, other than immaterial reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to accounting policies or procedures;

 

   

(i) make any change (or file any such change) in any method of tax accounting; (ii) make, change or rescind any material tax election; (iii) settle or compromise any material tax liability or consent to any claim or assessment relating to taxes; (iv) file any amended tax return or claim for refund; enter into any closing agreement relating to material taxes; or (iv) waive or extend the statute of limitations in respect of taxes;

 

   

pay, discharge or satisfy any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business and consistent with past practice, of liabilities reflected or reserved against in World Heart’s consolidated balance sheet as at December 31, 2011 or subsequently incurred in the ordinary course of business and consistent with past practice;

 

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commence or settle any action in an amount greater than $20,000;

 

   

enter into, amend, modify or consent to the termination of any material contract, or enter into, amend, waive, modify or consent to the termination of the material rights of World Heart or its subsidiaries thereunder;

 

   

(i) abandon, disclaim, dedicate to the public, sell, assign or grant any security interest in, to or under any intellectual property or intellectual property agreement of World Heart or its subsidiaries, including failing to perform or cause to be performed all applicable filings, recordings and other acts, or to pay or cause to be paid all required fees and taxes, to maintain and protect its interest in such intellectual property and intellectual property agreements; (ii) grant to any third party any license, or enter into any covenant not to sue, with respect to any intellectual property, except in the ordinary course of business consistent with past practice; (iii) develop, create or invent any intellectual property jointly with any third party, except under existing arrangements that have been disclosed to HeartWare; (iv) disclose or allow to be disclosed any confidential information or confidential intellectual property to any person, other than employees of World Heart or its subsidiaries or other persons that are subject to a valid and enforceable written confidentiality or non-disclosure covenant protecting against further disclosure thereof; or (v) fail to notify HeartWare promptly of any infringement, misappropriation or other violation of or conflict with any material intellectual property of which World Heart or any of its subsidiaries becomes aware and to consult with HeartWare regarding the actions (if any) to take to protect such intellectual property;

 

   

fail to timely exercise cancellation rights pursuant to the terms of World Heart’s real property leases;

 

   

fail to make, in a timely manner, any filings with the SEC required under the Securities Act or the Exchange Act, or the rules and regulations promulgated thereunder, or any material disclosures mandated by the rules and regulations of the NASDAQ Stock Market;

 

   

fail to maintain (with insurance companies substantially as financially responsible as its existing insurers) insurance in at least such amounts and against at least such risks and losses as are consistent in all material respects with the past practice of World Heart and its subsidiaries;

 

   

with respect to the development of the MiFlow VAD: (i) incur liabilities after the date of the merger agreement or (ii) make payments, including salaries or other compensation, to the retained MiFlow VAD research and development staff, in each case in an amount greater than the amount specified in the cost analysis agreed between HeartWare and World Heart; or

 

   

announce an intention, enter into any formal or informal agreement or otherwise make a commitment, to do any of the foregoing.

In addition, between the date of the merger agreement and the effective time of the merger, World Heart and its subsidiaries will promptly notify HeartWare of any notice of any suit, claim, action, investigation, audit or proceeding in respect of any tax matters (or any significant developments with respect to ongoing suits, claims, actions, investigations, audits or proceedings in respect of such tax matters), prepare and timely file all tax returns required to be filed before the effective time of the merger, and timely pay all taxes shown to be due and payable on such tax returns, provided that such tax returns will be prepared on a basis consistent with those prepared for prior taxable periods unless a different treatment of any item is required by an intervening change in law, and World Heart will provide HeartWare and its authorized representative with a copy of such completed tax return at least 30 days prior to the due date (including any extension thereof) for the filing of such tax return and will accept any comments made by HeartWare with respect to any material issue or item.

 

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Conduct of Business of HeartWare

HeartWare has also agreed that, between the date of the merger agreement and the effective time of the merger, except as expressly permitted by the merger agreement or consented to in writing by World Heart (which consent World Heart will not unreasonably withhold, delay or condition), HeartWare will not:

 

   

amend or otherwise change its certificate of incorporation or bylaws in a manner adverse to World Heart stockholders as opposed to any other holders of HeartWare common stock;

 

   

declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock, except for dividends by any of HeartWare’s direct or indirect wholly owned subsidiaries to HeartWare or any of its other wholly owned subsidiaries;

 

   

adjust, reclassify, combine, split, subdivide or redeem, or purchase or otherwise acquire, directly or indirectly, any of its capital stock;

 

   

fail to make in a timely manner any filings with the SEC required under the Securities Act or the Exchange Act or the rules and regulations promulgated thereunder or any disclosures mandated by the rules and regulations of the NASDAQ Stock Market; or

 

   

announce an intention, enter into any formal or informal agreement or otherwise make a commitment, to do any of the foregoing.

Stockholder Meeting

Unless the merger agreement has been terminated, World Heart will take all lawful action to call, give notice of, convene and, after the commencement of the mailing of this proxy statement/prospectus to the World Heart stockholders, hold a meeting of the World Heart stockholders for the purpose of obtaining as promptly as practicable the World Heart stockholders’ approval of the merger. Provided that the merger agreement has not been terminated as set forth under the heading “The Merger Agreement—Termination” beginning on page 80 of this proxy statement/prospectus, World Heart’s obligations set forth under this heading “The Merger Agreement—Stockholder Meeting” will not be affected by any commencement, disclosure, announcement or submission of any Competing Transaction (as defined on page 76) or by any action by the World Heart board of directors to withdraw, qualify, modify, amend or fail to make, or propose publicly to withdraw, qualify, modify or amend its recommendation that World Heart stockholders adopt the merger agreement or make any public statement inconsistent with such recommendation that World Heart stockholders adopt the merger agreement (herein referred to as the Company Recommendation).

Agreement Not to Solicit Other Offers

World Heart has agreed that neither it nor any of its subsidiaries nor any of their respective representatives will, and that it will cause each of its subsidiaries and each of its and its subsidiaries’ representatives not to, directly or indirectly,

 

   

solicit, initiate or encourage (including by way of furnishing nonpublic information), or take any other action to facilitate, any inquiries or the making of any proposal or offer (including any proposal or offer to the World Heart stockholders) with respect to any Competing Transaction (as defined on page 78);

 

   

enter into, maintain, continue or otherwise engage or participate in any discussions or negotiations with any person or entity in furtherance of such inquiries or to obtain a proposal or offer with respect to a Competing Transaction;

 

   

agree to, approve, endorse, recommend or consummate any Competing Transaction;

 

   

enter into any contract, commitment or agreement relating to, or which may reasonably be expected to result in or otherwise further, any Competing Transaction (other than a confidentiality agreement under certain limited circumstances);

 

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take any action to approve a third party becoming an “interested stockholder,” or to approve any transaction, for purposes of Section 203 of the Delaware General Corporation Law; or

 

   

resolve, propose or agree, or authorize or permit any representative, to do any of the foregoing.

However, prior to obtaining the approval of the World Heart stockholders in favor of the adoption of the merger agreement, World Heart may furnish information to, and enter into discussions with, a person who has made an unsolicited, written, bona fide proposal or offer with respect to a Competing Transaction that did not arise or result from any breach of its non-solicitation obligations if, prior to furnishing such information and entering into such discussions, the World Heart board of directors has (i) determined, in its good faith judgment (after having received the advice of outside legal counsel) (A) that such proposal or offer constitutes, or may reasonably be expected to lead to, a Superior Proposal (as defined on page 78) and (B) that the failure to furnish such information to, or enter into such discussions with, the person who made such proposal or offer would be inconsistent with the World Heart board of directors’ fiduciary duties to the World Heart stockholders under applicable law, (ii) provided written notice to HeartWare of its intent to furnish information or enter into discussions with such person, which notice may be provided on the same day that World Heart takes such action, and (iii) obtained from such person a confidentiality agreement on terms no less favorable to World Heart than those contained in the confidentiality agreement in place between HeartWare and World Heart and which contains a standstill or similar provision on terms no less restrictive with respect to such person than the terms of any standstill or similar provision in any agreement applicable to HeartWare (it being understood that such confidentiality agreement and any related agreements will not include any provision granting such person exclusive rights to negotiate with World Heart or having the effect of prohibiting World Heart from satisfying its obligations under the merger agreement) and, immediately upon its execution, delivered to HeartWare a copy of such confidentiality agreement.

World Heart’s board of directors may not (i) withdraw, qualify, modify, amend or fail to make, or propose publicly to withdraw, qualify, modify or amend the Company Recommendation or (ii) make any public statement inconsistent with the Company Recommendation (any of the actions described in clauses (i) or (ii) herein referred to as a Change in the Company Recommendation). Notwithstanding the foregoing, at any time prior to the receipt of the World Heart stockholder approval, in response to a Superior Proposal that did not arise or result from any breach of World Heart’s non-solicitation obligations or an Intervening Event (as defined on page 76), the World Heart board of directors may make a Change in the Company Recommendation if the World Heart board of directors determines in its good faith judgment (after having received the advice of outside legal counsel) that, in light of such Superior Proposal or Intervening Event, the failure of the World Heart board of directors to make a Change in the Company Recommendation would be inconsistent with the fiduciary duties of the members of the World Heart board of directors to World Heart and its stockholders under applicable law; provided that World Heart is not entitled to exercise its right to make a Change in the Company Recommendation unless:

in connection with a Superior Proposal:

 

   

Prior to giving effect to the steps listed below, the World Heart board of directors has determined, in its good faith judgment (after having received the advice of outside legal counsel) that the unsolicited, written, bona fide proposal or offer with respect to a Competing Transaction that did not arise or result from any breach of World Heart’s non-solicitation obligations constitutes, or may reasonably be expected to lead to, a Superior Proposal;

 

   

World Heart has provided written notice to HeartWare describing the Competing Transaction;

 

   

World Heart has provided written notice to HeartWare (herein referred to as a Notice of Change in the Company Recommendation), stating that the World Heart board of directors intends to make a Change in the Company Recommendation and the manner in which it intends (or may intend) to do so, at least four business days prior to making any Change in the Company Recommendation; and

 

   

HeartWare does not, within four business days of receipt of the Notice of Change in the Company Recommendation, make an offer or proposal to revise the terms of the merger agreement, including by increasing or modifying the merger consideration, in a manner that the World Heart board of directors

 

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determines in its good faith judgment, after having received the advice of outside legal counsel, is on such terms and conditions that the failure of the World Heart board of directors to make a Change in the Company Recommendation would no longer be inconsistent with the World Heart board of directors’ fiduciary duties to World Heart and its stockholders under applicable law; provided that during the four business day notice period World Heart will negotiate in good faith with HeartWare (to the extent HeartWare desires to negotiate) regarding any revised transaction proposal, provided, further, that any amendment to the terms of a Superior Proposal during the four business day notice period will require a new written notice of the terms of such amended Superior Proposal from World Heart and an additional notice period of two business days (instead of four business days).

in connection with an Intervening Event:

 

   

World Heart has provided a Notice of Change in the Company Recommendation, stating that the World Heart board of directors intends to make a Change in the Company Recommendation and the manner in which it intends (or may intend) to do so, describing the applicable material fact, event, change, development or set of circumstances giving rise to the Intervening Event, at least four business days prior to making any Change in the Company Recommendation; and

 

   

HeartWare does not, within the four business day notice period, make a revised transaction proposal, in a manner that the World Heart board of directors determines in its good faith judgment, after having received the advice of outside legal counsel, is on such terms and conditions that the failure of the World Heart board of directors to make a Change in the Company Recommendation would no longer be inconsistent with the World Heart board of directors’ fiduciary duties to World Heart and its stockholders under applicable law; provided that during the four business day notice period World Heart will negotiate in good faith with HeartWare (to the extent HeartWare desires to negotiate) regarding any revised transaction proposal.

In addition, World Heart has agreed to:

 

   

promptly (and in any event within 24 hours after World Heart attains knowledge thereof) notify HeartWare, orally and in writing, after the receipt by World Heart, any or its subsidiaries or any of their respective representatives of any proposal, inquiry, offer or request (or any amendment thereto) with respect to either a Competing Transaction or a sale or license of any of World Heart’s or its subsidiaries’ intellectual property (herein referred to as an IP Transaction) and including any request for discussions or negotiations and any request for information relating to World Heart or any of its subsidiaries or for access to the business, properties, assets, books or records of World Heart or any of its subsidiaries, in each case, with respect to a Competing Transaction or an IP Transaction. The notice must indicate the identity of the person making such proposal, inquiry, offer or request and, to the extent such proposal, inquiry, offer or request (or any amendment thereto) is oral, a description of such proposal, inquiry, offer or request, including the terms and conditions (if any) of the proposed Competing Transaction or IP Transaction, and World Heart will promptly (and in any event within 24 hours after receipt by World Heart) provide to HeartWare copies of any written materials received by World Heart in connection with any of the foregoing;

 

   

keep HeartWare reasonably informed of the status and material details of (including discussions with respect to or amendments or proposed amendments to) any proposal, inquiry, offer or request described above and any information requested of or provided by World Heart pursuant to any such proposal;

 

   

to the extent practicable, provide HeartWare with notice of any meeting of the World Heart board of directors at which the World Heart board of directors is reasonably expected to consider any proposal, inquiry, offer or request with respect thereto (or any lesser advance notice otherwise provided to members of the World Heart board of directors in respect of such meeting), which notice may be provided on the same day that notice is provided to the World Heart board of directors of such meeting; and

 

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provide simultaneously to HeartWare any nonpublic information concerning World Heart that may be made available to any other person in response to any such proposal, inquiry, offer or request (or any amendment thereto) to the extent that World Heart has not made the information previously available to HeartWare.

World Heart has waived compliance by HeartWare, Merger Subsidiary, or any of their respective affiliates, of the standstill obligations contained in the confidentiality agreement in place between HeartWare and World Heart with respect to the merger agreement and the merger.

As used in the merger agreement, the term “Competing Transaction” means, other than the merger, any transaction or series of related transactions that constitute, or may reasonably be expected to result in:

 

   

any merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or other similar transaction involving World Heart or any of its subsidiaries;

 

   

any sale, lease, license, exchange, transfer or other disposition of, or joint venture involving, assets or businesses that constitute or represent more than 15% of the total revenue, operating income, EBITDA or fair market value of the assets of World Heart and its subsidiaries, taken as a whole;

 

   

any sale, exchange, transfer or other disposition of more than 15% of any class of equity securities, or securities convertible into or exchangeable for equity securities, of World Heart or any of its subsidiaries;

 

   

any tender offer or exchange offer that, if consummated, would result in any person becoming the beneficial owner of more than 15% of any class of equity securities of World Heart or any of its subsidiaries;

 

   

any sale or license of any of World Heart’s or its subsidiaries’ owned intellectual property that constitutes all or substantially all of the assets of World Heart and its subsidiaries (taken as a whole); or

 

   

any combination of the foregoing.

As used in the merger agreement, the term “Superior Proposal” means an unsolicited written bona fide offer or proposal made by a third party with respect to a Competing Transaction on terms and conditions that the World Heart board of directors determines, in its good faith judgment, after having received the advice of outside legal counsel, and taking into account all legal, financial and regulatory and other aspects of the proposal, reasonable expectation of consummation and any changes to the terms of the merger agreement proposed by HeartWare in response to such offer or proposal or otherwise, to be more favorable, including from a financial point of view, to the World Heart stockholders than the merger; provided that no offer or proposal will be deemed to be a “Superior Proposal” if any financing required to consummate the transaction contemplated by such offer or proposal is not fully committed or if the receipt of any such financing is a condition to the consummation of such transaction. For purposes of the definition of “Superior Proposal,” each reference to “15%” in the definition of “Competing Transaction” will be replaced with “50%.”

As used in the merger agreement, the term “Intervening Event” means, with respect to World Heart, a material fact, event, change, development or set of circumstances that was not known to the World Heart board of directors on the date of the merger agreement (or if known, the consequences of which were not known to or reasonably foreseeable by the World Heart board of directors as of the date of the merger agreement), which fact, event, change, development or set of circumstances, or any material consequences thereof, becomes known to the World Heart board of directors prior to the effective time of the merger; provided that no fact, event, change, development or set of circumstances shall constitute an Intervening Event if such fact, event, change, development or set of circumstances resulted from, arose out of or relates to (i) the receipt, existence, or terms of any proposal, inquiry, offer or request with respect to a Competing Transaction or (ii) matters specific to HeartWare or any of its affiliates, in each case, including any matter relating thereto or consequence thereof.

 

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Efforts to Complete the Merger

World Heart, HeartWare, and Merger Subsidiary will use commercially reasonable efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws or otherwise to consummate and make effective the merger and the transactions contemplated by the merger agreement and the voting agreements, including using commercially reasonable best efforts to obtain, or cause to be obtained, all permits, consents, approvals, authorizations, qualifications and orders of all governmental authorities and officials and parties to contracts with World Heart and its subsidiaries that may be or become necessary for the performance of the obligations of such party and the consummation of the merger and the transactions contemplated by the merger agreement and will cooperate fully with the other parties in promptly seeking to obtain all such permits, consents, approvals, authorizations, qualifications and orders.

World Heart, HeartWare, and Merger Subsidiary have agreed to cooperate and use commercially reasonable efforts to vigorously contest and resist any action, including any administrative or judicial action, and to have vacated, lifted, reversed or overturned any order (whether temporary, preliminary or permanent) that is in effect and that restricts, prevents or prohibits consummation of the merger and the transactions contemplated by the merger agreement, including by vigorously pursuing all available avenues of administrative and judicial appeal.

Benefits Matters

From and after the effective time of the merger, HeartWare will cause the surviving corporation and its subsidiaries to honor in accordance with their terms, all contracts, agreements, arrangements, policies, plans and commitments of World Heart and its subsidiaries as in effect immediately prior to the effective time of the merger that are applicable to any current or former employees or directors of World Heart or any of its subsidiaries; provided that nothing in the merger agreement will prohibit HeartWare or the surviving corporation and its subsidiaries from, with respect to any such contract, agreement, arrangement, policy, plan or commitment, terminating it in accordance with its terms or replacing it with a similar contract, agreement, arrangement policy, plan or commitment of HeartWare, as applicable. With respect to any employees of World Heart or any of its subsidiaries as of the date of the merger agreement who remain employed by the surviving corporation or any of its subsidiaries immediately following the closing date of the merger, during the six month period following the closing date of the merger, HeartWare will cause the surviving corporation and its subsidiaries to honor the agreed upon severance arrangements applicable to such employees.

Employees of World Heart or any of its subsidiaries will receive credit for purposes of eligibility to participate in, and vesting under, any employee benefit plan, program or arrangement established or maintained by the surviving corporation or any of its subsidiaries for service accrued or deemed accrued prior to the effective time of the merger with World Heart or any of its subsidiaries; provided that such crediting of service will not operate to duplicate any benefit or the funding of any such benefit. In addition, HeartWare will waive, or cause to be waived, any limitations on benefits relating to any pre-existing conditions to the extent such conditions are covered immediately prior to the effective time of the merger under the applicable plans and to the same extent such limitations are waived under any comparable plan of HeartWare or its subsidiaries and use commercially reasonable efforts to recognize, for purposes of annual deductible and out-of-pocket limits under its medical and dental plans, deductible and out-of-pocket expenses paid by employees of World Heart and its subsidiaries in the calendar year in which the effective time of the merger occurs.

On or prior to the date that is ten business days prior to the closing date of the merger, HeartWare may request that World Heart take all necessary action to terminate World Heart’s 401(k) plan effective as of no later than the day immediately preceding the closing date of the merger. If HeartWare makes such a request, World Heart will provide HeartWare with evidence reasonably acceptable to HeartWare that the 401(k) plan has been terminated effective as of no later than the day immediately preceding the closing date of the merger pursuant to resolutions of the World Heart board of directors and HeartWare will use its reasonable best efforts to take all steps necessary to permit each employee of World Heart or one of its subsidiaries who has received an eligible

 

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rollover distribution from the 401(k) plan, if any, to roll such eligible rollover distribution as part of any lump sum distribution to the extent permitted by the 401(k) plan into an account under HeartWare’s 401(k) plan to the extent permitted by HeartWare’s 401(k) plan.

World Heart will not continue to offer a group health plan to employees after the closing and, accordingly, HeartWare will be solely responsible for providing, or causing an affiliate of HeartWare to provide, continuation coverage under COBRA, to those individuals who are qualified beneficiaries with respect to the transactions contemplated by the merger agreement. World Heart will provide all necessary or appropriate information for HeartWare to offer COBRA continuation coverage to these qualified beneficiaries.

Indemnification and Insurance

HeartWare and the surviving corporation have agreed in the merger agreement that all rights to indemnification existing in favor of the current or former directors, officers, employees, fiduciaries or agents of World Heart or any of its subsidiaries as provided in the respective charter, by-laws or other organizational documents or in any indemnification agreement as in effect on the date of the merger agreement for acts or omissions occurring prior to the effective time of the merger will be assumed and performed by the surviving corporation and will continue in full force and effect for not less than six years following the effective time of the merger, except as otherwise required by law. If any claims for indemnification are asserted within such period, all rights to indemnification in respect of such claims shall continue until final disposition of such claims. The certificate of incorporation of the surviving corporation will contain provisions no less favorable with respect to indemnification than are set forth in the certificate of incorporation and the bylaws of World Heart, which provisions will not be amended, repealed or otherwise modified for a period of six years from the effective time of the merger in any manner that would affect adversely the rights thereunder of individuals who, at or prior to the effective time, were directors, officers, employees, fiduciaries or agents of World Heart, unless required by law.

The surviving corporation shall use its reasonable best efforts to maintain in effect for six years from the effective time of the merger, if available, the directors’ and officers’ liability insurance policies maintained by World Heart with respect to matters occurring prior to the effective time of the merger. The surviving corporation’s obligation to maintain such directors’ and officers’ liability insurance policies may be satisfied, with the approval of HeartWare, by World Heart purchasing a “tail” policy from an insurance carrier with substantially the same or better credit rating as the current carrier for World Heart’s existing directors and officers insurance policy, which (i) has an effective term of six years from the effective time of the merger, (ii) covers each person covered by World Heart’s existing directors and officers insurance policy and (iii) contains terms and conditions that are no less favorable than the terms and conditions of World Heart’s existing directors and officers insurance policy. The amount paid by World Heart for a “tail” policy, however, will not exceed 150% of the annual premiums currently paid by World Heart for its existing directors and officers insurance policy. If these “tail” policies are obtained by World Heart prior to the effective time of the merger, the surviving corporation shall maintain these policies in full force and effect, for their full respective terms, and continue to honor the surviving corporation’s obligations thereunder.

NASDAQ Listing

HeartWare will use its reasonable best efforts to cause the shares of HeartWare common stock to be issued in connection with the merger to be approved for listing on the NASDAQ Stock Market at the effective time of the merger, subject to official notice of issuance.

 

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Conditions to the Obligations of Each Party to Consummate the Merger

The respective obligations of World Heart, HeartWare and Merger Subsidiary to consummate the merger are subject to the satisfaction or written waiver (where permissible under applicable law) at or prior to the closing of the merger of the following conditions:

 

   

This proxy statement/prospectus shall have been declared effective by the SEC under the Securities Act and no stop order suspending the effectiveness of this proxy statement/prospectus shall have been issued by the SEC and no proceeding for that purpose shall be pending before the SEC;

 

   

World Heart stockholder approval shall have been obtained;

 

   

No governmental authority shall have enacted, issued, promulgated, enforced or entered any law or order enjoining, restraining, prohibiting or otherwise making illegal the consummation of the merger and the other transactions contemplated by the merger agreement; and

 

   

The shares of HeartWare common stock to be issued in the merger shall have been authorized for listing on the NASDAQ Stock Market, subject to official notice of issuance.

Conditions to the Obligations of HeartWare and Merger Subsidiary to Consummate the Merger

The obligations of HeartWare and Merger Subsidiary to consummate the merger and the other transactions contemplated in the merger agreement are also subject to the satisfaction or written waiver (where permissible under applicable law) at or prior to the closing of the merger of the following conditions:

 

   

(i) The representations and warranties of World Heart contained in its representation as to its corporate organization and the first three sentences of its capitalization representation shall be true and correct except for de minimis errors, (ii) the representations and warranties of World Heart contained in its corporate authority representation and in its absence of certain changes representation shall be true and correct and (iii) each of the other representations and warranties of World Heart contained in the merger agreement shall be true and correct without giving effect to any materiality or material adverse effect qualifier, in each case as of the date of the merger agreement and as of the effective time of the merger, as though made on, or at, and as of such date or time (except to the extent expressly made as of a specific date, in which case as of such date), except, in the case of clause (iii), where the failure of such representations and warranties of World Heart to be so true and correct has not had a World Heart material adverse effect;

 

   

World Heart shall have performed or complied in all material respects with all of the agreements and covenants required by the merger agreement to be performed or complied with by it at or prior to the effective time of the merger;

 

   

Since the date of the merger agreement, there shall not have been any World Heart material adverse effect;

 

   

World Heart shall have delivered to HeartWare a certificate, dated the closing date of the merger, signed by an executive officer of World Heart, certifying as to the satisfaction of the conditions specified above; and

 

   

World Heart shall have delivered evidence reasonably satisfactory to HeartWare showing that World Heart and its subsidiaries will have cash on hand in an aggregate amount as of the effective time of the merger not less than $4,000,000, subject to certain exceptions and adjustment under certain circumstances.

 

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Conditions to the Obligations of World Heart to Consummate the Merger

The obligations of World Heart to consummate the merger and the other transactions contemplated by the merger agreement are also subject to the satisfaction or written waiver (where permissible under applicable law) at or prior to the closing of the merger of the following conditions:

 

   

The representations and warranties of HeartWare and Merger Subsidiary contained in their representation as to corporate organization and the first three sentences of HeartWare’s capitalization representation are true and correct except for de minimis errors, (ii) the representations and warranties of HeartWare and Merger Subsidiary contained in their representation as to corporate authority shall be true and correct in all respects and (iii) each of the other representations and warranties of HeartWare and Merger Subsidiary contained in the merger agreement shall be true and correct without giving effect to any materiality or material adverse effect qualifier, in each case as of the date of the merger agreement and as of the effective time of the merger, as though made on, or at, and as of such date or time, except to the extent expressly made as of a specific date, in which case as of such date, except, in the case of clause (iii), where the failure of such representations and warranties of HeartWare and Merger Subsidiary to be so true and correct has not had a HeartWare material adverse effect;

 

   

HeartWare and Merger Subsidiary shall have performed or complied in all material respects with all of the agreements and covenants required by the merger agreement to be performed or complied with by them at or prior to the effective time of the merger;

 

   

Since the date of the merger agreement, there shall not have been any HeartWare material adverse effect; and

 

   

HeartWare shall have delivered to World Heart a certificate, dated the closing date of the merger, signed by an executive officer of HeartWare, certifying as to the satisfaction of the conditions specified above.

Termination

The merger agreement may be terminated and the merger and the other transactions contemplated by the merger agreement abandoned at any time prior to the effective time of the merger by either HeartWare or World Heart:

 

   

Upon mutual written agreement of HeartWare and World Heart duly authorized by their respective boards of directors;

 

   

If the merger is not consummated by August 31, 2012 (provided, that such right to terminate the merger agreement is not available to any party whose failure to fulfill any obligation under the merger agreement or other intentional breach has been a material cause of, or resulted in, the failure of the effective time of the merger to occur on or before August 31, 2012); or

 

   

If World Heart stockholder approval is not obtained upon a final vote to adopt the merger agreement held at the World Heart special meeting or any adjournment or postponement thereof.

The merger agreement may be terminated and the merger and the other transactions contemplated by the merger agreement abandoned at any time prior to the effective time of the merger by HeartWare:

 

   

Upon a breach by World Heart of any representation, warranty, covenant or agreement set forth in the merger agreement such that the closing conditions regarding the accuracy of World Heart’s representations and warranties and compliance by World Heart with its covenants and agreements would not be satisfied and such breach cannot be cured or has not been cured within 15 days of the receipt by World Heart of written notice from HeartWare;

 

   

If (i) a Change in the Company Recommendation has occurred; (ii) World Heart has failed to include the Company Recommendation in the proxy statement; (iii) World Heart or its board of directors has approved, endorsed, adopted, recommended or entered into an agreement in respect of a Competing

 

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Transaction; (iv) the World Heart board of directors has failed to publicly recommend against a Competing Transaction within five days of a written request by HeartWare that it do so; or (v) World Heart has materially breached, or is deemed to have materially breached, its obligations to hold the World Heart special meeting to adopt the merger agreement or its non-solicitation obligations; or

 

   

If a World Heart material adverse effect has occurred.

The merger agreement may be terminated and the merger and the other transactions contemplated by the merger agreement abandoned at any time prior to the effective time of the merger by World Heart:

 

   

Upon a breach by HeartWare or Merger Subsidiary of any representation, warranty, covenant or agreement set forth in the merger agreement such that the closing conditions regarding the accuracy of HeartWare’s and Merger Subsidiary’s representations and warranties and compliance by HeartWare and Merger Subsidiary with their covenants and agreements would not be satisfied and such breach cannot be cured or has not been cured within 15 days of the receipt by HeartWare of written notice from World Heart; or

 

   

If a HeartWare material adverse effect has occurred.

Effect of Termination

If the merger agreement is terminated, it will become void and have no effect, and there will be no liability on the part of HeartWare and World Heart or any of their respective subsidiaries, except that World Heart, HeartWare and their respective subsidiaries will remain liable for fraud committed prior to such termination or for any intentional breach prior to such termination of any of its representations, warranties, covenants or agreements set forth in the merger agreement; provided that for purposes of the merger agreement, an intentional breach means a breach of any representation, warranty or covenant that is a consequence of an act or failure to act that a party takes with the knowledge or intention that the taking of such act or the failure to take such act could cause or could reasonably be expected to cause a breach of the merger agreement. Designated provisions of the merger agreement will survive termination, including, but not limited to, the effectiveness of the license agreement (as described below) and confidential treatment of information.

Effectiveness of License Agreement and Expenses

Upon the payment of the license fee specified in the license agreement (summarized further herein in “The License Agreement” beginning on page 85), the license agreement will become effective in the following circumstances:

 

   

If HeartWare and World Heart terminate the merger agreement upon mutual written agreement;

 

   

(i) If HeartWare or World Heart terminate the merger agreement for failure to consummate the merger by August 31, 2012, (ii) the reason that HeartWare has not consummated the transactions contemplated by the merger agreement prior to August 31, 2012 is the failure by World Heart to have $4,000,000 cash or cash equivalents on hand (net of certain liabilities), and (iii) World Heart and its subsidiaries have less than $3,500,000 cash or cash equivalents on hand (net of certain liabilities);

 

   

If HeartWare terminates the merger agreement upon a breach by World Heart of any representation, warranty, covenant or agreement set forth in the merger agreement such that the closing conditions regarding the accuracy of World Heart’s representations and warranties and compliance by World Heart with its covenants and agreements would not be satisfied and such breach cannot be cured or has not been cured within 15 days of the receipt by World Heart of written notice from HeartWare;

 

   

If HeartWare terminates the merger agreement because (i) a Change in the Company Recommendation has occurred; (ii) World Heart has failed to include the Company Recommendation in the proxy statement; (iii) World Heart or its board of directors have approved, endorsed, adopted, recommended or entered into an agreement in respect of a Competing Transaction; (iv) the World Heart board of directors has failed to publicly recommend against a Competing Transaction within five days of a

 

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written request by HeartWare that it do so; or (v) World Heart has materially breached, or is deemed to have materially breached, its obligations to hold the World Heart special meeting to adopt the merger agreement or its non-solicitation obligations;

 

   

If HeartWare terminates the merger agreement because a World Heart material adverse effect has occurred; or

 

   

If HeartWare or World Heart terminates the merger agreement for failure of World Heart to obtain World Heart stockholder approval upon a final vote to adopt the merger agreement held at the World Heart special meeting or any adjournment or postponement thereof.

HeartWare must reimburse World Heart for all MiFlow VAD related expenses, including (i) any liabilities incurred by World Heart or any of its subsidiaries after the date of the merger agreement, (ii) any payments, including salaries or other compensation, made by World Heart or any of its subsidiaries to the retained MiFlow VAD research and development staff, (iii) any liability or payments to consultants and contractors, (iv) any liability or payments for MiFlow VAD materials and (v) any liability or payments for MiFlow VAD related travel (in each case in an amount not exceeding a specified amount), in the following circumstances:

 

   

If HeartWare and World Heart terminate the merger agreement upon mutual written agreement;

 

   

If World Heart terminates the merger agreement for failure to consummate the merger by August 31, 2012;

 

   

If World Heart terminates the merger agreement upon a breach by HeartWare or Merger Subsidiary of any representation, warranty, covenant or agreement set forth in the merger agreement such that the closing conditions regarding the accuracy of HeartWare’s and Merger Subsidiary’s representations and warranties and compliance by HeartWare and Merger Subsidiary with their covenants and agreements would not be satisfied and such breach cannot be cured or has not been cured within 15 days of the receipt by HeartWare of written notice from World Heart; or

 

   

If HeartWare terminates the merger agreement for failure to consummate the merger by August 31, 2012 (provided that this same termination right is also available to World Heart at the time of HeartWare’s termination).

Amendments and Waivers

The merger agreement may be amended by World Heart, HeartWare and Merger Subsidiary at any time prior to the effective time of the merger; provided that, after the World Heart stockholder approval has been obtained, no amendment may be made that under applicable law or in accordance with the NASDAQ Stock Market rules requires further approval by the World Heart stockholders without such stockholder approval having been obtained. Any amendment will be valid only if set forth in an executed writing.

At any time prior to the effective time of the merger, any of World Heart, HeartWare or Merger Subsidiary may (a) extend the time for the performance of any obligation or other act of any other party to the merger agreement, (b) waive any breach of or inaccuracy in the representations and warranties of any other party contained in the merger agreement and (c) to the extent permitted, waive compliance with any agreement of any other party or any condition to its own obligations contained in the merger agreement. No failure or delay by any of World Heart, HeartWare or Merger Subsidiary in exercising any right under the merger agreement operates as a waiver thereof, nor does any single or partial exercise thereof preclude any other or future exercise of any other right under the merger agreement. Any extension or waiver will be valid only if set forth in an executed writing.

Governing Law

The merger agreement is governed by the laws of the State of Delaware and provides that any action or proceeding arising out of or relating to the merger agreement will be heard and determined exclusively in the Court of Chancery of the State of Delaware.

 

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THE VOTING AGREEMENTS

This section of the proxy statement/prospectus describes the material provisions of the voting agreements entered into by HeartWare with certain of World Heart’s significant stockholders. The summary of the voting agreements does not purport to describe all of the terms of the voting agreements. The following summary is qualified in its entirety by reference to the complete text of the voting agreements, a form of which is attached as Annex B to this proxy statement/prospectus and incorporated herein by reference. We urge you to read the full text of the form of the voting agreements because they are the legal documents that govern the voting obligations of certain World Heart stockholders in connection with the merger. The form of the voting agreements and the description under this heading “The Voting Agreements” have been included to provide you with information regarding the terms of the voting agreements. They are not intended to provide any other factual information about HeartWare or World Heart. That information can be found elsewhere in this proxy statement/prospectus and in the other public filings made by HeartWare or World Heart with the SEC, which are available without charge. See “Where You Can Find More Information” beginning on page 199 of this proxy statement/prospectus.

As a condition to its entering into the merger agreement, HeartWare required World Heart stockholders New Leaf Ventures II L.P., Venrock Associates V, L.P., Venrock Entrepreneurs Fund V, L.P., Venrock Partners V, L.P., and World Heart director Austin Marxe, who also serves as President of AWM Investment Company Inc. and is a World Heart stockholder, to each enter into a voting agreement with HeartWare.

Under the voting agreements, each voting agreement stockholder has agreed to do the following with respect to an aggregate of 11,666,294 shares of World Heart common stock, which represents approximately 42% of the World Heart shares outstanding as of the record date, which shares we refer to herein as the voting agreement shares:

 

   

vote (or cause to be voted) the voting agreement shares in favor of the merger and the merger agreement; and

 

   

vote (or cause to be voted) the voting agreement shares against any proposal or offer with respect to a any competing transaction and against any action, proposal, transaction or agreement which would reasonably be expected to impede, interfere with, delay, discourage, adversely affect or inhibit the timely consummation of the merger or the fulfillment of HeartWare’s, World Heart’s or Merger Subsidiary’s conditions under the merger agreement or change in any manner the voting rights of any World Heart security (including by any amendments to World Heart’s certificate of incorporation or bylaws).

Each voting agreement stockholder has agreed not to, directly or indirectly:

 

   

sell, transfer (including by operation of law), pledge, assign or otherwise encumber or dispose of, or enter into any agreement, option or other arrangement (including any profit sharing arrangement) or understanding with respect to any of its World Heart securities to any person other than HeartWare or its designee;

 

   

deposit any of its World Heart securities into a voting trust or enter into any voting arrangement, whether by proxy, voting agreement, voting trust, power-of-attorney, attorney-in-fact, agent or otherwise, with respect to its World Heart securities; or

 

   

take any other action that would in any way make any representation or warranty of the voting agreement stockholder in the voting agreement untrue or incorrect in any material respect or otherwise restrict, limit or interfere in any material respect with the performance of the voting agreement stockholder’s obligations under the voting agreement or the transactions contemplated in the voting agreement.

 

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Each voting agreement stockholder has agreed not to, directly or indirectly, through any officer, director, agent or other representative:

 

   

solicit, initiate or encourage (including by way of furnishing nonpublic information), or take any other action to facilitate, any inquiries or the making of any proposal or offer (including any proposal or offer to World Heart stockholders) with respect to any Competing Transaction; or

 

   

enter into, maintain, continue or otherwise engage or participate in any discussions or negotiations with any person or entity in furtherance of such inquiries or to obtain a proposal or offer with respect to a Competing Transaction.

The voting agreements terminate upon the first to occur of:

 

   

the closing of the merger;

 

   

the date on which the merger agreement is terminated in accordance with its terms; and

 

   

the mutual written agreement of the parties thereto to terminate the voting agreement.

 

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THE LICENSE AGREEMENT

This section of the proxy statement/prospectus describes the material provisions of the license agreement entered into by HeartWare and World Heart. The summary of the license agreement does not purport to describe all of the terms of the license agreement. The following summary is qualified in its entirety by reference to the complete text of the license agreement, which is attached as Annex C to this proxy statement/prospectus and incorporated herein by reference. We urge you to read the full text of the license agreement because it is the legal document that governs the license of certain World Heart intellectual property to be granted by World Heart to HeartWare in certain circumstances if the merger is not consummated. The license agreement and the description under the heading “The License Agreement” have been included to provide you with information regarding the terms of the license agreement. They are not intended to provide any other factual information about HeartWare or World Heart. That information can be found elsewhere in this proxy statement/prospectus and in the other public filings made by HeartWare or World Heart with the SEC, which are available without charge. See “Where You Can Find More Information” beginning on page 199 of this proxy statement/prospectus.

Concurrent with the execution of the merger agreement, HeartWare and World Heart entered into the license agreement, pursuant to which World Heart agrees to grant to HeartWare a non-exclusive, worldwide, royalty-free, nontransferable (except in certain circumstances) license under certain patents and patent applications owned by World Heart, which are considered “non-core” to magnetic levitation and relate primarily to VAD peripherals including controllers, algorithms, batteries, percutaneous leads, cables and cannulae. The license does not include patents and patent applications to magnetic levitation technology intended to be incorporated within the MiFlow and PediaFlow products. The license grant takes effect upon a termination of the merger agreement prior to the closing under certain circumstances described in the merger agreement (see “The Merger Agreement—Effectiveness of License Agreement and Expenses” beginning on page 81) and upon the payment by HeartWare of $500,000 to World Heart.

Should the license become effective, HeartWare would be required to reimburse World Heart for reasonable costs and expenses incurred by World Heart in connection with the prosecution and maintenance of the licensed patents. This reimbursement amount would be reduced in the event the licensed patents are licensed to third parties by World Heart, or if HeartWare, at its option, terminates the license granted under individual licensed patents.

HeartWare would be required to indemnify World Heart and its affiliates and their directors, officers, employees and agents from losses arising from third party claims relating to the products and services of HeartWare that use the technology covered by the licensed patents. The license may be terminated by World Heart under certain circumstances, including in the event that HeartWare commences proceedings to challenge the validity or enforceability of the licensed patents, or knowingly assists a third party in doing the same.

 

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DISSENTERS’ RIGHTS

Holders of World Heart common stock who dissent to the merger will not have rights to an appraisal of the fair value of their shares. Under Delaware law, appraisal rights are not available for the shares of any class or series if the shares of the class or series are listed on a national securities exchange or held of record by more than 2,000 holders on the record date. HeartWare’s common stock is listed on the NASDAQ Stock Market, therefore, since holders of World Heart common stock will receive shares of HeartWare common stock as consideration in the merger, these holders will not have rights to an appraisal of the fair value of their shares.

 

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REGULATORY MATTERS

The completion of the transactions contemplated by the merger agreement is not conditioned on the receipt of any regulatory approvals. Both HeartWare and World Heart have agreed to use their respective commercially reasonable efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws or otherwise to consummate and make effective the completion of the transactions contemplated by the merger agreement, including using commercially reasonable best efforts to obtain, or cause to be obtained, all permits, consents, approvals, authorizations, qualifications and orders of all governmental authorities and officials that may be or become necessary for the performance of the obligations of a party to the merger agreement and the consummation of the transactions contemplated by the merger agreement.

 

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INFORMATION ABOUT THE COMPANIES

HeartWare International, Inc.

Unless the context requires otherwise, in this “Information About the Companies—HeartWare International, Inc.” section of this proxy statement/prospectus, references to “HeartWare,” “the company,” “HeartWare Group,” “we,” “us” and “our” refer to HeartWare International, Inc. and its consolidated subsidiaries, HeartWare Pty. Limited, HeartWare, Inc., HeartWare GmbH, HeartWare (UK) Limited and HeartWare France.

Description of HeartWare’s Business

Corporate Information

HeartWare International, Inc. was incorporated in Delaware on July 29, 2008 and became the successor issuer to HeartWare Limited, an Australian corporation, on November 13, 2008, as a result of the Australian Court approved redomiciliation of HeartWare Limited from Australia to Delaware. Prior to this date, HeartWare Limited was the ultimate parent company of the HeartWare Group and, following the redomiciliation, HeartWare International, Inc. became the ultimate parent company. In January 2009, HeartWare Limited was converted to an Australian private company and was renamed HeartWare Pty. Limited.

We further discuss our corporate history below under “Corporate History.”

In connection with the 2008 redomiciliation referred to above, each holder of HeartWare Limited ordinary shares, share options or performance rights received one share of common stock, one stock option or one restricted stock unit, of HeartWare International, Inc., for every 35 of HeartWare Limited ordinary shares, share options or performance rights, respectively, held by such holder. Unless the context requires otherwise, all information in this proxy statement/prospectus regarding shares, options or other securities of HeartWare International, Inc. or HeartWare Limited, as applicable, including related data on a per-unit basis, has been adjusted to give effect to the 2008 redomiciliation transaction, whether such information pertains to a date or period of time subsequent or prior to the redomiciliation transaction.

Our principal executive offices are located at 205 Newbury Street, Suite 101, Framingham, Massachusetts. Our telephone number is (508) 739-0950. Our website address is www.heartware.com. We make available on this website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission. We have included our website address in this proxy statement/prospectus as an inactive textual reference only. The information on, or that can be accessed through, our website is not part of this proxy statement/prospectus.

Currency

Unless indicated otherwise in this proxy statement/prospectus, all references to “$,” “U.S.$” or “dollars” refer to United States dollars, the lawful currency of the United States of America. References to “AU$” refer to Australian dollars, the lawful currency of the Commonwealth of Australia. References to “€” or “Euros” means Euros, the single currency of Participating Member States of the European Union. References to “£” or “British Pounds” refer to British pound sterling, the lawful currency of the United Kingdom.

Trademarks

HEARTWARE®, HVAD®, MVAD®, KRITON® and various company logos are the trademarks of HeartWare, in the United States, Europe, Australia and other countries. All other trademarks and trade names mentioned in this proxy statement/prospectus are the property of their respective owners.

 

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Business Overview

HeartWare develops and manufactures small implantable heart pumps, or ventricular assist devices, for the treatment of advanced heart failure. The HeartWare System, which includes a VAD, or blood pump, patient accessories and surgical tools, is designed to provide circulatory support for patients in the advanced stage of heart failure. The core of the HeartWare System is a proprietary continuous flow blood pump, the HVAD Pump, which is a full-output device capable of pumping up to 10 liters of blood per minute. The HeartWare System is designed to be implanted adjacent to the heart, avoiding the abdominal surgery generally required to implant similar devices.

Heart failure is a chronic disease that results in the heart’s pumping power being weaker than normal. In a healthy person, the left ventricle of the heart pumps oxygenated blood into the aorta and the blood is then circulated throughout the body until it returns through the venous system to the right side of the heart, which pumps it into the lungs where it is re-oxygenated. If the left ventricle is not working properly, the oxygenated blood is not fully cleared from the lungs and the blood is not circulated effectively. If the muscle of the left ventricle is damaged or is not working efficiently, the ventricle will tend to compensate by working harder in an effort to supply adequate blood flow into the aorta. The increased effort generally results in dilation, or enlargement, of the ventricle, rather than increased blood flow. This dilation then makes it harder for the heart to contract effectively which results in even lower blood flow and increased effort and further dilation of the ventricle. This progressive, degenerative process generally continues until the patient becomes debilitated and eventually dies from inadequate clearing of the lungs and inadequate flow of oxygenated blood throughout the body. The inadequate lung clearance or lung congestion is why the advanced stages of heart failure are called congestive heart failure.

In 2009, we received CE Marking for the HeartWare System in the European Union and in March 2011, we received approval from the Therapeutic Goods Administration in Australia allowing for commercial sale and distribution of our device for bridge-to-transplant use. In the U.S., the device is the subject of clinical trials for two indications: bridge-to-transplant and destination therapy. Our device is also available in other countries around the world under special access programs and limited commercial availability. As of December 31, 2011, the HeartWare System has been implanted outside of the U.S. in patients at over 73 health care sites in 22 countries.

Bridge-to-transplant

HeartWare’s ADVANCE clinical trial is an FDA-approved investigational device exemption, or IDE, study designed to evaluate the HeartWare® Ventricular Assist System as a bridge-to-heart transplantation for patients with end-stage heart failure. Between August 2008 and February 2010, 140 patients at 30 hospitals in the United States received the HeartWare investigational device. The protocol analysis includes 137 patients in the investigational device cohort.

On December 27, 2010, HeartWare submitted to the FDA a PMA application seeking approval of the HeartWare System for the bridge-to-transplant indication. The PMA application was supported with data from our bridge-to-transplant clinical trial, named “ADVANCE”, in the U.S. On April 25, 2012, the FDA’s Circulatory System Devices Panel of the Medical Devices Advisory Committee voted 9 to 2 that the benefits outweigh the risks for the use of the HeartWare System as a bridge to heart transplantation in patients with end-stage heart failure.

IDE Supplements have allowed us to continue to enroll patients in our ADVANCE trial under a Continued Access Protocol (“CAP”). The CAP makes the HeartWare System available to patients and clinicians while also providing additional data for the FDA to evaluate prior to determining whether or not to approve the HeartWare System. The CAP patients will be enrolled and followed under a modified protocol of the ADVANCE trial. Through December 31, 2011, 202 patients have been enrolled in the study under the CAP. On March 16, 2012, the FDA approved an IDE Supplement that allows us to enroll a fourth allotment of 54 additional patients in our ADVANCE trial under the CAP.

 

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On November 14, 2010, data from HeartWare’s bridge-to-heart transplantation study, ADVANCE, was presented at the 2010 Scientific Sessions of the American Heart Association by co-principal investigator Keith Aaronson, M.D., M.S., Associate Professor in the Division of Cardiovascular Medicine and Medical Director of the Heart Transplant Program and Center for Circulatory Support at the University of Michigan, on behalf of the ADVANCE investigators.

Results from the ADVANCE clinical study showed that 92% of the investigational device patients met the per protocol primary endpoint of the trial, which was defined as alive on the originally implanted device, transplanted or explanted for recovery at 180 days. Results from the ADVANCE clinical study also demonstrated that 94% of the investigational device patients enrolled in the study achieved a survival endpoint at 180 days.

Results for the comparator arm of the study, derived from 499 contemporaneous patients from the Interagency Registry for Mechanically Assisted Circulatory Support (“INTERMACS”) demonstrated 90% success of the primary endpoint at 180 days, as well as Kaplan-Meier survival at 180 days of 90%. Based on these results for the primary endpoint of the ADVANCE study, non-inferiority of the investigational device was established [p<0.0001].

In April 2011, clinical data from our ADVANCE bridge-to-transplant clinical trial was presented at The International Society of Heart and Lung Transplantation (ISHLT) 31st Annual Meeting and Scientific Sessions in San Diego. The data showing 180-day survival, using Kaplan-Meier analysis, for a combined 250 investigational device patients in the original study and the CAP was 94%.

In October 2011, we presented updated clinical data from our ADVANCE bridge-to-transplant clinical trial and the CAP at the 25th European Association for Cardio-Thoracic Surgery Annual Meeting in Lisbon, Portugal. The updated data for 241 patients enrolled in either the pivotal trial ADVANCE or CAP, and supported for at least six months, demonstrated a 180-day survival of 93%.

Destination Therapy

In June 2010, we received conditional IDE approval from the FDA to begin enrollment in our destination therapy clinical study for the HeartWare System. Designed to enroll up to 450 patients at 50 U.S. hospitals, the non-inferiority study, which is named “ENDURANCE”, is a randomized, controlled, unblinded, multi-center clinical trial to evaluate the use of the HeartWare System as a destination therapy in advanced heart failure patients. The study population will be selected from patients with end-stage heart failure who have not responded to standard medical management and who are ineligible for cardiac transplantation. Patients in the study will be randomly selected to receive either the HeartWare System or, as part of a control group they will be implanted with any alternative ventricular assist device approved by the FDA for destination therapy, in a 2:1 ratio. Each patient receiving the HeartWare System or control VAD will be followed to the primary endpoint at two years, with a subsequent follow-up period extending to five years post implant. In August 2010, our first patient was implanted as part of the ENDURANCE trial and we received full IDE approval from the FDA in September 2010. As of December 31, 2011, 311 patients had been enrolled in the study. In May 2012, we completed enrollment of our ENDURANCE destination therapy clinical trial and expect to submit for a CAP for this trial during the summer 2012.

Other Clinical Activities

As of January 15, 2011, we entered into a Public, Private Partnership Agreement with the Regents of the University of Michigan whereby we will act as industry sponsor of a study conducted by the University of Michigan Cardiovascular Center and the University of Pittsburgh exploring the potential benefits of VADs in patients who will be given earlier access to these devices under a grant awarded from the National Heart, Lung and Blood Institute. In the study, called REVIVE-IT, researchers will compare whether non-transplant eligible patients with heart failure less advanced than that of current VAD recipients do better with implanted devices than with current medical therapy. Pursuant to the terms of the agreement, we have committed to provide financial support up to $9.6 million over the five-year trial period. The REVIVE-IT study device will be

 

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HeartWare’s ventricular assist device, the HVAD Pump. The pilot study of approximately 12 U.S. sites, including Michigan and Pittsburgh, will include 100 patients. Enrollment in the study is expected to commence in 2012.

Other Devices

Beyond the HeartWare System, we are also evaluating our new miniaturized device, known as the MVAD® system. The MVAD is based on the same technology platform as the HeartWare System but adopts an axial flow, rather than a centrifugal flow, configuration and is being developed in multiple designs. The MVAD designs are currently at the preclinical stage undergoing animal studies focused on less invasive implantation techniques, in preparation for first-in-man studies. We expect to enroll our first patient in an MVAD first-in-man study during 2012. Each of the MVAD configurations is approximately one-third the size of the HVAD Pump. We believe that the MVAD designs will be implantable by surgical techniques that are even less invasive than those required to implant the HVAD Pump.

Operations

We began generating revenue from sales of the HeartWare System in August 2008 and have incurred net losses in each year since our inception. We expect our losses to continue as we expand our pipeline through continued research and development into next generation products, continue our clinical trials and expand commercial markets outside of the United States.

We have financed our operations primarily through the issuance of convertible notes and the issuance of shares of our common stock. Most recently, on December 15, 2010, the company issued Convertible Senior Notes with an aggregate principal amount of $143.75 million pursuant to the terms of an Indenture dated as of December 15, 2010. The Convertible Senior Notes are senior unsecured obligations of the company. The Convertible Senior Notes bear interest at a rate of 3.5% per annum, payable semi-annually in arrears on June 15 and December 15 of each year. The Convertible Senior Notes will mature on December 15, 2017, unless earlier repurchased or converted. In February 2010, we closed a public offering, under a shelf registration on Form S-3 filed with the Securities and Exchange Commission on December 24, 2009, of approximately 1.77 million shares of our common stock at an offering price of $35.50 per share for aggregate gross proceeds of approximately $62.8 million. This amount includes the underwriter’s exercise of their over-allotment option to purchase an additional 230,595 shares of our common stock at the offering price. In August 2009, we sold approximately 2.74 million shares of our common stock through private placements in the United States and Australia, which raised net proceeds of approximately $58.6 million.

We are headquartered in Framingham, Massachusetts. We have operations and manufacturing facilities in Miami Lakes, Florida, a development and operations facility in Sydney, Australia and a distribution and customer service facility in Hannover, Germany. As of December 31, 2011, we had 330 employees worldwide.

Market Opportunity

Heart Failure

Heart failure is one of the leading causes of death in the developed world. The American Heart Association estimates that heart failure affects 5.8 million people in the United States, while the European Society of Cardiology reports a prevalence of at least 10 million in European countries. Heart failure is a cardiovascular disease with both an increasing incidence and death rate worldwide. In the United States, approximately 670,000 new cases are diagnosed annually and approximately 300,000 patient deaths are attributed to advanced heart failure.

 

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Our Target Markets—Class III and Class IV Patients

Our devices target certain classes of advanced heart failure patients, specifically Class III and IV patients as defined by the New York Heart Association (“NYHA”). It is estimated that the number of Class III and Class IV heart failure patients worldwide is approximately 7 million and that approximately 20% of these patients could benefit from a circulatory assist device. We believe that there is a significant market opportunity for ventricular assist devices, or VADs, that are smaller, easier to implant, easier to use and/or more reliable than the devices that are currently available. We also believe there is a significant market opportunity for any device that, relative to existing therapies, demonstrates superior patient outcomes at a lower cost.

It is estimated that there are approximately 5 million Class III heart failure patients worldwide. Of these five million patients, we estimate that approximately 1 million patients are severely impacted by congestive heart failure, or CHF, but are not yet nearing the end stages of the disease. While these patients suffer on a daily basis, they do not need the same full support as the sicker, later-stage Class IV patients and they may be less willing to undergo the more invasive procedure required for the placement of the typical VAD. We believe that up to one-third of these one million patients could be candidates for a less invasive surgical approach because of the potential for reduced surgical risk and shorter post-operative recovery periods.

CHF Treatment Options

Although many pharmacological therapies and pacing devices that are designed to stimulate the heart have proven to be effective at prolonging the quality and duration of a patient’s life, such treatments and devices do not halt the progression of CHF. Pharmacologic management of CHF focuses primarily on increasing or stimulating the force of heart contractions. Medication regimens aim to improve the effectiveness of the heart’s contractions and slow the rate of CHF progression. For later stage Class III and Class IV patients, some investigations have suggested that the increase in patient survival rates using medical therapy is limited and that optimal medical therapy has not been demonstrated to stop or reverse the effects of CHF. Other approaches, such as devices that allow physicians to restrict or reduce the size of the heart and cell based therapy, are either in the early development stages or have not yet achieved outcomes that we believe would lead most physicians to consider these technologies as viable solutions.

Heart transplantation is the current primary therapy for refractory advanced heart failure and ultimately provides the best recovery of cardiac function. Heart transplantation is an effective and accepted surgical procedure that can result in end-stage heart failure patients resuming relatively normal lives for a period usually expected to be ten years or longer. However, the therapy is significantly constrained by the limited number of available donor hearts. Also, many patients with heart failure are ineligible for heart transplantation because of factors such as age or the presence of other diseases.

VAD Treatment for Advanced Heart Failure

Circulatory assist devices are designed to take over some or all of the pumping function of the heart by mechanically pumping blood into the aorta. Implantation of circulatory assist devices is the only therapy other than transplantation that has been shown to rehabilitate a patient from NYHA Class IV to Class I or II. A November 2001 article in The New England Journal of Medicine on a study entitled “Randomized Evaluation of Mechanical Assistance for the Treatment of Congestive Heart Failure,” or the REMATCH study, concluded that “the use of a left ventricular assist device in patients with advanced heart failure resulted in a clinically meaningful survival benefit and an improved quality of life. A left ventricular assist device is an acceptable alternative therapy in selected patients who are not candidates for cardiac transplantation.” The conclusions in this study have since been reconfirmed in a number of subsequent similar studies with VADs, including a bridge-to-transplant study and a destination therapy study, reported in the August 2007 and November 2009 articles, respectively, in The New England Journal of Medicine.

 

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A large population of end-stage heart failure patients can benefit from VAD therapy, such as our HeartWare System. Within this population there are four different indications of use of VADs: “bridge-to-transplant” therapy, “bridge-to-decision” therapy, “destination therapy” and “bridge-to-recovery” therapy.

Bridge-to-transplant therapy—Each year, the number of heart failure patients in need of a heart transplant exceeds the number of donor hearts that become available. According to the Organ Procurement and Transplantation Network, or OPTN, and Scientific Registry of Transplant Recipients, or SRTR, there were 1,853 heart transplants conducted in the United States in 2009, and as of February 3, 2012, 3,127 people are currently listed for heart transplant. The OPTN/SRTR 2010 Annual Data Report reported approximately 46% of the transplant candidates in 2009 spent one year or more on the waiting list, while nearly 40% of the patients transplanted were on a VAD as a bridge-to-transplant. Bridging the patient to transplant provides time to stabilize the patient until a suitable donor heart becomes available. We expect this percentage of patients on the waiting list who receive VAD support as a bridge-to-transplant to increase as surgeons and cardiologists become more familiar with the technology and confidence in the procedure grows in line with improving clinical data and device reliability.

Bridge-to-decision therapy—VADs are increasingly being used to assist physicians in determining which patients previously not eligible for a transplant should be listed. Rather than disqualify certain patients based upon their pre-VAD implant status, many patients now receive VAD implants and then the physician subsequently evaluates whether or not to list them for heart transplant in the future. The VAD “bridges” the physician’s listing decision and enables them to determine whether or not the patient will be a good transplant candidate by evaluating their overall health status after time spent on the VAD. This indication is best reflected in the National Institute of Health’s, or NIH, sponsored INTERMACS registry, which showed in June 2010 that 43% of registered patients were listed for heart transplant at the time of their implant, while 42% were listed as “bridge to candidacy”, or bridge-to-decision. Of note, 11.5% were registered as destination therapy.

Destination therapy—Circulatory assist devices can also be used as a permanent or lifetime therapy in medically refractory advanced heart failure patients who are deemed ineligible for heart transplantation due to, for example, their age or the presence of other diseases. The NIH estimates that destination therapy represents a long-term option for up to 100,000 patients in the United States. For these late stage patients, drug therapy historically has been the only alternative, with the 12-month mortality rate of approximately 75%. We believe that device durability and reliability, together with ease and perceived risk of implantation and better clinical outcomes, are important factors in determining whether destination therapy VADs will become accepted by physicians and patients.

Bridge-to-recovery therapy—Circulatory assist devices that provide prolonged unloading of the heart muscle, or myocardium, have been claimed to lead to recovery of the heart in some patients. In these patients, the combination of ventricular unloading combined with pharmaceutical therapy enables the physician to wean the patient from the pump and eventually remove it. This potential application of VADs was cited in the November 2006 New England Journal of Medicine article that described a recovery rate of approximately 75% in the Harefield Hospital study. While there can be no certainty that these results will be replicated or occur with sufficient repeatability in similar clinical trials, we believe that if use of VADs in these circumstances achieves widespread physician acceptance, the potential market for use of our HeartWare System in bridge-to-recovery therapy could increase significantly since removal of the device reduces the potential clinical risks associated with pumps that are left in place for multiple years.

Our Solution and Products

Proprietary Pump Technology

The HeartWare System features the smallest, full-output centrifugal pump designed to be implanted in the chest, directly adjacent to the heart. At the core of our technology platform is our proprietary “hybrid” system for

 

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suspending the impeller, which is the only moving part within the pump. The impeller is suspended within the pump housing by the opposing forces of passive magnets and hydrodynamic thrust generated by the pump impeller, which circulates a cushion of blood. Once power is applied to the device and the impeller begins to rotate, there are no points of mechanical contact within the pump, thus providing a completely wearless pumping system.

We believe the hybrid suspension system has several important advantages over traditional technologies. The elimination of the internal mechanical bearings which are characteristic of second generation devices removes all points of mechanical friction or contact within the pump. We believe that this removal of contact should lead both to longer term reliability of the device and to a potential reduced risk of physical damage to blood cells as they pass through the pump. Our hybrid suspension technology also establishes a miniaturization path, which we believe will allow us to significantly downsize our pump technology without compromising clinical performance. We believe competing pump designs which rely on either active magnetic or hydrodynamic forces alone face various physical constraints that may limit their ability to downsize without sacrificing performance.

The HeartWare System

The first product in our portfolio, the HeartWare System, is comprised of the HVAD Pump, a small, permanently implantable VAD, patient accessories and surgical tools. The HVAD Pump is capable of generating up to 10 liters of blood flow per minute. With a displaced volume of only 50 cubic centimeters and a mass of 140 grams, the HVAD Pump is the only full-output pump implantable in the pericardial space, directly adjacent to the heart. It is also the only pump designed to be implanted above the diaphragm in all eligible patients. We believe the implanting in the pericardial space generally leads to significantly shorter surgery time and a less invasive procedure relative to alternative devices, which are normally implanted in the abdomen.

Device reliability of the HeartWare System is designed to be enhanced through the use of dual motor stators with independent drive circuitry, allowing a seamless transition between dual and single stator mode if required. The pump’s inflow cannula is integrated with the device itself, providing proximity between the heart and the pumping mechanism, facilitating ease of implant and helping to ensure optimal blood flow characteristics. The use of a wide-bladed impeller and the clear flow paths through the pump are designed to help reduce the risk of pump-induced damage to blood cells.

The HeartWare System has been approved for sale in Europe since early 2009. In the United States, we must obtain PMA before the HeartWare System can be commercialized. That PMA application was submitted to the FDA in late December 2010. On April 25, 2012, the FDA’s Circulatory System Devices Panel of the Medical Devices Advisory Committee voted 9 to 2 that the benefits outweigh the risks for the use of the HeartWare System as a bridge to heart transplantation in patients with end-stage heart failure.

The HeartWare MVAD

The MVAD is a miniaturized blood pump intended for chronic heart failure patients. The device is a full-output axial flow pump with a fully suspended rotor and a displacement volume approximately one-third that of the HVAD Pump. The pre-clinical Good Laboratory Practices (GLP) in-vivo studies completed in September 2011 have shown the MVAD to have similar comparable blood flow characteristics to the HVAD Pump. The MVAD is designed for pericardial implantation and initial human clinical trials are expected to commence in summer 2012.

We believe it is likely that more patients will be willing to undergo a shorter, less invasive surgical procedure that may result in quicker recoveries and hospital discharge. We have taken advantage of the versatility of the MVAD design with multiple configurations specific to less invasive implantation procedures. This development has been supported by over 100 in-vivo studies. These devices may expand the potential pool of chronic heart failure patients.

 

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Before the MVAD product will be available for commercial sale, we will need to achieve the following milestones:

 

   

completion of the system development including next generation peripherals (e.g., controller, batteries, power adapters);

 

   

approval of and successful completion of a clinical trial; and

 

   

receipt of regulatory approvals for commercialization.

Enhanced Quality of Life with Implantable Devices

Currently, the HeartWare System and all commercially available VADs are powered by a controller and battery packs worn external to the body. Power is transferred to the implanted pump via a thin electrical cable, called a driveline, which exits the patient’s skin in the abdominal area. We are working to develop an implantable system utilizing transcutaneous energy transfer, or TET, that will eliminate the need for a percutaneous driveline. A TET system contains a wearable power management system that is inductively coupled to implanted electronics that includes a rechargeable battery pack. The patient can remove the wearable power management system and enjoy a high quality lifestyle while the system is powered by the internal battery pack.

We are collaborating with Dualis MedTech GmbH, a subsidiary of AVRA Surgical, Inc., on the development of an implantable system. Since mid-2011, a team of HeartWare and Dualis engineers has worked to successfully demonstrate the feasibility of integrating Dualis’ proprietary wireless energy transfer technology with both the HeartWare System and the MVAD system. It is expected that an implantable system will be ready for GLP animal studies in 2013 and for human pre-clinical trials following successful completion of GLP studies.

Our Business Strategy

Our primary goal, above all else, is to focus on optimizing outcomes of patients being treated for congestive heart failure. To this end, we are leading innovation in the VAD sector and are also striving to develop and maintain a proprietary technology platform that enables the development of a pipeline of ever-smaller heart pumps that will reduce procedural invasiveness and simultaneously increase the number of patients who can benefit from our products. In addition, we intend to explore technologies and therapies.

We believe that our technology portfolio provides us with a significant competitive advantage in the market. To capitalize on that advantage, we are pursuing the following plan:

Expand Market Penetration outside of the U.S.We sell to VAD centers and distributors throughout Europe and in other countries outside the U.S. With the receipt of CE Marking in January 2009, we began to develop the necessary infrastructure to support commercial sales in Europe. Throughout 2011 we continued to expand our infrastructure to support commercial activity, including establishing a European distribution facility, and have generated sales through 2011 from customers in 22 countries outside of the U.S. In the future, we intend to build wider distribution channels and ordering systems to deliver our products to the European market on a wider commercial scale as well as increase the number of countries where we have approval to sell our device commercially.

Obtain regulatory approval in the United StatesIn September 2008, we received full IDE approval from the FDA and commenced a 150 patient bridge-to-transplant clinical trial in up to 28 centers. The FDA allowed an increase to 40 centers in 2009, and in February 2010, we completed enrollment of this trial with 140 patients implanted with the HeartWare System. The remaining 10 patients were enrolled but did not receive an implant of the HeartWare System because they failed to meet the trial’s inclusion and exclusion criteria. We filed a PMA application with the FDA in late December 2010. On April 25, 2012, the FDA’s Circulatory System Devices Panel of the Medical Devices Advisory Committee voted 9 to 2 that the benefits outweigh the risks for the use of the HeartWare System as a bridge to heart transplantation in patients with end-stage heart failure.

 

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In June 2010, we received conditional IDE approval from the FDA to begin enrollment in our destination therapy clinical study for the HeartWare System. Designed to enroll up to 450 patients at 50 U.S. hospitals, the non-inferiority study, which is named “ENDURANCE,” is a randomized, controlled, unblinded, multi-center clinical trial to evaluate the use of the HeartWare System as a destination therapy in advanced heart failure patients. Each patient receiving the HeartWare System or control VAD will be followed to the primary endpoint at two years, with a subsequent follow-up period extending to five years post implant. In August 2010, our first patient was implanted as part of the ENDURANCE trial and we received full IDE approval from the FDA in September 2010. As of December 31, 2011, 311 patients have been enrolled in the ENDURANCE trial. In May 2012, we completed enrollment of our ENDURANCE destination therapy clinical trial and expect to submit for a CAP for this trial during summer 2012.

Focus on continuous product developmentIn parallel with the clinical development of the HeartWare System, we plan to advance the development of our next generation products, such as MVAD and a TET system, and to enhance our existing HeartWare System peripheral equipment. We expect assessment and development and/or enhancement work for the MVAD, the TET system and our existing HeartWare System peripheral equipment to continue throughout 2012. We have completed GLP studies for the MVAD and the designs are currently at the preclinical stage undergoing animal studies focused on less invasive implantation techniques, in preparation for first-in-man studies. The primary objective of these projects is improved ease of implantation and use of the HeartWare System that we believe will enhance market acceptance.

Partner with leading professionals in the fields of cardiovascular surgery around the worldWe have established relationships with leading professionals in the field of cardiovascular surgery and heart centers around the world and continue to expand this network. We believe these relationships are key to our growth as they help to drive clinical awareness of our products.

Explore complimentary or alternative therapies and technologiesWe intend to explore business development opportunities including strategic alliances, joint ventures, and acquisitions that might complement or expand our market opportunities. Recently, we entered into a development agreement with Dualis MedTech to develop ventricular assist devices with wireless transcutaneous energy transfer (TET) system technology exclusively for HeartWare.

Sales and Marketing

Our sales and marketing strategy is to educate and promote the benefits of ventricular assist devices for the treatment of clinical heart failure among a variety of health care professionals. Outside of the U.S., we market directly to cardiac centers and hospitals that perform heart transplants as well as through medical device distributors with experience in local markets. In the U.S., until we receive the necessary regulatory approvals, our device is not marketed but the device is available through clinical studies.

We work with a broad spectrum of health care industry participants to promote the clinical benefits of our device, including hospital administrators, cardiologists, surgeons, nurses, perfusionists, insurers and government and industry representatives. Key to the development of our business is optimizing patient outcomes via effective training and clinical end-user support programs and resources.

More than 1,800 implants have been performed globally with the HeartWare Ventricular Assist System. At December 31, 2011, the HeartWare System had been implanted in patients outside of the U.S. at over 74 health care sites in 22 countries. To support commercial sales and enrollments in clinical trials we have created field teams including sales and marketing personnel and clinical specialists to educate and service this larger and rapidly growing patient base. In addition, we partner with leading physicians in the field to proctor and preceptor new physicians on the use of our devices in their centers and to present clinical and technical data about our system at scientific symposia, congresses, and trade shows, as well as publish in peer reviewed cardiovascular journals.

 

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Our product management team conducts market research on end-user preferences and unmet needs, identifies ways to evergreen our HVAD technology with new enhancements, and works with research and development on new technologies that meet newly identified needs that are not currently addressed with our current platform of products.

Intellectual Property

We rely on a combination of patents, trade secrets, trademarks and copyrights, together with non-disclosure and confidentiality agreements, to protect our proprietary rights in our technologies.

As of December 31, 2011, we have 27 issued U.S. patents, 10 issued Australian patents, 5 issued patents in each of Japan, Germany, the United Kingdom and France, as well as patents issued in the Netherlands, Spain, Italy, Korea, Canada and Israel. We also have 29 pending U.S. non-provisional patent applications and a number of international patent applications filed under the Patent Cooperation Treaty, as well as in Japan, Europe, Australia, China, Canada, India, Korea and Israel.

Our U.S. and foreign issued patents and patent applications cover fundamental technologies underlying our hemodynamically and physiologically compatible full-output, long-term circulatory assist devices. The main technologies claimed in patents and patent applications include:

 

   

use of dual stators in a blood pump;

 

   

the combination of passive magnetic bearings and hydrodynamic thrust bearings;

 

   

channels or wide-bladed impellers in a blood pump;

 

   

the use of ceramic between an impeller and motor stator;

 

   

flow estimation based on impeller speed and viscosity; and

 

   

use of platinum alloy for blood pump impellers.

Major patents and pending patent applications covering technologies for our HeartWare System are scheduled to expire at various times between 2016 and 2027. Patents and patent applications covering technologies for our MVAD pump system are scheduled to expire at various times between 2024 and 2030.

We actively monitor our intellectual property position and periodically review new developments to identify prudent extensions to our patent portfolio. We plan to file additional patent applications on inventions that we believe are patentable and important to our business. We may also license or acquire patents from third parties that may enhance or expand our development activities. Accordingly, we intend to pursue and defend aggressively patent protection on our proprietary technologies. We have previously asserted claims and responded to counterclaims relating to our intellectual property. In connection with such processes, we have entered into and may in the future enter into settlement agreements pursuant to which third parties or their respective successors or assigns may commercialize competing technologies or products that would have otherwise been precluded by our patents subject to the agreement. See the section of this proxy statement/prospectus entitled “Risk Factors” beginning on page 16.

Despite our efforts, we may be subject to challenges, with or without merit, regarding our patents or other intellectual property. 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, or other persons could allege that our products and technologies infringe, upon 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 arises, we may seek to enter into a royalty or licensing arrangement. However, such an arrangement may not be

 

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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. At this time we are not party to any material legal proceedings that relate to patents or proprietary rights. We have had communication with various parties regarding certain of our patents which are material to our business and these are discussed in the section of this proxy statement/prospectus entitled “Risk Factors” beginning on page 16.

Our intellectual property also includes non-patented technology, processes and procedures, and technical knowledge and know-how accumulated or acquired since inception, all of which are significant to our competitive position. It is our policy to enter into confidentiality, non-disclosure and intellectual property assignment agreements with employees and consultants to help ensure that we can protect our rights in developed proprietary technology and prohibit the disclosure of any confidential information or trade secrets.

Government Regulation

United States

Our products are regulated by the FDA as a Class III medical device under the U.S. Food, Drug, and Cosmetic Act. FDA regulations govern:

 

   

product design and development;

 

   

product testing;

 

   

product manufacturing;

 

   

product safety and effectiveness;

 

   

product labeling;

 

   

product storage;

 

   

record keeping;

 

   

premarket approval;

 

   

advertising and promotion;

 

   

distribution;

 

   

product sales and post-market activities;

 

   

import and export;

 

   

medical device (adverse event) reporting; and

 

   

field corrective actions (e.g., recalls).

Premarket Approval

Each of our devices will be regulated as a Class III medical device. PMA approval from the FDA is required before marketing of a Class III medical device in the United States can commence. The process of obtaining PMA can be costly, lengthy and uncertain. A PMA application must be supported by extensive data including, but not limited to, technical, preclinical and clinical trials to demonstrate the safety and effectiveness of the device to the FDA’s satisfaction. Among other information, the PMA application must also contain a full description of the device and its components, a full description of the methods, facilities and controls used for manufacturing, and proposed device and patient labeling.

If the FDA determines that a PMA application is complete, the FDA accepts the application and then begins an in-depth review of the submitted information. The FDA, by statute and regulation, has 180 days to review an accepted PMA application, although the review and response process generally occurs over a significantly longer

 

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period of time, typically one year, and can take up to several years. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a pre-approval inspection of our and our key suppliers’ facilities to evaluate compliance with the quality system regulation. They will also conduct a Bioresearch Monitoring (“BIMO”) inspection of the clinical trial including some of the clinical data sites. To help assure the continued safety and effectiveness of an approved device, the FDA may also require a post-approval study as a condition of approval. A post-approval study may be a clinical or non-clinical study required in the PMA approval order and is intended to gather specific information to address questions about the post-market performance and physician experience with an approved medical device. Under the Medical Device User Fee and Modernization Act of 2002, the fee to submit a PMA application can be up to $200,775. User fees are expected to rise over time. We qualified for a small business exemption that allowed us to file our first PMA application at no charge. PMA supplements are required for modifications to the manufacturing process, labeling, use and design of a device that is approved through the premarket approval process. PMA supplements often require submission of the same type of information as a PMA application except that the supplement is limited to information needed to support any changes from the device covered by the original PMA.

After completing enrollment in our ADVANCE trial, we implanted additional patients under a Continued Access to Investigational Devices program (“Continued Access”). We may request approval for additional cohorts of continued access patients in the future until the device is approved. In May 2012, we completed enrollment of our ENDURANCE destination therapy clinical trial and expect to submit for a CAP for this trial during summer 2012.

Pervasive and Continuing FDA Regulation

Clinical trials require extensive recordkeeping and reporting requirements. Our clinical trials must be conducted under the oversight of an institutional review board at the relevant clinical trial site and in accordance with applicable regulations and policies including, but not limited to, the FDA’s good clinical practice, or GCP, requirements. We, the trial data safety monitoring board, the FDA or the institutional review board at each site at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a belief that the risks to study patients outweigh the anticipated benefits.

Both before and after FDA approval, numerous regulatory requirements apply. These include:

 

   

quality system regulation, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the design, manufacturing and commercialization phases;

 

   

regulations which govern product labels and labeling, prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling and promotional activities;

 

   

medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; and

 

   

notices of correction or removal and recall regulations.

Advertising and promotion of medical devices are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities. Recently, some promotional activities for FDA-regulated products have resulted in enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act, competitors and others can initiate litigation relating to advertising claims.

 

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Compliance with regulatory requirements is enforced through periodic, unannounced facility inspections by the FDA. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions against us:

 

   

warning letters or untitled letters;

 

   

fines, injunction and civil penalties;

 

   

recall or seizure of our products;

 

   

customer notification, or orders for repair, replacement or refund;

 

   

operating restrictions, partial suspension or total shutdown of production or clinical trials;

 

   

refusing our request for pre-market approval of new products;

 

   

withdrawing pre-market approvals that are already granted; and

 

   

criminal prosecution.

European Union

The primary regulatory environment in Europe is that of the European Union, or EU, which consists of 27 member states in Europe. The EU has adopted two directives that cover medical devices—Directive 93/42/EEC covering medical devices and Directive 90/385/EEC for active implantable medical devices, as well as numerous standards that govern and harmonize the national laws and standards regulating the design, manufacture, clinical trials, labeling, adverse event reporting and post market surveillance activities for medical devices that are marketed in member states. Medical devices that comply with the requirements of the national law of the member state in which they are first marketed will be entitled to bear CE Marking, indicating that the device conforms to applicable regulatory requirements, and, accordingly, can be commercially marketed within EEC states and other countries that recognize this mark for regulatory purposes. We received CE Marking for the HeartWare System in January 2009.

Australia

In Australia, the Therapeutic Goods Administration, or TGA, is responsible for administering the Australian Therapeutics Goods Act. The Office of Devices, Blood and Tissues is the department within the TGA responsible for devices. The TGA recognizes five classes of medical devices and HeartWare’s circulatory assist device falls under the category of “active implantable medical devices.”

The Australian Register of Therapeutic Goods, or ARTG, controls the legal supply of therapeutic goods in Australia. The ARTG is the register of information about therapeutic goods for human use that may be imported, supplied in, or exported from Australia. Any use of an unapproved medical device in humans, even in pilot trials, requires an exemption from the requirement for inclusion on the ARTG.

In March 2011 we received approval from the TGA to sell the HeartWare System commercially in Australia.

Other International Regulations

We are also subject to international regulations in other countries where our products are sold. We currently have limited sales to customers in countries outside of the EU, U.S. and Australia including Malaysia and New Zealand. These regulations relate to product standards, packaging and labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of the regulations applicable to our products in these countries are similar to those of the FDA. The national health or social security organizations of certain countries require our products to be qualified before they can be marketed in those countries.

 

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In order to be positioned for access to European and other international markets, we sought and obtained certification under the International Standards Organization (“ISO”) 13485 standards. ISO 13485 is a set of integrated requirements, which when implemented, form the foundation and framework for an effective quality management system. These standards were developed and published by the ISO, a worldwide federation of national bodies, founded in Geneva, Switzerland in 1947. ISO has more than 90 member countries and ISO certification is widely regarded as essential to enter Western European markets.

Healthcare Regulation

Recent healthcare policy changes

In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the federal government, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. For example, on March 23, 2010, the Patient Protection and Affordable Care Act (“PPACA”) was signed into law. On March 30, 2010, a companion bill, the Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act”) was also signed into law. Among other things, the PPACA and the Reconciliation Act (collectively, the “Acts”), when taken together, impose a 2.3% excise tax on the sale of certain medical devices that will take effect in 2013. In addition, it is possible that standard setters or regulators may address certain unique aspects of the accounting for the Acts in the future.

Regulations related to prohibiting “kickbacks” and false claims and protecting patient confidentiality

A federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar state and foreign laws, prohibit payments that are intended to induce physicians or others either to refer patients or to acquire or arrange for or recommend the acquisition of healthcare products or services. These laws constrain our sales, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with hospitals, physicians or other potential purchasers of medical devices. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent, or for items or services that were not provided as claimed. Because we may provide some coding and billing information to purchasers of the HeartWare System and our other products, and because we cannot assure that the government will regard any billing errors that may be made as inadvertent, these laws are potentially applicable to us. Anti-kickback and false claims laws prescribe civil and criminal penalties for noncompliance, which can be substantial.

There are a number of federal and state and foreign laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated patient privacy rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their own health information and limiting most use and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. If we are found to be in violation of the privacy rules under HIPAA or similar laws, we could be subject to civil or criminal penalties.

Transparency of certain payments

A section of the PPACA known as the Sunshine Act requires applicable manufacturers of drugs and devices to report annually for publication certain payments and other transfers of value to physicians and teaching hospitals as well as certain ownership interests held by physicians. Applicable manufacturers, including the company, must begin to submit reports in 2013 with respect to payments and transfers occurring in 2012. We are establishing processes and procedures to capture and report payments to physicians and teaching hospitals.

 

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Third Party Reimbursement

In the United States, hospitals and doctors generally rely on third-party payers, such as Medicare, Medicaid, private health insurance plans and self funded employers, to pay or reimburse for all or part of the cost of medical devices and the related surgical procedures. In the United States, heart failure represents Medicare’s greatest area of spending.

In 2011, the Center for Medicare and Medicaid Services, or CMS, established reimbursement rates for the treatment of patients with LVADs, with major complications and comorbidities (“MS-DRG 1”) and without major complications and comorbidities (“MS-DRG 2”). Most patients that receive VADs and all patients that receive heart transplants are eligible for MD-DRG 1 reimbursement. Using the 2011 published payment rates, the national average Medicare payment to CMS-certified centers for MS-DRG 1 procedures is approximately $140,000. Actual payments are subject to other variables such as an application of a wage index, indirect medical education costs, cost outliers, and disproportionate share payments for each institution. In addition, when VAD patients are discharged from the hospital and then readmitted for transplantation, hospitals may qualify for 2 separate MS-DRG 1 or 2 payments.

We believe that our products will be Medicare-eligible and therefore that they should be entitled to reimbursement. Several insurance providers have also implemented U.S. policies for circulatory assist devices, including Blue Cross and Blue Shield Plans, Aetna, Cigna, United Healthcare and others but such coverage may not be available if insurance providers refuse to cover Medicare approved IDE Category B2 clinical trials. We believe that many private insurers will cover our devices if they are also covered by Medicare. All of our sites in the U.S. bridge-to-transplant and destination therapy clinical trials received Medicare and third party reimbursement to some extent. In 2010, we added a reimbursement and government policy professional to our staff and will continue to build this team in 2012 with a view to improving insurance reimbursement outcomes for the HeartWare System.

International reimbursement varies from country to country and often hospital to hospital. The European system is more effective at focusing resource intensive procedures in a small number of centers within each country and LVADs fall into that category of resource intensive procedures. In those hospitals that perform VAD implantation, we believe that there are adequate budgets to purchase circulatory assist devices. As in the United States, we believe that in Europe certain groups of physicians will drive the decision as to which VAD to purchase.

Competition

Competition in the VAD industry is expected to increase as better devices become available. We believe that our products compete primarily on their safety and efficacy as a treatment for congestive heart failure as compared to other devices and other treatments. Other factors that affect our ability to effectively compete in the VAD market are our ability to obtain necessary regulatory approvals to market the device in the U.S., the price of our device and the ability of healthcare providers to secure reasonable reimbursement rates. We believe that only smaller, less invasive, reliable and durable devices will remain as viable alternatives for the treatment of congestive heart failure. In the long run, we believe our continued competitive success will depend on our ability to enhance patient outcomes and develop innovative products.

Our principal competitors in the implantable VAD space include Thoratec Corporation, Jarvik Heart, MicroMed Technology, Inc, Berlin Heart AG, and Terumo Heart, Inc., and a range of other smaller, specialized medical device companies with devices at varying stages of development.

We believe that the key features of the HeartWare System that provide us with certain advantages over our competitors’ known products include:

 

   

small device size which allows for implantation in the pericardial space immediately surrounding the heart in all patients unlike other full-output VADs that are currently available;

 

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our proprietary, hybrid technology system for suspending the pump impellers, providing a wearless pumping system; and

 

   

a design that includes a wide-bladed impeller and integrated inflow cannula, which is designed to optimize blood flow characteristics.

Although we believe the HeartWare System provides us with competitive advantages over our competitors’ known products, we note that:

 

   

our product’s success is dependent on our clinical trials demonstrating the safety and efficacy in the U.S.;

 

   

our market is an emerging market and is reliant upon acceptance of VAD technology.

See the section of this proxy statement/prospectus entitled “Risk Factors” beginning on page 16.

Research and Development

Research and development costs include activities related to the research, development, design, testing, and manufacturing of prototypes of our products as well as costs associated with certain clinical and regulatory activities. We expect our research and development expenses to continue to increase as we continue to research and develop improvements to the HeartWare System, research the application of, and develop our miniaturized heart pump technology, conduct additional clinical trials and hire additional employees. For the years ended December 31, 2009, 2010 and 2011 we incurred research and development expenses of $15.1 million, $33.1 million and $50.1 million, respectively.

Manufacturing and Assembly

Our manufacturing activities to date, and for the foreseeable future, will continue to consist primarily of process development, component assembly, quality control testing and sustaining engineering. Most of the components of the HeartWare System are manufactured by third parties, including the center post, pump housing and impeller. Some critical components, including the controller, are manufactured solely by an outside supplier and are essentially provided to us as a finished good ready-for-sale as part of our HeartWare System.

In order to sell our product commercially in the European Union, we are required to meet certain regulatory standards. In October 2008, we received a Certificate of Registration from the British Standard Institution (BSI) certifying that the company’s Quality Management System complies with the requirements of ISO 13485:2003. It signifies that HeartWare has established a comprehensive quality system that conforms to the International Organization for Standardization (“ISO”) 13485:2003 requirements. The ISO 13485:2003 standard is fully recognized in many countries as a measure of quality. In January 2009, we received a Full Quality Assurance Certificate, CE 540273 from BSI. It signifies that the HeartWare Ventricular Assist System designed and manufactured by HeartWare conforms with the provisions of Council Directive for Active Implantable Medical Devices, 90/385/EEC, Annex 2, Section 3.2 at every stage, from design to final controls. In order to maintain these certifications we must show through annual surveillance audits conducted by the British Standard Institute (BSI) that HeartWare’s Quality System remains compliant with the requirements of ISO 13485 and applicable standards.

We do not presently have supply agreements with some of our key suppliers and we have not secured second source suppliers for all of our supplies. See the “Risk Factors—Risks Related to HeartWare’s Business and Industry” section beginning on page 19 for additional information.

 

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Employees

As of December 31, 2011, we had 330 employees, of whom 229 employees are engaged in operations activities including research and development, quality assurance and manufacturing activities, 65 are engaged in marketing, clinical and regulatory activities and 36 are engaged in finance, legal and other administrative functions. None of our employees are represented by a labor union or covered by a collective bargaining agreement other than employees in France who are subject to national, collective bargaining agreements. We consider our relations with our employees to be good.

Corporate History

HeartWare International, Inc. was incorporated in Delaware on July 29, 2008 as a wholly-owned subsidiary of HeartWare Limited, a corporation incorporated in Australia on November 26, 2004. On November 13, 2008, HeartWare Limited completed its redomiciliation from Australia to Delaware pursuant to certain schemes of arrangement approved by an Australian court. Subsequent to the redomiciliation, HeartWare Limited was renamed HeartWare Pty. Limited. In connection with this redomiciliation, each holder of HeartWare Limited ordinary shares was issued one share of HeartWare International, Inc. common stock in exchange for every 35 ordinary shares of HeartWare Limited. As a result, HeartWare Limited became a wholly-owned subsidiary of HeartWare International, Inc., and HeartWare International, Inc. became the parent company of the HeartWare Group.

HeartWare Limited acquired our operating subsidiary, HeartWare, Inc., on January 24, 2005. HeartWare, Inc. is a Delaware corporation which was incorporated on April 8, 2003 under the name Perpetual Medical, Inc., and which changed its name to HeartWare, Inc. on July 10, 2003. Since July 10, 2003, HeartWare, Inc. has operated the business formerly owned and operated by Kriton Medical, Inc., which had been developing the HeartWare VAD System since approximately 1995.

In May 2003, Kriton filed for protection from creditors under Chapter 11 of the United States Bankruptcy Code. On May 20, 2003, Kriton and its lead investor Apple Tree Partners I, L.P., proposed a joint plan of liquidation for Kriton. On June 20, 2003, the United States Bankruptcy Court of the Southern District of Florida issued a court order confirming the plan of liquidation. This court order, together with a supplemental court order approving a settlement between Apple Tree Partners and various stockholders of Kriton issued on July 3, 2003, approved the sale of substantially all the assets of Kriton to HeartWare, Inc. On July 10, 2003, HeartWare, Inc. purchased substantially all of the assets of Kriton free and clear of any and all liens, security interests, encumbrances and claims. The assets included all of Kriton’s patents and other intellectual property which were assigned to HeartWare, Inc.

In connection with the asset purchase, HeartWare, Inc. issued Series A-1 and Series A-2 Preferred Stock to certain creditors of Kriton. The Series A-1 and Series A-2 Preferred Stock do not have any voting rights or the right to receive dividends but entitle the holders thereof to receive upon certain liquidation events of HeartWare, Inc. (but not the liquidation of or change of control of the parent of HeartWare, Inc.) an amount equal to $10 per share of Series A-1 and an amount of $21 per share of Series A-2. HeartWare, Inc. continued to operate as an independent entity until January 24, 2005, when HeartWare Limited acquired all of the voting stock of HeartWare, Inc. in exchange for the issuance by HeartWare Limited of 2.5 million shares (as adjusted for a reverse split in the ratio of 35 to 1) and a convertible note in the principal amount of $1.1 million. The convertible note was redeemed during the third quarter of 2008.

Description of Properties

Our corporate headquarters are located in Framingham, Massachusetts. We have operations and manufacturing facilities in Miami Lakes, Florida, a development and operations facility in Sydney, Australia and a distribution and customer service facility in Hannover, Germany.

 

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Our office in Framingham, Massachusetts consists of approximately 17,800 square feet and is primarily used for administrative functions. The lease expires on December 31, 2014 and we have an option to renew the lease for one additional four-year term. We also have an option to expand with an additional 3,002 square foot space in the building.

One of our facilities in Miami Lakes, Florida consists of approximately 59,000 square feet and includes office space, laboratories, research and development space and three clean rooms which are ISO Class 100,000 compliant. The facility is used primarily for manufacturing, research and development and administrative functions. The lease expires on June 30, 2013 and we have an option to renew the lease for two additional, three-year terms.

On December 9, 2010, we entered into a lease for a second facility in Miami Lakes, Florida as part of our planned expansion to support our efforts to prepare for U.S. commercialization. During 2011, we performed significant improvements on the facility and improvements will continue in the first quarter of 2012. Once completed, the facility will be used primarily for manufacturing, research and development and administrative functions. Under the lease, we rent approximately 131,000 square feet for a period ending February 28, 2022, with an option to renew for two five-year terms.

One of our facilities in Sydney, Australia consists of approximately 2,600 square feet of manufacturing space. We originally leased the space for a two-year period commencing on August 31, 2009. We did not exercise our option to renew the lease for an additional three-year term. We are currently occupying the space on a month-to-month basis.

On November 1, 2011, we entered into a lease for a new facility in Sydney, Australia. This facility will replace our current facility noted above and will be used primarily for manufacturing and administrative functions. Under the lease, we rent approximately 15,100 square feet for a period ending October 31, 2014, with an option to renew for two three-year terms.

Our facility in Hannover, Germany is approximately 3,900 square feet. The lease commenced on October 11, 2010 with an initial term of two years. We have an option to renew the lease for one additional three-year term.

We believe that the facilities noted above are suitable and adequate for our needs now and for the foreseeable future.

Legal Proceedings

From time to time we may be involved in litigation or other contingencies arising in the ordinary course of business. Except as set forth below, and based on the information presently available, management believes that there are no contingencies, claims or actions pending or threatened, the ultimate resolution of which will have a material adverse effect on our financial position, liquidity or results of operations.

On February 24, 2010, we received a letter from two holders of Series A Preferred Stock in HeartWare, Inc., an indirect subsidiary of HeartWare International, Inc. These holders requested various financial and other information regarding HeartWare, Inc. for the purpose of determining the company’s compliance with their rights as holders of Series A Preferred Stock, including whether a liquidation event has occurred since inception in 2003. HeartWare, Inc. issued Series A-1 and Series A-2 Preferred Stock to certain equity holders of Kriton Medical, Inc. when HeartWare, Inc. purchased out of bankruptcy substantially all of the assets of Kriton in July 2003. The Series A-1 and Series A-2 Preferred Stock do not have voting or dividend rights but entitle the holders thereof to receive, upon certain liquidation events of HeartWare, Inc. (but not the liquidation of or change of control of HeartWare International, Inc.), an amount equal to $10 per share of Series A-1 and $21 per share of Series A-2. The aggregate liquidation preference payment obligation totals approximately $15 million.

 

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On June 27, 2011, HeartWare International, Inc. and HeartWare, Inc., along with HeartWare’s directors, certain officers and a significant stockholder, were named as defendants in a putative class action lawsuit filed in Massachusetts state court by two other Series A Preferred Stockholders on behalf of all holders of Series A Preferred Stock. The complaint alleges that the defendants breached their fiduciary and contractual obligations to Series A Preferred Stockholders by preventing them from receiving a payment of the liquidation preference in connection with certain corporate transactions, including a transaction in 2005 in which HeartWare, Inc. was acquired by HeartWare Limited, a subsidiary of HeartWare International, Inc. The plaintiffs seek monetary damages, interest, costs and limited equitable relief. We do not believe HeartWare International, Inc., HeartWare, Inc. or any of our directors, officers or stockholders have abrogated the rights, or in any way failed to satisfy obligations owed to, any of our stockholders, including holders of Series A Preferred Stock. On September 12, 2011, the defendants served on plaintiffs a motion to dismiss the complaint with prejudice. On February 3, 2012, counsel for plaintiffs and defendants entered into a Memorandum of Understanding to settle the matter. Defendants have agreed to pay up to $1.125 million to participating putative class members in exchange for a full and unconditional release of all claims asserted in the litigation, including any and all claims arising from any right to receive a payment upon any liquidation or deemed liquidation event that has arisen or may arise in the future. We expect insurance to fund a significant portion of the settlement amount, although coverage is not assured. The court has scheduled a hearing for July 25, 2012 to finally approve the settlement following notice to putative class members.

In accordance with ASC 450, Contingencies, we accrue loss contingencies including costs of settlement, damages and defense related to litigation to the extent they are probable and reasonably estimable. Otherwise, we expense these costs as incurred. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the range. As of December 31, 2011, we have determined that settlement of the litigation discussed above is probable and that the reasonably estimable settlement amount is $1.1 million. At December 31, 2011, we recorded a liability for the $1.1 million, a $0.2 million receivable from one of the co-defendants, who is a related party, and expense of $0.9 million.

Market for Registrant’s Common Equity and Related Stockholder Matters

On February 24, 2009, our shares of common stock were listed on the NASDAQ Stock Market with trading commencing on February 25, 2009 under the symbol “HTWR”. Our shares of common stock also trade in the form of CHESS Depositary Interests (“CDIs”), each CDI representing one thirty-fifth of a share of our common stock, on the Australian Securities Exchange (“ASX”) under the symbol “HIN” since November 13, 2008. Prior to that date, our ordinary shares of HeartWare Limited (since renamed HeartWare Pty. Limited), of which we are the successor issuer, were traded on the ASX under the symbol “HTW”.

The following table sets forth, for the periods indicated, the high and low closing prices for our common stock on the NASDAQ Stock Market.

 

Period

   High      Low  

Fiscal Year 2011:

     

First Quarter

   $ 97.69       $ 81.19   

Second Quarter

     84.32         67.00   

Third Quarter

     74.58         54.90   

Fourth Quarter

     70.56         58.78   

Fiscal Year 2010:

     

First Quarter

   $ 44.47       $ 33.96   

Second Quarter

     74.65         45.14   

Third Quarter

     74.67         60.49   

Fourth Quarter

     93.76         61.90   

As of March 29, 2012, the date immediately before the public announcement of the merger, the closing price for HeartWare’s common stock was $66.72 per share.

 

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As of April 25, 2012, we had 14,135,115 shares of common stock issued and outstanding and there were approximately 13 holders of record of our common stock. In addition, as of that date, there were approximately 682 registered owners of our CDIs.

We have not declared or paid any cash dividends on our shares, and we currently do not anticipate paying any cash dividends in the foreseeable future. Our convertible notes were issued pursuant to the terms of an Indenture dated December 15, 2010. The Indenture does not contain any covenants or restrictions on the payments of dividends. We intend to retain any earnings to finance the development and expansion of our products and business.

Equity Compensation Plans

The following table sets forth information regarding the company’s Equity Compensation Plans as of December 31, 2011:

 

Plan Category

  Number of
securities
to be
issued
upon
exercise of
outstanding
options,
warrants
and rights
(a)
    Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
(b)
    Number of  securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
 

Equity compensation plans approved by security holders:

     

HeartWare International, Inc. Employee Stock Option Plan

    296,817      $ 31.87  (1)      (2) 

HeartWare International, Inc. Restricted Stock Unit Plan

    47,685      $ 0.00         16,976  (2) 

HeartWare International, Inc. 2008 Stock Incentive Plan (3)

    665,947      $ 5.51         368,982  (2)(4) 

Equity compensation plans not approved by security holders:

     

Non-Plan options

    5,142      $ 26.71  (1)      N/A   

 

(1) The exercise price has been converted to U.S. dollars using the spot rate at December 31, 2011.
(2) Future awards to employees and directors are expected to be made under the 2008 Stock Incentive Plan as any grants under the other plans reduce the availability of grants under the 2008 Stock Incentive Plan.
(3) Outstanding awards under the 2008 Stock Incentive Plan include 586,723 restricted stock units outstanding with exercise prices of $0 and 79,224 stock options outstanding with exercise prices equal to the fair value of our common stock on the date of grant. The weighted average exercise price of the outstanding stock options was $46.28 at December 31, 2011.
(4) The 2008 Stock Incentive Plan includes an annual adjustment to shares available for future issuance at each January 1 based on the prior number of weighted average shares outstanding in the prior year. As of January 1, 2012, the number of shares available for future issuance under the 2008 Stock Incentive Plan was approximately 460,000.

 

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Stock Price Performance Graph

The graph below compares the cumulative total stockholder return on an investment in our CDIs, the NASDAQ Composite Index (U.S. companies only) and the Morningstar Medical Devices Index for the five-year period ended December 31, 2011. The graph assumes the value of an investment in our CDIs traded on the ASX and each index was $100 on December 31, 2006 and the reinvestment of all dividends, if any.

The graph also presents the cumulative total stockholder return on an investment in our common stock for the period from February 25, 2009 to December 31, 2011. The graph assumes the value of an investment in our common stock was $100 on February 25, 2009, the date our common stock commenced trading on the NASDAQ Stock Market, and the reinvestment of all dividends, if any.

 

LOGO

 

Company/Market/Peer Group

  12/31/2006     12/31/2007     12/31/2008     2/25/2009     12/31/2009     12/31/2010     12/31/2011  

HeartWare International, Inc. (NASDAQ:HTWR)

        $ 100.00      $ 118.23      $ 291.90      $ 230.00   

HeartWare International, Inc. (ASX:HIN)

  $ 100.00      $ 91.45      $ 79.21      $ 141.31      $ 191.59      $ 494.96      $ 380.05   

NASDAQ Composite

  $ 100.00      $ 110.66      $ 66.41      $ 60.16      $ 96.54      $ 114.06      $ 113.16   

Morningstar Medical Devices

  $ 100.00      $ 96.38      $ 63.78      $ 65.88      $ 87.31      $ 89.69      $ 86.11   

 

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Supplementary Financial Information (Unaudited)

The following table presents selected quarterly financial information for the periods indicated. This information has been derived from our unaudited quarterly consolidated financial statements, which in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information. The quarterly per share data presented below was calculated separately and may not sum to the annual figures presented in the consolidated financial statements, which are included in this proxy statement/prospectus beginning on page FS-1. These operating results are also not necessarily indicative of results for any future period.

 

    Three Months Ended  
    March 31     June 30     September 30     December 31  
    (in thousands, except per share data)  

2011

       

Revenue, net

  $ 17,975      $ 20,389      $ 21,340      $ 23,060   

Gross profit

    10,379        12,476        13,456        13,521   

Net loss

    (9,431     (10,096     (13,964     (21,564

Net loss per common share—basic and diluted (1)

  $ (0.68   $ (0.73   $ (1.00   $ (1.53

Weighted average shares outstanding—basic and diluted

    13,901        13,923        13,948        14,063   

2010

       

Revenue, net

  $ 10,703      $ 9,757      $ 13,817      $ 20,887   

Gross profit

    5,023        5,464        7,814        12,422   

Net loss

    (4,544     (9,982     (7,844     (7,027

Net loss per common share—basic and diluted (1)

  $ (0.35   $ (0.73   $ (0.57   $ (0.51

Weighted average shares outstanding—basic and diluted

    12,958        13,683        13,753        13,874   

 

(1) Net loss per common share for each quarter is computed using the weighted-average number of shares outstanding during that quarter while net loss per common share for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters’ net loss per common share may not equal the full-year loss per share.

Significant amounts in per quarter information listed above include:

 

   

Net loss for the quarter ended March 31, 2011 included $2.9 million of share-based compensation expense, $2.6 million of interest expense and $0.6 million of foreign exchange gains.

 

   

Net loss for the quarter ended June 30, 2011 included $3.5 million of share-based compensation expense and $2.6 million of interest expense.

 

   

Net loss for the quarter ended September 30, 2011 included $3.6 million of share-based compensation expense, $2.7 million of interest expense and $1.4 million of foreign exchange losses.

 

   

Net loss for the quarter ended December 31, 2011 included $3.2 million of share-based compensation expense, $2.7 million of interest expense, $1.6 million of foreign exchange losses and $0.9 million related to an accrual for a potential litigation settlement.

 

   

Net loss for the quarters ended March 31, June 30, September 30 and December 31, 2010 include approximately $1.7 million, $4.3 million, $2.6 million and $2.0 million, respectively, of share-based compensation expense.

Manageme nt’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes, which are included in this proxy statement/prospectus beginning on page FS-1. This discussion and analysis contains forward-looking statements

 

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that involve risks, uncertainties, judgment and assumptions. You should review the “Risk Factors” section beginning on page 16 of this proxy statement/prospectus for a description of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Certain abbreviated key terms have the meanings defined elsewhere in this proxy statement/prospectus.

Overview

HeartWare is a medical device company that develops, manufactures and markets miniaturized implantable heart pumps, or ventricular assist devices, to treat patients suffering from advanced heart failure.

The HeartWare Ventricular Assist System (the “HeartWare System”), which includes a ventricular assist device (“VAD”), or blood pump, patient accessories and surgical tools, is designed to provide circulatory support for patients in the advanced stage of heart failure. The core of the HeartWare System is a proprietary continuous flow blood pump, the HVAD Pump, which is a full-output device capable of pumping up to 10 liters of blood per minute. The HeartWare System is designed to be implanted adjacent to the heart, avoiding the abdominal surgery generally required to implant similar devices.

In 2009, we received CE Marking for the HeartWare System in the European Union and in March 2011 we received approval from the Therapeutic Goods Administration in Australia allowing for commercial sale and distribution of our device. In the U.S., the device is the subject of clinical trials for two indications: bridge-to-transplant and destination therapy. Our device is also available in other countries around the world under special access programs and limited commercial availability.

Recent key milestones in the development and commercialization of the HeartWare System include the following:

 

   

In May 2012, we completed enrollment of our ENDURANCE destination therapy clinical trial and expect to submit for a CAP for this trial during summer 2012;

 

   

On April 25, 2012, the FDA’s Circulatory System Devices Panel of the Medical Devices Advisory Committee voted 9 to 2 that the benefits outweigh the risks for the use of the HeartWare System as a bridge to heart transplantation in patients with end-stage heart failure;

 

   

In March 2012, the FDA approved an Investigational Device Exemption Supplement that allows us to enroll a fourth allotment, of 54 additional patients, in our ADVANCE bridge-to-transplant clinical trial under a CAP. In three prior CAP allotments granted by FDA, 202 patients were enrolled between April 2010 and December 2011;

 

   

The HeartWare System was implanted in over 900 patients in 2011;

 

   

In January 2011, we were named to the REVIVE-IT study, a study to be completed by the Universities of Michigan and Pittsburgh on the benefits of LVADs in patients with earlier access to the device;

 

   

Approval of the HeartWare System by the Therapeutic Goods Administration (TGA) in Australia for listing on the Australian Register of Therapeutic Goods; and

 

   

Reimbursement approval in France and Belgium of the HeartWare System.

Beyond the HeartWare System, we are also evaluating our next generation device, the MVAD Pump. The MVAD Pump is a development-stage miniature ventricular assist device, approximately one-third the size of the HVAD Pump. The MVAD Pump is based on the same proprietary impeller suspension technology used in the HVAD Pump, with its single moving part held in place through a combination of passive-magnetic and hydrodynamic forces. Like the HVAD Pump, the MVAD Pump is designed to support the heart’s full cardiac output, yet also has the capability for partial support. On September 9, 2011, pre-clinical data was presented at the 19th Congress of the International Society for Rotary Blood Pumps (ISRBP), which demonstrated that the MVAD Pump attained the objectives for system performance, hemocompatability and biocompatibility in Good Laboratory Practice (“GLP”) animal studies, a precursor to human clinical trials. We are currently preparing to

commence human clinical studies in the second half of 2012. The MVAD Pump is designed to be implantable by surgical techniques that are even less invasive than those required to implant the HVAD Pump.

 

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We began generating revenue from our products in August 2008 and have incurred net losses in each year since our inception. We expect our losses to continue as we advance and expand our clinical trial activities in the U.S., continue to develop commercial markets outside of the U.S., and expand our research and development into next generation products including the MVAD Pump and related accessories.

We have financed our operations primarily through the issuance of convertible notes and the issuance of shares of our common stock. Most recently, on December 15, 2010, we issued convertible notes with an aggregate principal amount of $143.75 million pursuant to the terms of an Indenture dated as of December 15, 2010. The convertible notes are senior unsecured obligations of the company. The convertible notes bear interest at a rate of 3.5% per annum, payable semi-annually in arrears on June 15 and December 15 of each year. The convertible notes will mature on December 15, 2017, unless earlier repurchased or converted.

We are headquartered in Framingham, Massachusetts. We have operations and manufacturing facilities in Miami Lakes, Florida, a development and operations facility in Sydney, Australia and a distribution and customer service facility in Hannover, Germany.

Critical Accounting Policies and Estimates

We prepare our financial statements in accordance with accounting principles generally accepted in the United States. We are required to adopt various accounting policies and to make estimates and assumptions in preparing our financial statements that affect the reported amounts of our assets, liabilities, revenue and expenses. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on our historical experience to the extent practicable and on various other assumptions that we believe are reasonable under the circumstances and at the time they are made. If our assumptions prove inaccurate or if our future results are not consistent with our historical experience, we may be required to make adjustments in our policies that affect our reported results. Our significant accounting policies are disclosed in Note 3 to each of the financial statements provided, which are included in this proxy statement/prospectus beginning on page FS-1. During the three months ended March 31, 2012, there were no significant changes to any of our significant accounting policies.

Our most critical accounting policies and estimates include: revenue recognition, inventory capitalization and valuation, accounting for share-based compensation, measurement of fair value, and the valuation of tax assets and liabilities. We also have other key accounting policies that are less subjective and, therefore, their application is less subject to variations that would have a material impact on our reported results of operations. The following is a discussion of our most critical policies, as well as the estimates and judgments involved.

Revenue recognition

We recognize revenue from product sales in accordance with FASB ASC 605—Revenue Recognition. Pursuant to agreements or orders from customers, we ship product to our customers. Revenue from product sales is only recognized when persuasive evidence of an arrangement exists, substantially all the risks and rewards of ownership have transferred to our customers, the selling price is fixed and collection is reasonably assured. A majority of product sales are initially made on a consignment basis and as such, pursuant to the terms of the consignment arrangements, revenue is recognized on the date the consigned product is implanted or otherwise consumed. Revenue from product sales not sold on a consignment basis is recognized upon customer receipt and acceptance of the product. Revenue recognized to date is from sales of our devices in connection with our U.S. clinical trials and commercial sales in Europe and to a lesser extent under special access in other countries.

Inventory Capitalization

We expense costs relating to the production of inventories as research and development (“R&D”) expense in the period incurred until such time as we believe future commercialization is considered probable and future economic benefit is expected to be recognized, which generally is reliant upon receipt of regulatory approval. We then begin to capitalize subsequent inventory costs relating to that product. Inventories are stated at the lower of

 

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cost or market. Cost is determined on a first-in, first-out, or FIFO, method. Work-in-process and finished goods include direct and indirect labor and manufacturing overhead. Finished goods include product which is ready-for-use and which is held by us or by our customers on a consignment basis.

We review our inventory for excess or obsolete items and write down obsolete or otherwise unmarketable inventory to its estimated net realizable value. Obsolescence may occur due to product expiring or product improvements rendering previous versions obsolete. The extent to which product improvements will cause obsolescence of existing inventory is difficult to determine as the rate of customer acceptance is dependent on many factors. We make judgments and estimates on matters, including forecasted sales volume. Our estimates and judgments in this area are subject to uncertainty and may differ from our actual experience in the future, which could have a material effect on recorded inventory values.

We include in inventory materials and finished goods that are held for sale. Certain materials and finished goods held in inventory may be used in research and development activities and are expensed as part of research and development costs when consumed.

Share-Based Compensation

We recognize share-based compensation expense in connection with our share-based awards, net of an estimated forfeiture rate, and therefore only recognize compensation cost for those awards expected to vest over the service period of the award. We estimate the forfeiture rate based on our historical experience of forfeitures and our employee retention rate. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be significantly different from what we have recorded in the current period. Calculating share-based compensation expense requires the input of highly subjective judgment and assumptions, including estimates of expected life of the share-based award, stock price volatility, forfeiture rates and risk-free interest rates. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future.

We value restricted stock units, or RSUs, at their intrinsic value on the date of grant. We estimate the fair value of our stock options using a Black-Scholes option pricing model. The assumptions used in estimating the fair value of our stock options represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. When appropriate, we estimate the expected life of a stock option by averaging the contractual term of the stock option (up to 10 years) with the associated vesting term (typically 4 years). We estimate the volatility of our shares on the date of grant considering several factors, including the historical volatility of our publicly-traded shares. We estimate the risk-free interest rate based on rates in effect for United States government bonds with terms similar to the expected lives of the awards, at the time of grant.

We have issued share-based awards with performance-based vesting criteria. Achievement of the milestones must be probable before we begin recording share-based compensation expense. At each reporting period, we review the likelihood that these awards will vest and if the vesting is deemed probable, we begin to recognize compensation expense at that time. In the period that achievement of the performance-based criteria is deemed probable, U.S. GAAP requires the immediate recognition of all previously unrecognized compensation since the original grant date. As a result, compensation expense recorded in the period that achievement is deemed probable could include a substantial amount of previously unrecorded compensation expense related to the prior periods. During 2011, 2010 and 2009, we determined that achievement of certain performance-based vesting criteria for share-based awards originally granted in 2008 and 2007 was probable. Therefore, we began recording compensation expense during 2011, 2010 and 2009 in connection with certain share-based awards that had been outstanding but for which we had not previously recorded any compensation expense. If ultimately performance goals are not met, for any share-based awards where vesting was previously deemed probable, previously recognized compensation cost will be reversed.

 

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Fair Value Measurements

FASB ASC 820—Fair Value Measurements and Disclosures defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to us as of the respective reporting dates. Accordingly, the estimates presented in our financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments.

FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

The three levels of the fair value hierarchy are as follows:

Level 1—Quoted prices for identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3—Instruments with primarily unobservable value drivers.

The assumptions used in calculating the fair value of financial instruments represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, the use of different estimates or assumptions would result in a higher or lower fair value and different amounts being recorded in our financial statements. Calculating fair value utilizing Level 3 inputs requires the input of highly subjective judgment and assumptions.

Income Taxes

We account for income taxes in accordance with the liability method presented by FASB ASC 740—Income Taxes. Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of FASB ASC 740. Through December 31, 2011, we have historically concluded that a full valuation allowance is required to offset our net deferred tax assets. We operate within multiple taxing jurisdictions and are subject to audit in those jurisdictions. Because of the complex issues involved, any claims can require an extended period to resolve.

FASB ASC 740 requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more likely than not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

 

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Reserves

Management must make estimates and assumptions to determine the amount of reserves to record in the financial statements. If any of these decisions proves incorrect, our consolidated financial statements could be materially and adversely affected.

We maintain allowances for doubtful accounts for estimated losses that may result from an inability to collect payments owed to us for product sales. We regularly review the allowance by considering factors such as historical experience, the age of the accounts receivable balances and current economic conditions that may affect a customer’s ability to pay.

Certain patient accessories sold with the HeartWare System are covered by a limited warranty ranging from one to two years. Estimated contractual warranty obligations are recorded as an expense when the related revenue is recognized and are included in cost of revenue on our consolidated statements of operations. Factors that affect estimated warranty liability include the number of units sold, historical and anticipated rates of warranty claims, cost per claim, and vendor supported warranty programs. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.

Results of Operations

The following is a description of significant components of our operations, including significant trends and uncertainties that we believe are important to an understanding of our business and results of operations.

Fiscal Years 2011 and 2010, Three months ended March 31, 2012 and 2011

Revenue, net

In fiscal years 2011 and 2010, we generated revenue from commercial sales outside of the U.S. and sales in connection with our clinical trials in the U.S. The increase in revenue is primarily due to increased market penetration outside of the U.S., increased activity in our U.S. destination therapy study and continuing activity after completion of our U.S. bridge-to-transplant study through a CAP.

In the three months ended March 31, 2012 and 2011, we generated revenue from commercial sales outside of the U.S. and sales in connection with our clinical trials in the U.S. The increase in revenue in the first quarter of 2012 is primarily due to increased market penetration outside of the U.S. and continued enrollment in our U.S. destination therapy study.

Net revenue for the years ended December 31, 2011 and 2010 was as follows:

 

     2011      2010      Change  
     (in thousands)         

Revenue, net

   $ 82,764       $ 55,164         50
  

 

 

    

 

 

    

 

     Three Months Ended
March 31,
        
     2012      2011      Change  
     (in thousands)                

Revenue, net

   $ 26,346       $ 17,975         47 %

Approximately 34% of our product sales in 2011 were derived in the U.S. as compared to 27% in the prior year. The increase in the portion of our revenue derived in the U.S. was due primarily to the increased enrollment in our U.S. destination therapy study. In the three months ended March 31, 2012, approximately 24% of our product sales were derived in the U.S. as compared to 33% in the three months ended March 31, 2011. The percentage of our revenue generated in the U.S. decreased in the three months ended March 31, 2012 as compared to the same period in 2011 primarily due to the continued expansion of our commercial efforts in Europe.

 

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Our sales outside of the U.S. are made in multiple currencies, with the majority of our international revenue denominated in the Euro. During 2011, our net international revenue denominated in foreign currencies increased by $9.6 million, or 25%, compared to 2010. The change in exchange rates for all foreign currencies for 2011 accounted for approximately $2.5 million of the increase for the year. In the three months ended March 31, 2012, our net international revenue denominated in foreign currencies increased by $5.9 million, or 57%, compared to the three months ended March 31, 2011. Changes in foreign exchange rates unfavorably impacted revenue by approximately $0.6 million in the three months ended March 31, 2012 as compared to the three months ended March 31, 2011.

We expect to continue to generate and grow commercial revenue from product sales as we further expand our sales and marketing efforts outside of the United States. Notwithstanding our plans to generally expand our U.S. clinical programs, revenue from U.S. sources in connection with our trials may vary from quarter to quarter as the recruitment of qualified patients that meet protocol criteria fluctuate, as we approach the enrollment capacity in our approved trials and because additional CAP cohorts are subject to FDA approval.

Future product sales are dependent on many factors, including receiving and maintaining the necessary regulatory approvals in the U.S. and internationally, perception of product performance and market acceptance among physicians, patients, health care payers and the medical community as well as our capacity to meet customer demand by manufacturing sufficient quantities of our products.

In March 2012, the FDA approved an Investigational Device Exemption Supplement that allows us to enroll a fourth allotment, of 54 additional patients, in our ADVANCE bridge-to-transplant clinical trial under a CAP. In May 2012, we completed enrollment of our ENDURANCE destination therapy clinical trial and expect to submit for a CAP for this trial during summer 2012.

On April 25, 2012, the FDA’s Circulatory System Devices Advisory Committee voted 9 to 2 that the benefits outweigh the risks for the use of the HeartWare System as a bridge to heart transplantation in patients with end-stage heart failure. The Advisory Committee’s recommendation, while not binding, will be considered by the FDA in its review of the Premarket Approval (PMA) application that we submitted for the HeartWare System in December 2010. Approval of the PMA application is necessary before we can generate commercial revenue from the HeartWare System in the U.S.

Cost of Revenue

Cost of revenue includes costs associated with manufacturing and distributing our product and consists of direct materials, labor and overhead expenses allocated to the manufacturing process. Cost of revenue totaled approximately $32.9 million for the year ended December 31, 2011 and approximately $24.4 million for the year ended December 31, 2010. Cost of revenue totaled approximately $10.8 million and $7.6 million in the three months ended March 31, 2012 and 2011, respectively.

Gross profit and gross margin percentage for the years ended December 31, 2011 and 2010 were as follows:

 

     2011     2010  
     (in thousands)  

Gross profit

   $ 49,832      $ 30,723   
  

 

 

   

 

 

 

Gross margin %

     60     56
  

 

 

   

 

 

 

Gross profit and gross margin percentage for the three months ended March 31, 2012 and 2011 are as follows:

 

     Three Months Ended
March 31,
 
     2012     2011  
     (in thousands)  

Gross profit

   $ 15,518      $ 10,379   

Gross margin %

     59     58 %

 

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The gross margin percentage for 2011 increased compared to 2010 as a result of lower per-unit costs in 2011 primarily due to increased production volume and improved efficiencies in our manufacturing processes. In May 2011, we began shipping a sintered version of the HeartWare System on a global basis. Sintering is a process whereby minute beads are adhered to a titanium surface commonly used in medical devices to facilitate tissue adhesion. During the fourth quarter of 2011, we recorded a write-down of $0.6 million against our existing non-sintered inventory to reduce inventory to forecasted marketable levels, leaving a balance of $1.0 million as of December 31, 2011. This product continues to be implanted at certain customer sites. A write-down of all or a portion of this remaining inventory as obsolete could have a negative impact on our gross profit and gross margin percentage in future periods.

The gross margin percentage for the three months ended March 31, 2012 increased compared to the same period in 2011 due to variability in average selling price per unit.

Selling, General and Administrative

Selling, general and administrative expenses include costs associated with selling and marketing our products and the general corporate administration of the company. These costs are primarily related to salaries and wages and related employee costs, travel, external consultants and contractors, legal and accounting fees and general infrastructure costs, and include all operating costs not associated with or otherwise classified as research and development costs or cost of revenue.

Selling, general and administrative expenses for the years ended December 31, 2011 and 2010 were as follows:

 

     2011     2010     Change  
     (in thousands)        

Total selling, general and administrative expenses

   $ 42,314      $ 26,642        59
  

 

 

   

 

 

   

% of operating expenses

     46     45  
  

 

 

   

 

 

   
     Three Months Ended
March 31,
       
     2012     2011     Change  
     (in thousands)        

Total selling, general and administrative expenses

   $ 12,716      $ 8,664        47 %

% of operating expenses

     39     48  

During 2011, we continued to experience significant growth as we expanded European sales and distribution capabilities and increased the number of implants in the U.S. under clinical trials. We also experienced growth in administrative costs as we expanded our administrative capabilities to support overall corporate growth. As a result, we experienced expansion of our staff, including senior management, and overall growth in selling and marketing and administrative functions and experienced a related expansion in infrastructure costs.

The increase of $15.7 million was a result of an increase in employee costs, including salaries and wages and related costs, of approximately $6.2 million, primarily due to increased headcount. We also experienced increases in office expenses of $2.2 million, travel expenses of $2.0 million, marketing expenses of $1.5 million and legal costs of $2.2 million. The increase in legal costs includes $0.9 million for the potential settlement of ongoing litigation as discussed in Note 14 to the accompanying consolidated financial statements.

The increase of $4.1 million for the three months ended March 31, 2012 as compared to three months ended March 31, 2011 was primarily a result of an increase in employee costs, including salaries and wages and related costs, of approximately $1.7 million, primarily due to increased headcount to build our global sales and marketing and administrative functions to support expected future growth. We also experienced increases in consultants and contractors of $0.5 million, marketing expenses of $0.3 million, legal costs of $0.3 million, travel expenses of $0.2 million, office expenses of $0.2 million, and non-cash share-based compensation expense of $0.4 million.

 

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We expect our selling, general and administrative expenses to continue to increase in 2012 compared to 2011 as we prepare for the launch of the HeartWare System in the United States, and continue to expand our sales and distribution capabilities as well as our administrative capabilities to support our overall corporate growth. We have and will continue to experience an increase in our employee headcount as well as an increase in costs associated with the necessary administrative infrastructure to support this expansion.

Research and Development

Research and development expenses are the direct and indirect costs associated with developing our products prior to commercialization and are expensed as incurred. These expenses fluctuate based on project level activity and consist primarily of salaries and wages and related employee costs of our research and development, clinical and regulatory staff, external research and development costs, and materials and expenses associated with clinical trials. Additional costs include travel, facilities and overhead allocations.

 

     2011     2010     Change  
     (in thousands)        

Total research and development expenses

   $ 50,149      $ 33,108        51
  

 

 

   

 

 

   

% of operating expenses

     54     55  
  

 

 

   

 

 

   
     Three Months Ended
March 31,
       
     2012     2011     Change  
     (in thousands)        

Total research and development expenses

   $ 20,007      $ 9,300        115 %

% of operating expenses

     61     52  

The increase of $17.0 million was due to an increase in costs associated with development projects, including consumables, animal studies, outside engineering, consultants and contractors, of $9.2 million, primarily related to MVAD development. We also experienced an increase in employee costs, including salaries and wages and related costs, of approximately $3.8 million and an increase in share-based compensation of $1.6 million. Costs associated with our U.S. clinical trials increased by $1.0 million.

The increase of $10.7 million for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011 was due to an increase in costs associated with development projects, including consumables, outside engineering, consultants and contractors, of $7.0 million, primarily related to MVAD system development. We also experienced an increase in employee costs, including salaries and wages and related costs, of approximately $1.9 million and an increase in non-cash share-based compensation of $0.2 million. Costs associated with our U.S. clinical trials increased by $1.3 million.

Even with commercial approval of the HeartWare System in Europe, we expect that research and development expenses will continue to represent a significant portion of our operating expenses for the foreseeable future related to clinical trials in the U.S. and new product development, including costs related to the development of the MVAD system.

Foreign Exchange

We generate a substantial portion of our revenue and collect receivables in foreign currencies. Fluctuations in the exchange rate of the U.S. dollar against the Euro, British Pound and Australian dollar can result in foreign currency exchange gains and losses that may significantly impact our financial results. Continued fluctuation of these exchange rates could result in financial results that are not comparable from quarter to quarter. In general, we do not currently utilize foreign currency contracts to mitigate foreign exchange gains and losses.

 

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In 2011, our net foreign exchange losses totaled approximately $2.3 million compared to $0.5 million in 2010. The increase in our net foreign exchange losses is primarily due to fluctuations in the rate of exchange between the Euro and U.S. dollar during 2011. In the three months ended March 31, 2012, our net foreign exchange gains totaled approximately $1.1 million compared to $0.6 million in the three months ended March 31, 2011. In each 2012, 2011 and 2010, the majority of our realized and unrealized foreign exchange gains and losses were experienced upon the collection of certain accounts receivable that were denominated in foreign currencies, and the translation to U.S. dollars at period end of certain balance sheet accounts denominated in foreign currencies, primarily the Euro. We expect to continue to realize foreign exchange gains and losses for the foreseeable future as the majority of our sales denominated in foreign currencies are settled in Euros.

Interest Expense

Interest expense in 2012 and 2011 consists of interest incurred on the principal amount of our convertible senior notes issued in December 2010, amortization of the related discount and amortization of the portion of the deferred financing costs allocated to the debt component. The convertible senior notes bear interest at a rate of 3.5% per annum. The discount on the convertible senior notes and the deferred financing costs are being amortized to interest expense through the December 15, 2017 maturity date of the convertible senior notes using the effective interest method.

Interest expense was approximately $10.7 million in 2011. Interest incurred on the principal amount of the convertible notes at the 3.5% coupon rate was approximately $5.0 million and non-cash amortization of the discount and deferred financing costs totaled approximately $5.7 million.

In the three months ended March 31, 2012, interest expense was approximately $2.8 million, which included $1.3 million of interest incurred on the principal amount of the convertible notes at the 3.5% coupon rate and $1.5 million of non-cash amortization of the discount and deferred financing costs. In the three months ended March 31, 2011, interest expense was approximately $2.6 million, which included $1.3 million of interest incurred on the principal amount of the convertible notes at the 3.5% coupon rate and $1.3 million of non-cash amortization of the discount and deferred financing costs.

Investment Income, net

Investment income is primarily derived from investments and cash and short-term deposit accounts held in the U.S. The amortization of premium on our investments is also included in investment income, net. Investment income, net was approximately $0.5 million in 2011, compared to $0.6 million in 2010. While we had greater cash and investments balances during 2011 as a result of the issuance of our convertible senior notes in December 2010, we had experienced lower interest rates in 2011 compared to 2010. Investment income, net was approximately $0.1 million and $0.2 million in the three months ended March 31, 2012 and 2011, respectively. We have had lower cash and investments balances during 2012 and have experienced lower interest rates compared to 2011.

Income Taxes

We are subject to taxation in the United States and jurisdictions outside of the United States. These jurisdictions have different marginal tax rates. While we have incurred losses since inception, changes in issued capital and share ownership, as well as other factors, may limit our ability to utilize any net operating loss carry-forwards, and, as such, a 100% valuation allowance has been recorded against our net deferred tax assets.

As of each of December 31, 2011, and March 31, 2012, we did not have revenue or profit which would be sufficient to allow any portion of our deferred tax assets to be recorded. We intend to monitor closely whether to record a deferred tax asset as we further expand the commercialization of our products.

 

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Fiscal Years 2010 and 2009

Revenue, net

In 2010 and 2009, we generated revenue from commercial sales outside of the U.S. and sales in connection with our U.S. clinical trials. The increase in revenue is primarily due to increased market penetration outside of the U.S. and increased activity in our U.S. bridge-to-transplant study including sales after completion of the study through a Continued Access Protocol (“CAP”).

Net revenue for the years ended December 31, 2010 and 2009 were as follows:

 

     2010      2009      Change  
     (in thousands)         

Revenue, net

   $ 55,164       $ 24,172         128
  

 

 

    

 

 

    

Approximately 73% of our product sales in 2010 were derived outside of the U.S. as compared to 59% in the prior year. The increase in the portion of our revenue derived from outside of the United States is due to the continued commercial rollout of the HeartWare System in Europe and other countries with additional implants at existing sites and the addition of new sites.

Cost of Revenue

Cost of revenue totaled approximately $24.4 million for 2010 and approximately $13.2 million for 2009.

Gross profit and gross margin percentage for the years ended December 31, 2010 and 2009 were as follows:

 

     2010