SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 28, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-10114
THERMO CARDIOSYSTEMS INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-3027040
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
470 Wildwood Street, P.O. Box 2697
Woburn, Massachusetts 01888-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
---------------------------- -----------------------------------------
Common Stock, $.10 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to the
filing requirements for at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference into Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of January 24, 1997, was approximately $457,813,000.
As of January 24, 1997, the Registrant had 36,901,560 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 28, 1996, are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on June 2, 1997, are incorporated by
reference into Part III.
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PART I
Item 1. Business
(a) General Development of Business
Thermo Cardiosystems Inc. (the Company or the Registrant) is a leader
in the research, development, and manufacture of implantable left
ventricular-assist systems (LVAS). These systems are designed to perform
substantially all or part of the pumping function of the left ventricle
of the natural heart for patients suffering from cardiovascular disease.
Unlike total artificial heart systems, that require removal of the
natural heart, the LVAS allows the natural heart to remain in place,
preserving the heart's biological control mechanisms and reducing
blood-contacting surfaces that have led to strokes in patients using
other cardiac devices. The Company has developed two systems for patients
requiring long-term cardiac support: an implantable pneumatic LVAS that
is powered by an external electrically driven air-pump, and an electric
LVAS that is driven by an implanted electric motor and powered by a
lightweight battery pack worn by the patient.
In October 1994, the Company announced that the U.S. Food and Drug
Administration (FDA) had granted approval for the commercial sale of the
air-driven LVAS for use as a bridge to transplant. With this approval,
the air-driven system became available for sale to cardiac centers
throughout the United States. The Company received the European
Conformity Mark (CE Mark) for commercial sale of the air-driven LVAS in
all European Community countries in April 1994, and received the same
approval for the electric system in August 1995. The electric version of
the LVAS is currently being used in the U.S. in clinical trials for
patients awaiting heart transplants. In late 1995, the FDA approved the
protocol for conducting clinical trials of the electric LVAS as an
alternative to medical therapy, and in April 1996, the first patient was
implanted with an electric LVAS under this trial. The electric LVAS is
being used in Europe as both a bridge to transplant and as an alternative
to medical therapy.
In December 1996, the Company acquired substantially all of the
assets, subject to certain liabilities, of Nimbus Medical, Inc. (Nimbus),
a research and development organization, for approximately $5.0 million
in cash. Nimbus has been involved in artificial heart technology for more
than 20 years and has carried out research in two primary fields:
ventricular-assist devices and total artificial hearts. Nimbus was
instrumental in developing the basic technology for high-speed rotary
blood pumps. Because of their smaller size, rotary blood pumps may
potentially be used to provide cardiac support in small adults and in
children.
The Company was incorporated in 1988 as a wholly owned subsidiary of
Thermedics Inc. (Thermedics), a publicly traded subsidiary of Thermo
Electron Corporation (Thermo Electron), and is the successor in interest
to the assets and business of that company relating to the research and
development of implantable heart-assist systems. This business was
conducted by Thermedics from its formation in 1983, and prior to that
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time as a division of Thermo Electron beginning in 1966. As of December
28, 1996, Thermedics owned 19,757,612 shares of the Company's common
stock, representing 54% of such stock outstanding. In addition to the
Company's products, Thermedics develops, manufactures, and markets
product quality assurance systems, precision-weighing and inspection
equipment, electrochemistry and microweighing products, electronic-test
instruments, explosives-detection devices, and moisture-analysis systems.
As of December 28, 1996, Thermo Electron owned 46,278 shares of the
Company's common stock, representing .13% of such stock outstanding.
Thermedics is a 55%-owned subsidiary of Thermo Electron. Thermo Electron
is a world leader in environmental monitoring and analysis instruments,
biomedical products such as heart-assist devices and mammography systems,
papermaking and recycling equipment, biomass electric power generation,
and other specialized products and technologies. Thermo Electron also
provides a range of services related to environmental quality.
Thermedics intends, for the foreseeable future, to maintain at least
50% ownership of the Company. This may require the purchase by Thermedics
of additional shares of common stock of the Company from time to time as
the number of outstanding shares issued by the Company increases. These
or any other purchases by Thermedics may be made either in the open
market or directly from the Company or Thermo Electron. During 1996*,
Thermedics purchased 40,000 shares of the Company's common stock in the
open market for $1,219,000. See Notes 4 and 6 to Consolidated Financial
Statements in the Company's 1996 Annual Report to Shareholders for a
description of outstanding stock options and convertible obligations
issued by the Company.
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Annual Report
on Form 10-K. For this purpose, any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," "seeks," "estimates," and similar
expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the results of the
Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the caption "Forward-looking
Statements" in the Registrant's 1996 Annual Report Shareholders
incorporated herein by reference.
(b) Information About Industry Segments
The Company conducts business in one industry segment: the research,
development, and manufacture of implantable heart-assist systems.
* References to 1996, 1995, and 1994 herein are for the fiscal years
ended December 28, 1996, December 30, 1995, and December 31, 1994,
respectively.
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(c) Description of Business
Product Background
The Company began its research and development work in cardiac-
support systems in 1966. Since that time, the Company and its
predecessors have received more than $37 million in funding from the U.S.
government, principally from the National Heart, Lung, and Blood
Institute of the National Institutes of Health (NIH), to support its
research. This funding ended in 1992 as the Company moved from
development to clinical trials.
Federal regulations require that the Company obtain an
investigational device exemption (IDE) from the FDA to conduct testing in
humans. Once sufficient testing has been completed to demonstrate the
safety and effectiveness of the LVAS, the Company submits a premarket
approval (PMA) application to the FDA. PMA supplements must be submitted
for each type and application of the Company's LVAS before being sold
commercially (see "Government Regulation").
The Company's LVAS Devices
The human heart contains two main pumping chambers: the left and
right ventricles. The right ventricle pumps blood into the lungs where it
is oxygenated. The blood then flows into the left ventricle where it is
pumped throughout the body. The Company's LVAS devices support all or
part of the pumping function of the left ventricle.
The Company has developed two versions of its LVAS -- an implantable
pneumatic, or air-driven, system that can be controlled by either a
bedside or portable console, and an electric system that features an
internal electric motor powered by an external battery pack worn by the
patient. Both of the Company's systems employ the Company's HeartMate(R)
blood pump, and are designed for long-term use. The Company's LVAS
devices are at various stages of regulatory approval.
Each version of the Company's LVAS incorporates a number of
proprietary technological advances in biological compatibility that
distinguish it from other cardiac-assist devices. For example, the
Company's systems employ proprietary textured linings that significantly
reduce the likelihood of blood clots that can lead to strokes. As blood
enters the pump chamber, blood elements are trapped by its textured
surface, forming a coagulum, or lining. This coagulum is securely
anchored to the textured surface and forms a "living" lining similar to
that found in arteries and veins. This blood-contacting surface is
derived from the patient's own blood and is therefore blood-compatible.
Because of the risk of blood clots, patients who receive smooth-surface
devices must take daily doses of prescription anticoagulants, the level
of which must be constantly monitored. In contrast, patients on the
Company's LVAS receive only minimal anticoagulation treatment of one
aspirin per day.
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The HeartMate blood pump is used in each version of the Company's
LVAS. This pump is implanted just below the diaphragm in a position that
minimizes interference with normal circulation and other bodily
functions. An inlet tube is inserted into the apex of the left ventricle
to drain blood into the pump chamber. Blood is then forced out of the
pump through an animal tissue valve and back into the aorta. The
HeartMate blood pump works with the biological control mechanism of the
natural heart to increase pumping capability when required for activities
such as climbing stairs.
Air-driven LVAS. In October 1994, the air-driven system was approved
for commercial sale by the FDA. This approval allows the Company to sell
the air-driven LVAS to any of the nearly 900 cardiac surgery centers in
the United States. In April 1994, the Company received the CE Mark for
commercial sale of the air-driven LVAS in all European Community
countries. This system is intended as a bridge to transplant for patients
awaiting heart transplantation. In the air-driven LVAS, the HeartMate
blood pump is coupled to an external console connected to the body by a
tube. The Company has also developed the HeartPak(TM), a lightweight
portable console that can be carried over the shoulder. The portable
console received the CE Mark for commercial sale in European Community
countries in February 1995. In July 1995, the FDA approved the beginning
of Phase I clinical trials of the HeartPak portable pneumatic driver.
Phase I of the study will evaluate the safety of the system in the
hospital; Phase II will evaluate the system in the home environment. In
1996, doctors began enrolling patients in Phase I of this trial.
Electric LVAS. The Company has also developed an electric LVAS that
uses the HeartMate blood pump driven by an internal electric motor
mounted in the blood pump housing. The system is connected to its
external battery pack by wires that exit the body. Since the power source
and control elements are worn on a battery belt, the system allows the
patient complete mobility.
The electric LVAS may not be sold commercially in the U.S. until it
has received approval from the FDA. In December 1996, the Company began
actively working with the FDA on the PMA application for commercial
approval of the electric LVAS used as a bridge to transplant. In December
1995, the FDA approved the protocol for conducting clinical trials of the
electric LVAS as an alternative to medical therapy. The trial is expected
to compare the results of approved patients using the device to a similar
number using drug therapy. In August 1995, the electric LVAS was awarded
the CE Mark, allowing commercial sale of this system in all European
Community countries. The electric system is used as a bridge to
transplant in the U.S. and Europe, and is also implanted as an
alternative to heart transplant in Europe.
Government Regulation
The Company's products and its research, development, and
manufacturing activities are subject to regulation by numerous
governmental authorities in the United States and other countries. In the
United States, medical devices are subject to rigorous FDA review. The
Federal Food, Drug, and Cosmetic Act (the FDC Act), the Public Health
Services Act, and other federal statutes and regulations govern or
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influence the testing, manufacture, safety, labeling, storage, record
keeping, reporting, approval, advertising, and promotion of products such
as those offered by the Company. Noncompliance with applicable
requirements can result in fines, recalls or seizures of products, total
or partial suspension of production, and criminal prosecution.
Pursuant to the Medical Device Amendments of 1976 (the 1976
Amendments) to the FDC Act, and regulations promulgated thereunder,
medical devices intended for human use are classified into three
categories, Classes I, II, and III, which are subject to varying degrees
of regulatory control.
The Company's LVAS is classified as a Class III medical device under
the FDC Act, the classification generally given to life-sustaining or
supporting and implantable devices. Class III devices require clinical
testing to ensure safety and effectiveness. The first stage of obtaining
formal FDA market approval for a Class III device is submission of an
application for an IDE. The IDE application must be supported by data,
typically including the results of animal and mechanical testing. If
approved, the IDE permits clinical evaluations of significant risk
devices on human subjects under controlled experimental conditions by
designated qualified medical institutions. To obtain an IDE, approval of
the investigational plan for the applicable system is required from the
institutional review board within each participating medical institution
as well as from the FDA.
The second stage of formal FDA market approval is the PMA
application, which is submitted after sufficient data has been compiled
under the IDE. The FDA will grant market approval if it finds that the
safety and effectiveness of the product has been sufficiently
demonstrated, and that the product complies with all applicable
performance and manufacturing standards. In addition, any design change
to an approved device must be approved by the FDA pursuant to a
supplement to the applicable PMA application. The process of submitting
and obtaining FDA approval of a PMA application can take several years or
more, and is inherently uncertain. No assurance can be given that any of
the products under development by the Company currently or in the future,
including the electric LVAS, will be approved by the FDA for commercial
sale.
The Company is also subject to the FDA's Good Manufacturing Practice
(GMP) regulations. These regulations require that the Company manufacture
its systems and maintain its records in a prescribed manner. The FDA
inspects the Company's facilities for compliance with GMP. If the Company
is found not to be in compliance, the FDA has broad powers to issue
recalls, enjoin future violations, and assess civil and criminal
penalties against the Company, its officers, and its employees. In
addition to GMP, the Company must adhere to quality standards applicable
to European Community member countries and other countries where the
Company sells its systems. The Company is also subject to registration
and inspection requirements of state regulatory agencies.
Sales of medical devices outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a device by a
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comparable regulatory authority of a foreign country generally must be
obtained prior to the commencement of marketing in those countries. The
time required to obtain such approvals may be longer or shorter than that
required for FDA approval.
No FDA approval is required to export a device that is legally
marketed in the United States by the exporting company. Unapproved Class
III devices may also be exported without FDA approval to any country if
the device complies with the law of that country and has valid marketing
authorization in at least one of the following: Australia, Canada,
Israel, Japan, New Zealand, Switzerland, South Africa, or the European
Union or a country in the European Economic Area (listed countries).
Similarly, no FDA approval is required to export an investigational
device to a listed country as long as the proposed investigational use is
in accord with the importing country's laws. However, FDA approval is
required to export an unapproved Class III device that does not have
marketing authorization in one of the listed countries or to export an
investigational device to a nonlisted country. In such cases, the FDA
must determine that exportation of the unapproved or investigational
device is not contrary to the public health and safety and has the
approval of the country to which it is intended for export.
Third Party Reimbursement
The HeartMate air-driven LVAS is the only implantable, bridge to
transplant, ventricular-assist system approved for commercial sale in the
U.S. by the FDA.
In November 1995, the U.S. Health Care Finance Administration (HCFA)
issued a decision that extends Medicare coverage to the Company's
HeartMate air-driven LVAS. Part of the U.S. Department of Health and
Human Services, HCFA is responsible for establishing coverage and
reimbursement policies for Medicare and recommending guidelines for
Medicaid. Many third party payers review HCFA recommendations to
establish their own reimbursement policies. Several major nongovernment
insurers have already agreed to offer coverage for the air-driven LVAS.
Additional insurers are reviewing the clinical results of the device, and
additional coverage decisions will be forthcoming.
Additionally, the HCFA coding committee has established a detailed
resource code to be used when an implantable assist device, such as the
HeartMate air-driven LVAS, is employed. This will facilitate collection
of data on medical costs as well as resource information that may be used
in establishing a Diagnosis Related Group (DRG) specific to
ventricular-assist systems. HCFA and most states require that DRGs be
used in determining the amount of reimbursement for particular
procedures.
Sales of the Company's systems will depend to a large degree upon the
availability of reimbursement for the implantation of the devices. Even
though reimbursement has been established by HCFA and by several
nongovernment insurers, the amount of available reimbursement may change,
and reimbursement may be denied by an insurer under certain
circumstances, including determination that a procedure was not the most
cost-effective treatment method, was experimental, or was used for an
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unapproved indication. No assurance can be given that additional
third-party reimbursement for the HeartMate air-driven LVAS will be
granted within a reasonable period of time, or at all, and the Company
cannot predict what effect the future policies of government entities and
insurers will have on the sale of the Company's devices. The
unavailability of third-party reimbursement for procedures involving the
Company's systems would have a material adverse effect on the Company's
business.
Raw Materials
Certain raw materials used in the manufacture of the Company's LVAS
are available from only one or two suppliers. The Company is making
efforts to minimize the risks associated with sole sources and ensure
long-term availability, including qualifying alternative materials and
components or developing alternative sources for materials and components
supplied by a single source. Although the Company believes that it has
adequate supplies of materials and components to meet demand for the LVAS
for the foreseeable future, no assurance can be given that the Company
will not experience shortages of certain materials or components in the
future that could delay shipments of the LVAS.
The cost to the Company to evaluate and test alternative materials
and components and the time necessary to obtain FDA approval for these
materials or components are inherently difficult to determine because
both time and cost are dependent on at least two factors: the similarity
of the alternative materials or components to the original materials or
components, and the amount of third-party testing that may have already
been completed on alternative materials or components. There can be no
assurance that the substitution of alternative materials or components
will not cause delays in the Company's LVAS development program or
adversely affect the Company's ability to manufacture and ship LVAS to
meet demand.
Intellectual Property
The Company's policy is to protect its intellectual property rights
relating to its work on cardiac-support systems including, if
appropriate, applying for patents in the U.S. and foreign countries.
Thermedics has granted the Company a royalty-free license to use the
Dermaport(R) access device and Tecoflex(R) biomaterial in its LVAS.
Although some of these patent rights may provide the Company with a
competitive advantage, the Company primarily relies on its know-how and
trade secrets developed over 30 years of research, development, and
fabrication of cardiac-assist devices. The Company has received
correspondence from a third party alleging that the textured surface of
the LVAS housing infringes certain patent rights of such third party. The
third party has offered the Company a license, which the Company elected
not to accept. Although the Company believes that it has meritorious
defenses to the claims of the third party, due to the inherent
uncertainty of litigation, no assurance can be made that the Company
would be successful if any litigation were to begin. The Company seeks to
protect its proprietary information, but there can be no assurance that
others will neither develop independently the same or similar information
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nor obtain access to information that the Company believes is
proprietary. Moreover, there can be no assurance that others will not
claim that the Company's activities infringe their intellectual property
rights.
Backlog
The Company's backlog of firm orders was approximately $1,914,000 and
$1,351,000 as of December 28, 1996, and December 30, 1995, respectively.
The Company believes that substantially all of the backlog at December
28, 1996, will be shipped or completed during the next 12 months.
Competition
The Company is aware of one other company that has submitted a PMA
application with the FDA for an implantable LVAS. The Company is unaware
whether this PMA application has been accepted for filing by the FDA.
Also, the Company is aware of one other company that has received
approval by the FDA Advisory Panel on Circulatory System Devices and
subsequent commercial approval for its cardiac-assist device. This is an
external device, positioned on the outside of the patient's chest, and is
intended for short-term use in the hospital environment. In addition, the
Company is aware that a total artificial heart is currently undergoing
clinical trials. The requirement of obtaining FDA approval for commercial
sale of an LVAS in the U.S. is a significant barrier to entry into the
U.S. market for these devices. There can be no assurance, however, that
FDA regulations will not change in the future, reducing the time and
testing required for others to obtain FDA approval for commercial sale.
In addition, other research groups and companies, some that have
significantly greater resources than those of the Company, are developing
cardiac systems using alternative technologies or concepts, one or more
of which might prove functionally equivalent to, or more suitable than,
the Company's systems. Among products that have been approved for
commercial sale, the Company competes primarily on the basis of
performance, service capability, and price. Competition in the market for
medical devices is also significantly affected by the reimbursement
policies of government and private insurers. Any product for which
reimbursement is not available from such third-party payors will be at a
significant competitive disadvantage.
Research and Development
During 1996, 1995, and 1994, the Company expended approximately
$3,839,000, $3,324,000, and $3,437,000, respectively, on internally
sponsored research and development programs. Approximately 46
professional employees were engaged full-time in the Company's research
and development activities at December 28, 1996.
Environmental Protection Regulations
The Company believes that compliance by the Company with federal,
state, and local environmental protection regulations will not have a
material adverse effect on its capital expenditures, earnings, or
competitive position.
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Number of Employees
As of December 28, 1996, the Company had a total of 154 employees.
None of the Company's employees are represented by a labor union, and the
Company considers its relations with its employees to be good.
(d) Financial Information about Exports by Domestic Operations
Financial information about exports by domestic operations is
summarized in Note 11 to Consolidated Financial Statements in the
Registrant's 1996 Annual Report to Shareholders and is incorporated
herein by reference.
(e) Executive Officers of the Registrant
Present Title (Year First Became
Name Age Executive Officer)
---------------------------- --- ----------------------------------
Victor L. Poirier 55 President and Chief Executive
Officer (1988)
John N. Hatsopoulos 62 Vice President and Chief Financial
Officer (1988)
Betty A. Silverstein Russell 47 Senior Vice President (1989)
Timothy J. Krauskopf 35 Vice President, Regulatory
Affairs (1995)
Paul F. Kelleher 54 Chief Accounting Officer (1988)
Each executive officer serves until his or her successor is chosen or
appointed by the Board of Directors and qualified or until earlier
resignation, death, or removal. All executive officers, except Mr.
Krauskopf, have held comparable positions for at least five years with
the Company, Thermedics, or Thermo Electron. Mr. Poirier devotes
substantially all of his time to the affairs of the Company, but also
devotes a portion of his time to the affairs of Thermedics. Messrs.
Hatsopoulos and Kelleher are full-time employees of Thermo Electron, but
devote such time to the affairs of the Company as the Company's needs
reasonably require. Mr. Krauskopf was previously Director of Regulatory
Affairs of the Company from 1993 to 1995, and prior to that, was Senior
Regulatory Affairs Coordinator at USCI division of C.R. Bard, Inc. from
1992 to 1993, and worked in clinical affairs at Carbomedics, Inc. from
1989 to 1992.
Item 2. Properties
The Company subleases approximately 27,300 square feet of space in
Thermedics' corporate headquarters in Woburn, Massachusetts, pursuant to
a sublease expiring in 1999. The Company also occupies approximately
11,000 square feet of office and research facilities in Rancho Cordova,
California, pursuant to a lease expiring in 2000. Subsequent to year-end
1996, the Company subleased approximately 8,000 square feet of office and
research facilities in Chelmsford, Massachusetts, from Thermedics
Detection, Inc., a majority-owned subsidiary of Thermedics, pursuant to a
two-year lease agreement. The Company believes that these facilities are
in good condition and are suitable for its present operations.
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Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Information concerning the market and market price for the
Registrant's common stock, $.10 par value, and dividend policy is
included under the sections labeled "Common Stock Market Information" and
"Dividend Policy" in the Registrant's 1996 Annual Report to Shareholders
and is incorporated herein by reference.
Item 6. Selected Financial Data
The information required under this item is included under the
sections labeled "Selected Financial Information" and "Dividend Policy"
in the Registrant's 1996 Annual Report to Shareholders and is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required under this item is included under the
heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Registrant's 1996 Annual Report to
Shareholders and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements as of December 28,
1996 and Supplementary Data are included in the Registrant's 1996 Annual
Report to Shareholders and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the
caption "Election of Directors" in the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A, not later than 120 days after the close of
the fiscal year. The information concerning delinquent filers pursuant to
Item 405 of Regulation S-K is incorporated herein by reference from the
material contained under the heading "Section 16(a) Beneficial Ownership
Reporting Compliance" under the caption "Stock Ownership" in the
Registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120
days after the close of the fiscal year.
Item 11. Executive Compensation
The information required under this item is incorporated herein by
reference from the material contained under the caption "Executive
Compensation" in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated herein by
reference from the material contained under the caption "Stock Ownership"
in the Registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later
than 120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required under this item is incorporated herein by
reference from the material contained under the caption "Relationship
with Affiliates" in the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation
14A, not later than 120 days after the close of the fiscal year.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a,d) Financial Statements and Schedules
(1) The financial statements set forth in the list below are
filed as part of this Report.
(2) The financial statement schedule set forth in the list below
is filed as part of this Report.
(3) Exhibits filed herewith or incorporated herein by reference
are set forth in Item 14(c) below.
List of Financial Statements and Schedules Referenced in this
Item 14
Information incorporated by reference from Exhibit 13 filed
herewith:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders' Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules filed herewith:
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable
or not required, or because the required information is shown
either in the financial statements or in the notes thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 14, 1997 THERMO CARDIOSYSTEMS INC.
By: Victor L. Poirier
---------------------------------
Victor L. Poirier
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of March 14, 1997.
Signature Title
--------- -----
By: Victor L. Poirier President, Chief Executive Officer, and
------------------------
Victor L. Poirier Director
By: John N. Hatsopoulos Vice President and Chief Financial
------------------------
John N. Hatsopoulos Officer
By: Paul F. Kelleher Chief Accounting Officer
------------------------
Paul F. Kelleher
By: Walter J. Bornhorst Director
------------------------
Walter J. Bornhorst
By: Richard W.K. Chapman Director
------------------------
Richard W.K. Chapman
By: Elias P. Gyftopoulos Director
------------------------
Elias P. Gyftopoulos
By: Robert C. Howard Director
------------------------
Robert C. Howard
By: Leonard Laster Director
------------------------
Leonard Laster
By: John W. Wood Jr. Chairman of the Board and Director
------------------------
John W. Wood Jr.
By: Nicholas T. Zervas Director
-------------------------
Nicholas T. Zervas
14PAGE
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Report of Independent Public Accountants
----------------------------------------
To the Shareholders and Board of Directors of Thermo Cardiosystems Inc.:
We have audited, in accordance with generally accepted auditing
standards, the financial statements included in Thermo Cardiosystems
Inc.'s Annual Report to Shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated February 6, 1997. Our
audits were made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in Item 14 on page 13 is
the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. The schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation
to the basic financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
February 6, 1997
15PAGE
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SCHEDULE II
THERMO CARDIOSYSTEMS INC.
Valuation and Qualifying Accounts
(In thousands)
Balance at Provision Balance
Beginning Charged to Accounts at End
Description of Year Expense Written-off of Year
-------------------- ---------- ---------- ----------- -------
Year Ended
December 28, 1996
Allowance for
Doubtful Accounts $ 309 $ 165 $ - $ 474
Year Ended
December 30, 1995
Allowance for
Doubtful Accounts $ 225 $ 120 $ (36) $ 309
Year Ended
December 31, 1994
Allowance for
Doubtful Accounts $ 80 $ 170 $ (25) $ 225
16PAGE
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
3.1 Articles of Organization, as filed on August 18,
1988, and as amended on October 26, 1988, January 6,
1989, and May 23, 1990 (filed as Exhibit 3(a) to the
Registrant's Registration Statement on Form S-1 [Reg.
No. 33-34737] and incorporated herein by reference)
and as amended on October 25, 1993 (filed as Exhibit
3(c) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended October 2, 1993 [File No.
1-10114] and incorporated herein by reference).
3.2 By-Laws of the Registrant (filed as Exhibit 3(b) to
the Registrant's Registration Statement on Form S-1
[Reg. No. 33-25144] and incorporated herein by
reference).
4.1 Form of Guarantee Agreement between the Registrant
and Thermo Electron (filed as Exhibit 4(b) to the
Registrant's Registration Statement on Form S-1 [Reg.
No. 33-25144] and incorporated herein by reference).
4.2 Form of Amendment Number 1 to Guarantee Agreement
between the Registrant and Thermo Electron (filed as
Exhibit 4(e) to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-34737] and
incorporated herein by reference).
4.3 Fiscal Agency Agreement dated January 5, 1993, among
Thermo Electron, the Registrant, and Chemical Bank
(filed as Exhibit 4.11 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January
1, 1994 [File No. 1-10114] and incorporated herein by
reference).
4.4 Guarantee Reimbursement Agreement dated February 7,
1994, among the Registrant, Thermo Voltek Corp.,
Thermedics, and Thermo Electron (filed as Exhibit 4.4
to Thermedics' Annual Report on Form 10-K for the
fiscal year ended January 1, 1994 [File No. 1-9567]
and incorporated herein by reference).
10.1 Amended and Restated Corporate Services Agreement
dated January 3, 1993, between Thermo Electron and
the Registrant (filed as Exhibit 10(b) to the
Registrant's Annual Report on Form 10-K for the year
ended January 2, 1993 [File No. 1-10114] and
incorporated herein by reference).
17PAGE
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10.2 Sublease dated August 19, 1988, between the
Registrant and Thermedics, as amended by Amendment
No. 1 dated January 1, 1990 (filed as Exhibit 10(c)
to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 30, 1989 [File No.
1-10114] and incorporated herein by reference).
10.3 Form of Indemnification Agreement between the
Registrant and its officers and directors (filed as
Exhibit 10(d) to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-25144] and
incorporated herein by reference).
10.4 Thermo Electron Corporate Charter, as amended and
restated effective January 3, 1993 (filed as Exhibit
10(e) to the Registrant's Annual Report on Form 10-K
for the fiscal year ended January 2, 1993 [File No.
1-10114] and incorporated herein by reference).
10.5 Intellectual Property Cross-License Agreement between
Thermedics and the Registrant dated August 19, 1988
(filed as Exhibit 10(i) to the Registrant's
Registration Statement on Form S-1 [Reg. No.
33-25144] and incorporated herein by reference).
10.6 Agreement dated May 26, 1993, between The Polymer
Technology Group Incorporated and the Registrant
(filed as Exhibit 10(cc) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
July 3, 1993 [File No. 1-10114] and incorporated
herein by reference).
10.7 Amended and Restated Master Repurchase Agreement
dated July 2, 1996, between the Registrant and Thermo
Electron.
10.8-10.17 Reserved.
10.18 Equity Incentive Plan of the Registrant (filed as
Attachment A to the Proxy Statement dated May 5,
1994, of the Registrant [File No. 1-10114] and
incorporated herein by reference).
10.19 Deferred Compensation Plan for Directors of the
Registrant (filed as Exhibit 10(h) to the
Registrant's Registration Statement on Form S-1 [Reg.
No. 33-25144] and incorporated herein by reference).
18PAGE
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10.20 Directors Stock Option Plan of the Registrant (filed
as Exhibit 10.20 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994
[File No. 1-10114] and incorporated herein by
reference).
10.21 Incentive Stock Option Plan of the Registrant (filed
as Exhibit 10(f) to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-25144] and
incorporated herein by reference). (Maximum number of
shares issuable in the aggregate under this plan and
the Registrant's Nonqualified Stock Option Plan is
1,715,625 shares, after adjustment to reflect share
increase approved in 1992, 3-for-2 stock split
effected in January 1990, 5-for-4 stock split
effected in May 1990, 2-for-1 stock split effected in
November 1993, and 3-for-2 stock split effected in
May 1996.)
10.22 Nonqualified Stock Option Plan of the Registrant
(filed as Exhibit 10(g) to the Registrant's
Registration Statement on Form S-1 [Reg. No.
33-25144] and incorporated herein by reference).
(Maximum number of shares issuable in the aggregate
under this plan and the Registrant's Incentive Stock
Option Plan is 1,715,625 shares, after adjustment to
reflect share increase approved in 1992, 3-for-2
stock split effected in January 1990, 5-for-4 stock
split effected in May 1990, 2-for-1 stock split
effected in November 1993, and 3-for-2 stock split
effected in May 1996.)
In addition to the stock-based compensation plans of
the Registrant, the executive officers of the
Registrant may be granted awards under stock-based
compensation plans of Thermo Electron and Thermedics
for services rendered to the Registrant or to such
affiliated corporations. Thermo Electron's plans were
filed as Exhibits 10.21 through 10.44 to the Annual
Report on Form 10-K of Thermo Electron for the year
ended December 30, 1995 [File No. 1-8002] and as
Exhibit 10.19 to the Annual Report on Form 10-K of
Trex Medical Corporation for the fiscal year ended
September 28, 1996 [File No. 1-11827] and Thermedics'
plans were filed as Exhibits 10.18 through 10.22 to
the Annual Report on Form 10-K of Thermedics for the
year ended December 28, 1996 [File No. 1-9567] and
are incorporated herein by reference.
10.23 Restated Stock Holdings Assistance Plan and Form of
Promissory Note.
19PAGE
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
11 Statement re: Computation of Earnings per Share.
13 Annual Report to Shareholders for the year ended
December 28, 1996 (only those portions incorporated
herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
Exhibit 10.7
AMENDED AND RESTATED MASTER REPURCHASE AGREEMENT
The Master Repurchase Agreement dated as of July 2, 1996
between Thermo Electron Corporation, a Delaware corporation
("Seller"), and Thermo Cardiosystems Inc., a Delaware corporation
(the "Buyer"), is hereby amended and restated in its entirety as
follows on and as of December 28, 1996.
1. Applicability
From time to time Buyer and Seller may enter into
transactions in which Seller agrees to transfer to Buyer certain
securities and/or financial instruments ("Securities") against
the transfer of funds by Buyer, with a simultaneous agreement by
Buyer to transfer to Seller such Securities on demand, against
the transfer of funds by Seller. Each such transaction shall be
referred to herein as a "Transaction" and shall be governed by
this Agreement, unless otherwise agreed in writing.
2. Definitions
(a) "Act of Insolvency", with respect to either party (i)
the commencement by such party as debtor of any case or
proceeding under any bankruptcy, insolvency, reorganization,
liquidation, dissolution or similar law, or such party seeking
the appointment of a receiver, trustee, custodian or similar
official for such party or any substantial part of its property;
or (ii) the commencement of any such case or proceeding against
such party, or another seeking such an appointment, which (A) is
consented to or not timely contested by such party, (B) results
in the entry of an order for relief, such an appointment or the
entry of an order having a similar effect, or (C) is not
dismissed within 15 days; or (iii) the making by a party of a
general assignment for the benefit of creditors; or (iv) the
admission in writing by a party of such party's inability to pay
such party's debts as they become due;
(b) "Additional Purchased Securities", Securities provided
by Seller to Buyer pursuant to Paragraph 4(a) hereof;
(c) "Income", with respect to any Security at any time, any
principal thereof then payable and all interest, dividends or
other distributions thereon;
(d) "Market Value", with respect to any Securities as of
any date, the price for such Securities on such date obtained
from a generally recognized source agreed to by the parties or
the most recent closing bid quotation from such a source, plus
accrued Income to the extent not included therein (other than any
Income transferred to Seller pursuant to Paragraph 6 hereof) as
of such date (unless contrary to market practice for such
Securities);
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(e) "Other Buyers", third parties that have entered into an
agreement with Seller that is substantially similar to this
Agreement;
(f) "Pricing Rate", a rate equal to the Commercial Paper
Composite rate for 90-day maturities provided by Merrill Lynch,
Pierce, Fenner & Smith Incorporated (or, if such rate is not
available, a substantially equivalent rate agreed to by Buyer and
Seller) plus 25 basis points, which rate shall be adjusted on the
first business day of each fiscal quarter and shall be in effect
for the entirety such fiscal quarter;
(g) "Purchase Price", the price at which Purchased
Securities are transferred by Seller to Buyer;
(h) "Purchased Securities", the Securities transferred by
Seller to Buyer in a Transaction hereunder, and any Securities
substituted therefor in accordance with Paragraph 9 hereof. The
term "Purchased Securities" with respect to any Transaction at
any time also shall include Additional Purchase Securities
transferred pursuant to Paragraph 4(a) and shall exclude
Securities returned pursuant to Paragraph 4(b);
(i) "Repurchase Collateral Account", a book account
maintained by Seller containing, among other Securities, the
Purchased Securities; and
(j) "Repurchase Price", for any Purchased Security, an
amount equal to the Purchase Price paid by Buyer to Seller for
such Purchased Security.
3. Transactions
(a) A Transaction may be initiated by Buyer upon the
transfer of the Purchase Price to Seller's account. Upon such
transfer, Seller shall transfer to Buyer Purchased Securities
having a Market Value equal to 103% of the Purchase Price.
(b) Purchased Securities shall be held in custody for Buyer
by Seller in the Repurchase Collateral Account. Seller shall
indicate on its books for such account Buyer's ownership of the
Purchased Securities. Upon reasonable request from Buyer, Seller
shall provide Buyer with a complete list of Purchased Securities
owned by Buyer.
(c) Upon demand by Buyer or Seller, Seller shall repurchase
from Buyer, and Buyer shall sell to Seller, for the Repurchase
Price all or any part of the Purchased Securities then owned by
Buyer.
4. Margin Maintenance
(a) If at any time the aggregate Market Value of all
Purchased Securities then owned by Buyer is less than 103% of the
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aggregate Repurchase Price for such Purchased Securities, then
Seller shall transfer to Buyer additional Securities ("Additional
Purchased Securities"), so that the aggregate Market Value of
such Purchased Securities, including any such Additional
Purchased Securities, will thereupon equal or exceed 103% of such
aggregate Repurchase Price.
(b) If at any time the aggregate Market Value of all
Purchased Securities then owned by Buyer exceeds 103% of the
aggregate Repurchase Price for such Purchased Securities, then
Seller may transfer Purchased Securities to Seller, so that the
aggregate Market Value of such Purchased Securities will
thereupon not exceed 103% of such aggregate Repurchase Price.
5. Interest Payments
If during any fiscal month Buyer owned Purchased Securities,
then on the first day of the next following fiscal month Seller
shall pay to Buyer an amount equal to the sum of the aggregate
Repurchase Prices of the Purchased Securities owned by Buyer at
the close of each day during the preceding fiscal month divided
by the number of days in such month and the product multiplied by
the Pricing Rate times the number of days in such month divided
by 360.
6. Income Payments and Voting Rights
Where a particular Transaction's term extends over an Income
payment date on the Purchased Securities subject to that
Transaction, Buyer shall, on the date such Income is payable,
transfer to Seller an amount equal to such Income payment or
payments with respect to any Purchased Securities subject to such
Transaction. Seller shall retain all voting rights with respect
to Purchased Securities sold to Buyer under this Agreement.
7. Security Interest
Although the parties intend that all Transactions hereunder
be sales and purchases and not loans, in the event any such
Transactions are deemed to be loans, Seller shall be deemed to
have pledged to Buyer as security for the performance by Seller
of its obligations under each such Transaction and this
Agreement, and shall be deemed to have granted to Buyer a
security interest in, all of the Purchased Securities with
respect to all Transactions hereunder and all proceeds thereof.
8. Payment and Transfer
Unless otherwise mutually agreed, all transfers of funds
hereunder shall be in immediately available funds. As used
herein with respect to Securities, "transfer" is intended to have
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the same meaning as when used in Section 8-313 of the
Massachusetts Uniform Commercial Code or, where applicable, in
any federal regulation governing transfers of the Securities.
9. Substitution
Buyer hereby grants Seller the authority to manage, in
Seller's sole discretion, the Purchased Securities held in
custody for Buyer by Seller in the Repurchase Collateral Account.
Buyer expressly agrees that Seller may (i) substitute other
Securities for any Purchased Securities and (ii) commingle
Purchased Securities with other Securities held in the Repurchase
Collateral Account. Substitutions shall be made by transfer to
Buyer of such other Securities and transfer to Seller of the
Purchased Securities for which substitution is being made. After
substitution, the substituted Securities shall be deemed to be
Purchased Securities. Securities which are substituted for
Purchased Securities shall have a Market Value at the time of
substitution equal to or greater than the Market Value of the
Purchase Securities for which such Securities were substituted.
10. Representations
Each of Buyer and Seller represents and warrants to the
other that (i) it is duly authorized to execute and deliver this
Agreement, to enter into the Transactions contemplated hereunder
and to perform its obligations hereunder and has taken all
necessary action to authorize such execution, delivery and
performance, (ii) the person signing this Agreement on its behalf
is duly authorized to do so on its behalf, (iii) it has obtained
all authorizations of any governmental body required in
connection with this Agreement and the Transactions hereunder and
such authorizations are in full force and effect and (iv) the
execution, delivery and performance of this Agreement and the
Transactions hereunder will not violate any law, ordinance,
charter, by-law or rule applicable to it or any agreement by
which it is bound or by which any of its assets are affected. On
the date for any Transaction Buyer and Seller shall each be
deemed to repeat all the foregoing representations made by it.
11. Events of Default
In the event that (i) Seller fails to repurchase or Buyer
fails to transfer Purchased Securities upon demand for repurchase
from either Buyer or Seller, (ii) Seller or Buyer fails, after
one business day's notice, to comply with Paragraph 4 hereof,
(iii) Buyer fails to make payment to Seller pursuant to Paragraph
6 hereof, (iv) Seller fails to comply with Paragraph 5 hereof,
(v) an Act of Insolvency occurs with respect to Seller or Buyer,
(vi) any representation made by Seller or Buyer shall have been
incorrect or untrue in any material respect when made or repeated
or deemed to have been made or repeated, or (vii) Seller or Buyer
shall admit to the other its inability to, or its intention not
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to, perform any of its obligations hereunder (each an "Event of
Default"):
(a) At the option of the nondefaulting party, exercised by
written notice to the defaulting party (which option shall be
deemed to have been exercised, even if no notice is given,
immediately upon the occurrence of any Act of Insolvency), Seller
shall become obligated to repurchase, and Buyer shall become
obligated to sell, all Purchased Securities then owned by Buyer
for the Repurchase Price of such Purchased Securities.
(b) If Seller is the defaulting party and Buyer exercises
or is deemed to have exercised the option referred to in
subparagraph (a) of this Paragraph, (i) the Seller's obligations
hereunder to repurchase all Purchased Securities in such
Transactions shall thereupon become immediately due and payable,
(ii) all Income paid after such exercise or deemed exercise shall
be retained by Buyer and applied to the aggregate unpaid
Repurchase Prices owed by Seller, and (iii) Seller shall
immediately deliver to Buyer any Purchased Securities subject to
such Transactions then in Seller's possession.
(c) In all Transactions in which Buyer is the defaulting
party, upon tender by Seller of payment of the aggregate
Repurchase Prices for all such Transactions, Buyer's right, title
and interest in all Purchased Securities subject to such
Transactions shall be deemed transferred to Seller, and Buyer
shall deliver all such Purchased Securities to Seller.
(d) After one business day's notice to the defaulting party
(which notice need not be given if an Act of Insolvency shall
have occurred, and which may be the notice given under
subparagraph (a) of this Paragraph or the notice referred to in
clause (ii) of the first sentence of this Paragraph), the
nondefaulting party may:
(i) as to Transactions in which Seller is the
defaulting party, (A) immediately sell, in a recognized market at
such price or prices as Buyer may reasonably deem satisfactory,
any or all Purchased Securities subject to such Transactions and
apply the proceeds thereof to the aggregate unpaid Repurchase
Prices and any other amounts owing by Seller hereunder or (B) in
its sole discretion elect, in lieu of selling all or a portion of
such Purchased Securities, to give Seller credit for such
Purchased Securities in an amount equal to the price therefor on
such date, obtained from a generally recognized source or the
most recent closing bid quotation from such a source, against the
aggregate unpaid Repurchase Prices and any other amounts owing by
Seller hereunder; and
(ii) as to Transactions in which Buyer is the
defaulting party, (A) purchase securities ("Replacement
Securities") of the same class and amount as any Purchased
Securities that are not delivered by Buyer to Seller as required
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hereunder or (B) in its sole discretion elect, in lieu of
purchasing Replacement Securities, to be deemed to have purchased
Replacement Securities at the price therefor on such date,
obtained from a generally recognized source or the most recent
closing bid quotation from such a source.
(e) As to Transactions in which Buyer is the defaulting
party, Buyer shall be liable to Seller (i) with respect to
Purchased Securities (other than Additional Purchased
Securities), for any excess of the price paid (or deemed paid) by
Seller for Replacement Securities therefor over the Repurchase
Price for such Purchased Securities and (ii) with respect to
Additional Purchased Securities, for the price paid (or deemed
paid) by Seller for the Replacement Securities therefor.
(g) The defaulting party shall be liable to the
nondefaulting party for the amount of all reasonable legal or
other expenses incurred by the nondefaulting party in connection
with or as a consequence of an Event of Default.
(h) The nondefaulting party shall have, in addition to its
rights hereunder, any rights otherwise available to it under any
other agreement or applicable law.
12. Single Agreement
Buyer and Seller acknowledge that, and have entered hereinto
and will enter into each Transaction hereunder in consideration
of and in reliance upon the fact that, all Transactions hereunder
constitute a single business and contractual relationship and
have been made in consideration of each other. Accordingly, each
of Buyer and Seller agrees (i) to perform all of its obligations
in respect of each Transaction hereunder, and that a default in
the performance of any such obligations shall constitute a
default by it in respect of all Transactions hereunder, (ii) that
each of them shall be entitled to set off claims and apply
property held by them in respect of any Transaction against
obligations owing to them in respect of any other Transactions
hereunder and (iii) that payments, deliveries and other transfers
made by either of them in respect of any Transaction shall be
deemed to have been made in consideration of payments, deliveries
and other transfers in respect of any other Transactions
hereunder, and the obligations to make any such payments,
deliveries and other transfers may be applied against each other
and netted.
13. Entire Agreement; Severability
This Agreement shall supersede any existing agreements
between the parties containing general terms and conditions for
repurchase transactions. Each provision and agreement and
agreement herein shall be treated as separate and independent
from any other provision or agreement herein and shall be
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enforceable notwithstanding the unenforceability of any such
other provision or agreement.
14. Non-assignability; Termination
The rights and obligations of the parties under this
Agreement and under any Transactions shall not be assigned by
either party without the prior written consent of the other
party. Subject to the foregoing, this Agreement and any
Transactions shall be binding upon and shall inure to the benefit
of the parties and their respective successors and assigns. This
Agreement may be canceled by either party upon giving written
notice to the other, except that this Agreement shall,
notwithstanding such notice, remain applicable to any
Transactions then outstanding.
15. Governing Law
This Agreement shall be governed by the laws of the
Commonwealth of Massachusetts without giving effect to the
conflict of law principles thereof.
16. No Waivers, Etc.
No express or implied waiver of any Event of Default by
either party shall constitute a waiver of any other Event of
Default and no exercise of any remedy hereunder by any party
shall constitute a wavier of its right to exercise any other
remedy hereunder. No modification or waiver of any provision of
this Agreement and no consent by any party to a departure
herefrom shall be effective unless and until such shall be in
writing and duly executed by both of the parties hereto.
17. Intent
(a) The parties recognize that each Transaction is a
"repurchase agreement" as that term is defined in Section 101 of
Title 11 of the United States Code, as amended (except insofar as
the type of Securities subject to such Transaction or the term of
such Transaction would render such definition inapplicable), and
a "securities contract" as that term is defined in Section 741 of
Title 11 of the United States Code, as amended.
(b) It is understood that either party's right to liquidate
Securities delivered to it in connection with Transactions
hereunder or to exercise any other remedies pursuant to Paragraph
11 hereof, is a contractual right to liquidate such Transaction
as described in Sections 555 and 559 of Title 11 of the United
States Code, as amended.
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IN WITNESS WHEREOF, the parties have executed this Agreement
as of December 28, 1996.
THERMO ELECTRON CORPORATION THERMO CARDIOSYSTEMS INC.
By:_____________________________ By:_______________________
Name: Jonathan W. Painter Name: Victor Poirier
Title: Treasurer Title: President
Exhibit 10.23
THERMO CARDIOSYSTEMS INC.
RESTATED STOCK HOLDING ASSISTANCE PLAN
SECTION 1. Purpose.
The purpose of this Plan is to benefit Thermo Cardiosystems
Inc. (the "Company") and its stockholders by encouraging Key
Employees to acquire and maintain share ownership in the Company,
by increasing such employees' proprietary interest in promoting
the growth and performance of the Company and its subsidiaries
and by providing for the implementation of the Stock Holding
Policy.
SECTION 2. Definitions.
The following terms, when used in the Plan, shall have the
meanings set forth below:
Committee: The Human Resources Committee of the Board of
Directors of the Company as appointed from time to time.
Common Stock: The common stock of the Company and any
successor thereto.
Company: Thermo Cardiosystems Inc., a Massachusetts
corporation.
Stock Holding Policy: The Stock Holding Policy of the
Company, as adopted by the Committee and as in effect from time
to time.
Key Employee: Any employee of the Company or any of its
subsidiaries, including any officer or member of the Board of
Directors who is also an employee, as designated by the
Committee, and who, in the judgment of the Committee, will be in
a position to contribute significantly to the attainment of the
Company's strategic goals and long-term growth and prosperity.
Loans: Loans extended to Key Employees by the Company
pursuant to this Plan.
Plan: The Thermo Cardiosystems Inc. Stock Holding
Assistance Plan, as amended from time to time.
SECTION 3. Administration.
The Plan and the Stock Holding Policy shall be administered
by the Committee, which shall have authority to interpret the
Plan and the Stock Holding Policy and, subject to their
provisions, to prescribe, amend and rescind any rules and
regulations and to make all other determinations necessary or
desirable for the administration thereof. The Committee's
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interpretations and decisions with regard to the Plan and the
Stock Holding Policy and such rules and regulations as may be
established thereunder shall be final and conclusive. The
Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or the Stock Holding
Policy, or in any Loan in the manner and to the extent the
Committee deems desirable to carry it into effect. No member of
the Committee shall be liable for any action or omission in
connection with the Plan or the Stock Holding Policy that is made
in good faith.
SECTION 4. Loans and Loan Limits.
The Committee has determined that the provision of Loans
from time to time to Key Employees in such amounts as to cause
such Key Employees to comply with the Stock Holding Policy is, in
the judgment of the Committee, reasonably expected to benefit the
Company and authorizes the Company to extend Loans from time to
time to Key Employees in such amounts as may be requested by such
Key Employees in order to comply with the Stock Holding Policy.
Such Loans may be used solely for the purpose of acquiring Common
Stock (other than upon the exercise of stock options or under
employee stock purchase plans) in open market transactions or
from the Company.
Each Loan shall be full recourse and evidenced by a
non-interest bearing promissory note substantially in the form
attached hereto as Exhibit A (the "Note") and maturing in
accordance with the provisions of Section 6 hereof, and
containing such other terms and conditions, which are not
inconsistent with the provisions of the Plan and the Stock
Holding Policy, as the Committee shall determine in its sole and
absolute discretion.
SECTION 5. Federal Income Tax Treatment of Loans.
For federal income tax purposes, interest on Loans shall be
imputed on any interest free Loan extended under the Plan. A Key
Employee shall be deemed to have paid the imputed interest to the
Company and the Company shall be deemed to have paid said imputed
interest back to the Key Employee as additional compensation.
The deemed interest payment shall be taxable to the Company as
income, and may be deductible to the Key Employee to the extent
allowable under the rules relating to investment interest. The
deemed compensation payment to the Key Employee shall be taxable
to the employee and deductible to the Company, but shall also be
subject to employment taxes such as FICA and FUTA.
SECTION 6. Maturity of Loans.
Each Loan to a Key Employee hereunder shall be due and
payable on demand by the Company. If no such demand is made,
then each Loan shall mature and the principal thereof shall
become due and payable in five equal annual installments from the
2PAGE
<PAGE>
payment of annual cash incentive compensation (referred to as
bonus) to the Key Employee by the Company, beginning with the
first such bonus payment to occur after the date of the Note
evidencing the Loan, and on each of the next four bonus payment
dates, provided that the Committee may, in its sole and absolute
discretion, authorize such other maturity and repayment schedule
as the Committee may determine. Each Loan shall also become
immediately due and payable in full, without demand, upon the
occurrence of any of the events set forth in the Note; provided
that the Committee may, in its sole and absolute discretion,
authorize an extension of the time for repayment of a Loan upon
such terms and conditions as the Committee may determine.
SECTION 7. Amendment and Termination of the Plan.
The Committee may from time to time alter or amend the Plan
or the Stock Holding Policy in any respect, or terminate the Plan
or the Stock Holding Policy at any time. No such amendment or
termination, however, shall alter or otherwise affect the terms
and conditions of any Loan then outstanding to Key Employee
without such Key Employee's written consent, except as otherwise
provided herein or in the promissory note evidencing such Loan.
SECTION 8. Miscellaneous Provisions.
(a) No employee or other person shall have any claim or
right to receive a Loan under the Plan, and no employee shall
have any right to be retained in the employ of the Company due to
his or her participation in the Plan.
(b) No Loan shall be made hereunder unless counsel for the
Company shall be satisfied that such Loan will be in compliance
with applicable federal, state and local laws.
(c) The expenses of the Plan shall be borne by the Company.
(d) The Plan shall be unfunded, and the Company shall not
be required to establish any special or separate fund or to make
any other segregation of assets to assure the making of any Loan
under the Plan.
(e) Except as otherwise provided in Section 7 hereof, by
accepting any Loan under the Plan, each Key Employee shall be
conclusively deemed to have indicated his acceptance and
ratification of, and consent to, any action taken under the Plan
or the Stock Holding Policy by the Company, the Board of
Directors of the Company or the Committee.
(f) The appropriate officers of the Company shall cause to
be filed any reports, returns or other information regarding
Loans hereunder, as may be required by any applicable statute,
rule or regulation.
SECTION 9. Effective Date.
3PAGE
<PAGE>
The Plan and the Stock Holding Policy shall become effective
upon approval and adoption by the Committee.
4PAGE
<PAGE>
EXHIBIT A TO STOCK HOLDING ASSISTANCE PLAN
THERMO CARDIOSYSTEMS INC.
Promissory Note
$_________
Dated:____________
For value received, ________________, an individual whose
residence is located at _______________________ (the "Employee"),
hereby promises to pay to Thermo Cardiosystems Inc. (the
"Company"), or assigns, ON DEMAND, but in any case on or before
[insert date which is the fifth anniversary of date of issuance]
(the "Maturity Date"), the principal sum of [loan amount in
words] ($_______), or such part thereof as then remains unpaid,
without interest. Principal shall be payable in lawful money of
the United States of America, in immediately available funds, at
the principal office of the Company or at such other place as the
Company may designate from time to time in writing to the
Employee.
Unless the Company has already made a demand for payment in
full of this Note, the Employee agrees to repay the Company an
amount equal to 20% of the initial principal amount of the Note
from the payment of annual cash incentive compensation (referred
to as bonus) to the Employee by the Company, beginning with the
first such bonus payment to occur after the date of this Note,
and on each of the next four bonus payment dates. Any amount
remaining unpaid under this Note, if no demand has been made by
the Company, shall be due and payable on the Maturity Date.
This Note may be prepaid at any time or from time to time,
in whole or in part, without any premium or penalty. The
Employee acknowledges and agrees that the Company has advanced to
the Employee the principal amount of this Note pursuant to the
Company's Stock Holding Assistance Plan, and that all terms and
conditions of such Plan are incorporated herein by reference.
The unpaid principal amount of this Note shall be and become
immediately due and payable without notice or demand, at the
option of the Company, upon the occurrence of any of the
following events:
(a) the termination of the Employee's employment with
the Company, with or without cause, for any reason or for no
reason;
(b) the death or disability of the Employee;
5PAGE
<PAGE>
(c) the failure of the Employee to pay his or her
debts as they become due, the insolvency of the Employee, the
filing by or against the Employee of any petition under the
United States Bankruptcy Code (or the filing of any similar
petition under the insolvency law of any jurisdiction), or the
making by the Employee of an assignment or trust mortgage for the
benefit of creditors or the appointment of a receiver, custodian
or similar agent with respect to, or the taking by any such
person of possession of, any property of the Employee; or
(d) the issuance of any writ of attachment, by trustee
process or otherwise, or any restraining order or injunction not
removed, repealed or dismissed within thirty (30) days of
issuance, against or affecting the person or property of the
Employee or any liability or obligation of the Employee to the
Company.
In case any payment herein provided for shall not be paid
when due, the Employee further promises to pay all costs of
collection, including all reasonable attorneys' fees.
No delay or omission on the part of the Company in
exercising any right hereunder shall operate as a waiver of such
right or of any other right of the Company, nor shall any delay,
omission or waiver on any one occasion be deemed a bar to or
waiver of the same or any other right on any future occasion.
The Employee hereby waives presentment, demand, notice of
prepayment, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or
enforcement of this Note. The undersigned hereby assents to any
indulgence and any extension of time for payment of any
indebtedness evidenced hereby granted or permitted by the
Company.
This Note has been made pursuant to the Company's Stock
Holding Assistance Plan and shall be governed by and construed in
accordance with, such Plan and the laws of the Commonwealth of
Massachusetts and shall have the effect of a sealed instrument.
_______________________________
Employee Name: _________________
________________________
Witness
Exhibit 11
THERMO CARDIOSYSTEMS INC.
Computation of Earnings per Share
1996 1995 1994
----------- ----------- -----------
Computation of Primary Earnings
per Share:
Net Income (a) $ 5,358,000 $ 6,925,000 $ 1,899,000
----------- ----------- -----------
Shares:
Weighted average shares
outstanding 36,568,711 35,002,530 34,173,986
Add: Shares issuable from
assumed conversion of
subordinated convertible
debentures - 1,757,059 2,276,908
Shares issuable from
assumed exercise of
options and warrants (as
determined by the
application of the
treasury stock method) - 513,833 479,360
----------- ----------- -----------
Weighted average shares
outstanding, as adjusted (b) 36,568,711 37,273,422 36,930,254
----------- ----------- -----------
Primary Earnings per
Share (a) / (b) $ .15 $ .19 $ .05
=========== =========== ===========
Exhibit 13
THERMO CARDIOSYSTEMS INC.
Consolidated Financial Statements
1996
PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1996 1995 1994
------------------------------------------------------------------------
Revenues (Note 11) $29,970 $20,593 $10,409
------- ------- -------
Costs and Operating Expenses:
Cost of revenues 11,891 8,810 5,127
Selling, general, and administrative
expenses (Note 7) 6,697 4,146 2,789
Research and development expenses 3,839 3,324 3,437
Write-off of acquired technology (Note 3) 4,909 - -
------- ------- -------
27,336 16,280 11,353
------- ------- -------
Operating Income (Loss) 2,634 4,313 (944)
Interest Income 5,297 5,117 4,147
Interest Expense (Note 6) (80) (274) (375)
Gain on Sale of Investments, Net (Note 2) 919 421 97
------- ------- -------
Income Before Provision for Income Taxes 8,770 9,577 2,925
Provision for Income Taxes (Note 5) 3,412 2,652 1,026
------- ------- -------
Net Income $ 5,358 $ 6,925 $ 1,899
======= ======= =======
Earnings per Share $ .15 $ .19 $ .05
======= ======= =======
Weighted Average Shares 36,569 37,273 36,930
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
2PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Consolidated Balance Sheet
(In thousands) 1996 1995
------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 1,030 $ 4,398
Short-term available-for-sale investments,
at quoted market value (amortized cost
of $46,511 and $45,392; Note 2) 46,455 46,123
Accounts receivable, less allowances
of $474 and $309 9,443 5,013
Inventories 10,244 6,149
Prepaid and refundable income taxes (Note 5) 2,330 1,905
-------- --------
69,502 63,588
-------- --------
Machinery, Equipment, and Leasehold
Improvements, at Cost 3,762 2,819
Less: Accumulated depreciation and
amortization 2,082 1,435
-------- --------
1,680 1,384
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $33,929 and $39,795; Note 2) 33,920 39,953
-------- --------
Prepaid Income Taxes (Note 5) 1,746 783
-------- --------
Other Assets 273 478
-------- --------
$107,121 $106,186
======== ========
3PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1996 1995
------------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Current maturity of subordinated convertible
obligations (Note 6) $ 3,755 $ -
Accounts payable 1,847 1,670
Accrued payroll and employee benefits 712 864
Other accrued expenses 833 374
Due to parent company and Thermo Electron
Corporation 67 297
-------- --------
7,214 3,205
-------- --------
Subordinated Convertible Obligations (Note 6) - 11,642
-------- --------
Commitments and Contingency (Notes 7 and 8)
Shareholders' Investment (Notes 4 and 9):
Common stock, $.10 par value, 100,000,000
shares authorized; 36,872,257 and 24,126,947
shares issued 3,687 2,413
Capital in excess of par value 91,566 82,344
Retained earnings 13,549 8,191
Treasury stock at cost, 235,509 and 18,097
shares (8,854) (2,186)
Net unrealized gain (loss) on available-
for-sale investments (Note 2) (41) 577
-------- --------
99,907 91,339
-------- --------
$107,121 $106,186
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Operating Activities:
Net income $ 5,358 $ 6,925 $ 1,899
Adjustments to reconcile net income to
net cash provided by operating
activities:
Write-off of acquired technology
(Note 3) 4,909 - -
Depreciation and amortization 875 925 620
Provision for losses on accounts
receivable 165 120 170
Gain on sale of investments, net
(Note 2) (919) (421) (97)
Deferred income tax benefit (1,929) (1,437) (81)
Changes in current accounts,
excluding the effects of
acquisition:
Accounts receivable (4,582) (877) (3,169)
Inventories (4,036) (2,142) (1,007)
Refundable income taxes 873 (780) 102
Accounts payable 177 870 524
Other current liabilities 2,214 1,568 1,535
-------- -------- --------
Net cash provided by operating
activities 3,105 4,751 496
-------- -------- --------
Investing Activities:
Acquisition (Note 3) (5,013) - -
Proceeds from sale and maturities of
available-for-sale investments 89,615 84,782 32,121
Purchases of available-for-sale
investments (83,947) (92,707) (54,988)
Purchases of machinery, equipment, and
leasehold improvements (921) (1,063) (446)
Increase in other assets - (190) (100)
-------- --------- --------
Net cash used in investing activities (266) (9,178) (23,413)
-------- --------- --------
Financing Activities:
Purchase of Company common stock (5,665) - -
Net proceeds from issuance of Company
common stock 741 947 593
Payment of withholding taxes related
to stock option exercises (1,283) (1,500) (1,158)
Net proceeds from issuance of
subordinated convertible obligations
(Note 6) - - 31,968
-------- -------- --------
Net cash provided by (used in)
financing activities $ (6,207) $ (553) $ 31,403
-------- -------- --------
5PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash
Equivalents $ (3,368) $ (4,980) $ 8,486
Cash and Cash Equivalents at Beginning
of Year 4,398 9,378 892
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 1,030 $ 4,398 $ 9,378
======== ======== ========
Cash Paid For:
Interest $ - $ 29 $ 36
Income taxes $ 2,260 $ 3,191 $ 130
Noncash Activities (Note 3):
Fair value of assets of acquired
company $ 5,068 $ - $ -
Cash paid for acquired company (5,013) - -
-------- -------- --------
Liabilities assumed of acquired
company $ 55 $ - $ -
======== ======== ========
Conversions of subordinated
obligations (Note 6) $ 7,887 $ 21,808 $ 150
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
6PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Consolidated Statement of Shareholders' Investment
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Common Stock, $.10 Par Value
Balance at beginning of year $ 2,413 $ 2,288 $ 2,262
Issuance of stock under employees'
and directors' stock plans 9 22 24
Conversions of subordinated
convertible obligations (Note 6) 54 103 2
Effect of three-for-two stock split 1,211 - -
------- ------- -------
Balance at end of year 3,687 2,413 2,288
------- ------- -------
Capital in Excess of Par Value
Balance at beginning of year 82,344 57,081 56,355
Issuance of stock under employees'
and directors' stock plans 452 522 578
Tax benefit related to employees'
and directors' stock plans 2,190 3,335 -
Conversions of subordinated
convertible obligations (Note 6) 7,791 21,406 148
Effect of three-for-two stock split (1,211) - -
------- ------- -------
Balance at end of year 91,566 82,344 57,081
------- ------- -------
Retained Earnings
Balance at beginning of year 8,191 1,266 (633)
Net income 5,358 6,925 1,899
------- ------- -------
Balance at end of year 13,549 8,191 1,266
------- ------- -------
Treasury Stock
Balance at beginning of year (2,186) (1,089) (6)
Activity under employees'
and directors' stock plans (1,003) (1,097) (1,083)
Purchases of Company common stock (5,665) - -
------- ------- -------
Balance at end of year (8,854) (2,186) (1,089)
------- ------- -------
Net Unrealized Gain (Loss) on Available-
for-sale Investments
Balance at beginning of year 577 (1,189) -
Effect of change in accounting
principle (Note 2) - - 1,038
Change in net unrealized gain (loss)
on available-for-sale investments
(Note 2) (618) 1,766 (2,227)
------- ------- -------
Balance at end of year (41) 577 (1,189)
------- ------- -------
Total Shareholders' Investment $99,907 $91,339 $58,357
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
7PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Cardiosystems Inc. (the Company) is a leader in the research,
development, and manufacture of implantable left ventricular-assist
systems (LVAS). Its HeartMate(R) devices are designed to perform
substantially all or part of the pumping function of the left ventricle
of the natural heart for patients suffering from cardiovascular disease.
Relationship with Thermedics Inc. and Thermo Electron Corporation
The Company was incorporated in 1988 as a wholly owned subsidiary of
Thermedics Inc. (Thermedics). Prior to that time, the business was
conducted as a division of Thermedics. As of December 28, 1996,
Thermedics owned 19,757,612 shares of the Company's common stock,
representing 54% of such stock outstanding. Thermedics is a 55%-owned
subsidiary of Thermo Electron Corporation (Thermo Electron). As of
December 28, 1996, Thermo Electron owned 46,278 shares of the Company's
common stock, representing .13% of such stock outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the
Company and its wholly owned subsidiary. All material intercompany
accounts and transactions have been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest
December 31. References to 1996, 1995, and 1994 are for the fiscal years
ended December 28, 1996, December 30, 1995, and December 31, 1994,
respectively.
Cash and Cash Equivalents
As of December 28, 1996, $1,018,000 of the Company's cash equivalents
were invested in a repurchase agreement with Thermo Electron. Under this
agreement, the Company in effect lends excess cash to Thermo Electron,
which Thermo Electron collateralizes with investments principally
consisting of U.S. government agency securities, corporate notes,
commercial paper, money market funds, and other marketable securities, in
the amount of at least 103% of such obligation. The Company's funds
subject to the repurchase agreement are readily convertible into cash by
the Company. The repurchase agreement earns a rate based on the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter. Cash equivalents are carried at cost, which
approximates market value.
8PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market value and include materials, labor, and manufacturing
overhead. The components of inventories are as follows:
(In thousands) 1996 1995
-----------------------------------------------------------------------
Raw materials $ 7,349 $ 2,645
Work in process 2,578 3,141
Finished goods 317 363
------- -------
$10,244 $ 6,149
======= =======
Machinery, Equipment, and Leasehold Improvements
The costs of additions and improvements are capitalized, while
maintenance and repairs are charged to expense as incurred. The Company
provides for depreciation and amortization using the straight-line method
over the estimated useful lives of the property, as follows: machinery
and equipment, five to eight years, and leasehold improvements, the
shorter of the term of the lease or the life of the asset.
Revenue Recognition
The Company recognizes revenues upon shipment of its products. The
Company provides a reserve for its estimate of warranty costs at the time
of shipment.
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 4). Accordingly,
no accounting recognition is given to stock options granted at fair
market value until they are exercised. Upon exercise, net proceeds,
including tax benefits realized, are credited to equity.
Income Taxes
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes," the Company recognizes deferred
income taxes based on the expected future tax consequences of differences
between the financial statement basis and the tax basis of assets and
liabilities, calculated using enacted tax rates in effect for the year in
which the differences are expected to be reflected in the tax return.
Earnings per Share
Earnings per share have been computed based upon the weighted average
number of shares outstanding during the year. Weighted average shares in
1995 and 1994 includes the effect of common stock equivalents, which
represents the assumed conversion of the Company's noninterest-bearing
9PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
subordinated convertible obligations and the assumed exercise of stock
options and warrants that were computed using the treasury stock method.
Weighted average shares in 1996 does not include the effect of common
stock equivalents as the effect on earnings per share would be
immaterial.
Stock Split
All share and per share information, except for share information in
the accompanying 1995 balance sheet, has been restated to reflect a
three-for-two stock split effected in the form of a 50% stock dividend,
distributed in May 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Available-for-sale Investments
Effective January 2, 1994, the Company adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." In
accordance with SFAS No. 115, the Company's debt and marketable equity
securities are considered available-for-sale investments in the
accompanying balance sheet and are carried at market value, with the
difference between cost and market value, net of related tax effects,
recorded currently as a component of shareholders' investment titled "Net
unrealized gain (loss) on available-for-sale investments." Effect of
change in accounting principle in the accompanying 1994 statement of
shareholders' investment represents the unrealized gain, net of related
tax effects, pertaining to available-for-sale investments held by the
Company on January 2, 1994.
10PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
2. Available-for-sale Investments (continued)
The aggregate market value, cost basis, and gross unrealized gains and
losses of short- and long-term available-for-sale investments by major
security type, as of December 28, 1996, and December 30, 1995, are as
follows:
Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
--------------------------------------------------------------------------
1996
Government agency securities $76,901 $76,917 $ - $ (16)
Corporate bonds 1,014 1,006 8 -
Other 2,460 2,517 - (57)
------- ------- ------- -------
$80,375 $80,440 $ 8 $ (73)
======= ======= ======= =======
1995
Government agency securities $83,906 $83,035 $ 948 $ (77)
Corporate bonds 1,028 1,010 18 -
Other 1,142 1,142 - -
------- ------- ------- -------
$86,076 $85,187 $ 966 $ (77)
======= ======= ======= =======
Short- and long-term available-for-sale investments in the
accompanying 1996 balance sheet include $45,459,000 with contractual
maturities of one year or less, $34,067,000 with contractual maturities of
more than one year through five years, and $849,000 with contractual
maturities of more than five years. Actual maturities may differ from
contractual maturities as a result of the Company's intent to sell these
securities prior to maturity and as a result of put and call options that
enable either the Company, the issuer, or both to redeem these securities
at an earlier date.
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains recorded in the
accompanying statement of income. Gain on sale of investments, net,
resulted from gross realized gains of $1,040,000 and $439,000 and gross
realized losses of $121,000 and $18,000 in 1996 and 1995, respectively, and
gross realized gains of $97,000 in 1994, relating to the sale of
available-for-sale investments.
3. Acquisition
In December 1996, the Company acquired substantially all of the assets,
subject to certain liabilities, of Nimbus Medical, Inc. (Nimbus), a
research and development organization, specializing in ventricular-assist
devices and total artificial hearts, for $5,013,000 in cash. Nimbus is
engaged strictly in research and development activities and, through its
11PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
3. Acquisition (continued)
acquisition date, had not completed development of any commercial products
for which it retains ownership rights. Nimbus' assets acquired by the
Company included certain technology in development. The feasibility of the
technology in development had not been conclusively established at the
acquisition date and such technology had no future use other than in
potential future generations of heart-assist devices or in total artificial
hearts. In connection with the acquisition of Nimbus, the Company wrote off
$4,909,000, which represents the portion of the purchase price allocated to
technology in development based on estimated replacement cost.
This acquisition has been accounted for using the purchase method of
accounting and its results of operations have been included in the
accompanying financial statements from the date of acquisition. Pro forma
data is not presented since this acquisition was not material to the
Company's results of operations.
4. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
------------------
The Company has stock-based compensation plans for its key employees,
directors, and others. Two of these plans, adopted in 1988, permit the
grant of nonqualified and incentive stock options. A third plan, adopted in
1994, permits the grant of a variety of stock and stock-based awards as
determined by the human resources committee of the Company's Board of
Directors (the Board Committee), including restricted stock, stock options,
stock bonus shares, or performance-based shares. To date, only nonqualified
stock options have been awarded under this plan. The option recipients and
the terms of options granted under these plans are determined by the Board
Committee. Generally, options granted to date are exercisable immediately,
but are subject to certain transfer restrictions and the right of the
Company to repurchase shares issued upon exercise of the options at the
exercise price, upon certain events. The restrictions and repurchase rights
generally lapse ratably over a five to ten year period, depending on the
term of the option, which may range from seven to twelve years.
Nonqualified options may be granted at any price determined by the Board
Committee, although incentive stock options must be granted at not less
than the fair market value of the Company's stock on the date of grant. To
date, all options have been granted at fair market value. The Company also
has a directors' stock option plan, adopted in 1991, that provides for the
grant of stock options to outside directors pursuant to a formula approved
by the Company's shareholders. Options awarded under this plan are
exercisable six months after the date of grant and expire three or seven
years after the date of grant. In addition to the Company's stock-based
compensation plans, certain officers and key employees may also participate
in the stock-based compensation plans of Thermedics and Thermo Electron.
Employee Stock Purchase Program
-------------------------------
Substantially all of the Company's full-time employees are eligible to
participate in an employee stock purchase program sponsored by the Company
and Thermo Electron. Under this program, shares of the Company's and Thermo
12PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
Electron's common stock can be purchased at the end of a 12-month period at
95% of the fair market value at the beginning of the period, and the shares
purchased are subject to a six-month resale restriction. Prior to November
1, 1995, the applicable shares of common stock could be purchased at 85% of
the fair market value at the beginning of the period, and the shares
purchased were subject to a one-year resale restriction. Shares are
purchased through payroll deductions of up to 10% of each participating
employee's gross wages. During 1996, 1995, and 1994, the Company issued
3,469 shares, 7,881 shares, and 7,395 shares, respectively, of its common
stock under this program.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-based Compensation," which sets forth a
fair-value based method of recognizing stock-based compensation expense. As
permitted by SFAS No. 123, the Company has elected to continue to apply APB
No. 25 to account for its stock-based compensation plans. Had compensation
cost for awards in 1996 and 1995 under the Company's stock-based
compensation plans been determined based on the fair value at the grant
dates consistent with the method set forth under SFAS No. 123, the effect
on the Company's net income and earnings per share would have been as
follows:
(In thousands except per share amounts) 1996 1995
Net income:
As reported $5,358 $6,925
Pro forma 4,823 6,795
Earnings per share:
As reported .15 .19
Pro forma .13 .18
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation expense may not be representative of the amount to be expected
in future years. Compensation expense for options granted is reflected over
the vesting period; therefore, future pro forma compensation expense may be
greater as additional options are granted.
The fair value of each option grant was estimated on the grant date
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1996 1995
------------------------------------------------------------------------
Volatility 50% 50%
Risk-free interest rate 6.2% 6.0%
Expected life of options 6.6 years 4.7 years
13PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option-pricing models
require the input of highly subjective assumptions including expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
Stock Option Activity
A summary of the Company's stock option activity is as follows:
1996 1995 1994
---------------- ---------------- -----------------
Weighted Weighted Range of
Number Average Number Average Number Option
(Shares in of Exercise of Exercise of Prices
thousands) Shares Price Shares Price Shares per Share
--------------------------------------------------------------------------
Options outstanding, $ 1.15-
beginning of year 1,137 $ 9.84 1,458 $ 6.05 1,730 12.12
10.63-
Granted 189 32.90 121 28.34 144 14.19
1.15-
Exercised (179) 3.67 (429) 2.13 (385) 5.93
1.15-
Forfeited (17) 15.55 (13) 11.03 (31) 12.12
----- ----- -----
Options outstanding, $ 1.15-
end of year 1,130 $14.59 1,137 $ 9.84 1,458 $14.19
===== ====== ===== ====== ===== ======
$ 1.15-
Options exercisable 1,130 $14.59 1,137 $ 9.84 1,455 $14.19
===== ====== ===== ====== ===== ======
Options available
for grant 453 625 733
===== ===== =====
Weighted average fair
value per share of
options granted
during year $18.23 $14.02
====== ======
14PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
A summary of the status of the Company's stock options at December
28, 1996, is as follows:
Options Outstanding and Exercisable
-----------------------------------
Weighted
Number Weighted Average Average
of Remaining Exercise
Range of Exercise Prices Shares Contractual Life Price
-----------------------------------------------------------------------
(Shares in thousands)
$ 1.15 - $13.10 822 5.6 years $ 8.42
3.11 - 25.06 23 4.2 years 19.02
25.07 - 37.01 224 8.9 years 28.59
37.02 - 48.97 61 5.4 years 44.46
-----
$ 1.15 - $48.97 1,130 6.2 years $14.59
=====
401(k) Savings Plan
Substantially all of the Company's full-time employees are eligible
to participate in Thermo Electron's 401(k) savings plan. Contributions to
the plan are made by both the employee and the Company. Company
contributions are based upon the level of employee contributions. For
this plan, the Company contributed and charged to expense $192,000,
$135,000, and $91,000 in 1996, 1995, and 1994, respectively.
5. Income Taxes
The components of the provision for income taxes are as follows:
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Currently payable:
Federal $ 5,219 $ 4,024 $ 1,057
State 122 65 50
------- ------- -------
5,341 4,089 1,107
------- ------- -------
Net deferred (prepaid):
Federal (2,185) (1,437) (81)
State 256 - -
------- ------- -------
(1,929) (1,437) (81)
------- ------- -------
$ 3,412 $ 2,652 $ 1,026
======= ======= =======
The Company receives a tax deduction upon exercise of nonqualified
stock options by employees for the difference between the exercise price
and the market price of the Company's common stock on the date of
15PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Income Taxes (continued)
exercise. The provision for income taxes that is currently payable does
not reflect $2,190,000 and $3,335,000 of such benefits that have been
allocated to capital in excess of par value in 1996 and 1995,
respectively.
The provision for income taxes in the accompanying statement of
income differs from the provision calculated by applying the statutory
federal income tax rate of 34% to income before provision for income
taxes due to the following:
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Provision for income taxes at statutory rate $2,982 $3,256 $ 994
Increases (decreases) resulting from:
State income taxes, net of federal tax
benefit 249 43 32
Reversal of valuation allowance - (725) -
Other 181 78 -
------ ------ ------
$3,412 $2,652 $1,026
====== ====== ======
The Company's valuation allowance was reversed in 1995 as a result
of reduced uncertainty surrounding the realization of future tax
benefits. The portion of the reduction in the valuation allowance that
related to stock options was recorded as an increase to capital in excess
of par value.
Short- and long-term prepaid income taxes in the accompanying
balance sheet consist of the following:
(In thousands) 1996 1995
---------------------------------------------------------------
Prepaid income taxes:
State tax loss and credit carryforwards $ 434 $ 868
Available-for-sale investments 360 20
Inventory basis difference 483 200
Accrued compensation 277 220
Allowance for doubtful accounts 189 123
Reserves and accruals 114 83
Write-off of acquired technology (Note 3) 1,865 -
Other, net 25 (29)
------ ------
$3,747 $1,485
====== ======
6. Subordinated Convertible Obligations
In January 1994, the Company issued and sold at par value $33,000,000
principal amount of noninterest-bearing subordinated convertible
debentures due January 1997. The debentures are convertible into shares
of the Company's common stock at a conversion price of $14.49 per share.
16PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
6. Subordinated Convertible Obligations (continued)
During 1996, 1995, and 1994, $7,887,000, $21,808,000, and $150,000,
respectively, of subordinated convertible debentures were converted into
544,168 shares, 1,541,976 shares, and 22,783 shares, respectively, of the
Company's common stock.
In January 1997, all of the remaining principal amount of the
debentures was converted into common stock of the Company.
The Company's convertible obligations are guaranteed on a
subordinated basis by Thermo Electron. Thermedics has agreed to reimburse
Thermo Electron in the event Thermo Electron is required to make a
payment under the guarantee.
See Note 10 for the fair value information pertaining to the
Company's subordinated convertible obligations.
7. Related Party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement
under which Thermo Electron's corporate staff provides certain
administrative services, including certain legal advice and services,
risk management, certain employee benefit administration, tax advice and
preparation of tax returns, centralized cash management, and certain
financial and other services, for which the Company pays Thermo Electron
annually an amount equal to 1.0% of the Company's revenues. The Company
paid an annual fee equal to 1.20% and 1.25% of the Company's revenues in
1995 and 1994, respectively. The annual fee is reviewed and adjusted
annually by mutual agreement of the parties. The corporate services
agreement is renewed annually but can be terminated upon 30 days' prior
notice by the Company or upon the Company's withdrawal from the Thermo
Electron Corporate Charter (the Thermo Electron Corporate Charter defines
the relationship among Thermo Electron and its majority-owned
subsidiaries). In addition, the Company uses data processing services of
a majority-owned subsidiary of Thermo Electron, and accounting,
personnel, and administrative services of Thermedics. For these services,
as well as the administrative services provided by Thermo Electron, the
Company was charged $618,000, $478,000, and $368,000 in 1996, 1995, and
1994, respectively. Management believes that the service fees charged by
Thermo Electron, its majority-owned subsidiary, and Thermedics are
reasonable and that such fees are representative of the expenses the
Company would have incurred on a stand-alone basis. For additional items
such as employee benefit plans, insurance coverage, and other
identifiable costs, Thermo Electron charges the Company based upon costs
attributable to the Company.
Operating Leases
The Company subleases office and research facilities from Thermedics
and is charged for actual square footage occupied at approximately the
same rent paid per square foot by Thermedics under its prime lease. This
sublease expires in February 1999. The accompanying statement of income
includes expenses from the sublease of $116,000, $134,000, and $140,000
in 1996, 1995, and 1994, respectively. Currently, the cost of the area
occupied by the Company is $116,000 per year.
17PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
7. Related Party Transactions (continued)
Subsequent to year-end 1996, the Company subleased office and
research facilities from Thermedics Detection Inc. (Thermedics
Detection), a majority-owned subsidiary of Thermedics, under a two-year
sublease agreement. The cost of the area occupied by the Company will be
$40,000 in 1997 and $44,000 in 1998.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
8. Commitment and Contingency
Operating Lease
In addition to the operating leases described in Note 7, the Company
leases office and research facilities under an operating lease agreement
expiring in 2000. Future minimum payments due under this lease at
December 28, 1996, are $105,000 in 1997; $112,000 in 1998 and 1999; and
$107,000 in 2000. Total future minimum lease payments are $436,000.
Contingency
The Company has received correspondence alleging that the textured
surface of the LVAS housing infringed the intellectual property rights of
another party. In general, an owner of intellectual property can prevent
others from using such property without a license and is entitled to
damages for unauthorized past usage. The Company has investigated the
bases of the allegation and, based on the opinion of its counsel,
believes that if the Company were sued on these bases, it would have
meritorious defenses.
9. Stock Purchase Warrant and Common Stock
In May 1993, in connection with an agreement to develop a material
to be used in the Company's LVAS, the Company granted to a third party
the right to purchase from the Company 60,000 shares of the Company's
common stock at a price of $5.83 per share, which was the fair market
value of the Company's common stock on the date of grant. This warrant is
exercisable immediately and expires ten years after the date of grant.
At December 28, 1996, the Company had reserved 2,161,838 unissued
shares of its common stock for possible issuance under stock-based
compensation plans, possible conversion of its outstanding subordinated
convertible obligations, and possible issuance under the stock purchase
warrant.
10. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale investments, accounts receivable,
accounts payable, due to parent company and Thermo Electron Corporation,
and current and long-term subordinated convertible obligations. The
carrying amounts of these financial instruments, with the exception of
available-for-sale investments and current and long-term subordinated
18PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
10. Fair Value of Financial Instruments (continued)
convertible obligations, approximates fair value due to their short-term
nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on
quoted market prices. See Note 2 for fair value information pertaining to
these financial instruments.
The fair value of the Company's subordinated convertible obligations
was determined based on quoted market prices. The carrying amount and
fair value of the Company's subordinated convertible obligations are as
follows:
1996 1995
-------------------- --------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
-----------------------------------------------------------------------
Subordinated convertible
obligations (1) $ 3,755 $ 7,435 $11,642 $41,489
(1) The fair value of subordinated convertible obligations at December
28, 1996, and December 30, 1995, exceeds the carrying amount
primarily due to the market price of the Company's common stock
exceeding the conversion price of the subordinated convertible
obligations.
11. Significant Customers, Export Sales, and Concentrations of Risk
No customer accounted for 10% or more of the Company's total
revenues in 1996 and 1995. Revenues from AMETEC (a licensed distributor
of the Company's LVAS in Germany) accounted for 10% of the Company's
total revenues in 1994.
In 1996 and 1995, export revenues were $4,622,000 and $2,353,000,
respectively. In 1994, export revenues to Germany, other European
countries, and other countries were $1,032,000, $1,278,000, and $817,000,
respectively.
Certain raw materials used in the manufacture of the Company's LVAS
are available from only one or two suppliers. The Company is making
efforts to minimize the risks associated with sole sources and ensure
long-term availability, including qualifying alternative materials and
components or developing alternative sources for materials or components
supplied by a single source. Although the Company believes that it has
adequate supplies of materials and components to meet demand for the LVAS
for the foreseeable future, no assurance can be given that the Company
will not experience shortages of certain materials or components in the
future that could delay shipments of the LVAS.
19PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
12. Unaudited Quarterly Information
(In thousands except per share amounts)
1996 First Second Third Fourth(a)
--------------------------------------------------------------------
Revenues $6,693 $7,429 $7,594 $8,254
Gross profit 4,274 5,033 5,004 3,768
Net income (loss) 2,411 2,399 2,762 (2,214)
Earnings (loss) per share .06 .07 .08 (.06)
1995 First Second Third Fourth
-------------------------------------------------------------------
Revenues $4,392 $5,589 $5,068 $5,544
Gross profit 2,464 3,249 2,895 3,175
Net income 1,152 1,671 1,891 2,211
Earnings per share .03 .04 .05 .06
(a) Includes a write-off of $4,909,000 of acquired technology.
20PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Cardiosystems Inc.:
We have audited the accompanying consolidated balance sheet of Thermo
Cardiosystems Inc. (a Massachusetts corporation and 54%-owned subsidiary
of Thermedics Inc.) and subsidiary as of December 28, 1996, and December
30, 1995, and the related consolidated statements of income,
shareholders' investment, and cash flows for each of the three years in
the period ended December 28, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Thermo Cardiosystems Inc. and subsidiary as of December 28, 1996, and
December 30, 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 28, 1996,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 6, 1997
21PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," "seeks," "estimates," and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the results of the Company to differ
materially from those indicated by such forward-looking statements,
including those detailed immediately after this Management's Discussion
and Analysis of Financial Condition and Results of Operation under the
caption "Forward-looking Statements."
Overview
The Company is a leader in the research, development, and manufacture
of implantable left ventricular-assist systems (LVAS). Its HeartMate(R)
devices are designed to perform substantially all or part of the pumping
function of the left ventricle of the natural heart for patients
suffering from cardiovascular disease.
In general, a profit cannot be earned from the sale of an LVAS in the
United States until approval of the device has been received from the
U.S. Food and Drug Administration (FDA) for commercial sale. Until such
approval is obtained, only the direct and indirect costs of the LVAS can
be recovered, which are included in the Company's revenues. With the
FDA's approval of the air-driven LVAS, the Company began earning a profit
on the sale of such systems in the fourth quarter of 1994. In October
1994, the Company announced a price increase in the U.S. for its
air-driven LVAS that was phased in during a six-month period and more
than doubled the average price of the air-driven LVAS.
The Company derives its revenues from two types of sales:
implementation programs and subsequent implants. Implementation programs
consist of initial sales to new clinical centers or foreign distributors,
as well as sales of a new system, such as the electric LVAS, to an
existing customer. Revenues recorded from subsequent implants consist of
sales to an existing customer other than the initial sale of the
implementation program. In general, the Company receives greater revenues
from the sale of an implementation program than from a subsequent
implant.
In December 1996, the Company acquired substantially all of the
assets, subject to certain liabilities, of Nimbus Medical, Inc. (Nimbus),
a research and development organization. Nimbus has been involved in
artificial heart technology for more than 20 years and has carried out
research in two primary fields: ventricular-assist devices and total
artificial hearts. Nimbus was instrumental in developing the basic
technology for high-speed rotary blood pumps. Because of their smaller
size, rotary blood pumps may potentially be used to provide cardiac
support in small adults and in children.
22PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
1996 Compared With 1995
Revenues in 1996 increased 46% to $29,970,000 from $20,593,000 in
1995, primarily due to a 61% increase in the number of air-driven and
electric LVAS units shipped for subsequent implant and a 30% increase in
the number of LVAS implementation programs sold during 1996. The Company
expects that shipments of LVAS units will stabilize at current levels
until the electric system is approved for commercial sale in the U.S. and
for use outside the hospital. The Company believes that this approval
could occur during 1997, however, there can be no assurance that the
Company will receive this approval within the expected time period, or at
all.
The gross profit margin increased to 60% in 1996 from 57% in 1995,
primarily due to an increase in revenues from higher-margin
implementation programs, an increase in sales volume and, to a lesser
extent, manufacturing efficiencies. These increases were offset in part
by costs associated with modifications made to the Company's LVAS. The
Company will continue to be unable to earn a profit on sales of the
electric LVAS in the U.S. until FDA approval of that system is obtained.
Selling, general, and administrative expenses as a percentage of
revenues increased to 22% in 1996 from 20% in 1995 as a result of higher
marketing expenses due to an increase in the Company's sales force. This
increase was offset in part by the effect of lower expenses as a
percentage of revenues due to an increase in sales volume.
Research and development expenses of $3,839,000 in 1996 and
$3,324,000 in 1995 reflect the Company's continued development of the
LVAS. The Company does not expect research and development expenses to
increase materially as a result of its acquisition of Nimbus, as most of
Nimbus' research and development costs have historically been funded
through government contracts.
In connection with the December 1996 acquisition of Nimbus, the
Company wrote off $4,909,000, which represents the portion of the
purchase price allocated to technology in development based on estimated
replacement cost (Note 3).
Interest income increased to $5,297,000 in 1996 from $5,117,000 in
1995, primarily as a result of higher invested balances. Interest expense
decreased to $80,000 in 1996 from $274,000 in 1995, primarily as a result
of lower amortization of deferred issuance costs associated with the
Company's noninterest-bearing subordinated convertible debentures due to
the conversion of $7,887,000 principal amount of these debentures in
1996.
The Company recorded a gain on sale of investments, net, of $919,000
in 1996, compared with $421,000 in 1995 (Note 2).
The effective tax rates were 39% and 28% in 1996 and 1995,
respectively. The effective tax rate in 1996 exceeded the statutory
federal income tax rate primarily due to the impact of state income
taxes. The effective tax rate in 1995 was below the statutory federal
income tax rate due to the reversal of a tax valuation allowance that was
no longer required.
23PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1995 Compared With 1994
Revenues almost doubled in 1995 to $20,593,000 from $10,409,000 in
1994. Revenues in 1995 increased approximately 47% as a result of the
price increase that was phased in during the fourth quarter of 1994 and
the first two quarters of 1995. Revenues also increased due to a 43%
increase in the number of air-driven and electric LVAS units shipped
during 1995 compared with 1994. The number of implementation programs
sold in 1995 were comparable to those sold in 1994.
The gross profit margin increased to 57% in 1995 from 51% in 1994,
primarily due to the price increase and, to a lesser extent, the increase
in sales volume and improvements in manufacturing efficiencies.
The Company recorded operating income of $4,313,000 in 1995, compared
with an operating loss of $944,000 in 1994. This improvement resulted
primarily from an increased gross profit margin on higher revenues,
partially offset by increased expenses to market and distribute the
Company's LVAS.
Interest income increased to $5,117,000 in 1995 from $4,147,000 in
1994, principally due to higher prevailing interest rates in 1995
compared with 1994. Interest expense decreased to $274,000 in 1995 from
$375,000 in 1994, primarily as a result of lower amortization of deferred
issuance costs associated with the Company's noninterest-bearing
subordinated convertible debentures due to the conversion of $21,358,000
principal amount of these debentures in 1995.
The effective tax rate decreased to 28% in 1995 from 35% in 1994,
primarily due to the reversal of a tax valuation allowance that was no
longer required.
Liquidity and Capital Resources
Working capital was $62,288,000 at December 28, 1996, compared with
$60,383,000 at December 30, 1995. Cash, cash equivalents, and short- and
long-term available-for-sale investments were $81,405,000 at December 28,
1996, compared with $90,474,000 at December 30, 1995. During 1996,
$3,105,000 of cash was provided by operating activities. Cash provided by
the Company's operating results was offset in part by $4,582,000 and
$4,036,000 of cash used to fund increases in accounts receivable and
inventories, respectively. These increases were primarily due to a 46%
increase in sales volume and corresponding increases in production
levels.
During 1996, the Company's primary investing activities, excluding
purchases, sales, and maturities of available-for-sale investments,
included an acquisition and capital expenditures. In December 1996, the
Company acquired substantially all of the assets, subject to certain
liabilities, of Nimbus for $5,013,000 in cash (Note 3). The Company
expended $921,000 on purchases of machinery, equipment, and leasehold
improvements during 1996.
During 1996, the Company expended $6,207,000 for financing
activities. The Company's Board of Directors has authorized the
repurchase, through August 12, 1997, of up to $10.0 million of its own
securities. Any such purchases would be funded from working capital.
Through December 28, 1996, the Company had expended $5,665,000 under this
authorization.
24PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
In 1997, the Company expects to make capital expenditures of
approximately $1,600,000, principally for manufacturing and tooling
equipment and leasehold improvements for the continued development and
production of the Company's LVAS. The Company believes it has adequate
resources to meet its financial needs for the foreseeable future.
25PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company wishes to caution
readers that the following important factors, among others, in some cases
have affected, and in the future could affect, the Company's actual
results and could cause its actual results in 1997 and beyond to differ
materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
Uncertainty of Regulatory Approval for Biomedical Devices. The
Company's left ventricular-assist systems (LVAS) are subject to approval
by the U.S. Food and Drug Administration (FDA) before they may be sold at
a profit in the U.S. The Company is also subject to regulatory
requirements in foreign countries in which the Company markets its
devices. The process of obtaining regulatory approvals is lengthy,
expensive, and inherently uncertain. Even after FDA approval has been
obtained, such approval can be suspended or revoked if the FDA does not
continue to be satisfied with the safety and efficacy of a product.
Failure to comply with applicable regulatory requirements can result in,
among other things, fines, suspensions of approvals, recalls of products,
operating restrictions, and criminal prosecutions.
In October 1994, the Company received FDA approval for the commercial
sale of its pneumatic LVAS. In April 1994, the Company received the CE
Mark for commercial sale of the pneumatic LVAS in all European Union
countries. The Company has developed the HeartPak(TM), a lightweight,
portable console that can be carried over the shoulder and can be used as
an alternative to the larger external console approved for use with the
pneumatic LVAS. The HeartPak received the CE Mark in February 1995 and
the HeartPak is currently in Phase I clinical trials in the U.S. The
Company's electric LVAS is currently in use in clinical trials in the
U.S. These trials are testing the safety and efficacy of the device as
both a bridge to transplant and as an alternative to medical therapy. The
electric LVAS received the CE Mark in August 1995.
No assurance can be given that the Company will file a supplement to
its premarket approval (PMA) application with the FDA with respect to the
electric LVAS on a timely basis, or at all, or that the PMA supplement,
if filed, will ultimately be approved by the FDA. In addition, any design
changes to the Company's LVAS, including use of the portable console for
the pneumatic LVAS, must be approved pursuant to a supplement to an
approved PMA application. Failure of the Company to obtain FDA approval
for the commercial sale of the electric LVAS, either as a bridge to
transplant or as an alternative to medical therapy, would have a material
adverse effect on the Company's long-term growth prospects. In addition,
failure of the Company to obtain approval for the HeartPak portable
console would require patients supported by the pneumatic LVAS to remain
hospitalized. This could materially decrease the market for the pneumatic
LVAS.
Uncertainty of Patient Reimbursement. The cost of implanting a
cardiac support system is substantial. Without the financial support of
the government or third-party insurers, the market for the Company's
devices will be limited. Medicare and Medicaid limit the reimbursement
that U.S. hospitals receive for treating certain medical conditions by
setting maximum fees that can be charged to their patients. Under these
systems, hospitals are paid a fixed amount for treating each patient with
a particular diagnosis. Private insurers also have initiated
26PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Forward-looking Statements
reimbursement systems designed to slow the escalation of healthcare
costs. In addition, the federal government is considering, and certain
state governments are considering or have adopted, new healthcare
policies intended to curb rising costs. Such policies include rationing
of government-funded reimbursement for healthcare services and imposing
price controls upon providers of medical products and services. These
policies could have the effect of limiting the availability of
reimbursement for procedures, such as the implantation of an LVAS, that
involve prolonged treatment of critically ill patients.
In November 1995, the U.S. Health Care Finance Administration (HCFA)
issued a decision that extends Medicare coverage to the Company's
HeartMate pneumatic LVAS. Several major nongovernment insurers have
already agreed to offer coverage for the pneumatic LVAS. Even though
reimbursement has been established by HCFA and by certain nongovernment
insurers, the amount of available reimbursement may change, and
reimbursement may be denied by an insurer under certain circumstances,
including if it is determined that a procedure was not the most
cost-effective treatment method, was experimental, or was used for an
unapproved indication. No assurance can be given that additional
third-party reimbursement for the pneumatic LVAS will be granted within a
reasonable period of time, or at all. The unavailability of third-party
reimbursement for procedures involving the Company's systems would have a
material adverse effect on the Company's business.
Uncertainty of Opinion Leader Acceptance and Support. A limited
number of cardiac surgeons and cardiologists influence medical device
selection and purchase decisions for a large portion of the target
patient population. The Company will achieve its business objectives only
if its LVAS are recommended for use by such opinion leaders. The Company
has developed working relationships with a number of leading medical
centers, and its existing and proposed LVAS have been well received by
opinion leaders in cardiac surgery and cardiology. Moreover, since the
inception of its work on cardiac support systems in 1966, the Company has
relied upon surgical teams at medical institutions to perform clinical
trials that are necessary for obtaining FDA approvals. A continuing
working relationship with those and other institutions will be important
to the success of the Company. No assurance can be given that existing
relationships and arrangements can be maintained or that new
relationships will be established. Furthermore, economic, psychological,
ethical, and other concerns may limit acceptance of heart-assist devices
in general, and there can be no assurance that markets of sufficient size
will develop for the Company's LVAS.
Technological Change and Competition. The Company is aware of only
one other company performing clinical trials of intermediate or long-term
LVAS support in humans. However, there are many organizations engaged in
the development of various types of cardiac support systems, including a
total artificial heart. As other organizations realize the commercial
potential for LVAS, the Company believes that competition will intensify.
Although the length of the regulatory approval process for medical
devices such as LVAS is a barrier to entry into this market, the
Company's products could be rendered obsolete or uneconomical by
technological advances by one or more of the Company's present
27PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Forward-looking Statements
competitors or by future entrants into the industry. Many manufacturers
of medical devices have greater research and development, manufacturing,
and marketing resources than those of the Company.
Availability of Components and Raw Materials. The Company relies on a
number of custom-designed components and materials supplied by other
companies to manufacture its LVAS. The Company is making efforts to
minimize the risks associated with sole sources and ensure long-term
availability, including qualifying alternative materials and components
or developing alternative sources for materials and components supplied
by a single source. Although the Company believes that it has adequate
supplies of materials and components to meet demand for its products for
the foreseeable future, no assurance can be given that the Company will
not experience shortages of certain materials or components in the future
that could delay shipments of its products. The cost to the Company to
evaluate and test alternative materials and components and the time
necessary to obtain FDA approval for these materials are inherently
difficult to determine because both time and cost are dependent on at
least two factors: the similarity of the alternative material or
component to the original material or component, and the amount of
third-party testing that may have already been completed on alternative
materials or components. There can be no assurance that the substitution
of alternative materials or components would not cause delays in the
Company's LVAS development programs or adversely affect the Company's
ability to manufacture and ship LVAS to meet demand.
Intellectual Property Rights. The Company relies principally upon
trade secret protection and, to a lesser extent, patents to protect its
proprietary rights. No assurance can be given that the Company will be
able to effectively protect its trade secrets, or that competitors will
not independently develop equivalent technology or design around the
Company's patents. The Company's competitive position could be adversely
affected if the Company is unable to protect adequately its proprietary
rights. In addition, there can be no assurance that third parties will
not assert claims against the Company that the Company infringes the
intellectual property rights of such parties. The Company could incur
substantial costs and diversion of management resources with respect to
the defense of any such claims, which could have a material adverse
effect on the Company's business, financial condition, and results of
operations. Furthermore, parties making such claims could secure a
judgment awarding substantial damages, as well as injunctive or other
equitable relief, which could effectively block the Company's ability to
make, use, sell, distribute or market its products and services in the
U.S. or abroad. In the event that a claim relating to intellectual
property is asserted against the Company, the Company may seek licenses
to such intellectual property. There can be no assurance, however, that
such licenses could be obtained on commercially reasonable terms, if at
all. The failure to obtain the necessary licenses or other rights could
preclude the sale, manufacture, or distribution of the Company's products
and, therefore, could have a material adverse effect on the Company's
business, financial condition, and results of operations. The Company has
received correspondence from a third party alleging that the textured
surface of the LVAS infringes certain patent rights of such third party.
28PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Forward-looking Statements
The Company believes that it has meritorious defenses to the claims of
the third party. However, no assurance can be given that the Company
would be successful if litigation was commenced or that others will not
claim that the Company infringes their intellectual property rights.
Limited Manufacturing and Marketing Experience. Prior to FDA approval
of commercial sale of the pneumatic LVAS, the Company was engaged only in
the research and development of its LVAS. Since that time, the Company
has been building its manufacturing, marketing, and sales capabilities.
Although the Company has not experienced difficulties in manufacturing
its LVAS at volumes, cost, and quality levels sufficient to satisfy the
increased demand resulting from commercial approval, no assurance can be
given that the Company will not encounter difficulties as sales volumes
increase or new products and/or components are approved for commercial
sale. The Company does not have experience in the large-scale
commercialization of medical devices. Although the Company has added
sales and marketing staff and is expanding its distribution capabilities
worldwide, no assurance can be given that the Company will be able to
market and sell its products successfully in high volumes.
Product Liability. The Company faces an inherent business risk of
exposure to product liability claims relating to the use of its products.
Although the Company currently maintains product liability insurance
against this risk, there can be no assurance that it will continue to be
able to obtain such coverage at economically feasible rates, if at all,
or that such coverage will be adequate in terms and scope to completely
protect the Company in the event of a successful product liability claim.
29PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Selected Financial Information
(In thousands except
per share amounts) 1996(a) 1995(b) 1994(c) 1993 1992
----------------------------------------------------------------------
Statement of Income Data:
Revenues $ 29,970 $ 20,593 $10,409 $ 3,524 $ 2,441
Net income 5,358 6,925 1,899 404 18
Earnings per share .15 .19 .05 .01 -
Balance Sheet Data:
Working capital $ 62,288 $ 60,383 $44,121 $16,059 $15,118
Total assets 107,121 106,186 94,864 59,838 59,072
Long-term obligations - 11,642 33,450 600 2,520
Common stock subject
to redemption - - - - 5,468
Shareholders'
investment 99,907 91,339 58,357 57,978 50,038
(a) Reflects conversion of $7,887,000 principal amount of
noninterest-bearing subordinated convertible obligations and the
December 1996 acquisition of Nimbus Medical, Inc.
(b) Reflects conversion of $21,358,000 principal amount of noninterest-
bearing subordinated convertible obligations.
(c) Reflects the January 1994 issuance of $33,000,000 principal amount
of noninterest-bearing subordinated convertible obligations due
1997.
30PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Common Stock Market Information
The following table shows the market range for the Company's common
stock based on reported sales prices on the American Stock Exchange
(symbol TCA) for 1996 and 1995. Prices have been restated to reflect a
three-for-two stock split, effected in the form of a 50% stock dividend,
distributed in May 1996.
1996 1995
----------------- -----------------
Quarter High Low High Low
-----------------------------------------------
First $55 1/3 $39 1/3 $19 5/6 $10 5/12
Second 55 3/8 39 7/12 26 1/12 18 5/6
Third 44 5/8 29 1/2 33 1/6 24 1/6
Fourth 38 1/4 23 3/8 51 1/2 28 5/12
As of January 24, 1997, the Company had 465 holders of record of its
common stock. This does not include holdings in street or nominee names.
The closing market price on the American Stock Exchange for the Company's
common stock on January 24, 1997, was $27 per share.
Shareholder Services
Shareholders of Thermo Cardiosystems Inc. who desire information
about the Company are invited to contact John N. Hatsopoulos, Chief
Financial Officer, Thermo Cardiosystems Inc., 81 Wyman Street, P.O. Box
9046, Waltham, Massachusetts 02254-9046, (617) 622-1111. A mailing list
is maintained to enable shareholders whose stock is held in street name,
and other interested individuals, to receive quarterly reports, annual
reports, and press releases as quickly as possible. Beginning in 1997,
quarterly distribution will be limited to the second quarter report only.
All quarterly reports and press releases are available through the
Internet from Thermo Electron's home page on the World Wide Web
(http://www.thermo.com/subsid/tca.html).
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent
and maintains shareholder activity records. The agent will respond to
questions on issuance of stock certificates, change of ownership, lost
stock certificates, and change of address. For these and similar matters,
please direct inquiries to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
31PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Dividend Policy
Except for a $.01 per share dividend distributed to partially offset
income tax liability relating to the Company's recapitalization in 1990,
the Company has never paid any cash dividends because its policy is to
use earnings to finance expansion and growth. The Company's Board of
Directors anticipates that for the foreseeable future no cash dividends
will be paid on the Company's common stock.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended
December 28, 1996, as filed with the Securities and Exchange Commission,
may be obtained without charge by writing to John N. Hatsopoulos, Chief
Financial Officer, Thermo Cardiosystems Inc., 81 Wyman Street, P.O. Box
9046, Waltham, Massachusetts 02254-9046.
Annual Meeting
The annual meeting of shareholders will be held on Monday, June 2,
1997, at 1:30 p.m., at the Hyatt Regency Hotel, Hilton Head, South
Carolina.
32<PAGE>
Exhibit 21
THERMO CARDIOSYSTEMS INC.
Subsidiaries of the Registrant
As of February 28, 1997, the Registrant owned the following subsidiaries:
STATE OR
JURISDICTION PERCENT
NAME OF OF
INCORPORATION OWNERSHIP
Nimbus Inc. Massachusetts 100 %
TCA Securities Corporation Massachusetts 100 %
Exhibit 23
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the
incorporation by reference of our reports dated February 6, 1997,
included in or incorporated by reference into Thermo Cardiosystems Inc.'s
Annual Report on Form 10-K for the year ended December 28, 1996, into the
Company's previously filed Registration Statement No. 33-45283 on Form
S-8, Registration Statement No. 33-45255 on Form S-8, Registration
Statement No. 33-52822 on Form S-8, Registration Statement No. 33-75654
on Form S-3, Registration Statement No. 33-78732 on Form S-8,
Registration Statement No. 33-78730 on Form S-8, Registration Statement
No. 33-78734 on Form S-8, Registration Statement No. 33-78736 on Form
S-8, Registration Statement No. 33-78728 on Form S-8, Registration
Statement No. 033-65271 on Form S-8, and Registration No. 333-5671 on
Form S-3.
Arthur Andersen LLP
Boston, Massachusetts
March 14, 1997
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
CARDIOSYSTEMS INC.'S ANNUAL REPORT FILED ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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