Item 1. Business
(a) General Development of Business
Thermo Cardiosystems Inc. (the Company or the Registrant) develops, manufactures, and markets products in two segments: Left Ventricular-assist Systems (LVAS) and Other Medical Equipment. The LVAS is an implantable heart-assist device that is 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. The Company has developed two systems for patients requiring 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. The electric LVAS was granted the same approval by the FDA in September 1998. With these approvals, the air-driven and electric systems became available for sale to cardiac centers throughout the United States. In August 1998, the Medical Devices Bureau of Health Canada issued a Notice of Compliance for the Company's HeartMate LVAS, permitting the sale of both the air-driven and electric versions throughout Canada. Health Canada, through its Medical Devices Bureau, is the federal department responsible for ensuring that the drugs, medical devices, and other therapeutic products available in Canada are safe, effective, and of high quality. The Company's air-driven LVAS received the European Conformity Mark (CE Mark) required for commercial sale of medical devices in all European Community countries in April 1994, and received the same marking for the electric system in August 1995. 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. In December 1997, the FDA approved the Company's proposal to broaden the entrance criteria and increase the number of participating sites under this trial. The electric LVAS is being used in Europe as both a bridge to transplant and as an alternative to medical therapy.
The Company's Nimbus Medical Inc. subsidiary has been involved in artificial heart technology for over 20 years and has carried out research in two primary fields: ventricular-assist devices and total artificial hearts. Nimbus was instrumental in developing the basic technology for 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's Other Medical Equipment segment consists of International Technidyne Corporation. On May 2, 1997, the Company acquired International Technidyne Corporation from Thermo Electron Corporation in exchange for 3,355,705 shares of the Company's common stock. International Technidyne is a leading manufacturer of near-patient, whole-blood coagulation testing equipment and related disposables, and also manufactures premium-quality, single-use skin-incision devices.
The Company was incorporated in Massachusetts in 1988 as a wholly owned subsidiary of Thermedics Inc., a publicly traded subsidiary of 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 time as a division of Thermo Electron beginning in 1966. As of January 2, 1999, on a pro forma basis, assuming the completion of the transaction discussed below, Thermedics owned 23,113,317 shares of the Company's common stock, representing 60% of such stock outstanding. In addition to the Company's products, Thermedics develops, manufactures, and markets electrochemistry and microweighing products, product on-line quality-assurance systems, instruments to test electronics and semiconductors and a range of power products, and security devices. Thermedics is a 74%-owned subsidiary of Thermo Electron. As of January 2, 1999, on a pro forma basis, assuming the completion of the transaction discussed below, Thermo Electron owned 81,903 shares of the Company's common stock, representing 0.2% of such stock outstanding. Thermo Electron is a world leader in monitoring, analytical, and biomedical instrumentation; biomedical products including heart-assist
devices, respiratory-care equipment, and mammography systems; and paper recycling and papermaking equipment. Thermo Electron also develops alternative-energy systems and clean fuels, provides a range of services including industrial outsourcing and environmental-liability management, and conducts research and development in advanced imaging, laser communications, and electronic information-management technologies.
Thermo Electron or Thermedics may purchase shares of the Company's common stock from time to time in the open market or in negotiated transactions. On February 5, 1998, Thermedics' Board of Directors voted to acquire from Thermo Electron 3,355,705 shares of the Company's common stock in exchange for 4,880,533 shares of Thermedics common stock. Completion of this transaction is subject to the approval of Thermedics' shareholders. Because Thermo Electron is the majority shareholder and intends to vote its shares in favor of the transaction, the approval is assured. See Notes 4 and 6 to Consolidated Financial Statements in the Company's 1998* 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 heading "Forward-looking Statements" in the Registrant's 1998 Annual Report to Shareholders, which statements are incorporated herein by reference.
(b) Financial Information About Segments
Financial information concerning the Company's segments is summarized in Note 11 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders, which information is incorporated herein by reference.
(c) Description of Business
(i) Principal Products and Services
Left Ventricular-assist Systems
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 and approved for each type and application of the Company's LVAS before being sold commercially (see "Government Regulation").
- ------------------- * References to 1998, 1997, and 1996 herein are for the fiscal years ended January 2, 1999, January 3, 1998, and December 28, 1996, respectively.
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 substantially 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. 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. The Company's LVAS devices are at various stages of regulatory approval.
This segment also includes the Company's Nimbus Medical Inc. subsidiary, acquired in 1996. Nimbus was instrumental in developing the basic technology for high-speed rotary blood pumps, which is the basis for the HeartMate II, the next generation of the Company's LVAS. Because of its smaller size, the HeartMate II may potentially be used to provide cardiac support in small adults and in children.
Air-driven LVAS. In October 1994, the FDA approved the air-driven system as a bridge to transplant for patients awaiting heart transplantation. 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. In August 1998, the Medical Devices Bureau of Health Canada issued a Notice of Compliance for the Company's air-driven HeartMate LVAS, permitting its sale throughout Canada. 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 clinical trials of the HeartPak portable pneumatic driver. The Company is currently evaluating the safety of the system in the hospital, and the Company also plans to evaluate the system in the home environment.
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. In August 1995, the electric LVAS received 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 United States, Europe, and other regions, and is also implanted as an alternative to heart transplant in Europe and other regions. In August 1998, the Medical Devices Bureau of Health Canada issued a Notice of Compliance for the Company's electric HeartMate LVAS, permitting its sale throughout Canada. In September 1998, the FDA approved the electric system for commercial sale as a bridge to transplant for patients awaiting heart transplantation.
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 December 1997, the FDA approved the Company's proposal to broaden the entrance criteria and increase the number of participating sites under this trial. The Company estimates that it will complete this trial in two to three years; however, no assurance can be given that the Company will complete this study in this time period or at all, or that it will receive FDA approval after the trial or at all.
Other Medical Equipment
The Company's Other Medical Equipment segment consists of International Technidyne, which manufactures and supplies whole-blood coagulation testing equipment and related disposables, as well as skin-incision devices.
Whole-blood coagulation testing equipment. International Technidyne's HEMOCHRON(R) and HEMOCHRON Jr. Signature product lines offer whole-blood coagulation systems for bedside anticoagulation management, coagulation screening, and transfusion management. Each analyzes small blood samples, then processes and quickly displays comprehensive patient hemostasis information. Blood management of this type is essential for cardiopulmonary bypass surgery and angioplasty. HEMOCHRON models are designed for use in a clinical setting at the patient's bedside. They are lightweight, battery-operated, portable, and provide data-management features.
The ProTime(R) Microcoagulation System is designed to allow testing for patients who take the blood-thinning drug Warfarin (Coumadin). The system consists of a hand-held instrument, a five-channel cuvette, and a finger-incision device. These tests are performed in a doctor's office, clinic, or by the patients themselves.
Skin-incision devices. International Technidyne manufactures a family of single-use skin-incision devices for drawing blood from adults, children, and infants. Each employs International Technidyne's patented skin-incision technology to provide a standardized surgical incision. International Technidyne's line of Surgicutt(R) products are used to perform bleeding-time tests on adults, children, and newborns. International Technidyne's Tenderlett(R) finger-incision products for blood sampling are available in models suitable for adults, children, and infants and toddlers. Tenderfoot(R) is a heel-incision device that is designed specifically for toddlers, infants, and premature infants. These devices feature a permanently retractable blade to ensure safety for the patient and healthcare worker.
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 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/or 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 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 for a Class III device, 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 have 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, will be approved by the FDA for commercial sale.
The Company is also subject to the FDA's Quality System (QS) regulations. These regulations require that the Company manufacture its systems and maintain its records in accordance with current Good Manufacturing Practice (GMP). 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 the QS regulations, 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 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.
A majority of International Technidyne's products are regulated by the FDA as Class II medical devices. International Technidyne is also subject to regulatory requirements in foreign countries in which it markets its devices.
Third-party Reimbursement
In November 1995, the U.S. Health Care Finance Administration (HCFA) issued a decision that extended Medicare coverage to the Company's HeartMate air-driven LVAS when used as a bridge to transplant. Subsequently, HCFA broadened its decision to include all FDA-approved ventricular-assist systems used as a bridge to transplant, which extended coverage to the Company's electric 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 payors review HCFA recommendations to establish their own reimbursement policies. In addition, most major nongovernment insurers have already agreed to offer coverage for the air-driven LVAS, and many are revising their coverage policies to include the electric LVAS device.
HCFA requires that Diagnosis Related Groups (DRGs) be used in determining the amount of reimbursement for particular procedures. HCFA has classified LVAS implantation in a DRG that includes several other cardiac-related procedures. In October 1998, HCFA reclassified LVAS implementation to a slightly higher-paying DRG. Additionally, the HCFA coding committee has established a detailed resource code to be used when an implantable assist device, such as the HeartMate LVAS, is employed. This will facilitate collection of data on medical costs as well as resource information that may be used in establishing a DRG specific to ventricular-assist systems.
Sales of the Company's devices and 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 for the Company's LVAS devices, 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 unapproved indication. No assurance can be given that additional third-party reimbursement for the HeartMate 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 devices and systems would have a material adverse effect on the Company's business.
(ii) and (xi) New Products; Research and Development
The Company's business includes the research and development of new products (See "Principal products and services"). Research and development expenses for the Company were $10,929,000, $8,682,000, and $7,498,000 in 1998, 1997, and 1996, respectively, for internally sponsored research and development programs.
(iii)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.
(iv) Patents, Licenses, and Trademarks
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 United States 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. In general, an owner of intellectual property can prevent others from using such property without a license and is entitled to damages for unauthorized usage. The Company has investigated the bases of the allegation and, based on the opinion of its counsel and the Company's assessment of the proceedings in the United States Patent and Trademark Office to date, it believes that if it were sued on these bases, it would have meritorious defenses. Given the inherent uncertainties in dispute resolution, however, if the Company were sued and the outcome were unfavorable, the Company's results of operations or financial condition could be materially adversely affected in amounts the Company cannot reasonably estimate. 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 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.
In August 1998, the Company obtained an exclusive license to incorporate technology developed by Sulzer Electronics Ltd. into an advanced version of the Company's LVAS, HeartMate III. Sulzer Electronics Ltd., based in Switzerland, is a company within the Sulzer Corporation. HeartMate III is a miniature centrifugal pump featuring a magnetically controlled system that has been developed by Sulzer Electronics' Magnetics Group.
(v) Seasonal Influences
There are no significant seasonal influences on the Company's sales of its products and services.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended to customers that would have a material adverse effect on the Company's working capital.
(vii)Dependency on a Single Customer
Revenues from Allegiance Health Care accounted for 22% of the Company's total revenues in 1998. The loss of this customer would have a material adverse impact on the Company.
(viii) Backlog
Certain of these orders are cancelable by the customer upon payment of a cancellation charge. The Company believes that approximately 65% of the backlog at January 2, 1999, will be shipped or completed during 1999. The decrease in 1998 backlog compared with 1997 is primarily a result of the expiration of several government contracts at Nimbus. The Company does not believe the size of its backlog is necessarily indicative of intermediate or long-term trends in its business.
(ix) Government Contracts
Less than 10% of the Company's total revenues in 1998, 1997, and 1996, were derived from contracts or subcontracts with the federal government, which are subject to renegotiation of profits or termination. The Company does not have any knowledge of threatened or pending renegotiations or terminations.
(x) Competition
Left Ventricular-assist Systems
The Company is aware of one other company, Baxter Healthcare Corporation, that has received PMA approval from the FDA for an implantable LVAS similar to the Company's. Also, the Company is aware of one other company, Thoratec Laboratories Corporation, that has received commercial approval from the FDA 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 November, this company announced that it had received approval from the FDA for its IDE for a portable power source. In addition, the Company is aware that a total artificial heart is currently undergoing clinical trials. The Company is aware that other cardiac-assist devices are in various stages of development by other companies. The requirement of obtaining FDA approval for commercial sale of an LVAS in the United States is a significant barrier to entry into the United States 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.
Other Medical Equipment
International Technidyne's principal competitor for the HEMOCHRON coagulation monitoring instruments, used in the operating room and in cardiac catheterization, is the HemoTec division of Medtronic. The Roche Group competes with the ProTime with a blood coagulation monitor that is marketed to clinics and also is used for patient self-testing. There are also several new competitors that have recently entered the blood coagulation monitoring market. ITC's products compete primarily on the basis of reputation, utility, and price.
The Company's skin-incision devices compete with products offered by a number of companies, including Organon Teknika; Becton, Dickinson and Company; and Owen-Mumford. The Company's skin-incision devices compete primarily on the basis of safety, quality, and reputation.
(xii)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.
(xiii) Number of Employees
As of January 2, 1999, the Company had a total of 471 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 Geographic Areas
Financial information about geographic areas is summarized in Note 11 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders, which information is incorporated herein by reference.
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. Prior to joining the Company in November 1998, Mr. Kleine was the President and Chief Executive Officer of Sorin Biomedical from 1997 to 1998, a manufacturer and distributor of cardiopulmonary equipment. Prior to his employment at Sorin Biomedical, Mr. Kleine held a number of management positions from 1994 to 1997 at Bird Medical Technologies Inc., a wholly owned subsidiary of Thermo Electron, where he most recently served as President. Prior to his employment at Bird Medical Technologies Inc., he seved as Vice President of Sales, North America from 1993 to 1994 at Baxter International, Bentley Divison. 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. Ms. Silverstein Russell has been a Senior Vice President of the Company since 1989. 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. Mr. Melas-Kyriazi was appointed Chief Financial Officer of the Company and Thermo Electron on January 1, 1999. He joined Thermo Electron in 1986 as Assistant Treasurer, and became Treasurer in 1988. He was named President and Chief Executive Officer of ThermoSpectra Corporation, a public subsidiary of Thermo Instrument Systems Inc., in 1994. In 1998, he became Vice President of Corporate Strategy for Thermo Electron. Mr. Melas-Kyriazi remains a Vice President of Thermo Electron. Mr. Kelleher has been a Chief Accounting Officer of the Company and Thermo Electron since 1988. Messrs. Melas-Kyriazi 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.
Item 2.
Item 2. Properties
The Company believes that its facilities are in good condition and are adequate to meet its current needs and that other suitable space is readily available if any leases are not extended. The location and general character of the Company's properties by industry segment as of January 2, 1999, are:
Left Ventricular-assist Systems
The Company subleases approximately 32,000 square feet of space in Thermedics' corporate headquarters in Woburn, Massachusetts, pursuant to a sublease expiring in 2004. The Company also subleases approximately 12,000 square feet of office and research facilities in Chelmsford, Massachusetts, from Thermedics Detection Inc., a publicly traded, majority-owned subsidiary of Thermedics, under a lease expiring in 1999, with an option to renew for an additional five-year period. In addition, the Company occupies approximately 11,000 square feet of office and research facilities in Rancho Cordova, California, pursuant to a lease expiring in 2002.
Other Medical Equipment
The Company owns approximately 66,000 square feet and leases approximately 24,000 square feet of office, manufacturing, and research facilities in Edison, New Jersey, under a lease expiring in 2002. In addition, the Company leases approximately 1,000 square feet of office space in the United Kingdom, under a lease expiring in 1999.
Item 3.
Item 3. Legal Proceedings
Not applicable.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
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 1998 Annual Report to Shareholders and is incorporated herein by reference.
Item 6.
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 1998 Annual Report to Shareholders and is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required under this item is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1998 Annual Report to Shareholders and is incorporated herein by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required under this item is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1998 Annual Report to Shareholders and is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements as of January 2, 1999, and Supplementary Data are included in the Registrant's 1998 Annual Report to Shareholders and are incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
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.
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.
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.
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.
PART IV
Item 14.
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 Comprehensive Income and 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.
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 12, 1999 THERMO CARDIOSYSTEMS INC.
By: /s/ R. Michael Kleine R. Michael Kleine 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 12, 1999.
Signature Title
By: /s/ R. Michael Kleine Chief Executive Officer and Director R. Michael Kleine
By: /s/ Theo Melas-Kyriazi Chief Financial Officer Theo Melas-Kyriazi
By: /s/ Paul F. Kelleher Chief Accounting Officer Paul F. Kelleher
By: /s/ Walter J. Bornhorst Director Walter J. Bornhorst
By: /s/ Elias P. Gyftopoulos Director Elias P. Gyftopoulos
By: /s/ John T. Keiser Chairman of the Board and Director John T. Keiser
By: /s/ Leonard Laster Director Leonard Laster
By: /s/ Victor L. Poirier Director Victor L. Poirier
By: /s/ Nicholas T. Zervas Director Nicholas T. Zervas
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 consolidated 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 11, 1999. 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 consolidated financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the consolidated financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts February 11, 1999
EXHIBIT INDEX Exhibit Number Description of Exhibit
2 Agreement and Plan of Reorganization among Thermo Cardiosystems Inc., ITC Acquisition Corp., Thermo Electron Corporation, ITC Holdings Inc., and International Technidyne Corporation dated as of May 2, 1997 (filed as Exhibit 2.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997 [File No. 1-10114] and incorporated herein by reference).
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).
4.5 Fiscal Agency Agreement dated as of May 14, 1997, among the Registrant, Thermo Electron Corporation, and Bankers Trust Company as fiscal agent relating to $70 million principal amount of 4 3/4% Convertible Subordinated Debentures due 2004 (filed as Exhibit 4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997 [File No. 1-10114] 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).
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).
Exhibit Number Description of Exhibit
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 (filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 [File No. 1-10114] and incorporated herein by reference).
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). (Maximum number of shares issuable is 1,750,000 shares, after adjustment to reflect share increase approved in 1998.)
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).
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. The terms of such plans are substantially the same as those of the Registrant's Equity Incentive Plan.
Exhibit Number Description of Exhibit
10.23 Restated Stock Holdings Assistance Plan and Form of Promissory Note (filed as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended January 3, 1998 [File No. 1-10114] and incorporated herein by reference).
10.24 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 18, 1997, between Thermo Electron and the Registrant (filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended January 3, 1998 [File No. 1-10114] and incorporated herein by reference).
10.25 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 18, 1997, between Thermedics and the Registrant (filed as Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended January 3, 1998 [File No. 1-10114] and incorporated herein by reference).
13 Annual Report to Shareholders for the year ended January 2, 1999 (only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
99 Opinion of Cazenove Incorporated dated May 2, 1997 (filed as Exhibit 99 to the Registrant's Current Report on Form 8-K dated May 2, 1997 [File No. 1-10114] and incorporated herein by reference).