SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO.__)
FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
================================================================================
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to SS240.14a-11 (c) or SS240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6
(e)(2))
THERMO CARDIOSYSTEMS INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6 (i)(1) and 0-11.
1) Title of each class of securities to which transaction applies: Common
Stock
2) Aggregate number of securities to which transaction applies: 3,355,705
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): The filing
fee of $18,079.00 represents 1/50 of 1% of $90,394,304, which amount is
the value of the securities to be issued by the registrant as
consideration in the transaction (as calculated by multiplying the
average of the high and low prices of the registrant's common stock on
September 29, 1997 by the number of shares to be issued --- $26 15/16 X
3,355,705 = $90,394,304).
4) Proposed maximum aggregate value of transaction: $90,394,304
5) Total fee paid: $18,079.00
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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TCI
THERMO CARDIOSYSTEMS INC.
470 Wildwood Street
P.O. Box 2697
Woburn, Massachusetts 01888-2697
October , 1997
Dear Stockholder:
The enclosed Notice calls a Special Meeting of the Stockholders of Thermo
Cardiosystems Inc. I respectfully request all Stockholders to attend this
meeting, if possible.
Enclosed with this letter is a proxy authorizing three officers of the
Company to vote your shares for you if you do not attend the meeting. Whether or
not you are able to attend the meeting, I urge you to complete your proxy and
return it to our transfer agent, American Stock Transfer and Trust Company, in
the enclosed addressed, postage-paid envelope, as a quorum of the Stockholders
must be present at the meeting, either in person or by proxy.
I would appreciate your immediate attention to the mailing of this proxy.
Yours very truly,
VICTOR L. POIRIER
President and Chief Executive Officer
<PAGE>
TCI
THERMO CARDIOSYSTEMS INC.
470 Wildwood Street
P.O. Box 2697
Woburn, Massachusetts 01888-2697
NOTICE OF SPECIAL MEETING
October , 1997
To the Holders of the Common Stock of
THERMO CARDIOSYSTEMS INC.
A Special Meeting of the Stockholders (the "Meeting") of Thermo
Cardiosystems Inc. (the "Company") will be held on __________ , November ______
, 1997, at 10 a.m. at the offices of Thermo Electron Corporation, 81 Wyman
Street, Waltham, Massachusetts 02254. The purpose of the Meeting is to consider
and vote upon a proposal to approve the listing on the American Stock Exchange,
Inc. of 3,355,705 shares of the Company's common stock to be issued in
connection with the acquisition of International Technidyne Corporation from
Thermo Electron Corporation pursuant to an Agreement and Plan of Reorganization
dated as of May 2, 1997.
The transfer books of the Company will not be closed prior to the Meeting,
but, pursuant to appropriate action by the Board of Directors, the record date
for the determination of the Stockholders entitled to receive notice of and to
vote at the Meeting is October _________, 1997.
The By-laws require that the holders of a majority of the stock issued and
outstanding and entitled to vote be present or represented by proxy at the
Meeting in order to constitute a quorum for the transaction of business. It is
important that your shares be represented at the Meeting regardless of the
number of shares you may hold. Whether or not you are able to be present in
person, please sign and return promptly the enclosed proxy in the accompanying
envelope, which requires no postage if mailed in the United States.
This Notice, the proxy and proxy statement enclosed herewith are sent to you
by order of the Board of Directors.
SANDRA L. LAMBERT
Clerk
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PROXY STATEMENT
The enclosed proxy is solicited by the Board of Directors of Thermo
Cardiosystems Inc. (the "Company") for use at a Special Meeting of the
Stockholders (the "Meeting") to be held on , November , 1997, at 10 a.m. at the
offices of Thermo Electron Corporation, 81 Wyman Street, Waltham, Massachusetts
02254, and any adjournment thereof. The mailing address of the executive office
of the Company is 470 Wildwood Street, P.O. Box 2697, Woburn, Massachusetts
01888-2697, and its telephone number is (617) 932-8668. This proxy statement and
the enclosed proxy were first furnished to Stockholders of the Company on or
about October , 1997.
VOTING PROCEDURES
The Board of Directors intends to present to the Meeting a proposal to
approve the listing on the American Stock Exchange, Inc. of 3,355,705 shares of
the Company's common stock, $.10 par value per share ("Common Stock"), to be
issued in connection with the acquisition of International Technidyne
Corporation from Thermo Electron Corporation ("Thermo Electron") pursuant to an
Agreement and Plan of Reorganization dated as of May 2, 1997.
The representation in person or by proxy of a majority of the outstanding
shares of Common Stock entitled to vote at the Meeting is necessary to provide a
quorum for the transaction of business at the Meeting. Shares can only be voted
if the Stockholder is present in person or is represented by returning a
properly signed proxy. Each Stockholder's vote is very important. Whether or not
you plan to attend the Meeting in person, please sign and promptly return the
enclosed proxy card, which requires no postage if mailed in the United States.
All signed and returned proxies will be counted towards establishing a quorum
for the Meeting, regardless of how the shares are voted. Proxies are being
solicited by the Company.
Shares represented by proxy will be voted in accordance with your
instructions. You may specify your choice by marking the appropriate box on the
proxy card. If your proxy card is signed and returned without specifying
choices, your shares will be voted for the management proposal and as the
individuals named as proxy holders on the proxy deem advisable on all other
matters as may properly come before the Meeting.
The affirmative vote of a majority of the shares present in person or
represented by proxy, and entitled to vote on the matter, is necessary for
approval of the management proposal. An instruction to abstain from voting on
the proposal will be treated as shares present and entitled to vote and, for
purposes of determining the outcome of the vote, will have the same effect as a
vote against the proposal. A broker "non-vote" occurs when a nominee holding
shares for a beneficial holder does not have discretionary voting power and does
not receive voting instructions from the beneficial owner. Broker "non-votes"
will not be treated as shares present and entitled to vote on a voting matter
and will have no effect on the outcome of the vote.
A Stockholder who returns a proxy may revoke it at any time before the
Stockholder's shares are voted at the Meeting by written notice to the Clerk of
the Company received prior to the Meeting, by executing and returning a later
dated proxy or by voting by ballot at the Meeting. Representatives of Arthur
Andersen LLP, the Company's independent public accountants since its inception,
are not expected to be present at the Meeting.
The outstanding stock of the Company entitled to vote (excluding shares held
in treasury by the Company) as of October __, 1997 consisted of _______ shares
of Common Stock. Only Stockholders of record at the close of business on October
__, 1997 are entitled to vote at the Meeting. Each share is entitled to one
vote.
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PROPOSAL TO APPROVE THE LISTING OF SHARES ISSUABLE IN CONNECTION
WITH THE ACQUISITION OF INTERNATIONAL TECHNIDYNE CORPORATION
SUMMARY OF TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT
On May 2, 1997, the Company agreed to acquire International Technidyne
Corporation ("ITC") from Thermo Electron Corporation ("Thermo Electron") in
exchange for the right to receive 3,355,705 shares of the Company's Common
Stock. The acquisition, which became legally effective on May 23, 1997, was made
pursuant to an Agreement and Plan of Reorganization dated as of May 2, 1997 (the
"Merger Agreement"), among the Company; ITC Acquisition Inc., a wholly owned
subsidiary of the Company ("Acquisition"); Thermo Electron; ITC Holdings Inc., a
wholly owned subsidiary of Thermo Electron that owned ITC ("Holdings"); and ITC.
Under the terms of the Merger Agreement, (i) Acquisition merged with and into
ITC, (ii) outstanding shares of ITC's common stock were canceled and converted
into the right to receive 3,355,705 shares of the Company's Common Stock (the
"Shares"), (iii) each outstanding share of Acquisition's common stock was
canceled and converted into one share of the common stock of ITC, and (iv) ITC
became a wholly owned subsidiary of the Company.
Approval of the Merger by the Stockholders of the Company is not required by
the Business Corporation Law of the Commonwealth of Massachusetts or by the
Company's Articles of Organization or By-Laws, as amended. However, rules of the
American Stock Exchange, Inc. (the "AMEX"), on which the Company's Common Stock
is listed for trading, require that the holders of a majority of the Company's
outstanding shares present and voting at a shareholders' meeting approve the
listing of the Shares prior to their issuance. Thermo Electron and Thermedics
Inc., a majority-owned subsidiary of Thermo Electron ("Thermedics"), have agreed
to vote all of the shares of the Company's Common Stock held by them as of the
record date of the Meeting (the "Record Date") in favor of the listing of the
Shares and all matters related thereto. As of the Record Date, and without
giving effect to the issuance of the Shares pursuant to the Merger Agreement,
Thermo Electron and Thermedics owned an aggregate of approximately ___% of the
outstanding Common Stock of the Company. After giving effect to the issuance of
the Shares pursuant to the Merger Agreement, Thermo Electron and Thermedics
would have owned, in the aggregate, approximately ___% of such Common Stock
outstanding on the Record Date.
BACKGROUND OF THE MERGER AGREEMENT
The Company was incorporated in 1988 as a wholly owned subsidiary of
Thermedics to continue Thermedics' business of conducting research and
development relating to implantable heart-assist systems. This business was
begun by Thermo Electron in 1966 and had been transferred to Thermedics upon its
formation in 1983. In 1994, the Company announced that the United States Food
and Drug Administration (the "FDA") had granted approval for the commercial sale
of the Company's air-driven left-ventricular assist system ("LVAS") for use as a
bridge to transplant. The electric version of the LVAS is currently being used
in the U.S. in clinical trials for patients awaiting heart transplants. In
Europe, the electric LVAS is being used as both a bridge to transplant and as an
alternative to medical therapy.
As the Company evolves from a research and development company to a mature,
sales-oriented company, the Company believes that it is necessary to expand its
medical device business beyond the LVAS. The Company believes that competition
in the heart-assist device area is likely to increase in the future, and that
the Company's competitive position will be enhanced with a portfolio of
cardiovascular and hemostasis products. Accordingly, the Company has determined
that it will seek to acquire one or more operating companies with product
portfolios that are complementary to the LVAS and that are related to its core
cardiovascular market.
DETERMINATION OF THE CONSIDERATION ISSUABLE FOR ITC
Under the terms of the Merger Agreement, the Company has agreed to issue
3,355,705 Shares of its Common Stock to Thermo Electron in consideration of the
acquisition of ITC. The consideration to be paid for ITC was based on the
Company's determination of the fair market value of ITC's business.
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Based on the average of the closing prices of the Common Stock as reported on
the AMEX for the five trading days ending on March 27, 1997 (immediately prior
to the Company's public announcement of its intention to acquire ITC), the
Shares to be issued to Thermo Electron had a value of $75,000,000. In addition,
prior to the execution of the Agreement, the Board of Directors retained
Cazenove Incorporated, an investment banking firm, to render an opinion that
such consideration was fair to the Company from a financial point of view. See
"Opinion of Financial Advisor."
REASONS FOR THE MERGER/RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company believes that the acquisition of ITC provides the best
opportunity to expand the Company's business at a reasonable cost. ITC is a
leader in the development, manufacture and marketing of whole-blood coagulation
testing equipment used in the cardiovascular surgery, critical care,
hemodialysis and hospital neonatal unit markets; is a leading manufacturer and
marketer of premium-quality, single-use incision devices used to assess platelet
function and as bloodletting devices; and has introduced a device for at-home
patient self-testing for long-term oral anticoagulant therapy. In addition, the
Company believes that it will benefit from ITC's strong research and development
team and its existing manufacturing operations. Furthermore, because competition
for LVAS sales is likely to depend on the ability to offer a portfolio of
related products, the acquisition of ITC should enhance the competitiveness of
the Company's core business.
The Merger was structured as such in order to achieve the acquisition of ITC
by the Company in a transaction intended to qualify as a tax-free
reorganization. Assuming the Merger does so qualify, no gain or loss will be
recognized by the Company in connection therewith. See "Certain Federal Income
Tax Consequences." Further, as the consideration to be paid to Thermo Electron
consists of Common Stock of the Company rather than cash, the transaction will
not impair the Company's working capital.
As with any merger, however, there can be no assurance that the Company will
be successful in integrating ITC's business with its current operations, nor
that the benefits which the Company expects from the Merger, as described above,
will be achieved. If the Company were unsuccessful in achieving such
integration, such failure could adversely affect the Company's performance.
The Board of Directors has approved the Merger Agreement and the
transactions contemplated thereby and believes that the Merger is fair to and in
the best interests of the Company and its Stockholders. In addition, Cazenove
Incorporated, an investment banking firm, has rendered to the Board of Directors
an opinion that, as of the date of the Merger Agreement, the issuance of
3,355,705 Shares to Thermo Electron is fair to the Company from a financial
point of view. See "Opinion of Financial Advisor." THE BOARD OF DIRECTORS
RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF THE LISTING OF THE SHARES TO BE
ISSUED IN CONNECTION WITH THE MERGER AGREEMENT.
ACCOUNTING TREATMENT OF THE MERGER
Because the Company and ITC were deemed for accounting purposes to be under
control of their common majority owner, Thermo Electron, the transaction will be
accounted for at historical cost in a manner similar to a pooling-of-interests.
Accordingly, the Company's historical financial statements have been restated to
include ITC's historical results of operations.
OPINION OF FINANCIAL ADVISOR
The determination of the number of Shares to be issued to Thermo Electron in
connection with the Merger was determined by the Company's Board of Directors in
consultation with the Company's management. However, because the Merger involves
parties affiliated with the Company, before giving its final approval to the
terms of the Merger the Board of Directors retained Cazenove Incorporated, an
investment banking firm (the "Financial Advisor"), to render to the Board of
Directors an opinion that, as of the date of the Merger Agreement, the issuance
of such number of Shares to Thermo Electron is fair to the Company from a
financial point of view. In rendering its opinion, the Financial Advisor was
engaged to and did (1) review the proposed form of Merger Agreement; (2) review
certain historical and
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prospective financial, operating and other information concerning ITC; (3) meet
with the senior management of ITC to discuss the business and operations of ITC,
as well as prospects for ITC's industry; (4) visit the principal operations and
facilities of ITC; (5) review publicly available financial and market data for
companies which the Financial Advisor deemed comparable to ITC; (6) review the
financial terms of recent business combinations deemed comparable by the
Financial Advisor for which information was publicly available; and (7) conduct
such other financial studies, analyses and investigations as the Financial
Advisor deemed appropriate for purposes of its opinion. A more detailed
description of these items is set forth below.
The Financial Advisor was not engaged to make an independent evaluation or
appraisal of any particular asset of ITC, was not furnished with any such
evaluations or appraisals, and was not engaged to review any legal, accounting
or tax aspects of the Merger. Its opinion was based on its assessment of market,
economic and other conditions as they existed and could be evaluated as of the
date of the opinion. The Financial Advisor's opinion was not intended to confer
rights or remedies upon the Stockholders of the Company or any other persons.
The analyses performed by the Financial Advisor must be considered as a
whole, and selecting portions of its analyses and of the factors considered by
the Financial Advisor, without considering all of the factors and analyses,
could create a misleading view of the process underlying the Financial Advisor's
opinion. The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In arriving
at its opinion, the Financial Advisor did not attribute any particular weight to
any single analysis or factor, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor.
Comparable Company Analysis. Using publicly available information, the
Financial Advisor compared market multiples of comparable publicly traded
companies to those implied by the price paid to Thermo Electron for ITC. The
Financial Advisor selected seven publicly traded companies that were deemed to
possess general business, operating and financial characteristics representative
of the industry in which ITC operates. The Financial Advisor reviewed the
financial terms of recent business combinations deemed to be comparable for
which information was publicly available and calculated the average acquisition
premium. Applying the acquisition premium, and using the closing stock prices on
May 1, 1997, the Financial Advisor calculated the multiples for the latest
twelve months of earnings before interest and taxes ("EBIT"), pretax earnings
and net earnings for the comparable companies. The average multiples for the
comparable companies for the latest twelve months were 13.94 times EBIT, 12.89
times pretax earnings and 21.79 times net earnings, respectively. This compared
to the implied acquisition multiples of 11.93 times EBIT, 11.93 times pretax
earnings and 19.37 times net earnings, respectively, for the Company's
acquisition of ITC.
Comparable Transactions Analysis. The Financial Advisor reviewed publicly
available financial information on eight comparable acquisitions of similar size
and within the same general industry. The average multiples paid for revenues,
earnings before interest, taxes, depreciation and amortization ("EBITDA"), EBIT
and net earnings for the last twelve months for the comparable acquisitions were
4.71, 16.36, 22.85 and 38.27, respectively. This compared to implied acquisition
multiples of 2.66 times revenues, 10.17 times EBITDA, 11.93 times EBIT and 19.37
times net earnings, respectively, for the Company's acquisition of ITC.
Discounted Cash Flow Analysis. The Financial Advisor analyzed ITC based on a
discounted cash flow analysis of the projections provided by the Company and
ITC. The discounted cash flow analysis determined the present value of ITC's
projected unleveraged, after-tax cash flows and then added to such discounted
value the present value of the estimated terminal valuation at the end of fiscal
year 2001 to provide a total value. The terminal value methodology calculated
the valuation based upon a range of multiples of EBIT from 11 to 13 and a
discount rate of 12.72%. The discounted cash flow analysis resulted in a range
of total values from $110.1 million to $126.5 million.
A copy of the Financial Advisor's opinion is attached as Appendix A, and the
summary of its contents provided below is qualified in is entirety by reference
thereto. Stockholders are advised to read the opinion in its entirety.
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The opinion states that, based upon and subject to the qualifications set
forth therein, it is the opinion of the Financial Advisor that, as of the date
of the opinion, the consideration to be paid to Thermo Electron in connection
with the Merger is fair to the Company from a financial point of view. The
opinion is qualified by the Financial Advisor's statements therein that (a) the
Financial Advisor assumed that the Merger Agreement was in the form executed by
the parties did not differ from the proposed form of agreement reviewed by the
Financial Advisor in any material respect; (b) the Financial Advisor relied upon
and assumed the accuracy, genuineness, completeness and fairness of the
financial and other information provided by the Company or otherwise made
available to the Financial Advisor and did not attempt to independently verify
such information; (c) the Financial Advisor was not engaged to make any
independent evaluation or appraisal of any particular asset of ITC; and (d) the
Financial Advisor has expressed no opinion regarding ITC's liquidation value.
The opinion also states that it is based on the Financial Advisor's assessment
of market, economic and other conditions as they existed and could be evaluated
on the date of the opinion.
Stockholders are advised that the Financial Advisor's opinion does not
constitute a recommendation that any Stockholder of the Company vote either for
or against approval of the listing of the Shares. The Company has paid the
Financial Advisor a fee of $25,000 in connection with its evaluation of the
terms of the Merger, and has agreed, with certain exceptions, to indemnify the
Financial Advisor and its affiliates against losses suffered by them which
relate to or arise out of the Financial Advisor's engagement to render the
fairness opinion.
The Financial Advisor was chosen by the Board of Directors to render the
fairness opinion with regard to the Merger as it and several of its affiliates,
as part of their investment banking services, are regularly engaged in the
valuation of businesses and securities in connection with mergers, acquisitions,
sales and distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. The Financial Advisor has
performed investment banking and financial advisory services for Thermo Electron
and its affiliates from time to time for which it has received customary
compensation. In the ordinary course of business, affiliates of the Financial
Advisor actively trade the securities of the Company, Thermo Electron and their
affiliates for their own account and the accounts of their customers and,
accordingly, may at any time hold a long or short position in such securities.
The Financial Advisor may provide investment banking and financial advisory
services to the Company, Thermo Electron and their affiliates in the future.
SUMMARY OF THE MERGER AGREEMENT
GENERAL
On May 2, 1997, the Company, Acquisition, Thermo Electron, Holdings and ITC
entered into the Merger Agreement, pursuant to which the Company acquired ITC
from Thermo Electron in exchange for the right to receive 3,355,705 Shares of
the Company's Common Stock. Under the terms of the Merger Agreement (i)
Acquisition merged with and into ITC, (ii) outstanding shares of ITC's common
stock were canceled and converted into the right to receive 3,355,705 Shares of
the Company's Common Stock, (iii) each outstanding share of Acquisition's common
stock was canceled and converted into one share of the common stock of ITC, and
(iv) ITC became a wholly owned subsidiary of the Company. See "Determination of
the Consideration Issuable for ITC," above for a discussion of the valuation of
the transaction.
EFFECTIVE DATE
The Merger became legally effective on May 23, 1997, upon the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware
pursuant to Section 251 of the Delaware General Corporation Law.
ISSUANCE OF THE SHARES
Upon the effective date of the Merger, shares of ITC's common stock, all of
which were held by Holdings, were canceled and converted into the right to
receive 3,355,705 Shares of the Company's Common Stock. Holdings' right to
receive the Shares is conditioned only on the prior listing of such
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Shares for trading upon the AMEX. In the Merger Agreement, the Company agreed to
take all action necessary in accordance with applicable law to convene a meeting
of its Stockholders for the purpose of approving the listing of the Shares for
trading upon AMEX, and to recommend to the Stockholders the approval of such
listing. In the Merger Agreement, Thermo Electron and Thermedics agreed to vote
all of the shares of the Company's Common Stock held by them as of the record
date of any such meeting in favor of such listing. In the event that the Company
is unable to obtain the approval of its Stockholders of the listing of the
Shares on or before December 31, 1997, then, on December 31, 1997, the Company
will pay to Holdings the sum of $75,000,000 in cash in lieu of issuing the
Shares.
As of the Record Date, and without giving effect to the issuance of the
Shares pursuant to the Merger Agreement, Thermo Electron and Thermedics owned an
aggregate of approximately % of the outstanding Common Stock of the Company.
After giving effect to the issuance of the Shares pursuant to the Merger
Agreement, Thermo Electron and Thermedics would have owned, in the aggregate,
approximately % of such Common Stock outstanding on the Record Date.
REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
In the Merger Agreement, the Company, on the one hand, and Holdings, ITC and
Thermo Electron, on the other hand, made certain representations and warranties
to one another with respect to certain customary matters, such as their
respective organization, their respective authority to enter into the Merger
Agreement and the enforceability of the Merger Agreement. In addition, Holdings,
ITC and Thermo Electron made certain representations and warranties to the
Company with respect to (i) the capitalization of ITC, (ii) ITC's business and
assets, (iii) certain tax matters, (iv) environmental conditions with respect to
ITC's properties, certain employment and employee benefit matters, (v) ITC's
consolidated financial statements as of and for the periods ending March 29,
1997 and December 28, 1996 (including a representation that ITC had no
liabilities or obligations of any nature other than as reflected in such
financial statements), and (vi) other matters requested by the Company's
counsel. Each of these representations and warranties survives the effectiveness
of the Merger indefinitely.
CERTAIN ADJUSTMENTS
The Merger Agreement provides that, in the event that the Company takes
certain actions (such as stock splits, recapitalizations and sales of
substantial portions of the Company's assets), prior to the date of issuance of
the Shares (the "Payment Date"), then the number of shares of the Company's
Common Stock to be issued pursuant to the Merger will be adjusted as required to
put Holdings in the same position as if the record date with respect to any such
transaction or transactions had been immediately after the Payment Date, or
otherwise to carry out the intents and purposes of the Merger Agreement.
Similarly, in the event that the Company declares any dividend or other
distribution in respect of the Company's Common Stock payable in cash or other
property other than in shares of Common Stock, then the Shares to be issued in
connection with the Merger shall be deemed to be outstanding as of the record
date with respect to any such dividend or distribution, and the cash or other
property otherwise payable or distributable to Holdings with respect to such
Shares shall be held by the Company for the benefit of Holdings. Upon the
issuance of the Shares to Holdings, such cash or other property (together with
any earnings or interest thereon) will likewise be distributed by the Company to
Holdings.
AMENDMENTS; WAIVERS
Any provision of the Merger Agreement may be amended or waived by the mutual
consent of the parties at any time.
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL INFORMATION
The following table presents selected pro forma combined financial
information for the Company and ITC and selected per share data for the Company
on a historical and pro forma combined basis. The information is derived from
the consolidated historical financial statements of the Company and ITC,
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presented in greater detail elsewhere in this proxy statement. The pro forma
combined financial information has been prepared based on the assumption that
the acquisition will be accounted for at historical cost in a manner similar to
a pooling-of-interests.
This information is not necessarily indicative of the results of the future
operations of the combined entity or the actual results that would have occurred
had the acquisition of ITC been consummated prior to the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED FISCAL YEAR ENDED
JUNE 28, 1997 1996 1995 1994
------------- --------- --------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
PRO FORMA COMBINED:
STATEMENT OF INCOME DATA:
Revenues $ 30,833 $ 63,962 $ 52,880 $ 39,051
Net Income 4,097 10,030 11,135 5,687
BALANCE SHEET DATA (at end of period):
Working Capital $118,369 $ 65,328 $ 64,610 $ 47,369
Total Assets 176,038 124,978 124,285 109,988
Long-term Obligations 70,000 -- 11,642 33,450
Shareholders' Investment 87,945 111,089 103,416 68,382
PER SHARE DATA:
THE COMPANY HISTORICAL BEFORE RESTATEMENT:
Book Value per Common Share N/A $ 2.73 $ 2.53 $ 1.70
Cash Dividends Declared per Share N/A -- -- --
Earnings per Share N/A .15 .19 .05
THE COMPANY PRO FORMA COMBINED:
Book Value per Common Share $ 2.25 $ 2.78 $ 2.62 $ 1.82
Cash Dividends Declared per Share -- -- -- --
Earnings per Share .10 .25 .27 .14
</TABLE>
- - - ----------
(1) The pro forma combined book value per share of the Company is based on the
historical total common equity for the Company and ITC, divided by total pro
forma common shares of the combined entity.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a tax-free reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended. Neither the Company nor
Thermo Electron intend to request a ruling from the Internal Revenue Service
with respect to the Merger. Assuming that the Merger is a tax-free
reorganization, no gain or loss will be recognized by the Company in connection
with the Merger.
REGULATORY APPROVALS
No federal or state regulatory approvals are required in order to issue the
Shares pursuant to the Merger Agreement.
NO DISSENTERS' APPRAISAL RIGHTS
Under applicable provisions of the Massachusetts Business Corporation Law,
holders of the Company's Common Stock will not have any dissenters' appraisal
rights in connection with the listing of the Shares, or any other transaction
described in this proxy statement, to be acted upon at the Meeting.
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INFORMATION CONCERNING INTERNATIONAL TECHNIDYNE CORPORATION
BUSINESS
GENERAL
Under the terms of the Merger Agreement, the Company has acquired all of the
issued and outstanding shares of capital stock of International Technidyne
Corporation ("ITC"), a wholly owned subsidiary of Thermo Electron, in exchange
for the right to receive 3,355,705 shares of the Company's Common Stock. The
principal executive office of ITC is located at 8 Olsen Avenue, Edison, New
Jersey 08820, and its telephone number is (908) 548-5700.
ITC is a worldwide leader in the development, manufacture and marketing of
hemostasis management products sold for use by clinicians. ITC's research and
development and manufacturing operations are located in Edison, New Jersey. In
addition, ITC has sales offices in Chicago, Illinois and Kent, England.
The following is a brief description of the business of ITC.
PRINCIPAL PRODUCTS
Hemochron(R). ITC's principal product is the Hemochron, a portable, battery
operated device that uses disposable test tubes to perform whole-blood
coagulation monitoring at the patient site. The Hemochron is used primarily to
perform the Activated Clotting Time ("ACT") test, which monitors the effect of
the anticoagulant heparin and is sold primarily for use in cardiovascular
surgery, cardiac catheterization and hemodialysis procedures. Hemochron
instruments provide readings of coagulation time measured in seconds. Current
versions of the product include the single test well 401, the dual test well 801
and the computerized dual test well 8000. ITC also manufactures the Hemochron
Jr., a hand-held, less technician-dependent version of the Hemochron.
Approximately 65% of Hemochron revenues are derived from sales of consumables
such as ITC's proprietary test tubes and cuvettes.
The Company believes that Hemochron's advantages over alternative
coagulation systems include immediate test results, higher accuracy and the
flexibility to run tests with either fresh or citrated whole blood. In addition,
Hemochron instruments offer the widest range of coagulation tests currently
available.
ITC also manufactures a range of whole-blood coagulation testing products
that are designed for use with Hemochron instruments. Each product monitors
different coagulation indicators in varying sensitivities. In addition to the
ACT test, for example, low-range ACT tests available for use with Hemochron Jr.
are used to determine the optimal time to remove a sheath after a cardiac
catheterization. Other tests that can be performed with Hemochron include the
Activated Partial Thromboplastin Time and Prothrombin Time tests, which are used
for pre-operative coagulation screening as well as anticoagulation monitoring
and are among the most frequently ordered tests in hospitals today.
ProTime(tm) Microcoagulation Systems. ITC's newest product, ProTime, is a
Coumadin monitor designed for use at home by patients with artificial heart
valves and select patients with atrial fibrillation or deep vein thrombosis who
are on long-term anticoagulant therapy. Currently, ITC estimates that there are
approximately 2,000,000 patients receiving Coumadin therapy, 400,000 of whom are
patients with artificial heart valves. ProTime was cleared for patient self-
testing by the FDA in early 1997, and ITC recently began commercial sales.
ProTime is currently one of only two FDA-cleared patient self-testing Coumadin
monitors. ProTime is capable of automatically performing quality control tests
on each disposable cuvette used in the test, to ensure reliability of the test
results.
Incision Devices. ITC manufactures and markets a line of disposable,
precision incision and blood sampling devices, including its Tenderfoot(R),
Surgicutt(R) and Tenderlett(R) products. Each of ITC's incision devices is
spring-loaded and cam-driven to provide a standardized surgical quality
incision. A surgical steel blade is housed in each self-contained unit. When
triggered, the blade protracts down and out, and fully retracts automatically
back into the device. Automatic retraction of the blade eliminates the
variability of blade removal among patients and, more importantly, eliminates
possible injury to the patient and operator.
The Tenderfoot is a fully-automated disposable heel incision device designed
to sample blood from neonates, infants and toddlers. Applications include blood
sampling for legally-mandated screening
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tests, such as tests for phenylketonuria, a genetic disorder, and for the
measurement of biliruben to monitor jaundice, which affects approximately 15% of
all newborns. The Surgicutt is a diagnostic device which performs the bleeding
time test. Finally, ITC manufactures and markets Tenderlett, a disposable bladed
fingerstick device designed to be used where large blood samples are needed, or
where sensitivity to needle stick is comparatively high.
SALES AND MARKETING
ITC's coagulation monitoring products are sold worldwide, primarily through
direct, exclusive distributors. More than 45% of Hemochron revenues are
generated internationally. In 1996, 12% and 11% of ITC's revenues were generated
by export sales to Europe and to the rest of the world, respectively. ITC
currently has 11 regional distributors covering the U.S. hospital market, 32
overseas distributors and one direct sales office in the United Kingdom. The
U.S. distributor network is supported by an eight-person direct sales force.
ITC's incision devices are primarily sold in the United States, and are
distributed to hospitals on an exclusive basis by Allegiance Healthcare
Corporation (formerly Baxter Healthcare Corporation). Incision devices are
distributed in Western Europe by Johnson & Johnson's Ortho Diagnostics Company.
ITC also uses a variety of other distributors to reach fragmented markets such
as physicians' offices and home health care agencies. ITC also has a direct
sales force of approximately 10 supporting its laboratory/incision products. ITC
is expanding this sales force in its efforts to introduce ProTime to physicians.
PRINCIPAL CUSTOMERS
Sales to Allegiance Healthcare Corporation accounted for approximately 43%,
43% and 41% of ITC's revenues in the six months ended June 28, 1997 and fiscal
1996 and 1995, respectively.
COMPETITION
ITC's principal competitor in the market for coagulation monitoring
instruments such as Hemochron is the HemoTec division of Medtronic, which
manufactures a whole-blood ACT instrument as well as the Hepcon Hemostatic
Monitoring System. ITC also competes against two early stage companies: Array
Medical, a company founded by ITC's former Vice President of Sales and
Marketing, which markets an ACT monitor; and CDI, which is attempting to compete
with Hemochron. Boehringer Mannheim Corporation has developed a patient blood
coagulation self-testing device similar to the ProTime, which is marketed to
professionals. Boehringer Mannheim has also recently applied for marketing
clearance from the FDA for patient self-testing.
ITC's incision devices compete with products offered by a number of
companies, including Organon Teknika; Becton, Dickinson and Company; and
Sherwood Medical Company.
RESEARCH AND DEVELOPMENT
ITC has 29 full-time engineers and technicians, with experience in all
aspects of in vitro diagnostic instrumentation and medical disposable design and
development. Research and development expenditures in 1996 were $3,659,000, or
approximately 10.8% of ITC's revenue.
GOVERNMENT REGULATION
A majority of ITC's products are regulated by the FDA as Class II medical
devices. See "Information Concerning the Company -- Business -- Government
Regulation." ITC is also subject to regulatory requirements in foreign countries
in which it markets its devices. The FDA conducted a routine audit of ITC's
manufacturing facilities in September 1996, inspecting the manufacture of ITC's
coagulation timing instruments and coagulation timing cuvettes. On November 15,
1996, the FDA informed ITC that the areas inspected appeared to be in
substantial compliance with the applicable requirements of the Federal Food,
Drug, and Cosmetic Act and the regulations thereunder.
MANAGEMENT
The following sets forth information concerning the officers and directors
of ITC:
Gerald Feldman, age 46, has been President of ITC since 1987 and a director
of ITC since 1991.
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William Schwarzlow, age 49, has been Vice President, Finance and
Administration, of ITC since 1991, and was appointed Vice President, Operations
and Chief Financial Officer of ITC in June 1997. From 1990 until 1991, Mr.
Schwarzlow had been Controller of ITC.
Frank LaDuca, age 43, has been Vice President, Clinical and Regulatory
Affairs, since 1995. From 1986 until 1995, Dr. LaDuca served ITC in several
scientific positions, commencing in 1986 as Associate Director of Biomedical
Research.
Michael Gavin, age 44, has been Vice President, Research and Development, of
ITC since 1992. Prior to joining ITC, Mr. Gavin was employed by Technicon
Instruments as Director of Engineering for Clinical Chemistry.
Craig Rothman, age 42, has been Vice President, Marketing and Sales, of ITC
since 1994. Prior to joining ITC, Mr. Rothman was employed by Baxter Healthcare
Corporation as Eastern Regional Vice President for Sales.
Victor L. Poirier, age 55, has been a Director of ITC since May 1997 and a
director of the Company since 1991. Mr. Poirier has been president of the
Company since 1990 and chief executive officer of the Company since 1991. Mr.
Poirier has been a senior vice president of Thermedics since 1985.
John W. Wood Jr., age 53, has been a Director of ITC since September 1991
and a director of the Company since 1988. Mr. Wood has been a senior vice
president of Thermo Electron since November 1995 and, before his promotion, was
a vice president of Thermo Electron since September 1994. Mr. Wood has also been
president and chief executive officer of Thermedics since 1984. Mr. Wood is also
a director of Thermedics, Thermedics Detection Inc., Thermo Sentron Inc. and
Thermo Voltek Corp.
EMPLOYEES
As of December 28, 1996, ITC employed approximately 267 people, of whom
approximately 161 were engaged in manufacturing, 51 were engaged in sales, 32
were engaged in research and development and 23 were engaged in general
administration. From time to time, ITC also employs temporary employees engaged
primarily in manufacturing on an as-needed basis. As of December 28, 1996, ITC
employed 73 temporary employees. No employees are represented by unions, and the
Company believes that ITC's relations with its employees are good.
PROPERTIES
ITC owns and leases an aggregate of approximately 90,000 square feet of
office, research and development and manufacturing space in three buildings
located in Edison, New Jersey. The lease for approximately 24,250 square feet of
such space expires in 1999. In addition, ITC leases a sales office in Kent,
England, on a month-to-month basis from an affiliate that is controlled by
Thermo Electron and leases an office in Chicago, Illinois. The Company believes
that these facilities are adequate for ITC's present operations and that other
suitable space is readily available if any of such leases are not extended.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS)
- - - --------------
1996
---------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues $ 8,712 $ 8,464 $ 8,490 $ 8,326
Gross Profit 4,622 4,772 4,846 5,072
Net Income 1,020 1,174 1,200 1,278
1995
---------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Revenues $ 7,822 $ 8,639 $ 7,903 $ 7,923
Gross Profit 4,226 5,128 4,699 4,589
Net Income 622 1,224 1,155 1,209
</TABLE>
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SELECTED FINANCIAL INFORMATION -- INTERNATIONAL TECHNIDYNE CORPORATION
- - - ----------------------------------------------------------------------
The selected financial information below as of and for the fiscal years
ended December 28, 1996, December 30, 1995, and for the fiscal year ended
December 31, 1994, has been derived from International Technidyne Corporation's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report included
elsewhere in this Proxy Statement. The selected financial information as of and
for the fiscal years ended January 1, 1994, and January 2, 1993, and as of
December 31, 1994, has not been audited but, in the opinion of the Corporation,
includes all adjustments (consisting only of normal, recurring adjustments)
necessary to present fairly such information in accordance with generally
accepted accounting principles applied on a consistent basis.
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues $33,992 $ 32,287 $ 28,642 $ 24,325 $ 19,348
------- -------- -------- -------- --------
Costs and Operating Expenses:
Cost of revenues 14,680 13,645 11,731 12,196 9,293
Selling, general, and administrative
expenses 8,067 8,018 7,079 6,083 4,868
Research and development expenses 3,659 3,787 3,698 2,875 2,056
----- ----- ----- ----- -----
26,406 25,450 22,508 21,154 16,217
------ ------ ------ ------ ------
Income Before Provision for Income Taxes 7,586 6,837 6,134 3,171 3,131
Provision for Income Taxes 2,914 2,627 2,346 1,239 1,253
----- ----- ----- ----- -----
Net Income $ 4,672 $ 4,210 $ 3,788 $ 1,932 $ 1,878
======= ========= ======== ======== ========
BALANCE SHEET DATA (at end of period):
Working Capital $ 3,040 $ 4,227 $ 3,248 $ 2,989 $ 2,907
Total Assets 17,857 18,099 15,124 14,387 11,597
Parent Company Investment 11,182 12,077 10,025 9,536 8,313
</TABLE>
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 ITC to differ materially from those indicated by such forward-looking
statements, including those detailed under the caption "Forward-looking
Statements."
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OVERVIEW
ITC is a leading manufacturer of near-patient, whole-blood coagulation
testing equipment and related disposables. ITC is also a leading manufacturer
and marketer of premium-quality, single-use disposable incision devices used to
assess platelet function and as bloodletting devices.
Coagulation products are distributed throughout the world principally by
medical specialty dealers to health care professionals. The new ProTime
instrument is designed for home use.
Incision devices are distributed principally in the U.S. through a leading
medical supply dealer. All devices are disposable and have retractable blades to
protect the user from bloodborne diseases.
Most of ITC's export sales are denominated in U.S. dollars; therefore,
neither its revenue or its earnings are significantly affected by exchange rate
fluctuations.
RESULTS OF OPERATIONS
1996 Compared With 1995
Revenues increased 5% in 1996 to $34.0 million compared with $32.3 million
in 1995. Increased demand for skin-incision products, especially the Tenderfoot
product line, generated most of the increase.
The gross profit margin decreased in 1996 to 57% from 58% in 1995 due
primarily to increased overhead costs associated with an additional
manufacturing facility.
Selling, general, and administrative expenses as a percentage of revenues
decreased slightly to 24% in 1996 from 25% in 1995 due to increased revenues.
Expenses for research and development of $3.7 million and $3.8 million for 1996
and 1995, respectively, reflect the Company's continued development of new
products.
The effective tax rate was 38% for 1996 and 1995. The effective tax rate in
both years exceeded the statutory federal income tax rate due primarily to the
impact of state income taxes.
1995 Compared With 1994
Revenues increased 13% in 1995 to $32.3 million from $28.6 million in 1994.
Sales of new blood coagulation products and increased demand for skinincision
products, led by the Tenderfoot product line, accounted for the increase.
The gross profit margin for 1995 decreased to 58% from 59% in 1994 due to
higher manufacturing costs associated with new blood coagulation products.
Selling, general, and administrative expenses as a percentage of revenues
were 25% for both 1995 and 1994. Expenses for research and development of $3.8
million and $3.7 million for 1995 and 1994, respectively, reflect the Company's
continuing effort to develop new blood coagulation testing and skin-incision
products.
The effective tax rate was 38% for 1995 and 1994. The effective tax rate in
both years exceeded the statutory federal income tax rate due primarily to the
impact of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $3.0 million at December 28, 1996, compared with $4.2
million at December 30, 1995. During 1996, $7.4 million of cash was provided by
operating activities.
ITC expended $1.6 million on capital expenditures during 1996. In 1997, ITC
expects to make capital expenditures of $2.7 million. ITC believes its existing
resources are sufficient to meet the capital requirements of its existing
operations for the foreseeable future.
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INFORMATION CONCERNING THE COMPANY
BUSINESS
GENERAL
The Company 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 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.
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,
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.
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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.
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
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<PAGE>
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 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 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.
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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 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
16
<PAGE>
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 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 $3,441,000,
$1,947,000, and $1,429,000 as of June 28, 1997, December 28, 1996, and December
30, 1995, respectively. The Company believes that substantially all of the
backlog at June 28, 1997, 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 as a bridge to transplant. 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 $7,498,000,
$7,111,000, and $7,135,000, 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.
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.
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.
17
<PAGE>
MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is publicly traded on the AMEX. The following
sets forth, for the fiscal periods indicated, the high and low sales prices on
the AMEX. Prices have been restated to reflect the three-for-two split of the
Common Stock, effected in the form of a 50% stock dividend, distributed in May
1996.
<TABLE>
<CAPTION>
FISCAL 1995 HIGH LOW
----------- ---- ---
<S> <C> <C>
First Quarter $19 5/6 $10 5/12
Second Quarter 26 1/12 18 5/6
Third Quarter 33 1/6 24 1/6
Fourth Quarter 51 1/2 28 5/12
FISCAL 1996
- - - -----------
First Quarter 55 1/3 39 1/3
Second Quarter 55 3/8 39 7/12
Third Quarter 44 5/8 29 1/2
Fourth Quarter 38 1/4 23 3/8
FISCAL 1997
- - - -----------
First Quarter 32 20 1/2
Second Quarter 28 3/4 19
Third Quarter 27 5/8 19 1/8
Fourth Quarter (through , 1997)
</TABLE>
The high, low and closing prices of the Company's Common Stock on the AMEX
on May 1, 1997, the date preceding the public announcement of the Merger, were
$27 7/8 , $26 3/4 and $27 1/8 , respectively. On_____________, 1997 the closing
price of the Common Stock on the AMEX was $ ________ per share. There were
holders of Common Stock of record as of ___________ , 1997. Holders of Common
Stock do not have any preemptive rights to subscribe for additional issuances of
Common Stock or securities convertible into Common Stock.
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.
SELECTED QUARTERLY FINANCIAL DATA(1) (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997
------------------------
FIRST SECOND
----- ------
<S> <C> <C> <C> <C>
Revenues $ 14,902 $ 15,931
Gross Profit 7,973 8,703
Net Income 1,875 2,222
Earnings per Share .05 .06
1996
-------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Revenues $ 15,405 $ 15,893 $ 16,084 $ 16,580
Gross Profit 8,896 9,501 9,787 8,646
Net Income (Loss) 3,431 3,573 3,962 (936)
Earnings (Loss) per Share .08 .09 .10 (.02)
1995
-------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Revenues $ 12,214 $ 14,228 $ 12,971 $ 13,467
Gross Profit 6,691 8,377 7,594 7,763
Net Income 1,774 2,895 3,046 3,420
Earnings per Share .04 .07 .07 .08
</TABLE>
- - - ----------
(1) Financial data has been restated to reflect the May 1997 acquisition of ITC,
accounted for in a manner similar to a pooling-of-interests.
18
<PAGE>
SELECTED FINANCIAL INFORMATION -- THERMO CARDIOSYSTEMS INC.
- - - -----------------------------------------------------------
The selected financial information included below for Thermo Cardiosystems
Inc. (the "Company") as of and for the fiscal years ended December 28, 1996, and
December 30, 1995, and for the fiscal year ended December 31, 1994, has been
derived from the Company's Consolidated Financial Statements, which have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report included elsewhere in this Proxy Statement. The selected financial
information as of December 31, 1994, has been derived from the Company's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, but have not been included in this Proxy Statement. The selected financial
information as of and for the fiscal years ended January 1, 1994, and January 2,
1993, and as of and for the six months ended June 28, 1997, and June 29, 1996,
has not been audited but, in the opinion of the Company, includes all
adjustments (consisting only of normal, recurring adjustments) necessary to
present fairly such information in accordance with generally accepted accounting
principles applied on a consistent basis. The results of operations for the six
months ended June 28, 1997, are not necessarily indicative of results for the
entire year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED(A) FISCAL YEAR(A)
------------------- ---------------------------------------------------
JUNE 28, JUNE 29,
1997(B) 1996 1996(C) 1995(D) 1994(E) 1993 1992
------- ---- ------- ------- ------- ---- ----
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues $ 30,833 $ 31,298 $ 63,962 $ 52,880 $ 39,051 $27,849 $21,789
-------- -------- -------- -------- -------- ------- -------
Costs and Operating Expenses:
Cost of revenues 14,157 12,901 27,132 22,455 16,858 14,202 10,864
Selling, general, and administrative
expenses 8,130 6,426 14,203 12,164 9,868 7,799 6,443
Research and development expenses 4,070 3,691 7,498 7,111 7,135 5,851 4,328
Write-off of acquired technology -- -- 4,909 -- -- -- --
-------- -------- -------- -------- -------- ------- -------
26,357 23,018 53,742 41,730 33,861 27,852 21,635
-------- -------- -------- -------- -------- ------- -------
Operating Income (Loss) 4,476 8,280 10,220 11,150 5,190 (3) 154
Interest and Other Income, Net 2,236 2,701 6,136 5,264 3,869 3,648 3,045
-------- -------- -------- -------- -------- ------- -------
Income Before Provision for Income
Taxes 6,712 10,981 16,356 16,414 9,059 3,645 3,199
Provision for Income Taxes 2,615 3,977 6,326 5,279 3,372 1,309 1,303
-------- -------- -------- -------- -------- ------- -------
Net Income $ 4,097 $ 7,004 $ 10,030 $ 11,135 $ 5,687 $ 2,336 $ 1,896
======== ======== ======== ======== ======== ======= =======
Earnings per Share $ .10 $ .17 $ .25 $ .27 $ .14 $ .06 $ .06
======== ======== ======== ======== ======== ======= =======
Welighted Average Shares 39,945 40,909 39,924 40,629 40,286 36,620 33,825
======== ======== ======== ======== ======== ======= =======
BALANCE SHEET DATA (at end of period):
Working Capital $118,369 $ 74,884 $ 65,328 $ 64,610 $ 47,369 $19,048 $18,025
Total Assets 176,038 111,396 124,978 124,285 109,988 74,225 70,669
Long-term Obligations 70,000 8,532 -- 11,642 33,450 600 2,520
Common Stock Subject to Redemption -- -- -- -- -- -- 5,468
Shareholders' Investment 87,945 98,013 111,089 103,416 68,382 67,514 58,351
</TABLE>
- - - ----------
(a) Financial data has been restated to reflect the May 1997 acquisition of
International Technidyne Corporation, accounted for in a manner similar to a
pooling-of-interests (see Note 12 to Consolidated Financial Statements of
the Company).
(b) Reflects the May 1997 issuance of $70,000,000 principal amount of 4 3/4 %
subordinated convertible obligations and conversion of $3,755,000 principal
amount of noninterest-bearing subordinated obligations.
(c) Reflects conversion of $7,887,000 principal amount of noninterest-bearing
subordinated convertible obligations and the December 1996 acquisition of
Nimbus Medical, Inc.
(d) Reflects conversion of $21,808,000 principal amount of noninterest-bearing
subordinated convertible obligations.
(e) Reflects the January 1994 issuance of $33,000,000 principal amount of
noninterest-bearing subordinated convertible obligations due 1997.
19
<PAGE>
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 under the caption "Forward- looking
Statements."
OVERVIEW
The Company is a leader in the research, development, and manufacture of
implantable left ventricular-assist systems. Its HeartMate 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 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., 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.
The Company's ITC subsidiary 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.
RESULTS OF OPERATIONS
First Six Months 1997 Compared With First Six Months 1996
Revenues in the first six months of 1997 were $30,833,000, compared with
$31,298,000 in the first six months of 1996. The decrease was primarily due to a
$2,743,000 decrease in revenues from the Company's air-driven LVAS, offset in
part by a $1,805,000 increase in revenues from the Company's electric LVAS. The
Company expects that revenues from its LVAS will stabilize at current levels
until the electric system is approved in the U.S. for commercial sale. 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 decrease in revenues in 1997 was also offset in part
by the inclusion of $1,142,000 in revenues from Nimbus,
20
<PAGE>
acquired in December 1996. In addition, other revenues decreased $670,000. This
decrease included a reduction in revenues from ITC to $17,082,000 in the first
six months of 1997 from $17,176,000 in the first six months of 1996.
The gross profit margin decreased to 54% in the first six months of 1997
from 59% in the first six months of 1996, primarily due to increased revenues
from lower-margin electric LVAS systems, increased warranty costs due to a
Company-initiated modification of certain of its systems, completed in the first
quarter of 1997, and, to a lesser extent, the inclusion of low-margin revenues
from Nimbus. The Company announced an overall price increase of approximately
10% in the electric LVAS product line effective June 28, 1997, to help offset
increased production costs.
Selling, general, and administrative expenses as a percentage of revenues
increased to 26% in the first six months of 1997 from 21% in the first six
months of 1996, primarily due to higher marketing expenses as a result of an
increase in the Company's LVAS sales force and, to a lesser extent, an increase
in sales personnel and promotional expenses at ITC.
Research and development expenses of $4,070,000 and $3,691,000 in the first
six months of 1997 and 1996, respectively, primarily reflect the Company's
continued development of the LVAS.
Interest income decreased to $2,685,000 in the first six months of 1997 from
$2,704,000 in the first six months of 1996, primarily as a result of lower
average invested balances.
Interest expense increased to $449,000 in the first six months of 1997 from
$55,000 in the first six months of 1996, primarily as a result of the issuance
and sale at par of $70,000,000 principal amount of 4 3/4 % convertible
subordinated debentures due 2004 for net proceeds of $68,100,000.
The effective tax rates were 39% and 36% in the first six months of 1997 and
1996, respectively. The effective tax rates exceeded the statutory federal
income tax rate primarily due to the impact of state income taxes. The effective
tax rate increased in 1997 due to the full utilization of certain state tax loss
carryforwards in 1996.
1996 Compared With 1995
Revenues in 1996 increased 21% to $63,962,000 from $52,880,000 in 1995,
primarily due to a $9,377,000 increase in LVAS sales and, to a lesser extent, a
$1,705,000 increase in ITC product sales. The increase in LVAS revenues reflects
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. ITC revenue growth resulted primarily from a $1.4
million increase in sales of skin-incision devices due to an increase in demand.
The gross profit margin remained constant at 58% in 1996 and 1995. The LVAS
product 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. In addition, the gross profit margin at ITC decreased
slightly to 57% in 1996 from 58% in 1995, due primarily to increased costs
associated with an additional facility.
Selling, general, and administrative expenses as a percentage of revenues
decreased slightly to 22% in 1996 from 23% in 1995. LVAS-related expenses as a
percentage of revenues remained constant at 20% in 1996 and 1995. Higher
marketing expenses due to an increase in the Company's LVAS sales force were
offset by lower expenses as a percentage of revenues due to an increase in LVAS
sales volume. Selling, general, and administrative expenses as a percentage of
revenues declined slightly at ITC to 24% in 1996 from 25% in 1995 due to an
increase in revenues.
Research and development expenses of $7,498,000 in 1996 and $7,111,000 in
1995 reflect the Company's continued commitment to product development.
21
<PAGE>
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 (see
Note 3 to Consolidated Financial Statements of the Company).
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 (see Note 2 to Consolidated Financial
Statements of the Company).
The effective tax rates were 39% and 32% 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.
1995 Compared With 1994
Revenues increased 35% in 1995 to $52,880,000 from $39,051,000 in 1994,
primarily due to a $10,184,000 increase in LVAS sales and, to a lesser extent, a
$3,645,000 increase in ITC product sales. LVAS 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. ITC revenue growth
resulted primarily from sales of new blood coagulation products, as well as a
$1.6 million increase in sales of skin-incision devices due primarily to an
increase in demand.
The gross profit margin increased to 58% in 1995 from 57% in 1994. The LVAS
product 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 gross profit margin at ITC
decreased to 58% in 1995 from 59% in 1994 as a result of increased costs
associated with new blood coagulation products.
Selling, general, and administrative expenses decreased to 23% in 1995 from
25% in 1994. This decrease is primarily due to a decrease in LVAS-related
expense from 27% in 1994 to 20% in 1995 reflecting lower expenses as a
percentage of revenue due to an increase in sales volume, offset in part by
higher marketing expenses to increase the Company's sales force.
Research and development expense of $7,111,000 in 1995 and $7,135,000 in
1994 reflect the Company's continued commitment to product development.
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 32% in 1995 from 37% in 1994, primarily
due to the reversal of a tax valuation allowance that was no longer required.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $118,369,000 at June 28, 1997, compared
with $65,328,000 at December 28, 1996. Cash, cash equivalents, and short- and
long-term available-for-sale investments were $128,422,000 at June 28, 1997,
compared with $81,532,000 at December 28, 1996. During the first
22
<PAGE>
six months of 1997, $3,207,000 of cash was provided by operating activities. The
Company used cash of $1,193,000 to fund an increase in inventories due to
increased production of the electric LVAS and, to a lesser extent, inventories
related to government contracts at Nimbus. The Company also used cash of
$1,145,000 to fund an increase in accounts receivable due to a high level of
sales in June 1997.
Excluding purchases, sales, and maturities of available-for-sale
investments, the Company's investing activities primarily consisted of capital
additions. During the first six months of 1997, the Company expended $1,384,000
on purchases of property, plant, and equipment. During the remainder of 1997,
the Company expects to make capital expenditures of approximately $2,300,000,
principally for manufacturing and tooling equipment and leasehold improvements.
During the first six months of 1997, the Company's financing activities
provided $44,915,000 of cash. In May 1997, the Company issued and sold at par
$70,000,000 principal amount of 4 3/4 % subordinated convertible debentures due
2004 for net proceeds of $68.1 million.
Through a series of actions commencing in August 1996, the Company's Board
of Directors has authorized the repurchase through various dates ending in June
1998 of up to $50.0 million of its own securities in the open market, or in
negotiated transactions. Any repurchases under the Company's authorizations are
funded from working capital. Through June 28, 1997, the Company had committed
$37,389,000 under these authorizations. Of this amount, $23,889,000 was paid
during the first six months of 1997, and $7,835,000 was payable on June 28,
1997, in settlement of trades executed prior to that date.
The Company believes that it has adequate resources to meet its financial
needs for the foreseeable future.
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
biomedical devices, including its LVAS, are subject to approval by the FDA
before commercial sale of such devices may commence 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 and other
regulatory approvals have been obtained, such approvals can be suspended or
revoked if the Company's products do not continue to satisfy regulatory
requirements. 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's HeartPak portable console 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 PMA
application with the FDA with respect to its electric LVAS on a timely basis, or
at all, or that the PMA supplement, if filed, will be reviewed by the FDA on a
timely basis or 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
23
<PAGE>
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 restrict 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 and equipment 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 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 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 or for
the Company's biomedical devices 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. In addition, acceptance by these physicians of
ITC's whole-blood coagulation monitoring systems and Coumadin monitors is also
important to the success of the Company's business. The Company has developed
working relationships with a number of leading medical centers, and its existing
and proposed LVAS and ITC's blood coagulation monitoring systems 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. Further, ITC has several competitors
in the coagulation monitoring instrument market. Although the length of the
regulatory approval process for medical equipment and devices such as LVAS is a
barrier to entry into these markets, the Company's products
24
<PAGE>
could be rendered obsolete or uneconomical by technological advances by one or
more of the Company's present competitors or by future entrants into the markets
in which the Company competes. 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 with respect to its LVAS and its reagents, however, with respect to its
coagulation equipment and skin-incision products, the Company relies principally
on patents to protect its proprietary rights. No assurance can be given that the
Company will be able to effectively protect its patents and 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. 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
25
<PAGE>
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.
International Operations and International Sales. In 1996, sales originating
outside the U.S. and U.S. export sales accounted for approximately 19% of the
Company's total revenues, including ITC. The Company anticipates that sales
outside the U.S. and U.S. export sales will continue to account for a
significant percentage of the Company's total revenues. The Company intends to
continue to expand its presence in international markets. International revenues
are subject to a number of risks, including the following: agreements may be
difficult to enforce and receivables difficult to collect through a foreign
country's legal system; foreign customers may have longer payment cycles;
foreign countries may impose additional withholding taxes or otherwise tax the
Company's foreign income, impose tariffs or adopt other restrictions on foreign
trade; U.S. export licenses may be difficult to obtain; the protection of
intellectual property in foreign countries may be more difficult to enforce; and
fluctuations in exchange rates may affect product demand and may adversely
affect the profitability in U.S. dollars of products and services provided by
the Company in foreign markets where payment for the Company's products and
services is made in the local currency. There can be no assurance that any of
these factors will not have a material effect on the Company's business and
results of operations.
26
<PAGE>
STOCK OWNERSHIP
The following table sets forth the beneficial ownership of Common Stock, as
well as the common stock of Thermedics, the Company's parent company, and of
Thermo Electron, Thermedics' parent company, as of July 31, 1997, with respect
to (i) each person who was known by the Company to own beneficially more than 5%
of the outstanding shares of Common Stock, (ii) each director of the Company,
(iii) the chief executive officer of the Company and other executive officers of
the Company who, during the last completed fiscal year of the Company, met the
definition of "highly compensated" within the meaning of the Securities and
Exchange Commission's executive compensation disclosure rules, and (iv) all
directors and current executive officers as a group.
While certain directors and executive officers of the Company are also
directors and executive officers of Thermo Electron or its subsidiaries other
than the Company, all such persons disclaim beneficial ownership of the shares
of Common Stock owned by Thermedics or by Thermo Electron, as the case may be.
<TABLE>
<CAPTION>
THERMO THERMO ELECTRON
CARDIOSYSTEMS INC.(2) THERMEDICS INC.(3) CORPORATION(4)
--------------------- ------------------ --------------
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE NUMBER PERCENTAGE
NAME(1) SHARES OF CLASS SHARES OF CLASS OF SHARES OF CLASS
------- ------ -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Putnam Investments, Inc.(5) 3,806,602 9.8 N/A N/A N/A N/A
Thermo Electron Corporation(6) 3,448,708 8.8 21,142,303 57.6 N/A N/A
Thermedics Inc.(7) 19,757,612 50.7 N/A N/A N/A N/A
Walter J. Bornhorst 20,900 * 0 * 9,415 *
Elias P. Gyftopoulos 14,500 * 4,500 * 71,070 *
John T. Keiser 35,750 * 21,093 * 114,497 *
Timothy J. Krauskopf 64,896 * 843 * 1,506 *
Leonard Laster 33,619 * 0 * 0 *
Victor L. Poirier 198,007 * 71,195 * 51,398 *
Betty A. Silverstein-Russell 141,800 * 13,455 * 24,209 *
John W. Wood Jr. 60,332 * 179,049 * 265,999 *
Nicholas T. Zervas 47,258 * 26,559 * 0 *
All directors and current executive
officers together as a group
(11 persons) 619,483 1.6 401,414 1.1 1,306,356 *
</TABLE>
- - - ----------
* Reflects ownership of less than 1% of the outstanding common stock.
(1) Except as reflected in the footnotes to this table, shares beneficially
owned consist of shares owned by the indicated person or by that person for
the benefit of minor children, and all share ownership includes sole voting
and investment power.
(2) The shares of Common Stock shown in the table reflect a three-for-two split
of such stock distributed in May 1996 in the form of a 50% stock dividend.
Shares of Common Stock beneficially owned by Dr. Bornhorst, Dr. Gyftopoulos,
Mr. Keiser, Mr. Krauskopf, Dr. Laster, Mr. Poirier, Ms. Silverstein-Russell,
Mr. Wood, Dr. Zervas and all directors and executive officers as a group
include 20,750, 14,500, 35,750, 62,000, 1,000, 155,850, 98,975, 53,450,
12,700 and 454,975 shares, respectively, that such person or group has the
right to acquire within 60 days of July 31, 1997, through the exercise of
stock options. Shares beneficially owned by Dr. Laster, Dr. Zervas and all
directors and executive officers as a group include 2,219, 7,108 and 9,327
full shares, respectively, that had been allocated through July 31, 1997, to
their respective accounts maintained under the Company's deferred
compensation plan for directors. Shares of Common Stock
27
<PAGE>
beneficially owned by Ms. Silverstein-Russell include 157 shares owned by
her spouse and 13,500 shares her spouse has the right to acquire within 60
days of July 31, 1997, through the exercise of stock options. Shares of
Common Stock beneficially owned by Mr. Wood include 1,122 shares held by him
as custodian for two minor children.
(3) Shares of the common stock of Thermedics beneficially owned by Dr.
Gyftopoulos, Mr. Keiser, Mr. Poirier, Ms. Silverstein-Russell, Mr. Wood, Dr.
Zervas and all directors and executive officers as a group include 4,500,
17,300, 30,100, 12,000, 130,700, 8,650 and 272,250 shares, respectively,
that such person or group had the right to acquire within 60 days after July
31, 1997, through the exercise of stock options. Shares of the common stock
of Thermedics beneficially owned by Mr. Krauskopf and all directors and
executive officers as a group include 843 and 3,604 shares, respectively,
allocated through July 31, 1997, to their respective accounts maintained
pursuant to Thermo Electron's employee stock ownership plan (the "ESOP"), of
which the trustees, who have investment power over its assets, are executive
officers of Thermo Electron. Shares beneficially owned by Dr. Zervas and all
directors and executive officers as a group include 7,409 full shares
allocated through July 31, 1997, to Dr. Zervas' account maintained pursuant
to Thermedics' deferred compensation plan for directors. Shares of common
stock of Thermedics beneficially owned by Mr. Wood include 2,600 shares held
by him as custodian for two minor children.
(4) The shares of the common stock of Thermo Electron shown in the table reflect
a three-for-two split of such stock distributed in June 1996 in the form of
a 50% stock dividend. Shares of the common stock of Thermo Electron
beneficially owned by Dr. Gyftopoulos, Mr. Keiser, Mr. Krauskopf, Mr.
Poirier, Ms. Silverstein-Russell, Mr. Wood and all directors and executive
officers as a group include 9,375, 84,397, 100, 46,250, 20,887, 230,458 and
1,022,289 shares, respectively, that such person or group has the right to
acquire within 60 days of July 31, 1997, through the exercise of stock
options. Shares of the common stock of Thermo Electron beneficially owned by
Ms. Silverstein- Russell include 168 shares owned by her spouse. Shares of
the common stock of Thermo Electron beneficially owned by Mr. Krauskopf and
all directors and executive officers as a group include 849 and 4,107 full
shares, respectively, allocated through July 31, 1997 to their respective
accounts maintained pursuant to the ESOP.
(5) Information regarding the number of shares of Common Stock beneficially
owned by Putnam Investments, Inc. is based on the most recent Schedule 13G
of Putnam Investments, Inc. received by the Company, which reported such
ownership as of December 31, 1996. The address of Putnam Investments, Inc.
is One Post Office Square, Boston, Massachusetts 02109. Based on such
information, Putnam Investments, Inc. beneficially owned approximately 9.8%
of the Common Stock outstanding as of July 31, 1997.
(6) Included in the shares of Common Stock beneficially owned by Thermo Electron
are the 3,355,705 Shares to be issued in connection with the acquisition of
ITC by the Company. As of July 31, 1997, and including such Shares, Thermo
Electron beneficially owned approximately 8.8% of the outstanding Common
Stock. Thermedics, which beneficially owns approximately 50.7% of the
outstanding Common Stock, is a majority-owned subsidiary of Thermo Electron
and, therefore, Thermo Electron may be deemed the beneficial owner of the
shares of Common Stock beneficially owned by Thermedics. Thermo Electron
disclaims beneficial ownership of such shares. Thermo Electron's address is
81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046.
(7) As of July 31, 1997, Thermedics beneficially owned approximately 50.7% of
the outstanding Common Stock. Thermedics' address is 470 Wildwood Street,
P.O. Box 2999, Woburn, Massachusetts 01888-2999. As of July 31, 1997,
Thermedics had the power to elect all of the members of the Company's Board
of Directors. Thermedics is a majority-owned subsidiary of Thermo Electron
and therefore, Thermo Electron may be deemed a beneficial owner of the
shares of Common Stock beneficially owned by Thermedics. Thermo Electron
disclaims beneficial ownership of these shares.
28
<PAGE>
RELATIONSHIP WITH AFFILIATES
Thermo Electron has adopted a strategy of selling a minority interest in
subsidiary companies to outside investors as an important tool in its future
development. As part of this strategy, Thermo Electron and certain of its
subsidiaries have created several privately and publicly held subsidiaries, and
Thermedics has created the Company as a publicly held, majority-owned
subsidiary. From time to time, Thermo Electron and its subsidiaries will create
other majority-owned subsidiaries as part of its spinout strategy. (The Company
and such other majority-owned Thermo Electron subsidiaries are hereinafter
referred to as the "Thermo Subsidiaries.")
Thermo Electron and each of the Thermo Subsidiaries recognize that the
benefits and support that derive from their affiliation are essential elements
of their individual performance. Accordingly, Thermo Electron and each of the
Thermo Subsidiaries have adopted the Thermo Electron Corporate Charter (the
"Charter") to define the relationships and delineate the nature of such
cooperation among themselves. The purpose of the Charter is to ensure that (1)
all of the companies and their stockholders are treated consistently and fairly,
(2) the scope and nature of the cooperation among the companies, and each
company's responsibilities, are adequately defined, (3) each company has access
to the combined resources and financial, managerial and technological strengths
of the others, and (4) Thermo Electron and the Thermo Subsidiaries, in the
aggregate, are able to obtain the most favorable terms from outside parties.
To achieve these ends, the Charter identifies the general principles to be
followed by the companies, addresses the role and responsibilities of the
management of each company, provides for the sharing of group resources by the
companies and provides for centralized administrative, banking and credit
services to be performed by Thermo Electron. The services provided by Thermo
Electron include collecting and managing cash generated by members, coordinating
the access of Thermo Electron and the Thermo Subsidiaries (the "Thermo Group")
to external financing sources, ensuring compliance with external financial
covenants and internal financial policies, assisting in the formulation of
long-range planning and providing other banking and credit services. Pursuant to
the Charter, Thermo Electron may also provide guarantees of debt or other
obligations of the Thermo Subsidiaries or may obtain external financing at the
parent level for the benefit of the Thermo Subsidiaries. In certain instances,
the Thermo Subsidiaries may provide credit support to, or on behalf of, the
consolidated entity or may obtain financing directly from external financing
sources. Under the Charter, Thermo Electron is responsible for determining that
the Thermo Group remains in compliance with all covenants imposed by external
financing sources, including covenants related to borrowings of Thermo Electron
or other members of the Thermo Group, and for apportioning such constraints
within the Thermo Group. In addition, Thermo Electron establishes certain
internal policies and procedures applicable to members of the Thermo Group. The
cost of the services provided by Thermo Electron to the Thermo Subsidiaries is
covered under existing corporate services agreements between Thermo Electron and
each of the Thermo Subsidiaries.
The Charter presently provides that it shall continue in effect so long as
Thermo Electron and at least one Thermo Subsidiary participate. The Charter may
be amended at any time by agreement of the participants. Any Thermo Subsidiary,
including the Company, can withdraw from participation in the Charter upon 30
days' prior notice. In addition, Thermo Electron may terminate a subsidiary's
participation in the Charter in the event the subsidiary ceases to be controlled
by Thermo Electron or ceases to comply with the Charter or the policies and
procedures applicable to the Thermo Group. A withdrawal from the Charter
automatically terminates the corporate services agreement and tax allocation
agreement (if any) in effect between the withdrawing company and Thermo
Electron. The withdrawal from participation does not terminate outstanding
commitments to third parties made by the withdrawing company, or by Thermo
Electron or other members of the Thermo Group, prior to the withdrawal. In
addition, a withdrawing company is required to continue to comply with all
policies and procedures applicable to the Thermo Group and to provide certain
administrative functions mandated by Thermo Electron so long as the withdrawing
company is controlled by or affiliated with Thermo Electron.
As provided in the Charter, the Company and Thermo Electron have entered
into a Corporate Services Agreement (the "Services Agreement") under which
Thermo Electron's corporate staff provides certain administrative services,
including certain legal advice and services, risk management,
29
<PAGE>
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management and financial and other services to the Company. The
Company was assessed an annual fee equal to 1.0% of the Company's revenues for
these services for calendar 1996. The fee is reviewed annually and may be
changed by mutual agreement of the Company and Thermo Electron. During fiscal
1996, Thermo Electron assessed the Company $958,000 in fees under the Services
Agreement. Management believes that the charges under the Services Agreement are
reasonable and that the terms of the Services Agreement are fair to the Company.
For items such as employee benefit plans, insurance coverage and other
identifiable costs, Thermo Electron charges the Company based on charges
attributable to the Company. The Services Agreement automatically renews for
successive one-year terms, unless canceled by the Company upon 30 days' prior
notice. In addition, the Services Agreement terminates automatically in the
event the Company ceases to be a member of the Thermo Group or ceases to be a
participant in the Charter. In the event of a termination of the Services
Agreement, the Company will be required to pay a termination fee equal to the
fee that was paid by the Company for services under the Services Agreement for
the nine-month period prior to termination. Following termination, Thermo
Electron may provide certain administrative services on an as-requested basis by
the Company or as required in order to meet the Company's obligations under
Thermo Electron's policies and procedures. Thermo Electron will charge the
Company a fee equal to the market rate for comparable services if such services
are provided to the Company following termination.
From time to time the Company may transact business with other companies in
the Thermo Group. In fiscal 1996, these transactions included the following.
The Company subleases office and research facilities from Thermedics and
pays to Thermedics a pro rata amount based on the actual square footage occupied
by the Company, at a rate approximately equal to Thermedics' rent per square
foot under its prime lease. This sublease expires in 1999. The Company paid
approximately $116,000 to Thermedics in sublease payments during 1996. The
Company also pays Thermedics for the Company's portion of certain expenses
shared with Thermedics at the subleased facilities. In 1996, the Company paid
Thermedics $222,000 for such expenses.
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 corporate
notes, U.S. government agency securities, money market funds, commercial paper
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 and have a maturity of three months or
less. 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.
Thermedics beneficially owned approximately 54% of the Company's outstanding
Common Stock on December 28, 1996. 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 the Company's Common Stock from time to
time as the number of outstanding shares issued by the Company increases. These
purchases may be made either in the open market or directly from the Company.
Thermo Electron's Tecomet division provides metal fabrication services in
connection with the manufacture of the heart assist devices sold by the Company.
During 1996, the Company paid Tecomet $2,892,000 for these services.
Dr. Elias P. Gyftopoulos, Dr. Nicholas T. Zervas and Messrs. Mr. John T.
Keiser, Victor L. Poirier, John W. Wood Jr., John N. Hatsopoulos and Paul F.
Kelleher, directors and/or executive officers of the Company, are also directors
and/or executive officers of Thermedics and/or Thermo Electron.
STOCK HOLDING ASSISTANCE PLAN
During 1996, the Human Resources Committee of the Company's Board of
Directors (the "Committee") established a stock holding policy for executive
officers of the Company. The stock holding policy specifies an appropriate level
of ownership of the Company's Common Stock as a
30
<PAGE>
multiple of the officer's compensation. For the chief executive officer, the
multiple is one times his base salary and reference bonus for the calendar year.
For all other officers, the multiple is one times the officer's base salary. The
Committee deemed it appropriate to permit officers to achieve these ownership
levels over a three-year period.
In order to assist officers in complying with the policy, the Committee also
adopted a stock holding assistance plan under which the Company is authorized to
make interest-free loans to officers to enable them to purchase shares of the
Common Stock in the open market. The loans are required to be repaid to the
Company upon the earlier of demand or the fifth anniversary of the date of the
loan, unless otherwise authorized by the Committee. No such loans are currently
outstanding under the plan.
RECOMMENDATION
The Board of Directors believes that the proposal is in the best interest of
the Company and its Stockholders and recommends that the Stockholders vote "FOR"
the approval of the listing of Shares of the Company's Common Stock on the AMEX
in connection with the acquisition of ITC. If not otherwise specified, proxies
will be voted FOR approval of this proposal. Thermedics and Thermo Electron,
which beneficially owned an aggregate of approximately % of the outstanding
Common Stock as of the Record Date (before giving effect to the issuance of the
Shares pursuant to the Merger Agreement), have sufficient votes to approve the
proposal and have indicated their intention to vote for the proposal.
OTHER ACTION
Management is not aware at this time of any other matters that will be
presented for action at the Meeting. Should any such matters be presented, the
proxies grant power to the proxy holders to vote shares represented by the
proxies in the discretion of such proxy holders.
STOCKHOLDER PROPOSALS
Proposals of Stockholders intended to be presented at the 1998 Annual
Meeting of the Stockholders of the Company must be received by the Company for
inclusion in the proxy statement and form of proxy relating to that meeting no
later than January 12, 1998.
SOLICITATION STATEMENT
The cost of this solicitation of proxies will be borne by the Company.
Solicitation will be made primarily by mail, but regular employees of the
Company may solicit proxies personally, by telephone or telegram. Brokers,
nominees, custodians and fiduciaries are requested to forward solicitation
materials to obtain voting instructions from beneficial owners of stock
registered in their names, and the Company will reimburse such parties for their
reasonable charges and expenses in connection therewith.
Woburn, Massachusetts
October , 1997
31
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
THERMO CARDIOSYSTEMS INC.
Report of Independent Public Accountants .............................. F-2
Consolidated Statement of Income for the six months ended June
28, 1997, and June 29, 1996, and the years ended December 28, 1996,
December 30, 1995, and December 31, 199 ............................. F-3
Consolidated Balance Sheet as of June 28, 1997, December 28,
1996, and December 30, 1995 ......................................... F-4
Consolidated Statement of Cash Flows for the six months ended
June 28, 1997, and June 29, 1996, and the years ended
December 28, 1996, December 30,
1995, and December 31, 1994 ......................................... F-5
Consolidated Statement of Shareholders' Investment for the six
months ended June 28, 1997, and the years ended December 28, 1996,
December 30, 1995, and December 31, 1994 ............................ F-6
Notes to Consolidated Financial Statements ............................ F-7
INTERNATIONAL TECHNIDYNE CORPORATION
Report of Independent Public Accountants .............................. F-19
Consolidated Statement of Income for the years ended December
28, 1996, December 30, 1995, and December 31, 1994 ............ F-20
Consolidated Balance Sheet as of December 28, 1996,
and December 30, 1995 ............................................... F-21
Consolidated Statement of Cash Flows for the years ended December
28, 1996, December 30, 1995, and December 31, 1994 ............ F-22
Consolidated Statement of Parent Company Investment for the
years ended December 28, 1996, December 30, 1995, and December
31, 1994 ............................................................ F-23
Notes to Consolidated Financial Statements ............................ F-24
F-1
<PAGE>
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
May 2, 1997 (except with
respect to the matter
discussed in Note 12
as to which the date is
May 9, 1997)
F-2
<PAGE>
THERMO CARDIOSYSTEMS INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
JUNE 28, JUNE 29,
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Note 11) ................................................ $ 30,833 $ 31,298 $ 63,962 $ 52,880 $ 39,051
-------- -------- -------- -------- --------
Costs and Operating Expenses:
Cost of revenues ............................................... 14,157 12,901 27,132 22,455 16,858
Selling, general, and administrative expenses (Note 7) ......... 8,130 6,426 14,203 12,164 9,868
Research and development expenses .............................. 4,070 3,691 7,498 7,111 7,135
Write-off of acquired technology (Note 3) ...................... -- -- 4,909 -- --
-------- -------- -------- -------- --------
26,357 23,018 53,742 41,730 33,861
-------- -------- -------- -------- --------
Operating Income .................................................. 4,476 8,280 10,220 11,150 5,190
Interest Income ................................................... 2,685 2,704 5,297 5,117 4,147
Interest Expense (Notes 6 and 12) ................................. (449) (55) (80) (274) (375)
Gain on Sale of Investments, Net (Note 2) ......................... -- 52 919 421 97
-------- -------- -------- -------- --------
Income Before Provision for Income Taxes .......................... 6,712 10,981 16,356 16,414 9,059
Provision for Income Taxes (Note 5) ............................... 2,615 3,977 6,326 5,279 3,372
-------- -------- -------- -------- --------
Net Income ........................................................ $ 4,097 $ 7,004 $ 10,030 $ 11,135 $ 5,687
======== ======== ======== ======== ========
Earnings per Share ................................................ $ .10 $ .17 $ .25 $ .27 $ .14
======== ======== ======== ======== ========
Weighted Average Shares ........................................... 39,945 40,909 39,924 40,629 40,286
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
THERMO CARDIOSYSTEMS INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 28,
1997 1996 1995
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................................. $ 62,235 $ 1,157 $ 4,441
Short-term available-for-sale investments, at quoted
market value (amortized cost of $40,413, $46,511, and
$45,392; Note 2) ........................................................ 40,391 46,455 46,123
Accounts receivable, less allowances of $837, $736, and $571 .............. 14,572 13,490 9,625
Inventories ............................................................... 15,057 13,870 9,835
Prepaid and refundable income taxes (Note 5) .............................. 4,182 4,202 3,744
Prepaid expenses .......................................................... 25 43 69
--------- -------- --------
136,462 79,217 73,837
--------- -------- --------
Property, Plant, and Equipment, at Cost ...................................... 17,007 15,834 13,416
Less: Accumulated depreciation and amortization ........................... 8,383 7,334 5,518
--------- -------- --------
8,624 8,500 7,898
--------- -------- --------
Long-term Available-for-sale Investments, at Quoted Market
Value (amortized cost of $25,782, $33,929, and $39,795; Note 2) ............ 25,796 33,920 39,953
--------- -------- --------
Prepaid Income Taxes (Note 5) ................................................ 2,704 2,704 1,865
--------- -------- --------
Other Assets ................................................................. 2,452 637 732
--------- -------- --------
$ 176,038 $ 124,978 $ 124,285
========= ========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Current maturity of subordinated convertible
obligations (Notes 6 and 12) ............................................ $ -- $ 3,755 $ --
Accounts payable .......................................................... 2,970 3,502 3,044
Accrued payroll and employee benefits ..................................... 2,068 2,675 2,754
Accrued warranty expenses ................................................. 875 770 768
Accrued income taxes ...................................................... 1,225 -- --
Other accrued expenses .................................................... 2,789 3,120 2,364
Payable for repurchase of Company common stock ............................ 7,835 -- --
Due to parent company and Thermo Electron Corporation ..................... 331 67 297
--------- -------- --------
18,093 13,889 9,227
--------- -------- --------
Subordinated Convertible Obligations (Notes 6 and 12) ........................ 70,000 -- 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; 40,520,521, 40,227,962, and 26,364,084
shares issued ........................................................... 4,052 4,023 2,636
Capital in excess of par value ............................................ 97,174 93,234 84,125
Retained earnings ......................................................... 27,174 22,727 18,264
Treasury stock at cost, 1,477,956, 235,509, and 18,097
shares .................................................................. (40,479) (8,854) (2,186)
Cumulative translation adjustment ......................................... 29 -- --
Net unrealized gain (loss) on available-for-sale
investments (Note 2) .................................................... (5) (41) 577
--------- -------- --------
87,945 111,089 103,416
--------- -------- --------
$ 176,038 $ 124,978 $ 124,285
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
THERMO CARDIOSYSTEMS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
JUNE 28, JUNE 29,
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income ..................................................... $ 4,097 $ 7,004 $ 10,030 $ 11,135 $ 5,687
Adjustments to reconcile net income to net cash provided
by operating activities:
Write-off of acquired technology (Note 3) .................. -- -- 4,909 -- --
Depreciation and amortization .............................. 1,265 1,181 2,182 2,013 1,492
Provision for losses on accounts receivable ................ 60 30 165 120 213
Gain on sale of investments, net (Note 2) .................. -- (52) (919) (421) (97)
Deferred income tax expense (benefit) ...................... -- -- (1,838) (1,775) 114
Other noncash expenses (income) ............................ (13) 72 60 36 (20)
Changes in current accounts, excluding the effects
of acquisition:
Accounts receivable ..................................... (1,145) (2,010) (4,017) (1,045) (3,338)
Inventories ............................................. (1,193) (2,653) (3,976) (3,513) (829)
Refundable income taxes ................................. 17 31 873 (780) 102
Other current assets .................................... -- -- 26 43 (98)
Accounts payable ........................................ (534) (70) 458 1,045 250
Other current liabilities ............................... 653 1,636 2,586 2,316 2,057
------- ------- -------- -------- -------
Net cash provided by operating activities ......................... 3,207 5,169 10,539 9,174 5,533
------- ------- -------- -------- -------
Investing Activities:
Acquisition (Note 3) ........................................... -- -- (5,013) -- --
Proceeds from sale and maturities of available-for-sale
investments .................................................. 57,421 51,014 89,615 84,782 32,121
Purchases of available-for-sale investments .................... (43,176) (48,837) (83,947) (92,707) (54,988)
Purchases of property, plant, and equipment .................... (1,384) (1,552) (2,570) (3,347) (2,183)
Increase in other assets and other ............................. 54 (45) (134) (218) (150)
------- ------- -------- -------- -------
Net cash provided by (used in) investing activities ............... 12,915 580 (2,049) (11,490) (25,200)
------- ------- -------- -------- -------
Financing Activities:
Purchase of Company common stock ................................ (23,889) -- (5,665) -- --
Net proceeds from issuance of Company common stock ............. 409 563 741 947 593
Payment of withholding taxes related to stock option
exercises .................................................... (94) -- (1,283) (1,500) (1,158)
Transfers to Thermo Electron from International
Technidyne ................................................... 350 (3,012) (5,567) (2,158) (3,299)
Net proceeds from issuance of subordinated convertible
obligations (Notes 6 and 12) ................................. 68,139 -- -- -- 31,968
------- ------- -------- -------- -------
Net cash provided by (used in) financing activities ............... 44,915 (2,449) (11,774) (2,711) 28,104
------- ------- -------- -------- -------
Exchange rate effect on cash ...................................... 41 -- -- -- --
------- ------- -------- -------- -------
Increase (Decrease) in Cash and Cash Equivalents .................. 61,078 3,300 (3,284) (5,027) 8,437
Cash and Cash Equivalents at Beginning of Period .................. 1,157 4,441 4,441 9,468 1,031
------- ------- -------- -------- -------
Cash and Cash Equivalents at End of Period ........................ $ 62,235 $ 7,741 $ 1,157 $ 4,441 $ 9,468
======== ======== ======== ======== ========
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) ............... $ 3,755 $ 3,110 $ 7,887 $ 21,808 $ 150
======== ======== ======== ======== ========
Cancellation of note receivable and application to
purchase of property ......................................... $ -- $ -- $ -- $ -- $ 633
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
THERMO CARDIOSYSTEMS INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
(In thousands)
<TABLE>
<CAPTION>
NET
COMMON UNREALIZED
STOCK, CAPITAL IN CUMULATIVE GAIN (LOSS) ON
$.10 PAR EXCESS OF RETAINED TREASURY TRANSLATION AVAILABLE-FOR-SALE
VALUE PAR VALUE EARNINGS STOCK ADJUSTMENT INVESTMENTS
----- --------- -------- ----- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1994 ............................. $ 2,485 $ 58,136 $ 6,899 $ (6) $ -- $ --
Net income .......................................... 5,687
Issuance of stock under employees' and
directors' stock plans ............................ 24 578 -- (1,083) -- --
Conversions of subordinated convertible
obligations (Note 6) .............................. 2 148 -- -- -- --
Transfers to Thermo Electron from International
Technidyne ........................................ -- -- (3,299) -- -- --
Effect of change in accounting principle (Note 2) ... -- -- -- -- -- 1,038
Change in net unrealized gain (loss) on
available-for- sale investments ................... -- -- -- -- -- (2,227)
------- ------- -------- -------- -------- --------
Balance December 31, 1994 ........................... 2,511 58,862 9,287 (1,089) -- (1,189)
Net income .......................................... 11,135 -- -- --
Issuance of stock under employees' and
directors' stock plans ............................ 22 522 -- (1,097) -- --
Conversions of subordinated convertible
obligations (Note 6) .............................. 103 21,406 -- -- -- --
Transfers to Thermo Electron from International
Technidyne ........................................ -- -- (2,158) -- -- --
Tax benefit related to employees' and directors'
stock plans ....................................... -- 3,335 -- -- -- --
Change in net unrealized gain (loss) on
available-for- sale investments ................... -- -- -- -- -- 1,766
------- ------- -------- -------- -------- --------
Balance December 30, 1995 ........................... 2,636 84,125 18,264 (2,186) -- 577
Net income .......................................... 10,030
Issuance of stock under employees' and
directors' stock plans ............................ 9 452 -- (1,003) -- --
Conversions of subordinated convertible
obligations (Note 6) .............................. 54 7,791 -- -- -- --
Transfers to Thermo Electron from International
Technidyne ........................................ -- -- (5,567) -- -- --
Tax benefit related to employees' and directors'
stock plans ....................................... -- 2,190 -- -- -- --
Change in net unrealized gain (loss) on
available-for- sale investments ................... -- -- -- -- -- (618)
Purchase of Company common stock .................... -- -- -- (5,665) -- --
Effect of three-for-two stock split ................. 1,324 (1,324) -- -- -- --
------- ------- -------- -------- -------- --------
Balance December 28, 1996 ........................... 4,023 93,234 22,727 (8,854) -- (41)
(UNAUDITED)
Net income .......................................... 4,097
Issuance of stock under employees' and
directors' stock plans ............................ 3 214 -- 99 -- --
Conversions of subordinated convertible
obligations (Note 6) .............................. 26 3,726 -- -- -- --
Transfers from Thermo Electron to International
Technidyne ........................................ -- -- 350 -- -- --
Change in net unrealized gain (loss) on
available-for- sale investments ................... -- -- -- -- -- 36
Purchase of Company common stock .................... -- -- -- (31,724) -- --
Translation adjustment .............................. -- -- -- -- 29 --
------- ------- -------- -------- -------- --------
Balance June 28, 1997 ............................... $ 4,052 $ 97,174 $ 27,174 $(40,479) $ 29 $ (5)
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
THERMO CARDIOSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Thermo Cardiosystems Inc. (the Company) 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. The Company's International
Technidyne Corporation (International Technidyne) subsidiary is a leading
manufacturer of near-patient, whole- blood coagulation testing equipment and
related disposables. International Technidyne also manufactures premium-quality,
single-use, skin-incision devices.
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. Thermedics is a 55%-owned subsidiary of Thermo
Electron Corporation (Thermo Electron). As of December 28, 1996, Thermedics and
Thermo Electron owned a total of 23,159,595 shares of the Company's common
stock, representing 58% of such stock outstanding (as adjusted to reflect the
issuance of 3,355,705 shares of the Company's common stock to Thermo Electron
for the acquisition of International Technidyne (Note 12)).
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
FISCAL YEAR
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 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.
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:
<TABLE>
<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Raw materials .......................... $ 9,111 $ 4,603
Work in process ........................ 3,043 3,436
Finished goods ......................... 1,716 1,796
----- -----
$13,870 $ 9,835
======= =======
</TABLE>
F-7
<PAGE>
THERMO CARDIOSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property, as follows: buildings, 15 and 31.5 years;
machinery and equipment, five to ten years, and leasehold improvements, the
shorter of the term of the lease or the life of the asset. Property, plant, and
equipment consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land and buildings ..................................... $ 2,786 $ 2,786
Machinery, equipment, and leasehold improvements ....... 13,048 10,630
------ ------
15,834 13,416
Less: Accumulated depreciation and amortization ........ 7,334 5,518
----- -----
$ 8,500 $ 7,898
======= =======
</TABLE>
OTHER ASSETS
Other assets in the accompanying consolidated balance sheet include the cost
of acquired patents and trademarks. These assets are being amortized using the
straight-line method over their estimated useful lives, which range from 17 to
40 years. These assets were $461,000 and $360,000, net of accumulated
amortization of $130,000 and $106,000, at year-end 1996 and 1995, respectively.
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
F-8
<PAGE>
THERMO CARDIOSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
FOREIGN CURRENCY
All assets and liabilities of the Company's foreign subsidiary are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Foreign currency transaction gains and losses are
included in the accompanying statement of income and are not material for each
of the three years presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRESENTATION
The historical information for all periods presented has been restated to
reflect the May 2, 1997, acquisition of International Technidyne (Note 12).
Because the Company and International Technidyne were deemed for accounting
purposes to be under control of their common majority owner, Thermo Electron,
the transaction has been accounted for at historical cost in a manner similar to
a pooling-of-interests.
INTERIM FINANCIAL STATEMENTS
The financial statements as of June 28, 1997, and for the six-month periods
ended June 28, 1997, and June 29, 1996, are unaudited but, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair presentation of results for these interim periods. The results of
operations for the six-month period ended June 28, 1997, are not necessarily
indicative of the results to be expected for the entire year.
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.
F-9
<PAGE>
THERMO CARDIOSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
GROSS GROSS
MARKET COST UNREALIZED UNREALIZED
VALUE BASIS GAINS LOSSES
----- ----- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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)
======= ======= ======= =======
</TABLE>
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 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.
F-10
<PAGE>
THERMO CARDIOSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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:
<TABLE>
<CAPTION>
1996 1995
---- ----
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
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
</TABLE>
F-11
<PAGE>
THERMO CARDIOSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Volatility ..................................... 50% 50%
Risk-free interest rate ........................ 6.2% 6.0%
Expected life of options ....................... 6.6 years 4.7 years
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------ -------------------
WEIGHTED WEIGHTED RANGE OF
AVERAGE AVERAGE OPTION
NUMBER EXERCISE NUMBER EXERCISE NUMBER PRICES
OF SHARES PRICE OF SHARES PRICE OF SHARES PER SHARE
--------- ----- --------- ----- --------- ---------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year ............... 1,137 $ 9.84 1,458 $ 6.05 1,730 $ 1.15 - 12.12
Granted ........................................... 189 32.90 121 28.34 144 10.63 - 14.19
Exercised ......................................... (179) 3.67 (429) 2.13 (385) 1.15 - 5.93
Forfeited ......................................... (17) 15.55 (13) 11.03 (31) 1.15 - 12.12
------ -------- ----- ------- ----- ---------------
Options outstanding, end of year ..................... 1,130 $ 14.59 1,137 $ 9.84 1,458 $ 1.15 - $14.19
====== ======== ===== ======= ===== ===============
Options exercisable .................................. 1,130 $ 14.59 1,137 $ 9.84 1,455 $ 1.15 - $14.19
====== ======== ===== ======= ===== ===============
Options available for grant .......................... 453 625 733
====== ===== =====
Weighted average fair value per share of
options granted during year ........................ $ 18.23 $ 14.02
======== =======
</TABLE>
A summary of the status of the Company's stock options at December 28, 1996, is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-----------------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE REMAINING AVERAGE
RANGE OF EXERCISE PRICES OF SHARES CONTRACTUAL LIFE EXERCISE PRICE
- - - ------------------------ --------- ---------------- --------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
$ 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
=====
</TABLE>
F-12
<PAGE>
THERMO CARDIOSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
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 $459,000, $413,000, and $260,000 in 1996, 1995, and 1994,
respectively.
5. INCOME TAXES
The components of income before provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic .............................. $16,081 $16,414 $9,059
Foreign ............................... 275 -- --
------- ------- ------
$16,356 $16,414 $9,059
======= ======= ======
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal ............................ $ 7,440 $ 6,333 $ 2,734
State .............................. 724 721 524
------- ------- ------
8,164 7,054 3,258
------- ------- ------
Net deferred (prepaid):
Federal ............................ (2,115) (1,697) 69
State .............................. 277 (78) 45
------- ------- ------
(1,838) (1,775) 114
------- ------- ------
$ 6,326 $ 5,279 $3,372
======= ======== ======
</TABLE>
The Company receives a tax deduction upon exercise of nonqualified stock
options by employees for the difference between the exercise price and the
market price of the Company's common stock on the date of exercise. The
provision for income taxes that is currently payable does not reflect $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:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for income taxes at statutory
rate ..................................... $5,561 $ 5,581 $ 3,080
Increases (decreases) resulting from:
State income taxes, net of federal tax
benefit ................................. 660 424 375
Foreign sales corporation benefit ........ (111) (103) (87)
Reversal of valuation allowance .......... -- (725) --
Other .................................... 216 102 4
------- ------- ------
$6,326 $ 5,279 $ 3,372
====== ======= =======
</TABLE>
F-13
<PAGE>
THERMO CARDIOSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Prepaid income taxes:
State tax loss and credit carryforwards ............... $ 434 $ 868
Available-for-sale investments ........................ 360 20
Inventory basis difference ............................ 1,314 974
Depreciation and amortization ......................... 958 1,082
Accrued compensation .................................. 277 220
Allowance for doubtful accounts ....................... 189 123
Reserves and accruals ................................. 1,136 1,017
Write-off of acquired technology (Note 3) ............. 1,865 --
Other, net ............................................ 44 102
------ ------
$6,577 $4,406
====== ======
</TABLE>
A provision has not been made for U.S. or additional foreign taxes on
$181,000 of undistributed earnings of the Company's U.K. subsidiary that could
be subject to taxation if remitted to the U.S. because the Company currently
plans to keep this amount permanently reinvested overseas. The Company believes
that any additional U.S. tax liability due upon remittance of such earnings
would be immaterial due to available U.S.
foreign tax credits.
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.
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.
F-14
<PAGE>
THERMO CARDIOSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $958,000,
$865,000, and $726,000 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.
The Company leases office space on a month-to-month basis from an affiliate
which is controlled by Thermo Electron. The accompanying statement of income
includes expenses from this lease of $8,000, $17,000, and $18,000 in 1996, 1995,
and 1994, respectively.
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
manufacturing, office, and research facilities under two operating lease
agreements expiring in 1999 and 2000. Future minimum payments due under these
leases at December 28, 1996, are $299,000 in 1997; $311,000 in 1998; $215,000 in
1999; and $107,000 in 2000. Total future minimum lease payments are $932,000.
F-15
<PAGE>
THERMO CARDIOSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENT AND CONTINGENCY -- (CONTINUED)
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 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:
<TABLE>
<CAPTION>
1996 1995
------------------ -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Subordinated convertible obligations ..... $ 3,755 $ 7,435 $11,642 $41,489
</TABLE>
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 CUSTOMER, EXPORT SALES, AND CONCENTRATIONS OF RISK
SIGNIFICANT CUSTOMER
Sales to one customer accounted for 23%, 25%, and 29% of the Company's total
revenues in 1996, 1995, and 1994, respectively.
F-16
<PAGE>
THERMO CARDIOSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SIGNIFICANT CUSTOMER, EXPORT SALES, AND CONCENTRATIONS OF RISK --
(CONTINUED)
EXPORT SALES
Export revenues to Europe accounted for 10%, 11%, and 15% of the Company's
total revenues in 1996, 1995, and 1994, respectively. Export revenues to other
countries accounted for 8%, 7%, and 10% of the Company's total revenues in 1996,
1995, and 1994, respectively.
CONCENTRATIONS OF RISK
Certain raw materials used in the manufacture of the Company's LVAS are
available from only one or two suppliers. The Company is making efforts to
minimize the risks associated with sole sources and ensure long-term
availability, including qualifying alternative materials and components or
developing alternative sources for materials or components supplied by a single
source. Although the Company believes that it has adequate supplies of materials
and components to meet demand for the LVAS for the foreseeable future, no
assurance can be given that the Company will not experience shortages of certain
materials or components in the future that could delay shipments of the LVAS.
The Company sells its products to customers in the healthcare industry. The
Company does not normally require collateral or other security to support its
accounts receivable. Management does not believe that this concentration of
credit risk has, or will have, a significant negative impact on the Company.
12. SUBSEQUENT EVENTS
ACQUISITION
On May 2, 1997, the Company acquired International Technidyne from Thermo
Electron in exchange for the right to receive 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.
Because the Company and International Technidyne were deemed for accounting
purposes to be under control of their common majority owner, Thermo Electron,
the transaction has been accounted for at historical cost in a manner similar to
a pooling-of-interests. Accordingly, all historical financial information
presented has been restated to include the acquisition of International
Technidyne. The 3,355,705 shares of the Company's common stock issuable in the
merger will not be issued until the listing of such shares for trading upon
American Stock Exchange has been approved by the Company's shareholders. Because
Thermedics is the majority shareholder and intends to vote its shares in favor
of such listing, the approval is assured and, therefore, the shares are
considered to be outstanding as of January 2, 1994, for purposes of computing
weighted average shares.
Revenues and net income, as previously reported by the separate entities
prior to the acquisition and as restated for the combined Company, are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Historical $29,970 $20,593 $10,409
International Technidyne 33,992 32,287 28,642
------ ------ ------
$63,962 $52,880 $39,051
======= ======= =======
Net Income:
Historical $ 5,358 $ 6,925 $ 1,899
International Technidyne 4,672 4,210 3,788
----- ----- -----
$10,030 $11,135 $ 5,687
======= ======= =======
</TABLE>
F-17
<PAGE>
THERMO CARDIOSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS -- (CONTINUED)
ISSUANCE OF SUBORDINATED CONVERTIBLE DEBENTURES
On May 9, 1997, the Company issued and sold at par $70,000,000 principal
amount of 4 3/4% subordinated convertible debentures due 2004 for net proceeds
of approximately $68,100,000. The debentures are convertible into shares of the
Company's common stock at a conversion price of $31.415 per share and are
guaranteed on a subordinated basis by Thermo Electron Corporation.
13. UNAUDITED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH(A)
----- ------ ----- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996
- - - ----
Revenues $15,405 $15,893 $16,084 $16,580
Gross profit 8,896 9,501 9,787 8,646
Net income (loss) 3,431 3,573 3,962 (936)
Earnings (loss) per share .08 .09 .10 (.02)
1995 FIRST SECOND THIRD FOURTH
- - - ---- ----- ------ ----- ------
Revenues $12,214 $14,228 $12,971 $13,467
Gross profit 6,691 8,377 7,594 7,763
Net income 1,774 2,895 3,046 3,420
Earnings per share .04 .07 .07 .08
</TABLE>
(a) Includes a write-off of $4,909,000 of acquired technology.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO INTERNATIONAL TECHNIDYNE CORPORATION:
We have audited the accompanying consolidated balance sheet of International
Technidyne Corporation (a Delaware corporation and 100%-owned subsidiary of
Thermo Electron Corporation) and subsidiary as of December 28, 1996 and December
30, 1995, and the related consolidated statements of income, parent company
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
International Technidyne Corporation 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 5, 1997 (except with
respect to Note 7 as to which
the date is May 9, 1997)
F-19
<PAGE>
INTERNATIONAL TECHNIDYNE CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues (Note 6) ............................................................... $33,992 $32,287 $28,642
------- ------- -------
Costs and Operating Expenses:
Cost of revenues ............................................................ 14,680 13,645 11,731
Selling, general, and administrative expenses (Note 4) ...................... 8,067 8,018 7,079
Expenses for research and development ....................................... 3,659 3,787 3,698
------- ------- -------
26,406 25,450 22,508
------- ------- -------
Income Before Provision for Income Taxes ........................................ 7,586 6,837 6,134
Provision for Income Taxes (Note 3) ............................................. 2,914 2,627 2,346
------- ------- -------
Net Income ...................................................................... $ 4,672 $ 4,210 $ 3,788
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE>
INTERNATIONAL TECHNIDYNE CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash ........................................................................... $ 127 $ 43
Accounts receivable, less allowances of $262 in 1996 and 1995 .................. 4,047 4,612
Inventories .................................................................... 3,626 3,686
Prepaid income taxes (Note 3) .................................................. 1,872 1,839
Prepaid expenses ............................................................... 43 69
----- -----
9,715 10,249
----- -----
Property, Plant, and Equipment, at Cost ........................................... 12,072 10,597
Less: Accumulated depreciation and amortization ................................ 5,252 4,083
----- -----
.................................................................................. 6,820 6,514
----- -----
Prepaid Income Taxes .............................................................. 958 1,082
----- -----
Other Assets ...................................................................... 364 254
----- -----
$17,857 $18,099
======= =======
LIABILITIES AND PARENT COMPANY INVESTMENT
Current Liabilities:
Accounts payable ............................................................... $ 1,655 $ 1,374
Accrued payroll and employee benefits .......................................... 1,963 1,890
Accrued warranty expenses ...................................................... 700 700
Other accrued expenses ......................................................... 2,357 2,058
----- -----
6,675 6,022
----- -----
Commitments and Contingencies (Note 5)
Parent Company Investment ......................................................... 11,182 12,077
------ ------
$17,857 $18,099
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
INTERNATIONAL TECHNIDYNE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands except in text)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net income .................................................................. $ 4,672 $ 4,210 $ 3,788
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ............................................ 1,307 1,088 872
Provision for losses on accounts receivable .............................. -- -- 43
Deferred income tax expense (benefit) .................................... 91 (338) 195
Other noncash expenses (income) .......................................... 60 36 (20)
Changes in current accounts:
Accounts receivable ................................................... 565 (168) (169)
Inventories ........................................................... 60 (1,371) 178
Other current assets .................................................. 26 43 (98)
Accounts payable ...................................................... 281 175 (274)
Other current liabilities ............................................. 372 748 522
----- ----- -----
Net cash provided by operating activities ....................................... 7,434 4,423 5,037
----- ----- -----
Investing Activities:
Purchases of property, plant, and equipment ................................. (1,649) (2,284) (1,737)
Increase in other assets .................................................... (134) (69) (81)
Other ....................................................................... -- 41 31
----- ----- -----
Net cash used in investing activities ........................................... (1,783) (2,312) (1,787)
----- ----- -----
Financing Activities:
Transfers to parent company ................................................. (5,567) (2,158) (3,299)
----- ----- -----
Increase (Decrease) in Cash ..................................................... 84 (47) (49)
Cash at Beginning of Year ....................................................... 43 90 139
----- ----- -----
Cash at End of Year ............................................................. $ 127 $ 43 $ 90
======= ======= =======
</TABLE>
Noncash Activities:
In 1994, a note receivable of $633,000 was cancelled and applied to the
purchase price of a building and land acquired by the Company.
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
INTERNATIONAL TECHNIDYNE CORPORATION
CONSOLIDATED STATEMENT OF PARENT COMPANY INVESTMENT
(In thousands)
<TABLE>
<CAPTION>
PARENT
COMPANY
INVESTMENT
----------
<S> <C>
Balance January 1, 1994 ............................................................ $ 9,536
Net income ......................................................................... 3,788
Net transfers to parent company .................................................... (3,299)
------
Balance December 31, 1994 .......................................................... 10,025
Net income ......................................................................... 4,210
Net transfers to parent company .................................................... (2,158)
------
Balance December 30, 1995 .......................................................... 12,077
Net income ......................................................................... 4,672
Net transfers to parent company .................................................... (5,567)
------
Balance December 28, 1996 .......................................................... $11,182
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
INTERNATIONAL TECHNIDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
International Technidyne Corporation (the Company) is a leading manufacturer
of near-patient, whole-blood, coagulation-testing equipment and related
disposables and also manufactures single-use, premium-priced, skin-incision
devices.
RELATIONSHIP WITH THERMO ELECTRON CORPORATION
The Company was incorporated in 1969. In September 1991, the Company was
acquired, through a pooling-of-interests transaction, and became a wholly owned
subsidiary of Thermo Electron Corporation (Thermo Electron). As of December 28,
1996, Thermo Electron owned 153,700 shares of the Company's common stock,
representing 100% of such stock outstanding.
The accompanying financial statements include the assets, liabilities,
income, and expenses of the Company as included in Thermo Electron's
consolidated financial statements. The accompanying financial statements do not
include Thermo Electron's general corporate debt, which is used to finance
operations of all of its respective business segments, or an allocation of
Thermo Electron's interest expense. The Company has had positive cash flows from
operations for all periods presented.
PRINCIPLES OF CONSOLIDATION
The accompanying 1996 financial statements include the accounts of the
Company and its wholly owned subsidiary, International Technidyne Corporation,
Ltd. 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
The cash receipts and disbursements of the Company's domestic operations are
combined with other Thermo Electron corporate cash transactions and balances.
Therefore, cash of the Company's domestic operations is not included in the
accompanying balance sheet.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market value and include materials, labor, and manufacturing overhead. The
components of inventories are as follows:
1996 1995
---- ----
(IN THOUSANDS)
Raw materials ............................... $ 1,762 $ 1,958
Work in process and finished goods .......... 1,864 1,728
----- -----
$ 3,626 $ 3,686
======= =======
F-24
<PAGE>
INTERNATIONAL TECHNIDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property, as follows: buildings, 15 and 31.5 years;
machinery and equipment, 5 to 10 years; and leasehold improvements, the shorter
of the term of the lease or the life of the asset. Property, plant, and
equipment consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land and buildings ................................... $ 2,786 $ 2,786
Machinery, equipment, and leasehold improvements ..... 9,286 7,811
----- -----
12,072 10,597
Less: Accumulated depreciation and amortization ...... 5,252 4,083
----- -----
$ 6,820 $ 6,514
======== ========
</TABLE>
OTHER ASSETS
Other assets in the accompanying consolidated balance sheet include the cost
of acquired patents and trademarks. These assets are being amortized using the
straight-line method over their estimated useful lives, which range from 17 to
40 years. These assets were $461,000 and $360,000, net of accumulated
amortization of $130,000 and $106,000 at year-end 1996 and 1995, respectively.
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.
INCOME TAXES
The Company and Thermo Electron have a tax allocation agreement under which
the Company is included in the consolidated federal and certain state income tax
returns filed by Thermo Electron. The agreement provides that in years in which
the Company has taxable income, it will pay to Thermo Electron amounts
comparable to the taxes the Company would have paid if it had filed separate tax
returns.
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.
CONCENTRATION OF CREDIT RISK
The Company sells its products to customers in the healthcare industry. The
Company does not normally require collateral or other security to support its
accounts receivable. Management does not believe that this concentration of
credit risk has, or will have, a significant negative impact on the Company.
F-25
<PAGE>
INTERNATIONAL TECHNIDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(CONTINUED)
FOREIGN CURRENCY
All assets and liabilities of the Company's wholly owned subsidiary are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Foreign currency transaction gains and losses are
included in the accompanying statement of income and are not material for each
of the three years presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of accounts receivable
and accounts payable, which approximate fair value due to their short-term
nature.
2. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PROGRAM
Substantially all of the Company's full-time U.S. employees are eligible to
participate in an employee stock purchase program sponsored by Thermo Electron.
Under this program, shares of Thermo Electron 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, shares of Thermo Electron's common stock
could be purchased at the end of a 12-month period 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.
401(K) SAVINGS PLAN
Substantially all of the Company's full-time U.S. 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 $267,000, $278,000, and $169,000 in 1996, 1995, and 1994,
respectively.
3. INCOME TAXES
The components of income before provision for income taxes ARE AS FOLLOWS:
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Domestic ............................ $7,311 $6,837 $6,134
Foreign ............................. 275 -- --
------ ------ ------
$7,586 $6,837 $6,134
====== ====== ======
F-26
<PAGE>
INTERNATIONAL TECHNIDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INCOME TAXES -- (CONTINUED)
The components of income before provision for income taxes ARE AS FOLLOWS:
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Currently payable:
Federal .................................... $2,221 $2,309 $1,677
State ...................................... 602 656 474
------ ------ ------
2,823 2,965 2,151
------ ------ ------
(Prepaid) Deferred:
Federal .................................... 70 (260) 150
State ...................................... 21 (78) 45
------ ------ ------
91 (338) 195
------ ------ ------
$2,914 $2,627 $2,346
====== ====== ======
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:
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Provision for income taxes at statutory rate .. $2,579 $2,325 $2,086
Increases (decreases) resulting from:
State income taxes, net of federal tax ..... 411 381 343
Foreign sales corporation benefit .......... (111) (103) (87)
Nondeductible expenses and other ........... 35 24 4
------ ------ ------
$2,914 $2,627 $2,346
====== ====== ======
Short- and long-term prepaid income taxes in the accompanying balance sheet
consist of the following:
1996 1995
---- ----
(IN THOUSANDS)
Prepaid income taxes:
Depreciation and amortization ............... $ 958 $1,082
Reserves and other accruals ................. 1,022 934
Inventory basis difference .................. 831 774
Other, net .................................. 19 131
------ ------
$2,830 $2,921
====== ======
A provision has not been made for U.S. or additional foreign taxes on
$181,000 of undistributed earnings of the Company's U.K. subsidiary that could
be subject to taxation if remitted to the U.S. because the Company currently
plans to keep this amount permanently reinvested overseas. The Company believes
that any additional U.S. tax liability due upon remittance of such earnings
would be immaterial due to available U.S.
foreign tax credits.
F-27
<PAGE>
INTERNATIONAL TECHNIDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. 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 paid Thermo Electron annually an amount equal to 1.0%, 1.20%, and
1.25% of the Company's revenues in fiscal 1996, 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). For these services, the Company was charged
$340,000, $387,000, and $358,000 in 1996, 1995, and 1994, respectively.
Management believes that the service fees charged by Thermo Electron 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.
RENT EXPENSE
The Company's wholly owned subsidiary rents office space on a month-to-month
basis from an affiliate which is controlled by Thermo Electron. The total rent
expense paid to this affiliate was $8,000, $17,000, and $18,000 in 1996, 1995,
and 1994, respectively.
5. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Beginning in 1995, the Company has leased manufacturing and office
facilities under a lease expiring in 1999. The accompanying statement of income
includes expenses from this lease of $188,000 and $13,000 in 1996 and 1995,
respectively. Future minimum payments due under this noncancelable operating
lease as of December 28, 1996 are $194,000 in 1997; $199,000 in 1998; and
$103,000 in 1999. Total future minimum lease payments are $496,000.
CONTINGENCIES
The Company is contingently liable with respect to lawsuits and other
matters. In the opinion of management, these contingencies will not have a
material effect upon the financial position of the Company or its results of
operations.
6. SIGNIFICANT CUSTOMERS AND EXPORT SALES
Sales to one customer accounted for 43%, 41%, and 40% of the Company's total
revenues in 1996, 1995, and 1994, respectively. Export sales to Europe accounted
for 12%, 11%, and 12% of the Company's total revenues in 1996, 1995, and 1994,
respectively. All other export sales accounted for 11%, 10%, and 11% of the
Company's total revenues in 1996, 1995, and 1994, respectively.
7. SUBSEQUENT EVENT
In March 1997, Thermo Electron announced its intent to sell the Company to
Thermo Cardiosystems Inc., one of its publicly held, majority-owned
subsidiaries.
In May 1997, Thermo Electron agreed to sell the Company to Thermo
Cardiosystems.
F-28
<PAGE>
APPENDIX A
[CAZENOVE LOGO)
CAZENOVE INCORPORATED
1177 AVENUE OF THE AMERICAS
NEW YORK, N.Y. 10036
TELEPHONE: (212) 376-1225 FACSIMILE: (212) 376-5387
MEMBER: PACIFIC STOCK EXCHANGE
Board of Directors
THERMO CARDIOSYSTEMS INC.
470 Wildwood Street
P.O. Box 2697
Woburn, MA 01888-2697
May 2, 1997
Dear Sirs,
We understand that Thermo Cardiosystems Inc. (the "Company") proposes to
engage in a transaction (the "Transaction") with Thermo Electron Corporation
("Thermo"), an affiliate of the Company, pursuant to which the Company will
acquire the outstanding capital stock of International Technidyne Corporation
("ITC"), a wholly-owned subsidiary of Thermo, in consideration of the payment of
3,355,705 shares of common stock, $0.10 par value, of the Company valued on
March 29, 1997 at $75,000,000, subject to adjustment as described in the
Agreement and Plan of Reorganization (the "Acquisition Agreement").
The terms of the proposed Transaction are to be set forth in the Acquisition
Agreement between the Company and Thermo. We have been provided with and have
reviewed a proposed form of the Acquisition Agreement dated April 29, 1997. We
have assumed for the purposes of this opinion that the Acquisition Agreement in
the form executed by the parties will not differ from such proposed form in any
material respect.
You have asked us to advise you with respect to whether or not the
consideration to be paid by the Company for the outstanding capital stock of ITC
in connection with the proposed Transaction is fair, from a financial point of
view, to the Company. With respect to such opinion, we have, among other things:
(i) reviewed the proposed form of the Acquisition Agreement;
(ii) reviewed certain historical and prospective financial, operating and
other information furnished to us by ITC and Thermo concerning ITC;
(iii)met with the senior management of ITC to discuss the business and
operations of ITC, as well as the prospects for the industry;
(iv) visited the principal operations and facilities of ITC;
(v) reviewed publicly available financial and market data for public
companies which we deemed comparable to ITC;
(vi) reviewed the financial terms of recent business combinations deemed
comparable by us for which information was publicly available; and
(vii)conducted such other financial studies, analyses and investigations as
we deemed appropriate for purposes of this opinion.
A-1
<PAGE>
We have, in the past, provided financing and financial advisory services to
Thermo and have received fees for rendering such services.
In rendering our opinion we have relied upon and assumed the accuracy,
genuineness, completeness and fairness of the financial and other information
provided by the Company or otherwise made available to us and have not attempted
independently to verify such information. We have relied upon the assurances of
the managements of the Company and Thermo that they are not aware of any
information or facts that would make the information provided to us misleading.
We have not made an independent evaluation or appraisal of any particular asset,
nor have we been furnished with such appraisals, and express no opinion
regarding ITC's liquidation value. Our opinion is necessarily based upon market,
economic and other conditions as they exist on, and can be evaluated as of, the
date of this letter.
It is understood that our opinion has been prepared solely for the
confidential use of the Board of Directors of the Company. This letter, except
as otherwise required by law, is not to be reproduced, summarized, described,
quoted, referred to, or given to any other person, except Thermo, or made
available, in whole or in part, in any registration statement, prospectus, proxy
statement, or in any other written document used in connection with the proposed
Transaction, nor shall this letter be used for any other purpose without our
prior written consent.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the consideration to be paid by the Company for ITC in
connection with the proposed Transaction is fair, from a financial point of
view, to the Company.
Yours faithfully,
CAZENOVE INCORPORATED
A-2
<PAGE>
FORM OF PROXY
THERMO CARDIOSYSTEMS INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD NOVEMBER __, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints John N. Hatsopoulos, Victor L. Poirier and
Melissa F. Riordan, or any one of them in the absence of others, as attorneys
and proxies of the undersigned, with full power of substitution, for and in the
name of the undersigned, to represent the undersigned at the Special Meeting of
the Stockholders of Thermo Cardiosystems Inc., a Massachusetts corporation (the
"Company"), to be held on ________, November __, 1997, at 10:00 a.m. at Thermo
Electron Corporation, 81 Wyman Street, Waltham, Massachusetts 02254, and at any
adjournment or postponement thereof, and to vote all shares of common stock of
the Company standing in the name of the undersigned on October __, 1997, with
all of the powers the undersigned would possess if personally present at such
meeting:
(IMPORTANT = TO BE SIGNED AND DATED ON THE REVERSE SIDE.)
PLEASE DATE, SIGN AND MAIL YOUR PROXY
CARD BACK AS SOON AS POSSIBLE!
SPECIAL MEETING OF STOCKHOLDERS
THERMO CARDIOSYSTEMS INC.
NOVEMBER __, 1997
Approve management proposal to list 3,355,705 shares of common stock,
to be issued in connection with an acquisition, on the American Stock Exchange,
Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL
SET FORTH ABOVE IF NO INSTRUCTION TO THE CONTRARY IS INDICATED OR IF NO
INSTRUCTION IS GIVEN.
Copies of the Notice of the Meeting and of the Proxy Statement have
been received by the undersigned.
PLEASE DATE, SIGN AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED ENVELOPE.
Signature(s)_____________________________________ Date _________________________
Note: This proxy should be dated, signed by the shareholder(s) exactly as his or
her name appears hereon, and returned promptly in the enclosed envelope. Persons
signing in a fiduciary capacity should so indicate. If shares are held by joint
tenants or as community property, both should sign.
