SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------------------------------
AMENDMENT NO. 1 ON FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported):
May 2, 1997
________________________________________
THERMO CARDIOSYSTEMS INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 1-10114 04-3027040
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation or File Number) Identification Number)
organization)
470 Wildwood Street, P.O. Box 2697
Woburn, Massachusetts 01888-2697
(Address of principal executive offices) (Zip Code)
(617) 622-1000
(Registrant's telephone number
including area code)
PAGE
<PAGE>
FORM 8-K/A
Item 2. Acquisition or Disposition of Assets
On May 2, 1997, Thermo Cardiosystems Inc. (the "Company") acquired
International Technidyne Corporation ("ITC"), a wholly owned subsidiary
of Thermo Electron Corporation ("Thermo Electron"), in exchange for the
right to receive 3,355,705 shares of the Company's common stock. ITC is a
manufacturer of near-patient, whole-blood coagulation-testing equipment
and related disposables, as well as single-use, premium-priced,
skin-incision devices. In 1996, ITC had revenues of $34,000,000, with net
income of $4,700,000.
The acquisition was made pursuant to an Agreement and Plan of
Reorganization dated as of May 2, 1997 (the "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, (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.
The shares of the Company's common stock to be issued in connection
with the acquisition will be so issued as soon as such shares are listed
for trading upon the American Stock Exchange, Inc. The exchange requires
that the listing be approved by the holders of a majority of the
Company's outstanding shares present and voting at a shareholders'
meeting. The meeting is expected to be held before the end of fiscal
1997. Thermo Electron and Thermedics Inc. ("Thermedics") have each agreed
to vote all of the shares of the Company's common stock held by them as
of the record date of the meeting in favor of the listing of the
Company's shares and all matters related thereto. Before giving effect to
the issuance of the shares to be issued pursuant to the Agreement, Thermo
Electron and Thermedics owned an aggregate of 54.2% of the outstanding
common stock of the Company. Giving effect to the issuance of such
shares, Thermo Electron and Thermedics own an aggregate of 58.1% of such
outstanding common stock.
The consideration to be paid for ITC was based on the Company's
determination of the fair market value of ITC's business. Based on the
average of the closing prices of the Company's common stock as reported
on the American Stock Exchange for the five trading days ending on March
27, 1997, the shares to be issued to Thermo Electron had a value of
$75,000,000 prior to the execution of the Agreement. Prior to the
execution of the Agreement, Cazenove Incorporated, an investment banking
firm, provided a written opinion to the Board of Directors of the Company
indicating that, as of May 2, 1997, the consideration to be paid for ITC
was fair to the Company from a financial point of view.
The Company has no present intention to use ITC's assets for
purposes materially different from the purposes for which such assets
were used prior to the acquisition. However, the Company will review
ITC's business and assets, corporate structure, capitalization,
operations, properties, policies, management and personnel and, upon
completion of this review, may develop alternative plans or proposals,
including mergers, transfers of a material amount of assets or other
transactions or changes relating to such business.
2PAGE
<PAGE>
FORM 8-K/A
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired - Attached hereto.
Restated Exhibit 11 to the Registrant's Form 10-K for the year
ended December 28, 1996 - Attached hereto.
Restated Exhibit 13 to the Registrant's Form 10-K for the year
ended December 28, 1996 - Attached hereto.
(b) Pro Forma Financial Information.
The pro forma financial information required by Form 8-K is not
presented due to the inclusion of the Restated Exhibit 13 to the
Registrant's Form 10-K for the year ended December 28, 1996
attached hereto.
(c) Exhibits.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
3PAGE
<PAGE>
FORM 8-K/A
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized, on this 30th day of May, 1997.
THERMO CARDIOSYSTEMS INC.
By: Paul F. Kelleher
--------------------
Paul F. Kelleher
Chief Accounting Officer
4PAGE
<PAGE>
INTERNATIONAL TECHNIDYNE CORPORATION
Consolidated Financial Statements
1996
PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
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 March 29, 1997)
2PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Consolidated Statement of Income
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
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
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
3PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Consolidated Balance Sheet
(In thousands) 1996 1995
-----------------------------------------------------------------------
Assets
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
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Consolidated Statement of Cash Flows
(In thousands except in text) 1996 1995 1994
-----------------------------------------------------------------------
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
======= ======= =======
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.
5PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Consolidated Statement of Parent Company Investment
Parent
Company
(In thousands) Investment
-----------------------------------------------------------------------
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
=======
The accompanying notes are an integral part of these consolidated
financial statements.
6PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
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.
7PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Inventories
Inventories are stated at the lower of cost (on a first-in,
first-out basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are as follows:
(In thousands) 1996 1995
-----------------------------------------------------------------------
Raw materials $ 1,762 $ 1,958
Work in process and finished goods 1,864 1,728
------- -------
$ 3,626 $ 3,686
======= =======
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:
(In thousands) 1996 1995
-----------------------------------------------------------------------
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
======= =======
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.
8PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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.
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.
9PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Domestic $7,311 $6,837 $6,134
Foreign 275 - -
------ ------ ------
$7,586 $6,837 $6,134
====== ====== ======
10PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
3. Income Taxes (continued)
The components of the provision for income taxes are as follows:
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
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:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
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:
(In thousands) 1996 1995
---------------------------------------------------------------
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
====== ======
11PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
3. Income Taxes (continued)
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.
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
12PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Commitments and Contingencies (continued)
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 that arose in the ordinary course of business. 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.
13PAGE
<PAGE>
Exhibit 11
THERMO CARDIOSYSTEMS INC.
Computation of Earnings per Share
1996 1995 1994
----------- ----------- -----------
Computation of Primary Earnings
per Share:
Net Income (a) $10,030,000 $11,135,000 $ 5,687,000
----------- ----------- -----------
Shares:
Weighted average shares
outstanding 36,568,711 35,002,530 34,173,986
Add: Shares assumed issued
for acquisition of
International Technidyne
Corporation 3,355,705 3,355,705 3,355,705
Shares issuable from
assumed conversion of
subordinated convertible
debentures - 1,757,059 2,276,908
Shares issuable from
assumed exercise of
options and warrants (as
determined by the
application of the
treasury stock method) - 513,833 479,360
----------- ----------- -----------
Weighted average shares
outstanding, as adjusted (b) 39,924,416 40,629,127 40,285,959
----------- ----------- -----------
Primary Earnings per
Share (a) / (b) $ .25 $ .27 $ .14
=========== =========== ===========
PAGE
<PAGE>
Exhibit 13
THERMO CARDIOSYSTEMS INC.
Consolidated Financial Statements
1996
PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1996 1995 1994
-----------------------------------------------------------------------
Revenues (Note 11) $63,962 $52,880 $39,051
------- ------- -------
Costs and Operating Expenses:
Cost of revenues 27,132 22,455 16,858
Selling, general, and administrative
expenses (Note 7) 14,203 12,164 9,868
Research and development expenses 7,498 7,111 7,135
Write-off of acquired technology (Note 3) 4,909 - -
------- ------- -------
53,742 41,730 33,861
------- ------- -------
Operating Income 10,220 11,150 5,190
Interest Income 5,297 5,117 4,147
Interest Expense (Note 6) (80) (274) (375)
Gain on Sale of Investments, Net (Note 2) 919 421 97
------- ------- -------
Income Before Provision for Income Taxes 16,356 16,414 9,059
Provision for Income Taxes (Note 5) 6,326 5,279 3,372
------- ------- -------
Net Income $10,030 $11,135 $ 5,687
======= ======= =======
Earnings per Share $ .25 $ .27 $ .14
======= ======= =======
Weighted Average Shares 39,924 40,629 40,286
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
2PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Consolidated Balance Sheet
(In thousands) 1996 1995
------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 1,157 $ 4,441
Short-term available-for-sale investments,
at quoted market value (amortized cost
of $46,511 and $45,392; Note 2) 46,455 46,123
Accounts receivable, less allowances
of $736 and $571 13,490 9,625
Inventories 13,870 9,835
Prepaid and refundable income taxes (Note 5) 4,202 3,744
Prepaid expenses 43 69
-------- --------
79,217 73,837
-------- --------
Property, Plant, and Equipment, at Cost 15,834 13,416
Less: Accumulated depreciation and
amortization 7,334 5,518
-------- --------
8,500 7,898
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $33,929 and $39,795; Note 2) 33,920 39,953
-------- --------
Prepaid Income Taxes (Note 5) 2,704 1,865
-------- --------
Other Assets 637 732
-------- --------
$124,978 $124,285
======== ========
3PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1996 1995
------------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Current maturity of subordinated convertible
obligations (Note 6) $ 3,755 $ -
Accounts payable 3,502 3,044
Accrued payroll and employee benefits 2,675 2,754
Accrued warranty expenses 770 768
Other accrued expenses 3,120 2,364
Due to parent company and Thermo Electron
Corporation 67 297
-------- --------
13,889 9,227
-------- --------
Subordinated Convertible Obligations (Note 6) - 11,642
-------- --------
Commitments and Contingency (Notes 7 and 8)
Shareholders' Investment (Notes 4 and 9):
Common stock, $.10 par value, 100,000,000
shares authorized; 40,227,962 and 26,364,084
shares issued 4,023 2,636
Capital in excess of par value 93,234 84,125
Retained earnings 22,727 18,264
Treasury stock at cost, 235,509 and 18,097
shares (8,854) (2,186)
Net unrealized gain (loss) on available-
for-sale investments (Note 2) (41) 577
-------- --------
111,089 103,416
-------- --------
$124,978 $124,285
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Operating Activities:
Net income $ 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 2,182 2,013 1,492
Provision for losses on accounts
receivable 165 120 213
Gain on sale of investments, net
(Note 2) (919) (421) (97)
Deferred income tax expense
(benefit) (1,838) (1,775) 114
Other noncash expenses (income) 60 36 (20)
Changes in current accounts,
excluding the effects of
acquisition:
Accounts receivable (4,017) (1,045) (3,338)
Inventories (3,976) (3,513) (829)
Refundable income taxes 873 (780) 102
Other current assets 26 43 (98)
Accounts payable 458 1,045 250
Other current liabilities 2,586 2,316 2,057
-------- -------- --------
Net cash provided by operating
activities 10,539 9,174 5,533
-------- -------- --------
Investing Activities:
Acquisition (Note 3) (5,013) - -
Proceeds from sale and maturities of
available-for-sale investments 89,615 84,782 32,121
Purchases of available-for-sale
investments (83,947) (92,707) (54,988)
Purchases of property, plant, and
equipment (2,570) (3,347) (2,183)
Increase in other assets and other (134) (218) (150)
-------- -------- --------
Net cash used in investing activities $ (2,049) $(11,490) $(25,200)
-------- -------- --------
5PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Financing Activities:
Purchase of Company common stock $ (5,665) $ - $ -
Net proceeds from issuance of Company
common stock 741 947 593
Payment of withholding taxes related
to stock option exercises (1,283) (1,500) (1,158)
Transfers to Thermo Electron
from International Technidyne (5,567) (2,158) (3,299)
Net proceeds from issuance of
subordinated convertible obligations
(Note 6) - - 31,968
-------- -------- --------
Net cash provided by (used in)
financing activities (11,774) (2,711) 28,104
-------- -------- --------
Increase (Decrease) in Cash and Cash
Equivalents (3,284) (5,027) 8,437
Cash and Cash Equivalents at Beginning
of Year 4,441 9,468 1,031
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 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) $ 7,887 $ 21,808 $ 150
======== ======== ========
Cancellation of note receivable
and application to purchase of
property $ - $ - $ 633
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
6PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Consolidated Statement of Shareholders' Investment
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Common Stock, $.10 Par Value
Balance at beginning of year $ 2,636 $ 2,511 $ 2,485
Issuance of stock under employees'
and directors' stock plans 9 22 24
Conversions of subordinated
convertible obligations (Note 6) 54 103 2
Effect of three-for-two stock split 1,324 - -
-------- -------- --------
Balance at end of year 4,023 2,636 2,511
-------- -------- --------
Capital in Excess of Par Value
Balance at beginning of year 84,125 58,862 58,136
Issuance of stock under employees'
and directors' stock plans 452 522 578
Tax benefit related to employees'
and directors' stock plans 2,190 3,335 -
Conversions of subordinated
convertible obligations (Note 6) 7,791 21,406 148
Effect of three-for-two stock split (1,324) - -
-------- -------- --------
Balance at end of year 93,234 84,125 58,862
-------- -------- --------
Retained Earnings
Balance at beginning of year 18,264 9,287 6,899
Net income 10,030 11,135 5,687
Transfers to Thermo Electron from
International Technidyne (5,567) (2,158) (3,299)
-------- -------- --------
Balance at end of year 22,727 18,264 9,287
-------- -------- --------
Treasury Stock
Balance at beginning of year (2,186) (1,089) (6)
Activity under employees'
and directors' stock plans (1,003) (1,097) (1,083)
Purchases of Company common stock (5,665) - -
-------- -------- --------
Balance at end of year (8,854) (2,186) (1,089)
-------- -------- --------
Net Unrealized Gain (Loss) on Available-
for-sale Investments
Balance at beginning of year 577 (1,189) -
Effect of change in accounting
principle (Note 2) - - 1,038
Change in net unrealized gain (loss)
on available-for-sale investments
(Note 2) (618) 1,766 (2,227)
-------- -------- --------
Balance at end of year (41) 577 (1,189)
-------- -------- --------
Total Shareholders' Investment $111,089 $103,416 $ 68,382
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
7PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Cardiosystems Inc. (the Company) is a leader in the research,
development, and manufacture of implantable left ventricular-assist
systems (LVAS). Its HeartMate(R) devices are designed to perform
substantially all or part of the pumping function of the left ventricle
of the natural heart for patients suffering from cardiovascular disease.
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 single-use, premium-priced,
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.
8PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market value and include materials, labor, and manufacturing
overhead. The components of inventories are as follows:
(In thousands) 1996 1995
-----------------------------------------------------------------------
Raw materials $ 9,111 $ 4,603
Work in process 3,043 3,436
Finished goods 1,716 1,796
------- -------
$13,870 $ 9,835
======= =======
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:
(In thousands) 1996 1995
-----------------------------------------------------------------------
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
======= =======
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.
9PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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
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.
10PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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.
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.
The aggregate market value, cost basis, and gross unrealized gains and
losses of short- and long-term available-for-sale investments by major
security type, as of December 28, 1996, and December 30, 1995, are as
follows:
Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
--------------------------------------------------------------------------
1996
Government agency securities $76,901 $76,917 $ - $ (16)
Corporate bonds 1,014 1,006 8 -
Other 2,460 2,517 - (57)
------- ------- ------- -------
$80,375 $80,440 $ 8 $ (73)
======= ======= ======= =======
1995
Government agency securities $83,906 $83,035 $ 948 $ (77)
Corporate bonds 1,028 1,010 18 -
Other 1,142 1,142 - -
------- ------- ------- -------
$86,076 $85,187 $ 966 $ (77)
======= ======= ======= =======
11PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
2. Available-for-sale Investments (continued)
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.
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
12PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
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
13PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
the grant dates consistent with the method set forth under SFAS No. 123,
the effect on the Company's net income and earnings per share would have
been as follows:
(In thousands except per share amounts) 1996 1995
----------------------------------------------------------------------
Net income:
As reported $5,358 $6,925
Pro forma 4,823 6,795
Earnings per share:
As reported .15 .19
Pro forma .13 .18
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation expense may not be representative of the amount to be
expected in future years. Compensation expense for options granted is
reflected over the vesting period; therefore, future pro forma
compensation expense may be greater as additional options are granted.
The fair value of each option grant was estimated on the grant date
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1996 1995
-----------------------------------------------------------------------
Volatility 50% 50%
Risk-free interest rate 6.2% 6.0%
Expected life of options 6.6 years 4.7 years
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.
14PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
Stock Option Activity
A summary of the Company's stock option activity is as follows:
1996 1995 1994
---------------- ---------------- -----------------
Weighted Weighted Range of
Number Average Number Average Number Option
(Shares in of Exercise of Exercise of Prices
thousands) Shares Price Shares Price Shares per Share
--------------------------------------------------------------------------
Options outstanding, $ 1.15-
beginning of year 1,137 $ 9.84 1,458 $ 6.05 1,730 12.12
10.63-
Granted 189 32.90 121 28.34 144 14.19
1.15-
Exercised (179) 3.67 (429) 2.13 (385) 5.93
1.15-
Forfeited (17) 15.55 (13) 11.03 (31) 12.12
----- ----- -----
Options outstanding, $ 1.15-
end of year 1,130 $14.59 1,137 $ 9.84 1,458 $14.19
===== ====== ===== ====== ===== ======
$ 1.15-
Options exercisable 1,130 $14.59 1,137 $ 9.84 1,455 $14.19
===== ====== ===== ====== ===== ======
Options available
for grant 453 625 733
===== ===== =====
Weighted average fair
value per share of
options granted
during year $18.23 $14.02
====== ======
15PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
A summary of the status of the Company's stock options at December
28, 1996, is as follows:
Options Outstanding and Exercisable
-----------------------------------
Weighted
Number Weighted Average Average
of Remaining Exercise
Range of Exercise Prices Shares Contractual Life Price
-----------------------------------------------------------------------
(Shares in thousands)
$ 1.15 - $13.10 822 5.6 years $ 8.42
3.11 - 25.06 23 4.2 years 19.02
25.07 - 37.01 224 8.9 years 28.59
37.02 - 48.97 61 5.4 years 44.46
-----
$ 1.15 - $48.97 1,130 6.2 years $14.59
=====
401(k) Savings Plan
Substantially all of the Company's full-time employees are eligible
to participate in Thermo Electron's 401(k) savings plan. Contributions to
the plan are made by both the employee and the Company. Company
contributions are based upon the level of employee contributions. For
this plan, the Company contributed and charged to expense $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:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Domestic $16,081 $16,414 $ 9,059
Foreign 275 - -
------- ------- -------
$16,356 $16,414 $ 9,059
======= ======= =======
16PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Income Taxes (continued)
The components of the provision for income taxes are as follows:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
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
======= ======= =======
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:
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
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
======= ======= =======
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.
17PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Income Taxes (continued)
Short- and long-term prepaid income taxes in the accompanying
balance sheet consist of the following:
(In thousands) 1996 1995
----------------------------------------------------------------------
Prepaid income taxes:
State tax loss and credit carryforwards $ 434 $ 868
Available-for-sale investments 360 20
Inventory basis difference 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
====== ======
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.
18PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
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.
19PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
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.
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.
20PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
10. Fair Value of Financial Instruments
The fair value of the Company's subordinated convertible obligations
was determined based on quoted market prices. The carrying amount and
fair value of the Company's subordinated convertible obligations are as
follows:
1996 1995
-------------------- --------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
-----------------------------------------------------------------------
Subordinated convertible
obligations $ 3,755 $ 7,435 $11,642 $41,489
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.
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.
21PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
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 single-use,
premium-priced, 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:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
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
======= ======= =======
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.
22PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
13. Unaudited Quarterly Information
(In thousands except per share amounts)
1996 First Second Third Fourth(a)
--------------------------------------------------------------------
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
(a) Includes a write-off of $4,909,000 of acquired technology.
23PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Cardiosystems Inc.:
We have audited the accompanying consolidated balance sheet of Thermo
Cardiosystems Inc. (a Massachusetts corporation and 54%-owned subsidiary
of Thermedics Inc.) and subsidiary as of December 28, 1996, and December
30, 1995, and the related consolidated statements of income,
shareholders' investment, and cash flows for each of the three years in
the period ended December 28, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Thermo Cardiosystems Inc. and subsidiary as of December 28, 1996, and
December 30, 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 28, 1996,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
May 2, 1997 (except with
respect to the matter
discussed in Note 12
as to which the date is
May 9, 1997)
24PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," "seeks," "estimates," and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the results of the Company to differ
materially from those indicated by such forward-looking statements,
including those detailed immediately after this Management's Discussion
and Analysis of Financial Condition and Results of Operation under the
caption "Forward-looking Statements."
Overview
The Company is a leader in the research, development, and manufacture
of implantable left ventricular-assist systems (LVAS). Its HeartMate(R)
devices are designed to perform substantially all or part of the pumping
function of the left ventricle of the natural heart for patients
suffering from cardiovascular disease.
In general, a profit cannot be earned from the sale of an LVAS in the
United States until approval of the device has been received from the
U.S. Food and Drug Administration (FDA) for commercial sale. Until such
approval is obtained, only the direct and indirect costs of the LVAS can
be recovered, which are included in the Company's revenues. With the
FDA's approval of the air-driven LVAS, the Company began earning a profit
on the sale of such systems in the fourth quarter of 1994. In October
1994, the Company announced a price increase in the U.S. for its
air-driven LVAS that was phased in during a six-month period and more
than doubled the average price of the air-driven LVAS.
The Company derives its revenues from two types of sales:
implementation programs and subsequent implants. Implementation programs
consist of initial sales to new clinical centers or foreign distributors,
as well as sales of a new system, such as the electric LVAS, to an
existing customer. Revenues recorded from subsequent implants consist of
sales to an existing customer other than the initial sale of the
implementation program. In general, the Company receives greater revenues
from the sale of an implementation program than from a subsequent
implant.
In December 1996, the Company acquired substantially all of the
assets, subject to certain liabilities, of Nimbus Medical, Inc. (Nimbus),
a research and development organization. Nimbus has been involved in
artificial heart technology for more than 20 years and has carried out
research in two primary fields: ventricular-assist devices and total
artificial hearts. Nimbus was instrumental in developing the basic
technology for high-speed rotary blood pumps. Because of their smaller
size, rotary blood pumps may potentially be used to provide cardiac
support in small adults and in children.
25PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview (continued)
The Company's International Technidyne Corporation (International
Technidyne) subsidiary 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.
Results of Operations
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 International Technidyne 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. The Company expects that shipments of LVAS units will
stabilize at current levels until the electric system is approved for
commercial sale in the U.S. and for use outside the hospital. The Company
believes that this approval could occur during 1997, however, there can
be no assurance that the Company will receive this approval within the
expected time period, or at all. International Technidyne 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. The
Company will continue to be unable to earn a profit on sales of the
electric LVAS in the U.S. until FDA approval of that system is obtained.
In addition, the gross profit margin at International Technidyne
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 International
Technidyne 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. The Company does not expect research and development
expenses to increase materially as a result of its acquisition of Nimbus,
as most of Nimbus' research and development costs have historically been
funded through government contracts.
26PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1996 Compared With 1995 (continued)
In connection with the December 1996 acquisition of Nimbus, the
Company wrote off $4,909,000, which represents the portion of the
purchase price allocated to technology in development based on estimated
replacement cost (Note 3).
Interest income increased to $5,297,000 in 1996 from $5,117,000 in
1995, primarily as a result of higher invested balances. Interest expense
decreased to $80,000 in 1996 from $274,000 in 1995, primarily as a result
of lower amortization of deferred issuance costs associated with the
Company's noninterest-bearing subordinated convertible debentures due to
the conversion of $7,887,000 principal amount of these debentures in
1996.
The Company recorded a gain on sale of investments, net, of $919,000
in 1996, compared with $421,000 in 1995 (Note 2).
The effective tax rates were 39% and 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 International Technidyne 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. International
Technidyne 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 International Technidyne 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.
27PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1995 Compared With 1994 (continued)
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
Working capital was $65,328,000 at December 28, 1996, compared with
$64,610,000 at December 30, 1995. Cash, cash equivalents, and short- and
long-term available-for-sale investments were $81,532,000 at December 28,
1996, compared with $90,517,000 at December 30, 1995. During 1996,
$10,539,000 of cash was provided by operating activities. The Company
used $4,017,000 and $3,976,000 of cash in 1996 to fund increases in
accounts receivable and inventories, respectively. These increases were
primarily due to the increase in sales volume and corresponding increases
in production levels.
During 1996, the Company's primary investing activities, excluding
purchases, sales, and maturities of available-for-sale investments,
included an acquisition and capital expenditures. In December 1996, the
Company acquired substantially all of the assets, subject to certain
liabilities, of Nimbus for $5,013,000 in cash (Note 3). The Company
expended $2,570,000 on purchases of property, plant, and equipment during
1996.
During 1996, the Company expended $11,774,000 for financing
activities. The Company's Board of Directors has authorized the
repurchase, through August 12, 1997, of up to $10.0 million of its own
securities. Any such purchases would be funded from working capital.
Through December 28, 1996, the Company had expended $5,665,000 under this
authorization.
In May 1997, the Company received net proceeds of approximately $68.1
million from the issuance of $70 million principal amount of 4 3/4%
subordinated convertible debentures (Note 12).
In 1997, the Company expects to make capital expenditures of
approximately $4,300,000, including expenditures for manufacturing and
tooling equipment and leasehold improvements. The Company believes it has
adequate resources to meet its financial needs for the foreseeable
future.
28PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company wishes to caution
readers that the following important factors, among others, in some cases
have affected, and in the future could affect, the Company's actual
results and could cause its actual results in 1997 and beyond to differ
materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
Uncertainty of Regulatory Approval for Biomedical Devices. The
Company's biomedical devices, including its left ventricular-assist
systems (LVAS), are subject to approval by the U.S. Food and Drug
Administration (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(TM) 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 premarket approval (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 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
29PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Forward-looking Statements
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 U.S. Health Care Finance Administration (HCFA)
issued a decision that extends Medicare coverage to the Company's
HeartMate pneumatic LVAS. Several major nongovernment insurers have
already agreed to offer coverage for the pneumatic LVAS. Even though
reimbursement has been established by HCFA and by certain nongovernment
insurers, the amount of available reimbursement may change, and
reimbursement may be denied by an insurer under certain circumstances,
including if it is determined that a procedure was not the most
cost-effective treatment method, was experimental, or was used for an
unapproved indication. No assurance can be given that additional
third-party reimbursement for the pneumatic LVAS will be granted within a
reasonable period of time, or at all. The unavailability of third-party
reimbursement for procedures involving the Company's systems 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 the Company'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 its 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
30PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Forward-looking Statements
potential for LVAS, the Company believes that competition will intensify.
Further, the Company 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 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
31PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Forward-looking Statements
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 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
32PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Forward-looking Statements
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.
33PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Selected Financial Information
(In thousands except
per share amounts) 1996(a) 1995(b) 1994(c) 1993 1992
-----------------------------------------------------------------------
Statement of Income Data:
Revenues $ 63,962 $ 52,880 $ 39,051 $ 27,849 $ 21,789
Net income 10,030 11,135 5,687 2,336 1,896
Earnings per share .25 .27 .14 .06 .06
Balance Sheet Data:
Working capital $ 65,328 $ 64,610 $ 47,369 $ 19,048 $ 18,025
Total assets 124,978 124,285 109,988 74,225 70,669
Long-term obligations - 11,642 33,450 600 2,520
Common stock subject
to redemption - - - - 5,468
Shareholders'
investment 111,089 103,416 68,382 67,514 58,351
(a) Reflects conversion of $7,887,000 principal amount of
noninterest-bearing subordinated convertible obligations and the
December 1996 acquisition of Nimbus Medical, Inc.
(b) Reflects conversion of $21,358,000 principal amount of noninterest-
bearing subordinated convertible obligations.
(c) Reflects the January 1994 issuance of $33,000,000 principal amount
of noninterest-bearing subordinated convertible obligations due
1997.
34PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Common Stock Market Information
The following table shows the market range for the Company's common
stock based on reported sales prices on the American Stock Exchange
(symbol TCA) for 1996 and 1995. Prices have been restated to reflect a
three-for-two stock split, effected in the form of a 50% stock dividend,
distributed in May 1996.
1996 1995
----------------- -----------------
Quarter High Low High Low
-----------------------------------------------
First $55 1/3 $39 1/3 $19 5/6 $10 5/12
Second 55 3/8 39 7/12 26 1/12 18 5/6
Third 44 5/8 29 1/2 33 1/6 24 1/6
Fourth 38 1/4 23 3/8 51 1/2 28 5/12
As of January 24, 1997, the Company had 465 holders of record of its
common stock. This does not include holdings in street or nominee names.
The closing market price on the American Stock Exchange for the Company's
common stock on January 24, 1997, was $27 per share.
Shareholder Services
Shareholders of Thermo Cardiosystems Inc. who desire information
about the Company are invited to contact John N. Hatsopoulos, Chief
Financial Officer, Thermo Cardiosystems Inc., 81 Wyman Street, P.O. Box
9046, Waltham, Massachusetts 02254-9046, (617) 622-1111. A mailing list
is maintained to enable shareholders whose stock is held in street name,
and other interested individuals, to receive quarterly reports, annual
reports, and press releases as quickly as possible. Beginning in 1997,
quarterly distribution will be limited to the second quarter report only.
All quarterly reports and press releases are available through the
Internet from Thermo Electron's home page on the World Wide Web
(http://www.thermo.com/subsid/tca.html).
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent
and maintains shareholder activity records. The agent will respond to
questions on issuance of stock certificates, change of ownership, lost
stock certificates, and change of address. For these and similar matters,
please direct inquiries to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
35PAGE
<PAGE>
Thermo Cardiosystems Inc. 1996 Financial Statements
Dividend Policy
Except for a $.01 per share dividend distributed to partially offset
income tax liability relating to the Company's recapitalization in 1990,
the Company has never paid any cash dividends because its policy is to
use earnings to finance expansion and growth. The Company's Board of
Directors anticipates that for the foreseeable future no cash dividends
will be paid on the Company's common stock.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended
December 28, 1996, as filed with the Securities and Exchange Commission,
may be obtained without charge by writing to John N. Hatsopoulos, Chief
Financial Officer, Thermo Cardiosystems Inc., 81 Wyman Street, P.O. Box
9046, Waltham, Massachusetts 02254-9046.
Annual Meeting
The annual meeting of shareholders will be held on Monday, June 2,
1997, at 1:30 p.m., at the Hyatt Regency Hotel, Hilton Head, South
Carolina.
Exhibit 23
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the
inclusion herein of our reports for Thermo Cardiosystems Inc. dated May
2, 1997 (except with respect to the matter discussed in Note 12, as to
which the date is May 9, 1997) and for International Technidyne
Corporation dated February 5, 1997 (except with respect to the matter
discussed in Note 7, as to which the date is March 29, 1997) included in
or made a part of this Form 8-K/A.
Arthur Andersen LLP
Boston, Massachusetts
May 29, 1997
<TABLE> <S> <C>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
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