SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended January 2, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-10114
THERMO CARDIOSYSTEMS INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-3027040
(State or other jurisdiction of
corporation or organization) (I.R.S. Employer Identification No.)
470 Wildwood Street, P.O. Box 2697
Woburn, Massachusetts 01888-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
--------------------------- -----------------------------------------
Common Stock, $.10 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to the filing requirements for
at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of January 29, 1999, was approximately $131,977,000.
As of January 29, 1999, the Registrant had 38,404,326 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
January 2, 1999, are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 27, 1999, are incorporated by reference into
Part III.
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
Thermo Cardiosystems Inc. (the Company or the Registrant) develops,
manufactures, and markets products in two segments: Left Ventricular-assist
Systems (LVAS) and Other Medical Equipment. The LVAS is an implantable
heart-assist device that is designed to perform substantially all or part of the
pumping function of the left ventricle of the natural heart for patients
suffering from cardiovascular disease. The Company has developed two systems for
patients requiring cardiac support: an implantable pneumatic LVAS that is
powered by an external electrically driven air-pump, and an electric LVAS that
is driven by an implanted electric motor and powered by a lightweight battery
pack worn by the patient.
In October 1994, the Company announced that the U.S. Food and Drug
Administration (FDA) had granted approval for the commercial sale of the
air-driven LVAS for use as a bridge to transplant. The electric LVAS was granted
the same approval by the FDA in September 1998. With these approvals, the
air-driven and electric systems became available for sale to cardiac centers
throughout the United States. In August 1998, the Medical Devices Bureau of
Health Canada issued a Notice of Compliance for the Company's HeartMate LVAS,
permitting the sale of both the air-driven and electric versions throughout
Canada. Health Canada, through its Medical Devices Bureau, is the federal
department responsible for ensuring that the drugs, medical devices, and other
therapeutic products available in Canada are safe, effective, and of high
quality. The Company's air-driven LVAS received the European Conformity Mark (CE
Mark) required for commercial sale of medical devices in all European Community
countries in April 1994, and received the same marking for the electric system
in August 1995. In late 1995, the FDA approved the protocol for conducting
clinical trials of the electric LVAS as an alternative to medical therapy, and
in April 1996, the first patient was implanted with an electric LVAS under this
trial. In December 1997, the FDA approved the Company's proposal to broaden the
entrance criteria and increase the number of participating sites under this
trial. The electric LVAS is being used in Europe as both a bridge to transplant
and as an alternative to medical therapy.
The Company's Nimbus Medical Inc. subsidiary has been involved in
artificial heart technology for over 20 years and has carried out research in
two primary fields: ventricular-assist devices and total artificial hearts.
Nimbus was instrumental in developing the basic technology for high-speed rotary
blood pumps. Because of their smaller size, rotary blood pumps may potentially
be used to provide cardiac support in small adults and in children.
The Company's Other Medical Equipment segment consists of International
Technidyne Corporation. On May 2, 1997, the Company acquired International
Technidyne Corporation from Thermo Electron Corporation in exchange for
3,355,705 shares of the Company's common stock. International Technidyne is a
leading manufacturer of near-patient, whole-blood coagulation testing equipment
and related disposables, and also manufactures premium-quality, single-use
skin-incision devices.
The Company was incorporated in Massachusetts in 1988 as a wholly owned
subsidiary of Thermedics Inc., a publicly traded subsidiary of Thermo Electron,
and is the successor in interest to the assets and business of that company
relating to the research and development of implantable heart-assist systems.
This business was conducted by Thermedics from its formation in 1983, and prior
to that time as a division of Thermo Electron beginning in 1966. As of January
2, 1999, on a pro forma basis, assuming the completion of the transaction
discussed below, Thermedics owned 23,113,317 shares of the Company's common
stock, representing 60% of such stock outstanding. In addition to the Company's
products, Thermedics develops, manufactures, and markets electrochemistry and
microweighing products, product on-line quality-assurance systems, instruments
to test electronics and semiconductors and a range of power products, and
security devices. Thermedics is a 74%-owned subsidiary of Thermo Electron. As of
January 2, 1999, on a pro forma basis, assuming the completion of the
transaction discussed below, Thermo Electron owned 81,903 shares of the
Company's common stock, representing 0.2% of such stock outstanding. Thermo
Electron is a world leader in monitoring, analytical, and biomedical
instrumentation; biomedical products including heart-assist
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devices, respiratory-care equipment, and mammography systems; and paper
recycling and papermaking equipment. Thermo Electron also develops
alternative-energy systems and clean fuels, provides a range of services
including industrial outsourcing and environmental-liability management, and
conducts research and development in advanced imaging, laser communications, and
electronic information-management technologies.
Thermo Electron or Thermedics may purchase shares of the Company's common
stock from time to time in the open market or in negotiated transactions. On
February 5, 1998, Thermedics' Board of Directors voted to acquire from Thermo
Electron 3,355,705 shares of the Company's common stock in exchange for
4,880,533 shares of Thermedics common stock. Completion of this transaction is
subject to the approval of Thermedics' shareholders. Because Thermo Electron is
the majority shareholder and intends to vote its shares in favor of the
transaction, the approval is assured. See Notes 4 and 6 to Consolidated
Financial Statements in the Company's 1998* Annual Report to Shareholders for a
description of outstanding stock options and convertible obligations issued by
the Company.
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Annual Report on Form
10-K. For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects,"
"seeks," "estimates," and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause the results of the Company to differ materially from those indicated by
such forward-looking statements, including those detailed under the heading
"Forward-looking Statements" in the Registrant's 1998 Annual Report to
Shareholders, which statements are incorporated herein by reference.
(b) Financial Information About Segments
Financial information concerning the Company's segments is summarized in
Note 11 to Consolidated Financial Statements in the Registrant's 1998 Annual
Report to Shareholders, which information is incorporated herein by reference.
(c) Description of Business
(i) Principal Products and Services
Left Ventricular-assist Systems
The Company began its research and development work in cardiac-support
systems in 1966. Since that time, the Company and its predecessors have received
more than $37 million in funding from the U.S. government, principally from the
National Heart, Lung, and Blood Institute of the National Institutes of Health
(NIH), to support its research. This funding ended in 1992 as the Company moved
from development to clinical trials.
Federal regulations require that the Company obtain an investigational
device exemption (IDE) from the FDA to conduct testing in humans. Once
sufficient testing has been completed to demonstrate the safety and
effectiveness of the LVAS, the Company submits a premarket approval (PMA)
application to the FDA. PMA supplements must be submitted and approved for each
type and application of the Company's LVAS before being sold commercially (see
"Government Regulation").
- -------------------
* References to 1998, 1997, and 1996 herein are for the fiscal years ended
January 2, 1999, January 3, 1998, and December 28, 1996, respectively.
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The human heart contains two main pumping chambers: the left and right
ventricles. The right ventricle pumps blood into the lungs, where it is
oxygenated. The blood then flows into the left ventricle, where it is pumped
throughout the body. The Company's LVAS devices support substantially all or
part of the pumping function of the left ventricle.
The Company has developed two versions of its LVAS: an implantable
pneumatic, or air-driven, system that can be controlled by either a bedside or
portable console; and an electric system that features an internal electric
motor powered by an external battery pack worn by the patient. Both of the
Company's systems employ the Company's HeartMate(R) blood pump, and are designed
for long-term use. This pump is implanted just below the diaphragm in a position
that minimizes interference with normal circulation and other bodily functions.
An inlet tube is inserted into the apex of the left ventricle to drain blood
into the pump chamber. Blood is then forced out of the pump through an animal
tissue valve and back into the aorta. The HeartMate blood pump works with the
biological control mechanism of the natural heart to increase pumping capability
when required for activities such as climbing stairs. The Company's LVAS devices
are at various stages of regulatory approval.
This segment also includes the Company's Nimbus Medical Inc. subsidiary,
acquired in 1996. Nimbus was instrumental in developing the basic technology for
high-speed rotary blood pumps, which is the basis for the HeartMate II, the next
generation of the Company's LVAS. Because of its smaller size, the HeartMate II
may potentially be used to provide cardiac support in small adults and in
children.
Air-driven LVAS. In October 1994, the FDA approved the air-driven system
as a bridge to transplant for patients awaiting heart transplantation. This
approval allows the Company to sell the air-driven LVAS to any of the nearly 900
cardiac surgery centers in the United States. In April 1994, the Company
received the CE Mark for commercial sale of the air-driven LVAS in all European
Community countries. In August 1998, the Medical Devices Bureau of Health Canada
issued a Notice of Compliance for the Company's air-driven HeartMate LVAS,
permitting its sale throughout Canada. In the air-driven LVAS, the HeartMate
blood pump is coupled to an external console connected to the body by a tube.
The Company has also developed the HeartPak(TM), a lightweight portable console
that can be carried over the shoulder. The portable console received the CE Mark
for commercial sale in European Community countries in February 1995. In July
1995, the FDA approved the beginning of clinical trials of the HeartPak portable
pneumatic driver. The Company is currently evaluating the safety of the system
in the hospital, and the Company also plans to evaluate the system in the home
environment.
Electric LVAS. The Company has also developed an electric LVAS that uses
the HeartMate blood pump driven by an internal electric motor mounted in the
blood pump housing. The system is connected to its external battery pack by
wires that exit the body. Since the power source and control elements are worn
on a battery belt, the system allows the patient complete mobility. In August
1995, the electric LVAS received the CE Mark, allowing commercial sale of this
system in all European Community countries. The electric system is used as a
bridge to transplant in the United States, Europe, and other regions, and is
also implanted as an alternative to heart transplant in Europe and other
regions. In August 1998, the Medical Devices Bureau of Health Canada issued a
Notice of Compliance for the Company's electric HeartMate LVAS, permitting its
sale throughout Canada. In September 1998, the FDA approved the electric system
for commercial sale as a bridge to transplant for patients awaiting heart
transplantation.
In December 1995, the FDA approved the protocol for conducting clinical
trials of the electric LVAS as an alternative to medical therapy. The trial is
expected to compare the results of approved patients using the device to a
similar number using drug therapy. In December 1997, the FDA approved the
Company's proposal to broaden the entrance criteria and increase the number of
participating sites under this trial. The Company estimates that it will
complete this trial in two to three years; however, no assurance can be given
that the Company will complete this study in this time period or at all, or that
it will receive FDA approval after the trial or at all.
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Other Medical Equipment
The Company's Other Medical Equipment segment consists of International
Technidyne, which manufactures and supplies whole-blood coagulation testing
equipment and related disposables, as well as skin-incision devices.
Whole-blood coagulation testing equipment. International Technidyne's
HEMOCHRON(R) and HEMOCHRON Jr. Signature product lines offer whole-blood
coagulation systems for bedside anticoagulation management, coagulation
screening, and transfusion management. Each analyzes small blood samples, then
processes and quickly displays comprehensive patient hemostasis information.
Blood management of this type is essential for cardiopulmonary bypass surgery
and angioplasty. HEMOCHRON models are designed for use in a clinical setting at
the patient's bedside. They are lightweight, battery-operated, portable, and
provide data-management features.
The ProTime(R) Microcoagulation System is designed to allow testing for
patients who take the blood-thinning drug Warfarin (Coumadin). The system
consists of a hand-held instrument, a five-channel cuvette, and a
finger-incision device. These tests are performed in a doctor's office, clinic,
or by the patients themselves.
Skin-incision devices. International Technidyne manufactures a family of
single-use skin-incision devices for drawing blood from adults, children, and
infants. Each employs International Technidyne's patented skin-incision
technology to provide a standardized surgical incision. International
Technidyne's line of Surgicutt(R) products are used to perform bleeding-time
tests on adults, children, and newborns. International Technidyne's
Tenderlett(R) finger-incision products for blood sampling are available in
models suitable for adults, children, and infants and toddlers. Tenderfoot(R) is
a heel-incision device that is designed specifically for toddlers, infants, and
premature infants. These devices feature a permanently retractable blade to
ensure safety for the patient and healthcare worker.
Government Regulation
The Company's products and its research, development, and manufacturing
activities are subject to regulation by numerous governmental authorities in the
United States and other countries. In the United States, medical devices are
subject to rigorous FDA review. The Federal Food, Drug, and Cosmetic Act (the
FDC Act), the Public Health Services Act, and other federal statutes and
regulations govern or influence the testing, manufacture, safety, labeling,
storage, record keeping, reporting, approval, advertising, and promotion of
products such as those offered by the Company. Noncompliance with applicable
requirements can result in fines, recalls or seizures of products, total or
partial suspension of production, and/or criminal prosecution.
Pursuant to the Medical Device Amendments of 1976 (the 1976 Amendments) to
the FDC Act, and regulations promulgated thereunder, medical devices intended
for human use are classified into three categories, Classes I, II, and III,
which are subject to varying degrees of regulatory control.
The Company's LVAS is classified as a Class III medical device under the
FDC Act, the classification generally given to life-sustaining or implantable
devices. Class III devices require clinical testing to ensure safety and
effectiveness. The first stage of obtaining formal FDA market approval for a
Class III device is submission of an application for an IDE. The IDE application
must be supported by data, typically including the results of animal and
mechanical testing. If approved, the IDE permits clinical evaluations of
significant risk devices on human subjects under controlled experimental
conditions by designated qualified medical institutions. To obtain an IDE for a
Class III device, approval of the investigational plan for the applicable system
is required from the institutional review board within each participating
medical institution as well as from the FDA.
The second stage of formal FDA market approval is the PMA application,
which is submitted after sufficient data have been compiled under the IDE. The
FDA will grant market approval if it finds that the safety and effectiveness of
the product has been sufficiently demonstrated, and that the product complies
with all applicable performance and manufacturing standards. In addition, any
design change to an approved device must be approved by
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the FDA pursuant to a supplement to the applicable PMA application. The process
of submitting and obtaining FDA approval of a PMA application can take several
years or more, and is inherently uncertain. No assurance can be given that any
of the products under development by the Company currently or in the future,
will be approved by the FDA for commercial sale.
The Company is also subject to the FDA's Quality System (QS) regulations.
These regulations require that the Company manufacture its systems and maintain
its records in accordance with current Good Manufacturing Practice (GMP). The
FDA inspects the Company's facilities for compliance with GMP. If the Company is
found not to be in compliance, the FDA has broad powers to issue recalls, enjoin
future violations, and assess civil and criminal penalties against the Company,
its officers, and its employees. In addition to the QS regulations, the Company
must adhere to quality standards applicable to European Community member
countries and other countries where the Company sells its systems. The Company
is also subject to registration and inspection requirements of state regulatory
agencies.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. Whether or not
FDA approval has been obtained, approval of a device by a comparable regulatory
authority of a foreign country generally must be obtained prior to the
commencement of marketing in those countries. The time required to obtain such
approvals may be longer or shorter than that required for FDA approval.
No FDA approval is required to export a device that is legally marketed in
the United States by the exporting company. Unapproved Class III devices may
also be exported without FDA approval to any country if the device complies with
the law of that country and has valid marketing authorization in at least one of
the following: Australia, Canada, Israel, Japan, New Zealand, Switzerland, South
Africa, or the European Union or a country in the European Economic Area (listed
countries). Similarly, no FDA approval is required to export an investigational
device to a listed country as long as the proposed investigational use is in
accord with the importing country's laws. However, FDA approval is required to
export an unapproved Class III device that does not have marketing authorization
in one of the listed countries or to export an investigational device to a
nonlisted country. In such cases, the FDA must determine that exportation of the
unapproved or investigational device is not contrary to the public health and
safety and has the approval of the country to which it is intended for export.
A majority of International Technidyne's products are regulated by the FDA
as Class II medical devices. International Technidyne is also subject to
regulatory requirements in foreign countries in which it markets its devices.
Third-party Reimbursement
In November 1995, the U.S. Health Care Finance Administration (HCFA)
issued a decision that extended Medicare coverage to the Company's HeartMate
air-driven LVAS when used as a bridge to transplant. Subsequently, HCFA
broadened its decision to include all FDA-approved ventricular-assist systems
used as a bridge to transplant, which extended coverage to the Company's
electric LVAS. Part of the U.S. Department of Health and Human Services, HCFA is
responsible for establishing coverage and reimbursement policies for Medicare
and recommending guidelines for Medicaid. Many third-party payors review HCFA
recommendations to establish their own reimbursement policies. In addition, most
major nongovernment insurers have already agreed to offer coverage for the
air-driven LVAS, and many are revising their coverage policies to include the
electric LVAS device.
HCFA requires that Diagnosis Related Groups (DRGs) be used in determining
the amount of reimbursement for particular procedures. HCFA has classified LVAS
implantation in a DRG that includes several other cardiac-related procedures. In
October 1998, HCFA reclassified LVAS implementation to a slightly higher-paying
DRG. Additionally, the HCFA coding committee has established a detailed resource
code to be used when an implantable assist device, such as the HeartMate LVAS,
is employed. This will facilitate collection of data on medical costs as well as
resource information that may be used in establishing a DRG specific to
ventricular-assist systems.
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Sales of the Company's devices and systems will depend to a large degree
upon the availability of reimbursement for the implantation of the devices. Even
though reimbursement has been established by HCFA and by several nongovernment
insurers for the Company's LVAS devices, the amount of available reimbursement
may change, and reimbursement may be denied by an insurer under certain
circumstances, including determination that a procedure was not the most
cost-effective treatment method, was experimental, or was used for an unapproved
indication. No assurance can be given that additional third-party reimbursement
for the HeartMate LVAS will be granted within a reasonable period of time, or at
all, and the Company cannot predict what effect the future policies of
government entities and insurers will have on the sale of the Company's devices.
The unavailability of third-party reimbursement for procedures involving the
Company's devices and systems would have a material adverse effect on the
Company's business.
(ii) and (xi) New Products; Research and Development
The Company's business includes the research and development of new
products (See "Principal products and services"). Research and development
expenses for the Company were $10,929,000, $8,682,000, and $7,498,000 in 1998,
1997, and 1996, respectively, for internally sponsored research and development
programs.
(iii)Raw Materials
Certain raw materials used in the manufacture of the Company's LVAS are
available from only one or two suppliers. The Company is making efforts to
minimize the risks associated with sole sources and ensure long-term
availability, including qualifying alternative materials and components or
developing alternative sources for materials and components supplied by a single
source. Although the Company believes that it has adequate supplies of materials
and components to meet demand for the LVAS for the foreseeable future, no
assurance can be given that the Company will not experience shortages of certain
materials or components in the future that could delay shipments of the LVAS.
The cost to the Company to evaluate and test alternative materials and
components and the time necessary to obtain FDA approval for these materials or
components are inherently difficult to determine because both time and cost are
dependent on at least two factors: the similarity of the alternative materials
or components to the original materials or components, and the amount of
third-party testing that may have already been completed on alternative
materials or components. There can be no assurance that the substitution of
alternative materials or components will not cause delays in the Company's LVAS
development program or adversely affect the Company's ability to manufacture and
ship LVAS to meet demand.
(iv) Patents, Licenses, and Trademarks
The Company's policy is to protect its intellectual property rights
relating to its work on cardiac-support systems including, if appropriate,
applying for patents in the United States and foreign countries. Thermedics has
granted the Company a royalty-free license to use the Dermaport(R) access device
and Tecoflex(R) biomaterial in its LVAS. Although some of these patent rights
may provide the Company with a competitive advantage, the Company primarily
relies on its know-how and trade secrets developed over 30 years of research,
development, and fabrication of cardiac-assist devices. The Company has received
correspondence from a third party alleging that the textured surface of the LVAS
housing infringes certain patent rights of such third party. In general, an
owner of intellectual property can prevent others from using such property
without a license and is entitled to damages for unauthorized usage. The Company
has investigated the bases of the allegation and, based on the opinion of its
counsel and the Company's assessment of the proceedings in the United States
Patent and Trademark Office to date, it believes that if it were sued on these
bases, it would have meritorious defenses. Given the inherent uncertainties in
dispute resolution, however, if the Company were sued and the outcome were
unfavorable, the Company's results of operations or financial condition could be
materially adversely affected in amounts the Company cannot reasonably estimate.
The Company seeks to protect its proprietary information, but there can be no
assurance that others will neither develop independently the
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same or similar information nor obtain access to information that the Company
believes is proprietary. Moreover, there can be no assurance that others will
not claim that the Company's activities infringe their intellectual property
rights.
In August 1998, the Company obtained an exclusive license to incorporate
technology developed by Sulzer Electronics Ltd. into an advanced version of the
Company's LVAS, HeartMate III. Sulzer Electronics Ltd., based in Switzerland, is
a company within the Sulzer Corporation. HeartMate III is a miniature
centrifugal pump featuring a magnetically controlled system that has been
developed by Sulzer Electronics' Magnetics Group.
(v) Seasonal Influences
There are no significant seasonal influences on the Company's sales of its
products and services.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on the Company's working
capital.
(vii)Dependency on a Single Customer
Revenues from Allegiance Health Care accounted for 22% of the Company's
total revenues in 1998. The loss of this customer would have a material adverse
impact on the Company.
(viii) Backlog
<TABLE>
<CAPTION>
The Company's backlog of firm orders at year-end 1998 and 1997 was:
<S> <C> <C>
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Left Ventricular-assist Systems $1,678 $ 2,340
Other Medical Equipment 140 216
------ -------
$1,818 $ 2,556
====== =======
</TABLE>
Certain of these orders are cancelable by the customer upon payment of a
cancellation charge. The Company believes that approximately 65% of the backlog
at January 2, 1999, will be shipped or completed during 1999. The decrease in
1998 backlog compared with 1997 is primarily a result of the expiration of
several government contracts at Nimbus. The Company does not believe the size of
its backlog is necessarily indicative of intermediate or long-term trends in its
business.
(ix) Government Contracts
Less than 10% of the Company's total revenues in 1998, 1997, and 1996,
were derived from contracts or subcontracts with the federal government, which
are subject to renegotiation of profits or termination. The Company does not
have any knowledge of threatened or pending renegotiations or terminations.
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(x) Competition
Left Ventricular-assist Systems
The Company is aware of one other company, Baxter Healthcare Corporation,
that has received PMA approval from the FDA for an implantable LVAS similar to
the Company's. Also, the Company is aware of one other company, Thoratec
Laboratories Corporation, that has received commercial approval from the FDA for
its cardiac-assist device. This is an external device, positioned on the outside
of the patient's chest, and is intended for short-term use in the hospital
environment. In November, this company announced that it had received approval
from the FDA for its IDE for a portable power source. In addition, the Company
is aware that a total artificial heart is currently undergoing clinical trials.
The Company is aware that other cardiac-assist devices are in various stages of
development by other companies. The requirement of obtaining FDA approval for
commercial sale of an LVAS in the United States is a significant barrier to
entry into the United States market for these devices. There can be no
assurance, however, that FDA regulations will not change in the future, reducing
the time and testing required for others to obtain FDA approval for commercial
sale. In addition, other research groups and companies, some that have
significantly greater resources than those of the Company, are developing
cardiac systems using alternative technologies or concepts, one or more of which
might prove functionally equivalent to, or more suitable than, the Company's
systems. Among products that have been approved for commercial sale, the Company
competes primarily on the basis of performance, service capability, and price.
Competition in the market for medical devices is also significantly affected by
the reimbursement policies of government and private insurers. Any product for
which reimbursement is not available from such third-party payors will be at a
significant competitive disadvantage.
Other Medical Equipment
International Technidyne's principal competitor for the HEMOCHRON
coagulation monitoring instruments, used in the operating room and in cardiac
catheterization, is the HemoTec division of Medtronic. The Roche Group competes
with the ProTime with a blood coagulation monitor that is marketed to clinics
and also is used for patient self-testing. There are also several new
competitors that have recently entered the blood coagulation monitoring market.
ITC's products compete primarily on the basis of reputation, utility, and price.
The Company's skin-incision devices compete with products offered by a
number of companies, including Organon Teknika; Becton, Dickinson and Company;
and Owen-Mumford. The Company's skin-incision devices compete primarily on the
basis of safety, quality, and reputation.
(xii)Environmental Protection Regulations
The Company believes that compliance by the Company with federal, state,
and local environmental protection regulations will not have a material adverse
effect on its capital expenditures, earnings, or competitive position.
(xiii) Number of Employees
As of January 2, 1999, the Company had a total of 471 employees. None of
the Company's employees are represented by a labor union, and the Company
considers its relations with its employees to be good.
(d) Financial Information About Geographic Areas
Financial information about geographic areas is summarized in Note 11 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders, which information is incorporated herein by reference.
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<TABLE>
<CAPTION>
(e) Executive Officers of the Registrant
<S> <C> <C>
Name Age Present Title (Fiscal Year First Became Executive
Officer)
---------------------------- ------ -----------------------------------------------------
R. Michael Kleine 45 Chief Executive Officer (1998)
Victor L. Poirier 57 President (1988)
Betty A. Silverstein Russell 49 Senior Vice President (1989)
Timothy J. Krauskopf 37 Vice President, Regulatory Affairs (1995)
Theo Melas-Kyriazi 39 Chief Financial Officer (1998)
Paul F. Kelleher 56 Chief Accounting Officer (1988)
</TABLE>
Each executive officer serves until his or her successor is chosen or
appointed by the Board of Directors and qualified or until earlier resignation,
death, or removal. Prior to joining the Company in November 1998, Mr. Kleine was
the President and Chief Executive Officer of Sorin Biomedical from 1997 to 1998,
a manufacturer and distributor of cardiopulmonary equipment. Prior to his
employment at Sorin Biomedical, Mr. Kleine held a number of management positions
from 1994 to 1997 at Bird Medical Technologies Inc., a wholly owned subsidiary
of Thermo Electron, where he most recently served as President. Prior to his
employment at Bird Medical Technologies Inc., he seved as Vice President of
Sales, North America from 1993 to 1994 at Baxter International, Bentley Divison.
Mr. Poirier devotes substantially all of his time to the affairs of the Company,
but also devotes a portion of his time to the affairs of Thermedics. Ms.
Silverstein Russell has been a Senior Vice President of the Company since 1989.
Mr. Krauskopf was previously Director of Regulatory Affairs of the Company from
1993 to 1995, and prior to that, was Senior Regulatory Affairs Coordinator at
USCI division of C.R. Bard, Inc. from 1992 to 1993, and worked in clinical
affairs at Carbomedics, Inc. from 1989 to 1992. Mr. Melas-Kyriazi was appointed
Chief Financial Officer of the Company and Thermo Electron on January 1, 1999.
He joined Thermo Electron in 1986 as Assistant Treasurer, and became Treasurer
in 1988. He was named President and Chief Executive Officer of ThermoSpectra
Corporation, a public subsidiary of Thermo Instrument Systems Inc., in 1994. In
1998, he became Vice President of Corporate Strategy for Thermo Electron. Mr.
Melas-Kyriazi remains a Vice President of Thermo Electron. Mr. Kelleher has been
a Chief Accounting Officer of the Company and Thermo Electron since 1988.
Messrs. Melas-Kyriazi and Kelleher are full-time employees of Thermo Electron,
but devote such time to the affairs of the Company as the Company's needs
reasonably require.
Item 2. Properties
The Company believes that its facilities are in good condition and are
adequate to meet its current needs and that other suitable space is readily
available if any leases are not extended. The location and general character of
the Company's properties by industry segment as of January 2, 1999, are:
Left Ventricular-assist Systems
The Company subleases approximately 32,000 square feet of space in
Thermedics' corporate headquarters in Woburn, Massachusetts, pursuant to a
sublease expiring in 2004. The Company also subleases approximately 12,000
square feet of office and research facilities in Chelmsford, Massachusetts, from
Thermedics Detection Inc., a publicly traded, majority-owned subsidiary of
Thermedics, under a lease expiring in 1999, with an option to renew for an
additional five-year period. In addition, the Company occupies approximately
11,000 square feet of office and research facilities in Rancho Cordova,
California, pursuant to a lease expiring in 2002.
Other Medical Equipment
The Company owns approximately 66,000 square feet and leases approximately
24,000 square feet of office, manufacturing, and research facilities in Edison,
New Jersey, under a lease expiring in 2002. In addition, the Company leases
approximately 1,000 square feet of office space in the United Kingdom, under a
lease expiring in 1999.
10
<PAGE>
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information concerning the market and market price for the Registrant's
common stock, $.10 par value, and dividend policy is included under the sections
labeled "Common Stock Market Information" and "Dividend Policy" in the
Registrant's 1998 Annual Report to Shareholders and is incorporated herein by
reference.
Item 6. Selected Financial Data
The information required under this item is included under the sections
labeled "Selected Financial Information" and "Dividend Policy" in the
Registrant's 1998 Annual Report to Shareholders and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required under this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1998 Annual Report to Shareholders and is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required under this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1998 Annual Report to Shareholders and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements as of January 2, 1999,
and Supplementary Data are included in the Registrant's 1998 Annual Report to
Shareholders and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
11
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the caption
"Election of Directors" in the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year. The information
concerning delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated herein by reference from the material contained under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance" under the caption
"Stock Ownership" in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
The information required under this item is incorporated herein by
reference from the material contained under the caption "Executive Compensation"
in the Registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated herein by
reference from the material contained under the caption "Stock Ownership" in the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required under this item is incorporated herein by
reference from the material contained under the caption "Relationship with
Affiliates" in the Registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the close of the fiscal year.
12
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a,d) Financial Statements and Schedules
(1)The financial statements set forth in the list below are filed as part
of this Report.
(2)The financial statement schedule set forth in the list below is filed
as part of this Report.
(3)Exhibits filed herewith or incorporated herein by reference are set
forth in Item 14(c) below.
List of Financial Statements and Schedules Referenced in this Item 14
Information incorporated by reference from Exhibit 13 filed herewith:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Comprehensive Income and Shareholders'
Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules filed herewith:
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or in the notes thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 12, 1999 THERMO CARDIOSYSTEMS INC.
By: /s/ R. Michael Kleine
R. Michael Kleine
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of March 12, 1999.
Signature Title
By: /s/ R. Michael Kleine Chief Executive Officer and Director
R. Michael Kleine
By: /s/ Theo Melas-Kyriazi Chief Financial Officer
Theo Melas-Kyriazi
By: /s/ Paul F. Kelleher Chief Accounting Officer
Paul F. Kelleher
By: /s/ Walter J. Bornhorst Director
Walter J. Bornhorst
By: /s/ Elias P. Gyftopoulos Director
Elias P. Gyftopoulos
By: /s/ John T. Keiser Chairman of the Board and Director
John T. Keiser
By: /s/ Leonard Laster Director
Leonard Laster
By: /s/ Victor L. Poirier Director
Victor L. Poirier
By: /s/ Nicholas T. Zervas Director
Nicholas T. Zervas
14
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Cardiosystems Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Thermo Cardiosystems Inc.'s
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 11, 1999. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in Item 14 on page 13 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. The schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the consolidated financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
February 11, 1999
15
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
THERMO CARDIOSYSTEMS INC.
Valuation and Qualifying Accounts
(In thousands)
<S> <C> <C> <C> <C>
Description Balance at Provision Accounts Balance
Beginning Charged to Written at End
of Year Expense Off of Year
- --------------------------------------------------------- ------------- ------------ ----------- -----------
Allowance for Doubtful Accounts
Year Ended January 2, 1999 $ 833 $120 $ (2) $ 951
Year Ended January 3, 1998 $ 736 $120 $ (23) $ 833
Year Ended December 28, 1996 $ 571 $165 $ - $ 736
</TABLE>
16
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2 Agreement and Plan of Reorganization among Thermo Cardiosystems
Inc., ITC Acquisition Corp., Thermo Electron Corporation, ITC
Holdings Inc., and International Technidyne Corporation dated as
of May 2, 1997 (filed as Exhibit 2.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 29,
1997 [File No. 1-10114] and incorporated herein by reference).
3.1 Articles of Organization, as filed on August 18, 1988, and as
amended on October 26, 1988, January 6, 1989, and May 23, 1990
(filed as Exhibit 3(a) to the Registrant's Registration Statement
on Form S-1 [Reg. No. 33-34737] and incorporated herein by
reference) and as amended on October 25, 1993 (filed as Exhibit
3(c) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 2, 1993 [File No. 1-10114] and incorporated
herein by reference).
3.2 By-Laws of the Registrant (filed as Exhibit 3(b) to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-25144] and incorporated herein by reference).
4.1 Form of Guarantee Agreement between the Registrant and Thermo
Electron (filed as Exhibit 4(b) to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-25144] and incorporated
herein by reference).
4.2 Form of Amendment Number 1 to Guarantee Agreement between the
Registrant and Thermo Electron (filed as Exhibit 4(e) to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-34737] and incorporated herein by reference).
4.3 Fiscal Agency Agreement dated January 5, 1993, among Thermo
Electron, the Registrant, and Chemical Bank (filed as Exhibit
4.11 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 1, 1994 [File No. 1-10114] and
incorporated herein by reference).
4.4 Guarantee Reimbursement Agreement dated February 7, 1994, among
the Registrant, Thermo Voltek Corp., Thermedics, and Thermo
Electron (filed as Exhibit 4.4 to Thermedics' Annual Report on
Form 10-K for the fiscal year ended January 1, 1994 [File No.
1-9567] and incorporated herein by reference).
4.5 Fiscal Agency Agreement dated as of May 14, 1997, among the
Registrant, Thermo Electron Corporation, and Bankers Trust
Company as fiscal agent relating to $70 million principal amount
of 4 3/4% Convertible Subordinated Debentures due 2004 (filed as
Exhibit 4 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 28, 1997 [File No. 1-10114] and
incorporated herein by reference).
10.1 Amended and Restated Corporate Services Agreement dated January
3, 1993, between Thermo Electron and the Registrant (filed as
Exhibit 10(b) to the Registrant's Annual Report on Form 10-K for
the year ended January 2, 1993 [File No. 1-10114] and
incorporated herein by reference).
10.2 Sublease dated August 19, 1988, between the Registrant and
Thermedics, as amended by Amendment No. 1 dated January 1, 1990
(filed as Exhibit 10(c) to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 30, 1989 [File No.
1-10114] and incorporated herein by reference).
10.3 Form of Indemnification Agreement between the Registrant and its
officers and directors (filed as Exhibit 10(d) to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-25144] and incorporated herein by reference).
17
<PAGE>
Exhibit
Number Description of Exhibit
10.4 Thermo Electron Corporate Charter, as amended and restated
effective January 3, 1993 (filed as Exhibit 10(e) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 2, 1993 [File No. 1-10114] and incorporated herein by
reference).
10.5 Intellectual Property Cross-license Agreement between Thermedics
and the Registrant dated August 19, 1988 (filed as Exhibit 10(i)
to the Registrant's Registration Statement on Form S-1 [Reg. No.
33-25144] and incorporated herein by reference).
10.6 Agreement dated May 26, 1993, between The Polymer Technology
Group Incorporated and the Registrant (filed as Exhibit 10(cc) to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended July 3, 1993 [File No. 1-10114] and incorporated herein by
reference).
10.7 Amended and Restated Master Repurchase Agreement dated July 2,
1996, between the Registrant and Thermo Electron (filed as
Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 28, 1996 [File No. 1-10114] and
incorporated herein by reference).
10.8-10.17 Reserved.
10.18 Equity Incentive Plan of the Registrant (filed as Attachment A to
the Proxy Statement dated May 5, 1994, of the Registrant [File
No. 1-10114] and incorporated herein by reference). (Maximum
number of shares issuable is 1,750,000 shares, after adjustment
to reflect share increase approved in 1998.)
10.19 Deferred Compensation Plan for Directors of the Registrant
(filed as Exhibit 10(h) to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-25144] and incorporated
herein by reference).
10.20 Directors Stock Option Plan of the Registrant (filed as Exhibit
10.20 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 [File No. 1-10114] and
incorporated herein by reference).
10.21 Incentive Stock Option Plan of the Registrant (filed as Exhibit
10(f) to the Registrant's Registration Statement on Form S-1
[Reg. No. 33-25144] and incorporated herein by reference).
(Maximum number of shares issuable in the aggregate under this
plan and the Registrant's Nonqualified Stock Option Plan is
1,715,625 shares, after adjustment to reflect share increase
approved in 1992, 3-for-2 stock split effected in January 1990,
5-for-4 stock split effected in May 1990, 2-for-1 stock split
effected in November 1993, and 3-for-2 stock split effected in
May 1996.)
10.22 Nonqualified Stock Option Plan of the Registrant (filed as
Exhibit 10(g) to the Registrant's Registration Statement on Form
S-1 [Reg. No. 33-25144] and incorporated herein by reference).
(Maximum number of shares issuable in the aggregate under this
plan and the Registrant's Incentive Stock Option Plan is
1,715,625 shares, after adjustment to reflect share increase
approved in 1992, 3-for-2 stock split effected in January 1990,
5-for-4 stock split effected in May 1990, 2-for-1 stock split
effected in November 1993, and 3-for-2 stock split effected in
May 1996.)
In addition to the stock-based compensation plans of the
Registrant, the executive officers of the Registrant may be
granted awards under stock-based compensation plans of Thermo
Electron and Thermedics for services rendered to the Registrant
or to such affiliated corporations. The terms of such plans are
substantially the same as those of the Registrant's Equity
Incentive Plan.
18
<PAGE>
Exhibit
Number Description of Exhibit
10.23 Restated Stock Holdings Assistance Plan and Form of Promissory
Note (filed as Exhibit 10.23 to the Registrant's Annual Report on
Form 10-K for the year ended January 3, 1998 [File No. 1-10114]
and incorporated herein by reference).
10.24 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 18, 1997, between Thermo Electron
and the Registrant (filed as Exhibit 10.24 to the Registrant's
Annual Report on Form 10-K for the year ended January 3, 1998
[File No.
1-10114] and incorporated herein by reference).
10.25 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 18, 1997, between Thermedics and
the Registrant (filed as Exhibit 10.25 to the Registrant's Annual
Report on Form 10-K for the year ended January 3, 1998 [File No.
1-10114] and incorporated herein by reference).
13 Annual Report to Shareholders for the year ended January 2, 1999
(only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
99 Opinion of Cazenove Incorporated dated May 2, 1997 (filed as
Exhibit 99 to the Registrant's Current Report on Form 8-K dated
May 2, 1997 [File No. 1-10114] and incorporated herein by
reference).
Exhibit 13
Thermo Cardiosystems Inc.
Consolidated Financial Statements
1998
<PAGE>
<TABLE>
<CAPTION>
Thermo Cardiosystems Inc. 1998 Financial Statements
Consolidated Statement of Income
<S> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Revenues (Note 11) $66,848 $ 62,834 $63,962
------- -------- -------
Costs and Operating Expenses:
Cost of revenues 28,405 27,143 27,132
Selling, general, and administrative expenses (Note 7) 18,960 16,548 14,203
Research and development expenses 10,929 8,682 7,498
Write-off of acquired technology (Note 3) - - 4,909
------- -------- -------
58,294 52,373 53,742
------- -------- -------
Operating Income 8,554 10,461 10,220
Interest Income 7,448 6,476 5,297
Interest Expense (3,591) (2,244) (80)
Gain on Sale of Investments, Net (Note 2) 28 5 919
------- -------- -------
Income Before Provision for Income Taxes 12,439 14,698 16,356
Provision for Income Taxes (Note 5) 4,619 5,679 6,326
------- -------- -------
Net Income $ 7,820 $ 9,019 $10,030
======= ======== =======
Basic and Diluted Earnings per Share (Note 12) $ .20 $ .23 $ .25
======= ======== =======
Weighted Average Shares (Note 12)
Basic 38,810 39,482 39,924
======= ======== =======
Diluted 38,985 39,765 40,929
======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
Thermo Cardiosystems Inc. 1998 Financial Statements
Consolidated Balance Sheet
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ---------
Assets
Current Assets:
Cash and cash equivalents (includes $20,717 and $70,488 under repurchase $ 42,026 $ 71,158
agreement with affiliated company)
Short-term available-for-sale investments, at quoted market value 43,310 45,589
(amortized cost of $43,155 and $45,443; Note 2)
Accounts receivable, less allowances of $951 and $833 12,240 11,377
Inventories 11,937 14,519
Prepaid income taxes (Note 5) 2,629 3,962
Prepaid expenses and other current assets 411 342
-------- --------
112,553 146,947
-------- --------
Property, Plant, and Equipment, at Cost, Net 7,330 8,481
-------- --------
Long-term Available-for-sale Investments, at Quoted Market Value 47,259 12,665
-------- --------
(amortized cost of $47,227 and $12,655; Note 2)
Prepaid Income Taxes (Note 5) 3,195 2,749
-------- --------
Other Assets 2,026 2,366
-------- --------
$172,363 $173,208
======== ========
3
<PAGE>
Thermo Cardiosystems Inc. 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Liabilities and Shareholders' Investment
Current Liabilities:
Accounts payable $ 4,356 $ 2,291
Accrued payroll and employee benefits 3,126 2,749
Accrued warranty expenses 1,210 1,100
Accrued income taxes 1,468 912
Other accrued expenses 3,154 2,885
Due to parent company and Thermo Electron Corporation 335 308
-------- --------
13,649 10,245
-------- --------
Subordinated Convertible Debentures (Note 6) 70,000 70,000
-------- --------
Commitments and Contingency (Notes 7 and 8)
Shareholders' Investment (Notes 4 and 9):
Common stock, $.10 par value, 100,000,000 shares authorized; 40,522,021 4,052 4,052
and 40,520,521 shares issued
Capital in excess of par value 98,489 98,252
Retained earnings 39,916 32,096
Treasury stock at cost, 2,031,795 and 1,502,474 shares (53,892) (41,563)
Accumulated other comprehensive items (Note 13) 149 126
-------- --------
88,714 92,963
-------- --------
$172,363 $173,208
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Thermo Cardiosystems Inc. 1998 Financial Statements
Consolidated Statement of Cash Flows
<S> <C> <C> <C>
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ---------- ----------- ----------
Operating Activities
Net income $ 7,820 $ 9,019 $ 10,030
Adjustments to reconcile net income to net cash provided by
operating activities:
Write-off of acquired technology (Note 3) - - 4,909
Depreciation and amortization 2,987 2,571 2,182
Provision for losses on accounts receivable 120 120 165
Gain on sale of investments, net (28) (5) (919)
Deferred income tax expense (benefit) 887 (170) (1,838)
Other noncash items (69) (13) 60
Changes in current accounts, excluding the effects of acquisition:
Accounts receivable (981) 1,987 (4,017)
Inventories 2,584 (658) (3,976)
Other current assets (69) (14) 899
Accounts payable 2,065 (1,210) 458
Other current liabilities 1,550 2,396 2,586
--------- --------- ----------
Net cash provided by operating activities 16,866 14,023 10,539
--------- --------- ----------
Investing Activities
Acquisition - - (5,013)
Proceeds from sale and maturities of available-for-sale 181,519 103,390 89,615
investments
Purchases of available-for-sale investments (213,775) (81,043) (83,947)
Purchases of property, plant, and equipment (1,599) (2,333) (2,570)
Proceeds from sale of property, plant, and equipment - 107 -
Other 173 (70) (134)
--------- --------- ----------
Net cash provided by (used in) investing activities (33,682) 20,051 (2,049)
--------- --------- ----------
Financing Activities
Net proceeds from issuance of subordinated convertible debentures - 68,028 -
(Note 6)
Purchases of Company common stock (12,114) (32,957) (5,665)
Net proceeds from issuance of Company common stock 525 602 741
Payment of withholding taxes related to stock option exercises (729) (138) (1,283)
International Technidyne transfers of cash (to) from Thermo - 350 (5,567)
Electron --------- --------- ----------
Net cash provided by (used in) financing activities (12,318) 35,885 (11,774)
--------- --------- ----------
Exchange Rate Effect on Cash 2 42 -
--------- --------- ----------
Increase (Decrease) in Cash and Cash Equivalents (29,132) 70,001 (3,284)
Cash and Cash Equivalents at Beginning of Year 71,158 1,157 4,441
--------- --------- ----------
Cash and Cash Equivalents at End of Year $ 42,026 $ 71,158 $ 1,157
========= ========= ==========
5
<PAGE>
Thermo Cardiosystems Inc. 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ---------- ----------- ----------
Cash Paid For
Interest $ 3,325 $ 1,672 $ -
Income taxes $ 2,961 $ 2,961 $ 2,260
Noncash Activities
Fair value of assets of acquired company $ - $ - $ 5,068
Cash paid for acquired company - - (5,013)
--------- --------- ----------
Liabilities assumed of acquired company $ - $ - $ 55
========= ========= ==========
Conversions of subordinated obligations (Note 6) $ - $ 3,755 $ 7,887
========= ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Thermo Cardiosystems Inc. 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Comprehensive Income
Net Income $ 7,820 $ 9,019 $ 10,030
--------- ------- ---------
Other Comprehensive Items (Note 13):
Foreign currency translation adjustment 3 26 -
Unrealized gain (loss) on available-for-sale investments, net of 20 141 (618)
reclassification adjustment --------- ------- ---------
23 167 (618)
--------- ------- ---------
$ 7,843 $ 9,186 $ 9,412
========= ======= =========
Shareholders' Investment
Common Stock, $.10 Par Value:
Balance at beginning of year $ 4,052 $ 4,023 $ 2,636
Issuance of stock under employees' and directors' stock plans - 3 9
Conversions of subordinated convertible obligations (Note 6) - 26 54
Effect of three-for-two stock split - - 1,324
--------- ------- ---------
Balance at end of year 4,052 4,052 4,023
--------- ------- ---------
Capital in Excess of Par Value:
Balance at beginning of year 98,252 93,234 84,125
Issuance of stock under employees' and directors' stock plans 11 211 452
Tax benefit related to employees' and directors' stock plans 226 1,078 2,190
Conversions of subordinated convertible obligations (Note 6) - 3,729 7,791
Effect of three-for-two stock split - - (1,324)
--------- ------- ---------
Balance at end of year 98,489 98,252 93,234
--------- ------- ---------
Retained Earnings:
Balance at beginning of year 32,096 22,727 18,264
Net income 7,820 9,019 10,030
International Technidyne transfer of cash (to) from Thermo - 350 (5,567)
Electron --------- ------- ---------
Balance at end of year 39,916 32,096 22,727
--------- ------- ---------
Treasury Stock:
Balance at beginning of year (41,563) (8,854) (2,186)
Activity under employees' and directors' stock plans (215) 248 (1,003)
Purchases of Company common stock (12,114) (32,957) (5,665)
--------- ------- ---------
Balance at end of year (53,892) (41,563) (8,854)
--------- ------- ---------
Accumulated Other Comprehensive Items (Note 13):
Balance at beginning of year 126 (41) 577
Other comprehensive items 23 167 (618)
--------- ------- ---------
Balance at end of year 149 126 (41)
--------- ------- ---------
$ 88,714 $92,963 $ 111,089
========= ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
Thermo Cardiosystems Inc. 1998 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) operates in two business segments:
Left Ventricular-assist Systems (LVAS) and Other Medical Equipment. The Company
is a leader in the research, development, and manufacture of two implantable
LVAS: a pneumatic, or air-driven, system, and an electric version. 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. This segment includes Nimbus Medical
Inc., which is involved in the research and development of ventricular devices
and total artificial hearts. The Company's Other Medical Equipment segment
consists of International Technidyne Corporation, a leading manufacturer of
near-patient, whole-blood coagulation testing equipment and related disposables,
as well as premium-quality, single-use, skin-incision devices.
Relationship with Thermedics Inc. and Thermo Electron Corporation
The Company was incorporated in 1988 as a wholly owned subsidiary of
Thermedics Inc. Prior to that time, the business was conducted as a division of
Thermedics. At January 2, 1999, on a pro forma basis, assuming the completion of
the transaction discussed below, Thermedics owned 23,113,317 shares of the
Company's common stock, representing 60% of such stock outstanding. Thermedics
is a 74%-owned subsidiary of Thermo Electron Corporation. At January 2, 1999, on
a pro forma basis, assuming the completion of the transaction discussed below,
Thermo Electron owned 81,903 shares of the Company's common stock, representing
0.2% of such stock outstanding. On February 5, 1998, Thermedics' Board of
Directors voted to acquire from Thermo Electron 3,355,705 shares of the
Company's common stock, in exchange for 4,880,533 shares of Thermedics common
stock. Completion of this transaction is subject to the approval of Thermedics'
shareholders. Because Thermo Electron is the majority shareholder and intends to
vote its shares in favor of the transaction, the approval is assured.
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 1998, 1997, and 1996 are for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996, respectively. Fiscal years 1998
and 1996 each included 52 weeks; fiscal year 1997 included 53 weeks.
Revenue Recognition
The Company recognizes the majority of its revenues upon shipment of its
products. The Company provides a reserve for its estimate of warranty costs at
the time of shipment. Revenues and profits on long-term research and development
contracts are recognized using the percentage-of-completion method. Revenues
recorded under the percentage-of-completion method were $1,547,000 and
$1,991,000 in 1998 and 1997. The percentage-of-completion is determined by
relating the actual costs incurred to date to management's estimate of total
costs to be incurred on each contract. If a loss is indicated on any contract in
process, a provision is made currently for the entire loss. Contracts generally
provide for the billing of customers on a cost-plus-fixed-fee basis as costs are
incurred.
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 shareholders' investment.
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the year. Diluted earnings
per share have been computed assuming the conversion of convertible debentures
and the elimination of the related interest expense, and the exercise of stock
options, as well as their related income tax effects.
Cash and Cash Equivalents
At year-end 1998 and 1997, $20,717,000 and $70,488,000, respectively, of
the Company's cash equivalents were invested in a repurchase agreement with
Thermo Electron. Under this agreement, the Company in effect lends excess cash
to Thermo Electron, which Thermo Electron collateralizes with investments
principally consisting of corporate notes, U.S. government-agency securities,
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. At year-end
1998 and 1997, the Company's cash and cash equivalents also include investments
in commercial paper and short-term certificates of deposit of the Company's
foreign operations which have an original maturity of three months or less.
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:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- --------
Raw Materials $ 3,010 $ 3,420
Work in Process 6,139 8,381
Finished Goods 2,788 2,718
------- --------
$11,937 $ 14,519
======= ========
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property, as follows: buildings, 30 years; machinery and
equipment, three to seven years, and leasehold improvements, the shorter of the
term of the lease or the life of the asset. Property, plant, and equipment
consists of:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Land $ 341 $ 341
Buildings 2,445 2,445
Machinery, Equipment, and Leasehold Improvements 16,194 15,075
------- --------
18,980 17,861
Less: Accumulated Depreciation and Amortization 11,650 9,380
------- --------
$ 7,330 $ 8,481
======= ========
</TABLE>
Other Assets
Other assets in the accompanying balance sheet include the cost of
acquired patents and trademarks and deferred debt expense relating to the
Company's issuance of subordinated convertible debentures. These assets are
being amortized using the straight-line method over their estimated useful
lives, which range from 7 to 40 years. These assets were $1,889,000 and
$2,145,000, net of accumulated amortization of $663,000 and $358,000, at
year-end 1998 and 1997, respectively.
Stock Split
All share and per share information was restated in 1996 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." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment
(Note 13). Foreign currency transaction gains and losses are included in the
accompanying statement of income and are not material for each of the three
years presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
Certain amounts in 1997 and 1996 have been reclassified to conform to the
presentation in the 1998 financial statements.
10
<PAGE>
2. Available-for-sale Investments
The Company's debt 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 in the "Accumulated other comprehensive items" component of
shareholders' investment.
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 are:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(In thousands) Gross Gross
Market Cost Unrealized Unrealized
Value Basis Gains Losses
- -------------------------------------------------- ------------- ------------- ------------- --------------
1998
Government-agency Securities $88,425 $88,337 $ 97 $ (9)
Other 2,144 2,045 124 (25)
------- ------- ------- -------
$90,569 $90,382 $ 221 $ (34)
======= ======= ======= =======
1997
Government-agency Securities $55,391 $55,334 $ 66 $ (9)
Corporate Bonds 1,001 1,000 1 -
Other 1,862 1,764 172 (74)
------- ------- ------- -------
$58,254 $58,098 $ 239 $ (83)
======= ======= ======= =======
</TABLE>
Short- and long-term available-for-sale investments in the accompanying
1998 balance sheet include $42,475,000 with contractual maturities of one year
or less, $47,260,000 with contractual maturities of more than one year through
five years, $288,000 with contractual maturities of more than five years through
ten years, and $546,000 with contractual maturities of more than ten 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 $28,000 and $5,000 in 1998 and 1997, and gross
realized gains of $1,040,000 and gross realized losses of $121,000 in 1996,
relating to the sale of available-for-sale investments.
3. Acquisitions
In May 1997, the Company acquired International Technidyne from Thermo
Electron in exchange for the right to receive 3,355,705 shares of the Company's
common stock. International Technidyne is a leading manufacturer of
near-patient, whole-blood coagulation testing equipment and related disposables
and also manufactures premium-quality, single-use, skin-incision devices.
Following approval of the Company's shareholders in April 1998, the shares
for the purchase of International Technidyne were issued. 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, the shares are considered to be outstanding and the
results of International Technidyne are included in the accompanying financial
statements for all periods presented.
11
<PAGE>
3. Acquisitions (continued)
Revenues and net income, as previously reported by the separate entities
prior to the acquisition and as restated for the combined Company, are:
<TABLE>
<CAPTION>
<S> <C>
(In thousands) 1996
- ---------------------------------------------------------------------------------------- -------- ---------
Revenues:
Historical $ 29,970
International Technidyne 33,992
--------
$ 63,962
========
Net Income:
Historical $ 5,358
International Technidyne 4,672
--------
$ 10,030
========
</TABLE>
In December 1996, the Company acquired substantially all of the assets,
subject to certain liabilities, of Nimbus Medical, Inc., 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 maintains stock-based compensation plans for its key
employees, directors, and others. Two of these plans permit the grant of
nonqualified and incentive stock options. Two other plans permit the grant of a
variety of stock and stock-based awards as determined by the human resources
committee of the Company's Board of Directors (the Board Committee), including
restricted stock, stock options, stock bonus shares, or performance-based
shares. As of year-end 1998, only nonqualified stock options have been awarded
under these plans. 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 one- to
ten-year period, depending on the term of the option, which may range from five
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 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
12
<PAGE>
4. Employee Benefit Plans (continued)
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.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 719,000 shares at a weighted average exercise price of $27.99 per share
elected to participate in this exchange and, as a result, received options to
purchase 360,000 shares of Company common stock at $10.91 per share, which are
included in the 1998 grants in the table below. The other terms of the new
options are the same as the exchanged options except that the holders may not
sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.
A summary of the Company's stock option activity is:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- --------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 1,646 $20.41 1,130 $14.59 1,137 $9.84
Granted 761 12.25 783 27.22 189 32.90
Exercised (159) 4.17 (119) 4.95 (179) 3.67
Forfeited (61) 26.14 (148) 24.42 (17) 15.55
Canceled due to exchange (719) 27.99 - - - -
----- ----- -----
Options Outstanding, End of Year 1,468 $13.99 1,646 $20.41 1,130 $14.59
===== ====== ===== ====== ===== ======
Options Exercisable 1,464 $13.96 1,646 $20.41 1,130 $14.59
===== ====== ===== ====== ===== ======
Options Available for Grant 1,087 318 453
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
A summary of the status of the Company's stock options at January 2, 1999,
is:
<S> <C> <C> <C>
Options Outstanding
------------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- --------------------------------------------------- --------------- ------------------- --------------------
$ 4.43 - $15.57 1,227 6.1 years $11.27
15.58 - 26.70 55 4.0 years 23.54
26.71 - 37.84 173 7.9 years 27.61
37.85 - 48.97 13 2.5 years 47.72
-----
$ 4.43 - $48.97 1,468 6.2 years $13.99
======
</TABLE>
The information disclosed above for options outstanding at January 2,
1999, does not differ materially for options exercisable.
13
<PAGE>
4. Employee Benefit Plans (continued)
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 which employees can purchase shares of the Company's and
Thermo Electron's common stock. Prior to the 1998 program year, the applicable
shares of common stock could 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 were subject to a six-month resale restriction. Effective November 1,
1998, the applicable shares of common stock may be purchased at 85% of the lower
of the fair market value at the beginning or end of the period, and shares
purchased are subject to a one-year resale restriction. Shares are purchased
through payroll deductions of up to 10% of each participating employee's gross
wages. No shares were issued under this program during 1998. During 1997 and
1996, the Company issued 435 shares and 3,469 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 granted
after 1994 under the Company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method set forth
under SFAS No. 123, the effect on the Company's net income and earnings per
share would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Net Income:
As reported $ 7,820 $ 9,019 $10,030
Pro forma 5,911 7,658 9,495
Basic Earnings per Share:
As reported .20 .23 .25
Pro forma .15 .19 .24
Diluted Earnings per Share:
As reported .20 .23 .25
Pro forma .15 .19 .23
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 weighted average fair value per share of options granted was $5.61,
$15.92, and $18.23 in 1998, 1997, and 1996, respectively. 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:
1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Volatility 52% 51% 50%
Risk-free Interest Rate 4.6% 6.4% 6.2%
Expected Life of Options 4.4 years 6.6 years 6.6 years
</TABLE>
14
<PAGE>
4. Employee Benefit Plans (continued)
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that 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.
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 these plans, the Company
contributed and charged to expense $584,000, $410,000, and $459,000 in 1998,
1997, and 1996, respectively.
5. Income Taxes
<TABLE>
<CAPTION>
The components of income before provision for income taxes are:
<S> <C> <C> <C>
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Domestic $12,506 $ 14,808 $16,081
Foreign (67) (110) 275
------- -------- -------
$12,439 $ 14,698 $16,356
======= ======== =======
The components of the provision for income taxes are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Currently Payable:
Federal $ 3,450 $ 4,838 $ 7,440
State 282 1,011 724
------- -------- -------
3,732 5,849 8,164
------- -------- -------
Net Deferred (Prepaid):
Federal 754 (136) (2,115)
State 133 (34) 277
------- -------- -------
887 (170) (1,838)
------- -------- -------
$ 4,619 $ 5,679 $ 6,326
======= ======== =======
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 $226,000,
$1,078,000, and $2,190,000 of such benefits that have been allocated to capital
in excess of par value in 1998, 1997, and 1996, respectively.
15
<PAGE>
5. Income Taxes (continued)
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 35% in 1998 and 1997, and 34% in 1996 to income before provision for
income taxes due to:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Provision for Income Taxes at Statutory Rate $ 4,354 $ 5,144 $ 5,561
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 270 635 660
Foreign sales corporation benefit (110) (160) (111)
Other 105 60 216
------- -------- -------
$ 4,619 $ 5,679 $ 6,326
======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Short- and long-term prepaid income taxes in the accompanying balance
sheet consist of:
<S> <C> <C>
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ----------- -----------
Prepaid Income Taxes:
Inventory basis difference $ 956 $1,334
State tax loss and credit carryforwards 683 612
Depreciation and amortization 1,146 971
Accrued compensation 290 580
Allowance for doubtful accounts 286 211
Reserves and accruals 1,098 1,097
Write-off of acquired technology (Note 3) 1,560 1,834
Other, net (195) 72
------ ------
$5,824 $6,711
====== ======
</TABLE>
The Company has available $7,055,000 of state net operating loss
carryforwards which expire from 1999 through 2003 and $147,000 of state tax
credit carryforwards which expire from 2000 through 2012.
6. Subordinated Convertible Debentures
In May 1997, the Company issued and sold at par value $70,000,000
principal amount of 4 3/4% subordinated convertible debentures due 2004, for net
proceeds of $68,028,000. The debentures are convertible into shares of the
Company's common stock at a conversion price of $31.415 per share.
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. During 1997 and 1996, $3,755,000 and $7,887,000, respectively, of
principal amount of these subordinated convertible debentures were converted
into 259,078 shares and 544,168 shares, respectively of the Company's common
stock.
The Company's convertible debentures 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 debentures.
16
<PAGE>
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 currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In 1997 and 1996, the Company paid an amount equal to
1.0% of the Company's revenues. 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 $768,000, $963,000, and $958,000 in 1998, 1997, and 1996, respectively.
The fee is reviewed and adjusted annually by mutual agreement of the parties.
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. 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 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. The sublease expires
in February 2004. The accompanying statement of income includes expenses from
the sublease of $151,000, $170,000, and $116,000 in 1998, 1997, and 1996,
respectively.
The Company subleases office and research facilities from Thermedics
Detection Inc., a publicly traded majority-owned subsidiary of Thermedics. The
Company is charged rent, operating costs, real estate taxes, and utilities, on a
pro rata basis, based upon actual square footage occupied. The sublease expires
in December 1999. The accompanying statement of income includes expenses from
the sublease of $94,000 and $73,000 in 1998 and 1997, respectively.
The Company leased office space on a month-to-month basis from an
affiliate that is controlled by Thermo Electron. This agreement was terminated
during 1997. The accompanying statement of income includes expenses from this
lease of $9,000 and $8,000 in 1997 and 1996, respectively.
Related-party Purchases
Thermo Electron's Tecomet division provides metal fabrication services in
connection with the manufacture of the heart-assist devices sold by the Company.
The Company paid $1,717,000, $1,872,000, and $2,892,000 for these services in
1998, 1997, and 1996, respectively.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
17
<PAGE>
8. Commitment and Contingency
Operating Leases
In addition to the related-party operating leases described in Note 7, the
Company leases manufacturing, office, and research facilities under various
operating lease agreements. The accompanying statement of income includes
expense from these leases of $556,000, $551,000, and $188,000 in 1998, 1997, and
1996, respectively. Future minimum payments due under these leases at January 2,
1999, are $362,000 in 1999 through 2001, $368,000 in 2002, and $13,000 in 2003.
Total future minimum lease payments are $1,467,000.
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 and the Company's assessment of the proceedings in
the United States Patent and Trademark Office to date, believes that if the
Company were sued on these bases, it would have meritorious defenses. Given the
inherent uncertainties in dispute resolution, however, if the Company were sued
and the outcome were unfavorable, the Company's results of operations or
financial condition could be materially adversely affected in amounts the
Company cannot reasonably estimate.
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 January 2, 1999, the Company had reserved 2,712,191 unissued shares of
its common stock for possible issuance under stock-based compensation plans,
possible conversion of its outstanding subordinated convertible debentures, 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 subordinated
convertible debentures. The carrying amounts of these financial instruments,
with the exception of available-for-sale investments and subordinated
convertible debentures, approximate fair value due to their short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on quoted
market prices. See Note 2 for fair value information pertaining to these
financial instruments.
The fair value of the Company's subordinated convertible debentures, based
on quoted market prices, was $60,116,000 and $74,900,000 in 1998 and 1997,
respectively.
18
<PAGE>
11. Significant Customer, Export Sales, Concentrations of Risk, and Segment
Information
Significant Customer
Sales to one customer accounted for 22%, 24%, and 23% of the Company's
total revenues in 1998, 1997, and 1996, respectively.
Export Sales
Export revenues accounted for 15%, 17%, and 18% of the Company's total
revenues in 1998, 1997, and 1996, 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.
Segment Information
The Company organizes and manages its business by functional operating
entity. The Company's functional entities operate in two segments: Left
Ventricular-assist Systems and Other Medical Equipment. The Company's LVAS
segment researches, develops, and manufactures an implantable pneumatic LVAS
that is powered by an external electrically driven air-pump and an electric LVAS
that is driven by an implanted electric motor and powered by a lightweight
battery pack worn by the patient. The Company's Other Medical Equipment segment
develops, manufactures, and markets near-patient, whole-blood coagulation
testing equipment and related disposables and premium-quality, single-use,
skin-incision devices.
19
<PAGE>
11. Significant Customer, Export Sales, Concentrations of Risk, and Segment
Information (continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Business Segment Information
Revenues:
Left Ventricular-assist Systems $ 30,303 $ 26,960 $ 29,970
Other Medical Equipment 36,545 35,874 33,992
--------- -------- ---------
$ 66,848 $ 62,834 $ 63,962
========= ======== =========
Income Before Provision for Income Taxes:
Left Ventricular-assist Systems $ 344 $ 3,107 $ 3,250
Other Medical Equipment 8,978 8,317 7,928
Corporate (a) (768) (963) (958)
--------- -------- ---------
Total operating income 8,554 10,461 10,220
Interest and other income, net 3,885 4,237 6,136
--------- -------- ---------
$ 12,439 $ 14,698 $ 16,356
========= ======== =========
Total Assets:
Left Ventricular-assist Systems $ 23,735 $ 26,451 $ 25,724
Other Medical Equipment 16,638 18,015 17,857
Corporate (b) 131,990 128,742 81,397
--------- -------- ---------
$ 172,363 $173,208 $ 124,978
========= ======== =========
Depreciation and Amortization:
Left Ventricular-assist Systems $ 1,312 $ 1,032 $ 875
Other Medical Equipment 1,675 1,539 1,307
--------- --------- --------
$ 2,987 $ 2,571 $ 2,182
========= ======== =========
Capital Expenditures:
Left Ventricular-assist Systems $ 961 $ 1,386 $ 921
Other Medical Equipment 638 947 1,649
--------- -------- ---------
$ 1,599 $ 2,333 $ 2,570
========= ======== =========
(a) Primarily general and administrative expenses.
(b) Primarily cash, cash equivalents, and short- and long-term
available-for-sale investments.
20
<PAGE>
12. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Basic
Net Income $ 7,820 $ 9,019 $10,030
------- -------- -------
Weighted Average Shares 38,810 39,482 39,924
------- -------- -------
Basic Earnings per Share $ .20 $ .23 $ .25
======= ======== =======
Diluted
Net Income $ 7,820 $ 9,019 $10,030
------- -------- -------
Basic Weighted Average Shares 38,810 39,482 39,924
Effect of:
Convertible debentures - 2 559
Stock options 175 281 446
------- -------- -------
Weighted Average Shares, as Adjusted 38,985 39,765 40,929
------- -------- -------
Diluted Earnings per Share $ .20 $ .23 $ .25
======= ======== =======
The computation of diluted earnings per share excludes the effect of
assuming the exercise of certain outstanding stock options because the effect
would be antidilutive. As of January 2, 1999, there were 1,362,515 of such
options outstanding, with exercise prices ranging from $10.75 to $48.97 per
share.
In addition, the computation of diluted earnings per share for 1998 and
1997 excludes the effect of assuming the conversion of $70,000,000 principal
amount of 4 3/4% subordinated convertible debentures, convertible at $31.415 per
share, because the effect would be antidilutive.
13. Comprehensive Income
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"other comprehensive items, net," which represents certain amounts that are
reported as components of shareholders' investment in the accompanying balance
sheet, including foreign currency translation adjustments and unrealized net of
tax gains and losses on available-for-sale investments.
Accumulated other comprehensive items in the accompanying
balance sheet consist of:
(In thousands) 1998 1997
- -------------------------------------------------------------------------- ---------------- ------- -------
Cumulative Translation Adjustment $ 29 $ 26
Net Unrealized Gain on Available-for-sale Investments 120 100
------ ------
$ 149 $ 126
====== ======
21
<PAGE>
13. Comprehensive Income (continued)
Unrealized gains (losses) on available-for-sale investments, a component
of other comprehensive items, net, in the accompanying statement of
comprehensive income and shareholders' investment, includes:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Unrealized Holding Gains (Losses) Arising During the Year (net $ 38 $ 144 $ (30)
of income tax (provision) benefit of $(21), $(82), and $5)
Reclassification Adjustment for Gains Included in Net Income (18) (3) (588)
(net of income tax provision of $10, $2, and $331) ------- ------- -------
Net Unrealized Gains (Losses) (net of income tax (provision) $ 20 $ 141 $ (618)
benefit of $(11), $(80), and $336) ======= ======= =======
14. Unaudited Quarterly Information
(In thousands except per share amounts)
1998 First Second Third Fourth
- ---------------------------------------------------------------- --------- ---------- ---------- ----------
Revenues $16,485 $16,133 $15,798 $18,432
Gross Profit 9,576 9,266 8,738 10,863
Net Income 2,308 1,850 1,438 2,224
Basic and Diluted Earnings per Share .06 .05 .04 .06
1997 First Second Third Fourth
- --------------------------------------------------------------- --------- ---------- ---------- ----------
Revenues $14,902 $15,931 $14,727 $17,274
Gross Profit 7,973 8,703 8,674 10,341
Net Income 1,875 2,222 2,228 2,694
Basic and Diluted Earnings per Share .05 .06 .06 .07
</TABLE>
22
<PAGE>
Thermo Cardiosystems Inc. 1998 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 60%-owned subsidiary of
Thermedics Inc.) and subsidiaries as of January 2, 1999, and January 3, 1998,
and the related consolidated statements of income, cash flows, and comprehensive
income and shareholders' investment for each of the three years in the period
ended January 2, 1999. 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 consolidated 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 subsidiaries as of January 2, 1999, and January 3, 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended January 2, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 11, 1999
23
<PAGE>
Thermo Cardiosystems Inc. 1998 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 heading "Forward-looking Statements."
Overview
The Company's businesses operate in two segments: Left Ventricular-assist
Systems (LVAS) and Other Medical Equipment. The LVAS segment researches,
develops, and manufactures two implantable LVAS: a pneumatic, or air-driven,
system, and an electric version. 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. This
segment includes the Company's Nimbus Medical Inc. subsidiary, acquired in 1996.
Nimbus has been involved in artificial heart technology for over 20 years and
has carried out research in two primary fields: ventricular-assist devices and
total artificial hearts. Nimbus was instrumental in developing the basic
technology for high-speed rotary blood pumps, which is the basis for the
HeartMate II, the next generation of the Company's LVAS. Because of its smaller
size, the HeartMate II may potentially be used to provide cardiac support in
small adults and in children.
The Other Medical Equipment segment consists of International Technidyne
Corporation, a leading manufacturer of near-patient, whole-blood coagulation
testing equipment and related disposables, as well as premium-quality,
single-use, skin-incision devices.
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 was
obtained, only the direct and indirect costs of the LVAS could be recovered,
which were 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 1994. In September 1998, the FDA granted approval for commercial sale in the
U.S. of the electric LVAS as a bridge to transplant, and as a result the Company
has become eligible to earn a profit on the sale of that device.
The profitability of the LVAS segment decreased in 1998 due to higher
marketing and selling expenses in anticipation of the September 1998 FDA
approval, as well as increased expenditures for research and development
discussed in the results of operations below. Following FDA approval of the
electric LVAS, the Company increased the price of the electric LVAS by
approximately 13%, effective November 1998.
Results of Operations
1998 Compared With 1997
Total revenues increased to $66.8 million in 1998 from $62.8 million in
1997. LVAS segment revenues increased to $30.3 million in 1998 from $27.0
million in 1997, primarily due to an increase in revenues from the Company's
electric LVAS as a result of FDA approval, which was granted in September 1998.
To a lesser extent, revenues increased due to price increases of the electric
LVAS and an increase in sales of the air-driven LVAS. These increases were
offset in part by a decrease in revenues at Nimbus due to the expiration of
several government research and development contracts. For the foreseeable
future, the Company expects that Nimbus will focus on technological research and
will no longer earn revenues from government contracts.
24
<PAGE>
1998 Compared With 1997 (continued)
Other Medical Equipment segment revenues increased to $36.5 million in
1998 from $35.9 million in 1997, primarily due to an increase in demand for the
Company's skin-incision devices, offset in part by a decrease in demand for the
Company's whole-blood coagulation testing equipment.
The gross profit margin increased to 58% in 1998 from 57% in 1997. The
gross profit margin for the Other Medical Equipment segment increased primarily
due to manufacturing efficiencies and cost reduction efforts implemented in
1998. The gross profit margin for the LVAS segment was unchanged.
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in 1998 from 26% in 1997, primarily at the LVAS segment, due to
an increase in sales and marketing staff and, to a lesser extent, higher
advertising costs in anticipation of increased electric LVAS sales following FDA
approval, which was granted in September 1998. The Company plans to continue
funding these efforts through 1999, which may adversely affect its operating
results.
Research and development expenses increased to $10.9 million in 1998 from
$8.7 million in 1997. This increase is primarily due to expenses associated with
a clinical trial being conducted by the LVAS segment to evaluate the electric
LVAS as an alternative to medical therapy, which commenced in December 1997, as
well as expenses associated with the development of its HeartMate II system. The
Company expects research and development expenses to continue to increase over
the life of the clinical trial, estimated at two to three years. There can be no
assurance that the Company will complete this study.
Interest income increased to $7.4 million in 1998 from $6.5 million in
1997, primarily as a result of higher average invested balances resulting from
the issuance of $70.0 million principal amount of 4 3/4% subordinated
convertible debentures in May 1997 (Note 6).
Interest expense increased to $3.6 million in 1998 from $2.2 million in
1997, primarily due to the inclusion of a full year of interest expense as a
result of the issuance of the 4 3/4% subordinated convertible debentures.
The effective tax rates were 37% and 39% in 1998 and 1997, respectively.
The effective tax rates exceeded the statutory federal income tax rate primarily
due to the impact of state income taxes. The effective tax rate decreased in
1998 due to a decrease in income allocated to state tax jurisdictions with
higher tax rates.
1997 Compared With 1996
Total revenues decreased to $62.8 million in 1997 from $64.0 million in
1996. LVAS segment revenues decreased to $27.0 million in 1997 from $30.0
million in 1996, primarily due to a decrease in revenues of $6.6 million from
the Company's air-driven LVAS, offset in part by a $1.9 million increase in
revenues from the Company's electric LVAS and the inclusion of $2.0 million in
revenues from Nimbus, acquired in December 1996.
Other Medical Equipment segment revenues increased to $35.9 million in
1997 from $34.0 million in 1996, primarily due to increased demand for the
Company's skin-incision devices.
The gross profit margin decreased to 57% in 1997 from 58% in 1996. The
gross profit margin for the LVAS segment decreased primarily due to a shift in
sales mix to the lower-margin electric LVAS and, to a lesser extent, increased
warranty costs due to a Company-initiated modification of certain of its LVAS,
completed in the first quarter of 1997. The Company announced an overall price
increase of approximately 10% in the electric LVAS product line, effective June
28, 1997, to help offset increased production costs. This decrease was offset in
part by an increase in the gross profit margin for the Other Medical Equipment
segment primarily due to improved margins at International Technidyne, primarily
due to manufacturing efficiencies.
Selling, general, and administrative expenses as a percentage of revenues
increased to 26% in 1997 from 22% in 1996, primarily due to higher marketing
expenses as a result of an increase in the Company's LVAS sales force and, to a
lesser extent, an increase in promotional expenses at International Technidyne.
25
<PAGE>
1997 Compared With 1996 (continued)
Research and development expenses increased to $8.7 million in 1997 from
$7.5 million in 1996, primarily due to a clinical trial being conducted by the
Company to evaluate the electric LVAS as an alternative to medical therapy and,
to a lesser extent, the inclusion of expenditures at Nimbus, acquired in
December 1996.
In connection with the December 1996 acquisition of the Nimbus business,
the Company wrote off $4.9 million in 1996, which represents the portion of the
purchase price allocated to technology in development based on estimated
replacement cost (Note 3).
Interest income increased to $6.5 million in 1997 from $5.3 million in
1996, primarily as a result of higher average invested balances resulting from
the issuance of $70.0 million principal amount of 4 3/4% subordinated
convertible debentures in May 1997 (Note 6).
Interest expense increased to $2.2 million in 1997 from $0.1 million in
1996, primarily as a result of the issuance of the 4 3/4% subordinated
convertible debentures.
The Company recorded a gain on sale of investments, net, of $5,000 in
1997, compared with $0.9 million in 1996.
The effective tax rates were 39% in both 1997 and 1996. The effective tax
rates exceeded the statutory federal income tax rate primarily due to the impact
of state income taxes.
Liquidity and Capital Resources
Consolidated working capital was $98.9 million at January 2, 1999,
compared with $136.7 million at January 3, 1998. Cash, cash equivalents, and
short- and long-term available-for-sale investments were $132.6 at January 2,
1999, compared with $129.4 million at January 3, 1998. During 1998, $16.9
million of cash was provided by operating activities. Cash of $3.6 million was
provided by an increase in accounts payable and other current liabilities,
primarily due to the timing of payments. Cash of $2.6 million was provided by a
decrease in inventories, primarily due to improved inventory management.
Excluding available-for-sale investment activity, the Company's investing
activities primarily consisted of capital additions. During 1998, the Company
expended $1.6 million on purchases of property, plant, and equipment. During
1999, the Company expects to make capital expenditures of approximately $3.5
million, principally for manufacturing and tooling equipment and leasehold
improvements.
During 1998, the Company's financing activities used $12.3 million of
cash. Through a series of transactions commencing in June 1997, the Company's
Board of Directors authorized the repurchase, through August 14, 1999, of up to
$40.0 million of its own common stock in the open market, or in negotiated
transactions. Any repurchases under the Company's authorizations are funded from
working capital. Through January 2, 1999, the Company had expended $26.1 million
under these authorizations, of which $12.1 million was paid during 1998.
The Company believes that it has adequate resources to meet its financial
needs for the foreseeable future.
26
<PAGE>
Market Risk
The Company is exposed to market risk from changes in interest rates and
equity prices, which could affect its future results of operations and financial
condition. The Company manages its exposure to these risks through its regular
operating and financing activities.
Interest Rates
The Company's available for sale investments and subordinated convertible
debentures are sensitive to changes in interest rates. Interest rate changes
would result in a change in the fair value of these financial instruments due to
the difference between the market interest rate and the rate at the date of
purchase of the financial instrument. A 10% decrease in year-end 1998 market
interest rates would result in a negative impact of $6.2 million on the net fair
value of the Company's interest-sensitive financial instruments.
Equity Prices
The Company's subordinated convertible debentures are sensitive to
fluctuations in the price of the Company's common stock into which the
debentures are convertible. Changes in equity prices would result in changes in
the fair value of the Company's subordinated convertible debentures due to the
difference between the current market price and the market price at the date of
issuance of the debentures. A 10% increase in the year-end 1998 market equity
prices would result in a negative impact of $1.6 million on the net fair value
of the Company's subordinated convertible debentures.
Year 2000
The Company continues to assess the potential impact of the year 2000 on
the Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading significant
information-technology systems and facilities; (ii) testing and developing
upgrades, if necessary, for the Company's current products and certain
discontinued products; (iii) contacting key suppliers and vendors to determine
their year 2000 compliance status; and (iv) developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information-technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information-technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical facilities. The Company is currently in phase two of its
program, during which any noncompliant systems or facilities that were
identified during phase one are prioritized and remediated. The Company is
currently upgrading or replacing such noncompliant information-technology
systems, and this process was approximately 70% complete as of January 2, 1999.
In many cases, such upgrades or replacements are being made in the ordinary
course of business, without accelerating previously scheduled upgrades or
replacements. The Company expects that all of its material
information-technology systems and critical facilities will be year 2000
compliant by October, 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells or for which the Company continues to provide technical support. The
Company believes that substantially all of these material products are year 2000
compliant. The Company has evaluated and identified those products which may not
be year 2000 compliant and has focused corrective efforts on products that are
still under warranty or early in their expected life and/or are subject to FDA
considerations due to safety risks. The Company is offering upgrades where
reasonably practicable and where deemed
27
<PAGE>
Year 2000 (continued)
necessary. However, as many of the Company's products are complex, interact with
or incorporate third-party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 2000 problems with its current products.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. The Company has started to follow-up and
monitor the year 2000 compliance progress of significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. The Company has not completed the majority of its
assessment of third-party risk, but expects to be substantially completed by
October, 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
relating to products and facilities were funded from working capital. All
internal costs and related external costs, other than capital additions, related
to year 2000 remediation have been and will continue to be expensed as incurred.
The Company does not track internal costs incurred for its year 2000 compliance
project. Such costs are principally the related payroll costs for its
information-systems group.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
material suppliers or vendors experience business disruptions due to year 2000
issues, the Company might also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
28
<PAGE>
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 1999 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. In
September 1998, the Company's electric LVAS received premarket approval by the
FDA for use as a bridge to transplant. The electric LVAS received the CE Mark in
August 1995 for use as a bridge to transplant and as an alternative to
transplant. The Company's electric LVAS is currently in use in clinical trials
in the U.S. testing the safety and efficacy of the device as an alternative to
transplant.
Significant 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 as an alternative to
transplant, 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 likely 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. In addition, the Company's coagulation testing
equipment can cost several thousand dollars per instrument. Without the
financial support of the government or third-party insurers, the market for the
Company's devices and equipment will be limited. Medicare and Medicaid limit the
reimbursement that U.S. hospitals receive for treating certain medical
conditions by setting maximum fees that can be charged to their patients. Under
these systems, hospitals are paid a fixed amount for treating each patient with
a particular diagnosis. Private insurers also have initiated reimbursement
systems designed to slow the escalation of healthcare costs. In addition, the
federal government is considering, and certain state governments are considering
or have adopted, new healthcare policies intended to curb rising costs. Such
policies include rationing of government-funded reimbursement for healthcare
services and imposing price controls upon providers of medical products and
services. These policies could have the effect of limiting the availability of
reimbursement for procedures, such as the implantation of an LVAS, that involve
prolonged treatment of critically ill patients.
In November 1995, the U.S. Health Care Finance Administration (HCFA)
issued a decision that extends Medicare coverage to LVAS devices used as a
bridge to heart transplant, which fulfill certain Medicare coverage criteria.
This decision, updated in April 1997, has applied to the Company's pneumatic
LVAS and has been extended to the electric LVAS. Several major non-government
insurers have also agreed to offer coverage for the pneumatic LVAS and the
electric LVAS; however, no assurance can be given that additional third-party
payors will cover the electric LVAS immediately because of the device's intended
out-patient use. Even though reimbursement has been established by HCFA and by
certain non-government insurers for LVAS devices, the Medicare coverage criteria
could be amended or revised by HCFA, 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-
29
<PAGE>
effective treatment method, was experimental, or was used for an unapproved
indication. No assurance can be given that additional third-party reimbursement
for the LVAS devices 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, Competition, and New Products. The Company is aware
of one other company that has received a premarket approval from the FDA for an
implantable LVAS that competes with the Company's LVAS. Also, there are many
organizations engaged in the development of various types of cardiac support
systems, including a total artificial heart. As other organizations realize the
commercial potential for LVAS, the Company believes that competition will
intensify. Further, 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.
Further, in September 1998, the Company's electric LVAS received FDA
approval for use as a bridge to transplant. That device is currently in use in
clinical trials in the U.S. to test the safety and efficacy of the device as an
alternative to transplant. In addition, the Company is currently devoting
significant resources to the development of new products, including its
Heartmate II and Heartmate III. Because the electric LVAS is new to the market,
there can be no assurance that difficulties with the product will not arise, or
if problems do arise that the Company can adequately correct them. Also, there
can be no assurance that the Company will successfully complete the development
of new products in a timely basis or at all. Any failure to complete development
of new products or the failure of the performance of the Company's current
products could have a material adverse affect on the Company's business and
results of operations.
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:
30
<PAGE>
the similarity of the alternative material or component to the original material
or component, and the amount of third-party testing that may have already been
completed on alternative materials or components. There can be no assurance that
the substitution of alternative materials or components would not cause delays
in the Company's LVAS development programs or adversely affect the Company's
ability to manufacture and ship LVAS to meet demand.
Intellectual Property Rights. The Company relies principally upon trade
secret protection and, to a lesser extent, patents to protect its proprietary
rights with respect to its LVAS and its reagents, however, with respect to its
coagulation equipment and skin-incision products, the Company relies principally
on patents to protect its proprietary rights. No assurance can be given that the
Company will be able to effectively protect its patents and trade secrets, or
that competitors will not independently develop equivalent technology or design
around the Company's patents. The Company's competitive position could be
adversely affected if the Company is unable to protect adequately its
proprietary rights. In addition, there can be no assurance that third parties
will not assert claims against the Company that the Company infringes the
intellectual property rights of such parties. The Company could incur
substantial costs and diversion of management resources with respect to the
defense of any such claims, which could have a material adverse effect on the
Company's business, financial condition, and results of operations. Furthermore,
parties making such claims could secure a judgment awarding substantial damages,
as well as injunctive or other equitable relief, which could effectively block
the Company's ability to make, use, sell, distribute, or market its products and
services in the U.S. or abroad. In the event that a claim relating to
intellectual property is asserted against the Company, the Company may seek
licenses to such intellectual property. There can be no assurance, however, that
such licenses could be obtained on commercially reasonable terms, if at all. The
failure to obtain the necessary licenses or other rights could preclude the
sale, manufacture, or distribution of the Company's products and, therefore,
could have a material adverse effect on the Company's business, financial
condition, and results of operations. The Company has received correspondence
from a third party alleging that the textured surface of the LVAS infringes
certain patent rights of such third party. The Company believes that it has
meritorious defenses to the claims of the third party. However, no assurance can
be given that the Company would be successful if litigation was commenced or
that others will not claim that the Company infringes their intellectual
property rights.
Limited Manufacturing and Marketing Experience. Prior to FDA approval of
commercial sale of the pneumatic LVAS, the Company's LVAS business was engaged
only in research and development. 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 volume, 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 LVAS 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 LVAS 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. This risk may
increase as the number of LVAS implants increase and as the number of centers
implanting the device expands. 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 1998, sales
originating outside the U.S. and U.S. export sales accounted for approximately
16% of the Company's total revenues. 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
31
<PAGE>
through a foreign country's legal system; foreign customers may have longer
payment cycles; foreign countries may impose additional withholding taxes or
otherwise tax the Company's foreign income, impose tariffs or adopt other
restrictions on foreign trade; U.S. export licenses may be difficult to obtain;
the protection of intellectual property in foreign countries may be more
difficult to enforce; and fluctuations in exchange rates may affect product
demand and may adversely affect the profitability in U.S. dollars of products
and services provided by the Company in foreign markets where payment for the
Company's products and services is made in the local currency. There can be no
assurance that any of these factors will not have a material effect on the
Company's business and results of operations.
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 problems will
not have a material adverse impact on the Company's business, operations or
financial condition. While the Company expects that upgrades to its internal
business systems will be completed in a timely fashion, there can be no
assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
material suppliers, or vendors experience business disruptions due to year 2000
issues, the Company might also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
32
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Information
<S> <C> <C> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 (a) 1996 (b) 1995 (c) 1994
- -------------------------------------------------- ---------- ----------- ---------- ---------- ----------
Statement of Income Data
Revenues $ 66,848 $ 62,834 $ 63,962 $ 52,880 $ 39,051
Net Income 7,820 9,019 10,030 11,135 5,687
Earnings per Share:
Basic .20 .23 .25 .29 .15
Diluted .20 .23 .25 .27 .14
Balance Sheet Data
Working Capital $ 98,904 $ 136,702 $ 65,328 $ 64,610 $ 47,369
Total Assets 172,363 173,208 124,978 124,285 109,988
Long-term Obligations 70,000 70,000 - 11,642 33,450
Shareholders' Investment 88,714 92,963 111,089 103,416 68,382
</TABLE>
(a) Reflects the May 1997 issuance of $70,000,000 principal amount of 4 3/4%
subordinated convertible debentures due 2004 and conversion of $3,755,000
principal amount of noninterest-bearing subordinated convertible
obligations.
(b) Reflects conversion of $7,887,000 principal amount of noninterest-bearing
subordinated convertible obligations.
(c) Reflects conversion of $21,358,000 principal amount of noninterest-bearing
subordinated convertible obligations.
33
<PAGE>
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol TCA. The following table sets forth the high and low sale prices of
the Company's common stock for 1998 and 1997, as reported in the consolidated
transaction reporting system.
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
First $27 1/2 $20 7/8 $32 $20 1/2
Second 28 21 3/8 28 7/8 19
Third 23 1/16 14 1/2 27 1/4 19 1/8
Fourth 15 3/4 7 1/2 28 7/8 19
</TABLE>
As of January 29, 1999, the Company had 459 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 29, 1999, was $8 3/4 per share.
Shareholder Services
Shareholders of Thermo Cardiosystems Inc. who desire information about the
Company are invited to contact the Investor Relations Department, Thermo
Cardiosystems Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts
02454-9046, (781) 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.
Distribution of printed quarterly reports is limited to the second quarter only.
All material is available from Thermo Electron's Internet site
(http://www.thermo.com/subsid/tca1.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
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 January
2, 1999, as filed with the Securities and Exchange Commission, may be obtained
without charge by writing to the Investor Relations Department, Thermo
Cardiosystems Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts
02454-9046.
Annual Meeting
The annual meeting of shareholders will be held on Thursday, May 27, 1999,
at 1:30 p.m., at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.
<PAGE>
Exhibit 21
THERMO CARDIOSYSTEMS INC.
Subsidiaries of the Registrant
As of February 28, 1999, Thermo Cardiosystems Inc. owned the following
companies:
STATE OR REGISTRANT'S
JURISDICTION PERCENT OF
NAME OF OWNERSHIP
INCORPORATION
- -----------------------------------------------------------------------------
International Technidyne Corporation Delaware 100%
International Technidyne Corporation Limited United Kingdom 100%
Nimbus Inc. Massachusetts 100%
TCA Securities Corporation Massachusetts 100%
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation by reference of our reports dated February 11, 1999,
included in or incorporated by reference into Thermo Cardiosystems Inc.'s
Annual Report on Form 10-K for the year ended January 2, 1999, into the
Company's previously filed Registration Statement No. 33-45283 on Form
S-8, Registration Statement No. 33-45255 on Form S-8, Registration
Statement No. 33-52822 on Form S-8, Registration Statement No. 33-75654 on
Form S-3, Registration Statement No. 33-78732 on Form S-8, Registration
Statement No. 33-78730 on Form S-8, Registration Statement No. 33-78734 on
Form S-8, Registration Statement No. 33-78736 on Form S-8, Registration
Statement No. 33-78728 on Form S-8, Registration Statement No. 033-65271
on Form S-8, Registration Statement No. 333-5671 on Form S-3, Registration
Statement No. 333-29287 on Form S-3, and Registration Statement No.
333-08809 on Form S-8.
Arthur Andersen LLP
Boston, Massachusetts
March 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
CARDIOSYSTEMS INC.'S REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 2, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 42,026
<SECURITIES> 43,310
<RECEIVABLES> 13,191
<ALLOWANCES> 951
<INVENTORY> 11,937
<CURRENT-ASSETS> 112,553
<PP&E> 18,980
<DEPRECIATION> 11,650
<TOTAL-ASSETS> 172,363
<CURRENT-LIABILITIES> 13,649
<BONDS> 70,000
0
0
<COMMON> 4,052
<OTHER-SE> 84,662
<TOTAL-LIABILITY-AND-EQUITY> 172,363
<SALES> 66,848
<TOTAL-REVENUES> 66,848
<CGS> 28,405
<TOTAL-COSTS> 28,405
<OTHER-EXPENSES> 10,929
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 3,591
<INCOME-PRETAX> 12,439
<INCOME-TAX> 4,619
<INCOME-CONTINUING> 7,820
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,820
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
