SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended October 3, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-12179
THERMO BIOANALYSIS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 85-0429899
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
504 Airport Road
Santa Fe, New Mexico 87504-2108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
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 (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Class Outstanding at October 30, 1998
---------------------------- -------------------------------
Common Stock, $.01 par value 17,546,428
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMO BIOANALYSIS CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
October 3, January 3,
(In thousands) 1998 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents (includes $70,679
and $10,158 under repurchase agreement with
affiliated company) $ 87,594 $ 39,704
Accounts receivable, less allowances of $6,908
and $6,232 45,914 47,210
Inventories:
Raw materials and supplies 9,421 12,818
Work in process 4,021 3,238
Finished goods 25,867 22,579
Prepaid income taxes 9,254 8,484
Prepaid expenses and other current assets 6,108 4,221
-------- --------
188,179 138,254
-------- --------
Property, Plant, and Equipment, at Cost 34,725 34,405
Less: Accumulated depreciation and
amortization 11,036 11,438
-------- --------
23,689 22,967
-------- --------
Other Assets 10,672 2,712
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Note 2) 168,128 158,506
-------- --------
$390,668 $322,439
======== ========
2
<PAGE>
THERMO BIOANALYSIS CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 3, January 3,
(In thousands except share amounts) 1998 1998
- --------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term obligations
(includes $50,000 due to parent company) $ 50,129 $ -
Borrowings under overdraft facility 2,667 2,465
Accounts payable 12,229 12,596
Accrued payroll and employee benefits 5,535 8,482
Accrued income taxes 5,316 6,097
Accrued acquisition expenses (Note 2) 4,153 5,110
Other accrued expenses (Note 4) 12,021 13,482
Deferred revenue 4,888 3,675
Due to parent company and affiliated companies
(Note 2) 35,889 35,846
-------- --------
132,827 87,753
-------- --------
Deferred Income Taxes 221 139
-------- --------
Long-term Obligations:
Note payable to parent company - 50,000
Subordinated convertible note, due to parent
company 50,000 50,000
Other 492 204
-------- --------
50,492 100,204
-------- --------
Minority Interest 480 -
-------- --------
Shareholders' Investment (Notes 2 and 6):
Common stock, $.01 par value, 75,000,000
shares authorized; 18,096,950 and 14,081,448
pro forma shares issued 181 141
Capital in excess of par value 200,627 131,483
Retained earnings 15,410 9,633
Treasury stock at cost, 550,522 shares (10,064) -
Accumulated other comprehensive items (Note 3) 494 (6,914)
-------- --------
206,648 134,343
-------- --------
$390,668 $322,439
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
THERMO BIOANALYSIS CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues (includes $704 and $3,861 from
affiliated companies) $51,110 $53,354
------- -------
Costs and Operating Expenses:
Cost of revenues (includes $325 and $978
for revenues from affiliated companies;
Note 4) 27,930 27,833
Selling, general, and administrative expenses 18,189 16,018
Research and development expenses 3,274 3,736
Restructuring costs (Note 4) 1,300 -
------- -------
50,693 47,587
------- -------
Operating Income 417 5,767
Interest Income 1,413 291
Interest Expense (includes $1,795 and $2,100 to
related party) (2,004) (2,244)
Equity in Earnings of Unconsolidated Subsidiary 409 -
------- -------
Income Before Provision for Income Taxes 235 3,814
Provision for Income Taxes 420 1,389
------- -------
Net Income (Loss) $ (185) $ 2,425
======= =======
Earnings (Loss) per Share (Note 5):
Basic $ (.01) $ .17
======= =======
Diluted $ (.01) $ .16
======= =======
Weighted Average Shares (Note 5):
Basic 18,065 14,080
======= =======
Diluted 18,065 17,244
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO BIOANALYSIS CORPORATION
Consolidated Statement of Operations
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues (includes $2,832 and $11,306 from
affiliated companies) $160,889 $138,945
-------- --------
Costs and Operating Expenses:
Cost of revenues (includes $1,690 and $4,288
for revenues from affiliated companies;
Note 4) 80,342 72,341
Selling, general, and administrative expenses 54,481 41,101
Research and development expenses 10,886 10,268
Restructuring costs (Note 4) 1,300 -
-------- --------
147,009 123,710
-------- --------
Operating Income 13,880 15,235
Interest Income 3,092 1,809
Interest Expense (includes $5,497 and $5,411 to
related party) (5,982) (5,734)
Equity in Earnings of Unconsolidated Subsidiary 409 -
-------- --------
Income Before Provision for Income Taxes 11,399 11,310
Provision for Income Taxes 4,575 4,116
-------- --------
Net Income $ 6,824 $ 7,194
======== ========
Earnings per Share (Note 5):
Basic $ .44 $ .56
======== ========
Diluted $ .42 $ .52
======== ========
Weighted Average Shares (Note 5):
Basic 15,649 12,928
======== ========
Diluted 18,879 16,041
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMO BIOANALYSIS CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 6,824 $ 7,194
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,155 7,073
Provision for losses on accounts
receivable 382 367
Equity in earnings of unconsolidated
subsidiary (409) -
Other noncash expenses 2,893 -
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable 3,668 (9,156)
Inventories (1,592) 2,549
Other current assets (1,777) (1,807)
Accounts payable (3,804) (1,318)
Due to parent company and affiliated
companies (6,925) 4,787
Other current liabilities (2,555) 2,037
-------- --------
Net cash provided by operating activities 4,860 11,726
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (Note 2) (16,109) (11,588)
Adjustment to acquisition purchase price 9,459 205
Purchases of property, plant, and equipment (4,653) (2,905)
Proceeds from sale of property, plant, and
equipment 848 384
Issuance of note receivable (2,000) -
Other (86) -
-------- --------
Net cash used in investing activities (12,541) (13,904)
-------- --------
Financing Activities:
Net proceeds from issuance of Company common
stock (Note 6) 69,184 6
Purchases of Company common stock (10,064) -
Repayment of indebtedness to parent company (6,342) -
Increase in bank overdraft facility 295 -
Other 28 -
-------- --------
Net cash provided by financing activities $ 53,101 $ 6
-------- --------
6
<PAGE>
THERMO BIOANALYSIS CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Exchange Rate Effect on Cash $ 2,470 $ (2,788)
-------- --------
Increase (Decrease) in Cash and Cash
Equivalents 47,890 (4,960)
Cash and Cash Equivalents at Beginning of
Period 39,704 45,476
-------- --------
Cash and Cash Equivalents at End of Period $ 87,594 $ 40,516
======== ========
Noncash Activities (Note 2):
Fair value of assets of acquired companies,
including cash acquired of $1,211 and
$23,995 $ 24,130 $242,374
Cash paid for acquired companies (16,109) (35,583)
Issuance of Company common stock for
acquired companies - (83,533)
Promissory note payable to parent company for
acquired companies - (50,000)
Debt payable to parent company for acquired
companies - (43,331)
Adjustments to purchase price due from parent
company for acquired companies - 9,075
-------- --------
Liabilities assumed of acquired companies $ 8,021 $ 39,002
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
THERMO BIOANALYSIS CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo BioAnalysis Corporation (the Company) without audit and, in the
opinion of management, reflect all adjustments of a normal recurring nature
necessary for a fair statement of the financial position at October 3, 1998, the
results of operations for the three- and nine-month periods ended October 3,
1998, and September 27, 1997, and the cash flows for the nine-month periods
ended October 3, 1998, and September 27, 1997. Interim results are not
necessarily indicative of results for a full year.
Historical financial results have been restated to include the Clinical
Products Group of Life Sciences International PLC (LSI), which was acquired in a
transaction accounted for in a manner similar to a pooling of interests (Note
2). The consolidated financial statements and notes are presented as permitted
by Form 10-Q and do not contain certain information included in the annual
financial statements and notes of the Company. The consolidated financial
statements and notes included herein should be read in conjunction with the
financial statements and notes included in the Company's Registration Statement
on Form S-1 (Reg. No. 333-52445) filed with the Securities and Exchange
Commission in May 1998.
2. Acquisitions
In August 1998, the Company acquired the stock of Trace Scientific Limited,
for $6.8 million in cash and the repayment of $2.2 million in debt, subject to a
post-closing adjustment. Trace, based in Melbourne, Australia, markets a wide
variety of chemical reagents used for diagnostic tests in clinical laboratories
and supplies a range of products. Trace has operations in Australia, New
Zealand, and Florida. To date, no information has been gathered that would cause
the Company to believe that the post-closing adjustment will be material.
In May 1998, the Company acquired all of the outstanding stock of Data
Medical Associates, Inc. (DMA), which develops, manufactures, and distributes
chemistry reagents and related accessories, for $5.2 million in cash and the
repayment of $0.5 million of debt, subject to a post-closing adjustment. To
date, no information has been gathered that would cause the Company to believe
that the post-closing adjustment will be material. In addition, in June 1998,
the Company completed another acquisition for $0.9 million in cash and in
September 1998, purchased an additional 35% interest in the Company's joint
venture in Shanghai, China, for $0.5 million in cash. This additional investment
increased the Company's ownership to 67.5% and, as a result, the joint venture's
results have been consolidated with the results of the Company, effective
September 1998.
These acquisitions have been accounted for using the purchase method of
accounting, and their results of operations have been included in the
accompanying financial statements from the respective dates of acquisition. The
cost of these acquisitions exceeded the estimated fair
8
<PAGE>
2. Acquisitions (continued)
value of the acquired net assets by $8.3 million, which is being amortized over
40 years. Allocation of the purchase price was based on estimates of the fair
value of the net assets acquired and is subject to adjustment upon finalization
of the purchase price allocations. The Company has gathered no information that
indicates the final allocations will differ materially from the preliminary
estimates. Pro forma data is not presented as the results of the acquired
businesses were not material to the Company's results of operations.
In March 1997, Thermo Instrument Systems Inc. acquired Life Sciences
International PLC (LSI). In May 1998, the Company agreed to acquire the Clinical
Products Group of LSI, which is comprised of Shandon Inc. and its related
businesses, including ALKO Diagnostic Corporation, from Thermo Instrument. The
Clinical Products Group provides equipment and consumables for cytology,
histology, and pathology applications. It also supplies consumables for blood
gas and ion-selective electrolyte analyzers. The net purchase price for the
Clinical Products Group was $66.7 million, which represents the sum of the net
book value of the businesses as of April 4, 1998, plus a percentage of Thermo
Instrument's total cost in excess of net assets acquired associated with its
acquisition of LSI, based on the 1996 revenues of the Clinical Products Group
relative to LSI's 1996 consolidated revenues. The Company believes that this
allocation methodology is reasonable and in accordance with the guidance
provided by Staff Accounting Bulletin 55 (Topic 1:B).
The net purchase price for the Clinical Products Group was comprised of
3,007,930 shares of Company common stock valued at $22.16 per share, which
represents the five-day average for the period preceding the date the parties
reached agreement in principle on the material terms of the transaction. On
September 10, 1998, the Company's shareholders approved the listing of the
shares on the American Stock Exchange and in October 1998, the shares of common
stock were issued to Thermo Instrument. In addition to the shares of Company
common stock issued to Thermo Instrument, the Company assumed $37.9 million of
existing indebtedness owed by the Clinical Products Group to Thermo Instrument,
making the gross purchase price $104.5 million. This amount includes $12.0
million for an equivalent amount of cash acquired. The existing indebtedness
owed to Thermo Instrument is due January 2, 1999, and bears interest at the
90-day Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter and is included in due to parent company and
affiliated companies in the accompanying balance sheet.
Because the Company and the Clinical Products Group were deemed for
accounting purposes to be under control of their common majority owner, Thermo
Instrument, the transaction has been accounted for in a manner similar to a
pooling of interests. Accordingly, the accompanying financial statements include
the results of the Clinical Products Group from March 12, 1997, the date these
businesses were acquired by Thermo Instrument, and the 3,007,930 shares issued
to Thermo Instrument in October 1998 have been deemed outstanding from March 12,
1997, and are therefore included in the computation of earnings per share. The
purchase price for the Clinical Products Group included $4.5 million for the
increase in net book value from the date the Clinical Products Group was
9
<PAGE>
2. Acquisitions (continued)
acquired by Thermo Instrument (including $1.0 million for earnings during the
first quarter of 1998). This amount was recorded as a deemed distribution from
retained earnings, reflecting consideration to Thermo Instrument for the
earnings of the Clinical Products Group from the date of the acquisition by
Thermo Instrument.
In connection with the acquisitions of the Clinical Products Group of LSI in
1998 and the Labsystems OY and Hybaid divisions of LSI in 1997, the Company
undertook a restructuring of the acquired businesses. This restructuring
primarily included reductions in staffing levels and, to a lesser extent, costs
for the termination of certain joint venture arrangements. In accordance with
the requirements of Emerging Issues Task Force Pronouncement No. 95-3, as part
of the cost of the acquisition, the Company established reserves of
approximately $8.5 million, of which the Company expended $3.4 million during
1997 and $2.3 million in the first nine months of 1998, primarily for severance
payments. Finalization of the Company's plan for restructuring the acquired
businesses occurred during the first quarter of 1998. Unresolved matters at
October 3, 1998, included completing termination of joint ventures and planned
severances. As of October 3, 1998, the Company had accrued $4.2 million of
restructuring costs for all of its acquisitions, including those described
above.
3. Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards 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," which
represents foreign currency translation adjustments, reported as a component of
shareholders' investment in the accompanying balance sheet. During the third
quarter of 1998 and 1997, the Company had comprehensive income of $6.9 million
and a comprehensive loss of $3.1 million, respectively. During the first nine
months of 1998 and 1997, the Company had comprehensive income of $14.2 million
and a comprehensive loss of $0.8 million, respectively.
4. Restructuring and Related Costs
During the third quarter of 1998, the Company recorded restructuring and
related costs of $4.1 million. Restructuring costs of $1.3 million consist of
$1.0 million related to severance costs for 105 employees across all functions,
and $0.3 million related primarily to facility-closing costs for the Company's
bioinstrumentation manufacturing operation in Guernsey and downsizing of its
clinical instrumentation manufacturing operations in the United Kingdom. The
charge for facility-closing costs includes $0.2 million for write-downs of
related fixed assets. In addition, the Company recorded a $2.8 million inventory
write-down related to discontinuing several low-margin product lines and
disposing of inventory at its manufacturing operation in Guernsey. The inventory
write-down is included in cost of revenues in the accompanying statement of
operations.
10
<PAGE>
4. Restructuring and Related Costs (continued)
The Company expects to complete the implementation of its restructuring plan
during the first half of 1999. As of October 3, 1998, the Company had terminated
16 employees and had expended $0.2 million of the established reserve, primarily
for severance costs. The remaining reserve for severance and abandoned-facility
payments of $1.0 million, net of currency changes, is included in other accrued
expenses in the accompanying balance sheet as of October 3, 1998. In addition to
the restructuring costs discussed above, the Company's nuclear instrumentation
joint venture (Note 7) incurred $0.5 million of restructuring costs during the
third quarter of 1998. The Company recorded its share of the joint venture's
restructuring costs of $0.3 million as a reduction of the Company's equity in
earnings of unconsolidated subsidiary in the accompanying statement of
operations.
5. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended Nine Months Ended
------------------- ------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Basic
Net Income (Loss) $ (185) $ 2,425 $ 6,824 $ 7,194
------- ------- ------- -------
Weighted Average Shares 15,057 11,072 12,641 10,724
Shares Issuable for
Acquisition of Clinical
Products Group of LSI
(Note 2) 3,008 3,008 3,008 2,204
------- ------- ------- -------
Pro Forma Weighted Average
Shares, as Adjusted 18,065 14,080 15,649 12,928
------- ------- ------- -------
Basic Earnings (Loss) per
Share $ (.01) $ .17 $ .44 $ .56
======= ======= ======= =======
Diluted
Net Income (Loss) $ (185) $ 2,425 $ 6,824 $ 7,194
Effect of Convertible
Debentures - 390 1,170 1,170
------- ------- ------- -------
Income (Loss) Available to
Common Shareholders, as
Adjusted $ (185) $ 2,815 $ 7,994 $ 8,364
------- ------- ------- -------
Basic Weighted Average Shares 18,065 14,080 15,649 12,928
Effect of:
Convertible debentures - 3,030 3,030 3,030
Stock options - 134 200 83
------- ------- ------- -------
Pro Forma Weighted Average
Shares, as Adjusted 18,065 17,244 18,879 16,041
------- ------- ------- -------
Diluted Earnings (Loss) per
Share $ (.01) $ .16 $ .42 $ .52
======= ======= ======= =======
11
<PAGE>
5. Earnings (Loss) per Share (continued)
The computation of diluted earnings per share for each period excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of October 3, 1998, there were 190,500 such
options outstanding, with exercise prices ranging from $17.38 to $21.93 per
share. In addition, the computation of diluted earnings per share for the
three-month period ended October 3, 1998, excludes the effect of assuming the
conversion of the Company's $50.0 million principal amount 4.875% subordinated
convertible note, convertible at $16.50 per share, because the effect would be
antidilutive.
6. Sale of Common Stock
In June 1998, the Company sold 4,000,000 shares of its common stock in a
public offering at $18.125 per share, for net proceeds of $69.0 million. Of this
amount, 1,000,000 shares were purchased by Thermo Electron Corporation.
7. Establishment of Joint Venture
As of July 5, 1998, the Company contributed the assets and liabilities of
its Eberline Health Physics division to a joint venture the Company formed with
Thermo Instrument. The joint venture was established to address the nuclear
instrumentation market. The Company received a 49% equity interest in the joint
venture, and initially receives 67% of the profit and losses of the joint
venture. The Company's health physics division had revenues of $13.4 million in
1997. As a result of the formation of the joint venture, the Company no longer
consolidates the results of this business, but instead records its share of the
income as equity in earnings of unconsolidated subsidiary.
8. Subsequent Event
On November 12, 1998, the Company acquired substantially all of the assets
of BioStar, Inc., for $28.9 million in cash and the assumption of certain
liabilities, subject to a post-closing adjustment. BioStar was a privately held
company which develops, manufactures, and markets point-of-care rapid
immunoassay test kits for detecting various medical conditions. During the third
quarter of 1998, the Company advanced $2.0 million to BioStar pursuant to a note
receivable, due August 1999. In October 1998, the Company advanced an additional
$0.5 million to Biostar, due August 1999. These amounts were included in the
total cash purchase price disclosed above.
Item 2 - 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,"
12
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
"plans," "expects," "seeks," "estimates," and similar expressions are intended
to identify forward-looking statements. There are a number of important factors
that could cause the results of the Company to differ materially from those
indicated by such forward-looking statements, including those detailed under the
caption "Risk Factors" included in the Company's Registration Statement on Form
S-1 (Reg. No. 333-52445).
Overview
The Company has three principal product lines: biomolecular instruments and
consumables, clinical laboratory equipment and supplies, and information
management systems. The Company's biomolecular instruments and consumables are
based on proprietary immunoassay, optical biosensor, polymerase chain reaction
(PCR), MALDI-TOF mass spectrometry (MALDI-TOF), DNA amplification, and capillary
electrophoresis (CE) technologies, and are used in pharmaceutical and
biopharmaceutical research, as well as for clinical laboratory testing and
diagnosis of patient samples. The Company's clinical laboratory products
business supplies a range of equipment and consumables with applications in
cytology, histology, and pathology. The Company's information management systems
business designs, implements, and supports laboratory information management
systems (LIMS) and chromatography data systems (CDS) for use in laboratories,
industrial applications, and clinical testing facilities.
The Company was incorporated in February 1995 and on February 7, 1996,
acquired the Dynex Technologies division of Dynatech Corporation. Since then,
the Company has acquired from Thermo Instrument the LabSystems and Affinity
Sensors divisions of Fisons, the Labsystems OY, Hybaid and Labsystems Japan
divisions of LSI, and the Clinical Products Group of LSI. The Company's
financial statements include the results of the acquired businesses of LSI from
March 12, 1997, the date LSI was acquired by Thermo Instrument. In addition, the
Company acquired Data Medical Associates, Inc. in May 1998, Trace Scientific
Limited in August 1998, and BioStar, Inc. in November 1998 (Notes 2 and 8).
As discussed in Note 7, as of July 1998, the Company contributed the assets
and liabilities of its Eberline Health Physics division to a joint venture the
Company formed with Thermo Instrument.
A significant percentage of the Company's revenues is derived from the sale
of products and services outside the U.S., including certain Asian countries and
Russia, through export sales and sales by the Company's foreign operations. Asia
and Russia are experiencing a severe economic crisis, which has been
characterized by sharply reduced economic activity and liquidity, highly
volatile foreign-currency-exchange and interest rates, and unstable stock
markets. The Company's sales to Asia have been adversely affected by the
unstable economic conditions there. Sales to Russia to date have not been
adversely affected by the unstable economic conditions there; however, no
assurances concerning future sales and trends can be given.
13
<PAGE>
Overview (continued)
The Company anticipates that a significant portion of its revenues will
continue to be from sales to customers outside the U.S. As a result, the
Company's financial performance and competitive position can be affected by
currency exchange rate fluctuations. The Company may use forward contracts to
reduce its exposure to currency fluctuations.
Results of Operations
Third Quarter 1998 Compared With Third Quarter 1997
Revenues decreased to $51.1 million in the third quarter of 1998 from $53.4
million in the third quarter of 1997. Revenues decreased $3.2 million due to the
Company contributing the net assets of its Eberline Health Physics division to a
joint venture with Thermo Instrument (Note 7). This decrease was offset in part
by the inclusion of $2.8 million of revenues from acquisitions (Note 2).
Increased sales in North America were offset in part by a decrease in sales to
Asia of $2.1 million as a result of the economic crisis there. In addition,
revenues decreased $0.9 million due to a change in the Company's distribution
relationship with certain affiliated companies that switched to direct sales,
and $0.8 million from lower sales of the Company's DIAS immunoassay system to
OEM customers. Revenues decreased $0.2 million due to the strengthening of the
U.S. dollar relative to foreign currencies in countries in which the Company
operates.
The gross profit margin decreased to 45% in the third quarter of 1998 from
48% in the third quarter of 1997, primarily due to a $2.8 million inventory
write-down related to discontinuing several low-margin product lines and closing
the Company's bioinstrumentation manufacturing operation in Guernsey (Note 7).
This decrease was offset in part by an increase in revenues from the Company's
LIMS business, which has a relatively high gross profit margin and, to a lesser
extent, an increase in the gross profit margin at the Company's liquid-handling
business as a result of the introduction of certain higher-margin products and
manufacturing efficiencies.
Selling, general, and administrative expenses as a percentage of revenues
increased to 36% in the third quarter of 1998 from 30% in the third quarter of
1997, primarily due to the opening of four direct sales and service offices and
the expansion of the U.S. direct sales and service office related to the
Company's liquid-handling and bioinstrumentation businesses. To a lesser extent,
selling, general, and administrative expenses as a percentage of revenues
increased due to the exclusion of results in the 1998 period of the Company's
former Eberline Health Physics division, which had lower selling, general, and
administrative expenses as a percentage of revenues, and the opening of three
direct sales and service offices related to the Company's LIMS business. These
increases were offset in part by lower costs at the Clinical Products Group
related to the restructuring of that business in connection with its
acquisition.
14
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
Research and development expenses decreased to $3.3 million in the third
quarter of 1998 from $3.7 million in the third quarter of 1997, primarily due to
reduced spending at the Company's PCR subsidiary as a result of the completed
development of certain new products in the fourth quarter of 1997 and first
quarter of 1998 and, to a lesser extent, decreased spending at the Company's
mass spectrometry business. In addition, research and development expenses
decreased due to the exclusion of the results of the Company's former Eberline
Health Physics division. These decreases were offset in part by the inclusion of
research and development expenses from acquired businesses.
In addition to the inventory write-down discussed above, the Company
recorded $1.3 million of restructuring costs during the third quarter of 1998
(Note 4).
Interest income increased to $1.4 million in the third quarter of 1998 from
$0.3 million in the third quarter of 1997, primarily due to higher average
invested balances as a result of the Company's June 1998 public offering of
common stock (Note 6). Interest expense decreased to $2.0 million in the third
quarter of 1998 from $2.2 million in the third quarter of 1997, primarily due to
the repayment, during the second quarter of 1998, of $6.3 million of debt
payable to Thermo Instrument associated with the acquisition of the Clinical
Products Group of LSI.
Equity in earnings of unconsolidated subsidiary represents the Company's
share of income from its nuclear instrumentation joint venture, established as
of July 1998 (Note 7). During the third quarter of 1998, the joint venture
incurred $0.5 million of restructuring costs, of which $0.3 million is included
as a reduction of the Company's equity in earnings of unconsolidated subsidiary.
The effective tax rates exceeded the statutory federal income tax rate
primarily due to the impact of state income taxes and nondeductible amortization
of cost in excess of net assets of acquired companies, offset in part by the
impact of relatively low tax rates in certain countries in which the Company
operates. The effective tax rate increased in 1998 due to the larger relative
effect of nondeductible costs as well as a greater percentage of the Company's
income being generated in countries with higher tax rates.
First Nine Months 1998 Compared With First Nine Months 1997
Revenues increased to $160.9 million in the first nine months of 1998 from
$138.9 million in the first nine months of 1997, primarily due to an increase of
$27.8 million from acquisitions (Note 2). This increase was offset in part by a
decrease in revenues of $3.2 million resulting from the Company contributing the
net assets of its Eberline Health Physics division to a joint venture with
Thermo Instrument (Note 7). Increased sales in North America and Europe were
offset in part by a decrease in sales to Asia of $5.4 million as a result of the
economic crisis there. Revenues decreased $3.3 million due to a change in the
Company's distribution relationship with certain affiliated companies that
switched
15
<PAGE>
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
to direct sales, and $1.7 million from lower sales of the Company's DIAS
immunoassay system to OEM customers. In addition, revenues decreased $1.6
million due to the strengthening of the U.S. dollar relative to foreign
currencies in countries in which the Company operates.
The gross profit margin increased to 50% in the first nine months of 1998
from 48% in the first nine months of 1997, primarily due to the introduction of
certain higher-margin products and manufacturing efficiencies at the
liquid-handling and PCR businesses and, to a lesser extent, an increase in
revenues from the LIMS business, which has a relatively high gross profit
margin. This increase was offset in part by an inventory write-down of $2.8
million recorded during the third quarter of 1998 (Note 4).
Selling, general, and administrative expenses as a percentage of revenues
increased to 34% in the first nine months of 1998 from 30% in the first nine
months of 1997, primarily due to the reasons discussed in the results of
operations for the third quarter.
Research and development expenses increased to $10.9 million in the first
nine months of 1998 from $10.3 million in the first nine months of 1997,
primarily due to the inclusion of expenses from acquired businesses for the full
period of 1998 and increased spending at the Company's LIMS business on products
introduced in 1998. This increase was offset in part by the completed
development of certain products by the Company's PCR business and reduced
spending at the Company's mass spectrometry business.
Interest income increased to $3.1 million in the first nine months of 1998
from $1.8 million in the first nine months of 1997, primarily due to higher
average invested balances as a result of the Company's June 1998 public offering
of common stock (Note 6) and, to a lesser extent, interest income received from
Thermo Instrument on a $9.1 million adjustment to the aggregate purchase price
for the acquisition of the Labsystems OY and Hybaid divisions of LSI. Interest
expense increased to $6.0 million in the first nine months of 1998 from $5.7
million in the first nine months of 1997. This increase is primarily due to the
inclusion of interest expense on the Company's debt to Thermo Instrument
associated with certain 1997 and 1998 acquisitions for the full period of 1998
(Note 2). This increase was offset in part by the repayment of a portion of the
debt payable to Thermo Instrument as discussed in the results of operations for
the third quarter.
The effective tax rate was 40% in the first nine months of 1998, compared
with 36% in the first nine months of 1997. The effective tax rates exceeded the
statutory federal income tax rate primarily due to the reasons described in the
results of operations for the third quarter. The effective tax rate increased in
1998 due to a greater percentage of the Company's income being generated in
countries with higher tax rates.
16
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $55.4 million at October 3, 1998, compared
with $50.5 million at January 3, 1998. Included in working capital are cash and
cash equivalents of $87.6 million at October 3, 1998, compared with $39.7
million at January 3, 1998. Of the Company's total cash and cash equivalents at
October 3, 1998, $70.7 million was invested in a repurchase agreement with
Thermo Electron. During the first nine months of 1998, the Company's operating
activities provided $4.9 million of cash. Cash of $3.7 million was provided by a
decrease in accounts receivable due to lower revenues in the third quarter of
1998. An increase in inventories used $1.6 million of cash, primarily related to
an increase in finished goods inventories at the Company's clinical laboratory
products business due in part to a decrease in sales in Asia. Cash of $6.9
million was used to reduce amounts due to parent company and affiliated
companies, primarily due to the timing of payments of certain trade and other
operating balances payable to affiliated companies.
The Company's investing activities used $12.5 million of cash during the
first nine months of 1998. During the first nine months of 1998, the Company
completed acquisitions for aggregate consideration of $16.1 million of cash, net
of cash acquired, and received acquisition purchase price adjustments
aggregating $9.5 million, including $9.1 million from Thermo Instrument related
to the 1997 acquisitions of the Labsystems OY, Hybaid, and Labsystems Japan
divisions of LSI. In addition, in May 1998, the Company acquired the Clinical
Products Group of LSI from Thermo Instrument (Note 2). The Company made
expenditures of $4.7 million for purchases of property, plant, and equipment,
and expects to make capital expenditures of approximately $2.0 million during
the remainder of 1998.
The Company has undertaken a restructuring of certain acquired businesses
(Note 2). Amounts accrued for such activities totaled $4.2 million at October 3,
1998. The payments will primarily occur during the remainder of 1998. The
Company expects that such expenditures will not change materially from amounts
accrued at October 3, 1998.
On November 12, 1998, the Company acquired substantially all of the assets
of BioStar, Inc., for $28.9 million in cash and the assumption of certain
liabilities, subject to a post-closing adjustment. BioStar was a privately held
company which develops, manufactures, and markets point-of-care rapid
immunoassay test kits for detecting various medical conditions. During the third
quarter of 1998, the Company advanced $2.0 million to BioStar pursuant to a note
receivable, due August 1999. In October 1998, the Company advanced an additional
$0.5 million to Biostar, due August 1999. These amounts were included in the
total cash purchase price disclosed above.
The Company recently signed a non-binding letter of intent to acquire a
business for approximately $1.9 million in cash. This proposed acquisition is
subject to certain conditions, including completion of due diligence and
negotiation of a definitive agreement. There can be no assurance that this
acquisition will be completed.
17
<PAGE>
Liquidity and Capital Resources (continued)
The Company's financing activities provided $53.1 million of cash during the
first nine months of 1998. In June 1998, the Company sold 4,000,000 shares of
its common stock in a public offering at $18.125 per share, for net proceeds of
$69.0 million (Note 6) and repaid $6.3 million of indebtedness to Thermo
Instrument associated with the acquisition of the Clinical Products Group of LSI
(Note 2). During the third quarter of 1998, the Company expended $10.1 million
in connection with the repurchase of 550,000 shares of its common stock from an
institutional investor.
The Company expects to have positive cash flow from its existing operations.
The Company expects that it will finance any future acquisitions through a
combination of internal funds and/or short-term borrowings from Thermo
Instrument or Thermo Electron, although there is no agreement with these
companies to ensure that funds will be available on acceptable terms or at all.
The Company has debt payable of $31.6 million to Thermo Instrument and a $50.0
million promissory note payable to Thermo Instrument due in January 1999 and
July 1999, respectively, which it expects to repay through a combination of
internal funds and/or short term borrowings from Thermo Instrument or Thermo
Electron, although there is no agreement with these companies to ensure that
funds will be available on acceptable terms or at all. Thermo Instrument,
however, has stated its intention to require repayment of such indebtedness only
to the extent that the Company's resources permit. Accordingly, the Company
believes that its existing cash and cash equivalents are sufficient to meet the
capital requirements of its existing businesses for the foreseeable future.
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 internal business
systems and facilities; (ii) testing and developing necessary upgrades for the
Company's current products and certain discontinued products; (iii) contacting
key suppliers, vendors, and customers to determine their year 2000 compliance
status; and (iv) developing contingency plans.
The Company's State of Readiness
The Company has tested and evaluated its critical information technology
systems for year 2000 compliance, including its significant computer systems,
software applications, and related equipment. The Company is currently in the
process of upgrading or replacing its noncompliant systems. The Company expects
that all of its material information technology systems will be year 2000
compliant by the end of 1999. The Company is also evaluating the potential year
2000 impact on its facilities, including its buildings and utility systems. Any
problems that are identified will be prioritized and remediated based on their
18
<PAGE>
Year 2000 (continued)
assigned priority. The Company will continue periodic testing of its critical
internal business systems and facilities in an effort to minimize operating
disruptions due to year 2000 issues.
The Company believes that all of the material products that it currently
manufactures and sells are year 2000 compliant. However, as many of the
Company's products are complex, interact with 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 believes that certain of its older products, which
it no longer manufactures or sells, may not be year 2000 compliant. The Company
is continuing to test and evaluate such products and may offer upgrades or
alternative products where reasonably practicable.
The Company is in the process of identifying and contacting suppliers,
vendors, and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company has developed and is distributing questionnaires
relating to year 2000 compliance to its significant suppliers, vendors, and
customers. The Company intends to follow-up and monitor the year 2000 compliant
progress of significant suppliers, vendors, and customers that indicate that
they are not year 2000 compliant or that do not respond to the Company's
questionnaires.
Contingency Plan
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
problems. The 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, vendors, and
customers, it will modify and adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred costs related to year 2000 issues of approximately
$530,000 as of October 3, 1998, and the total cost of year 2000 remediation is
expected to be approximately $1.6 million. All the costs incurred as of October
3, 1998, were spent on testing and upgrading internal business systems and
facilities and contacting suppliers, vendors, and customers. As of October 3,
1998, no material costs have been incurred related to evaluating and upgrading
products.
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
19
<PAGE>
Year 2000 (continued)
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, vendors, or customers experience business
disruptions due to year 2000 issues, the Company might also be materially
adversely affected. The Company's research and development, production,
distribution, financial, administrative, and communications operations might be
disrupted. 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. 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.
PART II - OTHER INFORMATION
Item 2 - Changes in Securities
(c) Recent Sales of Unregistered Securities
On October 20, 1998, the Company issued (i) 3,007,830 shares of its common
stock to Thermo Instrument and (ii) 100 shares of its common stock to
ThermoQuest Corporation in connection with the Company's acquisition of the
Clinical Products Group of LSI from Thermo Instrument. Exemption from
registration for this transaction is claimed under Section 4(2) of the
Securities Act of 1933, as amended.
Item 4 - Submission of Matters to a Vote of Security Holders
On September 10, 1998, at a Special Meeting of Shareholders, the Company's
shareholders approved (i) the listing of 3,007,930 shares of the Company's
common stock on the American Stock Exchange (AMEX) in connection with the
Company's acquisition of the Clinical Products Group of LSI from Thermo
Instrument and (ii) an increase in the Company's authorized common stock from 25
million shares to 75 million shares. Of the total votes recorded in connection
with the AMEX listing: 12,748,931 shares were voted in favor of the proposal,
13,899 shares were voted against the proposal, 1,950 shares abstained, and no
broker non-votes were recorded. Of the total votes recorded in connection with
increasing the Company's authorized common stock: 12,379,070 shares were voted
in favor of the proposal, 1,308,447 shares were voted against the proposal,
2,100 shares abstained, and no broker non-votes were recorded.
20
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On September 30, 1998, the Company filed a Current Report on Form 8-K dated
September 29, 1998, with respect to restructuring and other charges recorded
during the third quarter of 1998.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 10th day of November 1998.
THERMO BIOANALYSIS CORPORATION
Paul F. Kelleher
----------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
----------------------------
John N. Hatsopoulos
Chief Financial Officer and
Senior Vice President
22
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- -----------------------------------------------------------------------------
3.1 Certificate of Amendment of Certificate of Incorporation of the
Registrant.
3.2 Certificate of Incorporation of the Registrant (filed as
Exhibit 3.1 to the Registrant's Registration Statement on Form
S-1 [Reg. No. 333-8697] and incorporated herein by reference).
27 Financial Data Schedule.
Exhibit 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Thermo BioAnalysis Corporation, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, DOES
HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Thermo BioAnalysis
Corporation, a resolution was duly adopted setting forth a proposed
amendment to the Certificate of Incorporation of said corporation
declaring advisable the following amendment to the Certificate of
Incorporation of said corporation:
RESOLVED: That the Certificate of Incorporation of Thermo BioAnalysis
Corporation be amended by changing the Fourth Article thereof so
that, as amended, said Article shall be and read as follows:
FOURTH: The total number of shares of capital stock which the
Corporation shall have authority to issue is seventy-five
million (75,000,000), and the par value of each such share is
one cent ($.01), amounting in the aggregate to Seven Hundred
Fifty Thousand Dollars
($750,000) of capital stock.
SECOND: That on September 10, 1998, at the Corporation's Special Meeting
of Stockholders, the Amendment to the Corporation's Certificate of
Incorporation was duly adopted by the affirmative vote of Stockholders of
the Corporation holding a majority of the shares of Common Stock, $.01 par
value per share, of the Corporation in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
THIRD: That said amendment was duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, said Thermo BioAnalysis Corporation has caused this
certificate to be signed by Sandra L. Lambert, its Secretary this 21st day of
September, 1998.
THERMO BIOANALYSIS CORPORATION
By: /s/ Sandra L. Lambert
Sandra L. Lambert, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
BIOANALYSIS CORPORATION'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 3,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-03-1998
<CASH> 87,594
<SECURITIES> 0
<RECEIVABLES> 52,822
<ALLOWANCES> 6,908
<INVENTORY> 39,309
<CURRENT-ASSETS> 188,179
<PP&E> 34,725
<DEPRECIATION> 11,036
<TOTAL-ASSETS> 390,668
<CURRENT-LIABILITIES> 132,827
<BONDS> 492
0
0
<COMMON> 181
<OTHER-SE> 206,467
<TOTAL-LIABILITY-AND-EQUITY> 390,668
<SALES> 160,889
<TOTAL-REVENUES> 160,889
<CGS> 80,342
<TOTAL-COSTS> 80,342
<OTHER-EXPENSES> 12,186
<LOSS-PROVISION> 382
<INTEREST-EXPENSE> 5,982
<INCOME-PRETAX> 11,399
<INCOME-TAX> 4,575
<INCOME-CONTINUING> 6,824
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,824
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.42
</TABLE>
