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 September 27, 1997.
[ ] 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 (I.R.S. Employer
incorporation or organization) 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: (617) 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 September 27, 1997
---------------------------- ---------------------------------
Common Stock, $.10 par value 39,009,527
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO CARDIOSYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
September 27, December 28,
(In thousands) 1997 1996
------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 53,704 $ 1,157
Short-term available-for-sale
investments, at quoted market value
(amortized cost of $47,620 and $45,392) 47,706 46,455
Accounts receivable, less allowances of
$837 and $736 12,622 13,490
Inventories:
Raw materials 3,620 9,110
Work in process and finished goods 12,323 4,760
Prepaid and refundable income taxes 4,130 4,202
Other current assets 90 43
-------- --------
134,195 79,217
-------- --------
Property, Plant, and Equipment, at Cost 17,462 15,834
Less: Accumulated depreciation and
amortization 8,940 7,334
-------- --------
8,522 8,500
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $23,392 and $33,929) 23,444 33,920
-------- --------
Prepaid Income Taxes 2,704 2,704
-------- --------
Other Assets 2,481 637
-------- --------
$171,346 $124,978
======== ========
2PAGE
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THERMO CARDIOSYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
September 27, December 28,
(In thousands except share amounts) 1997 1996
------------------------------------------------------------------------
Current Liabilities:
Current maturity of subordinated convertible
obligations $ - $ 3,755
Accounts payable 2,948 3,502
Accrued payroll and employee benefits 2,337 2,675
Accrued income taxes 1,423 102
Accrued interest 1,247 -
Other accrued expenses 3,554 3,788
Due to parent company and Thermo Electron
Corporation 524 67
-------- --------
12,033 13,889
-------- --------
Subordinated Convertible Debentures (Note 3) 70,000 -
-------- --------
Shareholders' Investment (Note 2):
Common stock, $.10 par value, 100,000,000
shares authorized; 40,520,521 and
40,227,962 shares issued 4,052 4,023
Capital in excess of par value 97,174 93,234
Retained earnings 29,402 22,727
Treasury stock at cost, 1,510,994 and
235,509 shares (41,421) (8,854)
Cumulative translation adjustment 18 -
Net unrealized gain (loss) on available-for-
sale investments 88 (41)
-------- --------
89,313 111,089
-------- --------
$171,346 $124,978
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
3PAGE
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THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
----------------------------
September 27, September 28,
(In thousands except per share amounts) 1997 1996
------------------------------------------------------------------------
Revenues $14,727 $16,084
------- -------
Costs and Operating Expenses:
Cost of revenues 6,053 6,297
Selling, general, and administrative
expenses 4,011 3,487
Research and development expenses 1,978 1,765
------- -------
12,042 11,549
------- -------
Operating Income 2,685 4,535
Interest Income 1,804 1,286
Interest Expense (898) (11)
Gain on Sale of Investments, Net - 665
------- -------
Income Before Provision for Income Taxes 3,591 6,475
Provision for Income Taxes 1,363 2,513
------- -------
Net Income $ 2,228 $ 3,962
======= =======
Earnings per Share $ .06 $ .10
======= =======
Weighted Average Shares 39,018 40,038
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
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THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Income (continued)
(Unaudited)
Nine Months Ended
-----------------------------
September 27, September 28,
(In thousands except per share amounts) 1997 1996
-----------------------------------------------------------------------
Revenues $45,560 $47,382
------- -------
Costs and Operating Expenses:
Cost of revenues 20,210 19,198
Selling, general, and administrative
expenses 12,141 9,913
Research and development expenses 6,048 5,456
------- -------
38,399 34,567
------- -------
Operating Income 7,161 12,815
Interest Income 4,489 3,990
Interest Expense (1,347) (66)
Gain on Sale of Investments, Net - 717
------- -------
Income Before Provision for Income Taxes 10,303 17,456
Provision for Income Taxes 3,978 6,490
------- -------
Net Income $ 6,325 $10,966
======= =======
Earnings per Share $ .16 $ .28
======= =======
Weighted Average Shares 39,636 39,826
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
5PAGE
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THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
----------------------------
September 27, September 28,
(In thousands) 1997 1996
------------------------------------------------------------------------
Operating Activities:
Net income $ 6,325 $ 10,966
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,921 1,699
Provision for losses on accounts
receivable 90 60
Gain on sale of investments, net - (717)
Other noncash items (13) 33
Changes in current accounts:
Accounts receivable 769 (3,200)
Inventories (2,086) (4,114)
Prepaid and refundable income taxes (48) 143
Accounts payable (554) 41
Other current liabilities 2,447 2,622
-------- --------
Net cash provided by operating activities 8,851 7,533
-------- --------
Investing Activities:
Proceeds from sale and maturities of
available-for-sale investments 72,857 69,394
Purchases of available-for-sale investments (63,430) (58,209)
Purchases of property, plant, and equipment (1,817) (1,949)
Other 13 (72)
-------- --------
Net cash provided by investing activities 7,623 9,164
-------- --------
Financing Activities:
Net proceeds from issuance of Company
common stock 543 617
Payment of withholding taxes related to
stock option exercises (129) -
Purchases of Company common stock (32,765) -
Net proceeds from issuance of long-term
obligations (Note 3) 68,030 -
International Technidyne transfer of cash
(to) from Thermo Electron 350 (5,101)
-------- --------
Net cash provided by (used in) financing
activities 36,029 (4,484)
-------- --------
Exchange Rate Effect on Cash 44 -
-------- --------
Increase in Cash and Cash Equivalents 52,547 12,213
Cash and Cash Equivalents at Beginning of
Period 1,157 4,441
-------- --------
Cash and Cash Equivalents at End of Period $ 53,704 $ 16,654
======== ========
Noncash Activities:
Conversions of convertible debentures $ 3,755 $ 5,545
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
6PAGE
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THERMO CARDIOSYSTEMS INC.
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been
prepared by Thermo Cardiosystems Inc. (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
September 27, 1997, the results of operations for the three- and
nine-month periods ended September 27, 1997, and September 28, 1996, and
the cash flows for the nine-month periods ended September 27, 1997, and
September 28, 1996. Interim results are not necessarily indicative of
results for a full year.
Historical financial results have been restated to include
International Technidyne Corporation (International Technidyne), 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 consolidated financial statements and
notes of the Company. The consolidated financial statements and notes
included herein should be read in conjunction with the consolidated
financial statements and notes included in the Company's Annual Report on
Form 10-K, as amended, for the fiscal year ended December 28, 1996, filed
with the Securities and Exchange Commission.
2. Acquisition
In March 1997, the Company announced its intention to acquire
International Technidyne from Thermo Electron Corporation (Thermo
Electron), the Company's ultimate parent company, in a merger in which
approximately 3,356,000 shares of the Company's common stock would be
issued in exchange for all of the outstanding shares of International
Technidyne. On May 2, 1997, the transaction was completed, subject to
shareholder approval of the issuance of 3,355,705 shares of Company
common stock to Thermo Electron in the merger. 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. In 1996,
International Technidyne's revenues and net income were $33,992,000 and
$4,672,000, respectively.
Because the Company and International Technidyne were deemed for
accounting purposes to be under control of their common majority owner,
Thermo Electron, the transaction has been accounted for at historical
cost in a manner similar to a pooling of interests. Accordingly, all
historical financial information presented has been restated to include
the acquisition of International Technidyne. The 3,355,705 shares of the
Company's common stock issuable in the merger will not be issued until
the listing of such shares for trading on the American Stock Exchange has
been approved by the Company's shareholders. Because Thermedics Inc.
(Thermedics) is the majority shareholder and intends to vote its shares
in favor of such listing, approval is assured and, therefore, the shares
are considered to be outstanding as of January 1, 1996, for purposes
7PAGE
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THERMO CARDIOSYSTEMS INC.
2. Acquisition (continued)
of computing weighted average shares. Revenues and net income as
previously reported for the separate entities prior to the acquisition
and as restated for the combined Company are as follows:
Three Months Ended Nine Months Ended
(In thousands) September 28, 1996 September 28, 1996
----------------------------------------------------------------------
Revenues:
Historical $ 7,594 $21,716
International Technidyne 8,490 25,666
------- -------
$16,084 $47,382
======= =======
Net Income:
Historical $ 2,762 $ 7,572
International Technidyne 1,200 3,394
------- -------
$ 3,962 $10,966
======= =======
3. Subordinated Convertible Debentures
In May 1997, the Company issued and sold at par $70,000,000 principal
amount of 4 3/4% subordinated convertible debentures due 2004, for net
proceeds of $68.0 million. The debentures are convertible into shares of
the Company's common stock at a conversion price of $31.415 per share and
are guaranteed on a subordinated basis by Thermo Electron.
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,"
"plans," "expects," "seeks," "estimates," and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the results of the Company to differ
materially from those indicated by such forward-looking statements,
including those detailed under the caption "Forward-looking Statements"
in Exhibit 13 to the Company's Annual Report on form 10-K, as amended,
for the fiscal year ended December 28, 1996, filed with the Securities
and Exchange Commission.
8PAGE
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THERMO CARDIOSYSTEMS INC.
Overview
The Company is a leader in the research, development, and manufacture
of implantable left ventricular-assist systems (LVAS). Its HeartMate(R)
devices are designed to perform substantially all or part of the pumping
function of the left ventricle of the natural heart for patients
suffering from cardiovascular disease.
In general, a profit cannot be earned from the sale of an LVAS in the
United States until the U.S. Food and Drug Administration (FDA) has
approved the device for commercial sale. Until such approval is obtained,
only the direct and indirect costs of the LVAS can be recovered, which
are included in the Company's revenues. With the FDA's approval of the
air-driven LVAS, the Company began earning a profit on the sale of such
systems in the fourth quarter of 1994.
The Company derives its revenues from two types of sales:
implementation programs and subsequent implants. Implementation programs
consist of initial sales to new clinical centers or foreign distributors,
as well as sales of a new system, such as the electric LVAS, to an
existing customer. Revenues recorded from subsequent implants consist of
additional sales to an existing customer other than the initial sale of
the implementation program. In general, the Company receives greater
revenues from the sale of an implementation program than from a
subsequent implant.
In December 1996, the Company acquired substantially all of the
assets, subject to certain liabilities, of Nimbus Medical, Inc. (Nimbus),
a research and development organization. Nimbus has been involved in
artificial-heart technology for more than 20 years and has carried out
research in two primary fields: ventricular-assist devices and total
artificial hearts. Nimbus was instrumental in developing the basic
technology for high-speed rotary blood pumps. Because of their smaller
size, rotary blood pumps may potentially be used to provide cardiac
support in small adults and in children.
The Company's International Technidyne Corporation (International
Technidyne) subsidiary (Note 2) is a leading manufacturer of
near-patient, whole-blood coagulation testing equipment and related
disposables, and also manufactures premium-quality, single-use,
skin-incision devices.
Results of Operations
Third Quarter 1997 Compared With Third Quarter 1996
Revenues in the third quarter of 1997 were $14,727,000, compared with
$16,084,000 in the third quarter of 1996. This decrease was due to
decreases of $1,969,000 and $567,000 in revenues from the Company's
air-driven and electric LVAS, respectively. The Company expects that
revenues from sales of its LVAS will stabilize at approximately current
levels until the electric system is approved in the U.S. for commercial
sale. The Company believes that this approval could occur during 1997;
however, there can be no assurance that the Company will receive this
9PAGE
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THERMO CARDIOSYSTEMS INC.
Third Quarter 1997 Compared With Third Quarter 1996 (continued)
approval within the expected time period, or at all. The decrease in
revenues was offset in part by an increase in revenues from International
Technidyne to $9,090,000 in 1997 from $8,490,000 in 1996, as well as the
inclusion of $425,000 in revenues from Nimbus, acquired in December 1996.
The gross profit margin decreased to 59% in the third quarter of 1997
from 61% in the third quarter of 1996, primarily due to a shift in the
sales mix to lower-margin electric LVAS and, to a lesser extent, the
inclusion of low-margin revenues from Nimbus. This decrease was offset in
part by improved margins at International Technidyne, primarily due to
manufacturing efficiencies.
Selling, general, and administrative expenses as a percentage of
revenues increased to 27% in the third quarter of 1997 from 22% in the
third quarter of 1996, primarily due to higher marketing expenses as a
result of an increase in the Company's LVAS sales force and, to a lesser
extent, an increase in sales personnel and promotional expenses at
International Technidyne.
Research and development expenses increased to $1,978,000 in the
third quarter of 1997 from $1,765,000 in the third quarter of 1996. This
increase was primarily due to the inclusion of expenditures from Nimbus,
acquired in December 1996 and, to a lesser extent, expenses incurred in
association with a clinical trial being conducted by the Company to
evaluate the electric LVAS as an alternative to medical therapy. The
Company expects research and development expenses to continue to increase
over the life of the trial, estimated as two to three years. There can be
no assurance that the Company will complete this study or that it will
receive approval during this time period, or at all.
Interest income increased to $1,804,000 in the third quarter of 1997
from $1,286,000 in the third quarter of 1996, primarily as a result of
higher average invested balances. In May 1997, the Company issued and
sold at par $70,000,000 principal amount of 4 3/4% subordinated
convertible debentures due 2004, for net proceeds of $68.0 million
(Note 3).
Interest expense increased to $898,000 in the third quarter of 1997
from $11,000 in the third quarter of 1996, primarily as a result of the
issuance of the 4 3/4% subordinated convertible debentures.
The effective tax rates were 38% and 39% in the third quarter of 1997
and 1996, respectively. The effective tax rates exceeded the statutory
federal income tax rate, primarily due to the impact of state income
taxes.
10PAGE
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THERMO CARDIOSYSTEMS INC.
First Nine Months 1997 Compared With First Nine Months 1996
Revenues in the first nine months of 1997 were $45,560,000, compared
with $47,382,000 in the first nine months of 1996. This decrease was
primarily due to a $4,712,000 decrease in revenues from the Company's
air-driven LVAS, offset in part by a $1,238,000 increase in revenues from
the Company's electric LVAS. The decrease in revenues in 1997 was also
offset in part by the inclusion of $1,567,000 in revenues from Nimbus,
acquired in December 1996, as well as an increase in revenues from
International Technidyne to $26,171,000 in 1997 from $25,666,000 in 1996.
The gross profit margin decreased to 56% in the first nine months of
1997 from 59% in the first nine months of 1996, primarily due to a shift
in the sales mix to 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. This
decrease was offset in part by improved margins at International
Technidyne, primarily due to manufacturing efficiencies. The Company
announced an overall price increase of approximately 10% in the electric
LVAS product line, effective June 28, 1997, to help offset increased
production costs.
Selling, general, and administrative expenses as a percentage of
revenues increased to 27% in the first nine months of 1997 from 21% in
the first nine months of 1996, primarily due to the reasons discussed in
the results of operations for the third quarter.
Research and development expenses increased to $6,048,000 in the
first nine months of 1997 from $5,456,000 in the first nine months of
1996, primarily due to the reasons discussed in the results of operations
for the third quarter.
Interest income increased to $4,489,000 in the first nine months of
1997 from $3,990,000 in the first nine months of 1996. Interest expense
increased to $1,347,000 in the first nine months of 1997 from $66,000 in
the first nine months of 1996. These increases were primarily due to the
reasons discussed in the results of operations for the third quarter.
The effective tax rates were 39% and 37% in the first nine months of
1997 and 1996, respectively. The effective tax rates exceeded the
statutory federal income tax rate primarily due to the impact of state
income taxes. The effective tax rate increased in 1997 due to the full
utilization of certain state tax loss carryforwards in 1996.
Liquidity and Capital Resources
Consolidated working capital was $122,162,000 at September 27, 1997,
compared with $65,328,000 at December 28, 1996. Cash, cash equivalents,
and short- and long-term available-for-sale investments were $124,854,000
at September 27, 1997, compared with $81,532,000 at December 28, 1996.
During the first nine months of 1997, $8,851,000 of cash was provided by
operating activities. Cash of $2,447,000 was provided by an increase in
other current liabilities. This increase was offset in part by $2,086,000
used to fund an increase in inventories primarily due to increased
production of the electric LVAS.
11PAGE
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THERMO CARDIOSYSTEMS INC.
Liquidity and Capital Resources (continued)
Excluding available-for-sale investments activity, the Company's
investing activities primarily consisted of capital additions. During the
first nine months of 1997, the Company expended $1,817,000 on purchases
of property, plant, and equipment. During the remainder of 1997, the
Company expects to make capital expenditures of approximately $750,000,
principally for manufacturing and tooling equipment and leasehold
improvements.
During the first nine months of 1997, the Company's financing
activities provided $36,029,000 of cash. In May 1997, the Company issued
and sold at par $70,000,000 principal amount of 4 3/4% subordinated
convertible debentures due 2004 for net proceeds of $68.0 million
(Note 3). Through a series of actions commencing in August 1996, the
Company's Board of Directors has authorized the repurchase through
various dates ending in June 1998, of up to $50.0 million of its own
securities in the open market, or in negotiated transactions. Any
repurchases under the Company's authorizations are funded from working
capital. Through September 27, 1997, the Company had expended $38,430,000
under these authorizations, of which $32,765,000 was expended in the
first nine months of 1997.
The Company believes that it has adequate resources to meet its
financial needs for the foreseeable future.
PART II - OTHER INFORMATION
Item 6 - Exhibits
See exhibit index on the page immediately preceding exhibits.
12PAGE
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THERMO CARDIOSYSTEMS INC.
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 3rd day of November
1997.
THERMO CARDIOSYSTEMS INC.
Paul F. Kelleher
---------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
---------------------
John N. Hatsopoulos
Vice President and Chief
Financial Officer
13PAGE
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THERMO CARDIOSYSTEMS INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
11 Statement re: Computation of Earnings per Share.
27 Financial Data Schedule.
Exhibit 11
THERMO CARDIOSYSTEMS INC.
Computation of Earnings per Share
Three Months Ended
----------------------------
September 27, September 28,
1997 1996
-----------------------------------------------------------------------
Computation of Primary Earnings per Share:
Net Income (a) $ 2,228,000 $ 3,962,000
----------- -----------
Shares:
Weighted average shares outstanding 35,662,476 36,682,454
Add: Shares issuable from acquisition
of International Technidyne 3,355,705 3,355,705
----------- -----------
Weighted average shares outstanding,
as adjusted (b) 39,018,181 40,038,159
----------- -----------
Primary Earnings per Share (a) / (b) $ .06 $ .10
=========== ===========
PAGE
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Exhibit 11
THERMO CARDIOSYSTEMS INC.
Computation of Earnings per Share
Nine Months Ended
----------------------------
September 27, September 28,
1997 1996
-----------------------------------------------------------------------
Computation of Primary Earnings per Share:
Net Income (a) $ 6,325,000 $10,966,000
----------- -----------
Shares:
Weighted average shares outstanding 36,280,647 36,470,642
Add: Shares issuable from acquisition
of International Technidyne 3,355,705 3,355,705
----------- -----------
Weighted average shares outstanding,
as adjusted (b) 39,636,352 39,826,347
----------- -----------
Primary Earnings per Share (a) / (b) $ .16 $ .28
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
CARDIOSYSTEMS INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 27, 1997 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-03-1998
<PERIOD-END> SEP-27-1997
<CASH> 53,704
<SECURITIES> 47,706
<RECEIVABLES> 13,459
<ALLOWANCES> 837
<INVENTORY> 15,943
<CURRENT-ASSETS> 134,195
<PP&E> 17,462
<DEPRECIATION> 8,940
<TOTAL-ASSETS> 171,346
<CURRENT-LIABILITIES> 12,033
<BONDS> 70,000
0
0
<COMMON> 4,052
<OTHER-SE> 85,261
<TOTAL-LIABILITY-AND-EQUITY> 89,313
<SALES> 45,560
<TOTAL-REVENUES> 45,560
<CGS> 20,210
<TOTAL-COSTS> 20,210
<OTHER-EXPENSES> 6,048
<LOSS-PROVISION> 90
<INTEREST-EXPENSE> 1,347
<INCOME-PRETAX> 10,303
<INCOME-TAX> 3,978
<INCOME-CONTINUING> 6,325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,325
<EPS-PRIMARY> .16
<EPS-DILUTED> 0
</TABLE>
