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 July 4, 1998.
[ ] 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: (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 July 31, 1998
---------------------------- ----------------------------
Common Stock, $.10 par value 38,839,289
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO CARDIOSYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
July 4, January 3,
(In thousands) 1998 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents (includes $10,442
and $70,488 under repurchase agreement with
affiliated party) $ 36,108 $ 71,158
Short-term available-for-sale investments,
at quoted market value (amortized cost of
$50,565 and $45,443) 50,677 45,589
Accounts receivable, less allowances of
$891 and $833 9,630 11,377
Inventories:
Raw materials 3,078 3,420
Work in process and finished goods 9,571 11,099
Prepaid and refundable income taxes 3,973 3,962
Prepaid expenses and other current assets 549 342
-------- --------
113,586 146,947
-------- --------
Property, Plant, and Equipment, at Cost 18,550 17,861
Less: Accumulated depreciation and amortization 10,313 9,380
-------- --------
8,237 8,481
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $46,625 and $12,655) 46,625 12,665
-------- --------
Prepaid Income Taxes 2,749 2,749
-------- --------
Other Assets 2,220 2,366
-------- --------
$173,417 $173,208
======== ========
2
<PAGE>
THERMO CARDIOSYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 4, January 3,
(In thousands except share amounts) 1998 1998
- --------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 2,574 $ 2,291
Accrued payroll and employee benefits 2,321 2,749
Accrued warranty expenses 1,205 1,100
Accrued income taxes 3,252 912
Other accrued expenses 2,804 2,885
Due to parent company and affiliated companies 318 308
-------- --------
12,474 10,245
-------- --------
Subordinated Convertible Debentures 70,000 70,000
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 100,000,000
shares authorized; 40,521,121 and 40,520,521
shares issued 4,052 4,052
Capital in excess of par value 98,258 98,252
Retained earnings 36,254 32,096
Treasury stock at cost, 1,683,799 and
1,502,474 shares (47,730) (41,563)
Accumulated other comprehensive income (Note 3) 109 126
-------- --------
90,943 92,963
-------- --------
$173,417 $173,208
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
------------------
July 4, June 28,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $16,133 $15,931
------- -------
Costs and Operating Expenses:
Cost of revenues 6,867 7,228
Selling, general, and administrative expenses 4,848 4,125
Research and development expenses 2,447 2,000
------- -------
14,162 13,353
------- -------
Operating Income 1,971 2,578
Interest Income 1,887 1,510
Interest Expense (897) (449)
Gain on Sale of Investments, Net 2 -
------- -------
Income Before Provision for Income Taxes 2,963 3,639
Provision for Income Taxes 1,113 1,417
------- -------
Net Income $ 1,850 $ 2,222
======= =======
Basic and Diluted Earnings per Share (Note 2) $ .05 $ .06
======= =======
Weighted Average Shares (Note 2):
Basic 38,932 39,635
======= =======
Diluted 39,154 39,912
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Six Months Ended
------------------
July 4, June 28,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $32,618 $30,833
------- -------
Costs and Operating Expenses:
Cost of revenues 13,776 14,157
Selling, general, and administrative expenses 9,140 8,130
Research and development expenses 5,020 4,070
------- -------
27,936 26,357
------- -------
Operating Income 4,682 4,476
Interest Income 3,793 2,685
Interest Expense (1,795) (449)
Gain on Sale of Investments, Net 20 -
------- -------
Income Before Provision for Income Taxes 6,700 6,712
Provision for Income Taxes 2,542 2,615
------- -------
Net Income $ 4,158 $ 4,097
======= =======
Basic and Diluted Earnings per Share (Note 2) $ .11 $ .10
======= =======
Weighted Average Shares (Note 2):
Basic 38,979 39,945
======= =======
Diluted 39,219 40,262
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
--------------------
July 4, June 28,
(In thousands) 1998 1997
- -------------------------------------------------------------------------
Operating Activities:
Net income $ 4,158 $ 4,097
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,417 1,265
Provision for losses on accounts
receivable 60 60
Gain on sale of investments, net (20) -
Other noncash items (69) (13)
Changes in current accounts:
Accounts receivable 1,688 (1,145)
Inventories 1,755 (1,193)
Other current assets (90) 17
Accounts payable 283 (534)
Other current liabilities 1,944 653
--------- ---------
Net cash provided by operating activities 11,126 3,207
--------- ---------
Investing Activities:
Proceeds from sale and maturities of
available-for-sale investments 88,464 57,421
Purchases of available-for-sale investments (127,523) (43,176)
Purchases of property, plant, and equipment (1,129) (1,384)
Other 171 54
--------- ---------
Net cash provided by (used in) investing
activities (40,017) 12,915
--------- ---------
Financing Activities:
Net proceeds from issuance of Company
common stock 436 409
Payment of withholding taxes related to
stock option exercises (615) (94)
Purchases of Company common stock (5,982) (23,889)
Net proceeds from issuance of subordinated
convertible debentures - 68,139
International Technidyne transfer of cash
from Thermo Electron - 350
--------- ---------
Net cash provided by (used in) financing
activities $ (6,161) $ 44,915
--------- ---------
6
<PAGE>
THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
----------------------
July 4, June 28,
(In thousands) 1998 1997
- -------------------------------------------------------------------------
Exchange Rate Effect on Cash $ 2 $ 41
--------- ---------
Increase (Decrease) in Cash and Cash
Equivalents (35,050) 61,078
Cash and Cash Equivalents at Beginning of
Period 71,158 1,157
--------- ---------
Cash and Cash Equivalents at End of Period $ 36,108 $ 62,235
========= =========
Noncash Activities:
Conversions of convertible debentures $ - $ 3,755
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
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 July 4, 1998, the results of
operations for the three- and six-month periods ended July 4, 1998, and June 28,
1997, and the cash flows for the six-month periods ended July 4, 1998, and June
28, 1997. Interim results are not necessarily indicative of results for a full
year.
The consolidated balance sheet presented as of January 3, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. 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 Annual Report on Form 10-K for the fiscal year ended January 3, 1998,
filed with the Securities and Exchange Commission.
2. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Six Months Ended
-------------------- ------------------
(In thousands except July 4, June 28, July 4, June 28,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Basic
Net income $ 1,850 $ 2,222 $ 4,158 $ 4,097
------- ------- ------- -------
Weighted average shares 38,932 39,635 38,979 39,945
------- ------- ------- -------
Basic earnings per share $ .05 $ .06 $ .11 $ .10
======= ======= ======= =======
Diluted
Net income $ 1,850 $ 2,222 $ 4,158 $ 4,097
------- ------- ------- -------
Weighted average shares 38,932 39,635 38,979 39,945
Effect of:
Convertible debentures - - - 5
Stock options 222 277 240 312
------- ------- ------- -------
Weighted average shares,
as adjusted 39,154 39,912 39,219 40,262
------- ------- ------- -------
Diluted earnings per share $ .05 $ .06 $ .11 $ .10
======= ======= ======= =======
8
<PAGE>
2. Earnings per Share (continued)
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. At July 4, 1998, there were 960,200 of such options
outstanding, with exercise prices ranging from $24.33 to $48.97 per share. In
addition, the computation of diluted earnings per share for all periods
presented 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.
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 income. In general,
comprehensive income combines net income and "other comprehensive income," which
represents certain items 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 from
available-for-sale investments. During the second quarter of 1998 and 1997, the
Company's comprehensive income totaled $1,852,000 and $2,371,000, respectively.
During the first six months of 1998 and 1997, the Company's comprehensive income
totaled $4,141,000 and $4,129,000, respectively.
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 heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 3, 1998, filed with the Securities and Exchange
Commission.
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.
9
<PAGE>
Overview (continued)
In general, a profit cannot be earned from the sale of an LVAS in the United
States until approval of the device has been received from the U.S. Food and
Drug Administration (FDA) for commercial sale. Until such approval is obtained,
only the direct and indirect costs, including research and development expenses,
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 1994.
The Company's Nimbus Medical Inc. subsidiary, acquired in 1996, 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, 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 Company's International Technidyne Corporation subsidiary is a leading
manufacturer of near-patient, whole-blood coagulation testing equipment and
related disposables, and also manufactures premium-quality, single-use
skin-incision devices.
Results of Operations
Second Quarter 1998 Compared With Second Quarter 1997
Revenues in the second quarter of 1998 were $16,133,000, compared with
$15,931,000 in the second quarter of 1997. The increase in revenues was
primarily due to an increase in revenues from International Technidyne to
$9,000,000 in the second quarter of 1998 from $8,080,000 in the second quarter
of 1997 and a $394,000 increase in revenues from the Company's air-driven LVAS.
These increases were offset in part by a $958,000 decrease in revenues from the
Company's electric LVAS. In June 1998, the Company received approval from the
FDA for engineering advancements made to the electric LVAS. The FDA also
presented additional questions regarding certain other aspects of the Company's
submission. The Company responded to these questions in July 1998 and is
currently awaiting the FDA's response.
The gross profit margin increased to 57% in the second quarter of 1998 from
55% in the second quarter of 1997, primarily due to an increase in revenues from
higher-margin International Technidyne products and, to a lesser extent, a shift
in the LVAS sales mix to the higher-margin air-driven LVAS.
Selling, general, and administrative expenses as a percentage of revenues
increased to 30% in the second quarter of 1998 from 26% in the second quarter of
1997, primarily due to an increase in promotional expenses at International
Technidyne.
10
<PAGE>
Second Quarter 1998 Compared With Second Quarter 1997 (continued)
Research and development expenses increased to $2,447,000 in the second
quarter of 1998 from $2,000,000 in the second quarter of 1997. This increase was
primarily due to expenses incurred in association with a clinical trial being
conducted by the Company 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
trial, estimated at two to three years. There can be no assurance that the
Company will complete this study or that it will receive FDA approval of the
electric LVAS as an alternative to medical therapy during this time period, or
at all.
Interest income increased to $1,887,000 in the second quarter of 1998 from
$1,510,000 in the second quarter of 1997, 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 $68,139,000.
Interest expense increased to $897,000 in the second quarter of 1998 from
$449,000 in the second quarter of 1997, primarily due to interest expense
incurred as a result of the issuance of the 4 3/4% subordinated convertible
debentures.
The effective tax rates were 38% and 39% in the second quarter of 1998 and
1997, respectively. The effective tax rates exceeded the statutory federal
income tax rate, primarily due to the impact of state income taxes.
First Six Months 1998 Compared With First Six Months 1997
Revenues in the first six months of 1998 were $32,618,000, compared with
$30,833,000 in the first six months of 1997. The increase in revenues was
primarily due to an increase in revenues from International Technidyne to
$18,385,000 in 1998 from $17,082,000 in 1997 and a $2,160,000 increase in
revenues in the Company's air-driven LVAS. These increases were offset in part
by a $1,449,000 decrease in revenues from the Company's electric LVAS.
The gross profit margin increased to 58% in the first six months of 1998
from 54% in the first six months of 1997, primarily due to an increase in
revenues from higher-margin International Technidyne products and, to a lesser
extent, a shift in the LVAS sales mix to the higher-margin air-driven LVAS.
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in the first six months of 1998 from 26% in the first six
months of 1997, primarily due to the reason discussed in the results of
operations for the second quarter.
11
<PAGE>
First Six Months 1998 Compared With First Six Months 1997 (continued)
Research and development expenses increased to $5,020,000 in the first six
months of 1998 from $4,070,000 in the first six months of 1997, primarily due to
the reasons discussed in the results of operations for the second quarter.
Interest income increased to $3,793,000 in the first six months of 1998 from
$2,685,000 in the first six months of 1997. Interest expense increased to
$1,795,000 in the first six months of 1998 from $449,000 in the first six months
of 1997. These increases were due to the reasons discussed in the results of
operations for the second quarter.
The effective tax rates were 38% and 39% in the first six months of 1998 and
1997, respectively. 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 $101,112,000 at July 4, 1998, compared with
$136,702,000 at January 3, 1998. Cash, cash equivalents, and short- and
long-term available-for-sale investments were $133,410,000 at July 4, 1998,
compared with $129,412,000 at January 3, 1998. During the first six months of
1998, $11,126,000 of cash was provided by operating activities. Cash of
$1,944,000 was provided by an increase in other current liabilities, primarily
due to the timing of tax payments. Cash of $1,755,000 and $1,688,000 was
provided by decreases in inventories and accounts receivable, respectively.
These decreases were due to improved inventory controls and improved
collections, respectively.
Excluding available-for-sale investments activity, the Company's investing
activities primarily consisted of capital additions. During the first six months
of 1998, the Company expended $1,129,000 on purchases of property, plant, and
equipment. During the remainder of 1998, the Company expects to make capital
expenditures of approximately $2,200,000, principally for manufacturing and
tooling equipment and leasehold improvements.
During the first six months of 1998, the Company's financing activities used
$6,161,000 of cash. Pursuant to an authorization which expired on June 12, 1998,
the Company repurchased $5,982,000 of its common stock during the first six
months of 1998.
The Company believes that it has adequate resources to meet its financial
needs for the foreseeable future.
12
<PAGE>
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On June 1, 1998, at the Annual Meeting of Shareholders, the
shareholders elected seven incumbent directors to a one-year term expiring
in 1999. The directors reelected at the meeting were: Dr. Walter J.
Bornhorst, Dr. Elias P. Gyftopoulos, John T. Keiser, Dr. Leonard Laster,
Victor L. Poirier, John W. Wood Jr., and Dr. Nicholas T. Zervas. Each
director, except Dr. Bornhorst and Dr. Gyftopoulos, received 34,300,238
shares voted in favor of election and 23,594 shares voted against. Dr.
Bornhorst received 34,297,063 shares voted in favor of his election and
26,769 shares voted against. Dr. Gyftopoulos received 34,300,038 shares
voted in favor of his election and 23,794 shares voted against. No
abstentions or broker nonvotes were recorded on the election of directors.
Item 5 - Other Information
Pursuant to recent amendments to the rules relating to proxy statements
under the Securities Exchange Act of 1934, as amended (the Exchange Act),
shareholders of the Company are hereby notified that any shareholder proposal
not included in the Company's proxy materials for its 1999 Annual Meeting of
Shareholders (the Annual Meeting) in accordance with Rule 14a-8 under the
Exchange Act will be considered untimely for the purposes of Rules 14a-4 and
14a-5 under the Exchange Act if notice thereof is received by the Company after
March 15, 1999. Management proxies will be authorized to exercise discretionary
voting authority with respect to any shareholder proposal not included in the
Company's proxy materials for the Annual Meeting unless (a) the Company receives
notice of such proposal by March 15, 1999, and (b) the conditions set forth in
Rule 14a-4(c)(2)(i)-(iii) under the Exchange Act are met.
Item 6 - Exhibits
See Exhibit Index on the page immediately preceding exhibits.
13
<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 August 1998.
THERMO CARDIOSYSTEMS INC.
Paul F. Kelleher
----------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
----------------------------
John N. Hatsopoulos
Chief Financial Officer and
Senior Vice President
14
<PAGE>
THERMO CARDIOSYSTEMS INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ----------------------------------------------------------------------------
27 Financial Data Schedule.
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
CARDIOSYSTEMS INC.'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED JULY 4, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-END> JUL-04-1998
<CASH> 36,108
<SECURITIES> 50,677
<RECEIVABLES> 10,521
<ALLOWANCES> 891
<INVENTORY> 12,649
<CURRENT-ASSETS> 113,586
<PP&E> 18,550
<DEPRECIATION> 10,313
<TOTAL-ASSETS> 173,417
<CURRENT-LIABILITIES> 12,474
<BONDS> 70,000
0
0
<COMMON> 4,052
<OTHER-SE> 86,891
<TOTAL-LIABILITY-AND-EQUITY> 173,417
<SALES> 32,618
<TOTAL-REVENUES> 32,618
<CGS> 13,776
<TOTAL-COSTS> 13,776
<OTHER-EXPENSES> 5,020
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 1,795
<INCOME-PRETAX> 6,700
<INCOME-TAX> 2,542
<INCOME-CONTINUING> 4,158
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,158
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
