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 April 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 May 1, 1998
---------------------------- --------------------------
Common Stock, $.10 par value 39,038,839
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
-----------------------------
THERMO CARDIOSYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
April 4, January 3,
(In thousands) 1998 1998
------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents (includes $10,544
and $70,488 under repurchase agreement with
affiliated party) $ 39,195 $ 71,158
Short-term available-for-sale investments,
at quoted market value (amortized cost of
$69,397 and $45,443) 69,518 45,589
Accounts receivable, less allowances of
$861 and $833 10,937 11,377
Inventories:
Raw materials 3,258 3,420
Work in process and finished goods 10,034 11,099
Prepaid and refundable income taxes 3,975 3,962
Prepaid expenses and other current assets 460 342
-------- --------
137,377 146,947
-------- --------
Property, Plant, and Equipment, at Cost 18,351 17,861
Less: Accumulated depreciation and
amortization 9,957 9,380
-------- --------
8,394 8,481
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $26,455 and $12,655) 26,456 12,665
-------- --------
Prepaid Income Taxes 2,749 2,749
-------- --------
Other Assets 2,299 2,366
-------- --------
$177,275 $173,208
======== ========
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THERMO CARDIOSYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 4, January 3,
(In thousands except share amounts) 1998 1998
------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 2,396 $ 2,291
Accrued payroll and employee benefits 2,189 2,749
Accrued warranty expenses 1,152 1,100
Accrued income taxes 2,190 912
Accrued interest 1,238 406
Other accrued expenses 2,337 2,479
Due to parent company and affiliated companies 703 308
-------- --------
12,205 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 34,404 32,096
Treasury stock at cost, 1,482,582 and
1,502,474 shares (41,751) (41,563)
Accumulated other comprehensive income (Note 3) 107 126
-------- --------
95,070 92,963
-------- --------
$177,275 $173,208
======== ========
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
------------------------
April 4, March 29,
(In thousands except per share amounts) 1998 1997
------------------------------------------------------------------------
Revenues $16,485 $14,902
------- -------
Costs and Operating Expenses:
Cost of revenues 6,909 6,929
Selling, general, and administrative expenses 4,293 4,005
Research and development expenses 2,573 2,070
------- -------
13,775 13,004
------- -------
Operating Income 2,710 1,898
Interest Income 1,906 1,175
Interest Expense (898) -
Gain on Sale of Investments, Net 19 -
------- -------
Income Before Provision for Income Taxes 3,737 3,073
Provision for Income Taxes 1,429 1,198
------- -------
Net Income $ 2,308 $ 1,875
======= =======
Basic and Diluted Earnings per Share (Note 2) $ .06 $ .05
======= =======
Weighted Average Shares (Note 2):
Basic 39,025 40,256
======= =======
Diluted 39,284 40,613
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
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THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
--------------------
April 4, March 29,
(In thousands) 1998 1997
------------------------------------------------------------------------
Operating Activities:
Net income $ 2,308 $ 1,875
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 688 583
Provision for losses on accounts receivable 30 30
Gain on sale of investments, net (19) -
Other noncash items - (13)
Changes in current accounts:
Accounts receivable 412 480
Inventories 1,229 (1,603)
Other current assets (118) 9
Accounts payable 105 (89)
Other current liabilities 1,853 (112)
-------- --------
Net cash provided by operating activities 6,488 1,160
-------- --------
Investing Activities:
Proceeds from sale and maturities of available-
for-sale investments 43,456 30,008
Purchases of available-for-sale investments (81,192) (18,552)
Purchases of property, plant, and equipment (515) (599)
Other (19) 41
-------- --------
Net cash provided by (used in) investing activities (38,270) 10,898
-------- --------
Financing Activities:
Net proceeds from issuance of Company common
stock 38 247
Payment of withholding taxes related to stock
option exercises (220) (73)
International Technidyne transfer of cash from
Thermo Electron - 384
-------- --------
Net cash provided by (used in) financing activities (182) 558
-------- --------
Exchange Rate Effect on Cash 1 (14)
-------- --------
Increase (Decrease) in Cash and Cash Equivalents (31,963) 12,602
Cash and Cash Equivalents at Beginning of Period 71,158 1,157
-------- --------
Cash and Cash Equivalents at End of Period $ 39,195 $ 13,759
======== ========
Noncash Activities:
Conversions of convertible debentures $ - $ 3,755
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
5PAGE
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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 April
4, 1998, and the results of operations and cash flows for the three-month
periods ended April 4, 1998, and March 29, 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
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 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
--------------------
April 4, March 29,
(In thousands except per share amounts) 1998 1997
-----------------------------------------------------------------------
Basic
Net income $ 2,308 $ 1,875
------- -------
Weighted average shares 35,669 36,900
Shares issuable in connection with the acquisition
of International Technidyne Corporation 3,356 3,356
------- -------
Basic weighted average shares 39,025 40,256
------- -------
Basic earnings per share $ .06 $ .05
======= =======
Diluted
Net income $ 2,308 $ 1,875
------- -------
Basic weighted average shares 39,025 40,256
Effect of:
Convertible debentures - 10
Stock options 259 347
------- -------
Weighted average shares, as adjusted 39,284 40,613
------- -------
Diluted earnings per share $ .06 $ .05
======= =======
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THERMO CARDIOSYSTEMS INC.
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 April 4, 1998, there were 989,700 of
such options outstanding, with exercise prices ranging from $24.32 to
$48.97 per share. In addition, the computation of diluted earnings per
share for the first quarter of 1998 excluded 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 (SFAS) 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 first quarter of 1998 and 1997, the Company's comprehensive income
totaled $2,289,000 and $1,758,000, 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.
7PAGE
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THERMO CARDIOSYSTEMS INC.
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 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's Nimbus Medical, Inc. subsidiary, which business was
acquired in December 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. 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 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
First Quarter 1998 Compared With First Quarter 1997
---------------------------------------------------
Revenues in the first quarter of 1998 were $16,485,000, compared with
$14,902,000 in the first quarter of 1997. This increase was due primarily
to a $1,766,000 increase in revenues from the Company's air-driven LVAS,
offset in part by a $491,000 decrease in revenues from the Company's
electric LVAS. In April 1998, the Company received conditional approval
from the FDA for engineering advancements made to the electric LVAS. The
conditional approval of these advancements is contingent upon the Company
responding to a series of additional questions relating to the
submission. The Company anticipates that its response will be completed
within several weeks of receipt of the conditional approval. The increase
in revenues was also due to an increase in revenues from International
Technidyne to $9,385,000 in the first quarter of 1998, from $9,002,000 in
the first quarter of 1997.
The gross profit margin increased to 58% in the first quarter of 1998
from 54% in the first quarter of 1997, primarily due to a shift in the
LVAS sales mix to higher-margin air-driven LVAS and, to a lesser extent,
an increase in revenues from higher-margin International Technidyne
products.
Selling, general, and administrative expenses as a percentage of
revenues decreased to 26% in the first quarter of 1998 from 27% in the
first quarter of 1997, primarily due to increased revenues.
8PAGE
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THERMO CARDIOSYSTEMS INC.
First Quarter 1998 Compared With First Quarter 1997 (continued)
---------------------------------------------------
Research and development expenses increased to $2,573,000 in the
first quarter of 1998 from $2,070,000 in the first 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. 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 FDA approval
of the electric LVAS as an alternative to medical therapy during this
time period, or at all.
Interest income increased to $1,906,000 in the first quarter of 1998
from $1,175,000 in the first 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 $68.0 million.
Interest expense of $898,000 in the first quarter of 1998 represents
interest expense incurred as a result of the issuance of the 4 3/4%
subordinated convertible debentures.
The Company recorded a gain on sale of investments, net, of $19,000
in the first quarter of 1998.
The effective tax rates were 38% and 39% in the first 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.
Liquidity and Capital Resources
Consolidated working capital was $125,172,000 at April 4, 1998,
compared with $136,702,000 at January 3, 1998. Cash, cash equivalents,
and short- and long-term available-for-sale investments were $135,169,000
at April 4, 1998, compared with $129,412,000 at January 3, 1998. During
the first quarter of 1998, $6,488,000 of cash was provided by operating
activities. Cash of $1,853,000 was provided by an increase in other
current liabilities and $1,229,000 was provided by a decrease in
inventories, primarily due to increased sales.
Excluding available-for-sale investments activity, the Company's
investing activities primarily consisted of capital additions. During the
first quarter of 1998, the Company expended $515,000 on purchases of
property, plant, and equipment. During the remainder of 1998, the Company
expects to make capital expenditures of approximately $3,300,000,
principally for manufacturing and tooling equipment and leasehold
improvements.
9PAGE
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THERMO CARDIOSYSTEMS INC.
Liquidity and Capital Resources (continued)
During the first quarter of 1998, the Company's financing activities
used $182,000 of cash. The Company's Board of Directors has authorized
the repurchase, through June 12, 1998, of up to $20.0 million of its own
securities in the open market, or in negotiated transactions. Any
repurchases would be funded from working capital. As of April 4, 1998,
$11,378,000 remained under this authorization.
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.
10PAGE
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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 8th day of May 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
11PAGE
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THERMO CARDIOSYSTEMS INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
27 Financial Data Schedule.
<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 PERIOD ENDED APRIL 4,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> APR-04-1998
<CASH> 39,195
<SECURITIES> 69,518
<RECEIVABLES> 11,798
<ALLOWANCES> 861
<INVENTORY> 13,292
<CURRENT-ASSETS> 137,377
<PP&E> 18,351
<DEPRECIATION> 9,957
<TOTAL-ASSETS> 177,275
<CURRENT-LIABILITIES> 12,205
<BONDS> 70,000
0
0
<COMMON> 4,052
<OTHER-SE> 91,018
<TOTAL-LIABILITY-AND-EQUITY> 177,275
<SALES> 16,485
<TOTAL-REVENUES> 16,485
<CGS> 6,909
<TOTAL-COSTS> 6,909
<OTHER-EXPENSES> 2,573
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 898
<INCOME-PRETAX> 3,737
<INCOME-TAX> 1,429
<INCOME-CONTINUING> 2,308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,308
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
