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 2, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-10114
THERMO CARDIOSYSTEMS INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-3027040
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 October 29, 1999
Common Stock, $.10 par value 38,467,352
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO CARDIOSYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
October 2, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ---------- ----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents (includes $20,717 under repurchase $ 857 $42,026
agreement with affiliated company in fiscal 1998)
Advance to affiliate (Note 5) 22,935 -
Short-term available-for-sale investments, at quoted market value 79,632 43,310
(amortized cost of $79,752 and $43,155)
Accounts receivable, less allowances of $977 and $951 13,735 12,240
Inventories:
Raw materials 3,304 3,010
Work in process 7,613 6,139
Finished goods 2,831 2,788
Prepaid income taxes 2,882 2,629
Prepaid expenses and other current assets 168 411
-------- --------
133,957 112,553
-------- --------
Property, Plant, and Equipment, at Cost 20,583 18,980
Less: Accumulated depreciation and amortization 13,418 11,650
-------- --------
7,165 7,330
-------- --------
Long-term Available-for-sale Investments, at Quoted Market Value 33,215 47,259
(amortized cost of $33,504 and $47,227)
-------- --------
Prepaid Income Taxes 3,195 3,195
-------- --------
Other Assets 1,720 2,026
-------- --------
$179,252 $172,363
======== ========
2
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THERMO CARDIOSYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 2, January 2,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ---------- ----------
Current Liabilities:
Accounts payable $ 4,937 $ 4,356
Accrued payroll and employee benefits 3,273 3,126
Accrued warranty expenses 1,368 1,210
Accrued income taxes - 1,468
Accrued interest expense 1,238 406
Other accrued expenses 3,509 2,748
Due to parent company and affiliated companies 990 335
-------- --------
15,315 13,649
-------- --------
Subordinated Convertible Debentures 70,000 70,000
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 100,000,000 shares authorized; 4,052 4,052
40,522,021 shares issued
Capital in excess of par value 95,958 98,489
Retained earnings 46,544 39,916
Treasury stock at cost, 2,054,669 and 2,031,795 shares (51,807) (53,892)
Deferred compensation (573) -
Accumulated other comprehensive items (Note 2) (237) 149
-------- --------
93,937 88,714
-------- --------
$179,252 $172,363
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $19,738 $15,798
------- -------
Costs and Operating Expenses:
Cost of revenues 8,568 7,060
Selling, general, and administrative expenses 5,517 4,686
Research and development expenses 3,812 2,708
------- -------
17,897 14,454
------- -------
Operating Income 1,841 1,344
Interest Income 1,813 1,894
Interest Expense (905) (898)
------- -------
Income Before Income Taxes 2,749 2,340
Income Tax (Provision) Benefit 96 (902)
------- -------
Net Income $ 2,845 $ 1,438
======= =======
Basic and Diluted Earnings per Share (Note 3) $ .07 $ .04
======= =======
Weighted Average Shares (Note 3):
Basic 38,467 38,796
======= =======
Diluted 38,522 38,964
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $ 59,414 $48,416
-------- -------
Costs and Operating Expenses:
Cost of revenues 25,451 20,836
Selling, general, and administrative expenses 16,561 13,826
Research and development expenses 11,064 7,728
-------- -------
53,076 42,390
-------- -------
Operating Income 6,338 6,026
Interest Income 5,273 5,687
Interest Expense (2,715) (2,693)
Gain on Sale of Investments, Net - 20
-------- -------
Income Before Income Taxes 8,896 9,040
Income Tax Provision 2,268 3,444
-------- -------
Net Income $ 6,628 $ 5,596
======== =======
Basic and Diluted Earnings per Share (Note 3) $ .17 $ .14
======== =======
Weighted Average Shares (Note 3):
Basic 38,433 38,918
======== =======
Diluted 38,483 39,134
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
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THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income $ 6,628 $ 5,596
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,140 2,162
Provision for losses on accounts receivable 90 90
Gain on sale of investments, net - (20)
Other noncash items 52 (69)
Changes in current accounts:
Accounts receivable (1,588) 422
Inventories (1,812) 2,774
Other current assets 243 (413)
Accounts payable 583 84
Other current liabilities 1,044 4,553
--------- --------
Net cash provided by operating activities 7,380 15,179
--------- --------
Investing Activities:
Advances to affiliate, net (Note 5) (22,935) -
Proceeds from sale and maturities of available-for-sale investments 127,433 115,549
Purchases of available-for-sale investments (150,306) (169,820)
Purchases of property, plant, and equipment (1,702) (1,363)
Other 33 172
--------- --------
Net cash used in investing activities (47,477) (55,462)
--------- --------
Financing Activities:
Net proceeds from issuance of Company common stock 144 518
Payment of withholding taxes related to stock option exercises (290) (728)
Purchases of Company common stock (925) (7,341)
--------- --------
Net cash used in financing activities (1,071) (7,551)
--------- --------
Exchange Rate Effect on Cash (1) 2
--------- --------
Decrease in Cash and Cash Equivalents (41,169) (47,832)
Cash and Cash Equivalents at Beginning of Period 42,026 71,158
--------- --------
Cash and Cash Equivalents at End of Period $ 857 $ 23,326
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
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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 October 2, 1999, the results of
operations for the three- and nine-month periods ended October 2, 1999, and
October 3, 1998, and the cash flows for the nine-month periods ended October 2,
1999, and October 3, 1998. Interim results are not necessarily indicative of
results for a full year.
The consolidated balance sheet presented as of January 2, 1999, 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 2, 1999,
filed with the Securities and Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized net of tax gains and losses from
available-for-sale investments. During the third quarter of 1999 and 1998, the
Company's comprehensive income totaled $2,671,000 and $1,465,000, respectively.
During the first nine months of 1999 and 1998, the Company's comprehensive
income totaled $6,242,000 and $5,606,000, respectively.
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3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Basic
Net Income $2,845 $ 1,438 $6,628 $ 5,596
------ ------- ------ -------
Weighted Average Shares 38,467 38,796 38,433 38,918
------ ------- ------ -------
Basic Earnings per Share $ .07 $ .04 $ .17 $ .14
====== ======= ====== =======
Diluted
Net Income $2,845 $ 1,438 $6,628 $ 5,596
------ ------- ------ -------
Weighted Average Shares 38,467 38,796 38,433 38,918
Effect of Stock Options 55 168 50 216
------ ------- ------ -------
Weighted Average Shares, as Adjusted 38,522 38,964 38,483 39,134
------ ------- ------ -------
Diluted Earnings per Share $ .07 $ .04 $ .17 $ .14
====== ======= ====== =======
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3. Earnings 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 2, 1999, there were 1,384,000 of
such options outstanding, with exercise prices ranging from $9.39 to $38.78 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.
4. Business Segment Information
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Revenues:
Left Ventricular-assist Systems $9,952 $ 6,774 $30,207 $21,007
Other Medical Equipment 9,786 9,024 29,207 27,409
------ ------- ------ -------
$19,738 $15,798 $59,414 $48,416
======= ======= ======= =======
Income (Loss) Before Income Taxes:
Left Ventricular-assist Systems $ (217) $ (486) $ 287 $ (23)
Other Medical Equipment 2,254 2,071 6,688 6,676
Corporate (a) (196) (241) (637) (627)
------ ------- ------ -------
Total operating income 1,841 1,344 6,338 6,026
Interest and other income, net 908 996 2,558 3,014
------ ------- ------ -------
$2,749 $ 2,340 $8,896 $ 9,040
====== ======= ====== =======
(a) Primarily general and administrative expenses.
5. Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron Corporation
commenced use of a new domestic cash management arrangement. Under the new
arrangement, amounts advanced to Thermo Electron by the Company for domestic
cash management purposes bear interest at the 30-day Dealer Commercial Paper
Rate plus 50 basis points, set at the beginning of each month. Thermo Electron
is contractually required to maintain cash, cash equivalents, and/or immediately
available bank lines of credit equal to at least 50% of all funds invested under
this cash management arrangement by all Thermo Electron subsidiaries other than
wholly owned subsidiaries. The Company has the contractual right to withdraw its
funds invested in the cash management arrangement upon 30 days' prior notice.
Amounts invested in this arrangement are included in "advance to affiliate" in
the accompanying balance sheet.
8
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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 2, 1999, filed with the Securities and Exchange
Commission.
Overview
The Company's businesses operate in two segments: Left Ventricular-assist
Systems (LVAS) and Other Medical Equipment. The LVAS segment researches,
develops, and manufactures two implantable heart-assist devices: a pneumatic, or
air-driven, system, and an electric version. Its HeartMate(R) devices are
designed to perform substantially all or part of the pumping function of the
left ventricle of the natural heart for patients suffering from cardiovascular
disease. This segment includes the Company's Nimbus Medical Inc. subsidiary.
Nimbus has been involved in artificial heart technology for over 20 years and
has carried out research in two primary fields: ventricular-assist devices and
total artificial hearts. Nimbus was instrumental in developing the basic
technology for the high-speed rotary blood pump that is the basis for the
HeartMate II, the next generation of the Company's LVAS. Because of its smaller
size, the HeartMate II may potentially be used to provide cardiac support in
small adults and in children.
The Other Medical Equipment segment consists of International Technidyne
Corporation, a leading manufacturer of near-patient, whole-blood coagulation
testing equipment and related disposables, as well as premium-quality,
single-use skin-incision devices.
In general, a profit cannot be earned from the sale of an LVAS in the
United States until approval of the device has been received from the U.S. Food
and Drug Administration (FDA) for commercial sale. Until such approval was
obtained, only the direct and indirect costs of the LVAS could be recovered,
which were included in the Company's revenues. With the FDA's approval of the
air-driven LVAS, the Company began earning a profit on the sale of such systems
in 1994. In September 1998, the FDA granted approval for commercial sale in the
U.S. of the electric LVAS as a bridge to transplant. As a result, the Company
now earns a profit on the sale of that device. Following FDA approval of the
electric LVAS, the Company increased the price of the electric LVAS by
approximately 13%, effective November 1998.
Results of Operations
Third Quarter 1999 Compared With Third Quarter 1998
Total revenues increased to $19.7 million in the third quarter of 1999
from $15.8 million in the third quarter of 1998. LVAS segment revenues increased
to $10.0 million in 1999 from $6.8 million in 1998. The increase in LVAS segment
revenues was primarily due to an increase in demand for the Company's electric
LVAS as a result of FDA approval, which was granted in September 1998 and, to a
lesser extent, a 13% price increase for the electric LVAS, effective November
1998. These increases in revenues were offset in part by a decrease of $1.7
million in revenues from the Company's air-driven LVAS and a decrease in
revenues at Nimbus due to the expiration of several government research and
development contracts. For the foreseeable future, the Company expects that
Nimbus will focus on technological research and will no longer earn revenues
from government contracts.
9
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Third Quarter 1999 Compared With Third Quarter 1998 (continued)
Other Medical Equipment segment revenues increased to $9.8 million in the
third quarter of 1999 from $9.0 million in the third quarter of 1998, primarily
due to an increase in demand.
The gross profit margin increased to 57% in the third quarter of 1999 from
55% in the third quarter of 1998. The gross profit margin at the Other Medical
Equipment segment increased primarily due to increased production levels to
support higher sales, resulting in higher overhead absorption. To a lesser
extent, the gross profit margin increased at the LVAS segment due to a decrease
in lower-margin revenues from government contracts at Nimbus.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 28% in the third quarter of 1999 from 30% in the third quarter of
1998, primarily due to an increase in revenues. This decrease was offset in part
by an increase in sales and marketing staff, principally at the LVAS segment
and, to a lesser extent, higher advertising costs relating to the electric LVAS,
which was approved for commercial sale in September 1998. The Company plans to
continue funding these efforts through the remainder of 1999, which may
adversely affect its operating results.
Research and development expenses increased to $3.8 million, or 19% of
revenues, in the third quarter of 1999 from $2.7 million, or 17% of revenues, in
the third quarter of 1998, primarily due to an increase in expenses at the LVAS
segment relating to a clinical trial being conducted by the Company to evaluate
the electric LVAS as an alternative to medical therapy, as well as expenses
associated with the development of its HeartMate II system. The Company expects
research and development expenses to continue to increase over the life of the
clinical trial, estimated at two to three years. There can be no assurance that
the Company will complete this study.
Interest income decreased to $1.8 million in the third quarter of 1999
from $1.9 million in the third quarter of 1998, primarily due to a decrease in
interest rates. Interest expense was $0.9 million in both periods.
The Company recorded a tax benefit of $0.1 million in the third quarter of
1999 on pretax income of $2.7 million, due to a change in the Company's
estimated effective rate for 1999 as a result of a favorable resolution of a
Company claim for prior-year research and development tax credits. The effect of
the credit decreased the tax provision recorded in the third quarter of 1999 by
$1.2 million. The effective tax rate was 39% in the third quarter of 1998. The
effective tax rate exceeded the statutory federal income tax rate in 1998
primarily due to the impact of state income taxes.
First Nine Months 1999 Compared With First Nine Months 1998
Total revenues increased to $59.4 million in the first nine months of 1999
from $48.4 million in the first nine months of 1998. LVAS segment revenues
increased to $30.2 million in 1999 from $21.0 million in 1998. LVAS segment
revenues increased due to the reasons discussed in the results of operations for
the third quarter. These increases in revenues were offset in part by a decrease
of $6.6 million in revenues from the Company's air-driven LVAS and a decrease in
revenues at Nimbus due to the expiration of several government research and
development contracts.
Other Medical Equipment segment revenues increased to $29.2 million in the
first nine months of 1999 from $27.4 million in the first nine months of 1998,
primarily due to an increase in demand.
The gross profit margin remained unchanged at 57% in the first nine months
of 1999 and 1998.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 28% in the first nine months of 1999 from 29% in the first nine
months of 1998, primarily due to the reasons discussed in the results of
operations for the third quarter.
Research and development expenses increased to $11.1 million, or 19% of
revenues, in the first nine months of 1999 from $7.7 million, or 16% of
revenues, in the first nine months of 1998, primarily due to the reasons
discussed in the results of operations for the third quarter.
10
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First Nine Months 1999 Compared With First Nine Months 1998 (continued)
Interest income decreased to $5.3 million in the first nine months of 1999
from $5.7 million in the first nine months of 1998, primarily due to a decrease
in interest rates. Interest expense was $2.7 million in both periods.
The effective tax rate was 25% and 38% in the first nine months of 1999
and 1998, respectively. The effective tax rate was below the statutory federal
income tax rate in 1999, primarily due to the reason discussed in the results of
operations for the third quarter. The effective tax rate exceeded the statutory
federal income tax rate in 1998, primarily due to the impact of state income
taxes.
Liquidity and Capital Resources
Consolidated working capital was $118.6 million at October 2, 1999,
compared with $98.9 million at January 2, 1999. Cash, cash equivalents, and
short- and long-term available-for-sale investments were $113.7 million at
October 2, 1999, compared with $132.6 million at January 2, 1999. In addition,
as of October 2, 1999, the Company had $22.9 million invested in an advance to
affiliate. Prior to the use of a new domestic cash management arrangement
between the Company and Thermo Electron Corporation (Note 5), which became
effective June 1, 1999, amounts invested with Thermo Electron were included in
cash and cash equivalents. During the first nine months of 1999, $7.4 million of
cash was provided by operating activities. An increase in other current
liabilities provided $1.0 million of cash, primarily due to the timing of
interest payments. An increase in inventories used $1.8 million of cash due to
higher production levels in response to an increase in demand. Cash of $1.6
million was used to fund an increase in accounts receivable due to higher
revenues.
During the first nine months of 1999, the Company's primary investing
activity, excluding advance to affiliate (Note 5) and available-for-sale
investments activity, was the purchase of property, plant, and equipment for
$1.7 million. The Company expects to make capital expenditures of approximately
$1.0 million, principally for manufacturing and tooling equipment and leasehold
improvements, during the remainder of 1999.
During the first nine months of 1999, the Company's financing activities
used $0.9 million of cash to purchase Company common stock pursuant to
authorizations by the Company's Board of Directors. The Company's Board of
Directors has authorized the repurchase of up to an additional $25 million of
the Company's common stock through October 28, 2000.
The Company believes that it has adequate resources to meet its financial
needs for the foreseeable future.
Year 2000
The following constitutes a "Year 2000 Readiness Disclosure" under the
Year 2000 Information and Readiness Disclosure Act. The Company continues to
assess the potential impact of the year 2000 date recognition issue on the
Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading significant
information-technology systems and facilities; (ii) testing and developing
upgrades, if necessary, for the Company's current products and certain
discontinued products; (iii) assessing the year 2000 readiness of its key
suppliers and vendors; and (iv) developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information-technology systems and non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information-technology systems and
non-information technology systems for year 2000 compliance, has largely been
completed. During phase one, the Company tested and evaluated its significant
computer systems, software applications, and related equipment for year 2000
compliance. The Company also evaluated the potential year 2000 impact on its
critical non-information technology systems. The Company's
11
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Year 2000 (continued)
efforts included testing the year 2000 readiness of its manufacturing, utility,
and telecommunications systems at its critical non-information technology
systems. In phase two of its program, any material noncompliant systems or
non-information technology systems that were identified during phase one were
prioritized and remediated. Based on its evaluations of its critical
non-information technology systems, the Company does not believe any material
upgrades or modifications are required. The Company has substantially completed
upgrading or replacing its material noncompliant information-technology systems.
In many cases, such upgrades or replacements were made in the ordinary course of
business, without accelerating previously scheduled upgrades or replacements.
The Company believes that all of its material information-technology systems and
critical non-information technology systems are currently year 2000 compliant.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells or for which the Company continues to provide technical support. The
Company believes that substantially all of these material products are year 2000
compliant. The Company has evaluated and identified those products which may not
be year 2000 compliant and has focused corrective efforts on products that are
still under warranty or early in their expected life and/or are subject to FDA
considerations due to safety risks. The Company is offering upgrades where
reasonably practicable and where deemed necessary. However, as many of the
Company's products are complex, interact with or incorporate third-party
products, and operate on computer systems that are not under the Company's
control, there can be no assurance that the Company has identified all of the
year 2000 problems with its current products.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and distributed questionnaires relating to year 2000 compliance to its
significant suppliers and vendors. The Company has received responses from
approximately 80% of its significant suppliers and vendors to date. No
significant supplier or vendor has indicated that it believes its business
operations will be materially disrupted by the year 2000 issue. The Company
continues to follow-up with its significant suppliers and vendors that have not
responded to the Company's questionnaires.
Contingency Plan
The Company has substantially completed a contingency plan that allows its
primary business operations to continue despite disruptions due to year 2000
problems. This plan includes identifying and securing other suppliers,
increasing inventories, and modifying production facilities and schedules. As
the Company continues to evaluate the year 2000 readiness of its business
systems and facilities, products, and significant suppliers and vendors, it will
modify and adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
relating to products and facilities were funded from working capital. All
internal costs and related external costs, other than capital additions, related
to year 2000 remediation have been and will continue to be expensed as incurred.
The Company does not track internal costs incurred for its year 2000 compliance
project. Such costs are principally the related payroll costs for its
information-systems group.
12
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Year 2000 (continued)
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's material
suppliers or vendors experience business disruptions due to the year 2000 issue
and are unable to provide materials and services to the Company on time. The
Company's operations could be delayed or temporarily shut down, and it could be
unable to meet its obligations to customers in a timely fashion. The Company's
business, operations, and financial condition could be adversely affected in
amounts that cannot be reasonably estimated at this time. If the Company
believes that any of its key suppliers or vendors may not be year 2000
compliant, it will seek to secure other suppliers or vendors identified as part
of its contingency plan.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. 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. As discussed above, if any of the Company's material
suppliers or vendors experience business disruptions due to year 2000 issues,
the Company might also be materially adversely affected. There is expected to be
a significant amount of litigation relating to the year 2000 issue and there can
be no assurance that the Company will not incur material costs in defending or
bringing lawsuits. In addition, if any year 2000 issues are identified, there
can be no assurance that the Company will be able to retain qualified personnel
to remedy such issues. Any unexpected costs or delays arising from the year 2000
issue could have a material adverse impact on the Company's business,
operations, and financial condition in amounts that cannot be reasonably
estimated at this time.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
The company's exposure to market risk from changes in interest rates and
equity prices has not changed materially from its exposure at year-end 1998.
PART II - OTHER INFORMATION
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
None.
13
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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 5th day of November 1999.
THERMO CARDIOSYSTEMS INC.
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.
</TABLE>
<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 OCTOBER
2, 1999 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-01-2000
<PERIOD-END> OCT-02-1999
<CASH> 857
<SECURITIES> 79,632
<RECEIVABLES> 14,712
<ALLOWANCES> 977
<INVENTORY> 13,748
<CURRENT-ASSETS> 133,957
<PP&E> 20,583
<DEPRECIATION> 13,418
<TOTAL-ASSETS> 179,252
<CURRENT-LIABILITIES> 15,315
<BONDS> 70,000
0
0
<COMMON> 4,052
<OTHER-SE> 89,885
<TOTAL-LIABILITY-AND-EQUITY> 179,252
<SALES> 59,414
<TOTAL-REVENUES> 59,414
<CGS> 25,451
<TOTAL-COSTS> 25,451
<OTHER-EXPENSES> 11,064
<LOSS-PROVISION> 90
<INTEREST-EXPENSE> 2,715
<INCOME-PRETAX> 8,896
<INCOME-TAX> 2,268
<INCOME-CONTINUING> 6,628
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,628
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.17
</TABLE>
