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 1, 2000
[ ] 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
incorporation or organization) (I.R.S. Employer 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, 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 April 28, 2000
Common Stock, $.10 par value 38,566,165
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO CARDIOSYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
<TABLE>
<CAPTION>
April 1, January 1,
<S> <C> <C>
(In thousands) 2000 2000
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
Cash and cash equivalents $ 704 $ 418
Advance to affiliate 17,065 13,961
Short-term available-for-sale investments, at quoted market value 94,640 82,559
(amortized cost of $95,039 and $82,767)
Accounts receivable, less allowances of $949 and $1,009 13,743 14,368
Inventories:
Raw materials 3,452 3,863
Work in process 8,931 7,859
Finished goods 3,213 3,223
Deferred tax asset 4,155 4,128
Prepaid expenses and other current assets 14 69
-------- --------
145,917 130,448
-------- --------
Property, Plant, and Equipment, at Cost 21,938 21,420
Less: Accumulated depreciation and amortization 14,690 14,061
-------- --------
7,248 7,359
-------- --------
Long-term Available-for-sale Investments, at Quoted Market Value 15,563 28,108
(amortized cost of $15,765 and $28,427) -------- --------
Deferred Tax Asset 2,611 2,611
-------- --------
Other Assets 1,342 1,402
-------- --------
$172,681 $169,928
======== ========
2
<PAGE>
THERMO CARDIOSYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 1, January 1,
(In thousands except share amounts) 2000 2000
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Accounts payable $ 4,949 $ 4,235
Accrued payroll and employee benefits 2,822 3,788
Accrued warranty expenses 1,277 1,420
Accrued income taxes 1,192 1,067
Other accrued expenses 4,045 3,754
Due to parent company and affiliated companies 1,152 713
-------- --------
15,437 14,977
-------- --------
Subordinated Convertible Debentures 58,011 58,011
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 100,000,000 shares authorized; 4,063 4,053
40,625,230 and 40,531,130 shares issued
Capital in excess of par value 96,514 96,006
Retained earnings 51,270 49,500
Treasury stock at cost, 2,056,149 and 2,054,669 shares (51,779) (51,807)
Deferred compensation (469) (521)
Accumulated other comprehensive items (Note 2) (366) (291)
-------- --------
99,233 96,940
-------- --------
$172,681 $169,928
======== ========
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
April 1, April 3,
(In thousands except per share amounts) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $20,082 $19,461
------- -------
Costs and Operating Expenses:
Cost of revenues 8,292 8,367
Selling, general, and administrative expenses 5,855 5,462
Research and development expenses 3,974 3,572
Restructuring and unusual costs (Note 5) 141 -
------- -------
18,262 17,401
------- -------
Operating Income 1,820 2,060
Interest Income 1,805 1,722
Interest Expense (747) (905)
------- -------
Income Before Provision for Income Taxes 2,878 2,877
Provision for Income Taxes 1,108 1,104
------- -------
Net Income $ 1,770 $ 1,773
======= =======
Basic and Diluted Earnings per Share (Note 3) $ .05 $ .05
======= =======
Weighted Average Shares (Note 3):
Basic 38,519 38,412
======= =======
Diluted 38,581 38,455
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
April 1, April 3,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income $ 1,770 $ 1,773
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 747 685
Provision for losses on accounts receivable - 30
Other noncash items 52 -
Changes in current accounts:
Accounts receivable 623 (837)
Inventories (654) 679
Other current assets 54 218
Accounts payable 714 (806)
Other current liabilities (245) 1,178
-------- -------
Net cash provided by operating activities 3,061 2,920
-------- -------
Investing Activities:
Advances to affiliate, net (3,104) -
Proceeds from maturities of available-for-sale investments 12,652 67,237
Purchases of available-for-sale investments (12,274) (88,773)
Purchases of property, plant, and equipment (556) (318)
Other (9) 6
-------- -------
Net cash used in investing activities (3,291) (21,848)
-------- -------
Financing Activities:
Net proceeds from issuance of Company common stock 577 -
Payment of withholding taxes related to stock option exercises (31) -
Purchases of Company common stock - (925)
-------- -------
Net cash provided by (used in) financing activities 546 (925)
-------- -------
Exchange Rate Effect on Cash (30) (21)
-------- -------
Increase (Decrease) in Cash and Cash Equivalents 286 (19,874)
Cash and Cash Equivalents at Beginning of Period 418 42,026
-------- -------
Cash and Cash Equivalents at End of Period $ 704 $22,152
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
<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 April 1, 2000, and the results of
operations and cash flows for the three-month periods ended April 1, 2000, and
April 3, 1999. Interim results are not necessarily indicative of results for a
full year.
The consolidated balance sheet presented as of January 1, 2000, 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 1, 2000,
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 first quarter of 2000 and 1999, the
Company's comprehensive income totaled $1,695,000 and $1,754,000, respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
April 1, April 3,
(In thousands except per share amounts) 2000 1999
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Basic
Net Income $1,770 $ 1,773
------ -------
Weighted Average Shares 38,519 38,412
------ -------
Basic Earnings per Share $ .05 $ .05
====== =======
Diluted
Net Income $1,770 $ 1,773
------ -------
Weighted Average Shares 38,519 38,412
Effect of Stock Options 62 43
------ -------
Weighted Average Shares, as Adjusted 38,581 38,455
------ -------
Diluted Earnings per Share $ .05 $ .05
====== =======
6
<PAGE>
3. Earnings per Share (continued)
Options to purchase 335,000 and 1,389,000 shares of common stock were not
included in the computation of diluted earnings per share for the first quarter
of 2000 and 1999, respectively, because their effect would have been
antidilutive due to the options' exercise prices exceeding the average market
price for the common stock.
In addition, the computation of diluted earnings per share for each period
excludes the effect of assuming the conversion of the Company's 4 3/4%
subordinated convertible debentures, convertible at $31.415 per share, because
the effect would be antidilutive. The principal amount of the debentures was
$58,011,000 and $70,000,000 during the first quarter of 2000 and 1999,
respectively.
4. Business Segment Information
Three Months Ended
April 1, April 3,
(In thousands) 2000 1999
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Revenues:
Left Ventricular-assist Systems $10,326 $ 9,752
Other Medical Equipment 9,756 9,709
------- -------
$20,082 $19,461
======= =======
Income Before Provision for Income Taxes:
Left Ventricular-assist Systems (a) $ 92 $ 14
Other Medical Equipment (b) 1,968 2,248
Corporate (c) (240) (202)
------- -------
Total operating income 1,820 2,060
Interest income, net 1,058 817
------- -------
$ 2,878 $ 2,877
======= =======
(a) Includes restructuring and unusual costs of $100,000 in the three-month period ended April 1, 2000.
(b) Includes restructuring and unusual costs of $41,000 in the three-month period ended April 1, 2000.
(c) Primarily general and administrative expenses.
5. Restructuring and Unusual Costs
During the first quarter of 2000, the Company recorded restructuring and
unusual costs of $141,000 for employee retention costs in connection with Thermo
Electron Corporation's plan to sell the Company (Note 6). The retention costs
are being recorded ratably over the period through which the employees must
remain employed to qualify for the payment. Of the total costs incurred during
the first quarter of 2000, $100,000 were recorded in the Left Ventricular-assist
Systems segment and $41,000 were recorded by the Other Medical Equipment
segment. At April 1, 2000, no retention payments had been made. The liability
for retention costs is included in other accrued expenses in the accompanying
April 1, 2000, balance sheet.
6. Proposed Sale of the Company
On January 31, 2000, Thermo Electron announced that it plans to sell the
Company. This action is part of a major reorganization plan under which Thermo
Electron will spin in, spin off, and sell various businesses to focus solely on
its core measurement and detection instruments business.
7
<PAGE>
7. Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements."
SAB 101 includes requirements for when shipments may be recorded as revenue when
the terms of the sale include customer acceptance provisions or an obligation of
the seller to install the product. In such instances, SAB 101 generally requires
that revenue recognition occur at completion of installation and/or upon
customer acceptance. SAB 101 requires that companies conform their revenue
recognition practices to the requirements therein no later than the second
quarter of calendar 2000 through recording a cumulative net of tax effect of the
change in accounting. The Company has not completed the analysis to determine
the effect that SAB 101 will have on its financial statements.
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 1, 2000, 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 HeartMate
II, the next generation of the Company's LVAS. Because of its smaller size,
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
earns a profit on the sale of that device.
On January 31, 2000, Thermo Electron Corporation announced that it plans
to sell the Company, as part of a major reorganization plan (Note 6).
8
<PAGE>
Results of Operations
First Quarter 2000 Compared With First Quarter 1999
Total revenues increased to $20.1 million in the first quarter of 2000
from $19.5 million in the first quarter of 1999. LVAS segment revenues increased
to $10.3 million in 2000 from $9.8 million in 1999 due to a $0.3 million
increase in revenues from the Company's electric LVAS, principally due to an
increase in the average sales price as well as higher demand. Revenues in the
LVAS segment also increased due to higher sales of the Company's air-driven
LVAS. Revenues from government research and development contracts at Nimbus were
$0.2 million in the first quarter of 2000 and $0.1 million in the first quarter
of 1999. The Company expects that Nimbus will complete its existing government
contracts during the second quarter of 2000 and that Nimbus will focus on
technological research, as well as compete for new government contracts, in the
foreseeable future.
Other Medical Equipment segment revenues increased to $9.8 million in the
first quarter of 2000 from $9.7 million in the first quarter of 1999, primarily
due to a $0.6 million increase in revenues from coagulation systems due to
higher demand, offset in part by a decrease in revenues from skin-incision
devices due to lower demand.
The gross profit margin increased to 59% in the first quarter of 2000 from
57% in the first quarter of 1999 due to gross profit margin improvement in the
LVAS segment. This improvement was primarily due to an increase in the average
sales price for the electric LVAS, as well as manufacturing efficiencies. The
gross profit margin for the Other Medical Equipment segment decreased slightly,
principally as a result of changes in product mix.
Selling, general, and administrative expenses as a percentage of revenues
increased to 29% in the first quarter of 2000 from 28% in the first quarter of
1999. Selling, general, and administrative expenses increased to $5.9 million in
2000 from $5.5 million in 1999, primarily due to an increase in international
selling expenses in the LVAS segment. During the remainder of 2000, the Company
plans to increase its selling and marketing costs relating to the electric LVAS,
which was approved by the FDA for commercial sale in September 1998. Higher
selling and marketing costs may adversely affect the Company's operating
results.
Research and development expenses increased to $4.0 million, or 20% of
revenues, in the first quarter of 2000 from $3.6 million, or 18% of revenues, in
the first quarter of 1999, primarily due to a $0.3 million increase in expenses
in the LVAS segment, principally for the development of the HeartMate II and
continuing expenses related to a clinical trial that is currently being
conducted 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 clinical trial, which is estimated to be two to three
years. There can be no assurance that the Company will complete this study. To a
lesser extent, research and development expenses increased due to increased
product development activities in the Other Medical Equipment segment.
Restructuring and unusual costs of $0.1 million were recorded by the
Company, primarily in the LVAS segment, in the first quarter of 2000 for
employee retention costs in connection with Thermo Electron's plan to sell the
Company (Notes 5 and 6).
Interest income increased to $1.8 million in the first quarter of 2000
from $1.7 million in the first quarter of 1999, primarily due to an increase in
interest rates. Interest expense decreased to $0.7 million in the first quarter
of 2000 from $0.9 million in the first quarter of 1999, primarily due to the
purchase by the Company of $12.0 million principal amount of its 4 3/4%
subordinated convertible debentures in 1999.
The effective tax rate was 38% in the first quarter of 2000 and 1999. The
effective tax rates exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes.
9
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $130.5 million at April 1, 2000, compared
with $115.5 million at January 1, 2000. Cash, cash equivalents, advance to
affiliate, and short- and long-term available-for-sale investments were $128.0
million at April 1, 2000, compared with $125.0 million at January 1, 2000.
During the first quarter of 2000, $3.1 million of cash was provided by operating
activities. A decrease in accounts receivable provided $0.6 million of cash,
primarily due to the timing of cash receipts. Accounts payable increased $0.7
million principally to fund a $0.7 million increase in inventory in response to
increased product demand.
During the first quarter of 2000, the Company's primary investing
activity, excluding advance to affiliate and available-for-sale investments
activity, was the purchase of property, plant, and equipment for $0.6 million.
The Company expects to make capital expenditures of approximately $3.5 million
during the remainder of 2000, primarily for manufacturing and tooling equipment
and leasehold improvements.
During the first quarter of 2000, the Company sold 60,000 shares of
Company common stock for $0.3 million in connection with a warrant previously
granted to a third party. At April 1, 2000, the Company had an authorization by
its Board of Directors to purchase $15.1 million of Company common stock or
subordinated convertible debentures in the open market or negotiated
transactions through October 28, 2000. Any such repurchases would be funded from
working capital. At April 1, 2000, the Company had outstanding $58.0 million
principal amount of 4 3/4% subordinated convertible debentures due 2004. As a
result of Thermo Electron's plan to sell the Company (Note 6), these debentures
may be required to be repaid prior to the maturity date of 2004, depending upon
the terms of the sale.
The Company believes that it has adequate resources to meet its financial
needs for the foreseeable future.
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 1999.
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
On February 1, 2000, the Company filed a Current Report on Form 8-K dated
as of January 31, 2000, with respect to the proposed sale of the Company.
10
<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 9th day of May 2000.
THERMO CARDIOSYSTEMS INC.
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
11
<PAGE>
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 CARDIOSYSTEM'S
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL 1,2000
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> DEC-30-2000
<PERIOD-END> APR-01-2000
<CASH> 704
<SECURITIES> 94,640
<RECEIVABLES> 14,692
<ALLOWANCES> 949
<INVENTORY> 15,596
<CURRENT-ASSETS> 145,917
<PP&E> 21,938
<DEPRECIATION> 14,690
<TOTAL-ASSETS> 172,681
<CURRENT-LIABILITIES> 15,437
<BONDS> 58,011
0
0
<COMMON> 4,063
<OTHER-SE> 95,170
<TOTAL-LIABILITY-AND-EQUITY> 172,681
<SALES> 20,082
<TOTAL-REVENUES> 20,082
<CGS> 8,292
<TOTAL-COSTS> 8,292
<OTHER-EXPENSES> 4,115
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 747
<INCOME-PRETAX> 2,878
<INCOME-TAX> 1,108
<INCOME-CONTINUING> 1,770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,770
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
</TABLE>
