SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended September 30, 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
(State or other jurisdiction of 04-3027040
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 October 27, 2000
---------------------------- -------------------------------
Common Stock, $.10 par value 38,562,477
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
-----------------------------
THERMO CARDIOSYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, January 1,
(In thousands) 2000 2000
------------------------------------------------------------------------------- ------------- ----------
Current Assets:
Cash and cash equivalents (Note 9) $ 10,724 $ 418
Advance to affiliate (Note 9) - 13,961
Short-term available-for-sale investments, at quoted market value
(amortized cost of $118,711 and $82,767) 118,457 82,559
Accounts receivable, less allowances of $926 and $1,009 13,586 14,368
Inventories:
Raw materials 3,685 3,863
Work in process 9,876 7,859
Finished goods 2,902 3,223
Deferred tax asset 4,030 4,128
Prepaid expenses and other current assets 33 69
-------- --------
163,293 130,448
-------- --------
Property, Plant, and Equipment, at Cost 23,121 21,420
Less: Accumulated depreciation and amortization 16,057 14,061
-------- --------
7,064 7,359
-------- --------
Long-term Available-for-sale Investments, at Quoted Market Value
(amortized cost of $28,427) - 28,108
-------- --------
Deferred Tax Asset 2,611 2,611
-------- --------
Other Assets 1,211 1,402
-------- --------
$174,179 $169,928
======== ========
2
<PAGE>
THERMO CARDIOSYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
September 30, January 1,
(In thousands except share amounts) 2000 2000
------------------------------------------------------------------------------ ------------- ----------
Current Liabilities:
Accounts payable $ 3,876 $ 4,235
Accrued payroll and employee benefits 3,791 3,788
Accrued warranty expenses 1,035 1,420
Accrued income taxes 1,168 1,067
Accrued retention costs (Note 5) 1,030 -
Accrued interest 990 350
Other accrued expenses 2,844 3,404
Due to parent company and affiliated companies 939 713
-------- --------
15,673 14,977
-------- --------
Subordinated Convertible Debentures (in 2000 includes $1,500 due
to Thermo Electron; Note 6) 54,838 58,011
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 100,000,000 shares authorized; 4,063 4,053
40,626,130 and 40,531,130 shares issued
Capital in excess of par value 96,511 96,006
Retained earnings 55,403 49,500
Treasury stock at cost, 2,063,653 and 2,054,669 shares (51,869) (51,807)
Deferred compensation (293) (521)
Accumulated other comprehensive items (Note 2) (147) (291)
-------- --------
103,668 96,940
-------- --------
$174,179 $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
-------------------------
September 30, October 2,
(In thousands except per share amounts) 2000 1999
------------------------------------------------------------------------------ ------------- ----------
Revenues $19,391 $19,738
------- -------
Costs and Operating Expenses:
Cost of revenues 8,299 8,568
Selling, general, and administrative expenses 5,609 5,517
Research and development expenses 3,902 3,812
Restructuring and unusual costs (Note 5) 387 -
------- -------
18,197 17,897
Operating Income 1,194 1,841
Interest Income 1,945 1,813
Interest Expense (includes $18 to Thermo Electron in 2000) (707) (905)
Other Expense (6) -
------- -------
Income Before Income Taxes and Extraordinary Item 2,426 2,749
Income Tax (Provision) Benefit (932) 96
------- -------
Net Income $ 1,494 $ 2,845
======= =======
Basic and Diluted Earnings per Share (Note 3) $ .04 $ .07
======= =======
Weighted Average Shares (Note 3):
Basic 38,562 38,467
======= =======
Diluted 38,563 38,522
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
4
<PAGE>
THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
-------------------------
September 30, October 2,
(In thousands except per share amounts) 2000 1999
------------------------------------------------------------------------------ ------------- ----------
Revenues $62,235 $59,414
------- -------
Costs and Operating Expenses:
Cost of revenues 26,123 25,451
Selling, general, and administrative expenses 17,601 16,561
Research and development expenses 11,552 11,064
Restructuring and unusual costs (Note 5) 1,094 -
------- -------
56,370 53,076
------- -------
Operating Income 5,865 6,338
Interest Income 5,627 5,273
Interest Expense (includes $35 to Thermo Electron in 2000) (2,201) (2,715)
Other Expense (6) -
------- -------
Income Before Provision for Income Taxes and Extraordinary Item 9,285 8,896
Provision for Income Taxes 3,573 2,268
------- -------
Income Before Extraordinary Item 5,712 6,628
Extraordinary Item, Net of Provision for Income Taxes of $117 (Note 6) 191 -
------- -------
Net Income $ 5,903 $ 6,628
======= =======
Basic and Diluted Earnings per Share (Note 3) $ .15 $ .17
======= =======
Weighted Average Shares (Note 3):
Basic 38,549 38,433
======= =======
Diluted 38,573 38,483
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
5
<PAGE>
THERMO CARDIOSYSTEMS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
-------------------------
September 30, October 2,
(In thousands) 2000 1999
------------------------------------------------------------------------------ ------------- ----------
Operating Activities:
Net income $ 5,903 $ 6,628
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,150 2,140
Provision for losses on accounts receivable - 90
Extraordinary item, net of income taxes (Note 6) (191) -
Other noncash items 225 52
Changes in current accounts:
Accounts receivable 771 (1,588)
Inventories (1,526) (1,812)
Other current assets 34 243
Accounts payable (358) 583
Other current liabilities 980 1,044
--------- ---------
Net cash provided by operating activities 7,988 7,380
--------- ---------
Investing Activities:
Advances to affiliate, net 13,961 (22,935)
Proceeds from maturities of available-for-sale investments 70,674 127,433
Proceeds from sale of available-for-sale investments 287 -
Purchases of available-for-sale investments (78,753) (150,306)
Purchases of property, plant, and equipment (1,724) (1,702)
Other 284 33
--------- ---------
Net cash provided by (used in) investing activities 4,729 (47,477)
--------- ---------
Financing Activities:
Net proceeds from issuance of Company common stock 500 144
Payment of withholding taxes related to stock option exercises (47) (290)
Purchases of Company common stock and subordinated convertible
debentures (Note 6) (2,825) (925)
--------- ---------
Net cash used in financing activities (2,372) (1,071)
--------- ---------
Exchange Rate Effect on Cash (39) (1)
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents 10,306 (41,169)
Cash and Cash Equivalents at Beginning of Period 418 42,026
--------- ---------
Cash and Cash Equivalents at End of Period $ 10,724 $ 857
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
6
<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 September 30, 2000, the results of
operations for the three- and nine-month periods ended September 30, 2000, and
October 2, 1999, and the cash flows for the nine-month periods ended September
30, 2000, and October 2, 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 third quarter of 2000 and 1999, the
Company's comprehensive income totaled $1,749,000 and $2,671,000, respectively.
During the first nine months of 2000 and 1999, the Company's comprehensive
income totaled $6,047,000 and $6,242,000, respectively.
</TABLE>
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, October 2, September 30, October 2,
(In thousands except per share amounts) 2000 1999 2000 1999
--------------------------------------------- ------------- ---------- ------------- ----------
Basic
Net Income $ 1,494 $ 2,845 $ 5,903 $ 6,628
------- ------- ------- -------
Weighted Average Shares 38,562 38,467 38,549 38,433
------- ------- ------- -------
Basic Earnings per Share $ .04 $ .07 $ .15 $ .17
======= ======= ======= =======
Diluted
Net Income $ 1,494 $ 2,845 $ 5,903 $ 6,628
------- ------- ------- -------
Weighted Average Shares 38,562 38,467 38,549 38,433
Effect of Stock Options 1 55 24 50
------- ------- ------- -------
Weighted Average Shares, as Adjusted 38,563 38,522 38,573 38,483
------- ------- ------- -------
Diluted Earnings per Share $ .04 $ .07 $ .15 $ .17
======= ======= ======= =======
7
<PAGE>
THERMO CARDIOSYSTEMS INC.
3. Earnings per Share (continued)
Options to purchase 1,223,000 and 1,384,000 shares of common stock for the
third quarter of 2000 and 1999, respectively, and 841,000 and 1,421,000 shares
of common stock for the first nine months of 2000 and 1999, respectively, were
not included in the computation of diluted earnings per share 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
$54,838,000 and $70,000,000 at September 30, 2000, and October 2, 1999,
respectively.
During the second quarter of 2000, the Company recorded an extraordinary
gain in connection with the repurchase of its 4 3/4% subordinated convertible
debentures. The extraordinary gain had no effect on reported earnings per share
in the first nine months of 2000.
4. Business Segment Information
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, October 2, September 30, October 2,
(In thousands) 2000 1999 2000 1999
---------------------------------------------- -------------- -------------- -------------- -------------
Revenues:
Left Ventricular-Assist Systems $ 9,114 $ 9,952 $32,208 $30,207
Other Medical Equipment 10,277 9,786 30,027 29,207
------- ------- ------- -------
$19,391 $19,738 $62,235 $59,414
======= ======= ======= =======
Income Before Provision for Income
Taxes and Extraordinary Item:
Left Ventricular-assist Systems (a) $ (678) $ (217) $ 899 $ 287
Other Medical Equipment (b) 2,066 2,254 5,695 6,688
Corporate (c) (194) (196) (729) (637)
------- ------- ------- -------
Total operating income 1,194 1,841 5,865 6,338
Interest income, net 1,232 908 3,420 2,558
------- ------- ------- -------
$ 2,426 $ 2,749 $ 9,285 $ 8,896
======= ======= ======= =======
(a) Includes restructuring and unusual costs of $186,000 and $646,000 in the three- and nine-month periods
ended September 30, 2000, respectively.
(b) Includes restructuring and unusual costs of $201,000 and $448,000 in the three- and nine-month periods
ended September 30, 2000, respectively.
(c) Primarily general and administrative expenses.
8
<PAGE>
THERMO CARDIOSYSTEMS INC.
5. Restructuring and Unusual Costs
During the third quarter of 2000, the Company recorded restructuring and
unusual costs of $387,000 for employee retention costs in connection with the
proposed plan to sell the Company (Note 7). 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
third quarter of 2000, $186,000 was recorded in the Left Ventricular-Assist
Systems segment and $201,000 was recorded in the Other Medical Equipment
segment.
During the second quarter of 2000, the Company recorded restructuring and
unusual costs of $566,000 for employee retention costs. Of the total costs
incurred during the second quarter of 2000, $360,000 was recorded in the Left
Ventricular-Assist Systems segment and $206,000 was recorded in the Other
Medical Equipment segment.
</TABLE>
During the first quarter of 2000, the Company recorded restructuring and
unusual costs of $141,000 for employee retention costs. Of the total costs
incurred during the first quarter of 2000, $100,000 was recorded in the Left
Ventricular-Assist Systems segment and $41,000 was recorded in the Other Medical
Equipment segment. A summary of the changes in the liability for retention costs
follows:
<TABLE>
<CAPTION>
<S> <C>
(In thousands)
---------------------------------------------------------------------------------------------- ----------
Balance at January 1, 2000 $ -
Costs incurred in 2000 1,094
Usage (64)
------
Balance at September 30, 2000 $1,030
======
The Company expects to make the payments for employee retention during the
remainder of 2000 and 2001.
6. Extraordinary Item
During the second quarter of 2000, the Company purchased $3,173,000
principal amount of its 4 3/4% subordinated convertible debentures for
$2,825,000 in cash, resulting in an extraordinary gain of $191,000, net of taxes
of $117,000.
7. Proposed Merger
On October 3, 2000, the Company entered into a merger agreement with
Thoratec Laboratories Corporation. Under the terms of the agreement,
shareholders would receive 0.835 shares of Thoratec common stock for each share
of Company common stock. The Company expects that the transaction will be
treated as a tax-free exchange. The transaction is subject to approval by the
shareholders of the Company and Thoratec, regulatory approval, and other
customary conditions, and is expected to close during the first quarter of 2001.
8. 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 recording shipments 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 may require 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 fourth quarter of
calendar 2000 through recording a cumulative net of tax effect of the change in
accounting. The Company does not expect SAB 101 to have a material impact on its
financial statements.
9
<PAGE>
THERMO CARDIOSYSTEMS INC.
9. Advance to Affiliate
Effective August 2000, the Company no longer participates in a domestic
cash management arrangement with Thermo Electron Corporation. Amounts previously
invested in this arrangement are included in cash and cash equivalents and
available-for-sale investments in the September 30, 2000, balance sheet. Amounts
invested in cash equivalents primarily include investments in commercial paper
and U.S. government-agency and U.S. Treasury securities.
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 October 3, 2000, the Company entered into a merger agreement with
Thoratec Laboratories Corporation under which the Company's shareholders would
receive 0.835 shares of Thoratec common stock for each share of Company common
stock. The transaction is expected to close during the first quarter of 2001 if
the necessary approvals are received and conditions met (Note 7).
10
<PAGE>
THERMO CARDIOSYSTEMS INC.
Results of Operations
Third Quarter 2000 Compared With Third Quarter 1999
---------------------------------------------------
Total revenues decreased to $19.4 million in the third quarter of 2000
from $19.7 million in the third quarter of 1999. LVAS segment revenues decreased
to $9.1 million in 2000 from $10.0 million in 1999, primarily due to a decrease
in revenues from the Company's electric LVAS. The Company believes that the
decrease in sales resulted in part from uncertainty in the marketplace that
existed prior to the announcement of the Company's proposed merger.
Other Medical Equipment segment revenues increased to $10.3 million in the
third quarter of 2000 from $9.8 million in the third quarter of 1999, primarily
due to a $0.8 million increase in revenues from coagulation systems due to
increased demand and the introduction of new products, offset in part by a
decrease in revenues from skin-incision devices due to lower demand caused by
competitive pricing pressures.
The gross profit margin was 57% in the third quarter of 2000 and 1999.
Selling, general, and administrative expenses as a percentage of revenues
increased to 29% in the third quarter of 2000 from 28% in the third quarter of
1999, primarily due to decreased revenues. Selling, general, and administrative
expenses increased to $5.6 million in 2000 from $5.5 million in 1999, primarily
due to an increase in selling and marketing expenses in the Other Medical
Equipment segment.
Research and development expenses increased to $3.9 million in the third
quarter of 2000 from $3.8 million in the third quarter of 1999. Research and
development expenses were 20% and 19% of revenues in 2000 and 1999,
respectively. The Company expects research and development expenses to increase
over the life of the clinical trial being conducted to evaluate the electric
LVAS as an alternative to medical therapy, which is estimated to be two to three
years. There can be no assurance that the Company will complete this study.
Restructuring and unusual costs of $0.4 million were recorded by the
Company in the third quarter of 2000 for employee retention costs in connection
with the proposed sale of the Company (Notes 5 and 7).
Interest income increased to $1.9 million in the third quarter of 2000
from $1.8 million in the third quarter of 1999, primarily due to an increase in
interest rates. Interest expense decreased to $0.7 million in the third quarter
of 2000 from $0.9 million in the third quarter of 1999, primarily due to the
purchase by the Company of $15.2 million principal amount of its 4 3/4%
subordinated convertible debentures in 2000 and 1999 (Note 6).
The effective tax rate was 38% in the third quarter of 2000. The Company
recorded a tax benefit of $0.1 million on the pretax income of $2.7 million in
the third quarter of 1999 as a result of a favorable resolution of a Company
claim for prior-year research and development tax credits. The effective tax
rate exceeded the statutory federal income tax rate in 2000 primarily due to the
impact of state income taxes.
First Nine Months 2000 Compared With First Nine Months 1999
-----------------------------------------------------------
Total revenues increased to $62.2 million in the first nine months of 2000
from $59.4 million in the first nine months of 1999. LVAS segment revenues
increased to $32.2 million in 2000 from $30.2 million in 1999, primarily due to
an increase in revenues from the Company's electric LVAS, principally due to
higher demand.
Other Medical Equipment segment revenues increased to $30.0 million in the
first nine months of 2000 from $29.2 million in the first nine months of 1999,
primarily due to a $2.7 million increase in revenues from coagulation systems
due to increased demand and the introduction of new products, offset in part by
a decrease in revenues from skin-incision devices due to lower demand caused by
competitive pricing pressures.
11
<PAGE>
THERMO CARDIOSYSTEMS INC.
First Nine Months 2000 Compared With First Nine Months 1999 (continued)
-----------------------------------------------------------
The gross profit margin increased to 58% in the first nine months of 2000
from 57% in the first nine months 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, which improved the gross margin by
approximately $0.7 million, as well as improved overhead absorption due to
increased revenues. 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
were 28% in the first nine months of 2000 and 1999. Selling, general, and
administrative expenses increased to $17.6 million in 2000 from $16.6 million in
1999, primarily due to an increase in selling and marketing expenses in support
of higher revenues.
Research and development expenses increased to $11.6 million in the first
nine months of 2000 from $11.1 million in the first nine months of 1999,
primarily due to a $0.4 million increase in expenses in the LVAS segment,
principally for the development of the HeartMate II and continuing expenses
related to a clinical trial being conducted to evaluate the electric LVAS as an
alternative to medical therapy. Research and development expenses were 19% of
revenues in 2000 and 1999. 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 $1.1 million were recorded by the
Company in the first nine months of 2000, for the reason discussed in the
results of operations for the third quarter (Notes 5 and 7).
Interest income increased to $5.6 million in the first nine months of 2000
from $5.3 million in the first nine months of 1999, primarily due to an increase
in interest rates. Interest expense decreased to $2.2 million in the first nine
months of 2000 from $2.7 million in the first nine months of 1999, due to the
purchase by the Company of $15.2 million principal amount of its 4 3/4%
subordinated convertible debentures in 2000 and 1999 (Note 6).
The effective tax rate was 38% and 25% in the first nine months of 2000
and 1999, respectively. The effective tax rate exceeded the statutory federal
income tax rate in 2000 primarily due to the impact of state income taxes. The
effective tax rate was below the statutory federal income tax rate in 1999
primarily for the reason discussed in the results of operations for the third
quarter.
The Company recorded an extraordinary gain of $0.2 million in the first
nine months of 2000 as a result of the purchase by the Company of $3.2 million
principal amount of its 4 3/4% subordinated convertible debentures (Note 6).
Liquidity and Capital Resources
Consolidated working capital was $147.6 million at September 30, 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
$129.2 million at September 30, 2000, compared with $125.0 million at January 1,
2000 (Note 9). During the first nine months of 2000, $8.0 million of cash was
provided by operating activities. Cash of $1.5 million was used to fund an
increase in inventory, primarily due to lower than anticipated sales during the
third quarter of 2000. Cash of $1.0 million was provided by an increase in other
current liabilities, primarily accrued retention costs. Cash of $0.8 million was
provided by a decrease in accounts receivable, primarily due to increased
collection efforts.
During the first nine months 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 $1.7 million.
The Company expects to make capital expenditures of approximately $1.0 million
during the remainder of 2000, primarily for manufacturing and tooling equipment
and leasehold improvements.
12
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THERMO CARDIOSYSTEMS INC.
Liquidity and Capital Resources (continued)
During the first nine months of 2000, the Company used $2.8 million of
cash to purchase subordinated convertible debentures pursuant to authorizations
by the Company's Board of Directors. In addition, the Company sold 60,000 shares
of Company common stock in February 2000 for $0.3 million in connection with the
exercise of a warrant previously granted to a third party.
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 5 - Other Information
--------------------------
As previously disclosed in the Company's Annual Report on Form 10-K, the
Company has received correspondence from a third party alleging that the
manufacture and sale of the HeartMate LVAS infringes certain patent rights of
such third party. During the third quarter of 2000, the United States Patent and
Trademark Office, which has been reexamining the third party's U.S. patent,
reversed its prior position that all claims of the patent are invalid and
indicated that it intended to issue a reexamination certificate confirming
patentability of the patent claims. The Company continues to believe that the
patent is invalid. Given the inherent uncertainties in dispute resolution,
however, if the Company were sued and the outcome were unfavorable, the
Company's results of operations or financial condition could be materially
adversely affected in amounts the Company cannot reasonably estimate.
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
<PAGE>
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 9th day of November 2000.
THERMO CARDIOSYSTEMS INC.
--------------------------------------------
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<PAGE>
THERMO CARDIOSYSTEMS INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
--------------------------------------------------------------------------------
2 Agreement and Plan of Merger dated as of October 3, 2000, by and
among Thoratec Laboratories Corporation, Lightning Acquisition
Corp., Thermo Electron Corporation, and Thermo Cardiosystems Inc.
10.1 Addendum to Transition Agreement dated February 18, 2000, between
R. Michael Kleine and Thermo Electron Corporation.
10.2 Addendum to Transition Agreement dated February 18, 2000, between
Victor L. Poirier and Thermo Electron Corporation.
27 Financial Data Schedule.
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