-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ASQqGTUEamn6mG0yHb60NdGJ/47N1E3VlFq265ckvMsjoUKGS6Pk6jc0qTSkPmVh bOhgGPuG0huySk1c7PELOg== 0000721356-99-000010.txt : 19990512 0000721356-99-000010.hdr.sgml : 19990512 ACCESSION NUMBER: 0000721356-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990403 FILED AS OF DATE: 19990511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERMEDICS INC CENTRAL INDEX KEY: 0000721356 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 042788806 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09567 FILM NUMBER: 99616917 BUSINESS ADDRESS: STREET 1: 470 WILDWOOD ST STREET 2: P O BOX 2697 CITY: WOBURN STATE: MA ZIP: 01888-1799 BUSINESS PHONE: 7819383786 MAIL ADDRESS: STREET 1: 81 WYMAN STREET STREET 2: P.O. BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02254 10-Q 1 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 3, 1999 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-9567 THERMEDICS INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-2788806 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 470 Wildwood Street, P.O. Box 2999 Woburn, Massachusetts 01888-1799 (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 April 30, 1999 Common Stock, $.10 par value 41,698,796
PART I - FINANCIAL INFORMATION Item 1 - Financial Statements THERMEDICS INC. Consolidated Balance Sheet (Unaudited) Assets April 3, January 2, (In thousands) 1999 1999 - ----------------------------------------------------------------------------------- ----------- ---------- Current Assets: Cash and cash equivalents (includes $86,806 and $73,377 under $109,318 $142,108 repurchase agreements with parent company) Short-term available-for-sale investments, at quoted market value 86,242 43,310 (amortized cost of $86,094 and $43,155) Accounts receivable, less allowances of $4,688 and $4,498 63,300 63,438 Inventories: Raw materials and supplies 26,814 25,275 Work in process 15,885 15,918 Finished goods 19,826 21,590 Prepaid income taxes and expenses 14,649 14,572 -------- -------- 336,034 326,211 -------- -------- Property, Plant, and Equipment, at Cost 61,098 60,687 Less: Accumulated depreciation and amortization 40,073 38,780 -------- -------- 21,025 21,907 -------- -------- Long-term Available-for-sale Investments, at Quoted Market Value 25,866 47,259 (amortized cost of $25,822 and $47,226) -------- -------- Other Assets 12,076 12,723 -------- -------- Cost in Excess of Net Assets of Acquired Companies (Note 6) 153,477 145,518 -------- -------- $548,478 $553,618 ======== ======== 2 THERMEDICS INC. Consolidated Balance Sheet (continued) (Unaudited) Liabilities and Shareholders' Investment April 3, January 2, (In thousands except share amounts) 1999 1999 - ----------------------------------------------------------------------------------- ----------- ---------- Current Liabilities: Note payable to parent company $ 19,000 $19,000 Notes payable and current maturity of long-term obligations 11,819 6,312 Accounts payable 19,374 20,695 Accrued payroll and employee benefits 11,694 12,830 Accrued income taxes 9,725 8,159 Other accrued expenses 27,776 24,827 Due to parent company and affiliated companies 3,391 2,096 -------- -------- 102,779 93,919 -------- -------- Deferred Income Taxes and Other Deferred Items 409 191 -------- -------- Long-term Obligations: Subordinated convertible obligations 117,424 122,674 Other 217 128 -------- -------- 117,641 122,802 -------- -------- Minority Interest 79,126 88,730 -------- -------- Shareholders' Investment: Common stock, $.10 par value, 100,000,000 shares authorized; 4,174 4,174 41,740,808 and 41,739,308 shares issued Capital in excess of par value 106,996 106,846 Retained earnings 142,226 139,644 Treasury stock at cost, 42,012 and 47,348 shares (946) (1,026) Deferred compensation (29) - Accumulated other comprehensive items (Note 2) (3,898) (1,662) -------- -------- 248,523 247,976 -------- -------- $548,478 $553,618 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 3 THERMEDICS INC. Consolidated Statement of Income (Unaudited) Three Months Ended April 3, April 4, (In thousands except per share amounts) 1999 1998 - ----------------------------------------------------------------------------------- ----------- ---------- Revenues $77,604 $75,661 ------- ------- Costs and Operating Expenses: Cost of revenues 40,135 38,661 Selling, general, and administrative expenses 22,905 21,061 Research and development expenses 7,508 6,629 Nonrecurring costs (Note 7) 1,395 - ------- ------- 71,943 66,351 ------- ------- Operating Income 5,661 9,310 Interest Income 2,847 3,665 Interest Expense (includes $242 to parent company in 1999) (1,453) (1,206) Gain on Sale of Investments, Net - 18 ------- ------- Income Before Provision for Income Taxes, Minority Interest, and 7,055 11,787 Extraordinary Item Provision for Income Taxes 3,257 4,769 Minority Interest Expense 1,216 1,650 ------- ------- Income Before Extraordinary Item 2,582 5,368 Extraordinary Item, Net of Provision of Income Taxes of $780 (Note 3) - 1,205 ------- ------- Net Income $ 2,582 $ 6,573 ======= ======= Earnings per Share (Note 3): Basic $ .06 $ .16 ======= ======= Diluted $ .06 $ .16 ======= ======= Weighted Average Shares (Note 3): Basic 41,696 39,857 ======= ======= Diluted 42,806 41,925 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 4 THERMEDICS INC. Consolidated Statement of Cash Flows (Unaudited) Three Months Ended April 3, April 4, (In thousands) 1999 1998 - ----------------------------------------------------------------------------------- ----------- ---------- Operating Activities: Net income $ 2,582 $ 6,573 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,897 2,629 Minority interest expense 1,216 1,650 Gain on repurchase of subordinated convertible debentures - (1,985) Provision for losses on accounts receivable 324 111 Other noncash expenses 240 214 Change in current accounts: Accounts receivable (1,235) 3,553 Inventories 171 (1,520) Prepaid income taxes and expenses (210) 10 Accounts payable (975) 530 Other current liabilities 4,056 (770) Other (323) (161) -------- -------- Net cash provided by operating activities 8,743 10,834 -------- -------- Investing Activities: Acquisition of Thermo Voltek common stock (Note 6) (19,779) - Purchases of available-for-sale investments (88,773) (80,950) Proceeds from sale and maturities of available-for-sale investments 67,237 46,456 Purchases of property, plant, and equipment (1,417) (1,701) Other 1,261 (364) -------- -------- Net cash used in investing activities (41,471) (36,559) -------- -------- Financing Activities: Purchases of Company and subsidiary common stock (925) (1,054) Purchase of subordinated convertible debentures - (9,337) Net proceeds from issuance of Company and subsidiary common stock 225 107 Net increase in short-term borrowings 667 166 Other 87 - -------- -------- Net cash provided by (used in) financing activities 54 (10,118) -------- -------- Exchange Rate Effect on Cash (116) 234 -------- -------- Decrease in Cash and Cash Equivalents (32,790) (35,609) Cash and Cash Equivalents at Beginning of Period 142,108 187,012 -------- -------- Cash and Cash Equivalents at End of Period $109,318 $151,403 ======== ======== Noncash Activities: Assumption of Thermo Voltek stock options (Note 6) $ 703 $ - ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 5 Notes to Consolidated Financial Statements 1. General The interim consolidated financial statements presented have been prepared by Thermedics 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 3, 1999, and the results of operations and cash flows for the three-month periods ended April 3, 1999, and April 4, 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 first quarter of 1999 and 1998, the Company's comprehensive income totaled $771,000 and $6,424,000, respectively. 3. Earnings per Share Basic and diluted earnings per share were calculated as follows: Three Months Ended April 3, April 4, (In thousands except per share amounts) 1999 1998 - ----------------------------------------------------------------------------------- ----------- --------- Basic Net Income $ 2,582 $6,573 ------- ------ Weighted Average Shares 41,696 39,857 ------- ------ Basic Earnings per Share $ .06 $ .16 ======= ====== Diluted Net Income $ 2,582 $6,573 Effect of Majority-owned Subsidiaries' Dilutive Securities (5) (16) ------- ------ Income Available to Common Shareholders, as Adjusted 2,577 6,557 ------- ------ Weighted Average Shares 41,696 39,857 Effect of: Convertible obligations 966 1,933 Stock options 144 135 ------- ------ Weighted Average Shares, as Adjusted 42,806 41,925 ------- ------ Diluted Earnings per Share $ .06 $ .16 ======= ====== 6 3. 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. As of April 3, 1999, there were 1,553,000 of such options outstanding, with exercise prices ranging from $8.47 to $29.73 per share. In addition, the computation of diluted earnings per share for the first quarter of 1999 excludes the effect of assuming the conversion of $15,859,000 principal amount of 2.875% subordinated convertible debentures, convertible at $14.928 per share, because the effect would be antidilutive. During the first quarter of 1998, the Company recorded an extraordinary gain in connection with the repurchase of subsidiary subordinated convertible debentures, which increased basic and diluted earnings per share by $.03. 4. Business Segment Information Three Months Ended April 3, April 4, (In thousands) 1999 1998 - ----------------------------------------------------------------------------------- ----------- ---------- Revenues: Quality Assurance and Security Products $20,412 $23,707 Precision Weighing and Inspection Equipment 26,556 18,946 Heart Assist and Blood Testing Devices 19,461 16,485 Power Electronics and Test Equipment 6,217 11,440 Other 4,958 5,083 ------- ------- $77,604 $75,661 ======= ======= Income Before Provision for Income Taxes, Minority Interest, and Extraordinary Item: Quality Assurance and Security Products $ 2,647 $3,070 Precision Weighing and Inspection Equipment 2,008 1,960 Heart Assist and Blood Testing Devices 2,060 2,710 Power Electronics and Test Equipment (329) 822 Other 952 1,109 Corporate (a) (1,677) (361) ------- ------- Total operating income 5,661 9,310 Interest and other income, net 1,394 2,477 ------- ------- $ 7,055 $11,787 ======= ======= (a) Primarily general and administrative expenses and nonrecurring costs.
5. Accrued Acquisition Expenses The Company has undertaken restructuring activities at certain acquired businesses. The Company's restructuring activities, which were accounted for in accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing levels and the abandonment of excess facilities. In connection with these restructuring activities, as part of the cost of acquisitions, the Company established reserves, primarily for severance and excess facilities. In accordance with EITF 95-3, the Company finalizes its restructuring plans no later than one year from the respective dates of the acquisitions. Unresolved matters at April 3, 1999, 7 5. Accrued Acquisition Expenses (continued) primarily included completion of planned severances and abandonment of excess facilities for an acquisition completed during the last twelve months. A summary of the changes in accrued acquisition expenses, included in other accrued expenses in the accompanying balance sheet, follows:
Abandonment of Excess (In thousands) Severance Facilities Total - --------------------------------------------------------------- -------------- ------------- ------------- Balance at January 2, 1999 $ 177 $ 788 $ 965 Reserves established 34 31 65 Usage (129) (119) (248) ------ ----- ------ Balance at April 3, 1999 $ 82 $ 700 $ 782 ====== ===== ====== 6. Merger with Thermo Voltek Corp. In March 1999, the Company acquired, through a merger, all of the outstanding shares of Thermo Voltek Corp., a majority-owned subsidiary of the Company, that it did not previously own, other than the shares owned by Thermo Electron Corporation. The total cost of the acquisition is expected to be approximately $25,732,000, including related expenses and the assumption of Thermo Voltek's $5,250,000 principal amount of 3 3/4% subordinated convertible debentures, which became due and payable at the election of the holder following the merger, and Thermo Voltek's outstanding stock options. The Thermo Voltek stock options were converted into stock options that are exercisable into 619,819 shares of Company common stock at a weighted average price of $6.33 per share, with an aggregate value of $703,000 as of the date of the acquisition. Subsequent to this transaction, the Company and Thermo Electron owned approximately 97% and 3%, respectively, of the outstanding common stock of Thermo Voltek. The cost of the acquisition exceeded the estimated fair value of the incremental net assets by $10,050,000, which is being amortized over 40 years. Pro forma data is not presented since the acquisition of the minority interest of Thermo Voltek was not material to the Company's results of operations. In late March and early April 1998, four putative class actions were filed in the Court of Chancery of the State of Delaware in and for New Castle County by shareholders of Thermo Voltek, which were consolidated under the caption In re Thermo Voltek Corp. Shareholders Litigation, Consolidated C.A. 16287 (the Action) in October 1998. The complaint in the Action names the Company, Thermo Voltek, Thermo Electron, and directors of Thermo Voltek as defendants and alleges, among other things, that Thermo Voltek's directors violated the fiduciary duties of loyalty, good faith, and fair dealing that they owed to all shareholders of Thermo Voltek other than the named defendants and the affiliates of the named defendants because the proposed price of $7.00 per share to be paid to Thermo Voltek's shareholders under the terms of the proposed Merger Agreement was allegedly unfair and grossly inadequate. The complaints further allege that the Company, Thermo Voltek, and Thermo Electron have violated their alleged fiduciary duty of fair dealing by proposing the merger transaction at the time. The parties are currently conducting discovery. Due to the inherent uncertainty of litigation, the outcome of this matter cannot be estimated. The Company expects, however, that any resolution will not materially affect its future results of operations or financial position. 7. Proposed Reorganization and Related Costs During 1998, Thermo Electron announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. Under this plan, the Company would acquire Thermo Electron's wholly owned biomedical group for shares of Company common stock. In addition, the Company's equity interests in its Thermo Sentron Inc., Thermedics Detection Inc., and Thermo Voltek subsidiaries would be transferred to Thermo Electron for shares of common stock of the Company. Thermo Electron would, in turn, take Thermo Sentron and Thermedics 8 7. Proposed Reorganization and Related Costs (continued) Detection private; shareholders of these subsidiaries would receive cash in exchange for their shares of common stock. The proposed transactions are subject to a number of conditions, including the establishment of prices and exchange ratios; confirmation of anticipated tax consequences; the approval by the Board of Directors of the Company (including its independent directors); negotiation and execution of definitive agreements; clearance by the Securities and Exchange Commission of any necessary documents in connection with the proposed transactions; approval by the Board of Directors of Thermo Electron; and receipt of fairness opinions from an investment banking firm on certain financial aspects of the transactions. In connection with this transaction, the Company recorded $1,395,000 of nonrecurring costs in the first quarter of 1999, primarily investment banking fees. 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 four reportable segments: Quality Assurance and Security Products (Quality Assurance), Precision Weighing and Inspection Equipment (Inspection Equipment), Heart Assist and Blood Testing Devices (Heart Assist Devices), and Power Electronics and Test Equipment (Power Equipment). Through the Company's Thermedics Detection Inc. subsidiary, the Quality Assurance segment develops, manufactures, and markets high-speed detection and measurement instruments used in a variety of on-line industrial process applications, security applications, and laboratory analyses. The Inspection Equipment segment includes the Company's Thermo Sentron Inc. subsidiary, which develops, manufactures, and markets high-speed precision-weighing and inspection equipment for industrial production and packaging lines. In June 1998, Thermo Sentron acquired the three businesses that constituted the product-monitoring group of Graseby Limited (the product-monitoring businesses), a subsidiary of Smiths Industries plc. The Power Equipment segment, through the Company's Thermo Voltek Corp. subsidiary, manufactures electronics-test instruments and a range of products related to power amplification, conversion, and quality. The Heart Assist Devices segment, consisting of the Company's Thermo Cardiosystems Inc. subsidiary, manufactures two implantable left ventricular-assist systems (LVAS): a pneumatic, or air-driven, system and an electric version. The electric LVAS is being used in Europe as a bridge to transplant and to provide long-term cardiac support for patients not eligible for a heart transplant. In general, a profit cannot be earned from the sale of an LVAS in the United States until approval of the device for commercial sale has been received from the U.S. Food and Drug Administration (FDA). Both the air-driven and electric LVAS have received FDA approval for use as a bridge to transplant in the United States. Until FDA approval has been obtained, the Company may not earn a profit on the sale in the U.S. of products currently used in clinical studies. Thermo Cardiosystems' 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. The Company also develops and manufactures enteral nutrition-delivery systems and a line of medical-grade polymers used in medical disposables and in nonmedical, industrial applications, including safety glass and automotive coatings. 9 Overview (continued) A significant amount of the Company's revenues is derived from sales of products outside of the U.S., through export sales and sales by the Company's foreign subsidiaries. The Company expects an increase in the percentage of revenues derived from international operations. Although the Company seeks to charge its customers in the same currency as its operating costs, the Company's financial performance and competitive position can be affected by currency exchange rate fluctuations between the U.S. dollar and foreign currencies. Where appropriate, the Company uses forward contracts to reduce its exposure to currency fluctuations. Results of Operations First Quarter 1999 Compared With First Quarter 1998 Total revenues increased to $77.6 million in the first quarter of 1999 from $75.7 million in the first quarter of 1998. Increases in revenues at the Inspection Equipment segment of $7.6 million and the Heart Assist Devices segment of $3.0 million were partially offset by decreases in revenues at the Power Equipment segment of $5.2 million and the Quality Assurance segment of $3.3 million. Revenues from the Inspection Equipment segment increased to $26.6 million in the first quarter of 1999 from $18.9 million in the first quarter of 1998. Revenues increased $8.8 million as a result of the acquisition of the product-monitoring businesses by Thermo Sentron in June 1998. This increase was offset in part by a decrease in revenues from existing businesses of $1.0 million, primarily due to decreased demand in Europe. Heart Assist Devices segment revenues increased to $19.5 million in the first quarter of 1999 from $16.5 million in the first quarter of 1998. Revenues from Thermo Cardiosystems' LVAS increased to $9.8 million in 1999 from $7.1 million in 1998, primarily due to an increase in demand for the electric LVAS as a result of FDA approval, which was granted in September 1998 and, to a lesser extent, price increases for the electric LVAS. These increases were offset in part by a decrease in revenues from the air-driven LVAS and the expiration of several government research and development contracts. Revenues from the Power Equipment segment decreased to $6.2 million in the first quarter of 1999 from $11.4 million in the first quarter of 1998, primarily due to lower sales of electrostatic discharge (ESD) test equipment to the semiconductor industry and lower demand for certain lower-margin products in Europe. The decrease in revenues was also due to Thermo Voltek's sale of its Universal Voltronics division in November 1998, which contributed $1.3 million in revenues in the 1998 period. Revenues from the Quality Assurance segment decreased to $20.4 million in the first quarter of 1999 from $23.7 million in the first quarter of 1998. Revenues from EGIS(R) explosives-detection systems and related services decreased $1.5 million, primarily due to lower shipments of security systems. During 1998, Thermedics Detection completed shipments under a contract to provide security systems to the Federal Aviation Administration. Revenues under the contract totaled $1.1 million during the first quarter of 1998. Revenues from Thermedics Detection's laboratory products decreased $1.1 million, primarily due to lower worldwide demand for its products. In addition, revenues from Thermedics Detection's industrial process instruments decreased $0.6 million, primarily due to lower revenues from ALEXUS(R) and near-infrared analyzers, offset in part by an increase in InScan(R) product sales and contract revenues. The gross profit margin was 48% in the first quarter of 1999, compared with 49% in the first quarter of 1998. The gross profit margin at the Power Equipment segment decreased to 39% in 1999 from 46% in 1998, primarily due to lower revenues. The gross profit margin at the Inspection Equipment segment decreased to 38% in 1999 from 39% in 1998, primarily due to the inclusion of lower-margin revenues from the acquired product-monitoring businesses. These decreases were offset in part by an increase in the gross profit margin at the Quality Assurance segment to 58% in 1999 from 54% in 1998, primarily due to a shift in sales mix to higher-margin products, including products introduced after the first quarter of 1998. 10 First Quarter 1999 Compared With First Quarter 1998 (continued) Selling, general, and administrative expenses as a percentage of revenues increased to 30% in the first quarter of 1999 from 28% in the first quarter of 1998. The increase is primarily due to a decrease in revenues at the Power Equipment and Quality Assurance segments and, to a lesser extent, an increase in sales and marketing staff at the Heart Assist Devices segment. Research and development expenses increased to $7.5 million in the first quarter of 1999 from $6.6 million in the first quarter of 1998. The increase reflects increased expenses at the Heart Assist Devices segment associated with a clinical trial being conducted to evaluate the electric LVAS as an alternative to medical therapy, as well as expenses associated with the development of the HeartMate II system. In addition, research and development expenses increased at Thermo Sentron due to the inclusion of expenses from the acquired product-monitoring businesses. The Company recorded $1.4 million of nonrecurring costs in the first quarter of 1999, primarily for investment banking fees incurred in connection with the Company's proposed reorganization (Note 7). Interest income decreased to $2.8 million in the first quarter of 1999 from $3.7 million in the first quarter of 1998, primarily due to lower average invested balances as a result of cash expended for the acquisition of the product-monitoring businesses, the repurchase of securities of the Company and certain of its majority-owned subsidiaries, and a decrease in interest rates. Interest expense increased to $1.5 million in the first quarter of 1999 from $1.2 million in the first quarter of 1998, primarily as a result of interest expense on borrowings from Thermo Electron Corporation used to partially finance the acquisition of the product-monitoring businesses and, to a lesser extent, the Company's issuance of $15.9 million principal amount of 2 7/8% subordinated convertible debentures in exchange for $21.7 million principal amount of noninterest-bearing subordinated convertible debentures in July 1998. The effective tax rates were 46% and 40% in the first quarter of 1999 and 1998, respectively. The effective tax rates exceeded the statutory federal income tax rate primarily due to the impact of state income taxes and nondeductible amortization of cost in excess of net assets of acquired companies and, in 1999, the impact of nondeductible costs in connection with the Company's proposed reorganization (Note 7). Minority interest expense decreased to $1.2 million in the first quarter of 1999 from $1.7 million in the first quarter of 1998, primarily due to lower profits at certain of the Company's majority-owned subsidiaries. In the first quarter of 1998, the Company and a majority-owned subsidiary repurchased subordinated convertible debentures, resulting in an extraordinary gain of $1.2 million, net of related income taxes of $0.8 million. Liquidity and Capital Resources Consolidated working capital was $233.3 million at April 3, 1999, compared with $232.3 million at January 2, 1999. Cash, cash equivalents, and short- and long-term available-for-sale investments were $221.4 million at April 3, 1999, compared with $232.7 million at January 2, 1999. Of the $221.4 million balance at April 3, 1999, $204.6 million was held by the Company's majority-owned subsidiaries and the remainder by the Company and its wholly owned subsidiaries. During the first quarter of 1999, $8.7 million of cash was provided by operating activities. Cash of $4.1 million was provided by an increase in other current liabilities, primarily due to the timing of interest and tax payments. This increase in cash was offset in part by $1.2 million of cash used to fund an increase in accounts receivable, primarily at the Heart Assist Devices segment due to higher revenues. Excluding available-for-sale investments activity, the Company's primary investing activity in the first quarter of 1999 was the acquisition, through a merger, of all of the outstanding shares of Thermo Voltek that the Company did not previously own, other than the shares owned by Thermo Electron, for approximately $19.8 million in cash (Note 6). The Company is currently a party to litigation in the Delaware State Chancery Court with respect to this transaction. The Company also expended $1.4 million for purchases of property, plant, and equipment during the first quarter of 1999. During the remainder of 1999, the Company expects to make capital expenditures of approximately $8 million. 11 Liquidity and Capital Resources (continued) During the first quarter of 1999, the Company's financing activities provided cash of $0.1 million. Certain of the Company's majority-owned subsidiaries expended $0.9 million to repurchase common stock. These purchases were made pursuant to authorizations by the applicable majority-owned subsidiaries' Boards of Directors. As of April 3, 1999, $12.9 million remained under the Company's majority-owned subsidiaries' authorizations. Any such purchases are funded from working capital. The Company expects to continue to pursue its strategy of expanding its business both through the continued development, manufacture, and sale of new products, and through the possible acquisition of companies that will provide additional marketing or manufacturing capabilities and new products. In April 1999, the Company entered into a nonbinding letter of intent to acquire all of the outstanding shares of Erich Jaeger GmbH for approximately $42 million, including the repayment of debt. If completed, the Company would finance this acquisition primarily through third-party borrowings. Jaeger develops, manufactures, and markets a wide range of specialty medical equipment. The acquisition is subject to certain conditions, including satisfactory completion of due diligence, negotiation of a definitive agreement, receipt of all required regulatory approvals, and approval by the Company's Board of Directors. There can be no assurance that the Company will complete this acquisition. While the Company currently has no other definitive acquisition agreements, it expects that it would finance any acquisitions through internal funds or through borrowings from third parties or Thermo Electron, although it has no agreements that assure such funds will be available on acceptable terms or at all. The Company believes that its existing resources are sufficient to meet the capital requirements of its existing operations for the foreseeable future. Year 2000 The following information 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 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 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 facilities will be ready for the year 2000. The first phase of the program, testing and evaluating the Company's critical information technology systems and facilities 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 facilities. The Company is currently in phase two of its program, during which any material noncompliant systems or facilities that were identified during phase one are prioritized and remediated. Based on its evaluation, the Company does not believe that any material upgrades to its critical facilities are required. The Company is currently upgrading or replacing such noncompliant information technology systems, and this process was approximately 80% complete as of April 3, 1999. In many cases, such upgrades or replacements are being made in the ordinary course of business, without accelerating previously scheduled upgrades or replacements. The Company expects that all of its material information technology systems and critical facilities will be year 2000 compliant by the end of 1999. 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 all of such material products are year 2000 compliant. 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 12 Year 2000 (continued) 2000 problems with its current products. The Company believes that certain of its older products, which it no longer manufactures or sells, may not be year 2000 compliant. The Company is continuing to test and evaluate such products. The Company is focusing its efforts on products that are under warranty or early in their expected life and/or are subject to FDA considerations due to safety risks. The Company is offering upgrades and/or identifying potential solutions where reasonably practicable. 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 is distributing questionnaires relating to year 2000 compliance to 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 has started to follow-up with and monitor the year 2000 compliance progress of significant suppliers and vendors that indicate that they are not year 2000 compliant or that do not respond to the Company's questionnaires. The Company has not completed its assessment of third-party risk, but expects to be substantially completed by October 1999. Year 2000 Compliance Status ---------------------------------------------------------------------- Material Information Technology Systems and Facilities Approximately 80% completed Material Current Products Substantially completed Evaluation of Third-party Risk Approximately 50% completed Contingency Plan The Company is developing a contingency plan that will allow its primary business operations to continue despite disruptions due to year 2000 problems. This plan may include 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 The Company had incurred expenses to third parties (external costs) related to year 2000 issues of approximately $0.8 million as of April 3, 1999, and the total external costs of year 2000 remediation are expected to be approximately $1.3 million. Year 2000 costs are 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 the internal costs incurred for its year 2000 compliance project. Such costs are principally the related payroll costs for its information systems group. Reasonably Likely Worst Case Scenario The Company is not currently 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. 13 Year 2000 (continued) 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. While the Company expects that upgrades to its internal business systems will be completed in a timely fashion, there can be no assurance that the Company will not encounter unexpected costs or delays. 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. 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 significant 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 foreign currency exchange rates, interest rates, and equity prices has not changed materially from its exposure at year-end 1998. PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders On March 31, 1999, at a Special Meeting of Shareholders, the shareholders approved a proposal to list on the American Stock Exchange, Inc., 4,880,533 shares of the common stock of the Company, $.10 par value per share, to be issued in connection with the acquisition of TMO TCA Holdings, Inc. from Thermo Electron Corporation as follows: 33,057,588 shares were voted in favor of the proposal, 151,350 shares were voted against, and 108,997 shares abstained. No broker nonvotes were recorded on the proposal. The sole asset of TMO TCA Holdings is its ownership of 3,355,705 shares of common stock of Thermo Cardiosystems Inc. 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. 14 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 11th day of May 1999. THERMEDICS INC. /s/ Paul F. Kelleher -------------------------- Paul F. Kelleher Chief Accounting Officer /s/ Theo Melas-Kyriazi -------------------------- Theo Melas-Kyriazi Chief Financial Officer 15 EXHIBIT INDEX Exhibit Number Description of Exhibit 27 Financial Data Schedule.
EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-01-2000 APR-03-1999 109,318 86,242 67,988 4,688 62,525 336,034 61,098 40,073 548,478 102,779 117,641 0 4,174 244,349 548,478 77,604 77,604 40,135 40,135 7,508 324 1,453 7,055 3,257 2,582 0 0 0 2,582 0 0.06 0.06
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