SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 2, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-14262
THERMOQUEST CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 77-0407461
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2215 Grand Avenue Parkway
Austin, Texas 78728-3812
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 the filing
requirements for at least the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of January 29, 1999, was approximately $59,136,000.
As of January 29, 1999, the Registrant had 50,970,580 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
January 2, 1999, are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 27, 1999, are incorporated by reference into
Part III.
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PART I
Item 1. Business
(a) General Development of Business
The businesses of ThermoQuest Corporation (the Company or the Registrant)
are reported in two segments: Analytical Instruments and Scientific Equipment.
The Analytical Instruments segment develops, manufactures, sells, and services
mass spectrometers, liquid chromatographs, and gas chromatographs used in the
quantitative and qualitative analysis of chemical compounds at ultratrace levels
of detection. The Analytical Instruments segment also supplies consumables for
the chromatography industry. The Company's Scientific Equipment segment
develops, manufactures, sells, and services scientific equipment for the
preparation and preservation of chemical samples. The Company's products are
used primarily by pharmaceutical companies for drug research, testing, and
quality control; by biotechnology researchers to study proteins and other
biological samples to gain knowledge about diseases and possible treatments; by
environmental laboratories for testing water, air, and soil samples for
compliance with environmental regulations; by chemical companies for research
and quality control; by manufacturers for testing in certain industrial
applications, such as the manufacture of silicon chips, and for quality control;
by food and beverage companies for quality control and to test for product
contamination; and in forensic applications. The Company was incorporated in
June 1995 as a wholly owned subsidiary of Thermo Instrument Systems Inc. Thermo
Instrument is a publicly traded, majority-owned subsidiary of Thermo Electron
Corporation. Where the context requires, references herein to the Company refer
to ThermoQuest Corporation and its subsidiaries and to its predecessor
businesses as conducted by Thermo Instrument, the Company's parent, including
acquired businesses from their dates of acquisition.
The Company is a leading manufacturer of mass spectrometers, liquid
chromatographs, and gas chromatographs. Many of the major developments in modern
mass spectrometry were pioneered by the Company. The ion-trap mass spectrometer,
which utilizes the latest mass spectrometer technology, was first commercialized
by the Company. In 1995, the Company introduced two instruments that integrate a
highly sensitive yet affordable ion-trap mass spectrometer with a liquid
chromatograph or a gas chromatograph to form the industry's most powerful
benchtop liquid chromatograph/mass spectrometer (LC/MS) and gas
chromatograph/mass spectrometer (GC/MS) instruments.
An element of the Company's strategy is to combine its internal growth with
the acquisition of complementary products and technologies. Effective March 12,
1997, the Company acquired three business units within the Laboratory Products
Group of Thermo Instrument's Life Sciences International PLC subsidiary, as well
as Life Sciences' Hypersil operation, for approximately $156.9 million. The
Laboratory Products businesses develop, manufacture, sell, and service
scientific equipment for the preparation and preservation of chemical samples.
Hypersil develops, manufactures, and sells liquid chromatography media and
columns used in high-performance liquid chromatography.
In March and April 1996, the Company sold 3,450,000 shares of its
common stock in an initial public offering at $15.00 per share for net
proceeds of $47.8 million. In March 1997, the Company sold 1,768,500
shares of its common stock for net proceeds of $24.8 million. As of
January 2, 1999, Thermo Instrument owned 45,521,405 shares of the
Company's common stock, representing 89% of such stock outstanding.
During 1998*, Thermo Instrument purchased 525,200 shares of the Company's
common stock on the open market for $3,824,000. Thermo Instrument
develops, manufactures, markets, and services instruments and software
used for the identification and quantification of complex molecular
compounds and elements in gases, liquids, and solids. Uses include
pharmaceutical research and clinical diagnostics, monitoring and measuring
environmental pollutants, industrial inspection, and test and control for
quality assurance and productivity improvement. In addition, Thermo
Instrument develops, manufactures, markets, and services equipment for the
measurement, preparation, storage, and automation of sample materials and
photonics and vacuum components for original equipment manufacturers
(OEMs). Thermo Instrument is an 85%-owned subsidiary of Thermo Electron.
As of January 2, 1999, Thermo Electron owned 159,880 shares of the Company's
common stock,
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* References to 1998, 1997, and 1996 herein are for the fiscal years ended
January 2, 1999, January 3, 1998, and December 28, 1996, respectively.
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representing 0.31% of such stock outstanding. During 1998, Thermo Electron
purchased 101,600 shares of the Company's common stock on the open market for
$981,000. Thermo Electron is a world leader in monitoring, analytical, and
biomedical instrumentation; biomedical products including heart-assist devices,
respiratory-care equipment, and mammography systems; and paper recycling and
papermaking equipment. Thermo Electron also develops alternative-energy systems
and clean fuels, provides a range of services, including industrial outsourcing
and environmental-liability management, and conducts research and development in
advanced imaging, laser, and electronic information-management technologies.
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Annual Report on Form
10-K. 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 the Registrant's 1998 Annual Report to
Shareholders, which statements are incorporated herein by reference.
(b) Financial Information About Segments
Financial information concerning the Company's segments is summarized in
Note 11 to Consolidated Financial Statements in the Registrant's 1998 Annual
Report to Shareholders, which information is incorporated herein by reference.
(c) Description of Business
The Company develops, manufactures, sells, and services mass spectrometers,
liquid chromatographs, and gas chromatographs used in the quantitative and
qualitative analysis of chemical compounds at ultratrace levels of detection, as
well as supplies for the chromatography industry. The Company also develops,
manufactures, sells, and services scientific equipment for the preparation and
preservation of chemical samples.
(i) Principal Products and Services
MARKETS
The markets for the Company's products are highly specialized as a result of
the differing needs of the industries in which they are used. The Company
actively seeks to cross-sell its products among the various industries it
serves, particularly by adding its liquid chromatograph or gas chromatograph
input devices to its mass spectrometer products, and by introducing customers to
the sample preparation and preservation equipment and chromatography consumables
produced by the businesses acquired by the Company in 1997. The major markets in
which the Company sells its products are:
Pharmaceutical. In the pharmaceutical industry, the Company's products are
used in the identification of newly synthesized or discovered drug candidates,
to measure drugs and metabolites in clinical studies, and for quality assurance
of drugs in production.
Biotechnology. Researchers are using the Company's products to study
genomes, proteins, and peptides in animals, plants, and humans to determine the
factors influencing disease, as well as good health, and to develop possible
treatments or even cures.
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Environmental. A second major market for the Company's products is
environmental analysis. This market is driven to a great degree by federal,
state, local, and foreign environmental regulations, which provide specific
methods with respect to the testing of air, water, and soil for contaminants.
Industrial/Chemical. Industrial and chemical customers typically utilize the
Company's products for quality control and to test for contaminants in
substances used in a particular manufacturing application.
Food and Beverage. Customers in the food and beverage industry primarily use
the Company's products for quality control. In addition to assuring the correct
balance of ingredients, customers in these industries must respond both to
environmental and health regulations and to societal concerns regarding product
contamination.
Forensic Sciences. The Company's products are used in a variety of forensic
applications, including testing for illicit drug use by employees or athletes,
testing body fluids to determine causes of death, testing to determine the
identity of substances suspected to be illegal, and testing for the presence of
substances of evidentiary significance for use in criminal investigations.
TECHNOLOGY
Analytical Instruments
Mass Spectrometers. A mass spectrometer is an instrument in which the
chemical compound to be analyzed is broken down into electrically charged
fragments (ions), and then sorted according to their mass-to-charge ratios. All
mass spectrometers consist of a device to introduce samples, an ionization
source, a mass analyzer that separates ions according to mass ratios, a detector
that converts the ions into an electrical signal, a signal processor that
amplifies the electrical signal, and a computer that organizes and displays
information in a convenient and useful manner. The resulting data creates a
"fingerprint" that is then compared to a database for identification. Mass
spectrometers are the most powerful tools for the identification and
quantification of chemical substances. A gas or liquid chromatograph is used to
separate complex mixtures of chemicals into discrete components, which can then
be analyzed based on the chromatograph results alone or can be introduced into a
mass spectrometer to give additional information and to specifically identify
unknown components.
The Company has pioneered many of the significant developments in mass
spectrometry and holds numerous U.S. and international patents relating to mass
spectrometry, with additional patents pending. The Company has a distinguished
record of being the first to commercialize new technologies coming from its own
laboratories as well as from an extensive worldwide network of university
collaborators. Examples include the first computerized GC/MS quadrupole system,
the first commercial chemical ionization ion source, the first commercial triple
quadrupole MS/MS system, the first commercial ion-trap system, and the first
commercial ion-trap MS/MS system.
In January 1996, the Company acquired Extrel FTMS, Inc., a leading
manufacturer of Fourier transform mass spectrometry (FT/MS) instruments. Extrel
introduced the first commercial FT/MS product in 1981 and today offers a unique
multisource mass spectrometer with a range of ionization techniques. This
research-grade analytical instrument has the advantage of both high resolution
and high mass range and is particularly useful in pharmaceutical and polymer
research applications where large molecules in complex solutions need to be
precisely identified.
Effective January 1996, the Company acquired the Automass division of
Analytical Technology, Inc., a manufacturer of benchtop mass spectrometers, from
Thermo Instrument. Manufactured near Paris, France, these mass spectrometers
incorporate a quadrupole design that provides enhanced sensitivity and can
accommodate gas chromatographs as well as liquid chromatographs. These products
complement the Company's existing GCQ(R) and LCQ(R) line of benchtop ion-trap
mass spectrometers.
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Effective March 1996, the Company acquired MassLab Instruments, a
manufacturer of mass spectrometry instruments, from Thermo Instrument. Located
near Manchester, U.K., MassLab manufactures a line of mass spectrometers for
both gas chromatography and liquid chromatography applications. MassLab was
originally part of the Scientific Instruments Division of Fisons plc, a
substantial portion of which was acquired by Thermo Instrument in March 1996.
The Company currently manufactures three types of mass spectrometers:
Magnetic Sector Mass Spectrometers. Magnetic sector mass spectrometers are
generally used in high-resolution applications where an accurate analysis of
molecular weight is required to determine the elemental composition of unknown
samples. Magnetic sector instruments are typically purchased by universities and
pharmaceutical and chemical companies for use in research applications.
Quadrupole Mass Spectrometers. Single quadrupole mass spectrometers are
typically utilized in environmental and forensic laboratories, which require
dependable, routine analyses that meet applicable regulatory requirements, such
as those promulgated by the U.S. Environmental Protection Agency. Although
lacking the resolution of some types of magnetic sector mass spectrometers,
these instruments provide reliable performance at a relatively low price. Single
quadrupoles are frequently combined to form MS/MS spectrometers for use in more
complex analyses such as molecular structure analysis. Together with the
Company's triple stage quadrupoles, the most powerful type of quadrupole mass
spectrometer, single quadrupoles comprise a complete family of quadrupole mass
spectrometers.
Ion-trap Mass Spectrometers. The Company developed the first commercial
ion-trap mass spectrometer. The ability to trap and integrate the intensities of
ions has made the ion trap the most sensitive method of mass analysis for
certain applications. Ion traps are smaller, mechanically simpler, and therefore
easier to maintain than other types of mass spectrometers. While other types of
mass spectrometers separate and analyze a continuous stream of ions, ion-trap
mass spectrometers trap ions in a confined space using an electric field, which
can be adjusted to eject ions as a function of their mass-to-charge ratio. An
advantage of ion-trap mass spectrometers is that, through software, MS/MS
analysis can be performed in a single ion-trap mass spectrometer, theoretically
to an infinite number of stages (MS(n)). The Company has recently introduced ion
traps that incorporate an external ion source, such as those found in quadrupole
and magnetic sector mass spectrometers, which use sophisticated ionization
techniques to increase the specificity and detection limits of the instrument.
Due to their relative mechanical simplicity and small size, ion traps are
well suited for coupling with chromatographs to form benchtop LC/MS and GC/MS
instruments. Benchtop LC/MS(n) instruments were not commercially available until
the Company introduced the first such instrument in June 1995. Through
significant advancements in integration techniques and information technology,
the Company has developed the benchtop GCQ (GC/MS(n)) and LCQ (LC/MS(n))
instruments, which combine ion-trap mass spectrometers with chromatographs.
These instruments allow users to combine GC and LC with MS(n) in a benchtop
format, and offer high performance at a competitive price for appropriate
applications.
Liquid Chromatographs. High performance liquid chromatography (HPLC) is an
analytical technique used to separate, identify, and quantify complex mixtures
of primarily organic chemicals. In HPLC, the sample is introduced into a solvent
stream that is being pumped at a high pressure through a liquid chromatography
column. The column, both through physical and chemical properties, separates the
complex mixtures into discrete bands, allowing identification. The separated
sample is then passed through a detector that measures the sample by various
technologies, including ultraviolet and visible light absorption, changes in
refractive index, fluorescence, and conductivity. The data produced by the
detector is converted to an electronic form and transmitted for display and
manipulation on a personal computer. For complex mixtures, the HPLC may be
coupled with a mass spectrometer to give additional information and specifically
identify unknown components.
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Gas Chromatographs. Like HPLC, gas chromatography is an analytical technique
used to separate, identify, and quantify complex mixtures of primarily organic
chemicals. Although gas chromatographs are generally easier to use and have
higher resolution than liquid chromatographs, only a relatively small percentage
of compounds can be converted to gaseous form for analysis in a gas
chromatograph. In gas chromatographs, samples are introduced typically by
syringe injection and are converted into the gas phase by heating. The sample
passes through an analytical column, and the various components of the sample
mixture are separated into discrete bands that are suitable for analysis by
detectors. Detectors can be assembled in various configurations to facilitate
analysis of different chemical and physical properties in a sample mixture. The
data produced by the detector is converted to electronic form and transmitted
for display and manipulation on a personal computer. For complex mixtures, where
compounds cannot be adequately separated and identified by gas chromatography,
the gas chromatograph can be coupled with a mass spectrometer to give additional
information and specifically identify unknown components.
Effective March 1996, the Company acquired CE Instruments, a manufacturer of
gas chromatography instruments, from Thermo Instrument. Located near Milan,
Italy, CE Instruments has a long history of technological innovation in gas
chromatography. In 1956, CE Instruments produced the first commercial gas
chromatograph manufactured in Europe, and, in 1976, introduced the first
commercially available high-resolution gas chromatograph. In addition to gas
chromatography instruments, CE Instruments produces a line of organic elemental
analysis, mercury porosimetry, and gas absorption instruments for use in
research and quality-control laboratories in a number of application fields. CE
Instruments was originally part of the Scientific Instruments Division of
Fisons, a substantial portion of which was acquired by Thermo Instrument in
March 1996.
High-performance Liquid Chromatography Columns. These tubes are packed with
materials that have the ability to separate complex mixtures into their
individual ingredients.
Scientific Equipment
Sample Preparation Equipment
Biological Safety Cabinet. This cabinet protects the researcher, the sample
being examined, and the laboratory environment by providing a partially enclosed
work space that uses a combination of fans to circulate air and filters to trap
harmful biological substances.
Cell Culture Incubator. This device controls temperature, relative humidity,
and carbon dioxide and oxygen levels to provide the perfect in-vitro environment
for cell growth. Cell culture incubators are used in research and clinical
laboratories throughout the world for growing mammalian cells, bacteria, and
viruses.
Centrifugal Vacuum Concentrator. This equipment uses a rotational spinning
concentrator, refrigerated vapor trap, and vacuum source to dry multiple samples
for analysis, without losing portions of them, or cross-contaminating them.
Centrifuge. This equipment is used to prepare laboratory samples for
analysis by spinning them around a central axis to separate materials of
different specific gravities.
Electrophoresis System. This system prepares a biological sample for
analysis by using electricity to separate DNA/RNA and protein molecules
based upon electrophoretic mobility.
Orbital Shaker. This equipment, used in research and fermentation
laboratories, provides a controlled orbital motion for biological cultures in
glass flasks. The orbital agitation of the culture provides increased oxygen for
optimal cell growth. Combination incubators/orbital shakers provide precise
conditions of temperature and orbital agitation.
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Sample Preservation Equipment
Ultra-low Temperature Freezer. This specially designed cascade refrigeration
system is designed to store all types of biological material, providing storage
temperatures down to -86 degrees Celsius.
Cryopreservation System. This vacuum-insulated equipment controls liquid
nitrogen to produce extremely low temperatures, as low as -196 degrees Celsius,
in order to store biological material, such as bone marrow, cornea, heart
valves, spermatozoa, bacteria, and viruses, for very long periods of time.
SALES AND MARKETING
The Company markets its products in larger international markets through its
own worldwide sales force of direct salespeople, and in smaller markets through
a network of dealers and distributors. In addition, the Company sells certain of
its liquid and gas chromatographs as well as scientific equipment pursuant to
OEM arrangements under which third parties purchase and resell the Company's
products. The Company's sales force is supported throughout the world by a
customer support group which provides training, instrument servicing, and parts
replacements.
(ii) and (xi) New Products; Research and Development
The Company maintains active programs for the development of new
technologies and the enhancement of existing products. Research and development
expenses for the Company were $31.5 million, $28.2 million, and $21.8 million in
1998, 1997, and 1996, respectively.
(iii) Raw Materials
Raw materials, components, and supplies purchased by the Company are either
available from a number of different suppliers or from alternative sources that
could be developed without a material adverse effect on the Company. To date,
the Company has experienced no material difficulties in obtaining these
materials.
(iv) Patents, Licenses, and Trademarks
The Company's policy is to protect its intellectual property rights,
including applying for and obtaining patents when appropriate. The Company holds
numerous patents expiring at various dates related to its technologies, with
additional patents pending. The Company also enters into licensing agreements
expiring at various dates with other companies pursuant to which it has obtained
rights to specific patents and technical know-how. The Company also considers
technical know-how, trade secrets, and trademarks to be important to its
business.
(v) Seasonal Influences
There are no significant seasonal influences on the Company's sales of its
products.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on the Company's working
capital.
(vii) Dependency on a Single Customer
No single customer accounted for 10% or more of the Company's total revenues
in any of the past three years.
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(viii) Backlog
The Company's backlog of firm orders was:
(In thousands) 1998 1997
- -------------------------------------------------- ---------- ----------
Analytical Instruments $ 48,719 $ 45,083
Scientific Equipment 8,512 7,498
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$ 57,231 $ 52,581
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The Company includes in its backlog only orders confirmed with a purchase
order for products and related services scheduled to be shipped or rendered
within one year. Certain of such firm orders are cancelable by the customer upon
payment of a cancellation charge. The Company believes that substantially all of
the backlog at January 2, 1999, will be shipped or completed during 1999. The
Company does not believe that the level of, or changes in the level of, its
backlog is necessarily a meaningful indicator of future results of operations.
(ix) Government Contracts
Not applicable.
(x) Competition
The Company competes in each of its markets primarily on technical
performance, customer service and support, and price.
Analytical Instruments
The Company's principal competitors in the mass spectrometry market include
the Chemical Analysis Group of Hewlett-Packard Company, the MicroMass Group of
Waters Corporation, Shimadzu Corporation, and Perkin-Elmer Corporation. The
Company's principal competitors in the liquid chromatography market include
Waters, Hewlett-Packard, Shimadzu, and Perkin-Elmer. In the gas chromatography
market, the Company competes with numerous companies including Hewlett-Packard,
Varian Associates, Inc., Perkin-Elmer, and Shimadzu. The Company's principal
competitors in the chromatography consumables market include Waters,
Hewlett-Packard, Merck Corporation, Phenomenex Inc., and numerous regional
suppliers.
Scientific Equipment
The Company's principal competitors in the scientific equipment market
include Jouan S.A., NuAire Inc., Sanyo Electric Co. Ltd., and Labconco
Corporation.
(xii) Environmental Protection Regulations
The Company believes that compliance by the Company with federal, state, and
local environmental protection regulations will not have a material adverse
effect on its capital expenditures, earnings, or competitive position.
(xiii) Number of Employees
As of January 2, 1999, the Company employed approximately 2,010 people.
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(d) Financial Information About Exports by Domestic Operations and About
Geographic Areas
Financial information about exports by domestic operations and about
geographic areas is summarized in Note 11 to Consolidated Financial Statements
in the Registrant's 1998 Annual Report to Shareholders, which information is
incorporated herein by reference.
(e) Executive Officers of the Registrant
Name Age Present Title (Fiscal Year First
Became Executive Officer)
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Dr. Richard W.K. Chapman 54 Chief Executive Officer and President (1995)
Theo Melas-Kyriazi 39 Chief Financial Officer (1998)
Paul F. Kelleher 56 Chief Accounting Officer (1995)
Each executive officer serves until his successor is chosen or
appointed by the Board of Directors and qualified or until his earlier
resignation, death, or removal. Dr. Chapman has been Chief Executive
Officer and President of the Company since its inception in June 1995.
Dr. Chapman served as President of Finnigan Corporation, a subsidiary of
the Company, from 1992 to 1995. Mr. Melas-Kyriazi was appointed Chief
Financial Officer of the Company and Thermo Electron on January 1, 1999.
He joined Thermo Electron in 1986 as Assistant Treasurer, and became
Treasurer in 1988. He was named President and Chief Executive Officer of
ThermoSpectra Corporation, a public subsidiary of Thermo Instrument, in
1994, a position he held until becoming Vice President of Corporate
Strategy for Thermo Electron in 1998. Mr. Melas-Kyriazi remains a Vice
President of Thermo Electron. Messrs. Melas-Kyriazi and Kelleher are
full-time employees of Thermo Electron, but devote such time to the
affairs of the Company as the Company's needs reasonably require.
Item 2. Properties
The location and general character of the Company's principal properties by
segment as of January 2, 1999, are:
Analytical Instruments
The Company owns approximately 609,000 square feet of office, engineering,
laboratory, and production space, principally in California, Texas, Florida,
Germany, and Italy; and leases approximately 218,000 square feet of office space
under leases expiring from 1999 through 2006, principally in New York, England,
Germany, France, Japan, and the Netherlands. As of January 2, 1999, the Company
had a $7.3 million mortgage loan that is secured by 200,000 square feet of
property in California with a net book value of $14.9 million.
Scientific Equipment
The Company owns approximately 363,000 square feet of office, engineering,
laboratory, and production space in Ohio and Massachusetts; and leases
approximately 81,000 square feet of office space under leases expiring from 1999
through 2001, principally in New York and England.
The Company believes that its facilities are in good condition and are
suitable and adequate for its present operations and that suitable space is
readily available if any of such leases are not extended. With respect to leases
expiring in the near future, in the event the Company does not renew such
leases, the Company believes suitable alternate space is available for lease on
acceptable terms.
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Item 3. Legal Proceedings
On January 23, 1997, the Company's Finnigan subsidiary filed complaints
against Bruker-Franzen Analytik GmbH and its U.S. affiliate, and
Hewlett-Packard, for alleged violation of two U.S. patents owned by Finnigan.
The patents pertain to methods used in ion-trap mass spectrometers.
One of Finnigan's complaints was filed in the United States District Court
for the District of Massachusetts, and the other was filed with the United
States International Trade Commission (ITC) in Washington, DC. Finnigan has
asked for damages to compensate for the infringements, for injunctions against
further infringement, and for an order excluding further imports into the U.S.
of ion-trap mass spectrometers that use the patented methods.
The District Court action has, at the request of Hewlett-Packard and Bruker,
been stayed pending completion of an investigation by the ITC. In April 1998,
the ITC determined that the defendants did not engage in unfair practices in
U.S. import trade with respect to the Finnigan patents, and that the Finnigan
patents are invalid and/or not infringed. Finnigan has appealed the ITC's
determination with respect to one of its patents to the United States Court of
Appeals for the Federal Circuit (CAFC). The CAFC heard arguments in the appeal
on March 4, 1999.
Bruker presented counterclaims in the ITC investigation. The counterclaims,
which have been removed to the District Court in Massachusetts, allege that the
Finnigan patents are invalid and unenforceable and are not infringed by the mass
spectrometers co-marketed by Bruker. They also allege that Finnigan has violated
U.S. and Massachusetts antitrust laws and engaged in unfair competition by
attempting to maintain a monopoly position and restrain trade through
enforcement of allegedly fraudulently obtained patents. Bruker has asked for
judgment consistent with its counterclaims, and for three times the antitrust
damages (including attorneys' fees) it has sustained.
There can be no assurance as to the outcome of these matters or that an
unfavorable resolution would not have a material adverse effect on the Company's
future results of operations and financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information concerning the market and market price for the Registrant's
common stock, $.01 par value, and dividend policy is included under the sections
labeled "Common Stock Market Information" and "Dividend Policy" in the
Registrant's 1998 Annual Report to Shareholders and is incorporated herein by
reference.
Item 6. Selected Financial Data
The information required under this item is included under the sections
labeled "Selected Financial Information" and "Dividend Policy" in the
Registrant's 1998 Annual Report to Shareholders and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1998 Annual Report to Shareholders and
is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1998 Annual Report to Shareholders and
is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements as of January 2, 1999,
and Supplementary Data are included in the Registrant's 1998 Annual Report to
Shareholders and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the caption
"Election of Directors" in the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year. The information
concerning delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated herein by reference from the material contained under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" under the caption
"Stock Ownership" in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
The information required under this item is incorporated herein by reference
from the material contained under the caption "Executive Compensation" in the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated herein by reference
from the material contained under the caption "Stock Ownership" in the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required under this item is incorporated herein by reference
from the material contained under the caption "Relationship with Affiliates" in
the Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
12
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a,d) Financial Statements and Schedules
(1)The consolidated financial statements set forth in the list below are
filed as part of this Report.
(2)The consolidated financial statement schedule set forth in the list
below is filed as part of this Report.
(3)Exhibits filed herewith or incorporated herein by reference are set forth
in Item 14(c) below.
List of Financial Statements and Schedules Referenced in this Item 14
Information incorporated by reference from Exhibit 13 filed herewith:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Comprehensive Income and Shareholders'
Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules filed herewith:
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or in the notes thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 16, 1999 THERMOQUEST CORPORATION
By: /s/ Richard W.K. Chapman
Richard W.K. Chapman
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated below, as of March 16, 1999.
Signature Title
By: /s/ Richard W.K. Chapman President, Chief Executive Officer,
Richard W.K. Chapman and Director
By: /s/ Theo Melas-Kyriazi Chief Financial Officer
Theo Melas-Kyriazi
By: /s/ Paul F. Kelleher Chief Accounting Officer
Paul F. Kelleher
By: /s/ George N. Hatsopoulos Director
George N. Hatsopoulos
By: /s/ Frank Jungers Director
Frank Jungers
By: /s/ Earl R. Lewis Chairman of the Board and Director
Earl R. Lewis
By: /s/ Anthony J. Pellegrino Director
Anthony J. Pellegrino
By: /s/ Michael E. Porter Director
Michael E. Porter
14
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of ThermoQuest Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in ThermoQuest Corporation's
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 16, 1999. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in Item 14 on page 13 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the consolidated financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
February 16, 1999
15
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
THERMOQUEST CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Description Balance at Provision Accounts Accounts Other (a) Balance
Beginning Charged to Recovered Written at End
of Expense Off of Year
Year
- ----------------------------------- ----------- ------------ ------------ ----------- ----------- -----------
Allowance for Doubtful Accounts
Year Ended January 2, 1999 $4,361 $ 825 $ 90 $(1,357) $ 146 $4,065
Year Ended January 3, 1998 $4,459 $ 549 $ 33 $ (760) $ 80 $4,361
Year Ended December 28, 1996 $2,341 $ 220 $ 43 $ (351) $2,206 $4,459
Description Balance at Established Activity Other (c) Balance
Beginning as Cost of Charged to at End
of Acquisitions Reserve of Year
Year
- ----------------------------------- ----------- ------------ ------------ ----------- -----------
Accrued Acquisition Expenses (b)
Year Ended January 2, 1999 $1,048 $ 331 $ (369) $ (679) $ 331
Year Ended January 3, 1998 $ 357 $1,571 $ (789) $ (91) $1,048
Year Ended December 28, 1996 $ 129 $1,493 $(1,303) $ 38 $ 357
Description Balance at Provision Activity Other (f) Balance
Beginning Charged to Charged to at End
of Expense (e) Reserve of Year
Year
- ----------------------------------- ----------- ------------- ----------- ----------- -----------
Restructuring Reserves (d)
Year Ended January 2, 1999 $ - $3,660 $(2,010) $ (16) $1,634
(a) Includes allowance of businesses acquired during the year as described in
Note 2 to Consolidated Financial Statements in the Registrant's 1998 Annual
Report to Shareholders and the effect of foreign currency translation.
(b) The nature of activity in this account is described in Note 2 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders.
(c) Represents reversal of accrued acquisition expenses and corresponding
reduction of cost in excess of net assets of acquired companies resulting
from finalization of restructuring plans and the effect of foreign currency
translation.
(d) The nature of activity in this account is described in Note 9 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders.
(e) Excludes provision of $0.9 million for an asset write-down.
(f) Represents the effect of foreign currency translation.
</TABLE>
16
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2.1 Stock Purchase Agreement dated as of November 4, 1996, between SID
Instruments Inc. and the Registrant (filed as Exhibit 2.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 28, 1996 [File No. 1-14262] and
incorporated herein by reference).
2.2 Stock Purchase Agreement dated as of November 4, 1996, among SID
Instruments Inc., Thermo Instrument, and Finnigan MAT (Nevada) Inc.
(filed as Exhibit 2.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 28, 1996 [File No. 1-14262] and
incorporated herein by reference).
2.3 Asset and Share Purchase Agreement dated as of July 30, 1997, between
the Registrant and Thermo Instrument (filed as Exhibit 2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
28, 1997 [File No. 1-14262] and incorporated herein by reference).
3.1 Certificate of Incorporation, as amended, of the Registrant
(filed as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 333-00276] and incorporated
herein by reference).
3.2 By-laws of the Registrant (filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 [Reg. No.
333-00276] and incorporated herein by reference).
10.1 Corporate Services Agreement dated as of June 30, 1995, between
Thermo Electron and the Registrant (filed as Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1 [Reg. No. 333-00276]
and incorporated herein by reference).
10.2 Thermo Electron Corporate Charter, as amended and restated effective
January 3, 1993 (filed as Exhibit 10.1 to Thermo Electron's Annual
Report on Form 10-K for the fiscal year ended January 2, 1993 [File
No. 1-8002] and incorporated herein by reference).
10.3 Tax Allocation Agreement dated as of June 30, 1995, between Thermo
Electron and the Registrant (filed as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1 [Reg. No. 333-00276]
and incorporated herein by reference).
10.4 Amended and Restated Master Repurchase Agreement dated as of June 30,
1995, between Thermo Electron and the Registrant (filed as Exhibit
10.4 to the Registrant's Annual Report to Form 10-K for the fiscal
year ended January 3, 1998 [File No. 1-14262] and incorporated herein
by reference).
10.5 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated December 2, 1997, by and among Thermo Electron and
the Registrant (filed as Exhibit 10.7 to Thermo Instrument's Annual
Report on Form 10-K for the fiscal year ended January 3, 1998 [File
No. 1-9786] and incorporated herein by reference).
10.6 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated December 2, 1997, by and among Thermo Instrument and
the Registrant (filed as Exhibit 10.6 to the Registrant's Annual
Report to Shareholders for the fiscal year ended January 3, 1998
[File No. 1-14262] and incorporated herein by reference).
10.7 Equity Incentive Plan of the Registrant (filed as Exhibit 10.7
to the Company's Registration Statement on Form S-1 [Reg. No.
333-00276] and incorporated herein by reference).
17
<PAGE>
Exhibit
Number Description of Exhibit
10.8 Deferred Compensation Plan for Directors of the Registrant
(filed as Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 333-00276] and incorporated
herein by reference).
10.9 Directors Stock Option Plan of the Registrant (filed as Exhibit
10.9 to the Registrant's Registration Statement on Form S-1
[Reg. No. 333-00276] and incorporated herein by reference).
10.10 Form of Indemnification Agreement for Officers and Directors
(filed as Exhibit 10.10 to the Registrant's Registration
Statement on Form S-1 [Reg. No. 333-00276] and incorporated
herein by reference).
In addition to the stock-based compensation plans of the Registrant,
the executive officers of the Registrant may be granted awards under
stock-based compensation plans of Thermo Electron and Thermo
Instrument for services rendered to the Registrant or to such
affiliated corporations. The terms of such plans are substantially
the same as those of the Registrant's Equity Incentive Plan.
10.11 Fiscal Agency Agreement dated as of August 3, 1995, among the
Registrant, Thermo Electron, and The Chase Manhattan Bank (formerly
Chemical Bank) (filed as Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 333-00276] and
incorporated herein by reference).
10.12 Deed of Trust and Security Agreement dated February 22, 1989,
between the Company (as successor-in-interest to Finnigan
Properties, Inc.) and the Northwestern Mutual Life Insurance
Company (filed as Exhibit 10.13 to the Registrant's
Registration Statement on Form S-1 [Reg. No. 333-00276] and
incorporated herein by reference).
10.13 Indemnification Agreement dated as of November 4, 1996, between
Thermo Instrument and the Registrant (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 28, 1996 [File No. 1-14262] and incorporated
herein by reference).
10.14 Amended and Restated Stock Holdings Assistance Plan and Form of
Promissory Note (filed as Exhibit 10.14 to the Registrant's Annual
Report to Shareholders for the fiscal year ended January 3, 1998
[File No. 1-14262] and incorporated herein by reference).
13 Annual Report to Shareholders for the Year Ended January 2, 1999
(only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
18
Exhibit 13
ThermoQuest Corporation
Consolidated Financial Statements
1998
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ThermoQuest Corporation 1998 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Revenues (Notes 7 and 11) $ 433,684 $438,863 $ 313,793
--------- -------- ---------
Cost and Operating Expenses:
Cost of revenues 225,357 229,960 167,438
Selling, general, and administrative expenses (Note 7) 107,445 107,770 77,371
Research and development expenses 31,464 28,152 21,821
Restructuring costs (Note 9) 4,600 - -
Gain on sale of property (1,275) - -
--------- -------- ---------
367,591 365,882 266,630
--------- -------- ---------
Operating Income 66,093 72,981 47,163
Interest Income (includes $186 and $679 from related parties in 6,204 10,121 8,905
1998 and 1997)
Interest Expense (includes $3,126 to related parties in 1997; Note 2) (6,634) (10,081) (7,328)
--------- -------- ---------
Income Before Provision for Income Taxes and Extraordinary Item 65,663 73,021 48,740
Provision for Income Taxes (Note 4) 27,578 31,216 20,717
--------- -------- ---------
Income Before Extraordinary Item 38,085 41,805 28,023
Extraordinary Item, Net of Provision for Income Taxes of $172 (Note 5) 293 - -
--------- -------- ---------
Net Income $ 38,378 $ 41,805 $ 28,023
========= ======== =========
Earnings per Share (Note 12)
Basic $ .75 $ .83 $ .59
========= ======== =========
Diluted $ .72 $ .80 $ .57
========= ======== =========
Weighted Average Shares (Note 12)
Basic 51,270 50,120 47,677
========= ======== =========
Diluted 56,041 55,891 53,697
========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
ThermoQuest Corporation 1998 Financial Statements
Consolidated Balance Sheet
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Assets
Current Assets:
Cash and cash equivalents (includes $97,073 and $60,376 under repurchase $ 132,439 $ 91,898
agreements with affiliated company)
Accounts receivable, less allowances of $4,065 and $4,361 108,409 96,541
Inventories 70,612 66,389
Prepaid expenses 2,591 2,490
Prepaid income taxes (Note 4) 13,005 12,542
Due from parent company and affiliated companies (Note 2) - 750
--------- ---------
327,056 270,610
--------- ---------
Property, Plant, and Equipment, at Cost, Net 63,463 66,736
--------- ---------
Patents and Other Assets 3,041 2,845
--------- ---------
Cost in Excess of Net Assets of Acquired Companies (Notes 2 and 4) 249,682 255,435
--------- ---------
$ 643,242 $ 595,626
========= =========
3
<PAGE>
ThermoQuest Corporation 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable and current maturities of long-term obligations (Note 5) $ 12,074 $ 7,147
Accounts payable 27,024 24,151
Accrued payroll and employee benefits 17,361 19,541
Accrued installation and warranty expenses 9,623 9,991
Accrued income taxes (includes $11,000 and $10,600 due to parent company) 23,009 21,331
Deferred revenue 10,785 9,939
Customer deposits 6,227 5,193
Other accrued expenses (Notes 2 and 9) 18,448 16,907
Due to parent company and affiliated companies 2,487 -
--------- ---------
127,038 114,200
--------- ---------
Deferred Income Taxes (Note 4) 8,370 7,503
--------- ---------
Accrued Pension and Other Deferred Items (Note 3) 16,629 15,064
--------- ---------
Long-term Obligations (Note 5) 74,204 88,080
--------- ---------
Commitments and Contingencies (Note 6)
Shareholders' Investment (Notes 3 and 8):
Common stock, $.01 par value, 100,000,000 shares authorized; 51,520,004 515 512
and 51,185,127 shares issued
Capital in excess of par value 309,009 302,881
Retained earnings 116,607 78,229
Treasury stock at cost, 550,342 and 340 shares (5,300) (6)
Accumulated other comprehensive items (3,830) (10,837)
--------- ---------
417,001 370,779
--------- ---------
$ 643,242 $ 595,626
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ThermoQuest Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ---------- ----------- ----------
Operating Activities
Net income $ 38,378 $ 41,805 $ 28,023
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 15,008 14,285 9,603
Noncash restructuring costs (Note 9) 940 - -
Gain on sale of property (1,275) - -
Provision for losses on accounts receivable 825 549 220
Extraordinary item (Note 5) (465) - -
Other noncash expenses 972 1,136 1,417
Increase (decrease) in deferred income taxes 867 2,098 (362)
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable (8,187) (11,805) 8,179
Inventories (609) 1,111 4,748
Other current assets (348) (1,425) (3,013)
Accounts payable 2,191 842 (3,974)
Due to parent company and affiliated companies (2,711) (536) (1,470)
Other current liabilities 1,599 3,758 13,515
Other - (52) 239
--------- ----------- ---------
Net cash provided by operating activities 47,185 51,766 57,125
--------- ---------- ---------
Investing Activities
Acquisitions, net of cash acquired (Note 2) (1,342) (154,304) (32,408)
Refund from parent company for acquisitions (Note 2) 5,953 - -
Purchases of available-for-sale investments - - (7,250)
Proceeds from sale and maturities of available-for-sale - 7,250 -
investments
Purchases of property, plant, and equipment (7,076) (6,261) (3,761)
Proceeds from sale of property, plant, and equipment 3,383 2,624 432
Other - 175 (225)
--------- ---------- ---------
Net cash provided by (used in) investing activities 918 (150,516) (43,212)
--------- ---------- ---------
Financing Activities
Net proceeds from issuance of Company common stock (Note 8) 411 25,050 47,778
Repurchase of Company common stock and subordinated convertible
debentures (Note 5) (12,416) - -
Increase (decrease) in short-term obligations 3,699 (7,926) (5,389)
Repayment of long-term obligations (1,103) (2,791) (1,906)
Other 568 1,469 1,059
--------- ---------- ---------
Net cash provided by (used in) financing activities $ (8,841) $ 15,802 $ 41,542
---------- ---------- ---------
5
<PAGE>
ThermoQuest Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ---------- ----------- ----------
Exchange Rate Effect on Cash $ 1,279 $ (132) $ (831)
--------- ---------- ---------
Increase (Decrease) in Cash and Cash Equivalents 40,541 (83,080) 54,624
Cash and Cash Equivalents at Beginning of Year 91,898 174,978 120,354
--------- ---------- ---------
Cash and Cash Equivalents at End of Year $ 132,439 $ 91,898 $ 174,978
========= ========== =========
Cash Paid For
Interest $ 6,454 $ 9,851 $ 7,010
Income taxes $ 23,570 $ 25,207 $ 11,337
Noncash Activities
Fair value of assets of acquired companies $ 1,342 $ 184,659 $ 69,741
Cash paid for acquired companies (1,342) (160,411) (33,148)
Stock issued to parent company for acquired companies - (16) -
Adjustment of purchase price due from parent company for - 3,498 -
acquired companies --------- ---------- ---------
Liabilities assumed of acquired companies $ - $ 27,730 $ 36,593
========= ========== =========
Conversions of convertible debentures $ 5,000 $ 15,659 $ -
========= ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ThermoQuest Corporation 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- --------- ----------
Comprehensive Income
Net Income $ 38,378 $41,805 $ 28,023
--------- ------- ---------
Other Comprehensive Items, Net:
Foreign currency translation adjustments 7,007 (11,644) (1,341)
Unrealized gain (loss) on available-for-sale investments, net - (14) 14
of reclassification adjustment --------- ------- ---------
7,007 (11,658) (1,327)
--------- -------- ---------
$ 45,385 $30,147 $ 26,696
========= ======= =========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning of year $ 512 $ 485 $ 450
Net proceeds from issuance of Company common stock (Note 8) - 18 35
Conversions of convertible debentures 3 9 -
--------- -------- --------
Balance at end of year 515 512 485
--------- -------- --------
Capital in Excess of Par Value:
Balance at beginning of year 302,881 261,921 213,378
Net proceeds from issuance of Company common stock (Note 8) - 24,818 47,743
Conversions of convertible debentures 4,942 15,414 -
Stock issued to parent company for acquired companies (Note 2) - 16 -
Issuance of stock under employees' and directors' stock plans 414 220 -
Tax benefit related to employees' and directors' stock plans (Note 4) 772 492 800
--------- -------- --------
Balance at end of year 309,009 302,881 261,921
--------- -------- --------
Retained Earnings:
Balance at beginning of year 78,229 39,787 11,764
Net income 38,378 41,805 28,023
Deemed distribution to parent company for acquired companies (Note 2) - (3,363) -
--------- -------- --------
Balance at end of year 116,607 78,229 39,787
--------- -------- --------
Treasury Stock:
Balance at beginning of year (6) - -
Repurchase of Company common stock (5,291) - -
Activity under employees' and directors' stock plans (3) (6) -
--------- -------- --------
Balance at end of year (5,300) (6) -
--------- -------- --------
Accumulated Other Comprehensive Items:
Balance at beginning of year (10,837) 821 2,148
Other comprehensive items, net 7,007 (11,658) (1,327)
--------- -------- --------
Balance at end of year (3,830) (10,837) 821
--------- -------- --------
$ 417,001 $370,779 $303,014
========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
ThermoQuest Corporation (the Company) consists of businesses that are
reported in two segments: Analytical Instruments and Scientific Equipment. The
Company's Analytical Instruments segment develops, manufactures, sells, and
services mass spectrometers, liquid chromatographs, and gas chromatographs, as
well as consumables for the chromatography industry. The Company's Scientific
Equipment segment develops, manufactures, sells, and services scientific
equipment for the preparation and preservation of chemical samples. The
Company's products are used primarily by the pharmaceutical, biotechnology,
environmental, and industrial marketplaces.
Relationship With Thermo Instrument Systems Inc. and Thermo Electron Corporation
The Company was incorporated in June 1995 as a wholly owned subsidiary of
Thermo Instrument Systems Inc. As part of the formation of the Company, Thermo
Instrument transferred to the Company the assets, liabilities, and businesses of
Finnigan Corporation and Thermo Separation Products Inc. in exchange for
45,000,000 shares of the Company's common stock. As of January 2, 1999, Thermo
Instrument owned 45,521,405 shares of the Company's common stock, representing
89% of such stock outstanding. Thermo Instrument is an 85%-owned subsidiary of
Thermo Electron Corporation. As of January 2, 1999, Thermo Electron owned
159,880 shares of the Company's common stock, representing 0.31% of such stock
outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1998, 1997, and 1996 are for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996, respectively. Fiscal years 1998
and 1996 each included 52 weeks; 1997 included 53 weeks.
Revenue Recognition
The Company recognizes product revenues upon shipment of its products and
recognizes service contract revenues ratably over the term of the contract. The
Company provides a reserve for its estimate of warranty and installation costs
at the time of shipment. Deferred revenue in the accompanying balance sheet
consists primarily of unearned revenue on service contracts. Substantially all
of the deferred revenue included in the accompanying 1998 balance sheet will be
recognized within one year.
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 3). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
Income Taxes
The Company and Thermo Instrument have a tax allocation agreement under
which both the Company and Thermo Instrument are included in Thermo Electron's
consolidated federal and certain state income tax returns. The agreement
provides that in years in which the Company has taxable income, it will pay to
Thermo Electron amounts comparable to the taxes the Company would have paid if
it had filed separate tax returns. If Thermo Instrument's and Thermo Electron's
combined equity ownership of the Company were to drop below 80%, the Company
would be required to file its own income tax returns.
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
Earnings per Share
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the year. Diluted earnings
per share have been computed assuming the conversion of the Company's
convertible obligations and the elimination of the related interest expense, and
the exercise of stock options, as well as their related income tax effects.
Cash and Cash Equivalents
At year-end 1998 and 1997, $96,906,000 and $60,376,000, respectively, of
the Company's cash equivalents were invested in a repurchase agreement with
Thermo Electron. Under this agreement, the Company in effect lends excess cash
to Thermo Electron, which Thermo Electron collateralizes with investments
principally consisting of corporate notes, U.S. government-agency securities,
commercial paper, money market funds, and other marketable securities, in the
amount of at least 103% of such obligation. The Company's funds subject to the
repurchase agreement are readily convertible into cash by the Company. The
repurchase agreement earns a rate based on the 90-day Commercial Paper Composite
Rate plus 25 basis points, set at the beginning of each quarter.
At year-end 1998, $167,000 of the Company's cash equivalents, denominated
in Dutch guilders, were invested in a repurchase agreement with a wholly owned
subsidiary of Thermo Electron. Under this agreement, the Company in effect lends
excess cash to the subsidiary, which Thermo Electron collateralizes with
investments principally consisting of corporate notes, U.S. government-agency
securities, commercial paper, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The Company's
funds subject to the repurchase agreement are readily convertible into cash by
the Company. The repurchase agreement earns a rate based on Netherlands market
rates, set at the beginning of each month.
The Company, along with other subsidiaries of Thermo Electron,
participates in a notional pool arrangement with Barclays Bank, which includes a
$71 million credit facility. The Company has access to $0.3 million under this
credit facility. Only U.K.-based subsidiaries of Thermo Electron participate in
this arrangement. Under this arrangement, Barclays notionally combines the
positive and negative cash balances held by the participants to calculate the
net interest yield/expense for the group. The benefit derived from this
arrangement is then allocated based on balances attributable to the respective
participants. Thermo Electron guarantees all of the obligations of each
participant in this arrangement. At year-end 1998 and 1997, the Company had cash
balances under this arrangement of $3,520,000 and $747,000, respectively.
At year-end 1998 and 1997, the Company's cash equivalents also included
investments in commercial paper and short-term certificates of deposit held by
the Company's foreign operations, which have an original maturity of three
months or less. Cash equivalents are carried at cost, which approximates market
value.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out or
weighted average basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Raw Materials and Supplies $20,872 $ 17,174
Work in Process 15,344 17,736
Finished Goods 34,396 31,479
------- --------
$70,612 $ 66,389
======= ========
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: buildings and improvements, 5 to 40
years; machinery and equipment, 1 to 12 years; and leasehold improvements, the
shorter of the term of the lease or the life of the asset. Property, plant, and
equipment consists of:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Land $16,929 $ 17,428
Buildings 38,946 39,875
Machinery, Equipment, and Leasehold Improvements 34,756 32,013
------- --------
90,631 89,316
Less: Accumulated Depreciation and Amortization 27,168 22,580
------- --------
$63,463 $ 66,736
======= ========
Patents and Other Assets
Patents and other assets in the accompanying balance sheet includes
intangibles associated with a product line acquired in 1998 (Note 2) and the
costs of acquired patents. Such assets are amortized using the straight-line
method over their estimated useful lives, which range from 7 to 15 years. These
assets were $2,026,000 and $1,112,000, net of accumulated amortization of
$7,490,000 and $6,986,000, at year-end 1998 and 1997, respectively. Patents and
other assets in the accompanying balance sheet also includes deferred debt costs
of $703,000 and $1,250,000, net of accumulated amortization of $1,807,000 and
$1,385,000, at year-end 1998 and 1997, respectively. Deferred debt costs are
amortized through the maturities of the related debt in 2000 and 2004.
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method principally over 40 years.
Accumulated amortization was $34,922,000 and $28,166,000 at year-end 1998 and
1997, respectively. The Company assesses the future useful life of this asset
whenever events or changes in circumstances indicate that the current useful
life has diminished. The Company considers the future undiscounted cash flows of
the acquired companies in assessing the recoverability of this asset. If
impairment has occurred, any excess of carrying value over fair value is
recorded as a loss.
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment.
Foreign currency transaction gains and losses are included in the accompanying
statement of income and are not material for the three years presented.
Comprehensive Income
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"Other comprehensive items, net," 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 on available-for-sale investments. At year-end 1998 and
1997, the balance of accumulated other comprehensive items represented the
Company's cumulative translation adjustment.
Forward Contracts
The Company uses short-term forward foreign exchange contracts to manage
certain exposures to foreign currencies. The Company enters into forward foreign
exchange contracts to hedge firm purchase and sale commitments denominated in
currencies other than its subsidiaries' local currencies. These contracts
principally hedge transactions denominated in U.S. dollars and German marks. The
purpose of the Company's foreign currency hedging activities is to protect the
Company's local currency cash flows related to these commitments from
fluctuations in foreign exchange rates. Gains and losses arising from forward
foreign exchange contracts are recognized as offsets to gains and losses
resulting from the transactions being hedged. The Company does not enter into
speculative foreign currency agreements.
Recently Released Accounting Pronouncements
Effective in 2000, the Company will be required to adopt SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company has
not completed the analysis to assess the effect of the new pronouncement on its
financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
Certain amounts in 1997 and 1996 have been reclassified to conform to the
presentation in the 1998 financial statements.
11
</TABLE>
<PAGE>
2. Acquisitions
In January 1998, the Company acquired a line of freeze dryers from Edwards
High Vacuum International for $1,342,000 in cash.
In March 1997, Thermo Instrument acquired Life Sciences International PLC,
a London Stock Exchange-listed company. In July 1997, the Company agreed to
acquire three business units within Life Sciences' Laboratory Products Group, as
well as Life Sciences' Hypersil operation, from Thermo Instrument. The
Laboratory Products businesses manufacture scientific equipment for the
preparation and preservation of chemical samples, and Hypersil manufactures
columns used in high-performance liquid chromatography. The aggregate purchase
price for these businesses consisted of: (i) $103,795,000 in cash (net of an
adjustment to the purchase price discussed below), (ii) 1,000 shares of the
Company's common stock valued at $15,750, and (iii) the assumption of
$53,134,000 of debt payable to Thermo Instrument. The purchase price represents
the sum of the net tangible book value of the Laboratory Products businesses and
Hypersil as of June 28, 1997, plus a percentage of Thermo Instrument's total
cost in excess of net assets acquired associated with its acquisition of Life
Sciences, based on the aggregate 1996 revenues of the Laboratory Products
businesses and Hypersil relative to Life Sciences' 1996 consolidated revenues.
The Company believes that this allocation methodology is reasonable and in
accordance with the guidance provided by Staff Accounting Bulletin (SAB) 55
(Topic 1:B). The cash portion of the purchase price, including the repayment of
debt to Thermo Instrument, was paid in September 1997 together with interest
calculated at the 90-day Commercial Paper Composite Rate plus 25 basis points,
set at the beginning of each quarter, from June 28, 1997. In December 1997, the
Company was notified by Thermo Instrument that it would receive an adjustment to
the purchase price of $3,498,000 in connection with its acquisition of the
Laboratory Products businesses and Hypersil based on Thermo Instrument's final
determination of the net tangible book value of the acquired businesses and a
final calculation of Thermo Instrument's total cost in excess of net assets
acquired associated with its acquisition of Life Sciences. The adjustment to the
purchase price, which was received in April 1998, was recorded as a receivable
from Thermo Instrument as of January 3, 1998, and was included in due from
parent company and affiliated companies in the accompanying 1997 balance sheet.
Because the Company, the Laboratory Products businesses, and Hypersil were
deemed for accounting purposes to be under control of their common majority
owner, Thermo Instrument, the transaction has been accounted for in a manner
similar to a pooling of interests. Accordingly, the Company's 1997 historical
financial information has been restated to include the results of the Laboratory
Products businesses and Hypersil from March 12, 1997, the date these businesses
were acquired by Thermo Instrument, and the shares issued to Thermo Instrument
have been deemed outstanding from that date. The purchase price included
$3,363,000 for the increase in the net book value from the date the businesses
were acquired by Thermo Instrument to June 28, 1997. This amount was recorded as
a deemed distribution from retained earnings, reflecting payment by the Company
to Thermo Instrument for the earnings of the transferred businesses from the
date of the acquisition by Thermo Instrument until the date of transfer to the
Company.
In December 1995, Thermo Instrument acquired the assets of the analytical
instruments division of Analytical Technology, Inc. (ATI). In June 1996, the
Company acquired the Automass division of ATI from Thermo Instrument for
$4,129,000 in cash. The Automass division of ATI is a manufacturer of benchtop
mass spectrometers. Because the Company and the Automass division of ATI were
deemed for accounting purposes to be under control of their common majority
owner, Thermo Instrument, the transaction has been accounted for in a manner
similar to a pooling of interests. The Company's 1996 historical financial
information includes the results of the Automass division of ATI from January 1,
1996.
In January 1996, the Company acquired Extrel FTMS, Inc. from Waters
Technologies Corporation for $1,723,000 in cash. Extrel is a manufacturer of
Fourier transform mass spectrometers. The acquisition of Extrel has been
accounted for using the purchase method of accounting, and its results have been
included in the accompanying financial statements from the date of acquisition.
12
<PAGE>
2. Acquisitions (continued)
In March 1996, Thermo Instrument acquired a substantial portion of the
businesses constituting the Scientific Instruments Division of Fisons plc (the
Fisons businesses), a wholly owned subsidiary of Rhone-Poulenc Rorer Inc. (RPR).
In September 1996, the Company acquired two businesses that were formerly part
of Fisons, CE Instruments and MassLab Instruments, from Thermo Instrument for an
aggregate $27,296,000 in cash and the assumption of approximately $8,849,000 in
debt. CE Instruments is a manufacturer of gas chromatographs, and MassLab is a
manufacturer of mass spectrometers. The purchase price was determined based on
the net book value of CE Instruments and MassLab at March 29, 1996, plus a pro
rata allocation of Thermo Instrument's total cost in excess of net assets
acquired associated with its acquisition of the Fisons businesses. The Company
believes that this allocation methodology is reasonable and in accordance with
the guidance provided by SAB 55 (Topic 1:B). Because the Company, CE
Instruments, and MassLab were deemed for accounting purposes to be under control
of their common majority owner, Thermo Instrument, the transaction has been
accounted for in a manner similar to a pooling of interests. Accordingly, the
Company's 1996 historical financial information includes the results of CE
Instruments and MassLab from March 29, 1996, the date these businesses were
acquired by Thermo Instrument.
In December 1997, Thermo Instrument and RPR negotiated a post-closing
adjustment under the terms of the purchase agreement for the Fisons acquisition
pertaining to the determination of the net assets of the Fisons businesses at
the date of acquisition. This negotiation resulted in a refund to Thermo
Instrument that included interest from the date of acquisition. The Company
recorded a receivable from Thermo Instrument totaling $2,714,000 at January 3,
1998, which represented the Company's share of the refund received by Thermo
Instrument and was included in due from parent company and affiliated companies
in the accompanying 1997 balance sheet. The Company recorded $2,183,000 of the
refund as a reduction of cost in excess of net assets of acquired companies. Of
the remainder, $272,000 represented payment for uncollected accounts receivable
acquired by the Company that were guaranteed by RPR, and $259,000 represented
interest income on the refund from the date of acquisition. The Company received
the refund from Thermo Instrument in April 1998.
The aggregate cost of these acquisitions exceeded the estimated fair value
of the acquired net assets by $135,733,000, which is being amortized principally
over 40 years. Allocation of the purchase price for these acquisitions was based
on estimates of the fair value of the net assets acquired. The assets and
liabilities were recorded at their estimated fair values as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Laboratory
Products CE
(In thousands) Businesses Hypersil Instruments MassLab Other
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Purchase Price $150,444 $ 6,501 $ 18,023 $ 6,818 $ 5,852
-------- -------- -------- -------- --------
Allocation to:
Current assets 49,431 1,668 22,799 3,086 6,630
Long-lived assets 22,239 - 8,409 1,617 349
Current liabilities (24,176) - (23,081) (2,628) (5,205)
Deferred income taxes and other deferred (3,117) - (5,059) - -
items
Long-term debt (437) - - - (620)
Cost in excess of net assets 106,504 4,833 14,955 4,743 4,698
acquired
</TABLE>
In connection with these acquisitions, the Company has undertaken
restructuring activities at the 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
13
<PAGE>
2. Acquisitions (continued)
excess facilities. In connection with these restructuring activities, as part of
the cost of the acquisitions, the Company established reserves as detailed
below, primarily for severance and excess facilities. In accordance with EITF
95-3, the Company finalized its restructuring plans no later than one year from
the respective dates of the acquisitions. Accrued acquisition expenses are
included in other accrued expenses in the accompanying balance sheet. A summary
of the changes in accrued acquisition expenses is:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ------------------------------------------------- ------------ -------------- -------------- --------------
Balance at December 30, 1995 $ 4 $ 90 $ 35 $ 129
Reserves established 1,432 - 61 1,493
Usage (1,117) (90) (96) (1,303)
Currency translation adjustment 38 - - 38
------ -------- -------- --------
Balance at December 28, 1996 357 - - 357
Reserves established 1,018 395 158 1,571
Usage (713) - (76) (789)
Currency translation adjustment (88) (2) (1) (91)
------ -------- --------- --------
Balance at January 3, 1998 574 393 81 1,048
Reserves established - 211 120 331
Usage (172) - (197) (369)
Decrease due to finalization of restructuring
plan, recorded as a decrease to cost in
excess excess of net assets of acquired
companies (442) (275) (12) (729)
Currency translation adjustment 40 2 8 50
------ -------- -------- --------
Balance at January 2, 1999 $ - $ 331 $ - $ 331
====== ======== ======== ========
Based on unaudited data, the following table presents selected financial
information of the Company, the Laboratory Products businesses, and Hypersil on
a pro forma basis, assuming the companies had been combined since the beginning
of 1996. The effect of the acquisitions not included in the pro forma data was
not material to the Company's results of operations.
(In thousands except per share amounts) 1997 1996
- -------------------------------------------------------------------------- ---- ------------ --------------
Revenues $462,166 $462,421
Net Income 36,427 34,471
Earnings per Share:
Basic .73 .72
Diluted .70 .69
</TABLE>
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition of the
Laboratory Products businesses and Hypersil been made at the beginning of 1996.
14
<PAGE>
3. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has stock-based compensation plans for its key employees,
directors, and others. These plans permit the grant of a variety of stock and
stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted stock,
stock options, stock bonus shares, or performance-based shares. The option
recipients and the terms of options granted under the plans are determined by
the Board Committee. As of year-end 1998, only nonqualified stock options have
been awarded under these plans. Generally, options granted are exercisable
immediately, but are subject to certain transfer restrictions and the right of
the Company to repurchase shares issued upon exercise of the options at the
exercise price, upon certain events. The restrictions and repurchase rights
generally lapse ratably over a one- to ten-year period, depending on the term of
the option, which generally ranges from five to twelve years. Nonqualified stock
options may be granted at any price determined by the Board Committee, although
incentive stock options must be granted at not less than the fair market value
of the Company's stock on the date of grant. To date, all options have been
granted at fair market value. The Company also has a directors' stock option
plan that provides for the grant of stock options to outside directors pursuant
to a formula approved by the Company's shareholders. Options granted under this
plan have the same general terms as options granted under the stock-based
compensation plans described above, except that the restrictions and repurchase
rights generally lapse ratably over a four-year period and the option term is
five years. In addition to the Company's stock-based compensation plans, certain
officers and key employees may also participate in the stock-based compensation
plans of Thermo Electron and Thermo Instrument. Participation in these plans is
accounted for in accordance with APB No. 25.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 643,000 shares at a weighted average exercise price of $16.24 per share
elected to participate in this exchange and, as a result, received options to
purchase 321,000 shares of Company common stock at $10.51 per share, which are
included in the 1998 grants in the table below. The other terms of the new
options are the same as the exchanged options except that the holders may not
sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.
15
<PAGE>
<TABLE>
<CAPTION>
3. Employee Benefit Plans (continued)
A summary of the Company's stock option activity is:
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
------------------- ------------------ ------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- --------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 3,047 $14.21 2,330 $13.12 - $ -
Granted 970 9.83 873 16.90 2,425 13.12
Exercised (32) 13.00 (16) 13.30 - -
Forfeited (392) 14.36 (140) 13.02 (95) 13.00
Canceled due to exchange (643) 16.24 - - - -
----- ----- -----
Options Outstanding, End of Year 2,950 $12.32 3,047 $14.21 2,330 $13.12
===== ====== ===== ====== ===== ======
Options Exercisable 2,950 $12.32 3,047 $14.21 2,330 $13.12
===== ====== ===== ====== ===== ======
Options Available for Grant 1,427 862 595
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
A summary of the status of the Company's stock options at January 2, 1999,
is:
<S> <C> <C> <C>
Options Outstanding and Exercisable
------------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ------------------------------------------------ ------------------ ------------------- --------------------
$ 9.44 - $11.38 957 5.5 years $ 9.81
11.39 - 13.32 1,664 8.4 years 13.00
13.33 - 15.26 91 2.2 years 15.00
15.27 - 17.20 238 6.9 years 16.61
------
$ 9.44 - $17.20 2,950 7.1 years $12.32
======
</TABLE>
Employee Stock Purchase Program
Effective November 1, 1997, substantially all of the Company's full-time
U.S. employees are eligible to participate in an employee stock purchase program
sponsored by the Company and Thermo Electron, under which employees can purchase
shares of the Company's and Thermo Electron's common stock. Prior to November 1,
1997, the program was sponsored by Thermo Instrument and Thermo Electron. Prior
to the 1998 program year, the applicable shares of common stock could be
purchased at the end of a 12-month period at 95% of the fair market value at the
beginning of the period, and the shares purchased were subject to a six-month
resale restriction. Effective November 1, 1998, the applicable shares of common
stock may be purchased at 85% of the lower of the fair market value at the
beginning or end of the period, and the shares purchased are subject to a
one-year resale restriction. Shares are purchased through payroll deductions of
up to 10% of each participating employee's gross wages.
16
<PAGE>
3. Employee Benefit Plans (continued)
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
under the Company's and its affiliates' stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on the Company's net income and
earnings per share would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Net Income:
As reported $38,378 $41,805 $28,023
Pro forma 36,483 40,703 26,902
Basic Earnings per Share:
As reported .75 .83 .59
Pro forma .71 .81 .56
Diluted Earnings per Share:
As reported .72 .80 .57
Pro forma .69 .78 .55
Pro forma compensation expense for options granted is reflected over the
vesting period; therefore, future pro forma compensation expense may be greater
as additional options are granted.
The weighted average fair value per share of options granted was $2.78,
$5.75, and $5.93 in 1998, 1997, and 1996, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Volatility 29% 28% 26%
Risk-free Interest Rate 4.4% 5.7% 5.9%
Expected Life of Options 3.6 years 4.7 years 7.8 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plans
Substantially all of the Company's full-time U.S. employees are eligible
to participate in 401(k) savings plans sponsored by the several of the Company's
subsidiaries. Prior to 1998, one of the Company's subsidiaries participated in a
401(k) savings plan sponsored by Thermo Electron. Contributions to the 401(k)
savings plans are made by both the employee and the Company. Company
contributions are based upon the level of employee contributions. For these
plans, the Company contributed and charged to expense $1,790,000, $1,301,000,
and $1,118,000 in 1998, 1997, and 1996, respectively.
17
<PAGE>
3. Employee Benefit Plans (continued)
Defined Benefit Pension Plan
The Company's Bremen, Germany, subsidiary has a defined benefit pension
plan covering substantially all of its full-time employees. Benefits are based
on a percentage of eligible earnings for each year of service in excess of ten
years. The Company's funding policy is to make contributions within a range
required by applicable regulations. Net periodic benefit costs include the
following components:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Service Cost $ 208 $ 235 $ 305
Interest Cost on Benefit Obligation 1,012 954 1,059
Expected Return on Plan Assets (279) (167) (220)
Amortization of Unrecognized Gain (50) (67) (93)
Amortization of Initial Unrecognized Obligation 43 44 50
-------- -------- --------
$ 934 $ 999 $ 1,101
======== ======== ========
The Company's defined benefit plan activity is:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ----------- -----------
Change in Benefit Obligation:
Benefit obligation, beginning of year $ 13,369 $ 14,924
Service cost 208 235
Interest cost 1,012 954
Benefits paid (498) (344)
Actuarial (gain) loss 61 (68)
Adjustment for settlement - (305)
Currency translation adjustment 1,046 (2,027)
-------- --------
Benefit obligation, end of year 15,198 13,369
-------- --------
Change in Plan Assets:
Fair value of plan assets, beginning of year 4,969 5,858
Company contributions 186 119
Actual return on plan assets 287 192
Benefits paid (120) (115)
Adjustment for settlement - (305)
Currency translation adjustment 392 (780)
------- --------
Fair value of plan assets, end of year 5,714 4,969
------- --------
Funded Status (9,484) (8,400)
Unrecognized Net Gain (2,126) (2,077)
Unrecognized Initial Obligation 226 253
-------- --------
Accrued Benefit Costs $(11,384) $(10,224)
========= =========
18
<PAGE>
3. Employee Benefit Plans (continued)
The weighted average actuarial assumptions used to determine the net
periodic benefit costs in 1998, 1997, and 1996 were: discount rate - 7.5%, rate
of increase in salary levels - 3.5%, and expected long-term rate of return on
assets - 6.0%.
Deferred Compensation Plan
The Company's Italian subsidiary has an unfunded state mandated deferred
compensation plan, the cost of which the Company accrues based on a fixed
percentage of each employee's salary, adjusted for inflation. Benefits are paid
at the time an employee leaves the employ of the Company. The Company's expense
related to this plan was $440,000, $381,000, and $448,000 in 1998, 1997 and
1996, respectively. The Company's liability for this plan is included in accrued
pension and other deferred items in the accompanying balance sheet.
4. Income Taxes
The components of income before provision for income taxes and
extraordinary item are:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------- -------- --------- --------
Domestic $42,495 $ 52,240 $28,795
Foreign 23,168 20,781 19,945
------- -------- -------
$65,663 $ 73,021 $48,740
======= ======== =======
The components of the provision for income taxes are:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------- -------- --------- --------
Currently Payable:
Federal $14,564 $ 17,653 $11,224
State 2,446 3,640 2,340
Foreign 9,672 9,434 10,281
------- -------- -------
26,682 30,727 23,845
------- -------- -------
Net Deferred (Prepaid):
Federal 823 574 (1,529)
State 73 122 (324)
Foreign - (207) (1,275)
------- -------- -------
896 489 (3,128)
------- -------- -------
$27,578 $ 31,216 $20,717
======= ======== =======
The provision for income taxes that is currently payable does not reflect
$927,000, $1,099,000, and $1,840,000 of tax benefits used to reduce cost in
excess of net assets of acquired companies in 1998, 1997, and 1996,
respectively. In addition, the Company receives a tax deduction upon exercise of
nonqualified stock options by employees for the difference between the exercise
price and the market price of the underlying common stock on the date of
exercise.
19
<PAGE>
4. Income Taxes (continued)
The provision for income taxes that is currently payable does not reflect
$772,000, $492,000, and $800,000 of such benefits that have been allocated to
capital in excess of par value in 1998, 1997, and 1996, respectively.
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income before provision for income taxes and extraordinary
item due to:
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------- -------- --------- --------
Provision for Income Taxes at Statutory Rate $22,982 $ 25,557 $17,059
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 1,637 2,445 1,310
Foreign tax rate and tax law differential 1,563 1,954 2,024
Nondeductible amortization of cost in excess of net assets of
acquired companies 1,815 1,715 905
Tax benefit of foreign sales corporation (805) (984) (755)
Other, net 386 529 174
------- -------- -------
$27,578 $ 31,216 $20,717
======= ======== =======
Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of:
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------- --------- --------
Prepaid Income Taxes:
Foreign tax loss carryforwards $ 11,146 $10,041
Reserves and accruals 6,164 8,961
Inventory basis difference 4,324 1,876
Accrued compensation 2,517 1,705
-------- -------
24,151 22,583
Less: Valuation allowance 11,146 10,041
-------- -------
$ 13,005 $12,542
======== =======
Deferred Income Taxes:
Depreciation $ 8,370 $ 7,503
======== =======
The valuation allowance relates to uncertainty surrounding the realization
of foreign net operating losses, which is dependent on the future income of
certain foreign subsidiaries of the Company. The Company believes that it is
more likely than not that these deferred tax assets will not be realized. As of
January 2, 1999, the Company had $27,016,000 of foreign tax loss carryforwards,
which expire from 1999 through 2004. The increase in the valuation allowance in
1998 results from the increase in foreign tax loss carryforwards. Any tax
benefit resulting from use of acquired loss carryforwards has been or will be
recorded as a reduction of cost in excess of net assets of acquired companies.
A provision has not been made for U.S. or additional foreign taxes on
$62,021,000 of undistributed earnings of foreign subsidiaries that could be
subject to taxation if remitted to the U.S. because the Company plans to keep
these amounts permanently reinvested overseas.
20
<PAGE>
5. Short- and Long-term Obligations
Short-term Obligations
Notes payable and current maturities of long-term obligations in the
accompanying balance sheet includes $10,890,000 and $6,076,000 at year-end 1998
and 1997, respectively, of short-term bank borrowings and amounts borrowed under
lines of credit at the Company's foreign subsidiaries. The weighted average
interest rate for these borrowings was 2.18% and 1.63% at year-end 1998 and
1997, respectively. Unused lines of credit were $25,702,000 at year-end 1998.
Long-term Obligations
(In thousands except per share amounts) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
5% Subordinated Convertible Debentures, Due 2000, Convertible at $16.50 per $67,931 $80,591
Share
10.23% Mortgage Loan Secured by Property With a Net Book Value of $14,863, 7,319 8,343
Payable in Monthly Installments With Final Payments in 2004
Other 138 217
------- -------
75,388 89,151
Less: Current Maturities of Long-term Obligations 1,184 1,071
------- -------
$74,204 $88,080
======= =======
The Company's subordinated convertible debentures are guaranteed on a
subordinated basis by Thermo Electron. Thermo Instrument has agreed to reimburse
Thermo Electron in the event Thermo Electron is required to make a payment under
the guarantee.
During 1998 and 1997, $5,000,000 and $15,659,000 principal amount,
respectively, of the 5% subordinated convertible debentures were converted into
common stock of the Company. In the fourth quarter of 1998, the Company
repurchased $7,660,000 principal amount of its 5% subordinated convertible
debentures for $7,125,000 in cash, resulting in an extraordinary gain of
$293,000, net of taxes of $172,000.
The annual requirements of long-term obligations as of January 2, 1999,
are $1,184,000 in 1999, $69,239,000 in 2000, $1,422,000 in 2001, $1,538,000 in
2002, $1,702,000 in 2003, and $303,000 in 2004 and thereafter. Total future
requirements of long-term obligations are $75,388,000.
See Note 10 for the fair value information pertaining to the Company's
long-term obligations.
6. Commitments and Contingencies
Operating Leases
The Company leases portions of its office and operating facilities under
various operating lease arrangements. The accompanying statement of income
includes expenses from operating leases of $5,204,000, $4,608,000, and
$3,041,000 in 1998, 1997, and 1996, respectively. Future minimum payments due
under noncancelable operating leases at January 2, 1999, are $3,158,000 in 1999,
$2,781,000 in 2000, $1,842,000 in 2001, $894,000 in 2002, $476,000 in 2003, and
$2,588,000 in 2004 and thereafter. Total future minimum lease payments are
$11,739,000.
Contingencies
On January 23, 1997, the Company's Finnigan subsidiary filed complaints
against Bruker-Franzen Analytik GmbH and its U.S. affiliate, and Hewlett-Packard
Company, for alleged violation of two U.S. patents owned by Finnigan. The
patents pertain to methods used in ion-trap mass spectrometers.
One of Finnigan's complaints was filed in the United States District Court
for the District of Massachusetts and the other was filed with the United States
International Trade Commission (ITC) in Washington, DC. Finnigan has asked for
damages to compensate for the infringements, for injunctions against further
infringement, and for an order excluding further imports into the U.S. of
ion-trap mass spectrometers that use the patented methods.
21
<PAGE>
6. Commitments and Contingencies (continued)
The District Court action has, at the request of Hewlett-Packard and
Bruker, been stayed pending completion of an investigation by the ITC. In April
1998, the ITC determined that the defendants did not engage in unfair practices
in U.S. import trade with respect to the Finnigan patents, and that the Finnigan
patents are invalid and/or not infringed. Finnigan has appealed the ITC's
determination with respect to one of its patents to the United States Court of
Appeals for the Federal Circuit (CAFC). The CAFC heard arguments in the appeal
on March 4, 1999.
Bruker presented counterclaims in the ITC investigation. The
counterclaims, which have been removed to the District Court in Massachusetts,
allege that the Finnigan patents are invalid and unenforceable and are not
infringed by the mass spectrometers co-marketed by Bruker. They also allege that
Finnigan has violated U.S. and Massachusetts antitrust laws and engaged in
unfair competition by attempting to maintain a monopoly position and restrain
trade through enforcement of allegedly fraudulently obtained patents. Bruker has
asked for judgment consistent with its counterclaims, and for three times the
antitrust damages (including attorneys' fees) it has sustained.
There can be no assurance as to the outcome of these matters or that an
unfavorable resolution would not have a material adverse effect on the Company's
future results of operations and financial position.
7. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In 1997 and 1996, the Company paid an amount equal to
1.0% of the Company's revenues. For these services, the Company was charged
$3,469,000, $4,389,000, and $3,138,000 in 1998, 1997, and 1996, respectively.
The fee is reviewed and adjusted annually by mutual agreement of the parties.
The corporate services agreement is renewed annually but can be terminated upon
30 days' prior notice by the Company or upon the Company's withdrawal from the
Thermo Electron Corporate Charter (the Thermo Electron Corporate Charter defines
the relationship among Thermo Electron and its majority-owned subsidiaries).
Management believes that the service fee charged by Thermo Electron is
reasonable and that such fees are representative of the expenses the Company
would have incurred on a stand-alone basis. For additional items, such as
employee benefit plans, insurance coverage, and other identifiable costs, Thermo
Electron charges the Company based upon costs attributable to the Company.
Other Related-party Transactions
The Company purchases and sells products in the ordinary course of
business with other companies affiliated with Thermo Instrument. Purchases of
products from such affiliated companies totaled $10,256,000, $23,791,000, and
$10,527,000 in 1998, 1997, and 1996, respectively. Sales of products to such
affiliated companies totaled $5,521,000, $7,090,000, and $11,987,000 in 1998,
1997, and 1996, respectively.
Repurchase Agreements
The Company invests excess cash in repurchase agreements and a notional
pool arrangement with Thermo Electron as discussed in Note 1.
22
<PAGE>
8. Common Stock
In March 1997, the Company sold 1,768,500 shares of its common stock at
$15.00 per share for net proceeds of $24,836,000.
In March and April 1996, the Company sold 3,450,000 shares of its common
stock in an initial public offering at $15.00 per share for net proceeds of
$47,778,000.
At January 2, 1999, the Company had reserved 8,668,579 unissued shares of
its common stock for possible issuance under stock-based compensation plans and
for issuance upon possible conversion of the Company's subordinated convertible
debentures.
9. Restructuring Costs
During the third quarter of 1998, the Company recorded restructuring costs
of $4,600,000. The restructuring costs, which were accounted for in accordance
with EITF 94-3, consisted of $3,660,000 related to severance costs for
approximately 85 employees across all functions and an asset write-down of
$940,000 related to the closure and anticipated sale of a facility. The Company
plans to complete its restructuring plan by August 1999. As of January 2, 1999,
the Company had terminated 49 employees and had expended $2,010,000 of the
reserve established for severance. The remaining reserve for severance of
$1,634,000, as adjusted for the impact of currency translation, is included in
other accrued expenses in the accompanying 1998 balance sheet.
10. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, notes payable and current maturities of
long-term obligations, accounts payable, due to/from parent company and
affiliated companies, long-term obligations, and forward foreign exchange
contracts. The carrying amount of these financial instruments, with the
exception of long-term obligations and forward exchange contracts, approximate
fair value due to their short-term nature.
The carrying amount and fair value of the Company's long-term obligations
and off-balance-sheet financial instruments are:
1998 1997
-------------------- ----------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
Long-term Obligations:
Subordinated convertible debentures $67,931 $67,340 $80,591 $ 88,650
Other 6,273 8,749 7,489 9,319
------- ------- ------- --------
$74,204 $76,089 $88,080 $ 97,969
======= ======= ======= ========
Off-balance-sheet Financial Instruments:
Forward exchange contracts (payable) receivable $ (19) $ 19
The fair value of long-term obligations was determined based on quoted
market prices and on borrowing rates available to the Company at the respective
year-ends.
The notional amounts of forward exchange contracts totaled $752,000 and
$1,200,000 at year-end 1998 and 1997, respectively. The fair value of such
contracts is the estimated amount that the Company would pay or receive upon
termination of the contract, taking into account the change in foreign exchange
rates.
23
<PAGE>
11. Business Segments and Geographical Information
The Company organizes and manages its business by individual functional
operating entity. The Company's businesses are reported in two segments:
Analytical Instruments and Scientific Equipment. In classifying operational
entities into a particular segment, the Company aggregates businesses with
similar economic characteristics, products and services, production processes,
customers, and methods of distribution.
The Analytical Instruments segment develops, manufactures, sells, and
services mass spectrometers, liquid chromatographs, and gas chromatographs used
in the quantitative and qualitative analysis of chemical compounds at ultratrace
levels of detection, as well as consumables for the chromatography industry. The
Scientific Equipment segment, acquired from Thermo Instrument effective March
12, 1997 (Note 2), develops, manufactures, sells, and services scientific
equipment for the preparation and preservation of chemical samples.
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Business Segment Information
Revenues:
Analytical Instruments $ 300,820 $315,668 $ 313,793
Scientific Equipment 132,864 123,195 -
--------- -------- ---------
$ 433,684 $438,863 $ 313,793
========= ======== =========
Income Before Provision for Income Taxes and Extraordinary Item
(a):
Analytical Instruments $ 46,110 $ 59,680 $ 51,785
Scientific Equipment 25,376 19,511 -
Corporate (b) (5,393) (6,210) (4,622)
--------- -------- ---------
Total operating income 66,093 72,981 47,163
Interest income (expense), net (430) 40 1,577
--------- -------- ---------
$ 65,663 $ 73,021 $ 48,740
========= ======== =========
Total Assets:
Analytical Instruments $ 368,167 $342,796 $ 362,884
Scientific Equipment 165,427 174,514 -
Corporate (c) 109,648 78,316 172,186
--------- -------- ---------
$ 643,242 $595,626 $ 535,070
========= ======== =========
Depreciation and Amortization:
Analytical Instruments $ 9,542 $ 9,852 $ 9,603
Scientific Equipment 5,466 4,433 -
--------- -------- ---------
$ 15,008 $ 14,285 $ 9,603
========= ======== =========
Capital Expenditures:
Analytical Instruments $ 4,691 $ 4,771 $ 3,761
Scientific Equipment 2,385 1,490 -
--------- -------- ---------
$ 7,076 $ 6,261 $ 3,761
========= ======== =========
24
<PAGE>
11. Business Segments and Geographical Information (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ---------- ----------- ----------
Geographical Information
Revenues (d):
United States $ 285,110 $ 289,836 $ 171,100
Germany 60,980 64,116 66,228
England 56,425 60,609 29,597
Italy 34,068 35,142 41,546
Japan 33,206 36,892 41,993
Other 58,073 53,611 49,342
Transfers among geographical areas (e) (94,178) (101,343) (86,013)
--------- ---------- ---------
$ 433,684 $ 438,863 $ 313,793
========= ========== =========
Long-lived Assets (f):
United States $ 45,296 $ 49,063 $ 30,819
Germany 6,083 6,142 7,582
Italy 6,780 6,519 8,080
Other 5,304 5,127 4,562
--------- ---------- ---------
$ 63,463 $ 66,851 $ 51,043
========= ========== =========
Export Revenues Included in United States Revenues Above (g) $ 93,512 $ 108,764 $ 77,956
========= ========== =========
(a) Includes restructuring costs in 1998 of $4,570,000 in the Analytical
Instruments segment and $30,000 in the Scientific Equipment segment (Note 9).
(b) Primarily general and administrative expenses.
(c) Primarily cash, cash equivalents, and, in 1996, available-for-sale
investments.
(d) Revenues are attributed to countries based on selling location.
(e) Transfers among geographical areas are accounted for at prices that are
representative of transactions with unaffiliated parties.
(f) Includes property, plant, and equipment, net, and other long-term tangible assets.
(g) In general, export revenues are denominated in U.S. dollars.
25
<PAGE>
12. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------- ---------- ----------- ----------
Basic
Net Income $38,378 $41,805 $28,023
------- ------- -------
Weighted Average Shares 51,270 50,120 47,677
------ ------- ------
Basic Earnings per Share $ .75 $ .83 $ .59
====== ======= ======
Diluted
Net Income $38,378 $41,805 $28,023
Effect of Convertible Obligations 2,248 2,691 2,839
------ ------- ------
Income Available to Common Shareholders, as Adjusted $40,626 $44,496 $30,862
------- ------- -------
Weighted Average Shares 51,270 50,120 47,677
Effect of:
Convertible obligations 4,619 5,529 5,833
Stock options 152 242 187
------ ------- ------
Weighted Average Shares, as Adjusted 56,041 55,891 53,697
------ ------- ------
Diluted Earnings per Share $ .72 $ .80 $ .57
====== ======= ======
The computation of diluted earnings per share for 1998 and 1996 excludes
the effect of assuming the exercise of certain outstanding stock options because
the effect would be antidilutive. As of January 2, 1999, there were 1,992,575 of
such options outstanding, with exercise prices ranging from $12.54 to $17.20 per
share.
An extraordinary gain recorded by the Company increased basic earnings per
share by $.01 in 1998 (Note 5).
26
<PAGE>
13. Unaudited Quarterly Information
(In thousands except per share amounts)
1998 First Second Third (a) Fourth
(b)
- -------------------------------------------------------------- ----------- ---------- ---------- ----------
Revenues $108,118 $ 98,123 $105,003 $122,440
Gross Profit 52,745 48,079 49,203 58,300
Income Before Extraordinary Item 11,310 8,581 6,494 11,700
Net Income 11,310 8,581 6,494 11,993
Earnings per Share:
Basic .22 .17 .13 .23
Diluted .21 .16 .13 .23
1997 First (c) Second Third Fourth
- -------------------------------------------------------------- ----------- ---------- ---------- ----------
Revenues $ 89,353 $116,542 $109,303 $123,665
Gross Profit 42,390 55,605 52,587 58,321
Net Income 8,883 10,633 9,911 12,378
Earnings per Share:
Basic .18 .21 .20 .24
Diluted .18 .20 .19 .23
(a)Reflects restructuring costs of $4.6 million.
(b)Reflects an extraordinary gain of $0.3 million, net of taxes.
(c)Reflects the acquisition of the Laboratory Products businesses and Hypersil,
effective March 12, 1997.
27
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of ThermoQuest Corporation:
We have audited the accompanying consolidated balance sheet of ThermoQuest
Corporation (a Delaware corporation and 89%-owned subsidiary of Thermo
Instrument Systems Inc.) and subsidiaries as of January 2, 1999, and January 3,
1998, and the related consolidated statements of income, cash flows, and
comprehensive income and shareholders' investment for each of the three years in
the period ended January 2, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ThermoQuest
Corporation and subsidiaries as of January 2, 1999, and January 3, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended January 2, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 16, 1999
28
<PAGE>
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 immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
The Company's businesses are reported in two segments: Analytical
Instruments and Scientific Equipment. The Company's Analytical Instruments
segment develops, manufactures, sells, and services mass spectrometers, liquid
chromatographs, and gas chromatographs used in the quantitative and qualitative
analysis of chemical compounds at ultratrace levels of detection. The Company's
Analytical Instruments segment also supplies consumables for the chromatography
industry. The Company's Scientific Equipment segment develops, manufactures,
sells, and services scientific equipment for the preparation and preservation of
chemical samples. The Company's products are used primarily by pharmaceutical
companies for drug research, testing, and quality control; by biotechnology
researchers to study proteins and other biological samples to gain knowledge
about diseases and possible treatments; by environmental laboratories for
testing water, air, and soil samples for compliance with environmental
regulations; by chemical companies for research and quality control; by
manufacturers for testing in certain industrial applications, such as the
manufacture of silicon chips, and for quality control; by food and beverage
companies for quality control and to test for product contamination; and in
forensic applications.
An element of the Company's strategy is to combine its internal growth
with the acquisition of complementary products and technologies. Effective March
12, 1997, the Company acquired three business units within the Laboratory
Products Group of Thermo Instrument's Life Sciences International PLC
subsidiary, as well as Life Sciences' Hypersil operation (Note 2). The
Laboratory Products businesses, which constitute the Scientific Equipment
segment, develop, manufacture, sell, and service scientific equipment including
centrifuges, ultralow-temperature freezers, incubators, orbital shakers, vacuum
concentrators, and electrophoresis equipment. These products are used in a
variety of laboratories, including pharmaceutical, medical, industrial, and
environmental laboratories worldwide. Hypersil develops, manufactures, and sells
liquid chromatography media and columns used in high-performance liquid
chromatography. Effective March 29, 1996, the Company acquired CE Instruments, a
manufacturer of gas chromatographs, and MassLab Instruments, a manufacturer of
mass spectrometers, from Thermo Instrument (Note 2). In addition, on January 19,
1996, the Company acquired Extrel FTMS, Inc., a manufacturer of Fourier
transform mass spectrometers, from Waters Technologies Corporation, and,
effective January 1, 1996, the Company acquired the Automass division of
Analytical Technology, Inc. (ATI), a manufacturer of benchtop mass
spectrometers, from Thermo Instrument (Note 2).
The Company sells its products on a worldwide basis. During 1998, the
Company's U.S. and foreign operations had revenues to customers in Asia of
approximately 14% of total revenues. Certain countries in Asia are experiencing
a severe economic crisis, which has been characterized by sharply reduced
economic activity and liquidity, highly volatile foreign-currency-exchange and
interest rates, and unstable stock markets. Revenues to customers in South
Korea, Taiwan, Singapore, Malaysia, and Indonesia represented approximately 3%
of the Company's total revenues. The Company's sales to Asia, particularly in
the Analytical Instruments segment, have been adversely affected by the unstable
economic conditions there. 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.
Where appropriate, the Company uses forward contracts to reduce its exposure to
currency fluctuations.
29
<PAGE>
Results of Operations
1998 Compared With 1997
Revenues decreased to $433.7 million in 1998 from $438.9 million in 1997.
Revenues from the Analytical Instruments segment decreased $14.8 million to
$300.8 million in 1998 from $315.7 million in 1997. This decrease resulted
primarily from a decline in revenues from customers in Asia of $7.8 million due
to the unstable economic conditions there, heightened competition in two of the
Company's product lines, and a decrease in revenues of $3.9 million due to the
strengthening in value of the U.S. dollar relative to foreign currencies in
countries in which the Company operates. The acquisition of Hypersil from Thermo
Instrument, effective March 12, 1997, added revenues of $1.2 million in 1998.
Revenues from the Scientific Equipment segment increased $9.7 million to $132.9
million in 1998 from $123.2 million in 1997, primarily due to the acquisition of
three business units within Life Sciences' Laboratory Products Group, which
constitute the Scientific Equipment segment, from Thermo Instrument, effective
March 12, 1997. The acquisition of these businesses added revenues of $22.2
million in 1998. This increase was offset in part by a change in distribution
channels of an affiliated company, which began selling its products directly to
third parties and is no longer using the Company's sales offices. Such sales had
low margins due to the Company's sole role as distributor. To a lesser extent,
the increase in Scientific Equipment segment revenues was offset by a decline in
revenues from customers in Asia of $2.0 million due to the unstable economic
conditions there.
The gross profit margin remained unchanged at 48% in 1998 and 1997. The
gross profit margin for the Analytical Instruments segment decreased slightly in
1998, primarily due to heightened competition in two of its product lines. The
gross profit margin for the Scientific Equipment segment increased in 1998,
primarily due to improved manufacturing efficiencies and, to a lesser extent,
the inclusion in 1997 of an adjustment to expense of $1.0 million relating to
the sale of inventories revalued on the date the Laboratory Products businesses
were acquired.
Selling, general, and administrative expenses as a percentage of revenues
remained unchanged at 25% in 1998 and 1997. Selling, general, and administrative
expenses decreased slightly to $107.4 million in 1998 from $107.8 million in
1998. A decrease in selling, general, and administrative expenses, primarily due
to the implementation of cost-control measures in the Analytical Instruments
segment, was offset in part by the inclusion of expenses from the Scientific
Equipment segment for a full period in 1998.
Research and development expenses increased to $31.5 million in 1998 from
$28.2 million in 1997, primarily due to higher spending within the Analytical
Instruments segment and the inclusion of expenses from the Scientific Equipment
segment for a full period in 1998.
In the third quarter of 1998, the Company recorded restructuring costs of
$4.6 million related to severance costs for approximately 85 employees and the
closure of a facility (Note 9).
In 1998, the Company recorded gains of $1.3 million, primarily relating to
the sale of a parcel of land at a manufacturing facility in California and two
sales and services office buildings in England.
Interest income decreased to $6.2 million in 1998 from $10.1 million in
1997, primarily due to a reduction in cash as a result of the acquisition of the
Laboratory Products businesses and Hypersil from Thermo Instrument in September
1997 (Note 2). Interest expense decreased to $6.6 million in 1998 from $10.1
million in 1997, primarily due to the repayment to Thermo Instrument in
September 1997 of debt assumed in connection with the acquisition of the
Laboratory Products businesses (Note 2) and, to a lesser extent, the conversion
of a portion of the Company's 5% subordinated convertible debentures into common
stock of the Company.
The effective tax rate was 42% in 1998 and 43% in 1997. The effective tax
rates exceeded the statutory federal income tax rate primarily due to the effect
of state income taxes, foreign tax rate and tax law differentials, and
nondeductible amortization of cost in excess of net assets of acquired
companies.
During the fourth quarter of 1998, the Company recorded an extraordinary
gain, net of tax, of $0.3 million related to the early extinguishment of debt
(Note 5).
The Company is involved in a patent infringement proceeding relating to
its ion-trap mass spectrometers (Note 6).
30
<PAGE>
1997 Compared With 1996
Revenues increased 40% to $438.9 million in 1997 from $313.8 million in
1996. Revenues from the Analytical Instruments segment were $315.7 million in
1997, compared with $313.8 million in 1996. Revenues increased primarily due to
the acquisition of CE Instruments and MassLab from Thermo Instrument, effective
March 29, 1996, and the acquisition of Hypersil from Thermo Instrument,
effective March 12, 1997 (Note 2). These acquisitions added revenues of $14.3
million in 1997. In addition, revenues increased $11.6 million at the Company's
existing mass spectrometry business, due in part to the continued success of a
liquid chromatograph/ion-trap mass spectrometer instrument introduced in the
first quarter of 1996. These increases were offset in part by a decrease of
$21.3 million in revenues due to the strengthening in value of the U.S. dollar
relative to foreign currencies in countries in which the Company operates and,
to a lesser extent, a decrease in revenues at certain of the Company's existing
operations due to increased competition. In addition, revenues from the
Analytical Instruments segment in the first quarter of 1996 included $2.6
million from the sale of products manufactured by third parties. Revenues from
the Scientific Equipment segment in 1997 reflect the acquisition of the
Laboratory Products businesses from Thermo Instrument, effective March 12, 1997
(Note 2).
The gross profit margin increased to 48% in 1997 from 47% in 1996. An
increase in the profit margin for the Analytical Instruments segment, primarily
due to the increase in sales of higher-margin mass spectrometry products, was
offset in part by the inclusion of lower-margin revenues from the Scientific
Equipment segment, the businesses of which were acquired effective March 12,
1997. These businesses recorded an adjustment to expense of $1.0 million in the
first quarter of 1997 relating to the sale of inventories revalued at the date
of acquisition. The gross profit margin for the Scientific Equipment segment was
39% in 1997.
Selling, general, and administrative expenses as a percentage of revenues
remained unchanged at 25% in 1997 and 1996. Selling, general, and administrative
expenses increased to $107.8 million in 1997 from $77.4 million in 1996,
primarily due to the inclusion of expenses from the Scientific Equipment
segment.
Research and development expenses increased to $28.2 million in 1997 from
$21.8 million in 1996, primarily due to the inclusion of expenses from the
Scientific Equipment segment.
Interest income increased to $10.1 million in 1997 from $8.9 million in
1996, primarily as a result of interest income earned on invested proceeds from
the Company's initial public offering of common stock in March and April 1996
and sale of common stock in March 1997 (Note 8) and, to a lesser extent, the
inclusion of interest income from the Laboratory Products businesses. The
increase in interest income was offset in part by a reduction in cash as a
result of the acquisition of the Laboratory Products businesses and Hypersil
from Thermo Instrument in September 1997 and, to a lesser extent, the
acquisition of CE Instruments and MassLab in 1996 (Note 2). Interest expense
increased to $10.1 million in 1997 from $7.3 million in 1996, primarily due to
the inclusion of interest expense on debt assumed in connection with the
acquisition of the Laboratory Products businesses and Hypersil, which was repaid
to Thermo Instrument in September 1997 (Note 2).
The effective tax rate was 43% in 1997 and 1996. The effective tax rates
exceeded the statutory federal income tax rate primarily due to the impact of
state income taxes, foreign tax rate and tax law differentials, and
nondeductible amortization of cost in excess of net assets of acquired
companies.
31
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $200.0 million at January 2, 1999,
compared with $156.4 million at January 3, 1998. Included in working capital are
cash and cash equivalents of $132.4 million at January 2, 1999, compared with
$91.9 million at January 3, 1998. Cash provided by operating activities was
$47.2 million in 1998. Cash of $8.2 million was used to fund an increase in
accounts receivable, primarily due to increased shipments to Japan in the fourth
quarter of 1998, compared with the fourth quarter of 1997. Payment practices in
Japan are slower than in the U.S. Cash of $2.7 million was used to reduce
amounts due to parent company and affiliated companies, primarily due to the
timing of trade payments to affiliated companies.
At January 2, 1999, $31.4 million of the Company's cash and cash
equivalents was held by its foreign subsidiaries. While this cash can be used
outside of the United States, including for acquisitions, repatriation of this
cash into the United States would be subject to foreign withholding taxes and
could also be subject to a U.S. tax.
The Company's investing activities provided $0.9 million of cash in 1998.
The Company received an aggregate refund of $6.0 million from Thermo Instrument
in connection with the acquisition of businesses from Thermo Instrument in 1997
and 1996 (Note 2). During 1998, the Company expended $1.3 million for the
acquisition of a product line and $7.1 million for purchases of property, plant,
and equipment. The Company received $3.4 million in proceeds from the sale of
property, plant, and equipment, primarily from the sale of a parcel of land at a
manufacturing facility in California and two sales and services office buildings
in England. During 1999, the Company plans to make capital expenditures of
approximately $8 million.
The Company's financing activities used $8.8 million of cash in 1998. The
Company's Board of Directors has authorized the repurchase by the Company of up
to $20.0 million of its own securities, through September 25, 1999, in the open
market, or in negotiated transactions. Through January 2, 1999, the Company had
expended $12.4 million under this authorization for the purchase of its common
stock and subordinated convertible debentures. Such purchases are funded from
working capital. During 1998, the Company's short-term borrowings increased $3.7
million, primarily due to borrowings by two of the Company's foreign
subsidiaries. The Company used $1.1 million of cash for the repayment of
long-term obligations.
The Company has an underfunded defined benefit pension plan covering
employees of its manufacturing subsidiary in Bremen, Germany. The Company's
policy is to fund the plan at a level within the range required by applicable
regulations. As of January 2, 1999, the accrued benefit costs for this plan were
$11.4 million (Note 3). In addition, as of January 2, 1999, the Company has a
deferred compensation plan with an unfunded liability of $3.9 million (Note 3).
As of January 2, 1999, the Company's foreign subsidiaries had available
short-term credit facilities of $25.7 million.
In March 1999, the Company signed a nonbinding letter of intent to acquire
a company for $5.5 million. The proposed acquisition is subject to certain
conditions, including satisfactory completion of due diligence and approval by
the Company's Board of Directors.
Although the Company expects to have positive cash flow from its existing
operations, the Company anticipates it will require significant amounts of cash
to pursue the acquisition of complementary businesses. The Company expects that
it will finance acquisitions through a combination of internal funds, and/or
short-term borrowings from Thermo Instrument or Thermo Electron, although there
is no agreement with these companies to ensure that 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 businesses for the
foreseeable future.
32
<PAGE>
Market Risk
The Company is exposed to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices, which could affect its future
results of operations and financial condition. The Company manages its exposure
to these risks through its regular operating and financing activities.
Additionally, the Company uses short-term forward contracts to manage certain
exposures to foreign currencies. The Company enters into forward foreign
exchange contracts to hedge firm purchase and sale commitments denominated in
currencies other than its subsidiaries' local currencies. The Company does not
engage in extensive foreign currency hedging activities; however, the purpose of
the Company's foreign currency hedging activities is to protect the Company's
local currency cash flows related to these commitments from fluctuations in
foreign exchange rates. The Company's forward foreign exchange contracts
principally hedge transactions denominated in U.S. dollars and German marks.
Gains and losses arising from forward contracts are recognized as offsets to
gains and losses resulting from the transactions being hedged. The Company does
not enter into speculative foreign currency agreements.
Foreign Currency Exchange Rates
The Company generally views its investment in its foreign subsidiaries
with a functional currency other than the Company's reporting currency as
long-term. The Company's investment in foreign subsidiaries is sensitive to
fluctuations in foreign currency exchange rates. The functional currencies of
the Company's foreign subsidiaries are principally denominated in British pounds
sterling, German marks, Japanese yen, Italian lira, and French francs. The
effect of a change in foreign exchange rates on the Company's net investment in
its foreign subsidiaries is reflected in the "Accumulated other comprehensive
items" component of shareholders' investment. A 10% depreciation in year-end
1998 functional currencies, relative to the U.S. dollar, would result in a $13.1
million reduction of shareholders' investment.
Interest Rates
The Company's long-term obligations are sensitive to changes in interest
rates. Interest rate changes would result in a change in the fair value of these
financial instruments due to the difference between the market interest rate and
the rate at the date of issuance of the financial instruments. A 10% decrease in
year-end 1998 market interest rates would result in a negative impact of $4.0
million on the fair value of the Company's long-term obligations.
The Company's cash, cash equivalents, and notes payable are sensitive to
changes in interest rates. Interest rate changes would result in a change in
interest income and interest expense due to the difference between the current
interest rates on cash, cash equivalents, and notes payable and the variable
rate that these financial instruments may adjust to in the future. A 10%
decrease in year-end 1998 interest rates would result in a negative impact of
$0.4 million on the Company's net income.
Equity Prices
The Company's subordinated convertible debentures are sensitive to
fluctuations in the price of Company common stock into which the debentures are
convertible. Changes in equity prices would result in changes in the fair value
of the Company's subordinated convertible debentures due to the difference
between the current market price and the market price at the date of issuance of
the debentures. A 10% increase in the year-end 1998 market equity prices would
result in a negative impact of $3.7 million on the fair value of the Company's
subordinated convertible debentures.
33
<PAGE>
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 necessary
upgrades, if necessary, for the Company's current products; (iii) contacting key
suppliers and vendors to determine their year 2000 compliance status; 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 noncompliant systems or facilities that were
identified during phase one are prioritized and remediated. The Company is
currently upgrading or replacing such noncompliant information technology
systems, and this process was approximately 50% complete as of January 2, 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
September 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. 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 2000 problems with its current products. The Company
believes that certain of its older products, which it no longer manufactures or
sells, will not be year 2000 compliant.
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 in order to assess their year 2000 readiness.
As part of this effort, the Company has developed and is distributing
questionnaires relating to year 2000 compliance to its significant suppliers and
vendors. The Company has started to follow-up 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 completed the majority of its assessment of
third- party risk, and expects to be substantially completed by September 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 issues.
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
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
were funded from working capital. All internal costs and related external costs,
other than capital additions, related to year 2000 remediation have
34
<PAGE>
Year 2000 (continued)
been and will continue to be expensed as incurred. The Company does not track
internal costs incurred for its year 2000 compliance project. Such costs are
principally the related payroll costs for its information systems group.
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
issues 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
significant 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.
35
<PAGE>
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in 1999 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Competition, Technological Change, and Industry Acceptance. The Company
encounters, and expects to continue to encounter, intense competition in the
sale of its current and future products. Some of the Company's competitors and
potential competitors have greater resources, manufacturing and marketing
capabilities, research and development staff, and production facilities than
those of the Company. No assurance can be given that the Company's competitors
will not develop products that will be superior to the Company's products. The
market for the Company's products is characterized by rapid and significant
technological change and evolving industry standards. New product introductions
responsive to these factors require significant planning, design, development,
and testing at the technological, product, and manufacturing process levels, and
may render existing products and technologies uncompetitive or obsolete. In
addition, industry acceptance of new technologies developed by the Company may
be slow to develop due to, among other things, existing regulations written
specifically for older technologies and general unfamiliarity of users with new
technologies.
Risks Associated With Intellectual Property. The Company holds many
patents relating to various aspects of its products, including significant
patents relating to ion-trap mass spectrometers, discussed below. In addition,
the Company believes that proprietary technical know-how is critical to many of
its products. Proprietary rights relating to the Company's products are
protected from unauthorized use by third parties only to the extent that they
are covered by valid and enforceable patents or are maintained in confidence as
trade secrets. There can be no assurance that any patents now or hereafter owned
by the Company will afford protection against competitors and, in the absence of
patent protection, the Company may be vulnerable to competitors who attempt to
copy the Company's products or gain access to its trade secrets and know-how.
There can be no assurance that patents will issue from any future patent
applications filed by the Company or licensed by the Company. Proceedings
initiated by the Company to protect its proprietary rights could result in
substantial costs to the Company. There can be no assurance that competitors of
the Company will not initiate litigation challenging the validity of the
Company's patents or alleging the Company is infringing the competitors'
patents, or that they will not use their resources to design comparable products
that do not infringe the Company's patents. There may also be pending or issued
patents of which the Company is not aware held by parties not affiliated with
the Company that relate to the Company's products or technologies. The Company
may need to acquire licenses to, or contest the validity of, any such patents.
It is likely that significant funds would be required to contest the validity of
any such patents. There can be no assurance that any license that may be
required under any such patent would be made available on acceptable terms or
that the Company would prevail in any such contest. If the outcome of any such
litigation or dispute is unfavorable to the Company, the Company's business and
results of operations could be materially adversely affected.
The Company's Finnigan subsidiary has filed complaints against
Bruker-Franzen Analytik GmbH and its U.S. affiliate, and Hewlett-Packard
Company, for alleged violation of two U.S. patents owned by Finnigan. The
patents pertain to methods used in ion-trap mass spectrometers.
One of Finnigan's complaints was filed in the United States District Court
for the District of Massachusetts and the other was filed with the United States
International Trade Commission (ITC) in Washington, DC. Finnigan has asked for
damages to compensate for the infringements, for injunctions against further
infringement, and for an order excluding further imports into the U.S. of
ion-trap mass spectrometers that use the patented methods.
The District Court action has, at the request of Hewlett-Packard and
Bruker, been stayed pending completion of an investigation by the ITC. In April
1998, the ITC determined that the defendants did not engage in unfair practices
in U.S. import trade with respect to the Finnigan patents, and that the Finnigan
patents are invalid and/or not infringed. Finnigan has appealed the ITC's
determination with respect to one of its patents to the United States Court of
Appeals for the Federal Circuit (CAFC). The CAFC heard arguments in the appeal
on March 4, 1999.
36
<PAGE>
Bruker presented counterclaims in the ITC investigation. The
counterclaims, which have been removed to the District Court in Massachusetts,
allege that the Finnigan patents are invalid and unenforceable and are not
infringed by the mass spectrometers co-marketed by Bruker. They also allege that
Finnigan has violated U.S. and Massachusetts antitrust laws and engaged in
unfair competition by attempting to maintain a monopoly position and restrain
trade through enforcement of allegedly fraudulently obtained patents. Bruker has
asked for judgment consistent with its counterclaims, and for three times the
antitrust damages (including attorneys' fees) it has sustained.
There can be no assurance as to the outcome of these matters or that an
unfavorable resolution would not have a material adverse effect on the Company's
future results of operations and financial position.
In addition, the Company relies on trade secrets and confidentiality
agreements with its collaborators, employees, and consultants. There can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known or be independently developed by competitors.
Risks Associated With Acquisition Strategy. The Company's growth strategy
is to supplement its internal growth with the acquisition of businesses and
technologies that complement or augment the Company's existing product lines.
The Company has acquired certain portions of several businesses that have been
acquired by Thermo Instrument, the Company's parent, and may acquire additional
businesses from Thermo Instrument or other third parties in the future. Certain
of the businesses acquired have had low levels of profitability and businesses
that the Company may seek to acquire in the future may also be marginally
profitable or unprofitable. In order for any acquired businesses to achieve the
level of profitability desired by the Company, the Company must successfully
reduce expenses and improve operations. No assurance can be given that the
Company will be successful in this regard. In addition, promising acquisitions
are difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory approvals,
including antitrust approvals. There can be no assurance that the Company will
be able to complete pending or future acquisitions. In order to finance any such
acquisitions, it may be necessary for the Company to raise additional funds
either through public or private financings. Any equity or debt financing, if
available at all, may be on terms which are not favorable to the Company and may
result in dilution to the Company's shareholders.
Dependence on the Pharmaceutical Industry. The largest single market for
the Company's mass spectrometers and liquid chromatographs is the pharmaceutical
industry. Although the Company's existing products are not subject to regulation
by the U.S. Food and Drug Administration (the FDA), FDA regulations apply to the
processes and production facilities used to manufacture pharmaceutical products.
Any material change by a pharmaceutical company in its manufacturing process or
equipment could necessitate additional FDA review and approval. Such
requirements may make it more difficult for the Company to sell its products to
pharmaceutical customers that have already applied for or obtained approval for
production processes using different equipment and supplies. Any changes in the
regulations that apply to the processes and production facilities used to
manufacture pharmaceutical products or enforcement efforts in respect of such
regulations may adversely affect the market for the Company's products. In
addition, from time to time as a result of industry consolidation and other
factors, the pharmaceutical industry has reduced its capital expenditures for
equipment such as that manufactured by the Company, and there can be no
assurance that further changes in the pharmaceutical industry will not adversely
affect demand for the Company's products.
Possible Adverse Effect From Changes in Environmental Regulations. One of
the larger markets for the Company's products is environmental analysis.
Consolidation or contraction in this market could have an adverse impact on the
Company. Most air, water, and soil analysis is conducted to comply with federal,
state, local, and foreign environmental regulations. These regulations are
frequently specific as to the type of technology required for a particular
analysis and the level of detection required for that analysis. The Company
develops, configures, and markets its products to meet customer needs created by
existing and anticipated environmental regulations. These regulations may be
amended or eliminated in response to new scientific evidence or political or
economic
37
<PAGE>
considerations. Any significant change in environmental regulations or
enforcement efforts could result in a reduction in demand for the Company's
products.
Possible Adverse Impact of Significant International Operations.
International sales accounted for approximately 56% of the Company's revenues in
1998, and the Company expects that international sales will continue to account
for a significant portion of the Company's revenues in the future. Sales to
customers in foreign countries are subject to a number of risks, including the
following: agreements may be difficult to enforce, and receivables difficult to
collect through a foreign country's legal system; foreign customers may have
longer payment cycles; and foreign countries could impose withholding taxes or
otherwise tax the Company's foreign income, impose tariffs, embargoes or
exchange controls, or adopt other restrictions on foreign trade. Additionally,
the U.S. dollar value of the Company's net sales varies with currency exchange
rate fluctuations. Significant increases in the value of the U.S. dollar
relative to certain foreign currencies could have a material adverse effect on
the Company's competitive position and results of operations.
During 1998, the Company's U.S. and foreign operations had revenues to
customers in Asia of approximately 14% of total revenues. Certain countries in
Asia are experiencing a severe economic crisis, which has been characterized by
sharply reduced economic activity and liquidity, highly volatile
foreign-currency-exchange and interest rates, and unstable stock markets.
Revenues to customers in South Korea, Taiwan, Singapore, Malaysia, and Indonesia
represented approximately 3% of the Company's total revenues. The Company's
sales to Asia have been and may continue to be adversely affected by the
unstable economic conditions there.
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 issues 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
significant 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.
38
<PAGE>
Selected Financial Information
(In thousands except per share amounts) 1998 (a) 1997 (b) 1996 (c) 1995 (d) 1994
- --------------------------------------------------- ---------- ---------- ----------- ---------- ----------
Statement of Income Data
Revenues $433,684 $438,863 $ 313,793 $241,909 $223,396
Income Before Extraordinary Item 38,085 41,805 28,023 21,002 18,526
Net Income 41,805 28,023 21,002 18,526
38,378
Earnings per Share:
Basic .75 .83 .59 .47 .41
Diluted .72 .80 .57 .47 .41
Balance Sheet Data
Working Capital $200,018 $156,410 $ 216,865 $166,902 $ 47,955
Total Assets 643,242 595,626 535,070 428,042 306,284
Long-term Obligations 74,204 88,080 104,593 106,456 11,322
Shareholders' Investment 417,001 370,779 303,014 227,740 211,633
(a) Reflects restructuring costs of $4.6 million, an extraordinary gain of $0.3
million, net of taxes, related to the Company's repurchase of $7.7 million
principal amount of 5% subordinated convertible debentures, and conversion
of $5.0 million principal amount of 5% subordinated convertible debentures.
(b) Reflects the acquisition of three business units within the Laboratory
Products Group of Life Sciences International PLC and Life Sciences'
Hypersil operation, effective March 12, 1997, the net proceeds of the
Company's issuance of common stock in March 1997, and conversion of $15.7
million principal amount of 5% subordinated convertible debentures.
(c) Reflects the acquisition of the Automass division of Analytical Technology,
Inc., effective January 1, 1996, CE Instruments and MassLab Instruments,
effective March 29, 1996, and the net proceeds of the Company's initial
public offering in March and April 1996.
(d) Reflects the issuance in August 1995 of $96.3 million principal amount of 5%
subordinated convertible debentures due 2000.
39
<PAGE>
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol TMQ. The following table sets forth the high and low sale prices for
1998 and 1997, as reported in the consolidated transaction reporting system.
1998 1997
-------------------- ----------------------
Quarter High Low High Low
- -------------------------------------------------------------- ---------- ---------- ---------- -----------
First $19 31/32 $13 1/2 $16 3/8 $12 1/2
Second 19 3/4 14 16 5/8 11 1/2
Third 15 1/8 6 7/16 19 1/8 15 1/8
Fourth 13 3/4 8 7/8 20 1/2 16 1/8
</TABLE>
As of January 29, 1999, the Company had 228 holders of record of its
common stock. This does not include holdings in street or nominee names. The
closing market price on the American Stock Exchange for the Company's common
stock on January 29, 1999, was $11 1/4 per share.
Shareholder Services
Shareholders of ThermoQuest Corporation who desire information about the
Company are invited to contact the Investor Relations Department, ThermoQuest
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046,
(781) 622-1111. A mailing list is maintained to enable shareholders whose stock
is held in street name, and other interested individuals, to receive quarterly
reports, annual reports, and press releases as quickly as possible. Distribution
of printed quarterly reports is limited to the second quarter only. All material
is available from Thermo Electron's Internet site
(http://www.thermo.com/subsid/tmq1.html).
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent and
maintains shareholder activity records. The agent will respond to questions on
issuance of stock certificates, change of ownership, lost stock certificates,
and change of address. For these and similar matters, please direct inquiries
to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Board of Directors and will depend upon, among other factors,
the Company's earnings, capital requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended January
2, 1999, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, ThermoQuest
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.
Annual Meeting
The annual meeting of shareholders will be held on Thursday, May 27, 1999,
at 11 a.m., at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.
40
<TABLE>
<CAPTION>
Exhibit 21
THERMOQUEST CORPORATION
Subsidiaries of the Registrant
<S> <C> <C>
As of February 28, 1999, ThermoQuest Corporation owned the following companies:
STATE OR
JURISDICTION PERCENT OF
NAME OF OWNERSHIP
INCORPORATION
<S> <C> <C>
Denley Instruments Limited England 100
E-C Apparatus Limited England 100
Finnigan FT/MS Inc. Delaware 100
Finnigan Corporation Delaware 100
Finnigan Instruments, Inc. New York 100
Finnigan International Sales, Inc. California 100
Finnigan MAT China, Inc. California 100
Finnigan MAT (Delaware), Inc. Delaware 100
Finnigan MAT Instruments, Inc. Nevada 100
Finnigan MAT International Sales, Inc. California 100
Finnigan MAT (Nevada), Inc. Nevada 100
Finnigan MAT GmbH Germany 100
ThermoQuest Analytische Systeme GmbH Germany 100
Finnigan MAT S.R.L. Italy 100
Thermo Separation Products S.R.L. Italy 100
Masslab Limited United Kingdom 100
Thermo Instruments Australia Pty. Limited Australia 100
ThermoQuest Ltd. United Kingdom 100
Finnigan MAT Ltd. United Kingdom 100
ThermoQuest AB Sweden 100
Thermo Separation Products Ltd. United Kingdom 100
Finnigan Properties, Inc. California 100
Forma Scientific, Inc. Delaware 100
Forma Ohio Inc. Ohio 100
International Equipment Company Delaware 100
International Equipment Company Limited England 100
Savant Instruments, Inc. New York 100
Forma Scientific Limited England 100
Hypersil Inc. Delaware 100
Hypersil Limited England 100
Life Sciences International (Hong Kong) Limited Hong Kong 100
Life Sciences International, Inc. Pennsylvania 100
Life Sciences (Europe) Limited England 100
Life Sciences International (UK) Limited England 100
Kenbury Limited England 100
Savant Instruments Limited England 100
ThermoQuest B.V. Netherlands 100
Thermo Separation Products B.V. Netherlands 100
Thermo Separation Products B.V. B.A. Belgium 100
ThermoQuest France S.A. France 100
Finnigan Automass S.A. France 100
Finnigan MAT S.A.R.L. France 100
Thermo Separation Products S.A. France 100
ThermoQuest Italia S.p.A. Italy 100
ThermoQuest Spain S.A. Spain 100
ThermoQuest Wissenschaftliche Gerate GmbH Austria 100
Thermo Separation Products AG Switzerland 100
Thermo Separation Products Inc. Delaware 100
ThermoQuest K.K. Japan 100
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
by reference of our reports dated February 16, 1999, included in or incorporated
by reference into ThermoQuest Corporation's Annual Report on Form 10-K for the
year ended January 2, 1999, into the Company's previously filed Registration
Statements as follows: Registration Statement No. 333-08795 on Form S-8,
Registration Statement No. 333-08797 on Form S-8, Registration Statement No.
333-08799 on Form S-8, Registration Statement No. 333-24321 on Form S-3, and
Registration Statement No. 333-67853 on Form S-8.
Arthur Andersen LLP
Boston, Massachusetts
March 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMOQUEST
CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 2, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 132,439
<SECURITIES> 0
<RECEIVABLES> 112,474
<ALLOWANCES> 4,065
<INVENTORY> 70,612
<CURRENT-ASSETS> 327,056
<PP&E> 90,631
<DEPRECIATION> 27,168
<TOTAL-ASSETS> 643,242
<CURRENT-LIABILITIES> 127,038
<BONDS> 74,204
0
0
<COMMON> 515
<OTHER-SE> 416,486
<TOTAL-LIABILITY-AND-EQUITY> 643,242
<SALES> 433,684
<TOTAL-REVENUES> 433,684
<CGS> 225,357
<TOTAL-COSTS> 225,357
<OTHER-EXPENSES> 36,064
<LOSS-PROVISION> 825
<INTEREST-EXPENSE> 6,634
<INCOME-PRETAX> 65,663
<INCOME-TAX> 27,578
<INCOME-CONTINUING> 38,085
<DISCONTINUED> 0
<EXTRAORDINARY> 293
<CHANGES> 0
<NET-INCOME> 38,378
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.72
</TABLE>
