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 1, 2000.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 1-11757
THERMO OPTEK CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-3283973
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
8E Forge Parkway
Franklin, Massachusetts 02038
(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 28, 2000, was approximately $33,654,000.
As of January 28, 2000, the Registrant had 51,055,798 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
January 1, 2000, are incorporated by reference into Parts I and II.
The information required by Part III of Form 10-K will be filed as part of an
amendment of this Form 10-K no later than 120 days after January 1, 2000, and
such information is incorporated by reference from such filing.
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
Thermo Optek Corporation (the Company or the Registrant) is a worldwide
leader in spectroscopy instrumentation for molecular and elemental analysis
based upon energy and light measurements, as well as systems for materials
science, including surface analysis, characterization, preparation, and
physical-properties analysis. Thermo Optek provides industry, government, and
academia with complete solutions to specific analytical problems, moving
sophisticated analytical technology outside the laboratory. The Company's
instruments are used in virtually every industry for research and development,
manufacturing, and quality control. The businesses of the Company operate in two
segments: Spectroscopy (molecular and elemental analysis) and Materials Science
(surface analysis, characterization, and preparation and physical-properties
analysis).
An element of the Company's strategy is to acquire products and
technologies that complement those of existing Thermo Optek companies. In August
1998, the Company acquired Gebruder Haake GmbH (Haake) from Thermo Instrument.
This business was originally part of the Scientific Instruments Division of
Fisons plc (Fisons), a wholly owned subsidiary of Rhone-Pulenc Rorer, Inc. In
addition to Haake, Thermo Optek has acquired three other Fisons companies from
Thermo Instrument - ARL Applied Research Laboratories (ARL) and VG Elemental, in
November 1996 and VG Systems in July 1997. Because Thermo Optek, Haake, ARL, VG
Elemental, and VG Systems were deemed for accounting purposes to be under
control of Thermo Instrument, their common majority owner, the transactions have
been accounted for in a manner similar to a pooling of interests. This means
that the effective date for all four acquisitions is March 29, 1996 - the date
that the businesses were acquired by Thermo Instrument.
Haake is a supplier of viscometry and rheometry systems used by a wide
variety of manufacturers to measure the physical properties of liquid
substances. ARL is a manufacturer of Arc/Spark spectrometers used to analyze
solids, such as metals, and X-ray fluorescence instruments, used to analyze
nonmetallic solids, such as ceramics. VG Elemental is a manufacturer of
inductively coupled plasma (ICP) and mass spectroscopy instruments used to
analyze elemental liquids, particularly in high-sensitivity applications, such
as the evaluation of nutrition content of baby formulas. VG Systems manufactures
instrumentation and equipment for material and surface science analysis.
On December 15, 1997, the Company distributed 100% of Thermo Vision's
outstanding capital stock in the form of a dividend to the Company's
shareholders. Following the distribution, Thermo Vision, which is in the
photonics business, was a publicly traded, majority-owned subsidiary of Thermo
Instrument Systems Inc. In January 2000, the shareholders of Thermo Vision voted
to merge Thermo Vision into Thermo Instrument for cash.
As of January 1, 2000, Thermo Instrument owned 47,564,689 shares of the
Company's common stock, representing 93% of such stock outstanding. Thermo
Instrument is an 88%-owned subsidiary of Thermo Electron Corporation. As of
January 1, 2000, Thermo Electron owned 1,028,860 shares of the Company's common
stock, representing 2% of such stock outstanding. Thermo Instrument and Thermo
Electron develop, manufacture, and sell measurement and detection instruments
used in virtually every industry to monitor, collect, and analyze data that
provide knowledge for the user. For example, Thermo Instrument's and Thermo
Electron's powerful analysis technologies help researchers sift through data to
unlock the mysteries of DNA or develop new drugs; allow manufacturers to
fabricate ever-smaller components required to carry greater amounts of
information, faster; or monitor and control industrial processes on-line to
ensure that critical quality standards are met efficiently.
On January 31, 2000, the Company announced that Thermo Instrument will
acquire the publicly held shares of the Company's common stock for $15.00 per
share in cash, as outlined in Note 14 to Consolidated Financial Statements in
the Registrant's 1999* Annual Report to Shareholders, which statements are
incorporated herein by reference. This action is part of a major reorganization
plan under which Thermo Electron will spin in, spin off, and sell various
businesses to focus solely on its core measurement and detection instrument
business.
- --------------------
* References to 1999, 1998, and 1997 herein are for the fiscal years ended
January 1, 2000, January 2, 1999, and January 3, 1998, respectively.
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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 1999 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 1999 Annual
Report to Shareholders, which information is incorporated herein by reference.
(c) Description of Business
(i) Principal Products and Services
Almost every element in the periodic table, and nearly all molecules,
provide a unique response when exposed to energy (usually light). The Company's
light-based instruments "look" at these distinctive signatures to determine the
elemental and molecular composition of solids, liquids, and gases. Because light
is nondestructive, the Company's technologies do not destroy the sample being
tested. The Company's instruments can be found in crime laboratories throughout
the world. They are also ideally suited for use in manufacturing, both on and
off the production line.
The Company's lines of business include spectroscopy instruments for
molecular and elemental analysis, and systems for materials science. The
Company's goal is to design instruments that both analyze substances and
synthesize information. Instead of providing raw data that must be interpreted
by an expert user, the Company integrates information about the application with
a database in its instruments to provide the user with a specific answer
relevant to his or her task. For example, the airline industry uses the
Company's Fourier transform infrared (FT-IR) instruments to analyze jet engine
lubricants to determine when the oil needs to be changed, and uses the Company's
Arc/Spark products to identify and quantify metals present in the airplane's
engine oil. The Company's instruments use this information to pinpoint, for
airplane maintenance workers, when specific engine components need to be
serviced or replaced. In another example, automobile recyclers use the Company's
Arc/Spark instruments to sort metal components of automobiles. In addition, they
use the Company's FT-IR instruments to classify plastics which, to be
effectively recycled, cannot be mixed. The Company's instruments instantly
identify each of the plastics and indicate to plant workers how to sort the
components, without the necessity of interpreting complex data. Similarly,
commercial recyclers can use these instruments to assist in the sorting of
plastics collected through curbside recycling programs.
The applications for the Company's products continue to grow as the
Company continues to develop increasingly sophisticated instruments that have
enormous analytical power, but are easy to use by operators with varying levels
of education and technical expertise. Examples of some of the uses for the
Company's products are as follows:
Spectroscopy Products. Pharmaceutical and chemical manufacturers use the
Company's FT-IR and UV/Vis instruments to assess the quality of active
ingredients during the production process. They use FT-Raman instruments to
"look" through the plastic or glass container to ensure that the contents match
the label on the outside. Semiconductor manufacturers use FT-IR instruments in
quality control, and to monitor the air in production labs to ensure the safety
of their workers.
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The beverage industry uses the Company's UV/Vis instruments to ensure that
fruit juice concentrate formulations are blended consistently to specification,
and ICP instruments to validate the vitamin and mineral content for nutrition
labels.
The Company's portable UV/Vis spectrophotometers are available in many
home decorating stores, designed to take the frustration and guesswork out of
paint color matching. Customers can bring paint or fabric samples to the paint
store or can bring home a hand-held device, take a reading from a wall, drape,
rug, or whatever needs to be matched, and bring it back to the store where the
device is plugged into a computer. The dealer uses the formula from the samples
to create a color prescription and a paint-dispensing system automatically mixes
a matched can of paint.
The Company's ICP and atomic absorption spectroscopy instruments are also
used by municipalities in environmental monitoring to ensure the quality of the
air we breathe and the water we drink.
Police departments and forensic labs around the world use the Company's
UV/Vis instruments to identify the type and country-of-origin of illicit
substances and to analyze crime scene evidence.
Materials Science Products. Semiconductor manufacturers rely on the
Company's Auger and ESCA instruments to help them in building the next
generation of processors, analyzing the surface properties of chips in R&D, and
in failure analysis. The Company's V-100 and V-150 molecular beam epitaxy
products are used in the high volume production of devices for
telecommunications equipment, such as mobile phones, high-speed networks, and
digital switches. These instruments are used to grow and measure the thin films,
with the precision of a single atomic layer, that are the heart of these
devices. The Company also produces diffraction gratings used for routing light
through fiber optic cable.
The food and beverage industries are significant customers for the
Company's instruments for physical-properties analysis. For instance, consumers
can count on the famous smooth body of German beer to remain the same glass
after glass because many German beer manufacturers use Thermo Optek's
high-precision viscometers to maintain the quality and consistency of their
products. The Company's rheometers are key instruments when it comes to
controlling the texture of foods to ensure consumer satisfaction as well as
shelf life stability, particularly in emulsions such as mayonnaise or whipped
cream.
The Company's strategy is to continue to develop products and
technologies, to acquire product lines and technologies through acquisitions,
and to provide its customers with quality support services and applications
expertise.
Sales and Marketing
The Company markets its instruments internally through its own worldwide
sales force and through a network of dealers and distributors. In addition, the
Company sells certain components and instruments pursuant to original equipment
manufacturer 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 replacement.
(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 $27.8 million in 1999, $25.0 million in 1998, and
$30.9 million in 1997.
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(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 items.
(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
patents relating to its technologies expiring at various dates, with additional
patents pending. The Company also enters into licensing agreements 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 more than 10% of the Company's total
revenues in any of the past three years.
(viii)Backlog
The Company's backlog of firm orders was as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Spectroscopy $65,518 $62,543
Materials Science 33,827 22,833
------- -------
$99,345 $85,376
======= =======
The Company believes that substantially all of the backlog at January 1,
2000, will be shipped or completed during 2000. Certain of these orders are
subject to cancellation by the customer upon payment of a cancellation charge.
Because of the possibility of customer changes in delivery schedules,
cancellation of orders, and potential delays in product shipments, the Company's
backlog as of any particular date may not be representative of actual sales for
any succeeding period.
(ix) Government Contracts
Not applicable.
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(x) Competition
The Company competes in each of its markets primarily on product
performance, reliability, customer service, and price. In the Spectroscopy
segment, the Company competes primarily with the AI division of The Perkin-Elmer
Corporation, Varian Associates, Inc., Agilent Technologies Inc., Spectro
Analytical Instruments, Inc., the Digilab division of Bio-Rad Laboratories,
Inc., Bruker Instruments, Inc., and Shimadzu Corporation. In the Materials
Science segment, the Company competes primarily with Physical Electronics, Inc.,
Riber Instruments S.A., Kratos (a division of Shimadzu), Omnicron Associates,
Brookfield Engineering Laboratories, Inc., and TA Instruments, Inc. (a
subsidiary of Waters 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 1, 2000, the Company employed approximately 2,400 people.
(d) Financial Information About Geographic Areas
Financial information about geographic areas is summarized in Note 11 to
Consolidated Financial Statements in the Registrant's 1999 Annual Report to
Shareholders and is incorporated herein by reference.
</TABLE>
(e) Executive Officers of the Registrant
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Present Title (Fiscal Year First Became Executive Officer)
------------------ --- ---------------------------------------------------------
Barry S. Howe 44 President and Chief Executive Officer (1999)
Gerard Abraham 52 Vice President (1998)
G. Roger Herd 62 Vice President (1998)
Roland Schultner 51 Vice President (1999)
Fredric T. Walder 42 Senior Vice President (1998)
Theo Melas-Kyriazi 40 Chief Financial Officer (1998)
Paul F. Kelleher 57 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. Mr. Howe has been President and Chief Executive Officer of the
Company since March 1999 and has been President and Chief Executive Officer of
ThermoSpectra Corporation since March 1998. Prior to joining ThermoSpectra, Mr.
Howe was President and Chief Executive Officer of Thermo BioAnalysis
Corporation, a publicly traded, majority-owned subsidiary of Thermo Instrument,
from February 1995 to March 1998, and President of Thermo Instrument's Thermo
Separation Products Inc. subsidiary and its predecessor, a manufacturer of
liquid chromatography instruments, from September 1989 to December 1995. Mr.
Abraham has been Vice President since January 1998, and from 1993 to 1997, was
President of ARL. Mr. Herd has been Vice President since January 1998, and
Managing Director of VG Systems since April 1996. Mr. Herd was Manager of
International Business Development for Thermo Instrument from April 1994 to
April 1996, and prior to April 1994, was Managing Director of Thermo Instrument
Australia PTY Ltd. Mr. Schultner has been Vice President since October 1999 and
Managing Director of Haake since January 1993. Mr. Walder has been Senior Vice
President since April 1998, and President of Nicolet since December 1997. Mr.
Walder was General Manager of Nicolet from January 1997 to December 1997, Vice
President of Marketing and Sales from January 1996 to December 1996, Director of
Marketing
6
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from April 1994 to December 1995, and prior to April 1994, was a Marketing/Product Manager. Mr.
Melas-Kyriazi was appointed Chief Financial Officer of the Company and Thermo Electron on January 1,
1999. Mr. Melas-Kyriazi joined Thermo Electron in 1986 as Assistant Treasurer, and became Treasurer in
1988. He was named President and Chief Executive Officer of ThermoSpectra Corporation, then a public
subsidiary of Thermo Instrument, in 1994. In 1998, he became Vice President of Corporate Strategy for
Thermo Electron. Mr. Melas-Kyriazi remains a Vice President of Thermo Electron. Mr. Kelleher has held
comparable positions for at least five years with Thermo Instrument or Thermo Electron. Messrs.
Abraham, Herd, and Walder are full-time employees of the Company. Mr. Howe is an employee of
ThermoSpectra and the Company, but devotes such time to the affairs of the Company as the Company's
needs reasonably require. 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 1, 2000, are as follows:
The Company's Spectroscopy segment owns approximately 489,000 square feet
of office and manufacturing space, principally in Wisconsin, New York, Colorado,
Germany, the United Kingdom, and Switzerland; and leases an additional 434,000
square feet of office and manufacturing space under leases expiring from 2000
through 2017, principally in Massachusetts, Connecticut, and the United Kingdom.
The Company's Materials Science segment owns approximately 110,000 square
feet of office and manufacturing space in Germany; and leases approximately
168,000 square feet of office and manufacturing space under leases expiring from
2000 through 2013, principally in the United Kingdom and New Jersey.
In addition, the Company leases office space throughout the world for its
sales and service operations. The Company believes that its facilities are in
good condition and are suitable and adequate to meet current needs and that
suitable alternate space is readily available if any of such leases are not
extended.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
7
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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 1999 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 1999 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 1999 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 1999 Annual Report to Shareholders and is
incorporated in this document by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements as of January 1, 2000,
and Supplementary Data are included in the Registrant's 1999 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.
PART III
The information required under Items 10, 11, 12, and 13 of Form 10-K will
be filed as part of an amendment to this Form 10-K no later than 120 days after
January 1, 2000, the end of the Registrant's fiscal year covered by this Form
10-K.
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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.
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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, 2000 THERMO OPTEK CORPORATION
By: /s/ Barry S. Howe
Barry S. Howe
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, 2000.
Signature Title
By: /s/ Barry S. Howe President, Chief Executive Officer, and Director
Barry S. Howe
By: /s/ Theo Melas-Kyriazi Chief Financial Officer
Theo Melas-Kyriazi
By: /s/ Paul F. Kelleher Chief Accounting Officer
Paul F. Kelleher
By: /s/ Stephen R. Levy Director
Stephen R. Levy
By: /s/ Earl R. Lewis Chairman of the Board and Director
Earl R. Lewis
By: /s/ Robert A. McCabe Director
Robert A. McCabe
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Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Optek Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Thermo Optek Corporation's
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 15, 2000 (except with respect to
the matter discussed in Note 14, as to which the date is March 6, 2000). 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 9 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 15, 2000
</TABLE>
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SCHEDULE II
THERMO OPTEK CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Description Provision Accounts Accounts Other (a) Balance
Balance at Charged to Recovered Written at End
Beginning Expense Off of Year
of Year
- ----------------------------------- ----------- ----------- ----------- ----------- ----------- ---------
Allowance for Doubtful Accounts
Year Ended January 1, 2000 $ 4,960 $ 175 $ 155 $ (874) $ (135) $ 4,281
Year Ended January 2, 1999 $ 5,709 $ 519 $ 238 $(1,492) $ (14) $ 4,960
Year Ended January 3, 1998 $ 5,541 $ 629 $ 83 $(1,036) $ 492 $ 5,709
Description Balance at Established Cash Other (c) Balance
Beginning as Cost of Payments at End
of Year Acquisitions of Year
- ------------------------------------- ------------- ------------- ------------ ------------- ------------
Accrued Acquisition Expenses (b)
Year Ended January 1, 2000 $ 674 $ - $ (599) $ (28) $ 47
Year Ended January 2, 1999 $ 2,843 $ 843 $(2,065) $ (947) $ 674
Year Ended January 3, 1998 $10,420 $ 2,441 $(7,049) $(2,969) $ 2,843
Description Balance at Provision Other (f) Balance
Beginning Charged to Cash Payments at End
of Year Expense (e) of Year
- ------------------------------------- ------------- ------------ -------------- ------------- ------------
Accrued Restructuring Costs (d)
Year Ended January 1, 2000 $ 4,943 $ 989 $(4,834) $ (229) $ 869
Year Ended January 2, 1999 $ - $7,422 $(2,663) $ 184 $ 4,943
(a) Includes allowance of businesses acquired during the year as described in
Note 2 to Consolidated Financial Statements in the Registrant's 1999 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 1999 Annual Report to
Shareholders.
(c) Primarily 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 1999 Annual Report to
Shareholders.
(e) Excludes provision of $0.2 million for an asset write-down and $0.4 million
for the loss on the sale of a division in 1998.
(f) Represents the effect of foreign currency translation.
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<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2.1 Stock Purchase Agreement dated as of November 4, 1996, among
Thermo Instrument, SID Instruments Inc., and ATI Acquisition
Corp. (filed as Exhibit 2.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 28, 1996 [File No.
1-11757] and incorporated herein by reference).
2.2 Stock Purchase Agreement dated as of November 4, 1996, between
Thermo Instrument and the Company (filed as Exhibit 2.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 28, 1996 [File No. 1-11757] and incorporated herein by
reference).
2.3 Share Purchase Agreement dated as of July 30, 1997, between the Company and Thermo
Instrument (filed as Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 28, 1997 [File No. 1-11757] and incorporated herein by reference).
2.4 Share Purchase Agreement dated as of August 10, 1998, between the
Company and Thermo Instrument Systems Inc. Pursuant to Item
601(b)(2) of Regulation S-K, schedules to this Agreement have
been omitted. The Company hereby undertakes to furnish
supplementally a copy of such schedules to the Commission upon
request (filed as Exhibit 2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 3, 1998 [File No.
1-11757] and incorporated herein by reference).
3.1 Certificate of Incorporation, as amended, of the Company (filed as Exhibit 3.l to the
Company's Registration Statement on Form S-1 [Reg. No. 333-03630] and incorporated herein
by reference).
3.2 By-laws of the Company (filed as Exhibit 3.2 to the Company's Registration Statement on
Form S-1 [Reg. No. 333-03630] and incorporated herein by reference).
10.1 Corporate Services Agreement dated as of August 18, 1995, between
Thermo Electron and the Company (filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1 [Reg.
No. 333-03630] 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 August 18, 1995, between
Thermo Electron and the Company (filed as Exhibit 10.3 to the
Company's Registration Statement on Form S-1 [Reg.
No. 333-03630] and incorporated herein by reference).
10.4 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of
December 5, 1997, between Thermo Instrument and the Company (filed as Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No.
1-11757] and incorporated herein by reference).
10.5 Form of Indemnification Agreement for Officers and Directors (filed as Exhibit 10.9 to
the Company's Registration Statement on Form S-1 [Reg. No. 333-03630] and incorporated
herein by reference).
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Exhibit
Number Description of Exhibit
10.6 Fiscal Agency Agreement dated as of October 12, 1995, between the
Company and The Chase Manhattan Bank (formerly Chemical Bank)
(filed as Exhibit 10.10 to the Company's Registration Statement
on Form S-1 [Reg. No. 333-03630] and incorporated herein by
reference).
10.7 Stock Purchase Agreement dated as of April 11, 1996, between the Company and Thermo
Instrument (filed as Exhibit 10.11 to the Company's Registration Statement on Form S-1
[Reg. No. 333-03630] and incorporated herein by reference).
10.8 Asset Transfer Agreement dated as of December 31, 1995, by and among the Company, Nicolet
Instrument Corporation, and Thermo Instrument (filed as Exhibit 10.12 to the Company's
Registration Statement on Form S-1 [Reg. No. 333-03630] and incorporated herein by
reference).
10.9 Indemnification Agreement dated as of November 4, 1996, between
Thermo Instrument and the Company (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 28, 1996 [File No. 1-11757] and incorporated herein by
reference).
10.10 Restated Stock Holdings Assistance Plan and Form of Promissory
Note (filed as Exhibit 10.15 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 28, 1996 [File No.
1-11757] and incorporated herein by reference).
10.11 Master Cash Management, Guarantee Reimbursement, and Loan Agreement dated as of June 1,
1999, by and between the Registrant and Thermo Electron Corporation (filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999
[File No. 1-11757] and incorporated herein by reference).
10.12 Amended and Restated Equity Incentive Plan of the Registrant
(filed as Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended July 3, 1999 [File No.
1-11757] and incorporated herein by reference).
10.13 Amended and Restated Deferred Compensation Plan for Directors of the Registrant (filed as
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3,
1999 [File No. 1-11757] and incorporated herein by reference).
10.14 Amended and Restated Directors Stock Option Plan of the Registrant (filed as Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File
No. 1-11757] 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 such affiliated corporations. The terms of such
plans are substantially the same as those of the Company's Equity
Incentive Plan.
13 Annual Report to Shareholders for the Year Ended January 1, 2000
(only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
</TABLE>
Exhibit 13
Thermo Optek Corporation
Consolidated Financial Statements
1999
<PAGE>
<TABLE>
<CAPTION>
Thermo Optek Corporation 1999 Financial Statements
Consolidated Statement of Income
<S> <C> <C> <C>
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------- ----------- ---------- ----------
Revenues (Notes 7 and 11) $453,870 $447,301 $512,464
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues (Note 9) 245,239 240,613 276,998
Selling, general, and administrative expenses (Note 7) 113,809 111,909 126,750
Research and development expenses 27,793 24,963 30,861
Restructuring and unusual costs (Note 9) 989 8,026 -
Gain on sale of property (390) - -
-------- -------- --------
387,440 385,511 434,609
-------- -------- --------
Operating Income 66,430 61,790 77,855
Interest Income (includes $214, $357, and $564 from 2,886 4,490 4,448
related party; Note 7)
Interest Expense (includes $423, $1,346, and $1,896 to (4,931) (7,254) (10,197)
related parties; Note 8)
Other Income 273 - -
-------- -------- --------
Income Before Provision for Income Taxes and 64,658 59,026 72,106
Extraordinary Item
Provision for Income Taxes (Note 5) 25,218 25,443 30,796
-------- -------- --------
Income Before Extraordinary Item 39,440 33,583 41,310
Extraordinary Item, Net of Provision for Income Taxes of $165 (Note 8) - 280 -
-------- -------- --------
Net Income $ 39,440 $ 33,863 $ 41,310
======== ======== ========
Earnings per Share (Note 12)
Basic $ .77 $ .66 $ .82
======== ======== ========
Diluted $ .74 $ .63 $ .77
======== ======== ========
Weighted Average Shares (Note 12)
Basic 51,112 51,639 50,669
======== ======== ========
Diluted 56,145 57,420 57,261
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Thermo Optek Corporation 1999 Financial Statements
Consolidated Balance Sheet
<S> <C> <C>
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Assets
Current Assets:
Cash and cash equivalents (includes $8,216 under repurchase $ 41,172 $ 59,427
agreement with affiliated company in 1998)
Advance to affiliate 49,305 -
Accounts receivable, less allowances of $4,281 and $4,960 102,438 105,759
Inventories 64,652 63,697
Prepaid expenses and other assets 6,882 6,831
Deferred tax asset (Note 5) 11,453 10,777
Due from Thermo Vision Corporation (Note 7) 3,947 -
Due from parent company and affiliated companies 1,784 704
-------- --------
281,633 247,195
-------- --------
Property, Plant, and Equipment, at Cost, Net 59,193 62,894
-------- --------
Patents and Other Assets 4,957 6,427
-------- --------
Due From Thermo Vision Corporation (Note 7) - 3,947
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Notes 2 and 5) 222,346 241,205
-------- --------
$568,129 $561,668
======== ========
3
<PAGE>
Thermo Optek Corporation 1999 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Liabilities and Shareholders' Investment
Current Liabilities:
Short-term obligations and current maturities of $ 86,517 $ 22,602
long-term obligations (includes $8,455 of related-party
debt in 1999; Note 8)
Accounts payable 22,954 22,685
Accrued payroll and employee benefits 13,006 12,824
Accrued income taxes 21,897 20,958
Accrued installation and warranty expenses 12,195 15,171
Deferred revenue 18,129 20,017
Accrued restructuring costs (Note 9) 869 4,943
Other accrued expenses (Note 2) 32,286 30,204
-------- --------
207,853 149,404
-------- --------
Deferred Income Taxes (Note 5) 8,967 10,546
-------- --------
Other Deferred Items 2,881 2,906
-------- --------
Long-term Obligations:
Subordinated convertible debentures (includes $350 of - 71,505
related-party debt; Note 8)
Other 84 256
-------- --------
84 71,761
-------- --------
Commitments and Contingency (Note 6)
Shareholders' Investment (Notes 3 and 4):
Common stock, $.01 par value, 100,000,000 shares 518 518
authorized; 51,833,879 and 51,790,115 shares issued
Capital in excess of par value 266,647 265,904
Retained earnings 109,080 69,640
Treasury stock at cost, 803,509 and 479,209 shares (7,710) (4,459)
Deferred compensation (55) -
Accumulated other comprehensive items (20,136) (4,552)
-------- --------
348,344 327,051
-------- --------
$568,129 $561,668
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Thermo Optek Corporation 1999 Financial Statements
Consolidated Statement of Cash Flows
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Operating Activities
Net income $39,440 $ 33,863 $41,310
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 8,706 8,710 9,100
Amortization 7,445 7,876 7,714
Provision for losses on accounts receivable 175 519 629
Extraordinary item (Note 8) - (445) -
Deferred income tax expense (benefit) (1,000) (1,132) 2,662
Other noncash items 759 2,474 2,274
Changes in current accounts, excluding the effects of acquisitions and
distribution of Thermo Vision to shareholders:
Accounts receivable (1,520) 1,035 (5,583)
Inventories (4,234) 7,284 5,334
Other current assets (380) 1,140 442
Accounts payable 1,097 (3,082) (6,260)
Due to parent company and affiliated companies (1,741) (2,243) 17,309
Other current liabilities 3,381 (1,469) (2,245)
Other - 233 (66)
------- -------- -------
Net cash provided by operating activities 52,128 54,763 72,620
------- -------- -------
Investing Activities
Acquisitions, net of cash acquired (Note 2) - (7,907) (45,589)
Payment to parent company for acquisition of VG Systems (Note 2) - - (45,545)
Refund from parent company for acquisitions (Note 2) - 6,737 -
Advances to affiliate, net (49,305) - -
Purchases of property, plant, and equipment (9,960) (8,225) (8,619)
Proceeds from sale of property, plant, and equipment 2,096 1,194 1,705
Other 48 479 980
------- -------- -------
Net cash used in investing activities (57,121) (7,722) (97,068)
------- -------- -------
Financing Activities
Net proceeds from issuance of Company common stock 556 169 79
Proceeds from issuance (repayment) of notes payable to Thermo - (40,000) 43,800
Electron (Notes 2 and 8)
Purchases of Company securities (Note 8) (5,593) (10,570) -
Decrease in short-term obligations, net (3,530) (8,617) (14,746)
Repayment of long-term obligations (863) (1,655) (418)
Capital contribution from affiliated company - 366 1,042
------- -------- -------
Net cash provided by (used in) financing activities $(9,430) $(60,307) $29,757
------- -------- -------
5
<PAGE>
Thermo Optek Corporation 1999 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Exchange Rate Effect on Cash $(3,832) $ 1,448 $ (735)
------- -------- -------
Increase (Decrease) in Cash and Cash Equivalents (18,255) (11,818) 4,574
Cash and Cash Equivalents at Beginning of Year 59,427 71,245 66,671
------- -------- -------
Cash and Cash Equivalents at End of Year $41,172 $ 59,427 $71,245
======= ======== =======
Cash Paid For
Interest $ 4,584 $ 7,336 $ 9,491
Income taxes $21,088 $ 23,661 $14,617
Noncash Activities
Conversions of convertible debentures $ - $ 1,780 $16,294
Distribution of Thermo Vision to shareholders (Note 1) $ - $ - $24,614
Fair value of assets of acquired companies $ - $ 15,006 $56,797
Cash paid for acquired companies - (8,537) (46,457)
Stock issuable to parent company for acquired companies - - (12)
------- -------- -------
Liabilities assumed of acquired companies $ - $ 6,469 $10,328
======= ======== =======
Adjustment of purchase price due from parent company for $ - $ - $ 6,737
companies acquired in 1996 (Note 2) ======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Thermo Optek Corporation 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ----------- ---------- ---------
Comprehensive Income
Net Income $ 39,440 $ 33,863 $41,310
-------- -------- -------
Other Comprehensive Items:
Foreign currency translation adjustment (15,584) 6,739 (10,165)
-------- -------- -------
$ 23,856 $ 40,602 $31,145
======== ======== =======
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning of year $ 518 $ 516 $ 505
Conversions of convertible debentures (Note 8) - 2 11
-------- -------- -------
Balance at end of year 518 518 516
-------- -------- -------
Capital in Excess of Par Value:
Balance at beginning of year 265,904 263,301 245,917
Conversions of convertible debentures (Note 8) - 1,752 16,037
Issuance of stock under employees' and directors' stock plans 416 181 89
Issuance of Company common stock for acquired companies (Note 2) - - 12
Tax benefit related to employees' and directors' stock plans (Note 5) 327 304 204
Capital contribution from affiliated companies - 366 1,042
-------- -------- -------
Balance at end of year 266,647 265,904 263,301
-------- -------- -------
Retained Earnings:
Balance at beginning of year 69,640 35,777 20,843
Net income 39,440 33,863 41,310
Distribution of Thermo Vision to shareholders (Note 1) - - (24,614)
Deemed distribution to parent company for acquired companies (Note 2) - - (1,762)
-------- -------- -------
Balance at end of year 109,080 69,640 35,777
-------- -------- -------
Treasury Stock:
Balance at beginning of year (4,459) (10) -
Purchases of Company common stock (3,139) (4,437) -
Activity under employees' and directors' stock plans (112) (12) (10)
-------- -------- -------
Balance at end of year $ (7,710) $ (4,459) $ (10)
-------- -------- -------
7
<PAGE>
Thermo Optek Corporation 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued)
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Deferred Compensation (Note 3):
Balance at beginning of year $ - $ - $ -
Issuance of restricted stock under employees' stock plans (68) - -
Amortization of deferred compensation 13 - -
-------- --------- --------
Balance at end of year (55) - -
-------- --------- --------
Accumulated Other Comprehensive Items:
Balance at beginning of year (4,552) (11,291) (1,126)
Other comprehensive items (15,584) 6,739 (10,165)
-------- -------- --------
Balance at end of year (20,136) (4,552) (11,291)
-------- -------- --------
$348,344 $327,051 $288,293
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
Thermo Optek Corporation 1999 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Optek Corporation (the Company) is a worldwide leader in analytical
instruments that employ a range of optical spectroscopy and energy-based
techniques, and in systems used for materials analysis, characterization, and
preparation. These instruments are used in virtually every industry for
elemental and molecular analysis of a wide variety of solids, liquids, and
gases, as well as in testing and fabricating advanced materials. The Company
operates in two reportable segments: Spectroscopy and Materials Science.
Relationship with Thermo Instrument Systems Inc. and Thermo Electron Corporation
The Company was incorporated in August 1995 as a wholly owned subsidiary
of Thermo Instrument Systems Inc. As of January 1, 2000, Thermo Instrument owned
47,564,689 shares of the Company's common stock, representing 93% of such stock
outstanding. Thermo Instrument is an 88%-owned subsidiary of Thermo Electron
Corporation. As of January 1, 2000, Thermo Electron owned 1,028,860 shares of
the Company's common stock, representing 2% of such stock outstanding.
In January 2000, Thermo Electron announced a proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company. As
part of the reorganization, Thermo Instrument intends to acquire the publicly
held shares of the Company (Note 14).
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 1999, 1998, and 1997 are for the fiscal years ended January 1,
2000, January 2, 1999, and January 3, 1998, respectively. Fiscal years 1999 and
1998 each included 52 weeks; fiscal 1997 included 53 weeks.
Distribution of Thermo Vision Corporation to Shareholders
The Company had a wholly owned subsidiary, Thermo Vision Corporation,
which supplied a diverse array of photonics products - light-based technologies
for scientific and industrial applications including optical components, sensors
and imaging systems, and optically based instruments and lasers. On December 15,
1997, the Company distributed 100% of Thermo Vision's outstanding capital stock
in the form of a dividend to the Company's shareholders. As a result of the
distribution, Thermo Vision became a publicly traded, majority owned subsidiary
of Thermo Instrument. In January 2000, Thermo Instrument acquired all of the
outstanding shares of Thermo Vision. The results of operations of Thermo Vision
after December 15, 1997, have been excluded from the accompanying financial
statements.
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 in the accompanying 1999 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.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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 federal income tax return.
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. Except where the
effect would be antidilutive, diluted earnings per share have been computed
assuming the conversion of 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
The Company, along with other European-based subsidiaries of Thermo
Electron, participates in a notional pool arrangement with Barclays Bank. 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. The Company has access
to a $23,254,000 line of credit under this arrangement. Thermo Electron
guarantees all of the obligations of each participant in this arrangement. At
year-end 1999 and 1998, the Company had invested $4,960,000 and $17,935,000,
respectively, and borrowed $7,862,000 and $10,123,000, respectively, under this
arrangement (Note 8).
The Company, along with other European-based subsidiaries of Thermo
Electron, participates in a cash management arrangement in the Netherlands with
a wholly owned subsidiary of Thermo Electron. Under this arrangement,
participants' balances are pooled for interest calculation purposes. Interest
under this arrangement is based on Euro market rates. The Company has access to
a $2,963,000 line of credit under this arrangement. Thermo Electron guarantees
all of the obligations of each participant in this arrangement. At year-end
1999, the Company had $297,000 invested and $973,000 borrowed under this
arrangement (Note 8).
At year-end 1998, $8,216,000 of the Company's cash equivalents were
invested in a repurchase agreement with Thermo Electron. Under this agreement,
the Company in effect lent excess cash to Thermo Electron, which Thermo Electron
collateralized 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 were readily convertible
into cash by the Company. The repurchase agreement earned a rate based on the
90-day Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter. Effective June 1999, the Company adopted a new cash
management arrangement with Thermo Electron, described below, that replaces the
repurchase arrangement.
At year-end 1999 and 1998, 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.
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Advance to/from Affiliate
Effective June 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement. Under the new arrangement, amounts
advanced to Thermo Electron by the Company for domestic cash management purposes
bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis points,
set at the beginning of each month. Thermo Electron is contractually required to
maintain cash, cash equivalents, and/or immediately available bank lines of
credit equal to at least 50% of all funds invested under this cash management
arrangement by all Thermo Electron subsidiaries other than wholly owned
subsidiaries. The Company has the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice.
In addition, certain of the Company's European-based subsidiaries
participate in a new cash management arrangement with a wholly owned subsidiary
of Thermo Electron. The Company has access to a $8,733,000 line of credit under
this arrangement, of which the Company had borrowed $102,000 at year-end 1999.
Interest under this arrangement is based on Euro market rates and was 3.95% at
January 1, 2000. The other terms of this arrangement are similar to the domestic
cash management arrangement.
</TABLE>
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 as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Raw Material and Supplies $33,338 $30,657
Work in Process 12,514 12,360
Finished Goods 18,800 20,680
------- -------
$64,652 $63,697
======= =======
The Company periodically reviews its quantities of inventories on hand and
compares these amounts to expected usage of each particular product or product
line. The Company records as a charge to cost of product revenues any amounts
required to reduce the carrying value of inventories to net realizable value.
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, 10 to 40 years; machinery
and equipment, 2 to 10 years; and leasehold improvements, the shorter of the
term of the lease or the life of the asset. Property, plant, and equipment
consists of the following:
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Land $ 8,055 $ 8,926
Buildings 39,972 42,028
Machinery, Equipment, and Leasehold Improvements 54,333 49,492
-------- --------
102,360 100,446
Less: Accumulated Depreciation and Amortization 43,167 37,552
-------- --------
$ 59,193 $ 62,894
======== ========
11
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Patents and Other Assets
Patents and other assets in the accompanying balance sheet includes the
costs of acquired patents that are amortized using the straight-line method over
their estimated useful lives, which range from 12 to 13 years. These assets were
$4,216,000 and $5,205,000, net of accumulated amortization of $9,209,000 and
$8,220,000, at year-end 1999 and 1998, respectively. Patents and other assets in
the accompanying balance sheet also includes deferred debt costs of $318,000 and
$650,000, net of accumulated amortization of $1,974,000 and $1,624,000, at
year-end 1999 and 1998, respectively. Deferred debt costs are amortized through
the maturity of the related debt in 2000.
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 primarily over 40 years. Accumulated
amortization was $33,254,000 and $26,797,000 at year-end 1999 and 1998,
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. Such events or circumstances generally include the occurrence of
operating losses or a significant decline in earnings associated with the
acquired business or asset. The Company considers the future undiscounted cash
flows of the acquired companies in assessing the recoverability of this asset.
The Company assesses cash flows before interest charges and when impairment is
indicated, writes the asset down to fair value. If quoted market values are not
available, the Company estimates fair value by calculating the present value of
future cash flows. If impairment has occurred, any excess of carrying value over
fair value is recorded as a loss.
Environmental Liabilities
The Company accrues for costs associated with the remediation of
environmental pollution when it is probable that a liability has been incurred
and the Company's proportionate share of the amount can be reasonably estimated.
Any recorded liabilities have not been discounted.
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
Comprehensive income combines net income and "Other comprehensive items,"
which represents foreign currency translation adjustments, reported as a
component of shareholders' investment in the accompanying balance sheet. At
year-end 1999 and 1998, the balance of accumulated other comprehensive items
represents 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 certain firm purchase and sale commitments
denominated in currencies other than its subsidiaries' local currencies. These
contracts principally hedge transactions denominated in U.S. dollars, British
pounds sterling, Japanese yen, French francs, and Swiss francs. 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.
12
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements."
SAB 101 includes requirements for when shipments may be recorded as revenue when
the terms of the sale include customer acceptance provisions or an obligation of
the seller to install the product. In such instances, SAB 101 generally requires
that revenue recognition occur at completion of installation and/or upon
customer acceptance. SAB 101 requires that companies conform their revenue
recognition practices to the requirements therein during the first quarter of
calendar 2000 through recording a cumulative net of tax effect of the change in
accounting. The Company has not completed the analysis to determine the effect
that SAB 101 will have on its financial statements.
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 1998 and 1997 have been reclassified to conform to the
presentation in the 1999 financial statements.
2. Acquisitions
Acquisitions Effective in 1998
In August 1998, the Company's Spectroscopy segment purchased Scintag Inc.
for $4,000,000 in cash and the assumption of approximately $892,000 of debt.
Scintag, located in Cupertino, California, is a leading supplier of powder X-ray
diffractometers used primarily in research laboratories. In addition to Scintag,
during 1998, the Company acquired four businesses for an aggregate purchase
price of $4,537,000 in cash and assumption of $1,126,000 of debt. These
acquisitions have been accounted for using the purchase method of accounting.
Acquisitions Effective in 1997
In March 1997, Thermo Instrument acquired Life Sciences International PLC,
a London Stock Exchange-listed company. In July 1997, the Company's Spectroscopy
segment agreed to acquire Spectronic Instruments, Inc., a former Life Sciences'
subsidiary, from Thermo Instrument. Spectronic is a Rochester, New York-based
supplier of ultraviolet/visible spectroscopy instruments and accessories,
fluorescence instruments, and diffraction gratings for industrial and
educational markets worldwide. The purchase price for Spectronic consisted of:
(i) $20,150,000 in cash, (ii) 1,000 shares of the Company's common stock valued
at $12,000, and (iii) the assumption of $19,700,000 of debt payable to Thermo
Instrument. The purchase price represents the sum of the net tangible book value
of Spectronic 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 Spectronic relative to
Life Sciences' 1996 consolidated revenues. The Company believes that this
allocation methodology is reasonable and in accordance with the guidance
provided by SAB 55 (Topic 1:B). The cash portion of the purchase price 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.
Because the Company and Spectronic 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 accompanying financial statements include the
results of Spectronic from March 12,
13
<PAGE>
2. Acquisitions (continued)
1997, the date the business was acquired by Thermo Instrument, and the shares
issued to Thermo Instrument have been deemed outstanding from that date. The
purchase price included $1,762,000 for the increase in net book value from the
date Spectronic was 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 Spectronic from the date
of the acquisition by Thermo Instrument until the date of transfer to the
Company.
During 1997, the Company acquired four additional companies, for an
aggregate purchase price of $7,566,000 in cash, which were accounted for using
the purchase method of accounting. Thermo Vision acquired two of the companies
for $7,400,000. To fund one of those acquisitions, Thermo Vision borrowed
$3,800,000 from Thermo Electron pursuant to a promissory note. The promissory
note is payable by Thermo Vision, and is not an obligation of the Company. The
Company also acquired a former Singapore sales and service organization of the
Scientific Instruments Division of Fisons plc from Thermo Instrument for the
assumption of $585,000 of debt.
To partially fund acquisitions in 1997, the Company borrowed $40,000,000
from Thermo Electron pursuant to a promissory note, which was repaid in August
1998 (Note 8).
Acquisitions Effective in 1996
On March 29, 1996, Thermo Instrument acquired a substantial portion of the
businesses constituting the Scientific Instruments Division of Fisons plc
(Fisons), a wholly owned subsidiary of Rhone-Poulenc Rorer Inc. (RPR). In August
1998, the Company's Materials Science segment agreed to acquire Haake, a
business formerly part of Fisons, from Thermo Instrument for 2,075,342 shares of
the Company's common stock, valued at $23,814,000 at the time of the
transaction, and the assumption of $10,354,000 of debt. In July 1997, this
segment agreed to acquire VG Systems Limited, a business formerly part of
Fisons, from Thermo Instrument for $45,545,000 in cash. The purchase price for
these acquisitions was determined based on the net tangible book value of Haake
and VG Systems, at March 29, 1996, and 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). Haake is a supplier of viscometry and rheometry systems used by a
wide variety of manufacturers to measure the physical properties of liquid
substances. Haake also manufactures mixers, extruders, post-extrusion equipment,
circulators, baths, cryostats, water recirculators, and PVT analyzers. VG
Systems is a manufacturer of instrumentation and equipment for materials- and
surface-science analysis and fabrication.
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
received a refund totaling $7,257,000 from Thermo Instrument in 1998, which
represented the Company's share of the refund received by Thermo Instrument.
Payment of this amount was received in 1998. The Company recorded $5,884,000 of
the refund as a reduction of cost in excess of net assets of acquired companies.
Of the remainder, $853,000 represents payment for uncollected accounts
receivable acquired by the Company that were guaranteed by RPR, and $520,000
represents interest income on the refund from the date of acquisition.
Because the Company, Haake, and VG Systems were deemed for accounting
purposes to be under control of their common majority owner, Thermo Instrument,
the transactions have been accounted for in a manner similar to a pooling of
interests. Accordingly, the accompanying financial statements include the
results of Haake and VG Systems from March 29, 1996, 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 prices of Haake and VG
Systems included $4,780,000 and $6,902,000, respectively, for the increase in
net book value from the date the businesses were acquired by Thermo Instrument
to July 4, 1998, and June 28, 1997, respectively. The total of these two
amounts, $11,682,000, was recorded as a deemed distribution from retained
earnings, reflecting payment by the Company to Thermo Instrument for the
earnings of Haake and VG Systems from the date of the acquisition by Thermo
Instrument until the dates of transfer to the Company.
14
<PAGE>
2. Acquisitions (continued)
General
Excluding the Thermo Vision acquisitions, the aggregate cost of
acquisitions in 1999, 1998, and 1997 exceeded the estimated fair value of the
acquired net assets by $76,101,000, which is being amortized 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 aggregate cost of Thermo
Vision's acquisitions during this same period exceeded the estimated fair value
of the acquired net assets by $5,143,000, which had been amortized over 40 years
through the date on which the Company distributed its interest in Thermo Vision.
In connection with its 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 excess facilities. In connection with these
restructuring activities, as part of the cost of acquisitions, the Company
established reserves as detailed below, primarily for severance and excess
facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. Accrued acquisition expenses are included in other accrued
expenses in the accompanying balance sheet.
A summary of the changes in accrued acquisition expenses for acquisitions
completed before and during 1996 is as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Abandonment
of Excess Pre-1996
(In thousands) Severance Facilities Acquisitions Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Balance at December 28, 1996 $ 6,131 $ 2,344 $ 1,945 $10,420
Increases in reserves related to 1996 487 719 - 1,206
acquisitions
Usage (4,295) (1,471) (652) (6,418)
Decrease due to finalization of (1,935) (675) - (2,610)
restructuring plan, recorded as a
decrease to cost in excess of net assets
of acquired companies
Distribution of Thermo Vision to shareholders 12 (72) - (60)
Currency translation 99 (10) (25) 64
------- ------- ------- -------
Balance at January 3, 1998 499 835 1,268 2,602
Usage (187) (442) (611) (1,240)
Decrease due to finalization of (319) (295) (390) (1,004)
restructuring plan, recorded as a
decrease to cost in excess of net assets
of acquired companies
Currency translation 32 14 11 57
------- ------- ------- -------
Balance at January 2, 1999 25 112 278 415
Usage - (29) (339) (368)
Currency translation (25) (36) 61 -
------- ------- ------- -------
Balance at January 1, 2000 $ - $ 47 $ - $ 47
======= ======= ======= =======
</TABLE>
15
<PAGE>
2. Acquisitions (continued)
The principal acquisition expenses for 1996 acquisitions recorded in 1997
were for severance of 11 employees across all functions and for abandoned
facilities, primarily at the Fisons acquisition. The amounts established for
abandoned facilities include lease obligations for Fisons manufacturing and
sales facilities located throughout Europe and North America, with aggregate
obligations through 2000. The amount accrued for abandoned facilities at January
1, 2000, represent the remaining obligation for these facilities.
A summary of the changes in accrued acquisition expenses for acquisitions
completed during 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Abandonment
of Excess
(In thousands) Severance Facilities Total
- --------------------------------------------------------------- -------------- ------------- -------------
Balance at December 28, 1996 $ - $ - $ -
Reserves established 1,120 115 1,235
Usage (627) (4) (631)
Distribution to Thermo Vision shareholders (283) (100) (383)
Currency translation 20 - 20
------ ----- ------
Balance at January 3, 1998 230 11 241
Usage (230) (11) (241)
------ ----- ------
Balance at January 2, 1999 $ - $ - $ -
====== ===== ======
The principal acquisition expenses for 1997 acquisitions were for
severance for 30 employees across all functions and for abandoned facilities.
A summary of changes in accrued acquisition expenses for acquisitions
completed during 1998 is as follows:
Abandonment
of Excess
(In thousands) Severance Facilities Total
- --------------------------------------------------------------- -------------- ------------- -------------
Balance at January 3, 1998 $ - $ - $ -
Reserves established 786 57 843
Usage (584) - (584)
------ ----- ------
Balance at January 2, 1999 202 57 259
Usage (175) (56) (231)
Currency translation (27) (1) (28)
------ ----- ------
Balance at January 1, 2000 $ - $ - $ -
====== ===== ======
The principal acquisition expenses for 1998 acquisitions were for
severance for 11 employees across all functions and for abandoned facilities.
</TABLE>
16
<PAGE>
2. Acquisitions (continued)
Based on unaudited data, the following table presents selected financial
information for the Company and Spectronic, on a pro forma basis, assuming the
companies had been combined since the beginning of 1997. The effect of the
acquisitions not included in the pro forma data was not material to the
Company's results of operations.
<TABLE>
<CAPTION>
<S> <C>
(In thousands except per share amounts) 1997
- ------------------------------------------------------------------------- ----------- --------- ----------
Revenues $517,110
Net Income 39,432
Earnings per Share:
Basic .78
Diluted .74
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition of Spectronic
been made at the beginning of 1997.
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. 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 common 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 231,000 shares at a weighted average exercise price of $15.26 per share
elected to participate in this exchange and, as a result, received options to
purchase 115,000 shares of Company common stock at $9.61 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.
</TABLE>
17
<PAGE>
3. Employee Benefit Plans (continued)
In 1999, the Company awarded 7,000 shares of restricted Company common
stock to certain key employees. The shares had an aggregate value of $68,000 and
vest three years from the date of award, assuming continued employment, with
certain exceptions. The Company has recorded the fair value of the restricted
stock as deferred compensation in the accompanying balance sheet and is
amortizing such amount over the vesting period.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
------------------ ------------------ ------------------
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 3,052 $10.37 2,557 $10.84 2,397 $10.53
Granted 513 9.79 932 10.37 332 12.95
Exercised (28) 3.86 (17) 10.46 (7) 10.47
Forfeited (629) 10.78 (189) 10.73 (165) 10.61
Canceled due to exchange - - (231) 15.26 - -
----- ----- -----
Options Outstanding, End of Year 2,908 $10.24 3,052 $10.37 2,557 $10.84
===== ====== ===== ====== ===== ======
Options Exercisable 2,908 $10.24 3,052 $10.37 2,557 $10.84
===== ====== ===== ====== ===== ======
Options Available for Grant 913 798 610
===== ===== =====
</TABLE>
A summary of the status of the Company's stock options at January 1, 2000,
is as follows:
<TABLE>
<CAPTION>
<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
- ---------------------------------------------- ------------------- ------------------- -------------------
$ 7.85 - $10.11 851 5.0 years $ 8.87
10.12 - 12.38 1,965 7.2 years 11.02
12.39 - 16.92 92 4.6 years 15.48
-----
$ 7.85 - $16.92 2,908 6.5 years $10.24
=====
Option prices have been adjusted to reflect the reduction in the Company's
net assets resulting from the distribution of Thermo Vision to the Company's
shareholders pursuant to the guidance of EITF 90-9.
Employee Stock Purchase Program
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. Prior to November 1, 1997, the program was sponsored by
Thermo Instrument and Thermo Electron. Under this program, shares of the
Company's and Thermo Electron's common stock may be purchased at 85% of the
lower of the fair market value at the beginning or end of the
18
<PAGE>
3. Employee Benefit Plans (continued)
period, and the shares purchased are subject to a one-year resale restriction.
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. Shares are purchased through payroll deductions of up to 10%
of each participating employee's gross wages. During 1999, the Company issued
16,739 shares of its common stock under this program. There were no shares
issued under this program in 1998 or 1997.
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 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 as follows:
(In thousands except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Net Income:
As reported $39,440 $33,863 $41,310
Pro forma 37,646 32,050 40,288
Basic Earnings per Share:
As reported .77 .66 .82
Pro forma .74 .62 .80
Diluted Earnings per Share:
As reported .74 .63 .77
Pro forma .71 .60 .75
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 $3.53,
$3.21, and $4.73 in 1999, 1998, and 1997, 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:
1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Volatility 30% 28% 28%
Risk-free Interest Rate 5.8% 4.6% 5.8%
Expected Life of Options 4.4 years 4.0 years 5.2 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 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.
19
<PAGE>
3. Employee Benefit Plans (continued)
401(k) Savings Plan
The majority of the Company's full-time U.S. employees are eligible to
participate in a 401(k) savings plan sponsored by Thermo Electron. Contributions
to the 401(k) savings plan are made by both the employee and the Company.
Company contributions to the 401(k) plan are based upon the level of employee
contributions. The Company contributed and charged to expense for this plan
$1,158,000, $1,037,000, and $1,805,000 in 1999, 1998, and 1997, respectively.
Other Retirement Plans
Certain of the Company's subsidiaries offer other defined contribution
plans in lieu of participation in the Thermo Electron 401(k) savings plan.
Company contributions to these plans are based on formulas determined by the
Company. For these plans, the Company contributed and charged to expense
$2,567,000, $2,819,000, and $2,472,000 in 1999, 1998, and 1997, respectively.
4. Common Stock
At January 1, 2000, the Company had reserved 8,927,603 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.
5. Income Taxes
The components of income before provision for income taxes and
extraordinary item are as follows:
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------- -------- --------- -------
Domestic $31,620 $ 31,656 $40,366
Foreign 33,038 27,370 31,740
------- -------- -------
$64,658 $ 59,026 $72,106
======= ======== =======
20
<PAGE>
5. Income Taxes (continued)
The components of the provision for income taxes are as follows:
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------- -------- --------- -------
Currently Payable:
Federal $11,441 $ 12,640 $13,902
State 1,924 2,333 2,641
Foreign 12,853 11,602 11,591
------- -------- -------
26,218 26,575 28,134
------- -------- -------
Net Deferred (Prepaid):
Federal (889) (920) 924
State (110) (115) 196
Foreign (1) (97) 1,542
------- -------- -------
(1,000) (1,132) 2,662
------- -------- -------
$25,218 $ 25,443 $30,796
======= ======== =======
The provision for income taxes that is currently payable does not reflect
$3,474,000, $3,476,000, and $6,954,000 of tax benefits used to reduce cost in
excess of net assets of acquired companies in 1999, 1998, and 1997,
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. The provision for income taxes that is currently payable does not
reflect $327,000, $304,000, and $204,000 of such benefits that have been
allocated to capital in excess of par value in 1999, 1998, and 1997,
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 the following:
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------------- --------- --------- --------
Provision for Income Taxes at Statutory Rate $22,630 $20,659 $25,237
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 1,179 1,442 1,844
Amortization of cost in excess of net assets of acquired companies 1,174 1,153 1,295
Net foreign losses not benefited and foreign tax rate and tax law 1,289 1,926 2,024
differential
Tax benefit of foreign sales corporation (820) (748) (704)
Research and development tax credit claim from prior years (425) - -
Other, net 191 1,011 1,100
------- ------- -------
$25,218 $25,443 $30,796
======= ======= =======
</TABLE>
21
<PAGE>
5. Income Taxes (continued)
Deferred tax assets and deferred income taxes in the accompanying balance
sheet consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1999 1998
- --------------------------------------------------------------------------------------- --------- --------
Deferred Tax Assets:
Foreign tax loss carryforwards $13,941 $22,110
Reserves and accruals 3,016 3,135
Inventory basis difference 4,767 5,153
Accrued compensation 1,630 1,065
Other, net 2,040 1,424
------- -------
25,394 32,887
Less: Valuation allowance 13,941 22,110
------- -------
$11,453 $10,777
======= =======
Deferred Income Taxes:
Depreciation $ 5,179 $ 6,112
Intangible assets 1,546 1,576
Other, net 2,242 2,858
------- -------
$ 8,967 $10,546
======= =======
The valuation allowance relates to the uncertainty surrounding the use of
foreign tax loss carryforwards, the realization of which is limited to the
future income of certain subsidiaries. As of January 1, 2000, the Company's
Unicam subsidiary had tax loss carryforwards in the U.K. of $21,962,000 that are
subject to review and adjustment by the U.K. Inland Revenue Service as a result
of the acquisition of the analytical instruments division of Analytical
Technology, Inc. by Thermo Instrument. These and additional foreign tax loss
carryforwards of $19,630,000 can be used only to offset taxable income generated
in certain foreign countries. Of this amount, approximately $1,259,000 expire in
2002; approximately $26,260,000 expire in 2004; approximately $528,000 expire in
2005, and the remainder does not expire. The decrease in the valuation allowance
was due to the utilization and expiration of acquired foreign net operating
losses. Any tax benefit resulting from use of acquired loss carryforwards is
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
$76,465,000 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.
6. Commitments and Contingency
Commitments
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 $10,493,000, $10,726,000, and
$10,998,000 in 1999, 1998, and 1997, respectively. Future minimum payments due
under third-party noncancelable operating leases at January 1, 2000, are
$5,873,000 in 2000, $4,918,000 in 2001, $4,045,000 in 2002, $3,328,000 in 2003,
$2,277,000 in 2004, and $5,512,000 in 2005 and thereafter. Total future minimum
lease payments are $25,953,000.
22
<PAGE>
6. Commitments and Contingency (continued)
Contingency
Prior to Nicolet's acquisition by the Company, the Wisconsin Department of
Natural Resources (DNR) notified Nicolet that the DNR had begun a remedial
investigation to determine the extent of releases of hazardous substances from
the Refuse Hideaway Landfill located in Middleton, Wisconsin (the Landfill), and
that Nicolet was a potential responsible party (PRP) with regard to the
Landfill. Approximately 50 other parties were also notified of their PRP status.
The Environmental Protection Agency (EPA) subsequently added the Landfill to its
National Priorities List under the Comprehensive Environmental Response
Compensation and Liability Act of 1980 (CERCLA). In February 1995, the EPA and
the DNR recommended that various remediation efforts be made at the Landfill at
an estimated cost of approximately $5.2 million, and the Company expects that
such agencies will also seek to recover their oversight costs and expenses
related to the site. Under CERCLA, responsible parties can include current and
previous owners of a site, generators of hazardous substances disposed of at a
site, and transporters of hazardous substances to a site. Each responsible party
can be jointly and severally liable, without regard to fault or negligence, for
all costs associated with the remediation of the site. Although the Company
believes that the quantity of materials generated by Nicolet and transported to
the Landfill is relatively small in comparison to that of other named PRPs,
there can be no assurance as to the exact amount, if any, for which Nicolet will
be held responsible by the EPA and the DNR for costs associated with remediation
of the Landfill.
In connection with the organization of the Company, Thermo Instrument
agreed to indemnify the Company for any cash damages resulting from this matter.
Notwithstanding this indemnification, the Company would be required to report
any such damages as an expense in its results of operations, with any
indemnification payment it receives from Thermo Instrument being treated as a
contribution to shareholders' investment. In the opinion of management,
resolution of this matter will not have a material adverse effect on the
Company's financial position or results of operations.
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 pays Thermo Electron annually an amount equal to 0.8% of the
Company's revenues. The Company paid an amount equal to 0.8% and 1.0% of the
Company's revenues in 1998 and 1997, respectively. For these services, the
Company was charged $3,631,000, $3,578,000, and $5,125,000 in 1999, 1998, and
1997, 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.
Operating Leases
The Company leases office and manufacturing space to ThermoSpectra Corporation and Nicolet
Biomedical Inc., subsidiaries of Thermo Instrument and Thermo Electron, respectively, pursuant to an
arrangement whereby the Company charges ThermoSpectra and Nicolet Biomedical their allocated share of
the occupancy expenses of the Company's Wisconsin facility, based on the space ThermoSpectra and Nicolet
Biomedical use. The Company
23
<PAGE>
7. Related-party Transactions (continued)
recorded operating lease income of $947,000, $901,000, and $906,000 in 1999,
1998, and 1997, respectively, which is recorded as a reduction in selling,
general, and administrative expenses in the accompanying statement of income.
These leases expire on December 31, 2001.
Due from Thermo Vision Corporation
Thermo Vision borrowed $3,947,000 from the Company pursuant to promissory
notes due February 2000. These notes bear interest at the 90-day Commercial
Paper Composite Rate plus 25 basis points, set at the beginning of each quarter.
Thermo Vision repaid the promissory notes in February 2000. The interest rate
for the notes was 6.0% and 5.36% at year-end 1999 and 1998, respectively.
Other Related-party Transactions
The Company purchases and sells products in the ordinary course of
business with other companies affiliated with Thermo Instrument. Sales of
products to such affiliated companies totaled $9,287,000, $9,425,000, and
$12,931,000 in 1999, 1998, and 1997, respectively. Purchases of products from
such affiliated companies totaled $1,531,000, $3,807,000, and $8,007,000 in
1999, 1998, and 1997, respectively.
Cash Management
The Company invests excess cash and borrows short-term funds under
arrangements with Thermo Electron as discussed in Note 1.
Short-term Obligations
See Note 8 for short-term obligations with related parties.
8. Short- and Long-term Obligations
Short-term Obligations
To partially fund the July 1997 acquisitions of VG Systems and Spectronic
from Thermo Instrument (Note 2), the Company borrowed $40,000,000 from Thermo
Electron pursuant to a promissory note and bearing interest at the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the beginning of
each quarter. This note was repaid in August 1998.
Short-term obligations and current maturities of long-term obligations in
the accompanying balance sheet also includes $16,213,000 and $19,228,000 at
year-end 1999 and 1998, respectively, of short-term bank borrowings and amounts
borrowed under lines of credit by the Company's foreign subsidiaries.
The weighted average interest rate for the Company's short-term borrowings
was 3.8% and 4.4% at year-end 1999 and 1998, respectively. Unused lines of
credit were $38,510,000 at year-end 1999.
In addition, at year-end 1999, the Company has borrowings of $1,075,000
under arrangements with a wholly owned subsidiary of Thermo Electron (Note 1).
The weighted average interest rate for these borrowings was 5.6% at year-end
1999.
24
<PAGE>
8. Short- and Long-term Obligations (continued)
Long-term Obligations
(In thousands except per share amounts) 1999 1998
- ---------------------------------------------------------------------------------------- -------- --------
5% Subordinated Convertible Debentures, Due October 2000, $68,985 $ 71,505
Convertible at $13.95 per Share
Other 328 1,055
------- --------
69,313 72,560
Less: Current Maturities of Long-term Obligations 69,229 799
------- --------
$ 84 $ 71,761
======= ========
The 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 1999, the Company repurchased $2,520,000 principal amount of its 5%
subordinated convertible debentures for $2,454,000 in cash, resulting in a
nominal gain. During 1998, the Company repurchased $6,671,000 principal amount
of its convertible debentures for $6,133,000 in cash, resulting in an
extraordinary gain of $280,000, net of taxes of $165,000. In addition, during
1998, $1,780,000 principal amount of the 5% subordinated convertible debentures
were converted into 127,646 shares of the Company's common stock.
The annual requirements of long-term obligations as of January 1, 2000, are
$84,000 in 2000.
See Note 10 for the fair value information pertaining to the Company's
long-term obligations.
9. Restructuring and Unusual Costs
During 1998, the Company recorded restructuring charges and unusual costs
of $10,070,000. The restructuring costs of $8,026,000, which were accounted for
in accordance with EITF 94-3, consisted of $5,036,000 for severance and benefits
for 160 employees, primarily in manufacturing positions throughout the Company;
$1,341,000 for abandoned facilities, primarily for manufacturing facilities in
the United Kingdom with lease obligations through 2000; $234,000 for a
write-down of assets, primarily leasehold improvements to be abandoned; $370,000
for the loss on the sale of a division (VG Broadcast, see below); and $1,045,000
for miscellaneous items, including costs for terminating certain contracts and
agency relationships. These actions were taken to reduce costs, commenced in
September 1998, and were substantially completed in the fourth quarter of 1999.
The restructuring activities resulted in annualized cost savings of
approximately $6,000,000. In addition, the Company recorded an inventory
write-down of $2,044,000 related to discontinuing certain product lines and
inventory deemed excess based on lower product demand, which is included in cost
of revenues in the accompanying 1998 statement of income.
In 1998, the Company terminated 123 employees. During 1999, the Company
terminated 34 additional employees and recorded additional restructuring costs
of $1,468,000 that could not be accrued previously under EITF 94-3, all of which
was expended in 1999. The costs recorded in 1999 were for abandoned lease costs
for facilities located primarily in the United Kingdom with lease obligations
through 2000, pension costs for terminated employees, and other facility costs.
During 1999, the Company determined that certain employees would not be
terminated and settled certain lease obligations for amounts less than the
originally established reserves. Accordingly, the Company reversed $479,000 of
previously established restructuring reserves.
</TABLE>
25
<PAGE>
9. Restructuring and Unusual Costs (continued)
In 1998, the Company sold its VG Broadcast division, a United
Kingdom-based business providing data and text transmission equipment to the
television industry. In 1997, VG Broadcast had revenues and operating income of
$3,228,000 and $605,000, respectively. In 1998, through the date of its sale in
July 1998, it had revenues of $1,397,000 and operating income before
restructuring costs of $355,000.
The Company recorded charges for its restructuring plan as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Severance Facility- Other
closing
(In thousands) Costs Total
- ------------------------------------------------ -------------- ------------- -------------- -------------
Balance at January 3, 1998 $ - $ - $ - $ -
Costs incurred in 1998 (a) 5,036 1,341 1,045 7,422
Usage (1,982) (291) (390) (2,663)
Currency translation 136 20 28 184
------- ------ ------- -------
Balance at January 2, 1999 3,190 1,070 683 4,943
Costs incurred in 1999 (b) 225 1,000 243 1,468
Reversal of reserve (278) (201) - (479)
Usage (2,909) (1,591) (334) (4,834)
Currency translation (150) (53) (26) (229)
------- ------ ------- -------
Balance at January 1, 2000 $ 78 $ 225 $ 566 $ 869
======= ====== ======= =======
(a) Reflects restructuring costs of $6.1 million and $1.3 million recorded by
the Spectroscopy and Materials Science segments, respectively. Excludes $0.2
million for an asset write-down in the Spectroscopy segment and $0.4 million
for the loss on sale of a division in the Materials Science segment; and
$1.8 million and $0.2 million for an inventory provision in the Spectroscopy
and Material Science segments, respectively.
(b) Reflects restructuring costs, net of $0.5 million recorded by each of the
Spectroscopy and Materials Science segments.
10. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, advance to affiliate, accounts receivable, due from Thermo Vision
Corporation, due from parent company and affiliated companies, short-term
obligations and current maturities of long-term obligations, accounts payable,
long-term obligations, and forward foreign exchange contracts. The carrying
amounts of these financial instruments, with the exception of current maturity
of subordinated convertible debentures, long-term obligations, and forward
foreign exchange contracts, approximate fair value due to their short-term
nature.
26
<PAGE>
10. Fair Value of Financial Instruments (continued)
The carrying amount and fair value of the Company's current maturity of
subordinated convertible debentures, long-term obligations, and
off-balance-sheet financial instruments are:
1999 1998
-------------------- ------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -------------------------------------------------------------- ---------- ----------- ---------- ---------
Current Maturity of Subordinated Convertible $68,985 $ 67,764 $ - $ -
======= ======== ======= =======
Debentures
Long-term Obligations:
Subordinated convertible debentures $ - $ - $71,505 $68,201
Other 328 328 1,055 1,055
------- -------- ------- -------
$ 328 $ 328 $72,560 $69,256
======= ======== ======= =======
Off-balance-sheet Financial Instruments:
Forward exchange contracts payable $ - $ 98 $ - $ 829
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 foreign exchange contracts outstanding
totaled $32,266,000 and $23,635,000 at year-end 1999 and 1998, 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.
11. Business Segment and Geographical Information
The Company organizes and manages its business by individual functional
operating entity. The Company's businesses operate in two segments: Spectroscopy
and Materials Science. 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 Spectroscopy segment develops and manufactures analytical
instrumentation for molecular and elemental analysis based upon energy and light
measurements. The Materials Science segment develops and manufactures
instruments for surface analysis, characterization, and preparation and
physical-properties analysis.
Through December 15, 1997, the Company's results include those of Thermo
Vision (Note 1). Thermo Vision designs, manufactures, and markets a diverse
array of photonics products - light-based technologies that are embedded as
"enabling technologies" in a wide range of applications. Balances classified as
"Other" in the business segment information substantially represent amounts
pertaining to Thermo Vision.
</TABLE>
27
<PAGE>
11. Business Segment and Geographical Information (continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------- ---------- ---------- --------
Business Segment Information
Revenues:
Spectroscopy $ 348,095 $ 347,067 $365,317
Materials Science 106,023 100,677 112,916
Other - - 35,008
Intersegment sales elimination (248) (443) (777)
--------- --------- --------
$ 453,870 $ 447,301 $512,464
========= ========= ========
Income Before Provision for Income Taxes and Extraordinary Item:
Spectroscopy (a) $ 53,028 $ 51,863 $ 61,242
Materials Science (b) 18,773 16,548 19,689
Other (174) (335) 3,367
Corporate (c) (5,197) (6,286) (6,443)
--------- --------- --------
Total operating income 66,430 61,790 77,855
Interest and other expense, net (1,772) (2,764) (5,749)
--------- --------- --------
$ 64,658 $ 59,026 $ 72,106
========= ========= ========
Total Assets:
Spectroscopy $ 402,765 $ 422,350 $419,552
Materials Science 108,556 115,977 113,737
Other (317) (362) -
Corporate (d) 57,125 23,703 47,247
--------- --------- --------
$ 568,129 $ 561,668 $580,536
========= ========= ========
Depreciation and Amortization:
Spectroscopy $ 12,646 $ 12,716 $ 12,435
Materials Science 3,427 3,623 4,331
Other 78 247 48
--------- --------- --------
$ 16,151 $ 16,586 $ 16,814
========= ========= ========
Capital Expenditures:
Spectroscopy $ 7,691 $ 5,238 $ 4,534
Materials Science 2,118 2,952 2,303
Other 151 35 1,782
--------- --------- --------
$ 9,960 $ 8,225 $ 8,619
========= ========= ========
28
<PAGE>
11. Business Segment and Geographical Information (continued)
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------- ------------ ------------ -----------
Geographical Information
Revenues (e):
United States $ 256,979 $ 233,022 $281,324
United Kingdom 117,896 115,777 126,860
Germany 60,397 57,249 60,240
Other Europe 92,064 95,133 94,832
Other 44,280 39,656 39,150
Transfers among geographical areas (f) (117,746) (93,536) (89,942)
--------- --------- --------
$ 453,870 $ 447,301 $512,464
========= ========= ========
Long-lived Assets (g):
United States $ 32,970 $ 34,748 $ 35,807
United Kingdom 7,797 8,091 8,074
Germany 6,251 7,326 6,995
Switzerland 8,243 9,335 8,454
Other 4,100 3,615 3,579
--------- --------- --------
$ 59,361 $ 63,115 $ 62,909
========= ========= ========
Export Revenues Included in United States Revenues Above (h) $ 45,032 $ 72,445 $ 86,559
========= ========= ========
(a) Reflects restructuring costs, net of $0.5 million and $6.3 million in 1999
and 1998, respectively, and an inventory provision of $1.8 million in 1998.
(b) Reflects restructuring costs, net of $0.5 million and $1.7 million in 1999
and 1998, respectively, and an inventory provision of $0.2 million in 1998.
(c) Primarily general and administrative expenses.
(d) Primarily cash, cash equivalents, and advance to affiliate.
(e) Revenues are attributed to countries based on selling location.
(f) Transfers among geographical areas are accounted for at prices that are
representative of transactions with unaffiliated parties.
(g) Includes property, plant, and equipment, net, and other long-term tangible assets.
(h) In general, export revenues are denominated in U.S. dollars.
29
<PAGE>
12. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------------- -------- --------- -------
Basic
Net Income $39,440 $ 33,863 $41,310
------- -------- -------
Weighted Average Shares 51,112 51,639 50,669
------- -------- -------
Basic Earnings per Share $ .77 $ .66 $ .82
======= ======== =======
Diluted
Net Income $39,440 $ 33,863 $41,310
Effect of Convertible Debentures 2,086 2,314 2,818
------- -------- -------
Income Available to Common Shareholders, as Adjusted $41,526 $ 36,177 $44,128
------- -------- -------
Weighted Average Shares 51,112 51,639 50,669
Effect of:
Convertible debentures 4,985 5,531 6,345
Stock options 48 250 247
------- -------- -------
Weighted Average Shares, as Adjusted 56,145 57,420 57,261
------- -------- -------
Diluted Earnings per Share $ .74 $ .63 $ .77
======= ======== =======
Options to purchase 1,884,000, 1,329,000, and 54,000 shares of common
stock were not included in the computation of diluted earnings per share for
1999, 1998, and 1997, respectively, because their effect would have been
antidilutive due to the options' exercise prices exceeding the average market
price for the common stock.
An extraordinary gain recorded by the Company increased basic earnings per
share by $.01 in 1998 (Note 8).
</TABLE>
30
<PAGE>
13. Unaudited Quarterly Information
(In thousands except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 First Second Third Fourth
- ----------------------------------------------------------- ----------- ----------- ----------- ----------
Revenues $106,163 $110,142 $111,581 $125,984
Gross Profit 49,142 51,317 51,913 56,259
Net Income 7,107 9,942 9,948 12,443
Earnings per Share:
Basic .14 .19 .19 .24
Diluted .14 .19 .19 .23
1998 (a) First Second Third Fourth
- ----------------------------------------------------------- ----------- ----------- ----------- ----------
Revenues $113,799 $107,829 $107,507 $118,166
Gross Profit 52,840 52,087 47,379 54,382
Income Before Extraordinary Item 9,810 10,332 2,313 11,128
Net Income 9,810 10,332 2,526 11,195
Earnings per Share:
Basic .19 .20 .05 .22
Diluted .18 .19 .05 .21
(a) Reflects extraordinary gain, net of taxes, of $0.2 million and $0.1 million
in the third and fourth quarter, respectively.
14. Subsequent Event
On January 31, 2000, the Company announced that its parent company, Thermo
Instrument, will acquire the publicly held shares in the Company for $15.00 per
share in cash. This action is part of a major reorganization plan under which
Thermo Electron will spin in, spin off, and sell various businesses to focus
solely on its core measurement and detection instruments business. Thermo
Instrument currently owns approximately 93% of the outstanding shares of the
Company's common stock. Because Thermo Instrument's ownership is more than 90%,
it expects to acquire the minority interest through a "short-form" merger in
Delaware. The proposed short-form merger of the Company will require Securities
and Exchange Commission clearance of necessary filings; it will not require
approval by the Company's Board of Directors or shareholders. Immediately upon
completion of the proposed short-form merger, the Company's 5% subordinated
convertible debentures due October 15, 2000, will become convertible into the
same consideration that the minority holders of the Company's common stock
receive in the merger, or $15.00 per share in cash. Holders of the debentures
will therefore have the right, immediately upon completion of the merger, to
convert their debentures at the existing conversion price ($13.95 per share)
into $15.00 per share in cash, instead of into the actual shares of the
Company's common stock that they would have received if they converted prior to
the proposed merger. The Company will not call the debentures prior to the
merger.
On March 6, 2000, Thermo Instrument filed with the Securities and Exchange
Commission the materials necessary to take the Company private through a
short-form merger. Thermo Instrument expects to complete this transaction by the
end of the second quarter of 2000.
31
<PAGE>
Thermo Optek Corporation 1999 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Optek Corporation:
We have audited the accompanying consolidated balance sheet of Thermo
Optek Corporation (a Delaware corporation and 93%-owned subsidiary of Thermo
Instrument Systems Inc.) and subsidiaries as of January 1, 2000, and January 2,
1999, 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 1, 2000. 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 Thermo Optek
Corporation and subsidiaries as of January 1, 2000, and January 2, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended January 1, 2000, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 15, 2000 (except with respect to the matter
discussed in Note 14, as to which the date is March 6, 2000)
32
<PAGE>
Thermo Optek Corporation 1999 Financial Statements
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
Thermo Optek Corporation (the Company) is a worldwide leader in analytical
instruments that employ a range of optical spectroscopy and energy-based
techniques, and in systems used for materials analysis, characterization, and
preparation. These instruments are used in virtually every industry for
elemental and molecular analysis of a wide variety of solids, liquids, and
gases, as well as in testing and fabricating advanced materials. The Company
operates in two reportable segments: Spectroscopy and Materials Science.
The Spectroscopy segment has four principal operating units: Madison,
Wisconsin-based Nicolet Instrument Corporation, a manufacturer and distributor
of Fourier transform infrared (FT-IR) and FT-Raman spectrometry products;
Ecublens, Switzerland-based A.R.L. Applied Research Laboratories S.A. (ARL), a
manufacturer and distributor of wavelength-dispersive X-ray fluorescence and
atomic emission (AE) instruments; Franklin, Massachusetts-based TJA Solutions
division, a manufacturer and distributor of atomic absorption (AA) and AE
spectrometry products; and Rochester, New York-based Spectronic Instruments, a
manufacturer and distributor of UV-visible spectrophotometers.
The Materials Science segment has two principal operating units, VG
Systems Limited, located in East Grinstead, England, and Gebruder Haake GmbH
(Haake), located in Karlsruhe, Germany. VG Systems primarily includes VG
Semicon, a manufacturer and distributor of molecular-beam epitaxy systems for
the production of gallium arsenide wafers, and VG Scientific, a manufacturer and
distributor of instrumentation for surface and chemical analysis. Haake is a
supplier of viscometry and rheometry systems used by a wide variety of
manufacturers to measure the properties of liquid substances.
In December 1997, the Company distributed 100 percent of its Thermo Vision
Corporation subsidiary's capital stock in the form of a dividend to the
Company's shareholders. Thermo Vision supplies a diverse array of photonic
products - light-based technologies for scientific and industrial applications -
including optical components, sensors and imaging systems, and optically based
instruments and lasers. As a result of the distribution, Thermo Vision became a
publicly traded, majority-owned subsidiary of Thermo Instrument Systems Inc. In
January 2000, Thermo Instrument purchased all of the outstanding shares of
Thermo Vision. The consolidated financial statements of the Company included the
results of Thermo Vision through December 15, 1997. Since then, the results of
Thermo Vision have not been included as a reportable segment, but substantially
represent the amounts classified as "Other" in the segment data in Note 11 to
Notes to Consolidated Financial Statements.
The Company sells its products worldwide. 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 such currency fluctuations.
In January 2000, Thermo Electron announced a proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company. As
part of the reorganization, Thermo Instrument intends to acquire the publicly
held shares of the Company (Note 14).
33
<PAGE>
Results of Operations
1999 Compared With 1998
Revenues were $453.9 million in 1999, compared with $447.3 million in
1998. Revenues increased $3.4 million due to acquisitions, net of dispositions.
Revenues decreased $7.0 million due to the unfavorable effects of currency
translation due to the strengthening of the U.S. dollar relative to the foreign
currencies in countries in which the Company operates. Revenues in the
Spectroscopy segment increased $1.0 million to $348.1 million in 1999. Revenues
in this segment excluding the impact of acquisitions, net of disposition and
foreign currency translation, increased $3.2 million. Spectroscopy revenues
increased $3.4 million due to increased demand for products sold into the
semiconductor markets, offset in part by a decrease in revenues at certain
elemental analysis businesses due to increased price competition. Revenues in
the Materials Science segment increased $5.3 million to $106.0 million in 1999.
Revenues in this segment, excluding the effect of acquisitions, net of
disposition and foreign currency translation, increased $6.9 million, primarily
due to increased demand in the semiconductor market at its Haake business and
for molecular-beam epitaxy (MBE) systems at its VG Semicon business.
The gross profit margin remained unchanged at 46% in 1999 and 1998.
Excluding the impact of inventory write-downs in 1998 of $2.0 million for
discontinued products and excess inventories (Note 9), the gross profit margin
decreased 1% primarily from lower margins at Nicolet due to changes in product
mix and due to lower margins at VG Semicon as a result of new product
introductions.
Selling, general, and administrative expenses as a percentage of revenues
remained unchanged at 25% in 1999 and 1998.
Research and development expenses increased to $27.8 million in 1999 from
$25.0 million in 1998, primarily due to increased spending on new product
development, including the V150 MBE system at VG Semicon and new products at
Nicolet Instruments and TJA Solutions.
Restructuring costs of $1.0 million in 1999 primarily represent
facility-closing costs and pension costs for terminated employees, net of the
reversal of previously established restructuring reserves (Note 9). In addition
to the inventory write-downs in 1998, the Company recorded restructuring costs
of $8.0 million related to severance costs and the closure of facilities. The
Spectroscopy and Materials Science segments each incurred net restructuring
costs of $0.5 million in 1999, and restructuring costs of $6.3 million and $1.7
million, respectively, in 1998. The restructuring activities resulted in
annualized cost savings of $6.0 million, beginning primarily in the fourth
quarter of 1999.
Interest income decreased to $2.9 million in 1999 from $4.5 million in
1998, primarily due to lower average invested balances as a result of the
Company's purchases of common stock and subordinated convertible debentures.
Interest expense decreased to $4.9 million in 1999 from $7.3 million in 1998,
primarily due to lower borrowings under notes payable and, to a lesser extent,
due to the conversion and repurchase of a portion of the Company's 5%
subordinated convertible debentures.
The effective tax rate was 39% and 43% in 1999 and 1998, respectively. The
Company's effective tax rate exceeded the statutory federal income tax rate in
both periods primarily due to the effect of foreign tax law and rate
differences, state income taxes, and nondeductible amortization of cost in
excess of net assets of acquired companies, offset in part by the tax benefit
associated with a foreign sales corporation. The effective tax rate decreased in
1999 primarily due to lower foreign losses not benefited and the favorable
resolution of a claim for prior year research and development tax credits.
During 1998, the Company recorded an extraordinary gain, net of tax, of
$0.3 million related to the early extinguishment of debt (Note 8).
The Company is involved in a proceeding relating to the cleanup of a
contaminated landfill (Note 6).
34
<PAGE>
1998 Compared With 1997
Revenues decreased to $447.3 million in 1998 from $512.5 million in 1997.
The decrease resulted from several factors including the distribution of Thermo
Vision, which had revenues of $35.0 million in 1997; a $34.3 million decrease at
existing businesses primarily due to lower sales to Asia and, to a lesser
extent, the semiconductor industry; a $3.0 million decrease due to the
unfavorable effects of currency translation as a result of the strengthening in
the value of the U.S. dollar relative to foreign currencies in countries in
which the Company operates; a $3.8 million decrease due to a change in
distribution channels of affiliated parties; and a $1.8 million decrease due to
the sale of the Company's VG Broadcast division (Note 9). These decreases were
offset in part by the inclusion of $12.7 million of revenues from acquisitions
(Note 2).
Revenues in the Spectroscopy segment decreased to $347.1 million in 1998
from $365.3 million in 1997. The decrease was primarily the result of a decrease
in Asian and semiconductor sales, a $3.0 million decrease due to the unfavorable
effects of currency translation, and a $0.9 million decrease due to a change in
distribution channels of affiliated parties. This decrease was offset in part by
the inclusion of $10.6 million of revenues from acquired businesses. Revenues in
the Materials Science segment decreased to $100.7 million in 1998 from $112.9
million in 1997. The decrease was primarily a result of a decrease in Asian and
semiconductor sales, a $2.9 million decrease due to a change in distribution
channels of affiliated parties, and a $1.8 million decrease as a result of the
sale of the Company's VG Broadcast division. This decrease was offset in part by
$2.1 million of revenues from acquired businesses.
The gross profit margin was relatively unchanged at 46.2% in 1998,
compared with 45.9% in 1997. The Company recorded inventory write-downs of $2.0
million in 1998 for discontinued products and excess inventories caused by
decreased product demand (Note 9). Excluding the impact of the write-downs, the
gross profit margin would have been 46.7% in 1998. The gross profit margin in
the Materials Science segment increased primarily due to margin improvements at
Haake and the elimination of lower-margin sales due to a change in distribution
channels of affiliated parties.
Selling, general, and administrative expenses as a percentage of revenues
was unchanged at 25% in 1998 and 1997.
Research and development expenses decreased to $25.0 million in 1998 from
$30.9 million in 1997, primarily as a result of the distribution of Thermo
Vision.
In addition to the inventory write-downs, the Company recorded
restructuring costs of $8.0 million in 1998 primarily related to severance costs
and the closure of facilities (Note 9). The Spectroscopy and Materials Science
segments incurred restructuring costs of $6.3 million and $1.7 million,
respectively.
Interest income was relatively unchanged at $4.5 million in 1998 and $4.4
million in 1997. Interest expense decreased to $7.3 million in 1998 from $10.2
million in 1997, primarily due to decreased borrowings under notes payable and
the inclusion in 1997 of interest paid to Thermo Instrument in connection with
certain acquisitions. In addition, interest expense declined due to the
conversion of a portion of the Company's subordinated convertible debentures
into common stock of the Company and the purchase by the Company of a portion of
its subordinated convertible debentures (Note 8).
The effective tax rate was 43% in 1998 and 1997. The Company's effective
tax rate for both periods exceeded the statutory federal income tax rate
primarily due to the effect of foreign tax rate and tax law differences, losses
not benefited in certain foreign countries, state income taxes, and
nondeductible amortization of cost in excess of net assets of acquired
companies, offset in part by the tax benefit associated with a foreign sales
corporation.
During 1998, the Company recorded an extraordinary gain, net of taxes, of
$0.3 million related to the early extinguishment of debt (Note 8).
35
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $73.8 million at January 1, 2000,
compared with $97.8 million at January 2, 1999. Included in working capital are
cash and cash equivalents of $41.2 million at January 1, 2000, compared with
$59.4 million at January 2, 1999. In addition, as of January 1, 2000, the
Company had $49.3 million invested in an advance to affiliate. Prior to the use
of a new domestic cash management arrangement between the Company and Thermo
Electron Corporation, which became effective June 1999, such amounts were
included in cash and cash equivalents. At January 1, 2000, $38.4 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. Also reflected in
working capital is $69.0 million principal amount of 5% subordinated convertible
debentures due October 2000.
The Company's operating activities provided $52.1 million of cash in 1999.
An increase in inventories, primarily due to the buildup of product in
preparation for new introductions in early 2000 and the timing of shipments used
$4.2 million of cash. Cash was provided by a $4.5 million increase in accounts
payable and other current liabilities, primarily as a result of the timing of
payments.
The Company's investing activities used $57.1 million of cash in 1999.
Excluding advance to affiliate activity, the Company's primary investing
activities included the expenditure of $10.0 million for the purchase of
property, plant, and equipment. In 2000, the Company plans to make capital
expenditures of approximately $13 million.
The Company's financing activities used $9.4 million of cash in 1999. The
Company used $5.6 million of cash to purchase Company securities pursuant to an
authorization by the Company's Board of Directors. In October 1999, the
Company's Board of Directors authorized the purchase of up to an additional $5.0
million of its own securities through October 29, 2000, in the open market or in
negotiated transactions. The Company does not expect to expend any additional
amounts on purchases of its common stock as a result of Thermo Instrument's plan
to purchase the public shares of the Company (Note 14). During 1999, the Company
repaid $4.4 million of short- and long-term borrowings. In February 2000, Thermo
Vision repaid promissory notes totaling $3.9 million to the Company.
Although the Company expects to have positive cash flow from its
existing operations, the Company may require significant amounts of cash for any
acquisition of complementary businesses. The Company expects that it will
finance any such acquisitions through a combination of internal funds, and/or
short-term borrowings from Thermo Instrument or Thermo Electron, although it has
no agreement with these companies to ensure that funds will be available on
acceptable terms or at all. The Company's $69.0 million principal amount 5%
subordinated convertible debentures are due in October 2000. Thermo Instrument
plans to purchase the public shares of the Company at a price that exceeds the
conversion price of the convertible debentures, which will entitle the holders
thereof to convert such debentures, immediately upon completion of the merger at
the existing conversion price of $13.95 per share, into the same consideration
that the minority shareholders will receive, $15.00 cash per share, instead of
actual shares of the Company's common stock. The Company anticipates that Thermo
Instrument will complete the purchase of the Company's public shares prior to
maturity of these debentures, however, if that transaction is not complete by
that time and if the debentures are not converted prior to their maturity, the
Company may need to borrow funds at the debentures' maturity from Thermo
Instrument or the guarantor, Thermo Electron, although it has no agreements
currently to do so. The maturity of this debt could adversely affect the
Company's liquidity in the last half of 2000. Excluding the debentures, the
Company believes that its existing resources are sufficient to meet the capital
requirements of its existing businesses for the foreseeable future.
36
<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, British pounds
sterling, Japanese yen, French francs, and Swiss francs. 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 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 pound sterling,
Swiss francs, Dutch guilders, Deutsche marks, and French francs. The effect of a
change in foreign currency exchange rates on the Company's net investment in
foreign subsidiaries is reflected in the "Accumulated other comprehensive items"
component of shareholders' investment. A 10% depreciation in year-end 1999 and
1998 functional currencies, relative to the U.S. dollar, would result in a $19.3
million and $20.7 million, respectively, reduction of shareholders' investment.
Forward foreign exchange contracts are sensitive to changes in foreign
currency exchange rates. The fair value of forward foreign exchange contracts is
the estimated amount that the Company would pay or receive upon termination of
the contract, taking into account the change in foreign currency exchange rates.
A 10% depreciation in year-end 1999 and 1998 foreign currency exchange rates
related to the Company's contracts would result in an increase in the unrealized
loss on forward foreign exchange contracts of $3.7 million and $1.6 million,
respectively. Since the Company uses forward foreign exchange contracts as
hedges of firm purchase and sale commitments, the unrealized gain or loss on
forward foreign currency exchange contracts resulting from changes in foreign
currency exchange rates would be offset by a corresponding change in the fair
value of the hedged item.
Certain of the Company's cash and cash equivalents are denominated in
currencies other than the functional currency of the depositor and are sensitive
to changes in foreign currency exchange rates. A 10% depreciation in the related
foreign currency exchange rates in 1999 and 1998 would result in a negative
impact of $0.8 million and $0.9 million, respectively, on the Company's net
income.
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
long-term obligations due to the difference between the market interest rate and
the rate at the date of issuance of the long-term obligations. A 10% decrease in
year-end 1999 and 1998 market interest rates would result in a negative impact
to the Company of $1.2 million and $6.9 million, respectively, on the fair value
of its long-term obligations.
Equity Prices
The Company's subordinated convertible debentures are sensitive to
fluctuations in the price of Company common stock into which the obligations are
convertible. Changes in the price of the underlying common stock 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 1999 and
1998 market equity prices would result in a negative impact to the Company of
$0.9 million and $3.1 million, respectively, on the fair value of its
price-sensitive equity financial instruments.
37
<PAGE>
Year 2000
As of the date of this report, the Company has completed its year 2000
initiatives, which included: (i) testing and upgrading significant information
technology systems and facilities; (ii) testing and developing upgrades, where
necessary, for the Company's current products and certain discontinued products;
(iii) assessing the year 2000 readiness of its key suppliers, vendors, and
customers; and (iv) developing contingency plans.
As a result of completing these initiatives, the Company believes that all
of its material information technology systems and critical non-information
technology systems are year 2000 compliant. The Company believes that all of the
material products that it currently manufactures and sells are year 2000
compliant or are not date sensitive. In addition, the Company is not aware of
any significant supplier or vendor that has experienced material disruption due
to year 2000 issues. The Company has also developed a contingency plan to allow
its primary business operations to continue despite disruptions due to year 2000
problems, if any, that might yet arise in the future. The costs incurred to date
by the Company in connection with the year 2000 issue have not been material.
While the Company to date has been successful in minimizing negative
consequences arising from year 2000 issues, there can be no assurance that in
the future the Company's business operations or financial condition may not be
impacted by year 2000 problems, such as increased warranty claims, vendor and
supplier disruptions, or litigation relating to year 2000 issues.
38
<PAGE>
Thermo Optek Corporation 1999 Financial Statements
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 2000 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Risks Associated with Technological Change, Obsolescence, and the
Development and Acceptance of New 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. There can be no
assurance that the Company's products will not become 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. There can be no assurance that these factors will not have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Risks Associated with Acquisition Strategy. One of the Company's growth
strategies is to supplement its internal growth with the acquisition of
businesses and technologies that complement or augment the Company's existing
product lines. Certain businesses the Company has acquired in the past 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 market
penetration. 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, 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.
Possible Adverse Impact of Significant International Operations. Sales
outside the United States accounted for approximately 63% of the Company's
revenues in 1999, 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; foreign countries could impose withholding taxes
or otherwise tax the Company's foreign income, impose tariffs, or adopt other
restrictions on foreign trade; fluctuations in exchange rates may affect product
demand and adversely affect the profitability in U.S. dollars of products and
services provided by the Company in foreign markets where payment for the
Company's products and services is made in the local currency; U.S. or foreign
export licenses may be difficult to obtain; and the protection of intellectual
property in foreign countries may be more difficult to enforce. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business and results of operations.
Competition. The Company encounters and expects to continue to encounter
intense competition in the sale of its products. The Company believes that the
principal competitive factors affecting the market for its products include
product performance, reliability, customer service, and price. The Company's
competitors include large multinational corporations and their operating units,
including the AI division of The Perkin-Elmer Corporation, Varian Associates,
Inc., Bruker Instruments, Inc., Shimadzu Corporation, and Agilent Technologies.
These companies and certain of the Company's other competitors have
substantially greater financial, marketing, and other resources than those of
the Company. As a result, they may be able to adapt more quickly to new or
emerging technologies and changes in
39
<PAGE>
customer requirements, or to devote greater resources to the promotion and sale
of their products than the Company. In addition, competition could increase if
new companies enter the market or if existing competitors expand their product
lines or intensify efforts within existing product lines. There can be no
assurance that the Company's current products, products under development, or
ability to discover new technologies will be sufficient to enable it to compete
effectively with its competitors.
Risks Associated with Protection, Defense, and Use of Intellectual
Property. The Company holds patents relating to various aspects of its products,
and 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 patents will issue from any pending or
future patent applications owned by or licensed to the Company or that the
claims allowed under any issued patents will be sufficiently broad to protect
the Company's technology. 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. 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 to challenge the validity of the Company's 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 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. There can be no assurance that any license
required under any such patent would be made available on acceptable terms or
that the Company would prevail in any such contest. The Company could incur
substantial costs in defending itself in suits brought against it or in suits in
which the Company may assert its patent rights against others. If the outcome of
any such litigation is unfavorable to the Company, the Company's business,
results of operations, and financial position could be materially adversely
affected. In addition, the Company relies on trade secrets and proprietary
know-how which it seeks to protect, in part, by 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.
Dependence on Semiconductor Industry; Industry Volatility. A portion of
the Company's total revenues is attributable to the sale of products and related
services to customers in the semiconductor industry. The semiconductor industry
has historically been cyclical and is characterized by sudden and sharp changes
in supply and demand. Demand for the Company's products and services within the
semiconductor industry is dependent upon, among other factors, the level of
capital spending by semiconductor companies. Any decreases in semiconductor
activities could adversely affect the demand for the Company's products and
related services, which could materially adversely affect the Company's
business, results of operations, and financial condition.
Risks Associated with Cash Management Arrangement with Thermo Electron.
The Company participates in a cash management arrangement with Thermo Electron.
Under this cash management arrangement, the Company lends its excess cash to
Thermo Electron on an unsecured basis. The Company has the contractual right to
withdraw its funds invested in the cash management arrangement upon 30 days'
prior notice. Thermo Electron is contractually required to maintain cash, cash
equivalents and/or immediately available bank lines of credit equal to at least
50% of all funds invested under the cash management arrangement by all Thermo
Electron subsidiaries other than wholly owned subsidiaries. The funds are held
on an unsecured basis and therefore are subject to the credit risk of Thermo
Electron. The Company's ability to receive its cash upon notice of withdrawal
could be adversely affected if participants in the cash management arrangement
demand withdrawal of their funds in an aggregate amount in excess of the 50%
reserve required to be maintained by Thermo Electron. In the event of a
bankruptcy of Thermo Electron, the Company would be treated as an unsecured
creditor and its right to receive funds from the bankruptcy estate would
40
<PAGE>
be subordinated to secured creditors and would be treated on a pari passu basis
with all other unsecured creditors. Further, all cash withdrawn by the Company
from the cash management arrangement within one year before the bankruptcy would
be subject to rescission. The inability of Thermo Electron to return the
Company's cash on a timely basis or at all could have a material adverse effect
on the Company's results of operations and financial position.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Thermo Optek Corporation 1999 Financial Statements
Selected Financial Information
<S> <C> <C> <C> <C> <C>
(In thousands except per share amounts) 1999 (a) 1998 (b) 1997 (c) 1996 (d) 1995
- --------------------------------------------------- ---------- ---------- ----------- ---------- ---------
Statement of Income Data
Revenues $453,870 $447,301 $ 512,464 $446,583 $212,152
Income Before Extraordinary Item 39,440 33,583 41,310 27,263 16,009
Net Income 39,440 33,863 41,310 27,263 16,009
Earnings per Share:
Basic .77 .66 .82 .56 .36
Diluted .74 .63 .77 .55 .36
Balance Sheet Data
Working Capital $ 73,780 $ 97,791 $ 67,592 $ 40,150 $144,541
Total Assets 568,129 561,668 580,536 616,316 432,882
Long-term Obligations 84 71,761 81,400 96,778 101,079
Shareholders' Investment 348,344 327,051 288,293 266,139 220,988
(a) Reflects restructuring and unusual costs of $1.0 million, the repurchase of
$2.5 million principal amount of 5% subordinated debentures and the
reclassification as short-term of the 5% subordinated convertible debentures
due October 2000.
(b) Reflects restructuring and related costs of $10.1 million and an
extraordinary gain of $0.3 million, net of taxes, related to the Company's
repurchase of $6.7 million principal amount of 5% subordinated convertible
debentures.
(c) Reflects the acquisition of Spectronic, effective March 1997 and the
distribution of Thermo Vision in December 1997.
(d) Reflects the acquisitions of Haake, VG Systems, VG Elemental, and ARL,
effective March 1996 and the net proceeds from the Company's initial public
offering in June and July 1996.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Thermo Optek Corporation 1999 Financial Statements
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol TOC. The following table sets forth the high and low sale prices for
1999 and 1998, as reported in the consolidated transaction reporting system.
<S> <C> <C> <C> <C>
1999 1998
------------------- ------------------
Quarter High Low High Low
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
First $12 3/4 $ 8 1/8 $17 5/8 $12 1/2
Second 10 7/16 8 18 5/16 13 3/4
Third 10 3/8 7 7/8 14 7/8 7 3/16
Fourth 12 3/8 7 3/4 11 3/8 7 5/8
</TABLE>
As of January 28, 2000, the Company had 139 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 28, 2000, was $14 1/16 per share.
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.
Exhibit 21
Subsidiaries of the Registrant
As of February 23, 2000, Thermo Optek Corporation owned the following
companies:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NAME STATE OR JURISDICTION PERCENT OF
OF INCORPORATION OWNERSHIP
- -----------------------------------------------------------------------------------------------------------
Diametrix Detectors, Inc. Delaware 100
FI Instruments Inc. Delaware 100
Gebruder Haake GmbH Germany 100
RHEO S.A. France 100
SWO Polymertechnik GmbH Germany 100
HAAKE Instruments Inc. Delaware 100
Scintag, Inc. California 100
Spectronic Instruments, Inc. Delaware 100
SLM International Inc. Illinois 100
Thermo Jarrell Ash Corporation Massachusetts 100
A.R.L. Applied Research Laboratories S.A. Switzerland 100
Fisons Instruments (Proprietary) Limited South Africa 100
Thermo Optek Wissenschaftliche Gerate GesmbH Austria 100
Baird Do Brazil Representacoes Ltda. Brazil 100
Beijing Baird Analytical Instrument Technology Co. Limited China 100
Cahn Instrument Corporation Wisconsin 100
Mattson Instruments Limited England 100
Thermo Optek Limited England 100
Norlab Instruments Ltd. England 100
Thermo Elemental Limited England 100
Unicam Limited England 100
Unicam Export Limited England 100
Unicam Italia SpA Italy 100
Unicam S.A. Belgium 100
Thermo Instruments Nordic AB Sweden 100
Thermo Instruments Nordic AS Norway 100
Nicolet Instrument Corporation Wisconsin 100
Nicolet Japan K.K. Japan 100
Spectra-Tech, Inc. Wisconsin 100
Nicolet Instrument GmbH Germany 100
Optek Securities Corporation Massachusetts 100
Planweld Holding Limited England 100
Nicolet Instrument Limited England 100
Hilger Analytical Limited England 100
Thermo Electron Limited England 100
Thermo Instrument Systems Japan Holdings, Inc. Delaware 100
Nippon Jarrell-Ash Company, Ltd. Japan 100
Thermo Instruments (Canada) Inc. Canada 100
Fisons Instruments Inc. Canada 100
Unicam Analytical Inc. Canada 100
Thermo Optek S.A.R.L. France 100
<PAGE>
NAME STATE OR JURISDICTION PERCENT OF
OF INCORPORATION OWNERSHIP
- -----------------------------------------------------------------------------------------------------------
Thermo Optek Holding B.V. Netherlands 100
Baird Europe B.V. Netherlands 100
Baird France S.A.R.L. France 100
VG Systems Limited England 100
VG Elemental Limited England 100
Tein Benelux B.V. Netherlands 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 15, 2000 (except with respect to the
matter discussed in Note 14, as to which the date is March 6, 2000), included in
or incorporated by reference into Thermo Optek Corporation's Annual Report on
Form 10-K for the year ended January 1, 2000, into the Company's previously
filed Registration Statements as follows: Registration Statement No. 333-13757
on Form S-8, Registration Statement No. 333-13759 on Form S-8, Registration
Statement No. 333-13761 on Form S-8, Registration Statement No. 333-67869 on
Form S-8, and Registration Statement No. 333-81421 on Form S-8.
Arthur Andersen LLP
Boston, Massachusetts
March 15, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THERMO OPTEK CORPORATION'S
ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JANUARY 1,2000
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-01-2000
<PERIOD-END> JAN-01-2000
<CASH> 41,172
<SECURITIES> 0
<RECEIVABLES> 106,719
<ALLOWANCES> 4,281
<INVENTORY> 64,652
<CURRENT-ASSETS> 281,633
<PP&E> 102,360
<DEPRECIATION> 43,167
<TOTAL-ASSETS> 568,129
<CURRENT-LIABILITIES> 207,853
<BONDS> 84
0
0
<COMMON> 518
<OTHER-SE> 347,826
<TOTAL-LIABILITY-AND-EQUITY> 568,129
<SALES> 453,870
<TOTAL-REVENUES> 453,870
<CGS> 245,239
<TOTAL-COSTS> 245,239
<OTHER-EXPENSES> 28,782
<LOSS-PROVISION> 175
<INTEREST-EXPENSE> 4,931
<INCOME-PRETAX> 64,658
<INCOME-TAX> 25,218
<INCOME-CONTINUING> 39,440
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,440
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.74
</TABLE>
