INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION
Preliminary Statement of Additional Information
Dated July 22, 1996
THE THERMO OPPORTUNITY FUND, INC.
---------------------------------
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
, 1996
--------
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus of The Thermo Opportunity Fund, Inc. dated
, 1996. A copy of the Prospectus can be obtained by writing the Fund at
- --------
312 Walnut Street, 21st Floor, Cincinnati, Ohio 45202-4094, or by calling the
Fund nationwide toll-free 800-320-2212.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
The Thermo Opportunity Fund, Inc.
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
TABLE OF CONTENTS
-----------------
PAGE
----
THE THERMO ELECTRON SUBSIDIARIES
A. Management's Discussion and Analysis and Selected
Financial Information for the Subsidiaries . . . . 3
B. Historical Pricing of Subsidiaries' Common Stock . . 3
C. The Subsidiaries' Convertible Debentures . . . . . . 6
CERTAIN PORTFOLIO SECURITIES AND INVESTMENT TECHNIQUES . . 8
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . 11
DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . 13
THE INVESTMENT ADVISER . . . . . . . . . . . . . . . . . 15
SECURITIES TRANSACTIONS . . . . . . . . . . . . . . . . . 16
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . 17
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . 17
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . 19
AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . 19
MGF SERVICE CORP. . . . . . . . . . . . . . . . . . . . . 20
QUALITY RATINGS OF CORPORATE BONDS AND PREFERRED STOCKS . 20
STATEMENT OF ASSETS AND LIABILITIES . . . . . . . . . . . 27
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . A1
- 2 -
<PAGE>
THE THERMO ELECTRON SUBSIDIARIES
- --------------------------------
A. Management's Discussion and Analysis and Selected Financial Information for
the Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION, INCLUDING SELECTED FINANCIAL INFORMATION, AS SET FORTH IN EACH
PUBLICLY OFFERED SUBSIDIARY'S MOST RECENT ANNUAL REPORT ON FORM 10-K AND, IF
AVAILABLE, MOST RECENT QUARTERLY REPORT ON FORM 10-Q, IS PROVIDED IN THE
APPENDIX TO THIS STATEMENT OF ADDITIONAL INFORMATION. THE FUND HAS NOT
INDEPENDENTLY VERIFIED SUCH INFORMATION. A SUBSIDIARY'S COMPLETE ANNUAL REPORT
AND INTERIM UNAUDITED REPORTS MAY BE INSPECTED AND COPIED AT THE PUBLIC
REFERENCE SECTION OF THE SEC, 450 FIFTH STREET, N.W., ROOM 1024, WASHINGTON,
D.C. 20549, AT PRESCRIBED RATES, OR MAY BE OBTAINED FROM THE INVESTORS RELATION
DEPARTMENT OF THE APPLICABLE SUBSIDIARY. THE APPENDIX TO THIS STATEMENT OF
ADDITIONAL INFORMATION CONTAINS THE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" SECTIONS FROM SELECTED DOCUMENTS
OF THE SUBSIDIARIES AS FOLLOWS:
Page
----
Thermedics Inc. . . . . . . . . . . . . . . . . . . A1
Thermo Cardiosystems Inc. . . . . . . . . . . . . . A14
Thermo Sentron Inc. . . . . . . . . . . . . . . . . A20
Thermo Voltek Corp. . . . . . . . . . . . . . . . . A30
Thermo Instrument Systems Inc.. . . . . . . . . . . A36
ThermoSpectra Corporation . . . . . . . . . . . . . A45
ThermoQuest Corporation . . . . . . . . . . . . . . A55
Thermo Optek Corporation. . . . . . . . . . . . . . A62
Thermo TerraTech Inc. . . . . . . . . . . . . . . . A71
Thermo Remediation Inc. . . . . . . . . . . . . . . A78
Thermo Power Corporation. . . . . . . . . . . . . . A83
ThermoTrex Corporation. . . . . . . . . . . . . . . A93
ThermoLase Corporation. . . . . . . . . . . . . . . A104
Trex Medical Corporation. . . . . . . . . . . . . . A114
Thermo Fibertek Inc.. . . . . . . . . . . . . . . . A121
Thermo Ecotek Corporation . . . . . . . . . . . . . A128
B. Historical Pricing of Subsidiaries' Common Stock
THE TABLE BELOW REFLECTS THE RANGE OF HISTORICAL PRICES OF EACH PUBLICLY
TRADED SUBSIDIARY'S COMMON STOCK FOR EACH CALENDAR QUARTER SINCE JANUARY 1, 1994
(OR THE DATE OF THE SUBSIDIARY'S INITIAL PUBLIC OFFERING IF LATER). THE TABLE
IS INTENDED FOR THE SOLE PURPOSE OF PROVIDING INVESTORS WITH INFORMATION AS TO
HISTORICAL PRICE VOLATILITY OF THE SHARES OF COMMON STOCK OF THE SUBSIDIARIES,
AND SHOULD NOT BE RELIED UPON AS BEING INDICATIVE OF FUTURE PRICE VOLATILITY OR
PERFORMANCE OF THE SUBSIDIARIES OR OF THE FUND.
- 3 -
<PAGE>
Quarterly Price Ranges
Subsidiary 1996 1995 1994
- ---------- ---- ---- ----
High Low High Low High Low
Thermedics Inc.
First 30.500 23.250 17.500 12.500 15.000 11.750
Second 31.875 24.625 20.500 15.500 15.875 12.000
Third 21.875 17.750 16.000 12.875
Fourth 28.000 17.500 16.125 12.375
Thermo Instrument Systems Inc.
First 30.500 24.625 18.868 15.867 18.534 15.067
Second 43.375 28.500 20.200 17.200 17.001 14.467
Third 22.400 19.800 17.201 14.667
Fourth 27.100 21.500 17.001 15.267
Thermo TerraTech Inc.
First 14.625 10.875 8.875 7.750 9.250 7.875
Second 14.375 11.750 12.375 8.500 8.875 8.000
Third 12.875 11.125 8.500 7.875
Fourth 13.125 10.750 8.250 7.750
Thermo Power Corporation
First 16.125 11.375 10.375 8.875 9.875 7.375
Second 17.375 11.750 18.875 9.750 8.500 7.000
Third 19.500 15.125 9.375 7.500
Fourth 16.250 12.250 9.875 8.625
Thermo Cardiosystems Inc.
First 55.333 39.333 19.833 10.417 15.583 10.667
Second 55.375 39.578 26.083 18.833 15.417 12.583
Third 33.167 24.167 14.250 11.750
Fourth 51.500 28.417 14.667 10.000
Thermo Voltek Corp.
First 21.125 15.375 11.750 7.875 10.375 8.375
Second 22.500 18.125 15.750 10.000 9.000 8.000
Third 17.125 13.875 8.750 7.000
Fourth 16.625 14.500 8.875 7.625
ThermoTrex Corporation
First 50.875 41.375 16.625 12.000 16.625 13.500
Second 59.125 42.750 39.375 15.500 16.250 12.750
Third 41.500 31.500 16.000 12.000
Fourth 50.625 31.500 16.625 12.000
Thermo Fibertek Inc.
First 16.000 14.000 7.834 6.834 7.167 6.223
Second 20.328 14.578 9.056 7.501 6.945 6.223
Third 11.723 8.667 6.723 5.889
Fourth 15.167 10.417 7.167 6.278
- 4 -
<PAGE>
Subsidiary
1996 1995 1994
- ---------- ---- ---- ----
High Low High Low High Low
Thermo Remediation Inc.
First 16.250 13.250 13.584 10.751 9.917 8.417
Second 15.000 11.875 17.375 12.875 10.334 8.917
Third 16.625 14.000 10.501 9.084
Fourth 15.500 13.125 11.251 10.000
ThermoLase Corporation
First 31.000 20.875 6.938 3.625
Second 36.500 24.250 22.375 5.938 5.375 3.875
Third 25.500 19.500 5.125 3.875
Fourth 27.625 17.250 5.000 3.563
Thermo Ecotek Corporation
First 21.000 16.125 13.375 11.000
Second 25.250 19.750 14.500 12.375
Third 17.375 13.250
Fourth 16.750 13.375
ThermoSpectra Corporation
First 18.875 14.625
Second 18.875 15.250
Third 19.500 16.000
Fourth 17.625 14.750
ThermoQuest Corporation
First 20.000 16.250
Second 17.875 13.750
Third
Fourth
Thermo Sentron Inc.
First 17.000 16.000
Second 16.750 15.000
Third
Fourth
- 5 -
<PAGE>
C. The Subsidiaries' Convertible Debentures
THE TABLE BELOW LISTS THE CURRENTLY ISSUED CONVERTIBLE DEBENTURES OF THE
SUBSIDIARIES, BELIEVED TO BE ACCURATE AS OF THE DATE OF THIS STATEMENT OF
ADDITIONAL INFORMATION. THE FUND MAY INVEST IN ANY OF THE FOLLOWING SECURITIES
AND, IN ADDITION, MAY INVEST IN CONVERTIBLE DEBENTURES WHICH MAY BE ISSUED IN
THE FUTURE BY ANY CURRENT OR FUTURE SUBSIDIARY.
- 6 -
<PAGE>
<TABLE>
<CAPTION>
Amount Outstanding
Issued Amount Converts Conversion Incremental Existing Total
Name of Issue ($000) ($000)* Coupon Into Ratio Shares Shares Shares
------ -------- ------ -------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3 3/4% Sr. Convertible Debentures, Due 2000
Convertible Into THI @ $16.93 per share 70,000 67,600 3.750% THI 59.0549 3,992,111 92,796,000 96,788,111
5% Sub. Convertible Debentures, Due 2000
Convertible Into TMQ @ $16.50 per share 96,250 86,250 5.000% TMQ 60.6061 5,227,276 48,550,000 53,777,276
5% Sub. Convertible Debentures, Due 2000
Convertible Into TOC @ $14.85 per share 96,250 86,250 5.000% TOC 67.3401 5,808,081 48,450,000 54,258,081
4 7/8% Sub. Convertible Debentures, Due 2000
Convertible Into THN @ $17.92 per share 37,950 34,950 4.875% THN 58.8036 1,950,336 12,798,000 14,748,336
6 1/2% Sub. Convertible Debentures, Due 1997
Convertible Into TTT @ $10.33 per share 40,000 13,432 6.500% TTT 96.8054 1,300,290 17,563,000 18,863,290
Non-Int Bearing Sub. Convertible Debentures, Due 1997
Convertible Into TCA @ $21.74 per share 33,000 11,642 0.000% TCA 68.9974 803,268 36,303,000 37,106,268
3 3/4% Sub. Convertible Debentures, Due 2000
Convertible Into TVL @ $11.75 per share 30,000 25,240 3.750% TVL 85.1064 2,148,086 5,243,000 7,391,086
4 5/8% Sub. Convertible Debentures, Due 2003
Convertible Into TTT @ $15.90 per share** 100,000 100,000 4.625% TTT 62.8931 6,289,308 17,563,000 25,152,598
Non-Int Bearing Sub. Convertible Debenture, Due 2001
Convertible Into TCK @ $20.34 per share 37,000 37,000 0.000% TCK 49.1642 1,819,075 15,567,000 38,925,343
Non-Int. Bearing Sub. Convertible Debentures, Due 2003
Convertible Into TMD @ $32.68 per share 55,000 55,000 0.000% TMD 30.5998 1,682,987 36,471,000 38,153,987
- --------------------------------------------------------------------------------------------------------
Total Subsidiary Convertible Obligations
$517,364
</TABLE>
<TABLE>
<S> <C>
* Amount outstanding as of 12/31/95 unless issued subsequent to that date, in which case amount outstanding is assumed to be the
same as amount issued.
** Total shares after conversion includes 1,300,290 shares from assumed conversion of 6 1/2% Sub. Convertible Debenture due 1997.
</TABLE>
<TABLE>
<S> <C>
LEGEND Source: Thermo Electron company reports
Conversion Ratio = Number of common stock shares to be received in exchange for each $1,000 par amount of bonds upon
conversion.
Incremental Shares = Number of additional common stock shares represented by conversion of all outstanding convertible
bonds.
Total Shares = Sum of existing (outstanding) shares and incremental shares.
</TABLE>
<TABLE>
<S> <C>
THI = Thermo Instrument Systems Inc. THN = Thermo Redmediation Inc. TVL = Thermo Voltek Corp.
TMQ = ThermoQuest Corporation TTT = Thermo TerraTech Inc. TCK = Thermo Ecotek Corporation
TOC = Thermo Optek Corporation TCA = Thermo Cardiosystems Inc. TMD = Thermedics Inc.
</TABLE>
- 7 -
<PAGE>
CERTAIN PORTFOLIO SECURITIES AND INVESTMENT TECHNIQUES
- ------------------------------------------------------
A more detailed description of some of the securities in which the Fund is
permitted to invest and investment techniques in which it is permitted to engage
appears below:
U.S. Government Obligations. For defensive purposes, the Fund may from
---------------------------
time to time have a portion of its assets invested in U.S. Government
obligations. "U.S. Government obligations" include securities which are issued
or guaranteed by the United States Treasury, by various agencies of the United
States Government, and by various instrumentalities which have been established
or sponsored by the United States Government. U.S. Treasury obligations are
backed by the "full faith and credit" of the United States Government. U.S.
Treasury obligations include Treasury bills, Treasury notes, and Treasury bonds.
Agencies and instrumentalities established by the United States Government
include the Federal Home Loan Banks, the Federal Land Bank, the Government
National Mortgage Association, the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation, the Student Loan Marketing Association,
the Small Business Administration, the Bank for Cooperatives, the Federal
Intermediate Credit Bank, the Federal Financing Bank, the Federal Farm Credit
Banks, the Federal Agricultural Mortgage Corporation, the Financing Corporation
of America and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the United States Government while
others are supported only by the credit of the agency or instrumentality, which
may include the right of the issuer to borrow from the United States Treasury.
Commercial Paper. Commercial paper consists of short-term (usually from
----------------
one to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. The Fund will only invest in commercial
paper rated in one of the three highest categories by either Moody's Investors
Service, Inc. ("Moody's") (Prime-1, Prime-2 or Prime-3) or Standard & Poor's
Ratings Group ("S&P") (A-1, A-2 or A-3), or which, in the opinion of the
Adviser, is of equivalent investment quality. Certain notes may have floating
or variable rates.
The rating of Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: valuation of the management of the issuer; economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
strength of the parent company and the relationships which exist with the
issuer; and recognition by
- 8 -
<PAGE>
the management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3. Commercial paper rated A (highest quality) by S&P
has the following characteristics: liquidity ratios are adequate to meet cash
requirements; long-term senior debt is rated "A" or better, although in some
cases "BBB" credits may be allowed; the issuer has access to at least two
additional channels of borrowing; basic earnings and cash flow have an upward
trend with allowance made for unusual circumstances; typically, the issuer's
industry is well established and the issuer has a strong position within the
industry; and the reliability and quality of management are unquestioned. The
relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2, or A-3.
Bank Debt Instruments. Bank debt instruments in which the Fund may invest
---------------------
consist of certificates of deposit, bankers' acceptances and time deposits
issued by national banks and state banks, trust companies and mutual savings
banks, or of banks or institutions the accounts of which are insured by the
Federal Deposit Insurance Corporation. Certificates of deposit are negotiable
certificates evidencing the indebtedness of a commercial bank to repay funds
deposited with it for a definite period of time (usually from 14 days to one
year) at a stated or variable interest rate. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft which has been
drawn on it by a customer, which instruments reflect the obligation both of the
bank and of the drawer to pay the face amount of the instrument upon maturity.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate.
Repurchase Agreements. Repurchase agreements are transactions by which the
---------------------
Fund purchases a security and simultaneously commits to resell that security to
the seller at an agreed upon time and price, thereby determining the yield
during the term of the agreement. In the event of a bankruptcy or other default
by the seller of a repurchase agreement, the Fund could experience both delays
in liquidating the underlying security and losses. To minimize these
possibilities, the Fund intends to enter into repurchase agreements only with
its Custodian, with banks having assets in excess of $1 billion and with broker-
dealers who are recognized as primary dealers in U.S. Government obligations by
the Federal Reserve Bank of New York. Collateral for repurchase agreements is
held in safekeeping in the customer-only account of the Fund's Custodian at the
Federal Reserve Bank.
- 9 -
<PAGE>
Although the securities subject to a repurchase agreement might bear
maturities exceeding one year, settlement for the repurchase would not be more
than one year after the Fund's acquisition of the securities and normally would
be within a shorter period of time. The resale price will be in excess of the
purchase price, reflecting an agreed upon market rate effective for the period
of time the Fund's money will be invested in the securities, and will not be
related to the coupon rate of the purchased security. At the time the Fund
enters into a repurchase agreement, the value of the underlying security,
including accrued interest, will equal or exceed the value of the repurchase
agreement, and, in the case of a repurchase agreement exceeding one day, the
seller will agree that the value of the underlying security, including accrued
interest, will at all times equal or exceed the value of the repurchase
agreement. The collateral securing the seller's obligation must be of a credit
quality at least equal to the Fund's investment criteria for portfolio
securities and will be held by the Custodian or in the Federal Reserve Book
Entry System.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Fund to the seller subject
to the repurchase agreement and is therefore subject to the Fund's investment
restriction applicable to loans. It is not clear whether a court would consider
the securities purchased by the Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund to the seller.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the securities before repurchase of the security under
a repurchase agreement, the Fund may encounter delay and incur costs before
being able to sell the security. Delays may involve loss of interest or decline
in price of the security. If a court characterized the transaction as a loan
and the Fund has not perfected a security interest in the security, the Fund may
be required to return the security to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be
at the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt obligation purchased for the Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case, the seller. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the security, in which case the Fund may
incur a loss if the proceeds to the Fund of the sale of the security to a third
party are less than the repurchase price. However, if the market value of the
securities subject to the repurchase agreement becomes less than the repurchase
price (including interest), the Fund involved will direct the seller of the
security to deliver additional securities so that the market
- 10 -
<PAGE>
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price. It is possible that the Fund will be unsuccessful in
seeking to enforce the seller's contractual obligation to deliver additional
securities.
Loans of Portfolio Securities. The Fund may lend its portfolio securities
-----------------------------
subject to the restrictions stated in the Prospectus. Under applicable
regulatory requirements (which are subject to change), the loan collateral must,
on each business day, at least equal the value of the loaned securities. To be
acceptable as collateral, letters of credit must obligate a bank to pay amounts
demanded by the Fund if the demand meets the terms of the letter. Such terms
and the issuing bank must be satisfactory to the Fund. The Fund receives
amounts equal to the dividends or interest on loaned securities and also receive
one or more of (a) negotiated loan fees, (b) interest on securities used as
collateral, or (c) interest on short-term debt securities purchased with such
collateral; either type of interest may be shared with the borrower. The Fund
may also pay fees to placing brokers as well as custodian and administrative
fees in connection with loans. Fees may only be paid to a placing broker
provided that the Fund's Directors determine that the fee paid to the placing
broker is reasonable and based solely upon services rendered, that the Directors
separately consider the propriety of any fee shared by the placing broker with
the borrower, and that the fees are not used to compensate the Adviser or any
affiliated person of the Fund or an affiliated person of the Adviser or other
affiliated person. The terms of the Fund's loans must meet applicable tests
under the Internal Revenue Code of 1986, as amended (the "Code"), and permit the
Fund to reacquire loaned securities on five days' notice or in time to vote on
any important matter.
INVESTMENT RESTRICTIONS
- -----------------------
The Fund has adopted certain fundamental investment limitations designed to
reduce the risk of an investment in the Fund. These limitations may not be
changed without the affirmative vote of a majority (as defined in the 1940 Act)
of the outstanding shares of the Fund. As defined under the 1940 Act and as
used in the Prospectus and this Statement of Additional Information, the term
"majority" of the outstanding shares of the Fund means the lesser of (1) 67% or
more of the outstanding shares of the Fund present at a meeting, if the holders
of more than 50% of the outstanding shares of the Fund are present or
represented at such meeting or (2) more than 50% of the outstanding shares of
the Fund.
- 11 -
<PAGE>
The investment restrictions applicable to the Fund are:
1. Borrowing Money. The Fund will not borrow money, except from banks
---------------
for temporary or emergency (not leveraging) purposes in an amount up to 15% of
the Fund's total assets (including the amount borrowed) based on the lesser of
cost or market, less liabilities (not including the amount borrowed) at the time
the borrowing was made. While borrowings exceed 5% of the value of the Fund's
total assets, the Fund will not make any additional investments.
2. Margin Purchases. The Fund will not purchase any securities on
----------------
"margin" (except such short-term credits as are necessary for the clearance of
transactions). The deposit of funds in connection with transactions in options,
futures contracts, and options on such contracts will not be considered a
purchase on "margin."
3. Commodities. The Fund will not purchase or sell commodities or
-----------
commodity contracts, although the Fund may purchase or sell financial futures
contracts and related options.
4. Underwriting. The Fund will not act as underwriter of securities
------------
issued by other persons. This limitation is not applicable to the extent that,
in connection with the disposition of portfolio securities, the Fund may be
deemed an underwriter under certain federal securities laws.
5. Real Estate. The Fund will not purchase, hold or deal in real estate
-----------
or real estate mortgage loans, except that the Fund may purchase (a) securities
of companies (other than limited partnerships) which deal in real estate or (b)
securities which are secured by interests in real estate or by interests in
mortgage loans including securities secured by mortgage-backed securities.
6. Loans. The Fund will not make loans to other persons, except (a) by
-----
loaning portfolio securities, or (b) by engaging in repurchase agreements. For
purposes of this limitation, the term "loans" shall not include the purchase of
debt obligations.
7. Industry Concentration. Under normal market conditions, the Fund will
----------------------
invest at least 25% of its total assets in the instrumentation industry.
8. Senior Securities. The Fund will not issue or sell any senior
-----------------
security as defined by the 1940 Act, except in so far as any borrowing that the
Fund may engage in or the activities permitted in limitations 2, 3 and 4 may be
deemed to give rise to a senior security.
- 12 -
<PAGE>
Other current investment policies of the Fund, which are not fundamental
and which may be changed by action of the Board of Directors without shareholder
approval, are as follows:
1. Pledging. The Fund will not mortgage, pledge, hypothecate or in any
--------
manner transfer, as security for indebtedness, any security owned or held by the
Fund except as may be necessary in connection with borrowings described in
limitation (1) above.
2. Mineral Leases. The Fund will not purchase oil, gas or other mineral
--------------
leases, rights or royalty contracts.
3. Investing for Control. The Fund will not invest in companies for the
---------------------
purpose of exercising control.
4. Other Investment Companies. The Fund will not invest more than 10% of
--------------------------
its total assets in securities of other investment companies. The Fund will not
invest more than 5% of its total assets in the securities of any single
investment company. The Fund will not hold more than 3% of the outstanding
voting stock of any single investment company.
With respect to the percentages adopted by the Fund as maximum limitations
on the Fund's investment policies and restrictions, an excess above the fixed
percentage (except for the percentage limitations related to the borrowing of
money) will not be a violation of the policy or restriction unless the excess
results immediately and directly from the acquisition of any security or the
action taken.
DIRECTORS AND OFFICERS
- ----------------------
The following is a list of the Directors and executive officers of the
Fund. Each Director who is an "interested person" of the Fund, as defined by
the 1940 Act, is indicated by an asterisk.
Name and Address Age Position Held
---------------- --- -------------
*Gregory E. Ratte 35 Chairman and Director
One Broadway
New York, New York 10004
*Francis S. Branin, Jr. 49 President and Director
One Broadway
New York, New York 10004
+Henson L. Jones, Jr. 58 Director
744 Santa Barbara Road
Berkeley, California 94707
- 13 -
<PAGE>
+Hollis S. McLoughlin 46 Director
1133 Connecticut Avenue
Suite 200
Washington, DC 20038
+Blair M. Brewster 42 Director
297 Henry Street
Brooklyn, New York 11201
Robert G. Dorsey 39 Vice President
312 Walnut Street
Cincinnati, Ohio 45202
John F. Splain 39 Secretary
312 Walnut Street
Cincinnati, Ohio 45202
Mark J. Seger 34 Treasurer
312 Walnut Street
Cincinnati, Ohio 45202
* Mr. Ratte and Mr. Branin, as principals of Brundage, Story and Rose,
L.L.C., the Fund's investment adviser, are "interested persons" of the Fund
within the meaning of Section 2(a)(19) of the 1940 Act.
+ Member of Audit Committee.
The principal occupations of the remaining Directors and executive officers
of the Fund during the past five years are set forth below:
Henson L. Jones, Jr. is the General Partner of Telecam Partners, a real
estate development company and a director of Mountain Hardwear, an outdoor
equipment manufacturer.
Hollis S. McLoughlin is an officer and director of Darby Overseas Partners,
L.P., an emerging markets investing company, and an officer and director of
Darby Emerging Markets Fund, LDC. He is also a partner of TFMW, a real estate
company, and Petro Saantander, a Canadian oil and gas company.
Blair M. Brewster is President of Electromark, a manufacturing company, and
a director of Electromark AG and Electromark Grapic, which are sales companies.
He is also a director of Labelon, a manufacturing company, a partner of Brewster
Vineyards, a real estate company, and Managing Partner of The Guild, a real
estate company.
Robert G. Dorsey is President and Treasurer of MGF Service Corp. (a
registered transfer agent) and Treasurer of Midwest Group Financial Services,
Inc. (a registered broker-dealer and the Trust's principal underwriter) and
Leshner Financial, Inc. (a financial services company and parent of Midwest
Group Financial Services, Inc. and MGF Service Corp.). He is also Vice
President
- 14 -
<PAGE>
of Brundage, Story and Rose Investment Trust, Leeb Personal FinanceTM Investment
Trust, Markman MultiFund Trust and PRAGMA Investment Trust and Assistant Vice
President of Williamsburg Investment Trust, The Tuscarora Investment Trust,
Schwartz Investment Trust and Fremont Mutual Funds, Inc. (all of which are
registered investment companies).
John F. Splain is Secretary and General Counsel of Midwest Group Financial
Services, Inc., MGF Service Corp. and Leshner Financial, Inc. He is also
Secretary of Midwest Trust, Midwest Group Tax Free Trust, Midwest Strategic
Trust, Brundage, Story and Rose Investment Trust, Leeb Personal FinanceTM
Investment Trust, Markman MultiFund Trust, PRAGMA Investment Trust, The
Tuscarora Investment Trust and Williamsburg Investment Trust and Assistant
Secretary of Schwartz Investment Trust and Fremont Mutual Funds, Inc. (all of
which are registered investment companies).
Mark J. Seger, C.P.A. is Vice President of Leshner Financial, Inc. and MGF
Service Corp. He is also Treasurer of Midwest Trust, Midwest Group Tax Free
Trust, Midwest Strategic Trust, Brundage, Story and Rose Investment Trust, Leeb
Personal FinanceTM Investment Trust, Markman MultiFund Trust, PRAGMA Investment
Trust and Williamsburg Investment Trust, Assistant Treasurer of Schwartz
Investment Trust and The Tuscarora Investment Trust and Assistant Secretary of
Fremont Mutual Funds, Inc.
Directors who are not interested persons of the Fund or the Adviser receive
a retainer of $5,000 annually plus a fee of $500 for one or more meetings of the
Board of Directors (or a committee thereof) attended in person on a single day.
THE INVESTMENT ADVISER
- ----------------------
Brundage, Story and Rose, L.L.C. (the "Adviser") is the Fund's investment
adviser. Mr. Ratte and Mr. Branin, as principals of the Adviser, may directly
or indirectly receive benefits from the advisory fees paid to the Adviser.
Under the terms of the investment advisory agreement between the Fund and the
Adviser, the Adviser manages the Fund's investments. The Fund has agreed to pay
the Adviser a monthly fee computed at an annual rate of .80% of the Fund's net
assets.
The Fund is responsible for the payment of all expenses incurred in
connection with the organization, registration of shares and operations of the
Fund, including such extraordinary or non-recurring expenses as may arise, such
as litigation to which the Fund may be a party. The Fund may have an obligation
to indemnify the Fund's officers and Directors with respect to any such
litigation, except in instances of willful misfeasance, bad faith, gross
negligence or reckless disregard by such officers and Directors in the
performance of their duties. The
- 15 -
<PAGE>
compensation and expenses of any officer, Director or employee of the Fund who
is an officer, principal or employee of the Adviser are paid by the Adviser.
By its terms, the Fund's investment advisory agreement will remain in force
until , 1998 and from year to year thereafter, subject to annual
--------
approval by (a) the Board of Directors or (b) a vote of the majority of the
Fund's outstanding voting securities; provided that in either event continuance
is also approved by a majority of the Directors who are not interested persons
of the Fund, by a vote cast in person at a meeting called for the purpose of
voting such approval. The Fund's investment advisory agreement may be
terminated at any time, on sixty days' written notice, without the payment of
any penalty, by the Board of Directors, by a vote of the majority of the Fund's
outstanding voting securities, or by the Adviser. The investment advisory
agreement automatically terminates in the event of its assignment, as defined by
the 1940 Act and the rules thereunder.
SECURITIES TRANSACTIONS
- -----------------------
Decisions to buy and sell securities for the Fund and the placing of the
Fund's securities transactions and negotiation of commission rates where
applicable are made by the Adviser and are subject to review by the Board of
Directors of the Fund. In the purchase and sale of portfolio securities, the
Adviser seeks best execution for the Fund, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), the
execution capability, financial responsibility and responsiveness of the broker
or dealer and the brokerage and research services provided by the broker or
dealer. The Adviser generally seeks favorable prices and commission rates that
are reasonable in relation to the benefits received.
The Adviser is specifically authorized to select brokers who also provide
brokerage and research services to the Fund and/or other accounts over which the
Adviser exercises investment discretion and to pay such brokers a commission in
excess of the commission another broker would charge if the Adviser determines
in good faith that the commission is reasonable in relation to
the value of the brokerage and research services provided. The determination
may be viewed in terms of a particular transaction or the Adviser's overall
responsibilities with respect to the Fund and to accounts over which it
exercises investment discretion.
Research services include securities and economic analyses, reports on
issuers' financial conditions and future business prospects, newsletters and
opinions relating to interest trends, general advice on the relative merits of
possible investment
- 16 -
<PAGE>
securities for the Fund and statistical services and information with respect to
the availability of securities or purchasers or sellers of securities. Although
this information is useful to the Fund and the Adviser, it is not possible to
place a dollar value on it. Research services furnished by brokers through whom
the Fund effects securities transactions may be used by the Adviser in servicing
all of its accounts and not all such services may be used by the Adviser in
connection with the Fund.
The Adviser may aggregate purchase and sale orders for the Fund and its
other clients if it believes such aggregation is consistent with its duty to
seek best execution for the Fund and its other clients. The Adviser will not
favor any advisory account over any other account, and each account that
participates in an aggregated order will participate at the average share price
for all transactions of the Adviser in that security on a given business day,
with all transaction costs shared on a pro rata basis.
CODE OF ETHICS. The Fund and the Adviser have each adopted a Code of Ethics
under Rule 17j-1 of the 1940 Act. Each Code of Ethics significantly restricts
the personal investing activities of all employees of the Adviser. No employee
may purchase or sell any security which at the time is being purchased or sold
(as the case may be), or to the knowledge of the employee is being considered
for purchase or sale, by the Fund. Furthermore, each Code of Ethics provides
for trading "blackout periods" which prohibit trading by employees of the
Adviser within periods of trading by the Fund in the same (or equivalent)
security.
PORTFOLIO TURNOVER
- ------------------
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
fiscal year. High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Fund. The Adviser anticipates that the portfolio turnover rate for the Fund
normally will not exceed 100%. A 100% turnover rate would occur if all of the
Fund's portfolio securities were replaced once within a one year period.
Generally, the Fund intends to invest for long-term purposes. However, the
rate of portfolio turnover will depend upon market and other conditions, and it
will not be a limiting factor when the Adviser believes that portfolio changes
are appropriate.
TAXES
- -----
The Prospectus describes generally the tax treatment of distributions by
the Fund. This section of the Statement of
- 17 -
<PAGE>
Additional Information includes additional information concerning federal taxes.
The Fund intends to qualify annually for the special tax treatment afforded
a "regulated investment company" under Subchapter M of the Code so that it does
not pay federal taxes on income and capital gains distributed to shareholders.
To so qualify the Fund must, among other things, (i) derive at least 90% of its
gross income in each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities or foreign currency, or certain other income (including but not
limited to gains from options, futures and forward contracts) derived with
respect to its business of investing in stock, securities or currencies; (ii)
derive less than 30% of its gross income in each taxable year from the sale or
other disposition of the following assets held for less than three months: (a)
stock or securities, (b) options, futures or forward contracts not directly
related to its principal business of investing in stock or securities; and (iii)
diversify its holdings as described in the following paragraph.
In order to maintain its status as a regulated investment company for
Federal income tax purposes, the Fund must generally meet two diversification
tests at the end of each calendar quarter. The first requirement is that at
least fifty percent of its assets be invested in cash, cash items, Government
securities, other regulated investment companies, and securities of other
issuers in which the Fund owns no more than ten percent of the voting power and
which constitute no more than five percent of the Fund's assets. Each
Subsidiary is a separate issuer for this purpose, and the Fund intends to own no
more than ten percent of the voting power in any Subsidiary and to have no more
than five percent of its total assets invested in any Subsidiary. The second
requirement is that no more than 25% of the Fund's total assets be invested in
the securities of any one issuer, or of two or more issuers which are controlled
by the Fund and which are engaged in the same or similar businesses. "Control"
for this purpose means ownership of at least twenty percent of the voting power
of the issuer. The Fund will not own twenty percent of the voting power of any
issuer, so it will not have "control" over any issuer. Further, it will not
invest more than 25% of its assets directly in the securities of any one issuer.
However, for purposes of the 25% test, an investment in a parent corporation is
considered to include a proportional investment in each corporation controlled
by the parent. Thus if the Fund owned 4% of the stock of corporation X, which
in turn owned 90% of corporation Y, the Fund would be deemed to own 3.6% of
corporation Y. Any direct investment in corporation Y would be added to this
3.6% to determine whether the Fund's investment
- 18 -
<PAGE>
in corporation Y constituted more than 25% of the Fund's assets. The Fund will
take such indirect ownership into account when it decides to make investments in
Subsidiaries. Because of the concentration of the Fund's investment activities
in the stock and securities of the Subsidiaries, the risk of a failure to
satisfy the foregoing diversification tests is higher than it is in a regulated
investment company which is not so concentrated.
The Fund's net realized capital gains from securities transactions will be
distributed only after reducing such gains by the amount of any available
capital loss carryforwards. Capital losses may be carried forward to offset any
capital gains for eight years, after which any undeducted capital loss remaining
is lost as a deduction.
A federal excise tax at the rate of 4% will be imposed on the excess, if
any, of the Fund's "required distribution" over actual distributions in any
calendar year. Generally, the "required distribution" is 98% of the Fund's
ordinary income for the calendar year plus 98% of its net capital gains
recognized during the one year period ending on October 31 of the calendar year
plus undistributed amounts from prior years. The Fund intends to make
distributions sufficient to avoid imposition of the excise tax.
The Fund is required to withhold and remit to the U.S. Treasury a portion
(31%) of dividend income on any account unless the shareholder provides a
taxpayer identification number and certifies that such number is correct and
that the shareholder is not subject to backup withholding or demonstrates an
exemption from withholding. Further, the Fund is required to withhold and remit
to the U.S. Treasury a tax at the rate of 30% on dividends paid to nonresident
alien shareholders. The withholding rate can be reduced if the nonresident
alien shareholder files Internal Revenue Service Form 1001 or the equivalent
with the Fund establishing eligibility for a reduced rate of withholding under
an applicable treaty. Foreign investors are particularly encouraged to consult
their tax advisors concerning the tax consequences of an investment in the Fund.
CUSTODIAN
- ---------
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45202,
has been retained to act as Custodian for the Fund's investments. The Fifth
Third Bank acts as the Fund's depository, safekeeps its portfolio securities,
collects all income and other payments with respect thereto, disburses funds as
instructed and maintains records in connection with its duties.
AUDITORS
- --------
The firm of Arthur Andersen LLP has been selected as independent public
accountants for the Fund. Arthur Andersen LLP, 425 Walnut Street, Cincinnati,
Ohio 45202, performs an
- 19 -
<PAGE>
annual audit of the Fund's financial statements and advises the Fund as to
certain accounting matters.
MGF SERVICE CORP.
- -----------------
MGF Service Corp. ("MGF"), 312 Walnut Street, 21st Floor, Cincinnati, Ohio
45202, has been retained to provide administrative services to the Fund. MGF
is a subsidiary of Leshner Financial, Inc., of which Robert H. Leshner is the
controlling shareholder. In this capacity, MGF supplies non-investment related
statistical and research data, internal regulatory compliance services and
executive and administrative services. MGF supervises the preparation of tax
returns, reports to shareholders of the Fund, reports to and filings with the
Securities and Exchange Commission and state securities commissions, and
materials for meetings of the Board of Directors. MGF also provides accounting
and pricing services to the Fund and maintains such books and records as are
necessary to enable MGF to perform its duties. For the performance of these
administrative services, the Fund has agreed to pay MGF a fee at the annual rate
of .15% of the Fund's average net assets.
QUALITY RATINGS OF CORPORATE BONDS AND PREFERRED STOCKS
- -------------------------------------------------------
CORPORATE BOND RATINGS. The ratings of Moody's, S&P, Fitch Investors Service,
L.P. and Duff & Phelps Credit Rating Co. for corporate bonds in which the Fund
may invest are as follows:
Moody's Investors Service, Inc.
-------------------------------
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium
- 20 -
<PAGE>
grade obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Standard & Poor's Ratings Group
-------------------------------
AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic
- 21 -
<PAGE>
conditions than bonds in higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC and CC - Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
Fitch Investors Service, L.P.
-----------------------------
AAA - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated 'AAA.' Because bonds are
rated 'AAA' and 'AA' categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated 'F-1+.'
A - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds
and, therefore, impair timely payment. The likelihood that the
- 22 -
<PAGE>
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
BB - Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B - Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
Duff & Phelps Credit Rating Co.
-------------------------------
AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA - High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A - Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB - Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB - Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B - Below investment grade and possessing risk that obligations will not be
met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC - Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal and/or
- 23 -
<PAGE>
interest. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
DD - Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
PREFERRED STOCK RATINGS. The ratings of Moody's, S&P, Fitch Investors Service,
L.P. and Duff & Phelps Credit Rating Co. for preferred stocks in which the Fund
may invest are as follows:
Moody's Investors Service, Inc.
------------------------------
aaa - An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa - An issue which is rated aa is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a - An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
'aaa' and 'aa' classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa - An issue which is rated baa is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
ba - An issue which is rated ba is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b - An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa - An issue which is rated caa is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
Standard & Poor's Ratings Group
-------------------------------
AAA - This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
- 24 -
<PAGE>
AA - A preferred stock issue rated AA also qualifies as a high-quality
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A - An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the diverse
effects of changes in circumstances and economic conditions.
BBB - An issue rated BBB is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
BB, B and CCC - Preferred stock rated BB, B and CCC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC - The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C - A preferred stock rated C is a non-paying issue.
D - A preferred stock rated D is a non-paying issue with the issuer in
default on debt instruments.
Fitch Investors Service, L.P.
-----------------------------
AAA - Preferred stocks assigned this rating are the highest quality.
Strong asset protection, conservative balance sheet ratios, and positive
indications of continued protection of preferred dividend requirements are
prerequisites for an 'AAA' rating.
AA - Preferred or preference issues assigned this rating are very high
quality. Maintenance of asset protection and dividend paying ability appears
assured but not quite to the extent of the 'AAA' classification.
A - Preferred or preference issues assigned this rating are good quality.
Asset protection and coverages of preferred dividends are considered adequate
and are expected to be maintained.
- 25 -
<PAGE>
BBB - Preferred or preference issues assigned this rating are reasonably
safe but lack the protections of the 'A' to 'AAA' categories. Current results
should be watched for possible signs of deterioration.
BB - Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to wide fluctuations.
The longer-term financial capacities of the enterprises cannot be predicted with
assurance.
B - Issues assigned this rating are considered highly speculative. While
earnings should normally cover dividends, directors may reduce or omit payment
due to unfavorable developments, inability to finance, or wide fluctuations in
earnings.
CCC - Issues assigned this rating are extremely speculative and should be
assessed on their prospects in a possible reorganization. Dividend payments may
be in arrears with the status of the current dividend uncertain.
CC - Dividends are not currently being paid and may be in arrears. The
outlook for future payments cannot be assured.
C - Dividends are not currently being paid and may be in arrears.
Prospects for future payments are remote.
D - Issuer is in default on its debt obligations and has filed for
reorganization or liquidation under the bankruptcy law.
Duff & Phelps Credit Rating Co.
-------------------------------
AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA - High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A - Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB - Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB - Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or
- 26 -
<PAGE>
company fortunes. Overall quality may move up or down frequently within
this category.
B - Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC - Well below investment grade securities. Considerable uncertainty
exists as to timely payment of dividends. Protection factors are narrow and
risk can be substantial with unfavorable economic/industry conditions, and/or
with unfavorable company developments.
DP - Preferred stock with dividend arrearages.
STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------
The Fund's Statement of Assets and Liabilities as of
June 19, 1996 is presented below.
- 27 -
<PAGE>
THE THERMO OPPORTUNITY FUND, INC.
--------------------------------
STATEMENT OF ASSETS AND LIABILITIES
-----------------------------------
AS OF JUNE 19, 1996
-------------------
ASSETS
------
Cash $ 100,000
Deferred organizational expenses (Note 2) 148,500
Deferred offering costs (Note 2) 151,500
---------
Total assets 400,000
---------
LIABILITIES
-----------
Accrued expenses (Note 2) 300,000
---------
Total liabilities 300,000
---------
CAPITAL
-------
Common stock ($.001 par value; 16,000,000 shares
authorized, 6,667 shares issued and outstanding) 7
Paid-in-capital 99,993
---------
Net assets for shares of stock outstanding $ 100,000
=========
Shares outstanding 6,667
=========
Offering price per share $ 15.00
=========
The accompanying notes are an integral part
of this financial statement.
- 28 -
<PAGE>
THE THERMO OPPORTUNITY FUND, INC.
---------------------------------
NOTES TO THE STATEMENT OF ASSETS AND LIABILITIES
------------------------------------------------
JUNE 19, 1996
-------------
(1) The Thermo Opportunity Fund, Inc. (the "Fund") is a non-diversified,
closed-end management investment company. The Fund retains Brundage,
Story and Rose, L.L.C. (the "Adviser") as investment manager of the
Fund and retains MGF Service Corp. ("the Administrator) as
administrator of the Fund. The Fund has had no operations except for
the initial issuance of shares. On June 19, 1996, 6,667 shares of the
Fund were issued for cash at $15.00 per share to the Adviser.
(2) Expenses incurred in connection with the organization and the initial
offering of shares of the Fund are estimated to be $148,500 and
$151,500, respectively. These organizational and offering expenses
have been or will be paid by the Adviser. Upon commencement of the
public offering of shares of the Fund, the Fund will reimburse the
Adviser and the Administrator for such expenses, with the
organizational costs being capitalized and amortized on a straight-
line basis over five years and the offering costs being charged to
paid-in-capital at that time. As of June 19, 1996, all outstanding
shares of the Fund were held by the Adviser, which purchased these
initial shares in order to provide the Fund with its required capital.
In the event any of the initial shares of the Fund are sold by the
Adviser or by any subsequent owner at any time prior to the complete
amortization of organizational expenses, the proceeds payable with
respect to such shares will be reduced by the pro rata share of the
unamortized deferred organizational expenses as of the date of such
sale.
(3) Reference is made to the Prospectus and this Statement of Additional
Information for a description of the Investment Management Agreement,
the Administrative Services Agreement, the Custody Agreement, and The
Registrar and Transfer Agency Agreement, the Underwriting Agreement,
and tax aspects of the Fund.
- 29 -
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Directors and Stockholder of
The Thermo Opportunity Fund, Inc.:
We have audited the accompanying statement of assets and liabilities
of The Thermo Opportunity Fund, Inc. as of June 19, 1996. This financial
statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of assets and
liabilities is free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
statement of assets and liabilities. 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 audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to
above presents fairly, in all material respects, the financial position of
The Thermo Opportunity Fund, Inc. as of June 19, 1996 in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Cincinnati, Ohio
July 16, 1996
- 30 -
<PAGE>
APPENDIX
- --------
Form 10-Q
March 30, 1996
THERMEDICS INC.
---------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company's business can be divided into two segments: Instruments and
Other Equipment, and Biomedical Products. The Instruments and Other Equipment
segment includes Thermo Sentron Inc. (Thermo Sentron) which designs, develops,
manufactures, and sells high-speed precision-weighing and inspection equipment
for industrial production and packaging lines. The Instruments and Other
Equipment segment also includes the former Orion laboratory products division
(Orion) of Analytical Technology, Inc., which was acquired in December 1995.
Orion is a manufacturer of ectrochemistry, microweighing, process, and other
instruments used to analyze the chemical compositions of foods, beverages, and
pharmaceuticals, and to detect contaminants in environmental and high-purity
water samples. The Instruments and Other Equipment segment, through the
Company's Thermedics Detection Inc. (Thermedics Detection) subsidiary, also
develops, manufactures, and markets high-speed detection instruments, including
the Alexus (R) system, a process-detection instrument used in product quality
assurance applications in the beverage industry, and the EGIS (R) system, a
security instrument used to detect explosives at airports and other locations.
As a result of the January 1996 acquisition of Moisture Systems Corporation and
certain affiliated companies (collectively, Moisture Systems) and Rutter & Co.
(Rutter) by Thermedics Detection, the Company now offers a full range of
infrared moisture analyzers for the food, forest, paper, pharmaceutical, and
chemical industries. Through the Company's Thermo Voltek Corp. (Thermo Voltek)
subsidiary, the Instruments and Other Equipment segment also includes a line of
electronic test instruments and high-voltage power conversion systems.
As part of its Biomedical Products segment, the Company's Thermo
Cardiosystems Inc. (Thermo Cardiosystems) subsidiary has developed two
implantable left ventricular-assist systems (LVAS), a pneumatic, or air-driven,
system and an electric version. In October 1994, the Company announced that the
U.S. Food and Drug Administration (FDA) granted approval for the commercial sale
in the U.S. of the air-driven LVAS for use as a bridge to heart transplant. With
this approval, the air-driven system is available for sale to cardiac centers
throughout the U.S. The electric version of the LVAS, which is currently being
used in clinical trials in the U.S. for patients awaiting heart
- A1 -
<PAGE>
transplants, received the European Conformity Mark (CE Mark)in August 1995,
allowing commercial sale in all European Community countries. The air-driven
LVAS was granted the CE Mark in early 1994. In late 1995, the FDA approved the
protocol for conducting clinical trials of the electric LVAS as an alternative
to heart transplant in the U.S. In April 1996, the first implant under this
clinical trial was performed using the LVAS as an alternative for nontransplant
candidates. Until the Company's electric LVAS receives FDA commercial approval,
sales of the electric LVAS will fluctuate depending upon the number of implants
performed in ongoing studies at approved clinical sites and the number of
implementation programs sold. The Company also develops, manufactures, and
markets enteral nutrition-delivery systems and a line of polymers used in
medical disposables and nonmedical, industrial applications, including safety
glass and automotive coatings.
RESULTS OF OPERATIONS
First Quarter 1996 Compared With First Quarter 1995
---------------------------------------------------
Total revenues in the first quarter of 1996 were $60.3 million, compared
with $43.9 million in the first quarter of 1995. Instruments and Other Equipment
segment revenues increased to $49.8 million in 1996 from $32.8 million in 1995
due to the inclusion of $17.1 million in revenues from acquired businesses,
primarily Orion, which was acquired in December 1995, and Moisture Systems and
Rutter, which were acquired in January 1996. Thermedics Detection
process-detection instrument sales to the beverage industry declined to $2.9
million in 1996 from $6.4 million in 1995. This decline is primarily due to a
decrease in demand from Thermedics Detection's principal customer, which has
substantially completed its deployment of Alexus product quality assurance
systems. The decrease in revenues was offset in part by an increase in revenues
from Thermedics Detection's EGIS system to $2.9 million in the first quarter of
1996, from $1.5 million in 1995, due primarily to an order received in 1996 from
the U.S. government to provide Israel with counterterrorism support. Revenues
from Thermo Voltek increased $3.3 million due to an increase of $1.7 million in
revenue at its Comtest subsidiary, primarily as a result of greater overseas
demand and the introduction of a new product line in 1995. Thermo Voltek
revenues also increased $1.1 million due to the inclusion of revenues for the
full quarter of 1996 from Kalmus Engineering Incorporated (Kalmus), which was
acquired in March 1995.
Biomedical Products segment revenues decreased slightly to $10.5 million
in the first quarter of 1996 from $11.0 million in 1995 primarily due to a
decline of $2.9 million in revenues from Scent Seal fragrance samplers. In June
1995, the Company entered into an agreement with a third party granting an
exclusive license to all of its patents and know-how relating to the Scent Seal
fragrance samplers. The Company recorded royalty income of $72,000 in the first
quarter of 1996 related to this agreement.
- A2 -
<PAGE>
This decrease in revenues was offset in part by an increase of $2.3 million in
revenues from Thermo Cardiosystems primarily due to a 49% increase in the number
of air-driven and electric LVAS units shipped during the first quarter of 1996.
The gross profit margin was 47% in the first quarter of 1996, compared
with 45% in the first quarter of 1995. The gross profit margin for the
Instruments and Other Equipment segment increased to 46% in 1996 from 44% in
1995 primarily due to the inclusion of higher-margin revenues at Orion, Moisture
Systems, and Rutter, offset in part by a decrease in the gross profit margin due
to declining sales volume of process-detection instruments to the beverage
industry.
The gross profit margin for the Biomedical Products segment increased to
55% in the first quarter 1996 from 46% in 1995, reflecting higher margins at
Thermo Cardiosystems resulting from the increase in sales volume, improvements
in manufacturing efficiencies and, to a lesser extent, the LVAS price increase
that was phased in through the first half of 1995. In addition, the first
quarter of 1995 included low-margin revenues from Scent Seal fragrance samplers.
Selling, general and administrative expenses as a percentage of revenues
increased to 31% in the first quarter of 1996 from 28% in the first quarter of
1995. The increase was primarily a result of higher expenses as a percentage of
revenues due to lower sales volume of Thermedics Detection's process-detection
instruments to the beverage industry in the first quarter of 1996, and higher
expenses as a percentage of revenues at Orion, Moisture Systems, and Rutter.
Research and development expenses as a percentage of revenues increased to 6.7%
in the first quarter of 1996 from 5.4% in 1995 primarily due to increased
research and development expenses at Thermedics Detection.
Interest income was $2.1 million and $2.2 million in the first quarter
of 1996 and 1995, respectively. Interest expense increased to $1.3 million in
1996 from $0.9 million in 1995 as a result of additional borrowings by the
Company to fund acquisitions, offset in part by a decrease in interest expense
due to conversions of subordinated convertible obligations.
Gain on the issuance of stock by subsidiary of $2.5 million in the first
quarter of 1996 resulted from Thermedics Detection's March 1996 private
placement of 300,000 shares of Thermedics Detection common stock.
The effective tax rate in the first quarter of 1996 was below the
statutory federal income tax rate due primarily to the nontaxable gain on the
issuance of stock by subsidiary, offset in part by state income taxes and
nondeductible amortization of cost in excess of net assets of acquired
companies.
- A3 -
<PAGE>
Minority interest expense increased to $1.6 million in the first quarter
of 1996 from $0.7 million in the first quarter of 1995 due to higher profits at
the Company's 54%-owned Thermo Cardiosystems subsidiary and, to a lesser extent,
the Company's 53%-owned Thermo Voltek subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital, including cash, cash equivalents, and
short-term available-for-sale investments, was $103.2 million at March 30, 1996,
compared with $110.1 million at December 30, 1995. Cash, cash equivalents, and
short- and long-term available-for-sale investments were $153.8 million at March
30, 1996, compared with $155.2 million at December 30, 1995. Of the $153.8
million balance at March 30, 1996, $91.2 million was held by Thermo
Cardiosystems, $33.7 million by Thermo Voltek, $4.9 million by Thermedics
Detection, and the remainder by the Company and its wholly owned subsidiaries.
During the first quarter of 1996, $5.5 million of cash was provided by operating
activities and the Company expended $1.7 million on purchases of property, plant
and equipment.
In January 1996, the Company acquired the assets of Moisture Systems
Corporation and certain affiliated companies, and the stock of Rutter & Co., for
a total purchase price of $22.3 million in cash, which included the repayment of
$2.0 million of debt. In connection with these acquisitions, the Company
borrowed $15.0 million from Thermo Electron Corporation (Thermo Electron)
pursuant to a promissory note due February 1997. Thermo Electron has indicated
its intention to require the Company's indebtedness to Thermo Electron be repaid
to the extent that the Company's liquidity and cash flow permit.
In March 1996, Thermedics Detection issued shares of its common stock in
a private placement for net proceeds of $3.0 million.
In April 1996, Thermo Sentron issued 2,875,000 shares of its common
stock in an initial public offering for net proceeds of approximately $42.3
million. Thermo Sentron used part of the proceeds from the offering to repay
$12.6 million in short-term borrowings from Thermo Electron and third parties.
The Company intends, for the foreseeable future, to maintain at least
50% ownership of Thermo Cardiosystems, Thermo Voltek, and Thermo Sentron. This
may require the purchase by the Company of additional shares of common stock or,
if applicable, convertible debentures (which are then converted) of these
companies from time to time, if the number of the companies' outstanding shares
increases, whether as a result of conversion of convertible notes or exercise of
stock options issued by them, or otherwise. These or any other purchases may be
made either in the open market or directly from Thermo Cardiosystems, Thermo
Voltek, Thermo Sentron, or Thermo Electron, or pursuant to the
- A4 -
<PAGE>
conversion of all or part of Thermo Voltek's subordinated convertible notes held
by the Company. In January 1996, the Company issued 1,688,161 shares of its
common stock to Thermo Electron in exchange for 315,199 shares of Thermo Voltek
common stock and 529,965 shares of Thermo Cardiosystems common stock. In April
1996, the Company issued 299,112 shares of its common stock to Thermo Electron
in exchange for 107,500 shares of Thermo Voltek common stock and 90,000 shares
of Thermo Cardiosystems common stock. The shares of common stock were exchanged
at their respective fair market values on the dates of the transactions.
During the remainder of 1996, the Company expects to make capital
expenditures of approximately $5.0 million. The Company expects to continue to
pursue its strategy of expanding its business both through the continued
development, manufacture, and sale of new products, and through the possible
acquisition of companies that will provide additional marketing or manufacturing
capabilities and new products. The Company expects that it will finance these
acquisitions through a combination of internal funds, additional debt or equity
financing from the capital markets, or short-term borrowings from Thermo
Electron. The Company believes its existing resources are sufficient to meet the
capital requirements of its existing operations for the foreseeable future.
- A5 -
<PAGE>
Form 10-K
December 30, 1995
THERMEDICS INC.
---------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company's business can be divided into two segments: Instruments and
Other Equipment, and Biomedical Products. The Instruments and Other Equipment
segment includes Ramsey Technology, Inc., which was acquired in March 1994 and
was contributed by the Company in January 1996 to its newly formed Thermo
Sentron Inc. (Thermo Sentron) subsidiary in exchange for shares of Thermo
Sentron common stock. Thermo Sentron designs, develops, manufactures, and sells
high-speed precision weighing and inspection equipment for industrial production
and packaging lines. The Instruments and Other Equipment segment also includes
the Orion laboratory products division (Orion) of Analytical Technology, Inc.,
which was acquired in December 1995. Orion is a manufacturer of
electrochemistry, microweighing, process, and other instruments used to analyze
the chemical compositions of foods, beverages, and pharmaceuticals and detect
contaminants in environmental and high-purity water samples. The Instruments
and Other Equipment segment, through the Company's Thermedics Detection Inc.
(Thermedics Detection) subsidiary, also develops, manufactures, and markets
high-speed detection instruments, including the Alexus(R) system, a process
detection instrument used in product quality assurance applications, and the
EGIS(R) system, a security instrument used to detect explosives at airports and
other locations. Through the Company's Thermo Voltek Corp. (Thermo Voltek)
subsidiary, the Instruments and Other Equipment segment also manufactures a line
of electronic test instruments and high-voltage power conversion systems.
As part of its Biomedical Products segment, the Company's Thermo
Cardiosystems Inc. (Thermo Cardiosystems) subsidiary has developed two
implantable left ventricular-assist systems (LVAS): a pneumatic, or air-driven
system, and an electric version. In October 1994, the Company announced that the
U.S. Food and Drug Administration (FDA) granted approval for the commercial sale
of the air-driven LVAS for use as a bridge-to-transplant. With this approval,
the air-driven system became available for sale to cardiac centers throughout
the United States. Thermo Cardiosystems received the European Conformity Mark
(CE Mark) for commercial sale of the air-driven LVAS in all European Community
countries in April 1994, and, in August 1995, received the same approval for the
electric system. The electric version of the LVAS is currently being used in the
U.S. in clinical trials for
- A6 -
<PAGE>
patients awaiting heart transplants and, late in 1995, the FDA approved the
protocol for conducting clinical trials of the electric LVAS as an alternative
to heart transplant. Thermo Cardiosystems' electric LVAS is being used in
Europe as a bridge-to-transplant and as an alternative to heart transplant.
According to terms set by the FDA, no profit can be earned from the sale of an
LVAS until the FDA has approved the device for commercial sale. With FDA
approval, the Company began earning a profit on the sale of its air-driven LVAS
in the fourth quarter of 1994. In October 1994, Thermo Cardiosystems announced a
price increase in the U.S. for its air-driven LVAS that was phased in during a
six-month period that more than doubled the average price of the air-driven
LVAS. The Company also develops and manufactures enteral nutrition delivery
systems and a line of medical-grade polymers, used in medical disposables and
nonmedical, industrial applications, including safety glass and automotive
coatings.
Approximately 27% of the Company's revenues originate outside of the
U.S. 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 affecting the
relationship between the U.S. dollar and foreign currencies. Where appropriate,
the Company uses forward contracts to reduce its exposure to currency
fluctuations.
In October 1995, the Financial Accounting Standards Board (FASB) issued
an exposure draft of a Proposed Statement of Financial Accounting Standards,
"Consolidated Financial Statements: Policy and Procedures" (Proposed
Statement). The Proposed Statement would establish new rules for how
consolidated financial statements should be prepared. If the Proposed Statement
is adopted, there could be significant changes in the way the Company records
certain transactions of its controlled subsidiaries, including the following:
(i) any sale of the stock of a subsidiary that does not result in a loss of
control would be accounted for as a transaction in equity of the consolidated
entity with no gain or loss being recorded and (ii) under certain circumstances
acquisitions could be structured to significantly reduce the goodwill that is
recorded and consequently reduce the Company's future goodwill amortization
associatedwith the acquisition. The Company typically acquires technology
companies which are often characterized by significant amounts of goodwill. In
addition, under the Proposed Statement, a company that has made certain equity
investments of generally less than 20% ownership would record a gain (or loss)
upon increasing its investment level to the point of exerting "significant
influence," generally 20% or higher.
The FASB conducted a hearing concerning the Proposed Statement in
February 1996, at which Thermo Electron, along with other major companies and
many of the major accounting firms and accounting associations, expressed their
disagreement with
- A7 -
<PAGE>
various parts of the Proposed Statement. The FASB expects to issue a final
Statement by June 30, 1996, which could become effective for fiscal years
beginning after December 15, 1996.
RESULTS OF OPERATIONS
1995 Compared With 1994
-----------------------
Total revenues in 1995 were $175.8 million, compared with $155.1 million in
1994. Instruments and Other Equipment segment revenues increased 10% to $136.7
million in 1995 from $124.1 million in 1994. Revenues increased $17.4 million
due to the inclusion of sales for a full year from Thermo Sentron, which was
acquired in March 1994. Revenues from Thermo Voltek increased $12.7 million, due
to the inclusion of an additional $7.2 million
in revenues from businesses acquired in 1994 and 1995, an increase of $3.1
million in revenues from Comtest due primarily to the introduction of a new
product line in 1995, and an increase of $2.3 million in revenues from Keytek
due to greater demand. Revenues at Thermedics Detection were $28.0 million in
1995, compared with $50.3 million in 1994. Revenues from Thermedics Detection's
process detection instruments declined to $16.2 million in 1995 from $38.0
million in 1994. This decline is due to a decrease in demand from Thermedics
Detection's principal customer, which has substantially completed its deployment
of Alexus product quality assurance systems. While the Company has expanded its
customer base and continues to develop Alexus upgrades and new applications for
its process detection technology in the food and beverage market, no assurance
can be
given that the Company will be able to significantly broaden the market for its
process detection systems.
Revenues from Thermedics Detection's EGIS explosives-detection system
declined to $8.0 million in 1995 from $10.1 million in 1994. The Company's sales
of the EGIS system have been made primarily to government entities outside of
the U.S. During 1993 and 1994, large orders from the U.K. and German governments
accounted for a significant portion of EGIS sales. These orders have now been
filled. Demand for this highly specialized product will vary widely over time in
a particular country, and among different countries, due to many factors beyond
the control of the Company, such as budgetary constraints and social and
political concerns about security. Due to the nature of demand for the EGIS
system, future sales levels will depend, to a significant extent, upon the
Company's ability to obtain large orders from one or more government entities.
Biomedical Products segment revenues increased 26% to $39.0 million in
1995 from $31.0 million in 1994. Revenues from Thermo Cardiosystems increased by
$10.2 million to $20.6 million due in part to an increase in the price of the
LVAS. Revenues also increased due to a 43% increase in the number of air-driven
and electric LVAS units shipped during 1995 compared with 1994. The increase in
revenues from Thermo Cardiosystems was partially
- A8 -
<PAGE>
offset by a decline of $2.8 million in revenues from Scent Seal fragrance
samplers. In June 1995, the Company entered into an agreement granting an
exclusive license to all of its patents and know-how relating to the Scent Seal
fragrance samplers to a third party in consideration for royalty payments on
future sales by the licensee. The Company recorded royalty income of $197,000 in
1995.
The gross profit margin was 45% in 1995, compared with 44% in 1994. The
gross profit margin for the Instruments and Other Equipment segment was 43% in
1995, compared with 44% in 1994. This decline was due primarily to lower gross
margins at Thermedics Detection as a result of a lower sales volume and, to a
lesser extent, the inclusion of lower-margin research and development contract
revenues. In addition, Thermo Voltek's gross profit margin decreased to 48% in
1995 from 49% in 1994 due primarily to higher European sales in one product
line, which has lower margins due to competitive pricing pressures. These
decreases were offset in part by improved gross profit margins at Thermo Sentron
due to a reduction in operating expenses. The gross profit margin for the
Biomedical Products segment was 49% in 1995, compared with 42% in 1994,
reflecting higher margins at Thermo Cardiosystems resulting from the LVAS price
increase and, to a lesser extent, the increase in sales volume and improvements
in manufacturing efficiencies.
Selling, general and administrative expenses as a percentage of revenues
decreased to 27% in 1995 from 28% in 1994. This decline results primarily from
lower expenses as a percentage of revenues at Thermo Cardiosystems as a result
of a higher sales volume in 1995 and, to a lesser extent, a reduction in
operating expenses at Thermo Sentron. These improvements were partially offset
by higher expenses as a percentage of revenues at Thermedics Detection due to a
lower sales volume in 1995. Research and development expenses as a percentage of
revenues decreased to 6.3% in 1995 from 6.7% in 1994 due primarily to lower
expenses as a percentage of revenues at Thermo Cardiosystems as a result of an
increase in total revenues.
Interest income increased to $9.1 million in 1995 from $7.3 million in
1994 due to higher prevailing interest rates in 1995. Interest expense increased
to $3.7 million in 1995 from $3.2 million in 1994 as a result of borrowings by
Thermo Sentron's and Thermo Voltek's foreign subsidiaries, offset in part by a
decrease in interest expense due to conversions of subordinated convertible
obligations.
Gain on issuance of stock by subsidiary of $3.5 million in 1995 resulted
from the conversion of $9.1 million principal amount of Thermo Voltek's 3 3/4%
subordinated convertible debentures.
- A9 -
<PAGE>
The effective tax rate was 32% in 1995, compared with 38% in 1994. The
effective tax rate in 1995 was below the statutory federal income tax rate due
primarily to the nontaxable gain on issuance of stock by subsidiary and the
reduction of the valuation allowance no longer required, offset in part by state
income taxes. The effective tax rate in 1994 was higher than the statutory
federal income tax rate due primarily to state income taxes.
Minority interest expense increased to $4.5 million in 1995 from $1.2
million in 1994 due to higher net income at the Company's 52%-owned Thermo
Cardiosystems subsidiary and, to a lesser extent, the Company's 50%-owned Thermo
Voltek subsidiary.
1994 Compared With 1993
-----------------------
Total revenues in 1994 were $155.1 million, compared with $80.2 million in
1993, an increase of 93%. Instruments and Other Equipment segment revenues more
than doubled in 1994 to $124.1 million from $60.1 million in 1993. This
increase reflects the inclusion of $50.1 million in revenues from Thermo
Sentron, which was acquired in March 1994, $4.6 million in additional revenues
from Comtest, which was acquired by Thermo Voltek in August 1993, and an
increase of $4.1 million in revenues from the Company's EGIS
explosives-detection systems. Process detection instrument sales, principally to
one customer, were $38.0 million in 1994, compared with $34.4 million in 1993.
Biomedical Products segment revenues increased 54% to $31.0 million in
1994 from $20.1 million in 1993. The improvement is primarily the result of a
$6.9 million increase in sales of Thermo Cardiosystems' LVAS to $10.4 million
and additional revenues of $3.0 million from Scent Seal fragrance samplers,
which were introduced in the first quarter of 1993.
The Company's gross profit margin remained relatively unchanged at 44%
in 1994 and 43% in 1993. The gross profit margin for the Instruments and Other
Equipment segment remained unchanged at 44% in both 1994 and 1993. Improved
efficiencies in the worldwide service organization for process detection
instruments and, to a lesser extent, improved margins at Universal Voltronics
as a result of increased commercial sales relative to lower-margin government
contract revenues were offset by the inclusion of lower-margin Thermo Sentron
revenues. The gross profit margin for the Biomedical Products segment was 42% in
1994, compared with 38% in 1993, reflecting higher margins derived from Thermo
Cardiosystems' LVAS due to higher sales, manufacturing efficiencies, and the
initial impact of the price increase for the air-driven system which took effect
in the fourth quarter of 1994.
- A10 -
<PAGE>
Operating income, before the inclusion of Thermo Cardiosystems' results,
was $15.3 million in 1994, compared with $10.2 million in 1993. This
improvement results primarily from higher sales, which resulted in higher gross
profit. Including Thermo Cardiosystems' operating losses of $0.9 million in 1994
and $3.2 million in 1993, the Company reported operating income of $14.3 million
in 1994, compared with $7.1 million in 1993. Thermo Cardiosystems' lower
operating loss resulted primarily from an increased gross profit margin on
higher revenues, partially offset by increased expenses to develop and market
its LVAS.
Interest income increased to $7.3 million in 1994 from $6.1 million in
1993. This increase is due to higher average invested amounts derived from the
issuance of $34.5 million principal amount of 3 3/4% subordinated convertible
debentures by Thermo Voltek in November 1993, and the issuance of $33.0 million
principal amount of noninterest-bearing subordinated convertible debentures by
Thermo Cardiosystems in January 1994. This increase was offset in part by cash
expended for the acquisition of Thermo
Sentron in March 1994. Interest expense increased to $3.2 million in 1994 from
$2.4 million in 1993 due to the issuance of the 3 3/4% subordinated convertible
debentures by Thermo Voltek, partially offset by conversions of the Company's 6
1/2% subordinated convertible debentures.
Other income includes $635,000 in 1994 relating to foreign currency
transaction gains.
The effective tax rate was 38% in 1994 and 40% in 1993. These rates
exceed the statutory federal income tax rate due primarily to state income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, including cash, cash equivalents, and short-term
available-for-sale investments, was $110.1 million at December 30, 1995,
compared with $128.3 million at December 31, 1994. Cash, cash equivalents, and
short- and long-term available-for-sale investments were $155.2 million at
December 30, 1995, compared with $154.1 million at December 31, 1994. Of the
$155.2 million balance at December 30, 1995, $90.5 million was held by Thermo
Cardiosystems, $34.7 million by Thermo Voltek, and the remainder by the Company
and its wholly owned subsidiaries. During 1995, $14.9 million of cash was
provided by operating activities and the Company expended $4.4 million on
purchases of property, plant and equipment.
In December 1995, the Company acquired Orion for approximately $52.7
million in cash, which included the repayment of $8.6 million of debt, subject
to a post-closing adjustment. To partially finance this acquisition, the Company
borrowed $38.0
- A11 -
<PAGE>
million from Thermo Electron pursuant to a promissory note due December 1996,
and bearing interest at the Commercial Paper Composite Rate plus 25 basis
points. The balance of the purchase price was funded from the Company's working
capital. In January 1996, the Company acquired the assets of Moisture Systems
Corporation, based in Hopkinton, Massachusetts, and certain affiliated
companies, as well as Netherlands-based Rutter & Co., for a total purchase price
of $20.5 million in cash and the assumption of certain liabilities. In
connection with these acquisitions, the Company borrowed $15.0 million from
Thermo Electron pursuant to a promissory note due February 1997, and bearing
interest at the Commercial Paper Composite Rate plus 25 basis points. Thermo
Electron has indicated its intention to require the Company's indebtedness to
Thermo Electron be repaid to the extent the Company's liquidity and cash flow
permit. On February 1, 1996, Thermo Sentron filed a registration statement under
the Securities Act of 1933 with the Securities and Exchange Commission covering
shares of common stock to be offered in its initial public offering.
The Company intends, for the foreseeable future, to maintain at least
50% ownership of Thermo Cardiosystems, Thermo Voltek and Thermo Sentron. This
may require the purchase by the Company of additional shares of common stock or,
if applicable, convertible debentures (which are then converted) of these
companies from time to time, if the number of the companies' outstanding shares
increases, whether as a result of conversion of convertible notes or exercise of
stock options issued by them, or otherwise. These or any other purchases may be
made either in the open market or directly from Thermo Cardiosystems, Thermo
Voltek or Thermo Sentron, or pursuant to the conversion of all or part of Thermo
Voltek's subordinated convertible notes held by Thermedics. During 1995, the
Company expended $179,000 to purchase shares of Thermo Voltek common stock on
the open market.
In 1996, the Company expects to make capital expenditures of
approximately $6.6 million. The Company expects to continue to pursue its
strategy of expanding its business both through the continued development,
manufacture, and sale of new products, and through the possible acquisition of
companies that will provide additional marketing or manufacturing capabilities
and new products. The Company expects that it will finance these acquisitions
through a combination of internal funds, additional debt or equity financing
from the capital markets, or short-term borrowings from Thermo Electron. The
Company believes its existing resources are sufficient to meet the capital
requirements of its existing operations for the foreseeable future.
- A12 -
<PAGE>
SELECTED FINANCIAL INFORMATION
(In thousands
except per share amounts) 1995(a) 1994(b) 1993(c) 1992(d) 1991
- ------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Revenues $175,754 $155,111 $ 80,220 $ 45,778 $ 32,295
Net income 15,121 10,837 6,670 2,467 1,613
Earnings per share .45 .33 .22 .09 .06
BALANCE SHEET DATA:
Working capital $110,113 $128,330 $133,003 $ 63,205 $ 78,359
Total assets 368,150 291,567 237,487 146,663 128,880
Long-term obligations 45,201 82,551 59,130 33,820 34,315
Common stock of subsidiary
subject to redemption - - - 5,468 5,486
Shareholders' investment 167,010 131,765 117,451 69,323 73,510
(a) Reflects the December 1995 acquisition of the Orion laboratory products
division of Analytical Technology, Inc.
(b) Reflects the January 1994 issuance of $33.0 million principal amount of
noninterest-bearing subordinated convertible debentures by Thermo
Cardiosystems Inc. and the March 1994 acquisition of Ramsey Technology,
Inc.
(c) Reflects the May 1993 public offering of the Company's common stock for net
proceeds of $30.0 million, the August 1993 acquisition of Comtest
Instrumentation B.V. and Comtest Limited, and the November 1993 issuance of
$34.5 million principal amount of 3 3/4% subordinated convertible
debentures by Thermo Voltek Corp.
(d) Reflects the June 1992 acquisition of KeyTek Instrument.
- A13 -
<PAGE>
Form 10-Q
March 30, 1996
THERMO CARDIOSYSTEMS INC.
-------------------------
Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------
Results of Operations
- ---------------------
OVERVIEW
The Company is a leader in the research, development, and manufacture of
both an air-driven and an electric implantable left ventricular-assist system
(LVAS). The Company is also the only company with U.S. Food and Drug
Administration (FDA) approval to commercially market an implantable LVAS. Each
system is designed to perform substantially all or part of the pumping function
of the left ventricle of the natural heart for patients suffering from
cardiovascular disease. Unlike total artificial heart systems, which require
removal of the natural heart, an LVAS allows the natural heart to be left in
place, preserving the heart's biological control mechanisms.
In October 1994, the Company announced that the FDA granted approval for
the commercial sale in the U.S. of the air-driven LVAS for use as a bridge to
heart transplant. With this approval, the air-driven system is available for
sale to cardiac centers throughout the U.S. The electric version of the LVAS,
which is currently being used in clinical trials in the U.S. for patients
awaiting heart transplants, received the European Conformity Mark (CE Mark) in
August 1995, allowing commercial sale in all European Community countries. The
air-driven LVAS was granted the CE Mark in early 1994. In late 1995, the FDA
approved the protocol for conducting clinical trials of the electric LVAS as an
alternative to heart transplant in the U.S. In April 1996, the first implant
under this clinical trial was performed using the LVAS as an alternative for
nontransplant candidates. Until the Company's electric LVAS receives FDA
commercial approval, sales will fluctuate depending upon the number of implants
performed in ongoing studies at approved clinical sites and the number of
implementation programs sold.
In general, a profit cannot be earned from the sale of an LVAS until
approval of the device for commercial sale has been received from the FDA. Until
such approval is obtained, only the direct and indirect costs of the LVAS can be
recovered, which are included in the Company's revenues. With the FDA's approval
of the air-driven LVAS, the Company began earning a profit on the sale of such
systems in the fourth quarter of 1994.
- A14 -
<PAGE>
RESULTS OF OPERATIONS
First Quarter 1996 Compared With First Quarter 1995
---------------------------------------------------
Revenues in the first quarter of 1996 increased 52% to $6,693,000 from
$4,392,000 in the first quarter of 1995, primarily due to a 49% increase in the
number of air-driven and electric LVAS units shipped during the first quarter of
1996. Approximately 10% of the increase in revenues was a result of a price
increase that was phased in during the fourth quarter of 1994 and the first half
of 1995.
The gross profit margin increased to 64% in the first quarter of 1996 from
56% in the first quarter of 1995, primarily due to the increase in sales volume,
improvements in manufacturing efficiencies and, to a lesser extent, the price
increase.
Selling, general and administrative expenses as a percentage of revenues
decreased to 19% in the first quarter of 1996 from 22% in the first quarter of
1995 due to the higher sales volume in 1996. Research and development expenses
of $862,000 and $824,000 in the first quarter of 1996 and 1995, respectively,
reflect the Company's continued development of the LVAS.
Interest income increased to $1,362,000 in the first quarter of 1996 from
$1,197,000 in the first quarter of 1995 as a result of higher investment
balances.
The effective tax rates were 32% and 35% in the first quarter of 1996 and
1995, respectively. These rates were below the combined statutory federal and
state income tax rate due to the recognition of certain state tax benefits. As
of March 30, 1996, there are no state tax benefits remaining.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, including cash, cash equivalents, and short-term
available-for-sale investments, was $72,149,000 at March 30, 1996, compared with
$60,383,000 at December 30, 1995. Cash, cash equivalents, and short- and
long-term available-for-sale investments were $91,160,000 at March 30, 1996,
compared with $90,474,000 at December 30, 1995. During the first quarter of
1996, $1,108,000 of cash was provided by operating activities and the Company
expended $344,000 on purchases of machinery, equipment and leasehold
improvements.
During the remainder of 1996, the Company expects to make capital
expenditures of approximately $1,200,000, principally for manufacturing and
tooling equipment and leasehold improvements for the continued development and
production of the Company's LVAS. The Company believes that it has adequate
resources to meet its financial needs for the foreseeable future.
- A15 -
<PAGE>
Form 10-K
December 30, 1995
THERMO CARDIOSYSTEMS INC.
-------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company is a leader in the research, development, and manufacture of both
an air-driven and an electric implantable left ventricular-assist system (LVAS).
The Company is also the only company with U.S. Food and Drug Administration
(FDA) approval to commercially market an implantable LVAS. Each system is
designed to perform substantially all or part of the pumping function of the
left ventricle of the natural heart for patients suffering from cardiovascular
disease. Unlike total artificial heart systems, which require removal of the
natural heart, an LVAS allows the natural heart to be left in place, preserving
the heart's biological control mechanisms.
In October 1994, the Company announced that the FDA granted approval for
the commercial sale in the U.S. of the air-driven LVAS for use as a
bridge-to-transplant. With this approval, the air-driven system became available
to cardiac centers throughout the United States. In April 1994, the Company
received the European Conformity Mark (CE Mark) for commercial sale of the
air-driven LVAS in all European Community countries. Until the Company's
electric LVAS receives FDA commercial approval, sales of the electric LVAS will
fluctuate depending upon the number of implants performed in ongoing studies at
approved clinical sites and the number of implementation programs sold. The
electric version of the LVAS is currently being used in the U.S. in clinical
trials for patients awaiting heart transplants and, in late 1995, the FDA
approved the protocol for conducting clinical trials of the electric LVAS as an
alternative to heart transplant. In August 1995, the Company received the CE
Mark allowing commercial sale of the electric LVAS in European Community
countries. It is being used in Europe as both a bridge-to-transplant and as an
alternative to heart transplant.
In general, a profit cannot be earned from the sale of an LVAS until
approval of the device has been received from the FDA for commercial sale.
Until such approval is obtained, only the direct and indirect costs of the LVAS
can be recovered, which are included in the Company's revenues. With the FDA's
approval of the air-driven LVAS, the Company began earning a profit on the sale
of such systems in the fourth quarter of 1994. In October 1994, the Company
announced a price increase in the U.S. for its air-driven LVAS that was phased
in during a six-month period and that more than doubled the average price of the
air-driven LVAS.
- A16 -
<PAGE>
The Company derives its revenues from two types of sales:
implementation programs and subsequent implants. Implementation programs
consist of initial sales to new clinical centers or foreign distributors, as
well as sales of a new system, such as the electric LVAS, to an existing
customer. Revenues recorded from subsequent implants consist of sales to an
existing customer other than the initial sale of the implementation program. In
general, the Company receives greater revenues from the sale of an
implementation program than from a subsequent implant.
RESULTS OF OPERATIONS
1995 Compared With 1994
-----------------------
Revenues almost doubled in 1995 to $20,593,000 from $10,409,000 in 1994.
Revenues in 1995 increased approximately 47% as a result of the price increase
that was phased in during the fourth quarter of 1994 and the first two quarters
of 1995. Revenues also increased due to a 43% increase in the number of
air-driven and electric LVAS units shipped during 1995 compared with 1994. The
number of implementation programs sold in 1995 were comparable to those sold in
1994.
The gross profit margin increased to 57% in 1995 from 51% in 1994,
primarily due to the price increase and, to a lesser extent, the increase in
sales volume and improvements in manufacturing efficiencies. The Company will
continue to be unable to earn a profit on sales of the electric LVAS until FDA
approval of that system is obtained.
The Company recorded operating income of $4,313,000 in 1995, compared
with an operating loss of $944,000 in 1994. This improvement resulted primarily
from an increased gross profit margin on higher revenues, partially offset by
increased expenses to market and distribute the Company's LVAS.
Interest income increased to $5,117,000 in 1995 from $4,147,000 in 1994,
principally due to higher prevailing interest rates in 1995 compared with 1994.
Interest expense decreased to $274,000 in 1995 from $375,000 in 1994, primarily
as a result of lower amortization of deferred issuance costs associated with the
Company's noninterest-bearing subordinated convertible debentures due to the
conversion of $21,358,000 principal amount of these debentures in 1995.
The effective tax rate decreased to 28% in 1995 from 35% in 1994,
primarily due to the reversal of the tax valuation allowance that was no longer
required.
1994 Compared With 1993
-----------------------
Revenues in 1994 were $10,409,000, compared with $3,524,000 in 1993. Revenues
increased in 1994 principally due to an increase in the number of implementation
programs sold. Thirty-one
- A17 -
<PAGE>
implementation programs were sold in 1994, compared with ten implementation
programs sold in 1993. Eight implementation programs, or 26% of the total
programs sold in 1994, were a
result of FDA commercial approval of the air-driven LVAS. The increase in
revenues also reflects an increase in the number of subsequent implants,
primarily of the air-driven LVAS, performed at existing sites in 1994. Of the
total increase in revenues in the fourth quarter of 1994, approximately $250,000
was a result of the price increase that became effective during that period.
The gross profit margin increased to 51% in 1994 from 43% in 1993,
primarily due to the increase in sales volume, improvements in manufacturing
efficiencies, and the first phase of the price increase for the air-driven
system, which became effective in the fourth quarter of 1994.
The Company recorded an operating loss of $944,000 in 1994, compared
with a loss of $3,174,000 in 1993. The lower operating loss resulted primarily
from an increased gross profit margin on higher revenues, partially offset by
increased expenses to develop and market the Company's LVAS. The Company
recorded operating income of $384,000 in the fourth quarter of 1994.
Interest income increased to $4,147,000 in 1994 from $3,508,000 in 1993,
primarily as a result of higher average invested amounts derived from the
Company's issuance of $33,000,000 principal amount of noninterest-bearing
subordinated convertible debentures in January 1994. Interest expense increased
to $375,000 in 1994 from $94,000 in 1993. Interest expense relating to the
amortization of deferred issuance costs associated with the debentures issued in
January 1994 more than offset the decrease in interest expense due to the
conversion of $1,920,000 principal amount of a 4% subordinated convertible note
in the second half of 1993.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, including cash, cash equivalents, and short-term
available-for-sale investments, was $60,383,000 at December 30, 1995, compared
with $44,121,000 at December 31, 1994. Cash, cash equivalents, and short- and
long-term available-for-sale investments were $90,474,000 at December 30, 1995,
compared with $84,389,000 at December 31, 1994. During 1995, $3,251,000 of cash
was provided by operating activities and the Company expended $1,063,000 on
purchases of machinery, equipment and leasehold improvements.
In 1996, the Company expects to make capital expenditures of
approximately $1,500,000, principally for manufacturing and tooling equipment
and leasehold improvements for the continued development and production of the
Company's LVAS. The Company believes it has adequate resources to meet its
financial needs for the foreseeable future.
- A18 -
<PAGE>
SELECTED FINANCIAL INFORMATION
(In thousands except
per share amounts) 1995(a) 1994(b) 1993 1992(c) 1991
-------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Revenues $ 20,593 $10,409 3,524 $ 2,441 $ 1,975
Net income (loss) 6,925 1,899 404 18 (794)
Earnings (loss)
per share .28 .08 .02 - (.05)
BALANCE SHEET DATA:
Working capital $ 60,383 $44,121 $16,059 $15,118 $22,253
Total assets 106,186 94,864 59,838 59,072 43,838
Long-term obligations 11,642 33,450 600 2,520 29,000
Common stock subject
to redemption - - - 5,468 5,486
Shareholders'
investment 91,339 58,357 57,978 50,038 8,563
(a) Reflects conversion of $21,358,000 principal amount of
noninterest-bearing subordinated convertible debentures.
(b) Reflects the January 1994 issuance of $33,000,000 principal amount of
noninterest-bearing subordinated convertible debentures due 1997.
(c) Reflects a public offering of the Company's common stock for net
proceeds of $14,359,000 and conversion of $26,000,000 principal amount
of 6% subordinated convertible notes.
- A19 -
<PAGE>
Form 10-Q
March 30, 1996
THERMO SENTRON INC.
-------------------
Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------
Results of Operations
- ---------------------
OVERVIEW
The Company designs, develops, manufactures, and sells high-speed
precision-weighing and inspection equipment for industrial production and
packaging lines. The Company serves two principal markets: packaged goods and
bulk materials. The Company's products for the packaged-goods market include a
broad line of checkweighing equipment and metal detectors that can be integrated
at various stages in production lines for process control and quality assurance.
These products are sold primarily to customers in the food processing, baking,
and pharmaceutical industries. Products in the Company's bulk-materials product
line include conveyor-belt scales, solid-level measurement and
conveyor-monitoring devices, and sampling systems. These products are sold
primarily to customers in the mining and material-processing industries, as well
as to electric utilities, chemical, and other manufacturing companies.
A substantial portion of the Company's sales are derived from sales of
products outside the United States, through exports and sales by the Company's
foreign subsidiaries. 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. The
Company expects an increase in the percentage of its revenues derived from
international operations.
RESULTS OF OPERATIONS
First Quarter 1996 Compared With First Quarter 1995
---------------------------------------------------
Revenues were $16,697,000 in the first quarter of 1996, compared with
$16,457,000 in the first quarter of 1995. The increase in revenues reflects an
increase in international sales, as well as the inclusion of $991,000 in
revenues from Hitech, which was acquired in January 1996. These increases were
offset in part by lower U.S. product sales due to a decrease in demand and a
$786,000 decline in revenues due to the transfer of a product line, which the
Company had ceased to distribute upon its acquisition by Thermedics, to Thermo
Instrument Systems Inc. in 1995.
The gross profit margin was unchanged at 39% in the first quarter of
1996 and 1995.
- A20 -
<PAGE>
Selling, general and administrative expenses as a percentage of revenues
was unchanged at 27% in the first quarter of 1996 and 1995. Research and
development expenses as a percentage of revenues was relatively unchanged at
3.4% in the first quarter of 1996, compared with 3.1% in the first quarter of
1995.
The effective tax rate was 40% in the first quarter of 1996, compared
with 38% in the first quarter of 1995. These rates exceed the statutory federal
income tax rate due primarily to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was negative $7,495,000 at March 30, 1996, compared with
negative $853,000 at December 30, 1995. Included in working capital are cash and
cash equivalents of $1,873,000 at March 30, 1996, compared with $3,012,000 at
December 30, 1995.
During the first quarter of 1996, $2,447,000 of cash was used in
operating activities. Cash flow from operating activities was primarily affected
by an increase in accounts receivable and other current assets. Accounts
receivable increased due to a significant portion of first quarter sales
occuring in March 1996, as well as a lower accounts receivable balance at
year-end 1995.
In January 1996, the Company acquired Hitech for approximately $4.5
million in cash. Additionally, approximately $2.6 million of the purchase price
for the Endress + Hauser product line acquisition was advanced to a third party
escrow account as of March 30, 1996. The Hitech acquisition was financed with a
credit facility denominated in British pounds sterling, and the product line
acquisition was financed with an advance from Thermo Electron. The short-term
borrowing and advance from Thermo Electron were repaid in April 1996.
In April 1996, the Company sold 2,875,000 shares of its common stock in
an initial public offering at $16.00 per share for net proceeds of approximately
$42.3 million. The Company used part of the proceeds to repay $8.0 million in
short-term borrowings and $4.6 million in advances from Thermo Electron.
During the remainder of 1996, the Company plans to expend approximately
$825,000 for property, plant and equipment. Although the Company expects to have
positive cash flow from its existing operations, the Company anticipates it may
require significant amounts of cash to pursue the acquisition of complementary
businesses. The Company expects that it would seek to finance any such
acquisitions through a combination of internal funds, additional equity
financing or convertible debt financing from the capital markets and/or
short-term borrowings from Thermedics or Thermo Electron. The Company believes
that its
- A21 -
<PAGE>
existing resources, the proceeds from its initial public offering, and cash
provided by operations are sufficient to meet the capital requirements of its
existing businesses for the foreseeable future.
- A22 -
<PAGE>
Prospectus
March 27, 1996
THERMO SENTRON INC.
-------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company designs, develops, manufactures and sells high-speed precision
weighing and inspection equipment for industrial production and packaging lines.
The Company serves two principal markets: packaged goods and bulk materials.
The Company's products for the packaged goods market include a broad line of
checkweighing equipment and metal detectors that can be integrated at various
stages in production lines for process control and quality assurance. These
products, which accounted for approximately 35% of the Company's revenues for
the twelve months ended December 30, 1995, are sold primarily to customers in
the food processing and pharmaceutical industries. Products in the Company's
bulk materials product line include conveyor belt scales, solid level
measurement and conveyor monitoring devices and sampling systems. These
products, which accounted for approximately 65% of the Company's revenues for
the twelve months ended December 30, 1995, are sold primarily to customers in
the mining and material processing industries, as well as electric utilities,
chemical and other manufacturing companies.
Prior to March 16, 1994, the Company was operated as a wholly owned
subsidiary of Baker Hughes Incorporated ("Baker Hughes"). During the time that
Baker Hughes owned the Company, the Company's European subsidiaries had a high
cost structure relative to their sales. This high cost structure resulted in
losses at the Company's European Subsidiaries which could not be offset with
income from the U.S. and other sources for tax purposes. Consequently, the
Company's tax rate was significantly higher than statutory rates. Shortly after
its purchase by Thermedics in March 1994, the Company's management initiated a
restructuring program to reduce its costs. This restructuring involved reducing
the Company's manufacturing overhead through outsourcing of noncritical
manufacturing, as well as staff reductions, particularly at its European
subsidiaries. During the twelve months ended December 30, 1995, the Company's
foreign operations contributed levels of income before provision for taxes
comparable to those of the Company's domestic operations. In connection with
the acquisition of the Company by Thermedics, the Company ceased to distribute a
line of alloy analyzers (the
- A23 -
<PAGE>
"TN product line"). This distributorship was transferred to Thermo Instrument
Systems Inc., a majority-owned subsidiary of Thermo Electron, in January 1995
for book value. The Company recorded $3.1 million of revenues from the TN
product line in the twelve months ended December 31, 1994.
Subsequent to its acquisition by Thermedics, the Company made two
acquisitions: Tecno Europa Elettromeccanica S.r.l. ("Tecno Europa"), an Italian
manufacturer of precision weighing equipment with expertise in pharmaceutical
applications acquired by the Company in July 1994 for $0.9 million in cash and
the assumption of $0.6 million in debt; and Hitech Electrocontrols Limited
("Hitech"), a U.K.-based manufacturer of metal detection equipment and specialty
checkweighing equipment focusing on the bakery industry acquired by the Company
in January 1996 for $4.5 million in cash. At the time of acquisition, Tecno
Europa and Hitech had annual sales of approximately $4.5 million and $3.8
million, respectively. Both of these acquisitions were accounted for using the
purchase method of accounting. The Company's strategy is to continue to acquire
businesses and products that can be sold and serviced through its extensive
global distribution network.
A portion of the Company's revenues are generated from large orders for the
Company's sampling systems. This equipment has a high percentage of
subcontracted costs, particularly for steel and steel fabrication, which results
in lower gross profit margins than the Company's other products. The timing of
the sales of this equipment can lead to variability in the Company's quarterly
revenues and income. In addition, approximately 59% of the Company's sales are
derived from sales of products outside the United States, through exports and
sales by the Company's foreign subsidiaries. The Company expects an increase in
the percentage of its revenues derived from international operations. Although
the Company seeks to charge its customers in the same currency as its operating
costs, the Company's financial performance and competitive position can be
affected by currency exchange rate fluctuations affecting the relationship
between U.S. dollar and foreign currencies.
The following table sets forth the periods included in Management's
Discussion and Analysis of Financial Condition and Results of Operations. As
noted above, the Company was acquired by Thermedics on March 16, 1994. For
purposes of Management's Discussion and Analysis of Financial Condition and
Results of Operations for the twelve months ended December 31, 1994, the pre-
acquisition period from January 1, 1994 through March 15, 1994 has been combined
with the post-acquisition period from March 16, 1994 through December 31, 1994.
The principal difference in the basis of accounting between the Predecessor and
the Company relates to the cost in excess of net assets of acquired companies,
the amortization of which approximates $860,000 per year.
- A24 -
<PAGE>
Predecessor The Company
-------------------------- ---------------------------------
Twelve Months Ended
December 31, 1994
-------------------
Fiscal Year Jan 1, 1994 Mar 16, 1994 Fiscal Year
Ended Through Through Ended
Sept 30, 1993 Mar 15, 1994 Dec 31, 1994 Total Dec 30, 1995
------------- ------------ ------------ ----- ------------
STATEMENT OF
OPERATIONS
DATA:
Revenues $58,641 $11,016 $50,116 $61,132 $67,474
------- ------- ------- ------- -------
Costs and
Operating
Expenses:
Cost of
Revenues 38,285 7,525 32,680 40,205 41,017
Selling,
general and
administrative
expenses 17,210 3,616 13,540 17,156 17,371
Research and
development
expenses 1,028 311 1,228 1,539 1,920
------- ------- ------- ------- ------
56,523 11,452 47,448 58,900 60,308
------- ------- ------- ------- ------
Operating
Income (loss) 2,118 (436) 2,668 2,232 7,166
Interest Income 96 - 25 25 150
Interest Expense - - (572) (572) (904)
Other Income
(Expense), Net - 635 635 (37)
------- ------- ------- ------- ----
Income (Loss)Before
Provision for
Income Taxes 2,214 (436) 2,756 2,320 6,375
Provision for
Income Taxes 1,223 74 1,496 1,570 2,545
------- ------- ------- ------- -----
Net Income (Loss) $ 991 $ (510) $ 1,260 $ 750 $ 3,830
======= ======= ======= ======= =======
- A25 -
<PAGE>
Results of Operations
Twelve Months Ended December 30, 1995 Compared With Twelve Months Ended December
- --------------------------------------------------------------------------------
31, 1994
- --------
Revenues were $67.5 million in the twelve months ended December 30, 1995,
compared with $61.1 million in the twelve months ended December 31, 1994, an
increase of $6.4 million or 10%. Revenues increased $2.8 million due primarily
to the inclusion of revenues for the entire 1995 period from Tecno Europa, which
was acquired in July 1994. In addition, revenues increased in 1995 as a result
of $3.6 million in higher sales of the Company's packaged goods systems due to
increased demand, the inclusion of a $1.8 million sampling system order for a
customer in Taiwan and a $1.1 million increase due to the weakness of the U.S.
dollar in relation to foreign currencies. These increases were partially offset
by a $3.1 million decline in revenues due to the transfer of the TN product
line. See "Overview."
The gross profit margin increased to 39% in the twelve months ended
December 30, 1995 from 34% in the twelve months ended December 31, 1994, due
primarily to a reduction in workforce and other cost savings as a result of the
restructuring of the Company's operations during 1994, after the Company was
acquired by Thermedics.
Selling, general and administrative expenses as a percentage of revenues
decreased to 26% in the twelve months ended December 30, 1995 from 28% in the
twelve months ended December 31, 1994 due to the increased revenues in 1995 and
a reduction in general and administrative expenses as part of the restructuring
of the Company's operations in 1994. These decreases were offset in part by an
increase in amortization of cost in excess of net assets of acquired companies
during the twelve months ended December 30, 1995 as a result of the acquisition
of the Company by Thermedics. Research and development expenses as percentage
of revenues increased to 2.8% in the twelve months ended December 30, 1995 from
2.5% in the twelve months ended December 31, 1994 due to the higher rate of
research and development expenditures carried out by Tecno Europa.
Interest expense increased to $0.9 million in the twelve months ended
December 30, 1995 from $0.6 million in the twelve months ended December 31,
1994. Interest expense includes interest on borrowings at the Company's foreign
subsidiaries, incurred to refinance intercompany borrowings from Thermedics
which were made in connection with the acquisition of the Company by Thermedics.
Interest expense also includes borrowings relating to the purchase of Tecno
Europa in 1994. The increase in interest expense in 1995 results from a full
year of interest expense on the foreign borrowings related to the acquisition of
- A26 -
<PAGE>
the Company, offset in part by lower outstanding debt. Interest
expense will increase in future periods due to the acquisition of Hitech in
January 1996 for $4.5 million in cash, which was financed with a credit facility
denominated in British pounds sterling.
Other income of $0.6 million in the twelve months ended December 31, 1994,
represents a foreign exchange gain on the repayment of intercompany borrowings
from Thermedics.
The effective tax rate was 40% in the twelve months ended December 30,
1995, compared with 68% in the twelve months ended December 31, 1994. These
rates exceed the statutory federal income tax rate due primarily to state income
taxes in 1995, and to the inability to provide a tax benefit on losses incurred
at certain foreign subsidiaries, primarily in Germany, France and Italy, and the
impact of state income taxes in 1994. As discussed in "Overview," the
Predecessor and the Company had experienced losses at several foreign
subsidiaries through 1994 as a result of a historically high cost structure.
The Company took measures to reduce these losses following the 1994 acquisition
of the Company by Thermedics.
Twelve Months Ended December 31, 1994 Compared With Twelve Months Ended
- -----------------------------------------------------------------------
September 30, 1993
- ------------------
Revenues were $61.1 million in the twelve months ended December 31, 1994,
compared with $58.6 million in the twelve months ended September 30, 1993, an
increase of $2.5 million or 4%. The increase in revenues reflects higher U.S.
product sales due to increased demand, as well as the inclusion of $1.6 million
in revenues from Tecno Europa, which was acquired in July 1994. These increases
were offset in part by a $l.8 million decline in international sales due
primarily to the recession in Europe and a $0.6 million decline in revenues due
to the strength of the U.S. dollar in relation to foreign currencies.
The gross profit margin was 34% in the twelve months ended December 31,
1994, compared with 35% in the twelve months ended September 30, 1993. The
decrease resulted primarily from lower gross profit margins at the Company's
Australian operations due to a large sampling system order which had low gross
profit margins. See "Overview."
Selling, general and administrative expenses as a percentage of revenues
decreased to 28% in the twelve months ended December 31, 1994 from 29% in the
twelve months ended September 30, 1993. This decrease was due primarily to
reduced general and administrative expenses in Europe as a result of the
restructuring of the Company's operations in 1994, offset in part by the
inclusion of amortization of cost in excess of net assets
- A27 -
<PAGE>
of acquired companies in the 1994 period as a result of the acquisition of the
Company by Thermedics. Research and development expenses as a percentage of
revenues increased to 2.5% in the twelve months ended December 31, 1994 from
1.8% in the twelve months ended September 30, 1993 due to an increase in
expenses related to the development of multi-purpose electronics for the
Company's bulk weighing systems and a new checkweigher.
Interest expense of $0.6 million for the twelve months ended December 31,
1994 represents interest on borrowings at the Company's foreign subsidiaries, as
described in the results of operations for the twelve months ended December 30,
1995.
Other income of $0.6 million in the twelve months ended December 31, 1994
represents a foreign exchange gain on the repayment of intercompany borrowings
from Thermedics.
The effective tax rat was 68% in the twelve months ended December 31, 1994
and 55% in the twelve months ended September 30, 1993. These rates exceed the
statutory federal income tax rate due primarily to the inability to provide a
tax benefit on losses incurred at certain foreign subsidiaries and the impact of
state income taxes. The increase in the effective tax rate in 1994 resulted
from greater foreign losses in countries where the Company is unable to provide
a tax benefit, primarily Italy.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was negative $0.9 million at December 30,
1995, compared with negative $0.3 million at December 31, 1994. Included in
working capital are cash and cash equivalents of $3.0 million at December 30,
1995, compared with $2.1 million at December 31, 1994.
During the twelve months ended December 30, 1995, operating activities
provided $6.3 million of cash. During the twelve months ended December 30,
1995, the Company expended $0.7 million on purchases of property, plant and
equipment and $0.9 million on the repayment of the long-term obligation. In
1996, the Company plans to make expenditures of approximately $1.0 million for
property, plant and equipment. In January 1996, the Company acquired Hitech, a
U.K.-based manufacturer of metal detection equipment and specialty checkweighing
equipment, for $4.5 million in cash, which was financed with a credit facility
denominated in British pounds sterling.
Although the Company expects positive cash flow from its existing
operations, the Company anticipates it will require significant amounts of cash
to pursue the acquisition of complementary businesses. The Company expects that
it will finance these acquisitions through a combination of internal
- A28 -
<PAGE>
funds, including the net proceeds from the sale of the shares of Common Stock
offered hereby, additional debt or equity financing from the capital markets, or
short-term borrowings from Thermedics or Thermo Electron. The Company believes
that its existing resources are sufficient to meet the capital requirements of
its existing businesses for at least the next 24 months.
- A29 -
<PAGE>
Form 10-Q
March 30, 1996
THERMO VOLTEK CORP.
-------------------
Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------
Results of Operations
- ---------------------
DESCRIPTION OF BUSINESS
The Company designs, manufactures, and markets instruments that test
electronic and electrical systems and components for immunity to pulsed
electromagnetic interference (pulsed EMI) through its KeyTek Instrument division
(KeyTek), and designs, manufactures, and markets high-voltage power-conversion
systems, modulators, fast-response protection systems, and related high-voltage
equipment for industrial, medical, and environmental processes, and for defense
and scientific research applications, through its Universal Voltronics division.
Through its Comtest Instrumentation B.V. and Comtest Limited subsidiaries
(collectively, Comtest), the Company provides electromagnetic compatibility
(EMC) consulting and systems-integration services, distributes a range of
EMC-related products, and manufactures and markets specialized power supplies
for telecommunications equipment. Comtest's Verifier division, acquired in July
1994, manufactures a line of electrostatic discharge test equipment that
performs electrical stress tests for semiconductor devices. In March 1995, the
Company acquired Kalmus Engineering Incorporated and R. F. Power Labs,
Incorporated (collectively, Kalmus), which manufacture radio frequency power
amplifiers and systems used to test products for immunity to radiated or
conducted radio frequency interference and for medical imaging and
telecommunications applications.
RESULTS OF OPERATIONS
First Quarter 1996 Compared With First Quarter 1995
---------------------------------------------------
Revenues increased 45% to $10,621,000 in the first quarter of 1996 from
$7,308,000 in the first quarter of 1995, due primarily to an increase in Comtest
revenues of $1,663,000 and an increase of $1,126,000 due to the inclusion of
revenues for the full quarter of 1996 from Kalmus, which was acquired on March
1, 1995. The increase in revenues at Comtest resulted primarily from an increase
in demand in the Far East for Verifier's electrostatic discharge test equipment,
as well as an increase in revenues from a new radio frequency interference
immunity tester product line that was introduced in 1995. The balance of the
increase in revenues resulted from greater demand at KeyTek.
The gross profit margin increased to 49% in the first quarter of 1996
from 48% in the first quarter of 1995, due primarily to the inclusion of a full
quarter of higher-margin
- A30 -
<PAGE>
Kalmus revenues in 1996. This increase was offset in part by a decline in
margins at Verifier due to lower-margin sales in the Far East.
Selling, general and administrative expenses as a percentage of revenues
decreased to 31% in the first quarter of 1996 from 33% in the first quarter of
1995, due primarily to an increase in revenues. Research and development
expenses as a percentage of revenues increased to 6.7% in the first quarter of
1996 from 6.2% in the first quarter of 1995 due to higher research and
development expenditures at Verifier and KeyTek.
Interest income decreased to $502,000 in the first quarter of 1996 from
$538,000 in the first quarter of 1995 due primarily to lower average invested
balances. Interest expense decreased to $435,000 in the first quarter of 1996
from $564,000 in the first quarter of 1995 due to the conversion of $13,495,000
principal amount of the Company's subordinated convertible obligations during
1995 and 1996.
The effective tax rate was 29% and 28% in the first quarter of 1996 and
1995, respectively. These rates were below the statutory federal income tax rate
due to the utilization of tax net operating loss carryforwards, offset in part
by the impact of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $42,998,000 at March 30, 1996, compared with
$41,826,000 at December 30, 1995. Included in working capital are cash, cash
equivalents, and available-for-sale investments of $33,725,000 at March 30,
1996, compared with $34,689,000 at December 30, 1995. During the first quarter
of 1996, $792,000 of cash was used in operating activities primarily to reduce
accounts payable and to support higher accounts receivable, which resulted from
the timing of cash collections. During the first quarter of 1996, the Company
expended $254,000 for purchases of property, plant and equipment. During the
remainder of 1996, the Company expects to expend approximately $1,400,000 on
purchases of property, plant and equipment.
- A31 -
<PAGE>
Form 10-K
December 30, 1995
THERMO VOLTEK CORP.
-------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company designs, manufactures, and markets instruments that test
electronic and electrical systems and components for immunity to pulsed
electromagnetic interference (pulsed EMI) through its KeyTek Instrument division
(KeyTek), and designs, manufactures, and markets high-voltage power-conversion
systems, modulators, fast-response protection systems, and related high-voltage
equipment for industrial, medical, and environmental processes, and for defense
and scientific research applications, through its Universal Voltronics division.
Through its Comtest Instrumentation B.V. and Comtest Limited subsidiaries
(collectively, Comtest), the Company provides electromagnetic compatibility
(EMC) consulting and systems-integration services, distributes a range of EMC-
related products, and manufactures and markets specialized power supplies for
telecommunications equipment. In July 1994, Comtest acquired Verifier Systems
Limited (Verifier), which manufactures a line of electrostatic discharge test
equipment that performs electrical stress tests for semiconductor devices. In
March 1995, the Company acquired Kalmus Engineering Incorporated and R.F. Power
Labs, Incorporated (collectively, Kalmus), which manufacture radio frequency
power amplifiers and systems used to test products for immunity to radio
frequency interference and for medical imaging and telecommunications
applications.
The Company's strategy is to expand through a combination of internal
product development and the acquisition of new businesses and technologies. The
Company acquired Comtest to gain additional expertise in EMC technologies and
further access to European markets, and acquired Verifier to expand the
Company's component-testing product line. The acquisition of Kalmus expanded
the Company's EMC-testing line to include radio frequency interference testing
products. The Company's strategy is to make additional acquisitions to expand
the range of EMC products and services it can offer to its customers.
The Company sells its products primarily in the United States and Europe.
Approximately 36% of the Company's sales in 1995 originated in Europe. Although
the Company seeks to charge its customer in the same currency as its operating
costs, the Company's financial performance and competitive position can be
affected by currency exchange rate fluctuations affecting the relationship
between the U.S. dollar and foreign currencies.
- A32 -
<PAGE>
RESULTS OF OPERATIONS
1995 Compared With 1994
- -----------------------
Revenues increased 54% to $36.3 million in 1995 from $23.6 million in 1994.
The increase in revenues is primarily the result of the inclusion of $4.7
million in revenues from Kalmus, which was acquired in March 1995, an increase
of $3.1 million in revenues from Comtest, and an increase of $2.5 million in
revenues due to the inclusion of revenues for the full year of 1995 from
Verifier, which was acquired in July 1994. The increase in revenues from
Comtest resulted primarily from the introduction in 1995 of a new radio
frequency interference immunity tester product line and, to a lesser extent, the
favorable effects of currency translation due to a weaker U.S. dollar in 1995.
The balance of the increase in sales resulted from greater demand at KeyTek and,
to a lesser extent, Universal Voltronics.
The gross profit margin decreased to 48% in 1995 from 49% in 1994, due
primarily to higher European sales in 1995 in one of KeyTek's product lines,
which have lower margins due to competitive pricing pressures and, to a lesser
extent, higher costs associated with an upgraded product at KeyTek. These
decreases were offset in part by the inclusion of higher-margin Verifier
revenues.
Selling, general and administrative expenses as a percentage of revenues
decreased to 32% in 1995 from 34% in 1994, due primarily to lower costs as a
percentage of revenues at KeyTek and Universal Voltronics as a result of higher
sales volume in 1995, and lower selling, general and administrative expenditures
as a percentage of revenues at Kalmus. Research and development expenses as a
percentage of revenues remained unchanged at 6% in 1995 and 1994.
Interest income increased to $2.1 million in 1995 from $1.7 million in
1994, due primarily to higher prevailing interest rates in 1995. Interest
expense was $2.1 million in 1995, compared with $2.2 million in 1994. The
decrease in interest expense resulting from the conversion of $9.1 million
principal amount of the Company's subordinated convertible obligations during
1995 was substantially offset by the inclusion of interest expense associated
with increased borrowings under Comtest's outstanding line of credit.
The effective tax rate was 21% in 1995 and 25% in 1994. These rates are
below the statutory federal income tax rate due primarily to the utilization of
tax net operating loss carryforwards, offset in part by the impact of state
income taxes. The decrease in the effective tax rate in 1995 was due to
increased utilization of tax net operating loss carryforwards.
- A33 -
<PAGE>
1994 Compared With 1993
- -----------------------
Revenues increased 31% to $23.6 million in 1994 from $18.1 million in 1993.
The increase was due primarily to the inclusion of $6.4 million in revenues from
Comtest, which was acquired in August 1993 (compared with $2.8 million in
revenues for the period from August 1993 to year-end 1993), an increase of $1.2
million in revenues from KeyTek, and the inclusion of $1.0 million in revenues
from Verifier, which was acquired in July 1994. The increase in revenues at
KeyTek was due primarily to greater demand and, to a lesser extent, a bulk sale
of inventory of its older product lines in the second quarter of 1994. An
increase in commercial sales of $1.7 million at Universal Voltronics, primarily
to one customer in the automotive industry was more than offset by a decline of
$1.9 million in contract revenues. The decrease in contract revenues at
Universal Voltronics was due to the completion of certain contracts, primarily a
contract with the U.S. Navy, which were not replaced by new contracts.
The gross profit margin increased to 49% in 1994 from 46% in 1993. The
increase was due primarily to higher gross margins on increased commercial sales
at Universal Voltronics relative to lower-margin government contract revenues in
1993 and, to a lesser extent, the inclusion of higher-margin Verifier revenues.
Selling, general and administrative expenses as a percentage of revenues
remained relatively unchanged at 34% in 1994, compared with 33% in 1993.
Research and development expenses increased to $1.5 million in 1994 from $1.2
million in 1993, due primarily to higher development expenditures for new and
existing product lines at KeyTek.
Interest income increased to $1.7 million in 1994 from $0.2 million in
1993, and interest expense increased to $2.2 million in 1994 from $0.8 million
in 1993, primarily as a result of the Company's issuance of $34.5 million
principal amount of 3 3/4% subordinated convertible debentures in November 1993.
The effective tax rate was 25% in 1994 and 36% in 1993. These rates are
below the statutory federal income tax rate due primarily to the utilization of
tax net operating loss carryforwards, offset in part by the impact of state
income taxes. The decrease in the effective tax rate in 1994 was due to
increased utilization of tax net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $41.8 million at December 30, 1995, compared with $42.0
million at December 31, 1994. Included in working capital are cash, cash
equivalents, and short-term investments of $34.7 million at December 30, 1995,
compared with
- A34 -
<PAGE>
$37.1 million at December 31, 1994. During 1995, $1.9 million of cash was
provided by operating activities, compared with $2.5 million of cash during
1994. On March 1, 1995, the Company's KeyTek division acquired substantially
all of the assets, subject to certain liabilities, of Kalmus for $3.8 million in
cash. During 1995 the Company expended $1.4 million for property, plant and
equipment.
In 1996, the Company expects to make capital expenditures of approximately
$1.5 million. As part of its strategy for growth, the Company regularly reviews
opportunities to acquire businesses and core technologies that will complement
the Company's products and services, although the Company currently has no
agreements or commitments with respect to any such acquisitions. The Company
believes its existing resources are sufficient to meet the capital requirements
of its existing operations for the foreseeable future.
SELECTED FINANCIAL INFORMATION
(In thousands except
per share amounts) 1995(a) 1994(b) 1993(c) 1992(d) 1991
- ------------------ ------- ------- ------- ------- ----
STATEMENT OF
INCOME DATA:
Revenues $36,326 $23,641 $18,089 $12,998 $ 6,502
Net income (loss) 2,672 1,118 480 390 (316)
Earnings (loss)
per share:
Primary .60 .28 .12 .10 (.08)
Fully diluted .42 .26 .12 .10 (.08)
BALANCE SHEET DATA:
Working capital $41,826 $41,990 $42,023 $ 6,482 $ 5,583
Total assets 68,845 62,224 57,471 16,364 7,266
Long-term
obligations 36,740 46,000 46,000 7,500 -
Shareholders'
equity 20,959 8,472 7,097 6,598 6,208
(a) Reflects the March 1995 acquisition of Kalmus Engineering Incorporated
and R.F. Power Labs, Incorporated.
(b) Reflects the July 1994 acquisition of Verifier Systems Limited.
(c) Reflects the August 1993 acquisition of Comtest Instrumentation B.V. and
Comtest Limited, the issuance of a $4.0 million principal amount 5%
subordinated convertible note to Thermedics Inc., and the issuance of
$34.5 million principal amount of 3 3/4% subordinated convertible
debentures.
(d) Reflects the June 1992 acquisition of KeyTek Instrument, and the issuance
of a $7.5 million principal amount of 6 3/4% subordinated convertible
note to Thermedics Inc.
- A35 -
<PAGE>
Form 10-Q
March 30, 1996
THERMO INSTRUMENT SYSTEMS INC.
------------------------------
Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------
Results of Operations
- ---------------------
RESULTS OF OPERATIONS
First Quarter 1996 Compared With First Quarter 1995
---------------------------------------------------
Revenues increased $52.6 million, or 30%, to $225.6 million in the first
quarter of 1996 from $172.9 million in the first quarter of 1995 primarily due
to acquisitions, which included the analytical instrument division of Analytical
Technology, Inc. (ATI) in December 1995, Gould Instrument Systems, Inc. (GIS) in
May 1995, and Dynatech Worldwide (DLW) in February 1996. Acquisitions added
revenues of $40 million in the first quarter of 1996. The remainder of the
increase in revenues resulted from greater demand experienced by the Company's
existing businesses, primarily for ThermoQuest Corporation's (ThermoQuest) mass
spectrometry products and Thermo Optek Corporation's (Thermo Optek) Fourier
transform infrared products. These increases were offset in part by the
unfavorable effects of currency translation due to the strengthening of the U.S.
dollar relative to foreign currencies in countries where the Company operates.
The gross profit margin decreased to 48% in the first quarter of 1996
from 49% in the first quarter of 1995 primarily due to lower margins at acquired
businesses. As a result of the acquisition of a substantial portion of the
businesses comprising the Scientific Instruments Division of Fisons plc
(Fisons), the Company expects that the gross profit margin will continue to
decline due to lower margins at these businesses.
Selling, general and administrative expenses as a percentage of revenues
was 29% in the first quarter of 1996 and 1995. Research and development expenses
as a percentage of revenues remained relatively unchanged at 7.3% in 1996,
compared with 7.2% in 1995.
In the first quarter of 1996, the Company wrote off $3.5 million of
acquired technology in connection with the acquisition of the businesses from
Fisons.
Interest income increased to $5.1 million in the first quarter of 1996
from $2.3 million in the first quarter of 1995 primarily due to interest income
earned on invested proceeds from the issuance of $192.5 million aggregate
principal amount of 5% subordinated convertible debentures by ThermoQuest and
Thermo
- A36 -
<PAGE>
Optek in August 1995 and October 1995, respectively. Interest income also
increased, to a lesser extent, as a result of interest income earned on invested
proceeds from the issuance of common stock by the Company's Thermo BioAnalysis
Corporation (Thermo BioAnalysis) subsidiary in the first and second quarters of
1995 and the Company's ThermoSpectra Corporation (ThermoSpectra) subsidiary in
the third quarter of 1995. The increase in interest income was offset in part by
a reduction in cash as a result of the acquisitions of GIS in May 1995 and DLW
in February 1996. Interest expense increased to $6.3 million in 1996 from $3.8
million in 1995 primarily due to the issuance of the 5% subordinated convertible
debentures by ThermoQuest and Thermo Optek and, to a lesser extent, the issuance
by Thermo BioAnalysis of a $30 million promissory note to Thermo Electron
Corporation (Thermo Electron) to partially finance the acquisition of DLW. These
increases were offset in part by the conversion of a portion of the Company's 6
5/8% subordinated convertible debentures and 3 3/4% senior convertible
debentures into common stock of the Company.
The Company has adopted a strategy of spinning out certain of its
businesses into separate subsidiaries and having these subsidiaries sell a
minority interest to outside investors. The Company believes that this strategy
provides additional motivation and incentives for the management of the
subsidiaries through the establishment of subsidiary-level stock option
incentive programs, as well as capital to support the subsidiaries' growth. As a
result of the sale of stock by subsidiaries, the Company recorded gains of
approximately $24 million in the first quarter of 1996 and $4.7 million in the
first quarter of 1995. The size and timing of these transactions are dependent
on market and other conditions that are beyond the Company's control.
Accordingly, there can be no assurance that the Company will be able to realize
gains from such transactions in the future.
The effective tax rate decreased to 23% in the first quarter of 1996
from 34% in the first quarter of 1995 primarily due to a higher nontaxable gain
on the issuance of stock by subsidiary in 1996 compared with 1995. Excluding the
impact of gain on issuance of stock by subsidiaries in 1996 and 1995, the
effective tax rates in 1996 and 1995 exceeded the statutory federal income tax
rate due to nondeductible amortization of cost in excess of net assets of
acquired companies, the inability to provide a tax benefit on losses incurred at
certain foreign subsidiaries, and the impact of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $319.2 million at March 30, 1996,
compared with $489.9 million at December 30, 1995, a decrease of $170.7 million.
Included in working capital are cash and cash equivalents of $342.5 million at
March 30, 1996, and $395.2 million at December 30, 1995. Of the $342.5 million
- A37 -
<PAGE>
balance at March 30, 1996, $176.7 million was held by ThermoQuest, $21.5 million
by ThermoSpectra, $10.0 million by Thermo BioAnalysis, and $134.3 million by the
Company and its wholly owned subsidiaries, including Thermo Optek. The Company's
operating activities provided $30.7 million of cash in the first three months of
1996. A decrease in accounts receivable of $8.8 million and an increase in other
current liabilities of $5.0 million, which provided cash from operations, was
offset in part by an increase of $7.0 million in inventories and a decrease of
$1.9 million in accounts payable.
The Company's investing activities used $243.2 million of cash in the
first three months of 1996. The Company expended $239.4 million for
acquisitions, including the acquisition of a substantial portion of the
businesses comprising the Scientific Instruments Division of Fisons, and $5.4
million for the purchase of property, plant and equipment.
The Company's financing activities provided $159.9 million of cash in
the first three months of 1996. In March 1996, ThermoQuest sold shares of its
common stock in an initial public offering for net proceeds of approximately $42
million. In February 1996, to partially finance the acquisition of DLW, Thermo
BioAnalysis borrowed $30 million from Thermo Electron pursuant to a promissory
note due February 1997. In March 1996, to partially finance the acquisition of
certain businesses within the Scientific Instruments Division of Fisons, the
Company borrowed $89 million from Thermo Electron. Subsequent to the end of the
quarter, the Company repaid a portion of the borrowings from Thermo Electron and
issued a $65 million promissory note due April 1997 for the remaining
indebtedness.
In April 1996, the underwriters of ThermoQuest's initial public offering
exercised their over-allotment option to purchase additional shares of
ThermoQuest's common stock for net proceeds of approximately $6 million.
In April 1996, Thermo Optek filed a registration statement under the
Securities Act of 1933 with the Securities and Exchange Commission covering
shares of common stock to be offered in its initial public offering.
During the remainder of 1996, the Company plans to make expenditures of
approximately $15 million for property, plant and equipment. The Company
believes that its existing resources are sufficient to meet the capital
requirements of its existing operations for the foreseeable future. The Company
has historically complemented internal development with acquisitions of
businesses or technologies that extend the Company's presence in current markets
or provide opportunities to enter and compete effectively in new markets. The
Company will consider making acquisitions of such businesses or technologies
that are consistent with its plans for strategic growth.
- A38 -
<PAGE>
Form 10-K
December 30, 1995
THERMO INSTRUMENT SYSTEMS INC.
------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
RESULTS OF OPERATIONS
The Company's revenues were $782.7 million in 1995, compared with $650.0
million in 1994 and $529.3 million in 1993. The increases were primarily due to
acquisitions, which included the Analytical Instruments Division of Baird
Corporation in January 1995, Gould Instrument Systems, Inc. (GIS) in May 1995,
the Analytical Instrument Division of Analytical Technology, Inc. in December
1995, several businesses within the EnviroTech Measurements & Controls group of
Baker Hughes Incorporated (Baker Hughes) in March 1994, and the radiation safety
measurement products and radiometry process control divisions of FAG
Kugelfischer Georg Shafer AG in October 1993. Acquisitions added revenues of
$104 million in 1995 and $125 million in 1994. The 1993 results included $12.6
million of revenues from the biomedical instruments products business of the
Company's Nicolet Instrument Corporation subsidiary (Nicolet Biomedical), which
was sold to Thermo Electron Corporation (Thermo Electron) effective April 5,
1993. The remainder of the increase in revenues in 1995 was substantially a
result of the favorable effects of currency translation due to the decline in
the value of the U.S. dollar relative to foreign currencies in countries where
the Company operates. Approximately 50% of the Company's revenues originate
outside of the United States. 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
affecting the relationship between the U.S. dollar and foreign currencies. Where
appropriate, the Company uses forward exchange contracts to reduce its exposure
to currency fluctuations. An increase in revenues in 1995 from certain existing
businesses was offset in part by a decline in revenues from the Company's air
monitoring instruments subsidiary as most orders in response to Phases I and II
of the Clean Air Act of 1990 have been completed.
The gross profit margin remained relatively unchanged at 48% in 1995 and
1994 and 49% in 1993. If the Company completes the modified acquisition of the
Scientific Instruments Division of Fisons plc (Fisons), the Company expects that
the gross profit margin will decline due to lower margins at the businesses to
be acquired from Fisons.
Selling, general and administrative expenses as a percentage of revenues
increased to 28% in 1995 from 27% in 1994 and 26% in 1993 primarily due to
higher costs as a percentage of revenues at acquired businesses and reduced
revenues from the Company's air
- A39 -
<PAGE>
monitoring instruments subsidiary as discussed above. The Company's goal is to
continue to reduce selling, general and administrative expenses as a percentage
of revenues at its newly acquired businesses. If the Company completes the
modified acquisition of the Scientific Instruments Division of Fisons, the
Company expects that selling, general and administrative expenses will increase
as a percentage of revenues. The Company intends to take steps to reduce costs
at the businesses acquired from Fisons. These reductions are expected to take at
least several quarters to implement, and no assurance can be given that these
reductions will be sufficient to bring selling, general and administrative
expenses as a percentage of revenues at the businesses acquired from Fisons to a
level comparable to that of the Company's existing businesses.
Research and development expenses as a percentage of revenues were 6.9% in
1995, compared with 6.6% in 1994 and 6.5% in 1993. The increase is consistent
with the Company's objective to develop and market new products.
Interest income was $14.6 million in 1995, $5.9 million in 1994, and $3.6
million in 1993. The increase in 1995 was primarily the result of interest
income earned on the net proceeds from the issuance of $192.5 million aggregate
principal amount of 5% subordinated convertible debentures by the Company's
ThermoQuest Corporation (ThermoQuest) and Thermo Optek Corporation (Thermo
Optek) subsidiaries in August 1995 and October 1995, respectively, and higher
prevailing interest rates in 1995 compared with 1994. Interest income also
increased in 1995, to a lesser extent, as a result of interest income earned on
the net proceeds from the issuance of common stock by the Company's Thermo
BioAnalysis Corporation (Thermo BioAnalysis) subsidiary in the first and second
quarters of 1995 and by the Company's ThermoSpectra Corporation (ThermoSpectra)
subsidiary in the third quarter of 1995 and the third and fourth quarters of
1994. The increase was offset in part by a reduction in cash as a result of the
acquisitions of the Analytical Instruments Division of Baird Corporation in
January 1995 and GIS in May 1995. The increase in interest income in 1994 was
primarily a result of interest income earned on the net proceeds from the
issuance of 3 3/4% senior convertible obligations in September 1993, offset in
part by the cash used to purchase several businesses within the EnviroTech
Measurements & Controls group of Baker Hughes in the first quarter of 1994.
Interest expense increased to $18.1 million in 1995 from $15.8 million in 1994
and $14.4 million in 1993. The increase in 1995 was primarily due to the
issuance of the 5% subordinated convertible debentures by ThermoQuest and Thermo
Optek, offset in part by the conversion of a portion of the Company's 6 5/8%
subordinated convertible debentures and 3 3/4% senior convertible obligations
into common stock of the Company. The increase in interest expense in 1994 was
primarily due to the issuance of the 3 3/4% senior convertible obligations in
September 1993, offset in part by a reduction in interest expense as a result of
the repayment in the third quarter of 1993 of debt incurred in connection with
acquisitions.
- A40 -
<PAGE>
The Company has adopted a strategy of spinning out certain of its
businesses into separate subsidiaries and having these subsidiaries sell a
minority interest to outside investors. The Company believes that this strategy
provides additional motivation and incentives for the management of the
subsidiary through the establishment of subsidiary-level stock option incentive
programs, as well as capital to support the subsidiaries' growth. As a result of
the sale of stock by subsidiaries, the Company recorded gains of $20.1 million
in 1995 and $6.5 million in 1994. The size and timing of these transactions are
dependent on market and other conditions that are beyond the Company's control.
Accordingly, there can be no assurance that the Company will be able to realize
gains from such transactions in the future.
In October 1995, the Financial Accounting Standards Board (FASB) issued an
exposure draft of a Proposed Statement of Financial Accounting Standards,
"Consolidated Financial Statements: Policy and Procedures" (Proposed Statement).
The Proposed Statement would establish new rules for how consolidated financial
statements should be prepared. If the Proposed Statement is adopted, there could
be significant changes in the way the Company records certain transactions of
its controlled subsidiaries, including the following: (i) any sale of the stock
of a subsidiary that does not result in a loss of control would be accounted for
as a transaction in equity of the consolidated entity with no gain or loss being
recorded and (ii) under certain circumstances, acquisitions could be structured
to significantly reduce the goodwill that is recorded and consequently reduce
the Company's future goodwill amortization associated with the acquisition. The
Company typically acquires technology companies which are often characterized by
significant amounts of goodwill. In addition, under the Proposed Statement a
company that has made certain equity investments of generally less than 20%
ownership would record a gain (or loss) upon increasing its investment level to
the point of exerting "significant influence," generally 20% or higher.
The FASB conducted a hearing concerning the Proposed Statement in February
1996, at which Thermo Electron, along with other major companies and many of the
major accounting firms and accounting associations, expressed theirisagreement
with various parts of the Proposed Statement. The FASB expects to issue a final
statement by June 30, 1996, which could become effective for fiscal years
beginning after December 15, 1996.
The Company recorded gains of $2.2 million and $2.0 million in 1995 and
1994, respectively, from the sale of the Company's investment in Thermedics Inc.
convertible debentures. Thermedics Inc. is a majority-owned subsidiary of Thermo
Electron.
The effective tax rate was 35% in 1995, 39% in 1994, and 43% in 1993. The
effective tax rate decreased in 1995 and 1994 primarily due to the nontaxable
gains on the issuance of stock by subsidiaries. Excluding the impact of the
gains on the issuance
- A41 -
<PAGE>
of stock by subsidiaries, the effective tax rates exceeded the statutory federal
income tax rate primarily due to the impact of state income taxes, nondeductible
amortization of cost in excess of net assets of acquired companies, and the
inability to provide a tax benefit on losses incurred at certain foreign
subsidiaries.
Effective April 2, 1995, the Company and Thermo TerraTech Inc. (Thermo
TerraTech) (formerly Thermo Process Systems Inc.) dissolved their Thermo Terra
Tech joint venture. Thermo TerraTech then purchased the services businesses
formerly operated by the joint venture from the Company. Prior to the joint
venture's formation on April 2, 1994, the Company's services businesses
comprised its Services segment and were consolidated in the Company's financial
statements. The sale of the businesses to Thermo TerraTech represents the
Company's disposal of its Services segment.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $489.9 million at December 30, 1995, compared
with $230.3 million at December 31, 1994, an increase of $259.6 million.
Included in working capital are cash, cash equivalents, and available-for-sale
investments of $395.2 million at December 30, 1995 and $168.9 million at
December 31, 1994. Of the $395.2 million balance at December 30, 1995, $20.3
million was held by ThermoSpectra, $19.8 million by Thermo BioAnalysis, $120.4
million by ThermoQuest, $115.1 million by Thermo Optek, and $119.6 million by
the Company and its wholly owned subsidiaries. Cash provided by operations in
1995 was $60.1 million.
The Company's investing activities used $47.1 million of cash in 1995.
During 1995, the Company expended $89.5 million for acquisitions and $10.3
million for the purchase of property, plant and equipment. Additionally, during
1995, the Company and Thermo TerraTech dissolved their Thermo Terra Tech joint
venture and the Company sold its services businesses formerly operated by the
joint venture to Thermo TerraTech for $34.3 million in cash.
The Company's financing activities provided $228.3 million of cash in 1995.
In March and April 1995, Thermo BioAnalysis completed private placements of its
common stock for net proceeds of $14.9 million. In August and October 1995,
ThermoSpectra sold shares of its common stock in an initial public offering and
a private placement for aggregate net proceeds of $24.9 million. In August and
October 1995, ThermoQuest and Thermo Optek, respectively, each issued and sold
$96.3 million principal
amount of 5% subordinated convertible debentures due 2000 for net proceeds of
$93.9 million.
In February 1996, Thermo BioAnalysis acquired Dynatech Laboratories
Worldwide (DLW) from Dynatech Corporation for $43 million in cash, subject to
post-closing adjustments. To
- A42 -
<PAGE>
partially finance the acquisition of DLW, Thermo BioAnalysis borrowed $30
million from Thermo Electron pursuant to a promissory note due February 1997 and
bearing interest at the Commercial Paper Composite Rate plus 25 basis points.
In February 1996, ThermoQuest filed a registration statement under the
Securities Act of 1933 with the Securities and Exchange Commission covering
shares of common stock to be offered in its initial public offering.
In 1996, the Company plans to make expenditures of approximately $11.5
million for property, plant and equipment. The Company believes that its
existing resources are sufficient to meet the capital requirements of its
existing operations for the foreseeable future.
The Company has historically complemented internal development with
acquisitions of businesses or technologies that extend the Company's presence in
current markets or provide opportunities to enter and compete effectively in new
markets. The Company will consider making acquisitions of such businesses or
technologies that are consistent with its plans for strategic growth. On
February 15, 1996, the Company announced that the
Federal Trade Commission had granted early termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act with respect to the
previously announced modified acquisition of the Scientific Instruments Division
of Fisons plc (Fisons) and on March 1, 1996, the Company announced that it had
received clearance of the transaction from U.K. antitrust regulatory
authorities. It is the Company's intent in the future to sell a portion of the
businesses to be acquired from Fisons to the Company's majority- and wholly
owned subsidiaries, although
the size and timing of these transactions will be subject to negotiation between
the Company and its subsidiaries. The Company intends to fund the purchase price
of this acquisition, which is expected to be slightly less than 150 million
British pounds sterling, from available cash and through borrowings from Thermo
Electron. Borrowings from Thermo Electron will be at prevailing market rates at
the time funds are advanced.
- A43 -
<PAGE>
SELECTED FINANCIAL INFORMATION
(In thousands except
per share amounts) 1995(a)(b) 1994(c)(d) 1993(e) 1992(f) 1991
---------------------------------------------------------------------------
STATEMENT OF
INCOME DATA:
Revenues $ 782,662 $ 649,992 $ 529,278 $ 368,532 $ 283,613
Income from
continuing
operations 79,304 58,261 42,793 31,666 24,752
Net income 79,306 60,220 44,764 33,130 24,837
Earnings per
share from
continuing
operations:
Primary .88 .66 .51 .39 .32
Fully diluted .80 .61 .48 .38 .31
Earnings per
share:
Primary .88 .68 .53 .41 .33
Fully diluted .80 .63 .50 .39 .31
BALANCE SHEET
DATA:
Working capital $ 489,895 $ 230,306 $ 238,053 $ 68,412 $ 197,391
Total assets 1,372,813 1,011,917 891,141 686,425 497,959
Long-term
obligations 441,034 263,559 286,161 170,092 123,476
Shareholders'
investment 542,705 440,763 358,055 272,723 250,954
(a) Reflects the August and October 1995 issuance of $192,500,000
aggregate principal amount of 5% subordinated convertible debentures
due 2000 by ThermoQuest Corporation and Thermo Optek Corporation,
respectively.
(b) Results include nontaxable gains of $4,714,000, $4,831,000,
$9,333,000, and $1,250,000 in the first, second, third, and fourth
quarters, respectively, from the issuance of stock by subsidiaries.
(c) Reflects the March 1994 acquisition of several businesses within the
EnviroTech Measurements & Controls group of Baker Hughes Incorporated.
(d) Results include nontaxable gains of $3,284,000 and $3,185,000 in the
third and fourth quarters, respectively, from the issuance of stock by
subsidiary.
(e) Reflects the February 1993 acquisition of Spectra-Physics Analytical,
Inc., the April 1993 sale of the biomedical instruments products
business of the Company's Nicolet Instrument Corporation subsidiary,
and the September 1993 issuance of $210,000,000 aggregate principal
amount of 3 3/4% senior convertible obligations due 2000.
(f) Reflects the August 1992 acquisition of Nicolet Instrument
Corporation.
- A44 -
<PAGE>
Form 10-Q
March 30, 1996
THERMOSPECTRA CORPORATION
-------------------------
Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------
Results of Operations
- ---------------------
OVERVIEW
The Company develops, manufactures, and markets precision imaging,
inspection, and measurement instruments based on high-speed data acquisition and
digital processing technologies. These instruments are generally combined with
proprietary operations and analysis software to provide industrial and research
customers with integrated systems that address their specific needs. The
Company's products include digital oscillographic recorders that continuously
measure and monitor signals from various sensors; digital storage oscilloscopes
(DSOs) that are capable of taking hundreds of millions of measurements per
second of transient signals or short bursts of data; data acquisition systems
that combine the attributes of DSOs and digital oscillographic recorders; X-ray
microanalyzers used as accessories to electron microscopes to provide elemental
materials analysis as a supplement to the microscope's imaging capabilities;
non-destructive X-ray inspection systems for process monitoring and quality
control applications; and confocal laser scanning microscopes that use laser
light to generate precise optical images primarily for life-science
applications. The Company's growth strategy includes acquiring complementary
businesses, developing new applications for its technology to address related
market segments, and strengthening its presence in selected geographic markets.
The acquisitions that the Company has historically made have generally
been businesses with strong technologies and a good reputation and presence in
the markets they compete in, but relatively poor profitability because of high
manufacturing and operating expenses. The Company's goal has been to gradually
reduce these expenses and thereby improve the acquired companies' profitability.
Businesses that the Company may acquire in the future are likely to have these
same financial characteristics. To realize an attractive return on its
investment in such future acquisitions, the Company will likely need to
successfully reduce those acquired companies' expenses. Since the Company
competes primarily on the basis of its technology, the Company will also need to
continually improve the technology underlying the products of any company it
acquires.
The Company conducts all of its manufacturing operations in the United
States, except for the production of certain DSOs, which are manufactured in
England. The Company sells its products on a worldwide basis. The Company
anticipates that a majority of
- A45 -
<PAGE>
its revenues will be from sales to customers outside the United States. The
Company's business activities outside the United States are conducted through
sales and service subsidiaries and through third-party representatives and
distributors. The results of the Company's international operations are subject
to foreign currency fluctuations, and the exchange rate value of the dollar may
have a significant impact on both revenues and earnings. Where appropriate, the
Company uses forward contracts to reduce its exposure to currency fluctuations.
RESULTS OF OPERATIONS
First Quarter 1996 Compared With First Quarter 1995
---------------------------------------------------
Revenues were $26.9 million in the first quarter of 1996, compared with
$14.4 million in the first quarter of 1995, an increase of 86%. Revenues
increased $10.6 million due to the inclusion of revenues from Gould Instrument
Systems, Inc. (GIS), a manufacturer of digital oscillographic recorders, DSOs,
and data acquisition systems, which was acquired on May 10, 1995. Revenues from
existing operations increased approximately 14% in the first quarter of 1996
from the first quarter of 1995, due to the inclusion of approximately $1.5
million of revenues related to unusually large shipments of air bag inspection
systems at the Company's Nicolet Imaging Systems (NIS) business and due to an
increase in demand, particularly in the Pacific Rim, for confocal laser scanning
microscopes manufactured by the Company's NORAN Instruments, Inc. (NORAN)
subsidiary.
The gross profit margin decreased to 47.5% in the first quarter of 1996
from 50.6% in the first quarter of 1995. A higher gross profit margin at the
Company's Nicolet Instrument Technologies Inc. (NIT) subsidiary, a manufacturer
of DSOs, resulting from manufacturing efficiencies was more than offset by a
lower gross profit margin at NIS attributable to the inclusion of lower-margin
air bag inspection systems revenues and the inclusion of lower-margin revenues
at GIS. GIS's gross profit margin in the first quarter of 1996 was 44.4%,
compared with a gross profit margin of 43.0% for the period from May 10, 1995 to
December 30, 1995. The Company's goal is to continue to increase the gross
profit margin at GIS by improvements in product mix and manufacturing
efficiencies, although there can be no assurance that the Company will be
successful in these efforts.
Selling, general and administrative expenses as a percentage of revenues
decreased to 29% in the first quarter of 1996 from 30% in the first quarter of
1995 due principally to higher revenues at the Company's existing operations,
offset in part by higher selling, general and administrative expenses as a
percentage of revenues at GIS.
Research and development expenses as a percentage of revenues was 10% in
both the first quarter of 1996 and 1995. Higher research and development
expenditures at NORAN and NIT as
- A46 -
<PAGE>
a result of new product introductions scheduled for release in the second
quarter of 1996 were offset by lower expenditures as a percentage of revenues at
NIS due to higher revenues in the first quarter of 1996.
Interest income was relatively unchanged in the first quarter of 1996,
compared with the first quarter of 1995. Interest expense, related party
represents interest expense associated with a $7.3 million promissory note
issued to Thermo Instrument Systems Inc. (Thermo Instrument) in September 1994.
The effective tax rate was 40% in the first quarter of 1996, compared
with 43% in the first quarter of 1995. These rates exceeded the statutory
federal income tax rate due primarily to the impact of state income taxes,
nondeductible amortization of cost in excess of net assets of acquired companies
for certain of the Company's acquisitions and, in the first quarter of 1995, the
anticipated inability to provide a tax benefit on losses incurred at certain
foreign subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $36.4 million at March 30, 1996,
compared with $36.0 million at December 30, 1995. Included in working capital
are cash and cash equivalents of $21.5 million at March 30, 1996, compared with
$20.3 million at December 30, 1995. Cash provided by operating activities was
$2.9 million in the three months ended March 30, 1996. The Company plans to
expend approximately $3.0 million for the purchase of property, plant and
equipment in 1996, including $1.3 million that was expended in the first quarter
of 1996 to purchase a building previously leased by NIS.
In March 1996, Thermo Instrument completed the acquisition of a
substantial portion of the Scientific Instruments Division of Fisons plc
(Fisons). The Company has had discussions with Thermo Instrument regarding the
acquisition of the Kevex division of Fisons, a manufacturer of X-ray
microanalyzers, X-ray microfluorescence instruments, and microfocus X-ray tubes
with annual revenues of approximately $27 million. No assurance can be given
that the Company will ultimately acquire Kevex, and the timing and terms of the
acquisition, including price, would be subject to negotiation between the
Company and Thermo Instrument.
Although the Company expects to have positive cash flow from its
existing operations, the Company anticipates it may require significant amounts
of cash to pursue the acquisition of complementary businesses. The Company
expects that it would seek to finance any such acquisitions through a
combination of internal funds, additional equity financing or convertible debt
- A47 -
<PAGE>
financing from the capital markets and/or short-term borrowings from Thermo
Instrument or Thermo Electron Corporation. The Company believes that its
existing resources and cash provided by operations are sufficient to meet the
capital requirements of its existing businesses for the foreseeable future.
- A48 -
<PAGE>
Form 10-K
December 30, 1995
THERMOSPECTRA CORPORATION
-------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company develops, manufactures, and markets precision imaging,
inspection, and measurement instrumentation based on high-speed data acquisition
and digital processing technologies. These instruments are generally combined
with proprietary operations and analysis software to provide industrial and
research customers with integrated systems that address their specific needs.
The Company's products include digital oscillographic recorders that
continuously measure and monitor signals from various sensors, digital storage
oscilloscopes (DSOs) that are capable of taking hundreds of millions of
measurements per second of transient signals or short bursts of data, data
acquisition systems that combine the attributes of DSOs and digital
oscillographic recorders, X-ray microanalyzers used as accessories to electron
microscopes to provide elemental materials analysis as a supplement to the
microscope's imaging capabilities, nondestructive X-ray inspection systems for
process monitoring and quality control applications, and confocal laser scanning
microscopes that use laser light to generate precise optical images primarily
for life science applications. The Company's growth strategy includes acquiring
complementary businesses, developing new applications for its technology to
address related market segments, and strengthening its presence in selected
geographic markets.
In March 1994, Thermo Instrument Systems Inc. (Thermo Instrument)
acquired NORAN Instruments, Inc. (NORAN), a manufacturer of X-ray microanalyzers
and confocal laser scanning microscopes. Thermo Instrument contributed NORAN
and its existing DSO and X-ray inspection businesses as part of the Company's
formation in August 1994. In addition, the Company acquired IRT Corporation
(IRT), a manufacturer of in-line X-ray inspection systems, in September 1994;
Bakker Electronics Dongen B.V. (Bakker), a Dutch-based manufacturer of transient
analyzers, in January 1995; and Gould Instrument Systems, Inc. (GIS), a
manufacturer of digital oscillographic recorders and DSOs, in May 1995.
The acquisitions which the Company has made have generally been
businesses with strong technologies and a good reputation and presence in the
markets in which they compete, but
- A49 -
<PAGE>
relatively poor profitability because of high manufacturing and operating
expenses. The Company's goal is to gradually reduce these expenses and thereby
improve the acquired companies' profitability. Businesses which the Company may
acquire in the future are likely to have these same financial characteristics.
To realize an attractive return on its investment in such future acquisitions,
the Company will need to successfully reduce those acquired companies' expenses.
Since the Company competes primarily on the basis of its technology, it will
also need to continually improve the technology underlying the products of any
company it acquires.
The Company conducts all of its manufacturing operations in the United
States, except for the production of certain DSOs, which are manufactured in
England. The Company sells its products on a world-wide basis. The Company
anticipates that a majority of its revenues will be from sales to customers
outside the United States. The Company's business activities outside the United
States are conducted through sales and service subsidiaries and through third-
party representatives and distributors. The results of the Company's
international operations are subject to foreign currency fluctuations, and the
exchange rate value of the dollar may have a significant impact on both revenues
and earnings. Where appropriate, the Company will use forward contracts to
reduce its exposure to currency fluctuations.
RESULTS OF OPERATIONS
1995 Compared With 1994
- -----------------------
Revenues were $91.7 million in 1995, compared with $42.1 million in
1994, an increase of 118%. Revenues increased $47.5 million due to the
inclusion of revenues from NORAN, IRT, Bakker, and GIS from their respective
dates of acquisition. Revenues increased by approximately $l.5 million in 1995
due to the decline in the value of the U.S. dollar relative to foreign
currencies where the Company operates while revenues from existing businesses
remained relatively consistent.
The gross profit margin increased to 49% in 1995 from 48% in 1994.
Higher gross profit margins at existing businesses resulting principally from
shifts in product mixes and reduced manufacturing costs were offset in part by
the inclusion of lower-margin revenues at GIS. GIS's gross profit margin since
its acquisition was 43%. The Company's goal is to increase the gross profit
margin at GIS by improvements in product mix and manufacturing efficiencies,
although there can be no assurance that the Company will be successful in these
efforts.
- A50 -
<PAGE>
Selling, general and administrative expenses as a percentage of
revenues increased to 31% in 1995 from 29% in 1994 due principally to increased
marketing efforts at the Company's existing operations and higher selling,
general and administrative expenses as a percentage of revenues at GIS.
Research and development expenses as a percentage of revenues were relatively
unchanged at 9.9% in 1995 and 9.8% in 1994.
Interest income of $0.8 million in 1995 primarily represents interest
earned on increased cash balances as a result of the Company's fourth quarter
1995 and third quarter 1994 private placements and third quarter 1995 initial
public offering, offset in part by the cash expended to acquire GIS. Interest
income of $0.2 million in 1994 represents interest earned on the net proceeds
from the Company's 1994 private placements. Interest expense, related party, of
$0.7 million in 1995 and $0.1 million in 1994 represents interest expense
associated with the $7.3 million promissory note issued to Thermo Instrument in
connection with the September 1994 acquisition of IRT and the $15.0 million
promissory note issued to Thermo Electron Corporation (Thermo Electron) in
connection with the May 1995 acquisition of GIS. The $15.0 million promissory
note was repaid in August 1995 with the proceeds from the Company's initial
public offering of common stock.
The effective tax rate was 42% in 1995, compared with 44% in 1994.
These rates exceed the statutory federal income tax rate due primarily to the
impact of state income taxes, the nondeductible amortization of cost in excess
of net assets of acquired companies for certain of the Company's acquisitions,
and in 1994, the inability to provide a tax benefit on losses incurred at
certain foreign subsidiaries. The effective tax rate decreased in 1995
principally as a result of lower nondeductible expenses as a percentage of
income before income taxes.
1994 COMPARED WITH 1993
Revenues were $42.1 million in 1994, compared with $17.7 million in
1993, an increase of 138%. Revenues increased due to the inclusion of $21.3
million in revenues from NORAN; the inclusion of an aggregate of approximately
$3.6 million in revenues from IRT and ISI; and the decline in the value of the
U.S. dollar relative to its average value in 1993, which increased revenues by
approximately $0.3 million, or 1.8%. These increases were offset in part by a
decline in revenues from existing businesses due to a decrease in sales of the
Company's high-accuracy DSOs, which is partly attributable to the change from a
direct to an indirect distribution channel in Germany during mid-1994, offset in
part by higher demand at the Company's X-ray inspection business.
- A51 -
<PAGE>
The gross profit margin increased to 48% in 1994 from 42% in 1993 due
to the inclusion of higher-margin revenues from NORAN and substantial margin
improvements at the Company's X-ray inspection business as a result of product
design changes, which produced significant reductions in material costs as a
percentage of sales and, to a lesser extent, substantial margin improvements at
the Company's high-accuracy DSO business as a result of an improvement in
manufacturing efficiencies. The decline in the value of the U.S. dollar also
contributed to the gross profit margin improvement. These improvements were
partially offset by the inclusion of lower margin revenues from IRT.
Selling, general and administrative expenses as a percentage of
revenues decreased to 29% in 1994 from 31% in 1993 due primarily to lower
selling, general and administrative expenses as a percentage of revenues at
existing businesses, offset in part by the general and administrative expenses
incurred at the Company's newly formed group office and an increase in the
provision for losses on accounts receivable associated with aging receivables at
NORAN. Research and development expenses as a percentage of revenues increased
to 9.8% in 1994 from 8.6% in 1993 due to increased expenses at existing
businesses and higher spending as a percentage of revenues at NORAN.
Interest income in 1994 represents interest earned on the $14.0
million in net proceeds from the Company's 1994 private placements of its common
stock. Interest expense, related party, in 1994 represents interest associated
with the $7.3 million promissory note issued to Thermo Instrument in connection
with the September 1994 acquisition of IRT.
The effective tax rate was 44% in 1994, compared with 53% in 1993.
These rates exceed the statutory federal income tax rate due primarily to the
impact of state income taxes, the nondeductible amortization of cost in excess
of net assets of acquired companies, and the inability to provide a tax benefit
on losses incurred at certain foreign subsidiaries. The effective tax rate
decreased in 1994 as a result of substantially lower nondeductible amortization
of cost in excess of net assets of acquired companies as a percentage of income
before income taxes and due to the utilization of tax benefits attributable to a
foreign sales corporation established in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $36.0 million at December 30, 1995,
compared with $27.4 million at December 31, 1994, an increase of $8.6 million.
Included in working capital are cash, cash equivalents, and available-for-sale
investments of $20.3 million in 1995, compared with $19.3 million in 1994. Cash
- A52 -
<PAGE>
provided by operating activities was $5.3 million in 1995, compared with $6.9
million in 1994.
In August 1995, the Company sold 1,725,000 shares of its common stock
in its initial public offering for net proceeds of $21.9 million. In October
1995, the Company sold an additional 202,000 shares of its common stock in a
private placement for net proceeds of $3.0 million.
In January 1995, the Company acquired Bakker for $2.3 million in cash.
In May 1995, the Company acquired GIS for $25.8 million in cash, which includes
the repayment of $6.0 million of bank debt. The purchase price of GIS was
financed through the issuance of a $15.0 million promissory note to Thermo
Electron and the Company's existing cash balances. In August 1995, the Company
repaid the $15.0 million promissory note with the proceeds from its initial
public offering.
In December 1995, the Company purchased a 49% interest in a newly
created German joint venture for $2.0 million of cash and $0.4 million of
inventory. The joint venture distributes printed circuit board assembly and
inspection equipment in Europe, including inspection systems manufactured by the
Company's Nicolet Imaging Systems division (NIS).
In 1995, the Company expended $1.3 million for the purchase of
property, plant and equipment and plans to expend approximately $3.0 million for
the purchase of property, plant and equipment in 1996, including $1.3 million to
be expended in March 1996 to purchase a building currently being leased by NIS.
In March 1995, Thermo Instrument and Thermo Electron announced an
agreement to acquire the Scientific Instruments Divisions of Fisons plc
(Fisons). The completion of the acquisition has been delayed due to the
concerns of antitrust regulators in the United States and the United Kingdom.
In February and March 1996, the U.S. Federal Trade Commission and U.K. antitrust
authorities, respectively, cleared a modified form of the acquisition.
Completion of the acquisition by Thermo Instrument is still subject to the
consent of third parties and the satisfaction of other closing conditions. If
Thermo Instrument is successful in consummating this acquisition, the Company
may subsequently acquire Fisons' Kevex division (Kevex), a manufacturer of X-ray
microanalyzers, X-ray microflorescence instruments and microfocus X-ray tubes
with annual revenues of approximately $27 million. No assurance can be given
that the Company will ultimately acquire Kevex, and the timing and terms of the
acquisition, including the purchase price, would be subject to negotiation
between the Company and Thermo Instrument.
- A53 -
<PAGE>
Although the Company expects to have positive cash flow from its
existing operations, the Company anticipates that it may require significant
amounts of cash to pursue the acquisition of complementary businesses. The
Company expects that it would seek to finance any such acquisitions through a
combination of internal funds, additional equity financing or convertible debt
financing from the capital markets and/or short-term borrowings from Thermo
Instrument or Thermo Electron. The Company believes that its existing resources
and cash provided by operations are sufficient to meet the capital requirements
of its existing businesses for the foreseeable future.
SELECTED FINANCIAL INFORMATION
The Company Predecessor
----------------------------------------- -----------
(In thousands
except per 8/21/92 12/29/91
share through through
amounts) 1995(a) 1994(b) 1993 1/2/93 8/20/92(c)
- --------- ------- ------- ---- ------ ----------
STATEMENT OF
INCOME DATA:
Revenues $ 91,714 $ 42,142 $ 17,702 $ 8,710 $ 13,420
Net income
(loss) 4,594 2,368 253 734 (932)
Earnings
per share .41 .25 .03 .08
BALANCE SHEET DATA:
Working
capital $ 35,961 $ 27,377 $ 6,037 $ 6,802 $ 8,339
Total assets 122,917 78,701 18,795 21,151 12,741
Long-term
obligation 7,300 7,300 - - -
Shareholders'
investment 82,525 53,313 14,494 15,630 9,834
(a) Reflects the acquisition of Gould Instrument Systems, Inc. (GIS) in May
1995 and the net proceeds of the Company's initial public offering in
August 1995 and private placement in October 1995.
(b) Reflects the acquisition by Thermo Instrument Systems Inc. (Thermo
Instrument) of NORAN Instruments, Inc. (NORAN) in March 1994, the
acquisition by the Company of IRT Corporation (IRT) in September 1994, and
the net proceeds of the Company's private placements of common stock in
September and October 1994.
(c) Reflects the historical results of the oscilloscope and imaging systems
divisions as included in Nicolet Instrument Corporation's financial
statements prior to its acquisition by Thermo Instrument in August 1992.
- A54 -
<PAGE>
Form 10-Q
March 30, 1996
THERMOQUEST CORPORATION
-----------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company develops, manufactures, and sells mass spectrometers, liquid
chromatographs, and gas chromatographs. These analytical instruments are used in
the quantitative and qualitative chemical analysis of organic and inorganic
compounds at ultra-trace levels of detection. The Company's products are used
primarily by pharmaceutical companies for drug research, testing, and quality
control; by environmental laboratories for testing water, air, and soil samples
for compliance with environmental regulations; by chemical companies for
research and quality control; by manufacturers for testing in certain industrial
applications, such as the manufacture of semiconductor wafers, and for quality
control; by food and beverage companies for quality control and to test for
product contamination; and in forensic applications.
The Company's strategy is to supplement its internal growth with the
acquisition of complementary products and technologies. In January 1996, the
Company acquired Extrel FTMS, Inc., a manufacturer of Fourier transform mass
spectrometers, from Waters Technologies Corporation.
The Company sells its products on a worldwide basis. 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 affecting the relationship
between the U.S. dollar and foreign currencies. Where appropriate, the Company
uses forward contracts to reduce its exposure to currency fluctuations.
RESULTS OF OPERATIONS
First Quarter 1996 Compared With First Quarter 1995
---------------------------------------------------
Revenues increased 16% to $65.5 million in the first quarter of 1996
from $56.5 million in the first quarter of 1995 primarily due to an increase of
$5.8 million in revenues from the Company's mass spectrometry business, the
inclusion of $2.6 million in revenues from the sale of products manufactured by
third parties and, to a lesser extent, an increase of $1.7 million in revenues
from the Company's liquid chromatography
- A55 -
<PAGE>
business. The increase in revenues from the Company's mass spectrometry business
was primarily due to the introduction of a new product in the third quarter of
1995. These increases were offset by a decrease of $1.1 million in revenues due
to the strengthening of the U.S. dollar in relation to the Japanese yen.
The gross profit margin decreased to 47.5% in the first quarter of 1996
from 49.6% in the first quarter of 1995. This decline is primarily due to the
inclusion of lower-margin sales of products manufactured by third parties in
1996 and, to a lesser extent, a shift in product mix. The gross profit margin
for the third-party product sales was 7%.
Selling, general and administrative expenses as a percentage of revenues
decreased to 25.6% in the first quarter of 1996 from 28.0% in the first quarter
of 1995 primarily due to an increase in total revenues. Research and development
expenses as a percentage of revenues decreased to 6.9% in the first quarter of
1996 from 7.7% in the first quarter of 1995 primarily due to an increase in
total revenues.
Interest income increased to $1.6 million in the first quarter of 1996
from $0.1 million in the first quarter of 1995 as a result of interest income
earned on the invested proceeds from the Company's issuance of 5% subordinated
convertible debentures in August 1995. Interest expense increased to $1.7
million in 1996 from $0.4 million in 1995 due primarily to interest on the
Company's 5% subordinated convertible debentures.
The effective tax rate was 42.0% in the first quarter of 1996, compared
with 41.5% in the first quarter of 1995. These rates exceed the statutory
federal income tax rate primarily due to the impact of state income taxes, the
inability to provide a tax benefit for losses incurred at certain of the
Company's foreign operations, and the nondeductible amortization of cost in
excess of net assets of acquired companies.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $213.2 million at March 30, 1996,
compared with $166.9 million at December 30, 1995, an increase of $46.3 million.
Included in working capital are cash and cash equivalents of $176.7 million at
March 30, 1996, compared with $120.4 million at December 30, 1995. Cash provided
by operating activities was $12.5 million for the three months ended March 30,
1996. Cash used for an increase in inventories due to the introduction a new
mass spectrometer was more than offset by an increase in other current
liabilities primarily due to an increase in customer deposits.
- A56 -
<PAGE>
In March 1996, the Company sold 3,000,000 shares of its common stock in
an initial public offering at $15.00 per share for net proceeds of approximately
$41.6 million. Subsequent to the end of the quarter, the underwriters of the
Company's initial public offering exercised their over-allotment option to
purchase an additional 450,000 shares of the Company's common stock for net
proceeds of approximately $6.3 million.
During the remainder of 1996, the Company plans to expend approximately
$2.2 million for property, plant and equipment. Although the Company expects to
have positive cash flow from its existing operations, the Company anticipates it
will require significant amounts of cash to pursue the acquisition of
complementary businesses. In December 1995, Thermo Instrument Systems Inc.
(Thermo Instrument) acquired the assets of the analytical instrument division of
Analytical Technology, Inc. (ATI) and in March 1996, Thermo Instrument acquired
a substantial portion of the Scientific Instruments Division of Fisons plc.
(Fisons). The Company has had discussions with Thermo Instrument regarding the
acquisition of the Automass division of ATI, which manufactures mass
spectrometers, and the CE Instruments and Mass Lab divisions of Fisons, which
manufacture gas chromatographs and benchtop quadrupole mass spectrometers,
respectively. The Automass, CE Instruments, and Mass Lab divisions had revenues
of approximately $7 million, $38 million, and $10 million, respectively, in
1995. No assurance can be given that the Company will ultimately acquire these
businesses, and the timing and terms of the acquisitions, including price, would
be subject to negotiation between the Company and Thermo Instrument. The Company
expects that it will finance acquisitions through a combination of internal
funds, additional debt or equity financing from the capital markets, or
short-term borrowings from Thermo Instrument or Thermo Electron Corporation
(Thermo Electron), although there is no agreement with Thermo Instrument or
Thermo Electron under which such parties are obligated to lend funds to the
Company. The Company believes that its existing resources are sufficient to meet
the capital requirements of its existing businesses for the foreseeable future.
- A57 -
<PAGE>
Prospectus
March 19, 1996
THERMOQUEST CORPORATION
-----------------------
Management's Discussion and Analysis of Financial Condition And Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company develops, manufactures and sells mass spectrometers, liquid
chromatographs and gas chromatographs. These analytical instruments are used in
the quantitative and qualitative chemical analysis of organic and inorganic
compounds at ultra-trace levels of detection. The Company's products are used
primarily by pharmaceutical companies for drug research, testing and quality
control; by environmental laboratories for testing water, air and soil samples
for compliance with environmental regulations; by chemical companies for
research and quality control; by manufacturers for testing in certain industrial
applications, such as the manufacture of silicon chips, and for quality control;
by food and beverage companies for quality control and to test for product
contamination, and in forensic applications.
The Company was incorporated in June 1995 as a wholly owned subsidiary of
Thermo Instrument. After the formation of the Company, Thermo Instrument
transferred to the Company all of the assets, liabilities and businesses of
Finnigan and TSP. The Company's strategy is to supplement its internal growth
with the acquisition of complementary products and technologies. The Company
has successfully completed several such acquisitions. Thermo Instrument
acquired Spectra-Physics Analytical, a manufacturer of liquid chromatography
instruments, in February 1993 and Tremetrics, a manufacturer of gas
chromatographs, in March 1994; both of these companies are now part of TSP. In
addition, the Company acquired Extrel FTMS, Inc., a manufacturer of fourier
transform mass spectrometers, from Waters Technologies Corporation in January
1996. In the future, the Company will seek to acquire businesses which have
strong technologies and good reputations and presence in the markets in which
they compete, but may have relatively poor profitability because of high
manufacturing and operating expenses. To realize an attractive return on its
investment in any such future acquisitions, the Company will need to
successfully reduce the expenses of any acquired company. There can be no
assurance that such businesses will be available at prices attractive to the
Company. Since the Company competes primarily on the basis of its technology,
it will also need to continually improve the technology underlying the products
of any company it acquires, as well as the technology underlying its existing
products. While obsolescence of older products is a risk inherent in a company
- A58 -
<PAGE>
that periodically introduces newer, more technologically capable products, the
Company attempts to manage its inventory levels to reduce exposure resulting
from such obsolescence.
Approximately 69% of the Company's revenues originate outside the United
States. 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 affecting the
relationship between the U.S. dollar and foreign currencies. Where appropriate,
the Company uses forward contracts to reduce its exposure to currency
fluctuations.
RESULTS OF OPERATIONS
1995 Compared With 1994
- -----------------------
Revenues were $241.9 million in 1995, compared with $223.4 million in 1994,
an increase of 8.3%. Revenues increased $11.2 million in 1995 due to the
weakness of the U.S. dollar in relation to foreign currencies, particularly the
Japanese yen and the German mark. The remaining increase in revenues was
primarily due to the introduction of a new mass spectrometer by the Company in
1995.
The gross profit margin was 50.1% in 1995, compared with 49.6% in 1994.
Selling, general and administrative expenses as a percentage of revenues
remained relatively unchanged at 27.5% in 1995, compared with 28.0% in 1994.
Research and development expenses as a percentage of revenues increased to 7.2%
in 1995 from 6.6% in 1994 primarily due to increased expenditures in connection
with a line of mass spectrometry products that was introduced in 1995.
Interest income increased to $2.7 million in 1995 from $0.3 million in 1994
as a result of interest income earned on the invested proceeds from the
Company's 5% Convertible Subordinated Debentures, which were issued in August
1995. Interest expense increased to $3.7 million in 1995 from $1.7 million in
1994 primarily due to interest on the Company's 5% Convertible Subordinated
Debentures. Interest expense for both periods includes interest on mortgage
debt on the Company's San Jose, California facility and on borrowings by the
Company's foreign subsidiaries from local banks.
The effective tax rate was 41.9% in 1995, compared with 42.3% in 1994.
These rates exceed the statutory federal income tax rate primarily due to the
impact of state income taxes, the inability to provide a tax benefit for losses
incurred at certain of the Company's foreign operations and the nondeductible
amortization of cost in excess of net assets of acquired companies.
- A59 -
<PAGE>
The Company expects the growth of its international business to continue.
Inherent in international growth are risks such as greater difficulties in
collecting accounts receivable due to longer payment cycles and possible
difficulties enforcing agreements and legal claims in foreign jurisdictions.
Tax rates in certain foreign countries exceed that of the United States and
foreign earnings may be subject to withholding requirements or the imposition of
tariffs, exchange controls or other restrictions. In addition, currency
exchange fluctuations affecting the relationship of the U.S. dollar and foreign
currencies may adversely affect the Company's results of operations and cash
flows.
1994 Compared With 1993
- -----------------------
Revenues were $223.4 million in 1994, compared with $204.8 million in 1993,
an increase of 9.1%. Revenues increased primarily due to the inclusion of
additional revenues from Spectra-Physics Analytical, which was acquired by
Thermo Instrument in February 1993, and the inclusion of additional revenues
from Tremetrics, which was acquired by Thermo Instrument in March 1994. In
addition, revenues increased $4.5 million in 1994 due to the weakness of the
U.S. dollar in relation to foreign currencies, particularly the Japanese yen.
These increases were offset in part by declining sales in Europe due to the
European recession.
The gross profit margin improved to 49.6% in 1994 from 47.3% in 1993,
primarily due to increased sales of higher-margin mass spectrometry instruments
and, to a lesser extent, favorable currency translations as discussed above.
Selling, general and administrative expenses as a percentage of revenues
remained relatively unchanged at 28.0% in 1994, compared with 27.4% in 1993.
Research and development expenses as a percentage of revenues were 6.6% in 1994,
compared with 6.7% in 1993.
Interest expense in 1994 and 1993 primarily represents interest on mortgage
debt on the Company's San Jose, California facility and on borrowings by the
Company's foreign subsidiaries from local banks.
The effective tax rate was 42.3% in 1994, compared with 44.4% in 1993.
These rates exceed the statutory federal income tax rate primarily due to the
impact of state income taxes, the inability to provide a tax benefit for losses
incurred at certain of the Company's foreign operations and the nondeductible
amortization of cost in excess of net assets of acquired companies. The
effective tax rate decreased in 1994 due to a reduction in income taxed at
higher rates in Germany.
- A60 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $166.9 million at December 30, 1995,
compared with $48.0 million at December 31, 1994. Included in working capital
are cash and cash equivalents of $120.4 million at December 30, 1995, compared
with $13.1 million at December 31, 1994. In August 1995, the Company issued
$96.3 million principal amount of 5% Convertible Subordinated Debentures for net
proceeds of $93.9 million. During 1995, the Company's operating activities
provided $16.1 million of cash. Accounts receivable increased $13.1 million
primarily due to large shipments to Japan in the fourth quarter of 1995 and
inventories increased $7.5 million due to new product introductions. During
1995, the Company expended $2.8 million on purchases of property, plant and
equipment.
In 1996, the Company plans to make expenditures of approximately $3.1
million for property, plant and equipment. In addition, the Company has an
underfunded defined benefit pension plan covering employees of its manufacturing
subsidiary in Bremen, Germany. The Company's policy is to fund the plan at a
level within the range required by applicable regulations. As of December 30,
1995, the unfunded liabilities for this plan were $11.5 million. As of December
30, 1995, the Company's foreign subsidiaries have available short-term credit
facilities of $7,282,000.
Prior to June 1995, the Company's cash flows from the business were
transferred to Thermo Instrument. Following the Company's incorporation in June
1995, cash flows from the business are retained within the Company for working
capital needs and to fund growth through the acquisition of complementary
businesses as well as through research and development.
Though the Company expects positive cash flow from its existing operations,
the Company anticipates it will require significant amounts of cash to pursue
the acquisition of complementary businesses. The Company expects that it will
finance these acquisitions through a combination of internal funds, including
the net proceeds from the sale of the shares of Common Stock offered hereby,
additional debt or equity financing from the capital markets, or short-term
borrowings from Thermo Instrument or Thermo Electron, although there is no
agreement with Thermo Instrument or Thermo Electron under which such parties are
obligated to lend funds to the Company. The Company believes that its existing
resources are sufficient to meet the capital requirements of its existing
businesses for at least the next 24 months.
- A61 -
<PAGE>
Prospectus
June 7, 1996
THERMO OPTEK CORPORATION
------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company's principal operating units include TJA, a manufacturer and
distributor of AA and AE spectrometry products based in Franklin, Massachusetts,
and Nicolet, a manufacturer and distributor of FT-IR and FT-Raman spectrometry
products based in Madison, Wisconsin. Both TJA and Nicolet have worldwide sales
and service organizations with a strong overseas presence in Europe, Japan and
China.
The Company's strategy is to supplement its internal growth with the
acquisition of businesses and technologies that complement and augment its
existing product lines. In January 1995, the Company acquired the analytical
instruments division of Baird, a manufacturer of arc/spark spectrometers, and
subsequently consolidated its operations with TJA. In December 1995, Thermo
Instrument acquired the assets of the analytical instruments division (the
"Division") of ATI. In April 1996, the Company acquired the Division's Mattson
and Unicam businesses. Mattson is a manufacturer of FT-IR spectroscopy
instruments, and Unicam is a manufacturer of AA and ultraviolet/visible
spectroscopy instruments. Because, as of December 30, 1995, the Company, Mattson
and Unicam were deemed for accounting purposes to be under control of their
common owner, Thermo Instrument, the accompanying 1995 historical financial
information includes the results of operations of Mattson and Unicam from
December 1, 1995, the date these businesses were acquired by Thermo Instrument.
Because the Company had not disbursed the funds in connection with the
acquisition of Mattson and Unicam at December 30, 1995, the transfer of these
businesses has been reflected as a contribution of capital in excess of par
value as of December 1, 1995. The $36.6 million payment from the Company to
Thermo Instrument will be accounted for as a reduction of capital in excess of
par value as of April 11, 1996. Combined sales for Mattson and Unicam were $57.8
million for the eleven months ended November 30, 1995. In February 1996, the
Company acquired Oriel, a manufacturer and distributor of electro-optical
instruments and components and Corion, a manufacturer of commercial optical
filters. Oriel and Corion reported sales of $18.8 million and $8.5 million,
respectively, in 1995. See "Business -- Acquisitions."
In March 1996, Thermo Instrument completed the acquisition of a substantial
portion of the businesses comprising the scientific instruments division of
Fisons. The Company is discussing with Thermo Instrument the terms pursuant to
which the Company would acquire ARL, a Switzerland-based former subsidiary of
Fisons that manufactures arc/spark AE spectrometers and wavelength dispersive
X-ray fluorescence instruments. ARL had revenues of $55.7 million and $13.5
million for the year ended December 30, 1995 and for the three months ended
March 30, 1996, respectively. Although the Company believes it will acquire ARL
from Thermo Instrument, no assurance can be given that such acquisition will be
completed. See "Business -- Acquisitions."
- A62 -
<PAGE>
Certain of the businesses the Company has acquired historically have had
low levels of profitability, and businesses that the Company may acquire in the
future may also be marginally profitable or unprofitable. In general, the
businesses the Company seeks to acquire have a strong reputation in the markets
in which they compete but relatively poor operating results due to high
manufacturing and operating costs. The Company believes it can gradually reduce
these expenses and improve the acquired businesses' profitability, although
there can be no assurance that the Company will be successful in such efforts.
As a result of the acquisition of the Mattson and Unicam businesses from Thermo
Instrument and the potential ARL acquisition, the Company expects that its
operating margins will be reduced until such time as the Company has improved
the profitability of these businesses to levels comparable with those of the
Company's other businesses.
RESULTS OF OPERATIONS
First Quarter 1996 Compared With First Quarter 1995
---------------------------------------------------
Revenues were $69.7 million in the first quarter of 1996, compared with
$50.9 million in the first quarter of 1995, an increase of 37.0%. Revenues
increased $13.5 million and $3.5 million due to the acquisitions of Mattson and
Unicam in December 1995 and Oriel and Corion in February 1996, respectively. In
addition, revenues increased $2.7 million in Japan primarily as a result of
sales to the Japanese government by Nicolet, offset in part by the unfavorable
effects of currency translation due to the strengthening of the U.S. dollar in
relation to the Japanese yen.
The gross profit margin declined to 48.7% in the first quarter of 1996 from
49.5% in the first quarter of 1995 primarily due to the inclusion of
lower-margin revenues at Mattson and Unicam. An increase in the gross profit
margin at Nicolet as a result of improved margins for products introduced in
1995 was offset by a decline in the gross profit margin at TJA due to increased
competition resulting from the contraction of the environmental market. The U.S.
environmental market has been consolidating, which has negatively affected sales
of several of TJA's products.
Selling, general and administrative expenses as a percentage of revenues
increased to 30.6% in the first quarter of 1996 from 28.2% in the first quarter
of 1995 primarily due to higher costs as a percentage of revenues at Mattson and
Unicam, specifically higher Unicam international selling and administrative
costs. The Company is in the process of consolidating certain international
selling and administrative functions of Unicam with existing TJA and Nicolet
entities. Research and development expenses as a percentage of revenues
increased to 7.1% in 1996 from 6.3% in 1995 primarily due to higher research and
development costs as a percentage of revenues at Mattson and Unicam.
Interest income increased to $1.5 million in the first quarter of 1996 from
$13,000 in the first quarter of 1995 as a result of interest income earned on
the invested proceeds from the Company's $96.3 million principal amount of 5%
Convertible Subordinated Debentures, which were issued in October 1995. Interest
expense increased to $1.6 million in 1996 from $0.4 million in 1995 primarily
due to interest on these debentures.
- A63 -
<PAGE>
The effective tax rate was 43.5% in the first quarter of 1996, compared
with 41.5% in the first quarter of 1995. These rates exceed the statutory
federal income tax rate due to the impact of state income taxes, nondeductible
amortization of cost in excess of net assets of acquired companies and the
inability in 1995 to provide a tax benefit on foreign losses, offset in part by
the tax benefit associated with a foreign sales corporation. The effective tax
rate increased in 1996 primarily as a result of higher nondeductible
amortization of cost in excess of net assets of acquired companies.
The Company has established reserves totaling $11.6 million for certain
exit and other related costs in connection with the acquisitions of Mattson and
Unicam. These exit and other related costs are expected to include primarily
severance obligations and excess facility costs. The Company began reducing
staffing levels at the acquired businesses during the first quarter of 1996 and
is continuing these actions during the second quarter of 1996. The Company
expects to substantially complete its restructuring of Mattson and Unicam by
December 1996. The Company's results of operations will be substantially
unaffected by the payment of these restructuring costs because the reserves were
established as part of the cost of acquiring these businesses. In the fiscal
periods following such restructuring activities, the Company expects that its
results of operations will benefit from lower costs at these acquired
businesses, offset in part by amortization of cost in excess of net assets of
acquired companies.
As a result of the Unicam acquisition and potential ARL acquisition
referred to above, it is expected that the Company's international business will
continue to increase in 1996. Inherent in international operations are risks
such as greater difficulties in collecting accounts receivable due to longer
payment cycles and possible difficulties in enforcing agreements and legal
claims in foreign jurisdictions. Tax rates in certain foreign countries exceed
that of the U.S. and foreign earnings may be subject to withholding requirements
or the imposition of tariffs, exchange controls or other restrictions. In
addition, currency exchange fluctuations affecting the relationship of the U.S.
dollar and foreign currencies may adversely affect the Company's results of
operations and cash flows.
1995 Compared With 1994
-----------------------
Revenues were $212.2 million in 1995, compared with $165.4 million in 1994,
an increase of 28.3%. Revenues increased $25.9 million and $9.2 million due to
the acquisition of Baird in January 1995 and Mattson and Unicam in December
1995, respectively. In addition, revenues from Nicolet increased $10.4 million
due to increased demand for its products, particularly in Japan and the Pacific
Rim and, to a lesser extent, due to currency fluctuations. Overall, revenues
increased $5.7 million in 1995 due to the weakness of the U.S. dollar in
relation to foreign currencies.
The gross profit margin declined to 48.8% in 1995 from 50.3% in 1994. This
decline was primarily due to the inclusion of lower-margin products from Baird
and disruption in operations caused by the consolidation of the manufacturing
operations of Baird and TJA into a new facility in mid-1995. In addition,
increased competition due to the contraction of the environmental market as
discussed in the results of operations for the first quarter had a negative
- A64 -
<PAGE>
impact on the margins of TJA in 1995. The declines at Baird and TJA were offset
in part due to improved margins at Nicolet resulting primarily from the weakness
of the U.S. dollar in relation to foreign currencies, in particular the Japanese
yen and German mark, as well as improved margins for its newly introduced
products.
Selling, general and administrative expenses as a percentage of revenues
increased to 29.3% in 1995 from 28.1% in 1994 as a result of higher expenses at
Baird prior to the consolidation of Baird's operations with TJA and expanded
selling efforts in China and Brazil. Research and development expenses as a
percentage of revenues were relatively unchanged at 6.1% in 1995, compared with
6.3% in 1994.
Interest income increased to $1.5 million in 1995 as a result of interest
income earned on the invested proceeds from the Company's $96.3 million
principal amount of 5% Convertible Subordinated Debentures. Interest expense
increased to $2.5 million in 1995 from $1.7 million in 1994 primarily due to
interest on these debentures.
The effective tax rate was 41.8% in 1995 and 41.5% in 1994. These rates
exceed the statutory federal income tax rate due to the impact of state income
taxes, nondeductible amortization of cost in excess of net assets of acquired
companies and the inability in 1995 to provide a tax benefit on foreign losses,
offset in part by the tax benefit associated with a foreign sales corporation.
1994 Compared With 1993
-----------------------
Revenues were $165.4 million in 1994, compared with $161.0 million in 1993.
An increase in revenues at TJA due to increased demand, a $4.6 million increase
in revenues due to the acquisitions of Hilger Analytical in July 1993 and CID
Technologies Inc. in October 1994, and a $3.3 million increase in revenues due
to the weakness of the U.S. dollar in relation to foreign currencies were offset
in part by a decline in revenues at Nicolet due to two large orders that were
shipped during 1993.
The gross profit margin declined to 50.3% in 1994 from 52.4% in 1993 due to
lower margins at TJA resulting from changes in product mix and lower margins on
sales in Europe due to the European recession.
Selling, general and administrative expenses as percentages of revenues
were 28.1% in 1994, compared with 28.4% in 1993. Research and development
expenses as a percentage of revenues remained relatively unchanged at 6.3% in
1994, compared with 6.6% in 1993.
Interest expense declined to $1.7 million in 1994 from $2.2 million in 1993
due to the repayment of borrowings by Nicolet in September 1994 and reduced
working capital borrowings at the Company's European subsidiaries.
The effective tax rate was 41.5% in 1994, compared with 40.4% in 1993.
These rates exceed the statutory federal income tax rate due primarily to the
impact of state income taxes and the 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.
- A65 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $140.4 million at March 30, 1996, compared
with $144.5 million at December 30, 1995. Included in working capital are cash
and cash equivalents of $109.8 million at March 30, 1996, compared with $116.9
million at December 30, 1995. During the first three months of 1996, $10.2
million of cash was provided by operating activities. Other current liabilities
increased $5.5 million primarily as a result of higher income taxes payable and
an increase in payables to Thermo Electron and affiliated companies. Accounts
receivable increased to $62.6 million at March 30, 1996 from $62.3 million and
$40.4 million at December 30, 1995 and December 31, 1994, respectively. The
increase from December 31, 1994 to December 30, 1995 resulted from $13.5 million
of receivables at Mattson and Unicam, as well as higher receivables due to the
acquisition of Baird and higher international receivables, which typically have
longer payment cycles. Inventories increased from $43.0 million at December 30,
1995 to $51.1 million at March 30, 1996 primarily due to an increase of $6.0
million as a result of acquisitions.
The Company's investing activities used $17.0 million of cash in the first
three months of 1996. The Company expended $15.5 million, net of cash acquired,
for the acquisitions of Oriel and Corion and $1.6 million for the purchase of
property, plant and equipment.
The Company's financing activities used $90,000 of cash in the first three
months of 1996 for the repayment of long-term obligations.
In April 1996, the Company expended $36.6 million for the acquisitions of
Mattson and Unicam. During the remainder of 1996, the Company plans to make
expenditures of approximately $1.4 million for property, plant and equipment. As
discussed in the results of operations for the first quarter, the Company has
established reserves of $11.6 million for exit and other related costs in
connection with the acquisitions of Mattson and Unicam. The Company expects that
the cash impact of the reserves will affect the Company primarily in 1996 and
1997, as the Company makes payments for severance and excess facilities.
Though the Company expects positive cash flow from its existing operations,
the Company anticipates it will require significant amounts of cash to pursue
the acquisition of complementary businesses. The Company expects that it will
finance and subsequently restructure the operations of such acquired businesses
through a combination of internal funds, including the net proceeds from the
sale of the shares of Common Stock offered hereby, additional debt or equity
financing from capital markets, or short-term borrowings from Thermo Instrument
or Thermo Electron, although there is no agreement with Thermo Instrument or
Thermo Electron under which such parties are obligated to lend funds to the
Company. For the potential ARL acquisition, if consummated, the Company expects
to expend between $28 million and $38 million and assume debt of approximately
$12 million. The Company anticipates funding the purchase price for ARL from
existing cash balances. The purchase of Mattson and Unicam in April 1996 and the
potential purchase of ARL are not expected to have a material adverse impact on
the Company's short-term liquidity. The Company believes that its existing
resources are sufficient to meet the capital requirements of its existing
businesses for at least the next 24 months.
- A66 -
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected financial information presented below as of and for the fiscal
years ended January 1, 1994, December 31, 1994 and December 30, 1995 has been
derived from the Company's Consolidated Financial Statements, which have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report included elsewhere in this Prospectus. This information should be
read in conjunction with the Company's financial statements and related notes
included elsewhere in this Prospectus. The selected financial information for
the fiscal years ended December 28, 1991 and January 2, 1993 and for the three
months ended April 1, 1995 and March 30, 1996 have not been audited but, in the
opinion of the Company, includes all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly such information in
accordance with generally accepted accounting principles applied on a consistent
basis. The results of operations for the three months ended March 30, 1996 are
not necessarily indicative of results for the entire year.
- A67 -
<PAGE>
1991 1992(1) 1993 1994 1995(2)(3)(4)
-------- -------- -------- ------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME DATA:
Revenues................... $67,032 $102,232 $161,006 $165,398 $212,152
------- -------- -------- -------- --------
Costs and Operating
Expenses:
Cost of revenues......... 36,574 50,851 76,632 82,124 108,590
Selling, general and
administrative
expenses............... 15,788 28,121 45,778 46,532 62,109
Research and development
expenses............... 3,900 7,176 10,593 10,496 13,018
------- -------- -------- -------- --------
56,262 86,148 133,003 139,152 183,717
------- -------- -------- -------- --------
Operating Income........... 10,770 16,084 28,003 26,246 28,435
Interest Income............ -- 12 58 89 1,514
Interest Expense........... (957) (1,367) (2,249) (1,672) (2,450)
Other Expense, Net......... -- -- -- -- --
------- -------- -------- -------- --------
Income Before Provision for
Income Taxes............. 9,813 14,729 25,812 24,663 27,499
Provision for Income
Taxes.................... 4,574 6,848 10,440 10,240 11,490
------- -------- -------- -------- --------
Net Income................. $ 5,239 $ 7,881 $ 15,372 $ 14,423 $ 16,009
======= ======== ======== ======== ========
Earnings per Share(6)...... $ .12 $ .17 $ .34 $ .32 $ .35
======= ======== ======== ======== ========
Weighted Average
Shares(6)................ 45,157 45,157 45,157 45,157 45,157
======= ======== ======== ======== ========
BALANCE SHEET DATA (AT END
OF PERIOD):
Working Capital............ $20,234 $ 34,148 $ 31,448 $ 33,429 $144,541
Total Assets............... 52,250 226,130 229,034 230,606 432,882
Long-term Obligations...... 944 9,106 8,589 1,037 101,079
Shareholder's Investment... 28,192 149,304 146,918 156,175 220,988
- A68 -
<PAGE>
PRO FORMA COMBINED(5)
-------------------------
THREE MONTHS
THREE MONTHS ENDED FISCAL YEAR ENDED
------------------- ----------- ------------
APRIL 1, MARCH 30, MARCH 30,
1995(2) 1996 1995 1996
-------- --------- ----------- ------------
STATEMENT OF INCOME DATA:
Revenues................... $ 50,862 $ 69,668 $325,628 $ 83,145
-------- -------- -------- --------
Costs and Operating
Expenses:
Cost of revenues......... 25,710 35,760 180,181 44,967
Selling, general and
administrative
expenses............... 14,338 21,326 97,532 23,917
Research and development
expenses............... 3,211 4,934 21,394 5,826
-------- -------- -------- --------
43,259 62,020 299,107 74,710
-------- -------- -------- --------
Operating Income........... 7,603 7,648 26,521 8,435
Interest Income............ 13 1,541 1,956 525
Interest Expense........... (403) (1,591) (7,740) (1,703
Other Expense, Net......... -- -- (896) (64
-------- -------- -------- --------
Income Before Provision for
Income Taxes............. 7,213 7,598 19,841 7,193
Provision for Income
Taxes.................... 2,993 3,302 9,785 3,214
-------- -------- -------- --------
Net Income................. $ 4,220 $ 4,296 $ 10,056 $ 3,979
======== ======== ======== ========
Earnings per Share(6)...... $ .09 $ .10 $ .22 $ .09
======== ======== ======== ========
Weighted Average
Shares(6)................ 45,157 45,157 45,157 45,157
======== ======== ======== ========
BALANCE SHEET DATA (AT END
OF PERIOD):
Working Capital............ $ 40,731 $140,393 $ 67,386
Total Assets............... 260,504 441,787 436,504
Long-term Obligations...... 1,103 100,969 100,969
Shareholder's Investment... 173,168 224,480 187,922
- A69 -
<PAGE>
(1) Includes the results of Nicolet since its acquisition by Thermo Instrument
in August 1992.
(2) Includes the results of Baird since its acquisition by the Company in
January 1995.
(3) Includes the results of the Mattson and Unicam divisions of ATI since their
acquisition by Thermo Instrument in December 1995.
(4) Reflects the issuance in October 1995 of $96,250,000 principal amount of
Debentures.
(5) The pro forma combined statement of income data for fiscal year 1995 is
derived from the pro forma combined condensed statement of income included
elsewhere in this Prospectus, which was prepared as if the issuance of the
Debentures in October 1995, the acquisitions of the Mattson and Unicam
divisions of ATI and the proposed acquisition of ARL had occurred at the
beginning of 1995. The acquisitions are assumed to be financed by the net
proceeds from the issuance of the Debentures. The pro forma results are not
necessarily indicative of future operations or the actual results that would
have occurred had the issuance of the Debentures, the acquisitions of the
Mattson and Unicam divisions of ATI and the proposed acquisition of ARL
occurred at the beginning of 1995. The pro forma combined statement of
income data for the three months ended March 30, 1996 is derived from the
pro forma combined condensed statement of income included elsewhere in this
Prospectus, which was prepared as if the proposed acquisition of ARL had
occurred at the beginning of 1995. The pro forma combined balance sheet data
as of March 30, 1996 is derived from the pro forma combined condensed
balance sheet on page F-34, which was prepared as if the payment of $36.6
million by the Company to Thermo Instrument in April 1996, made in
consideration for the transfer of the Mattson and Unicam divisions of ATI,
had occurred on December 1, 1995 and the proposed acquisition of ARL had
occurred on March 30, 1996.
(6) Pursuant to Securities and Exchange Commission requirements, earnings per
share have been presented for all periods. Weighted average shares for such
periods include the 45,000,000 shares issued to Thermo Instrument in
connection with the initial capitalization of the Company and the effect of
the assumed exercise of stock options issued within one year prior to the
Company's initial public offering.
- A70 -
<PAGE>
Form 10-K
April 1, 1996
THERMO TERRATECH INC.
---------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company is a provider of environmental services and infrastructure
planning and design services, encompassing a range of specializations
within the consulting and design, remediation and recycling, and
laboratory-testing industries. The Company also provides metal-treating
services and thermal-processing systems used to treat primary metals and
metal parts. The Company's environmental services businesses are affected
by several factors, most particularly, extreme weather variations,
government spending, and deregulation of remediation activities.
Consulting and Design - The Company's wholly owned Bettigole Andrews &
Clark and Normandeau Associates subsidiaries provide both private and
public sector clients with a range of consulting services that address
transportation planning and design, and natural resource management issues,
respectively. In February 1995, the Company acquired Elson T. Killam
Associates Inc. (Killam Associates), which provides environmental
consulting and engineering services and specializes in wastewater treatment
and water resources management.
Remediation and Recycling - The Company's majority-owned Thermo
Remediation Inc. (Thermo Remediation) subsidiary operates a network of
soil-remediation centers, serving customers in more than a dozen states on
the East and West coasts by providing thermal treatment of soil to remove
and destroy petroleum contamination caused by leaking underground and
aboveground storage tanks, spills, and other sources. In addition, Thermo
Remediation's Thermo Fluids subsidiary, located in Arizona, offers
fluids-recycling services including waste motor oil and wastewater
treatment throughout Arizona, Nevada, and in neighboring states. Through
its Thermo Nutech subsidiary, Thermo Remediation provides services to
remove radioactive contaminants from sand, gravel, and soil, as well as
health physics, radiochemistry laboratory, and radiation dosimetry
services. In December 1995, Thermo Remediation acquired Remediation
Technologies, Inc. (ReTec), which provides integrated environmental
services such as remediation of industrial sites contaminated with organic
wastes and residues. The Company's majority-owned Thermo EuroTech N.V.
(Thermo EuroTech) subsidiary, located in the Netherlands, provides
wastewater treatment services as well as services to test, remove, and
install underground storage tanks. In March 1995, Thermo EuroTech acquired
Refining and Trading Holland B.V. (North Refinery), which specializes in
converting "off-spec" and contaminated petroleum fluids into usable oil
products.
Laboratory-testing - The Company's wholly owned Thermo Analytical
subsidiary operates a network of analytical laboratories that provide
environmental testing services to commercial and government clients
- A71 -
<PAGE>
throughout the U.S. The May 1995 acquisition of Lancaster Laboratories,
Inc. (Lancaster Laboratories) expands the Company's range of contract
services beyond environmental testing to the pharmaceutical- and
food-testing industries.
Metal-treating - The Company performs metallurgical processing
services using thermal-treatment equipment at locations in California and
Minnesota. The Company also designs, manufactures, and installs advanced
custom-engineered, thermal-processing systems through its equipment
division located in Michigan.
In October 1995, the Financial Accounting Standards Board (FASB)
issued an exposure draft of a Proposed Statement of Financial Accounting
Standards, "Consolidated Financial Statements: Policy and Procedures"
(Proposed Statement). The Proposed Statement would establish new rules for
how consolidated financial statements should be prepared. If the Proposed
Statement is adopted, there could be significant changes in the way the
Company records certain transactions of its controlled subsidiaries,
including the following: (i) any sale of the stock of a subsidiary that
does not result in a loss of control would be accounted for as a
transaction in equity of the consolidated entity with no gain or loss being
recorded and (ii) under certain circumstances, acquisitions could be
structured to significantly reduce the goodwill that is recorded and
consequently reduce the Company's future goodwill amortization associated
with the acquisition. The Company typically acquires technology companies
which are often characterized by significant amounts of goodwill. In
addition, under the Proposed Statement, a company that has made certain
equity investments of generally less than 20% ownership would record a gain
(or loss) upon increasing its investment level to the point of exerting
"significant influence," generally 20% or higher.
The FASB conducted a hearing concerning the Proposed Statement in
February 1996, at which Thermo Electron Corporation (Thermo Electron),
along with other major companies and many of the major accounting firms and
accounting associations, expressed their disagreement with various parts of
the Proposed Statement. The FASB expects to issue a final statement which
could become effective for fiscal years beginning after December 15, 1996.
RESULTS OF OPERATIONS
Fiscal 1996 Compared With Fiscal 1995
-------------------------------------
Total revenues increased 62% to $217.4 million in fiscal 1996 from
$133.8 million in fiscal 1995. Consulting and design services revenues
increased to $74.0 million in fiscal 1996 from $40.3 million in fiscal
1995, primarily as a result of an increase of $34.2 million due to the
inclusion of revenues for a full year from Killam Associates, which was
acquired in February 1995. Revenues from remediation and recycling services
increased to $77.0 million in fiscal 1996 from $58.2 million in fiscal
1995, primarily due to the inclusion of $24.4 million in revenues from
businesses acquired or constructed in late fiscal 1995 and 1996, and higher
revenues from a long-term environmental restoration contract for the U.S.
Department of Energy's (DOE) Hanford site (Hanford), which began in the
second quarter of fiscal 1995. These increases were offset in part by lower
- A72 -
<PAGE>
soil-remediation services revenues resulting from a decrease in the volume
and price of soil processed as a result of regulatory uncertainties at
several sites, competitive pricing pressures, and severe weather conditions
primarily in the fourth quarter of fiscal 1996. Revenues from
radiochemistry laboratory work also decreased, reflecting a reduction in
spending at the DOE and delays in federal government budget appropriations.
Revenues from laboratory-testing services, excluding the radiochemistry
laboratory services included in remediation and recycling services,
increased to $34.6 million in fiscal 1996 from $8.6 million in fiscal 1995,
reflecting the inclusion of $29.1 million in revenues from Lancaster
Laboratories, which was acquired in May 1995, offset in part by a decline
in revenues due to reduced federal spending and a shift in business from
existing sites to the newly acquired Lancaster Laboratories. Metal-treating
revenues increased to $31.8 million in fiscal 1996 from $26.7 million in
fiscal 1995, primarily due to an increase in demand for thermal-processing
equipment.
The gross profit margin increased to 29% in fiscal 1996 from 26% in
fiscal 1995, due to the inclusion of higher-margin revenues from Killam
Associates and Lancaster Laboratories, offset in part by lower margins from
remediation and recycling services revenues primarily due to competitive
pricing pressures and lower revenues from higher-margin radiochemistry
laboratory work. In addition, gross profit margins at Thermo EuroTech
decreased as a result of severe winter weather and market conditions in
fiscal 1996.
During the second quarter of fiscal 1996, the Company wrote off
$4,995,000 of cost in excess of net assets of acquired company related to
its thermal-processing equipment business. In addition, in the second
quarter of fiscal 1996, the Company incurred a loss of $569,000 as a result
of the sale of an engineering office. These noncash expenses are
nondeductible for tax purposes.
Selling, general and administrative expenses as a percentage of
revenues increased to 22% in fiscal 1996 from 20% in fiscal 1995, primarily
due to the inclusion of higher selling, general and administrative expenses
as a percentage of revenues at Killam Associates and, to a lesser extent,
at Thermo EuroTech due to the settlement of several contract disputes.
Interest income increased to $5.1 million in fiscal 1996 from $3.3
million in fiscal 1995 as a result of higher invested balances following
the issuance of $38 million principal amount of 4 7/8% subordinated
convertible debentures by Thermo Remediation in May 1995 and a private
placement of shares of Thermo Remediation's common stock in May 1995,
offset in part by funds expended to purchase the business formerly operated
by the environmental services joint venture from Thermo Instrument Systems
Inc. (Thermo Instrument). Interest expense increased to $10.7
million in fiscal 1996 from $2.9 million in fiscal 1995 as a result of
borrowings from Thermo Electron for the February 1995 acquisition of Killam
Associates and the May 1995 acquisition of Lancaster Laboratories, and the
issuance of the 4 7/8% subordinated convertible debentures by Thermo
Remediation in May 1995. Interest expense will increase in fiscal 1997 as a
result of the May 1996 issuance of $115 million principal amount of 4 5/8%
subordinated convertible debentures by the Company.
- A73 -
<PAGE>
As a result of the issuance of stock by Thermo Remediation in fiscal 1996
and 1995, and by Thermo EuroTech in fiscal 1995, the Company recorded gains of
$4,127,000 and $1,343,000 in fiscal 1996 and 1995, respectively. These gains
represent increases in the Company's proportionate share of the subsidiaries'
equity and are classified as gain on issuance of stock by subsidiaries in the
accompanying statement of income.
The effective tax rates were 44% and 24% in fiscal 1996 and 1995,
respectively. The effective tax rate in fiscal 1996 was higher than the
statutory federal income tax rate primarily due to the nondeductible write-off
of cost in excess of net assets of acquired company and the loss on sale of
assets, offset in part by the nontaxable gains on issuance of stock by
subsidiaries and the reversal of previously established tax reserves of $750,000
that were no longer required due to the completion of certain revenue agent
reviews. In fiscal 1995, the effective tax rate was lower than the statutory
federal income tax rate primarily due to the exclusion of income taxed directly
to a minority partner.
Minority interest expense decreased to $1.2 million in fiscal 1996 from
$4.3 million in fiscal 1995 due primarily to the Company's purchase of the
businesses formerly operated by the Company's joint venture with Thermo
Instrument.
Fiscal 1995 Compared With Fiscal 1994
-------------------------------------
Total revenues were $133.8 million in fiscal 1995, compared with $110.1
million in fiscal 1994, an increase of 21%. Revenues from consulting and design
services increased to $40.3 million in fiscal 1995 from $29.7 million in fiscal
1994, primarily due to the inclusion of approximately $7.2 million in revenues
from Killam Associates, which was acquired in February 1995. Revenues from
remediation and recycling services increased 20% to $58.2 million in fiscal 1995
from $48.7 million in fiscal 1994, primarily due to an increase in the volume of
soil processed at the Company's soil-remediation centers located in Southern
California and Florida, additional revenues of $3.8 million from businesses
acquired in late fiscal 1994 and in fiscal 1995 and, to a lesser extent,
revenues generated from the Hanford contract. Revenues from laboratory-testing
services, excluding the radiochemistry laboratory services included in
remediation and recycling services, increased to $8.3 million in fiscal 1995
from $6.0 million in fiscal 1994, primarily due to the inclusion of revenues
from Terra Tech Labs, Inc. (Terra Tech), which was acquired in late fiscal 1994.
Metal-treating revenues increased to $26.7 million in fiscal 1995 from $25.7
million in fiscal 1994, primarily due to the Company's efforts to increase its
nongovernment business.
Contract revenues from related party in fiscal 1994 represents funding
under an agreement between the Company and Thermo Electron to fund up to $4.0
million of the direct and indirect costs of the Company's development of
soil-remediation centers. The Company earned no profit from this funding. As of
October 2, 1993, funding under this agreement was completed. Any expenses
incurred in connection with the development of additional soil-remediation
centers subsequent to October 2, 1993, are included in product and new business
development expenses in the accompanying statement of income.
- A74 -
<PAGE>
The gross profit margin increased to 26% in fiscal 1995 from 24% in fiscal
1994. The gross profit margin on consulting and design services improved to 25%
in fiscal 1995 from 17% in fiscal 1994 due to the inclusion of higher-margin
revenues at Killam, which was acquired in February 1995. The gross profit margin
on remediation and recycling services declined slightly to 33% in fiscal 1995
from 34% in fiscal 1994, primarily due to a decrease in higher-margin
radiochemistry laboratory revenues, offset in part by higher-margin revenues
associated with the start-up of the Hanford contract. The gross profit margin on
laboratory-testing services decreased to 23% in fiscal 1995 from 30% in fiscal
1994, primarily due to a decrease in higher-margin revenues and an increase in
lower-margin revenues from Terra Tech. The gross profit margin on metal-treating
revenues increased to 14% in fiscal 1995 from 8% in fiscal 1994 as a result of
the Company's efforts to increase nongovernment business.
Selling, general and administrative expenses as a percentage of revenues
remained relatively unchanged at 19.6% in fiscal 1995, compared with 19.2% in
fiscal 1994.
The Company recorded gains on the issuance of stock by subsidiaries of $1.3
million in fiscal 1995 and $4.5 million in fiscal 1994.
Net interest income was $0.5 million in fiscal 1995, compared with $0.6
million in fiscal 1994. An increase in interest expense due to borrowings from
Thermo Electron in May 1994 to fund the Company's investment in the
environmental services joint venture with Thermo Instrument and in February 1995
to fund the Company's acquisition of Killam Associates was offset in part by
higher average invested balances.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital, including cash, cash equivalents, and
short-term available-for-sale investments, increased to $67.4 million at March
30, 1996 from $64.7 million at April 1, 1995. Cash, cash equivalents, and short-
and long-term available-for-sale investments were $40.3 million at March 30,
1996, compared with $51.5 million at April 1, 1995. In addition, at March 30,
1996, the Company had $24.3 million of long-term held-to-maturity investments,
compared with $22.6 million at April 1, 1995. Of the $40.3 million balance at
March 30, 1996, $35.3 million was held by Thermo Remediation, $0.1 million by
Thermo EuroTech, and the remainder by the Company and its wholly owned
subsidiaries. During fiscal 1996, operating activities provided cash of $8.5
million. The Company used cash of $5.4 million in fiscal 1996 to fund increases
in inventory and unbilled contract costs and fees primarily due to increased
thermal-processing equipment contracts and increased inventory at North
Refinery, and used $5.2 million to reduce current liabilities.
During fiscal 1996, the Company expended an aggregate of $78.1 million, net
of cash acquired, to purchase Lancaster Laboratories, ReTec, and the businesses
formerly operated by the Company's joint venture with Thermo Instrument. In
addition, the Company expended $16.5 million on purchases of property, plant and
equipment, primarily relating to two soil-remediation sites constructed in
fiscal 1996.
- A75 -
<PAGE>
In May 1995, Thermo Remediation issued and sold $38 million principal
amount of 4 7/8% subordinated convertible debentures due 2000. In addition, in
May 1995, Thermo Remediation sold 500,000 shares of its common stock in a
private placement for net proceeds of $6.6 million. In June 1995, Thermo
Remediation repaid its $4.0 million note payable to Thermo Electron with
proceeds from the offerings.
In May 1996, the Company issued and sold $115 million principal amount of
4 5/8% subordinated convertible debentures due 2003. The debentures are
convertible into shares of the Company's common stock at a price of $15.90 per
share. In May 1996, the Company repaid its $15.0 million and $35.0 million notes
payable to Thermo Electron with proceeds from the offering.
The Company has no material commitments to acquire other businesses or for
capital expenditures. Such expenditures will largely be affected by the number
and size of the complementary businesses that can be acquired or developed
during the year. The Company believes that it has adequate resources to meet the
financial needs of its current operations for the foreseeable future.
SELECTED FINANCIAL INFORMATION
(In thousands except
per share amounts) 1996(a) 1995(b) 1994(c) 1993 1992
- ---------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Revenues $217,397 $133,803 $110,131 $104,949 $103,019
Income before cumulative
effect of change in
accounting principle 3,218 4,115 3,409 3,164 1,035
Net income 3,218 4,115 3,909 3,164 1,035
Earnings per share
before cumulative
effect of change in
accounting principle .18 .24 .20 .19 .06
Earnings per share .18 .24 .23 .19 .06
BALANCE SHEET DATA:
Working capital $ 67,448 $ 64,696 $ 51,612 $ 49,542 $ 53,481
Total assets 332,009 271,673 155,434 134,114 129,230
Long-term obligations 155,384 96,851 18,732 18,743 18,918
Shareholders' investment 86,341 77,601 62,559 57,619 54,820
a)Reflects the acquisition of Lancaster Laboratories in May 1995, the
purchase of the businesses formerly operated by the environmental
services joint venture from Thermo Instrument, and the issuance of a
$35 million promissory note to Thermo Electron to fund the purchase.
Also reflects the Thermo Remediation acquisition of ReTec in December
1995, the issuance of $38 million principal amount of 4 7/8%
subordinated convertible debentures by Thermo Remediation, and the
private placement of 500,000 shares of Thermo Remediation common stock
for net proceeds of $6.6 million.
- A76 -
<PAGE>
(b)Reflects the acquisitions of RMC Environmental Services, Inc. in August
1994 and Killam Associates in February 1995, and the issuance of $53
million of long-term promissory notes to Thermo Electron. Also reflects
Thermo EuroTech's acquisition of North Refinery in March 1995.
(c)Reflects Thermo Remediation's private placement and initial public
offering of common stock for net proceeds of $15.6 million and the
acquisitions of Thermo Fluids in November 1993 and Terra Tech Labs,
Inc. in January 1994. Also reflects the adoption of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
- A77 -
<PAGE>
Form 10-K
April 1, 1996
THERMO REMEDIATION INC.
-----------------------
Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------
Operations
----------
OVERVIEW
The Company is a leading national provider of contaminated
soil-remediation services, industrial-remediation services,
nuclear-remediation services, and waste-fluids recycling services.
The Company is a national leader in the design and operation of
nonhazardous soil-remediation facilities and operates a network of such
facilities serving customers inmore than a dozen states along the East
and West Coasts.
In December 1995, the Company acquired Remediation Technologies, Inc.
(ReTec), a provider of consulting, engineering, and on-site services to
help clients manage problems associated with environmental compliance,
waste management, andthe remediation of industrial sites contaminated
with organic wastes and residues.
The Company's Thermo Nutech division provides services to remove
radioactive contaminants from sand, gravel, and soil, as well as health
physics services, radiochemistry laboratory services, and radiation
dosimetry services.
TheCompany's Thermo Fluids subsidiary collects, tests, processes,
and recycles used motor oil and other industrial oils.
The Company's soil-remediation business is affected by several
factors, including enactment and enforcement of environmental legislation
regarding underground storage tanks, the availability of state funding for
environmental cleanup, economic cycles, extreme weather variations, and
local competition. Since the soil-remediation centers compete locally,
these factors varyfrom site to site. The Company's ReTec and Thermo
Nutech businesses are affected by several factors,most particularly,
extreme weather variations, government spending, and deregulation of
remediation activities.
RESULTS OF OPERATIONS
Fiscal 1996 Compared With Fiscal 1995
-------------------------------------
Total revenues in fiscal 1996 were $66,957,000, compared with
$51,504,000 in fiscal 1995, an increase of 30%. Revenues increased due to
the inclusion of $21,304,000 in revenues from ReTec, acquired in December
1995, and the inclusion of revenues from soil-remediation businesses
acquired or constructed in late fiscal 1995 and in fiscal 1996. These
increases were offset in part by lower revenues from the Company's
soil-remediation services resulting from a decrease in the volume and
price
- A78 -
<PAGE>
of soil processed as a resultof regulatory uncertainties at several sites,
competitive pricing pressures,and severe weather conditions primarily in the
fourth quarterof fiscal 1996. Revenues from nuclear services declined dueto a
decrease in radiochemistry laboratory work, reflecting areduction in spending at
the DOE and delays in federal government budget appropriations, largely offset
by increased revenues from a long-termenvironmental restoration contract for the
U.S. Department of Energy's (DOE) Hanfordsite (Hanford), which began in the
second quarter of fiscal 1995.
The gross profit margin decreased to 27% in fiscal 1996 from 34% in fiscal
1995. The gross profit margin on soil-remediation services revenues decreased
primarily due to competitivepricing pressures, offset in part by operational
savings. The grossprofit margin on nuclear services decreased primarily due to
lower revenues from higher-margin radiochemistry laboratory work and increased
revenues from the lower- margin Hanford contract. Thegross profit margin on
fluids-recycling services improved to 40% during fiscal 1996 from 29% in fiscal
1995, primarily due to operational efficiencies.The addition of the ReTec
business is expected to negatively affect the Company's gross profit margin as
margins on ReTec's revenues are typically lowerthan the margins obtained from
the Company's existing soil-remediation services business.
Selling, general and administrative expenses as a percentage of revenues
decreased to 13% infiscal 1996 from 16% in fiscal 1995, due to an increase in
total revenues and, to a lesser extent, operational efficiencies.
Interest income increased to $2,539,000 in fiscal 1996 from $1,002,000 in
fiscal 1995 as a result of interestincome earned on investedproceeds from the
issuance of the 4 7/8% subordinated convertible debentures and shares of the
Company's common stock in May 1995. Interest expense increased to $1,850,000 in
fiscal 1996 from $68,000 in fiscal 1995 primarily due to the issuanceof the
subordinated convertible debentures in May 1995. Interest expense, related
party, decreased in fiscal 1996 due to the repayment of the $4,000,000
promissory note to Thermo Electron Corporation (Thermo Electron) in June 1995
and a decrease in the average interest rate related to this note.
The effective tax rate was 37% in fiscal 1996, compared with 38% in fiscal
1995. The effective tax rates werehigher than the statutory federal income tax
rate primarily due tothe impact of state income taxes, offset in part by
tax-exempt investment income.
Minority interest expense in fiscal 1995 represents Thermo Nutech's net
income which was allocated to the joint venture partner.
Fiscal 1995 Compared With Fiscal 1994
-------------------------------------
Total revenues in fiscal 1995 were $51,504,000, compared with $43,488,000
in fiscal 1994. Service revenues increased 20% to $51,504,000 in fiscal 1995
from $42,882,000 in fiscal 1994. Higher revenues resulted primarily from an
increase in the volume of soil processed at the Company's soil-remediation
centers located in Southern California and Florida and, to
- A79 -
<PAGE>
a lesser extent, additional revenues of$1,620,000 from businesses acquired
inlate fiscal 1994 and in fiscal 1995. These increases were offset in part by
competitive pricing pressures at severalof the Company's soil- remediation
centers.
Revenues from related party in fiscal 1994 represent reimbursements for
services provided by the Company under an agreement between Thermo Electron and
Thermo TerraTech Inc. (Thermo TerraTech) to develop new soil-remediation
centers. The Company earned no profit from this funding. As of October 2, 1993,
funding under this agreement was completed. Expenses incurred in connection with
the development of additional soil-remediation centers subsequent to October
2,1993 are classified as new business developmentexpenses in the accompanying
statement of income.
The gross profit margin on service revenues was 34% in fiscal 1995,
compared with 37% in fiscal 1994. The decline was primarily due to a decrease in
the higher-margin radiochemistry laboratory revenues in the nuclear services
business, offset in part by higher-margin revenue associated with the start-up
of the Hanford contract.
Selling, general and administrative expenses as a percentage of service
revenues decreased to 16% in fiscal 1995 from 17% in fiscal 1994, due to the
efficiencies associated with increased revenues.
Interest income increased to $1,002,000 in fiscal 1995 from $443,000 in
fiscal 1994 as a result of higher average invested balances. Interest expense in
fiscal 1995 and fiscal 1994 represents interest on promissory notes with an
original aggregate principal amount of $1,000,000 issued in connection with the
acquisition of a soil-remediation center in Portland, Oregon. The Company repaid
the remaining balance of $975,000 relating to these promissory notes in full in
March 1995. Interest expense, related party in fiscal 1995 represents interest
on the $2,650,000 subordinated convertible note issued to Thermo TerraTech in
November 1993 in connection with the acquisition of Thermo Fluids and interest
on the $4,000,000 promissory note issued to Thermo Electron in December 1994 in
connection with acquisitions completed during fiscal 1995.
The effective tax rate was 38% in fiscal 1995, compared with 40% in fiscal
1994. The effectivetax rates were higher than the statutory federal income tax
rate primarily due to the impact of stateincome taxes in fiscal 1995 and 1994,
offset inpart by tax-exempt investment income in fiscal 1995.
Minority interest expense in fiscal 1995 and 1994 represents Thermo
Nutech's net income which was allocated to the joint venture partner.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, including cash, cash equivalents, and short-term
available-for-sale investments, increased to $46,343,000 at March 30, 1996 from
$3,384,000 at April 1, 1995. Cash, cash equivalents, and short- and
long-termavailable-for-sale investments were $35,349,000 at March 30, 1996 from
$16,511,000 at April 1, 1995. During the year ended March 30, 1996, cash
provided by operating activities was$7,379,000. Cash used to reduce current
liabilities was offset in part by cash provided by a decrease in
- A80 -
<PAGE>
During fiscal 1996, the Company expended $17,713,000, net of cash
acquired, for the acquisition of ReTec and $9,489,000 for purchases of
property, plant and equipment, primarily relating to two soil-remediation
sites constructed in fiscal 1996.
In May 1995, the Company issued and sold $37,950,000 principal amount
of4 7/8% subordinated convertible debentures due 2000. In addition, in
May 1995, the Company sold 500,000 shares of its common stock in a private
placement for net proceeds of $6,625,000. In June 1995, the Company repaid
a $4,000,000 note payable to Thermo Electron with proceeds from the
offerings.
On September 15, 1995, and March 20, 1996, the Company paid cash
dividends of $.10 pershare of common stock to shareholders of record as
of August 30, 1995, and March 1, 1996, respectively. The Company paid
approximately $418,000 and $392,000, respectively, in connection with such
dividends. The amount of cash paid by the Company was dependent on the
number of shareholders participating in the Company's Dividend
Reinvestment Plan.
Although the Company has no material commitments for capital
expenditures, such expenditures will largely be affected by the number of
soil-remediation centers and fluid-collection businesses that can be
developed or acquired during the year. The Company believes that it has
adequate resources to meet its financial needs for the foreseeable future.
Selected Financial Information (a)
(In thousands except
per share amounts) 1996(b)(c) 1995(d) 1994(e)(f) 1993(g)
1992
- ---------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Revenues $ 66,957 $ 51,504 $ 43,488 $ 34,615 $ 23,359
Income (loss) before
cumulative effect of
change in accounting
principle 5,444 3,643 2,510 1,868 (75)
Net income (loss) 5,444 3,643 2,567 1,868 (75)
Earnings per share:
Primary .44 .36
Fully diluted .42 .35
BALANCE SHEET DATA:
Working capital 46,343 3,384 12,676 7,052 3,420
Total assets 135,802 79,156 68,939 43,637 25,336
Long-term obligations 40,600 2,650 2,650 - -
Shareholders' investment 83,352 60,320 47,638 26,600 13,161
OTHER DATA:
Cash dividends declared $ 2,491 $ 2,012 $ 2,127 $ 1,586 $ 69
- A81 -
<PAGE>
(a) Financial data has been restated to reflect the June 1995 acquisition
of Thermo Nutech, accounted for in a manner similar to the pooling-of-
interests method.
(b) Reflects the May 1995 issuance of $38 million principal amount of
4 7/8% subordinated convertible debentures and a private placement of
500,000 shares of the Company's common stock for net proceeds of $6.6
million.
(c) Reflects the December 1995 acquisition of Remediation Technologies,
Inc.
(d) Reflects the October 1994 acquisition of TPST Woodworth and the
December 1994 acquisition of TPST Maryland.
(e) Reflects the December 1993 initial public offering of the Company's
common stock for net proceeds of $13.5 million, and the November 1993
acquisition of Thermo Fluids and issuance of a $2.7 million principal
amount 3 7/8% subordinated convertible note.
(f) Reflects the adoption of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
(g) Reflects the December 1992 acquisitions of Oregon Hydrocarbon Inc. and
Soil Remediation Company and the operations from the Company's centers
in Adelanto, California and West Palm Beach, Florida, which opened in
fiscal 1993.
- A82 -
<PAGE>
Form 10-Q
March 30, 1996
THERMO POWER CORPORATION
------------------------
Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------
Results of Operations
- ---------------------
DESCRIPTION OF BUSINESS
Industrial Refrigeration Systems
The Company's FES division supplies standard and custom-designed
industrial refrigeration systems used primarily by the food processing,
petrochemical, and pharmaceutical industries. NuTemp, Inc. (NuTemp) is a
supplier of both remanufactured and new industrial refrigeration and
commercial cooling equipment for sale or rental. NuTemp's industrial
refrigeration equipment is used primarily in the food processing,
petrochemical, and pharmaceutical industries, and its commercial cooling
equipment is used primarily in institutions and commercial buildings, as
well as by service contractors. The demand for NuTemp's equipment is typically
highest in the summer period.
Engines
The Company's Crusader Engines (Crusader) division manufactures gasoline
engines for recreational boats; natural gas engines for vehicular, cooling,
pumping, refrigeration, and other industrial applications; and LPG
(liquefied petroleum gas) and gasoline engines for lift trucks.
Cooling and Cogeneration Systems
The Company's Tecogen division designs, develops, markets, and services
packaged cooling and cogeneration systems fueled principally by natural gas for
sale to a wide range of commercial, institutional, industrial, and multi-unit
residential users. Certain large-capacity cooling systems are manufactured by
FES, and the cogeneration systems are manufactured by Crusader. Tecogen
conducts research and development of natural gas-engine technology, and is
currently demonstrating a diesel-to-natural gas conversion system for buses
and other fleet vehicles. Tecogen also conducts research and development on
applications energy.
The Company's ThermoLyte Corporation (ThermoLyte) subsidiary is
developing a family of propane-powered flashlights, emergency lights, area
lights, and other lighting products.
The Company's revenues by industry segment are shown in the following
table.
- A83 -
<PAGE>
Three Months Ended Six Months Ended
-------------------- --------------------
March 30, April 1, March 30, April 1,
(In thousands) 1996 1995 1996 1995
- ----------------------------------------------------------------
Industrial
Refrigeration
Systems $ 15,962 $ 15,263 $33,033 $ 29,441
Engines 8,304 6,526 15,557 11,681
Cooling and
Cogeneration
Systems 5,913 3,843 9,523 7,223
Intersegment
sales
elimination (423) (720) (905) (1,119)
-------- -------- -------- --------
$ 29,756 $ 24,912 $57,208 $ 47,226
======== ======== ======== ========
RESULTS OF OPERATIONS
Second Quarter Fiscal 1996 Compared With Second Quarter Fiscal
--------------------------------------------------------------
1995
- ----
Total revenues increased 19% to $29,756,000 in the second quarter of
fiscal 1996 from $24,912,000 in the second quarter of fiscal 1995. Industrial
Refrigeration Systems segment revenues increased to $15,962,000 in 1996 from
$15,263,000 in 1995. Revenues at NuTemp increased by $605,000 primarily due
to two large orders for remanufactured commercial cooling equipment. Revenues
at FES increased slightly in 1996 primarily due to greater demand for custom-
designed refrigeration packages, offset by lower prices for refrigeration
packages due to increased competition in the refrigeration industry and lower
demand for standard screw compressor packages. Engines segment revenues
increased 27% to $8,304,000 in 1996 from $6,526,000 in 1995 primarily due to
increased demand for gasoline and natural gas TecoDrive engines and the
inclusion of revenues from lift-truck engines, offset in part by a decrease
of $1,025,000 in revenues from marine-engine related products. Cooling and
Cogeneration Systems segment revenues increased 54% to $5,913,000 in 1996
from $3,843,000 in 1995 primarily due to an increase in revenues from gas-
fueled cooling systems. Results for the Cooling and Cogeneration Systems
segment in 1995 include a $312,000 fee received from one of the Company's
distributors of packaged cogeneration systems to satisfy the financial
obligations under a minimum purchase contract.
The gross profit margin decreased to 16% in the second quarter of fiscal
1996 from 22% in the second quarter of fiscal 1995. The gross profit margin
for the Industrial Refrigeration Systems segment decreased to 17% in 1996
from 22% in 1995. The decrease is primarily due to lower prices at FES
resulting from
- A84 -
<PAGE>
increased competition in the refrigeration industry and due to lower
manufacturing efficiencies at FES, including higher production costs incurred
for work performed to compensate for lost production time during severe
storms this winter. To a lesser extent, the gross profit margin decreased
due to higher warranty expenses at FES and NuTemp in 1996 compared with 1995.
The Company expects a cost increase in one of the major components of its
industrial refrigeration packages to adversely effect the gross profit margin
beginning in the third quarter of fiscal 1996. The gross profit margin for
the Engines segment decreased to 3% in 1996 from 13% in 1995 primarily due to
unusually high warranty expenses in 1996 and, to a lesser extent, startup
costs associated with the introduction of lift-truck engines. This higher
level of warranty expense is expected to return to more normal levels in the
third quarter of fiscal 1996. The gross profit margin for the Cooling and
Cogeneration Systemssegment decreased to 28% in 1996 from 33% in 1995 primarily
due to the inclusion in 1995 of a fee received from one of the Company's
distributors of packaged cogeneration systems discussed above.
Selling, general and administrative expenses as a percentage of
revenues decreased to 14% in the second quarter of fiscal 1996 from 15% in the
second quarter of fiscal 1995 primarily due to an increase in total revenues.
Research and development expenses as a percentage of revenues remained unchanged
at 3% in 1996 and 1995. An increase in research and development expenses for
gas-fueled lighting products was offset by a decrease in spending on research
and development of natural gas-engine products.
Interest income remained relatively unchanged at $437,000 in the second
quarter of fiscal 1996, compared with $431,000 in the second quarter of fiscal
1995. Gain on sale of related party investments in represents a gain on the
sale of the Company's remaining investment in 6.5% subordinated convertible
debentures, which were issued by Thermo TerraTech Inc., a majority-owned
subsidiary of Thermo Electron Corporation (Thermo Electron).
The effective tax rate was 38% in the second quarter of fiscal 1996,
compared with 40% in the second quarter of fiscal 1995. These rates exceeded
the statutory federal income tax rate primarily due to the impact of state
income taxes.
First Six Months Fiscal 1996 Compared With First Six Months
-----------------------------------------------------------
Fiscal 1995
- -----------
Total revenues increased 21% to $57,208,000 in the first six months of
fiscal 1996 from $47,226,000 in the first six months of fiscal 1995. Industrial
Refrigeration Systems segment revenues increased to $33,033,000 in 1996 from
$29,441,000 in 1995. Revenues at FES increased in 1996 primarily due to
greater demand for custom-designed refrigeration packages, offset in part by
lower prices for refrigeration packages due to increased
- A85 -
<PAGE>
competition in the refrigeration industry and lower demand for standard screw
compressor packages. Revenues at NuTemp increased by $200,000 primarily due to
two large orders for remanufactured commercial cooling equipment, offset in
part by lower demand for rental equipment and remanufactured equipment
resulting from generally lower temperatures in 1996 compared with 1995.
Engines segment revenues increased 33% to $15,557,000 in 1996 from $11,681,000
in 1995 primarily due to increased demand for gasoline and natural gas TecoDrive
engines and the inclusion of revenues from lift-truck engines, offset in part
by a decrease of $1,933,000 in revenues from marine-engine related products.
Cooling and Cogeneration Systems segment revenues increased 32% to $9,523,000
in 1996 from $7,223,000 in 1995 primarily due to an increase in revenues from
gas-fueled cooling systems. Results for the Cooling and Cogeneration Systems
segment in 1995 include a $1,187,000 fee received from one of the Company's
distributors of packaged cogeneration systems to satisfy the financial
obligations under a minimum purchase contract.
The gross profit margin decreased to 17% in the first six months of
fiscal 1996 from 23% in the first six months of fiscal 1995. The gross
profit margin for the Industrial Refrigeration Systems segment decreased
to 19% in 1996 from 24% in 1995. The decrease is primarily due to lower prices
at FES resulting from increased competition in the refrigeration industry and
due to lower manufacturing efficiencies at FES. To a lesser extent, the gross
profit margin decreased due to higher warranty expenses at FES and NuTemp in
1996 compared with 1995. The gross profit margin for the Engines segment
decreased to 4% in 1996 from 12% in 1995 primarily due to unusually high
warranty expenses in 1996 and, to a lesser extent, startup costs associated
with the introduction of lift-truck engines. The gross profit margin for
the Cooling and Cogeneration Systems segment decreased to 27% in 1996 from 33%
in 1995 primarily due to the inclusion in 1995 of a fee received from one of
the Company's distributors of packaged cogeneration systems discussed above.
Selling, general and administrative expenses as a percentage of revenues
decreased to 14% in the first six months of fiscal 1996 from 16% in the first
six months of fiscal 1995 primarily due to an increase in total revenues.
Research and development expenses as a percentage of revenues remained unchanged
at 3% in 1996 and 1995. An increase in research and development expenses for
gas-fueled lighting products was offset in part by a decrease in spending
on research and development of natural gas-engine products.
Interest income increased to $874,000 in the first six months of fiscal
1996 from $731,000 in the first six months of fiscal 1995, reflecting interest
income earned on the proceeds from ThermoLyte's March 1995 private placement,
offset in part by a decrease in interest income earned on the Company's other
investments due to lower average invested amounts. Gain on sale of investments,
net, in 1996 primarily represents a gain of
- A86 -
<PAGE>
$344,000 relating to the sale of the Company's remaining investment in Thermo
Electron common stock and a gain of $125,000 relating to the sale of the
Company's remaining investment in 6.5% subordinated convertible debentures,
which were issued by Thermo TerraTech Inc.
The effective tax rate was 38% in the first six months of fiscal 1996,
compared with 39% in the first six months of fiscal 1995. These rates exceeded
the statutory federal income tax rate primarily due to the impact of state
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $58,779,000 at March 30, 1996, compared
with $60,140,000 at September 30, 1995. Included in working capital are cash,
cash equivalents, and available-for-sale investments of $34,679,000 at
March 30, 1996, compared with $34,170,000 at September 30, 1995. Of the
$34,679,000 balance at March 30, 1996, $17,450,000 was held by ThermoLyte and
the remainder was held by the Company and its wholly owned subsidiaries. During
the first six months of fiscal 1996, $1,177,000 of cash was provided by
operating activities. During the first quarter of fiscal 1996, the Company
acquired the thermoelectric cooling module business of ThermoTrex Corporation
(ThermoTrex) for $860,000, which was the net book value of the business
acquired. ThermoTrex is a majority-owned subsidiary of Thermo Electron.
During the remainder of fiscal 1996, the Company expects to make capital
expenditures of approximately $3,600,000, of which approximately $1,700,000
is expected to be used to expand and upgrade the manufacturing facilities
at FES. The Company believes its current resources are sufficient to meet
the capital requirements of its existing operations for the foreseeable
future.
- A87 -
<PAGE>
Form 10-K
September 30, 1995
THERMO POWER CORPORATION
------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company's business can be divided into three segments:
Industrial Refrigeration Systems, Engines, and Cooling and Cogeneration
Systems. Through the Company's FES division, the Industrial Refrigeration
Systems segment supplies standard and custom-designed refrigeration systems
used primarily by the food-processing, petrochemical, and pharmaceutical
industries. NuTemp, Inc. (NuTemp), which was acquired in May 1994, is a
supplier of both remanufactured and new industrial refrigeration and
commercial, cooling equipment for sale or rental. NuTemp's industrial
refrigeration equipment is used primarily in the food-processing,
petrochemical, and pharmaceutical industries, and its commercial cooling
equipment is used primarily in institutions and commercial buildings, as
well as by service contractors. The demand for NuTemp's equipment is
typically highest in the summer period.
Within the Engines segment, the Company's Crusader Engines division
(Crusader) manufactures gasoline engines for recreational boats; natural
gas engines for vehicles, cooling, pumping, refrigeration, and other
industrial applications; and LPG (liquefied petroleum gas) and gasoline
engines for lift trucks.
The Cooling and Cogeneration Systems segment consists of the
Company's Tecogen division and the Company's ThermoLyte Corporation
(ThermoLyte) subsidiary, formed in March 1995. Tecogen designs, develops,
markets, and services packaged cooling and cogeneration systems fueled
principally by natural gas for sale to a wide range of commercial,
institutional, industrial, and multi-unit residential users. Certain
large-capacity cooling systems are manufactured by FES, and the
cogeneration systems are manufactured by Crusader. Tecogen also conducts
research and development on applications of thermal energy. The Company
formed its ThermoLyte subsidiary to complete the development and
commercialization of a family of propane-powered flashlights, emergency
lights, area lights, and other lighting products.
- A88 -
<PAGE>
RESULTS OF OPERATIONS
Fiscal 1995 Compared With Fiscal 1994
- -------------------------------------
Total revenues increased 16% to $103,255,000 in fiscal 1995 from
$89,334,000 in fiscal 1994. Industrial Refrigeration Systems segment
revenues increased 13% to $64,708,000 in 1995 from $57,372,000 in 1994.
Industrial Refrigeration Systems segment revenues increased $5,577,000 due
to the inclusion of sales for a full year from NuTemp, which was acquired
in May 1994. Engines segment revenues increased 23% to $24,848,000 in 1995
from $20,204,000 in 1994 primarily due to increased demand for Crusader's
inboard marine-engine related products and, to a lesser extent, natural
gas-fueled TecoDrive(R) engines. Results for 1994 included $1,632,000 of
revenues from sterndrive marine engine-related products. The Company's
sterndrive customer exited that market in fiscal 1994. Cooling and
Cogeneration Systems segment revenues increased 20% to $15,873,000 in 1995
from $13,192,000 in 1994 due to the inclusion of a fee of $1,187,000
received from one of the Company's distributors of packaged cogeneration
systems to satisfy the financial obligations under a minimum purchase
contract and an increase of $1,184,000 in revenues from gas-fueled cooling
systems. These increases were offset in part by a decrease in revenues
from packaged cogeneration systems.
The gross profit margin increased to 23% in fiscal 1995 from 22% in
fiscal 1994. The gross profit margin for the Industrial Refrigeration
Systems segment increased to 25% in 1995 from 24% in 1994 primarily due to
the inclusion of higher-margin NuTemp revenues for the full year of 1995
compared with five months in 1994. The gross profit margin for the Engines
segment decreased to 11% in 1995 from 12% in 1994 primarily due to startup
costs associated with new products and, to a lesser extent, higher warranty
expenses in 1995 compared with 1994. The gross profit margin for the
Cooling and Cogeneration Systems segment increased to 29% in 1995 from 25%
in 1994 primarily due to the fee received from one of the Company's
distributors of packaged cogeneration systems discussed above.
Selling, general and administrative expenses as a percentage of
revenues decreased to 15% in fiscal 1995 from 16% in fiscal 1994 primarily
due to an increase in total revenues. Research and development expenses
increased to $3,065,000 in 1995 from $1,622,000 in 1994 primarily due to
development costs associated with natural gas-engine products and, to a
lesser extent, gas-fueled lighting products.
Interest income increased to $1,919,000 in fiscal 1995 from
$1,278,000 in fiscal 1994, reflecting interest income earned on the
proceeds from ThermoLyte's March 1995 private placement
- A89 -
<PAGE>
and, to a lesser extent, higher prevailing interest rates in 1995. The
increase was offset in part by lower average invested amounts as a result
of the cash expended for the acquisition of NuTemp in May 1994. Interest
expense decreased to $23,000 in 1995 from $61,000 in 1994 due to the
repayment of a $3,000,000 principal amount 6.2% subordinated convertible
note to Thermo Electron Corporation (Thermo Electron) in the first quarter
of fiscal 1994. The Company holds certain investments in companies
affiliated with Thermo Electron and has sold, from time to time, a portion
of these investments for a gain to the Company. Gain on sale of
investments, net, primarily represents a gain of $768,000 in 1995 and
$616,000 in 1994 relating to the sale of the Company's investment in
subordinated convertible debentures issued by Thermedics Inc. (a majority-
owned subsidiary of Thermo Electron). As of September 30, 1995, the
Company owned 7,313 shares of Thermo Electron common stock that were
purchased for $18,000 and have a market value of $339,000, and $429,000 of
6.5% subordinated convertible debentures due 1997 issued by Thermo Process
Systems Inc. (a majority-owned subsidiary of Thermo Electron) that were
purchased for $365,000. The Company may sell these investments from time
to time in the future.
The effective tax rate was 39% in both fiscal 1995 and 1994. This
rate exceeded the statutory federal income tax rate primarily due to the
impact of state income taxes.
Fiscal 1994 Compared With Fiscal 1993
- -------------------------------------
Total revenues increased 18% to $89,334,000 in fiscal 1994 from
$75,429,000 in fiscal 1993. Industrial Refrigeration Systems segment
revenues increased 35% to $57,372,000 in 1994 from $42,369,000 in 1993 due
to an increase in demand for refrigeration packages and, to a lesser
extent, the inclusion of $5,804,000 in revenues from NuTemp. These
increases were offset in part by lower prices for refrigeration packages at
the Company's FES division due to increased competition in the
refrigeration industry. Engines segment revenues increased to $20,204,000
in 1994 from $19,216,000 in 1993 due to an increase of $794,000 in revenues
from natural gas-fueled TecoDrive engines and, to a lesser extent, an
increase in revenues from marine products. Revenues from marine products
increased due to greater demand for Crusader's inboard marine engine-
related products and a one-time sterndrive spare parts stocking order in
the first six months of fiscal 1994, offset in part by a decrease in
sterndrive marine engine-related sales as a result of the Company's
sterndrive customer exiting that market. Cooling and Cogeneration Systems
segment revenues decreased to $13,192,000 in 1994 from $14,862,000 in 1993
primarily due to a decline of $837,000 in revenues from gas-fueled cooling
systems and a decline of $825,000 in revenues from sponsored research and
development contracts.
- A90 -
<PAGE>
The gross profit margin increased to 22% in fiscal 1994 from 19% in
fiscal 1993. The gross profit margin for the Industrial Refrigeration
Systems segment was 24% in 1994, compared with 23% in 1993. The inclusion
of higher-margin NuTemp revenues was offset in part by a decrease in
margins at FES due to lower prices resulting from increased competition in
the refrigeration industry. NuTemp's gross profit margin was 44% for the
period from May 1, 1994 to October 1, 1994. The gross profit margin for
the Engines segment increased to 12% in 1994 from 8% in 1993 primarily due
to a shift in the sales mix of marine products and, to a lesser extent,
improved margins on natural gas-fueled TecoDrive engines resulting from
increased revenues. The gross profit margin for the Cooling and
Cogeneration Systems segment increased to 25% in 1994 from 22% in 1993
primarily due to improved margins on the Company's gas-fueled cooling
systems resulting from a reduction in manufacturing costs.
Selling, general and administrative expenses as a percentage of
revenues were 16% in both fiscal 1994 and 1993. Research and development
expenses increased to $1,622,000 in 1994 from $995,000 in 1993 primarily
due to higher development costs associated with natural gas-engine
products.
Interest income increased to $1,278,000 in fiscal 1994 from
$1,161,000 in fiscal 1993 due to higher average invested amounts as a
result of the Company's public offering of common stock in February 1993,
offset in part by the cash expended for the acquisition of NuTemp in May
1994. Interest expense decreased to $61,000 in 1994 from $342,000 in 1993
due to the repayment of a $3,000,000 principal amount 6.2% subordinated
convertible note to Thermo Electron in the first quarter of fiscal 1994
and, to a lesser extent, the repayment of a $5,000,000 promissory note to
Thermo Electron and short-term borrowings from Thermo Electron in the
second quarter of fiscal 1993. Gain on sale of investments, net, primarily
represents a gain of $616,000 on the sale of a portion of the Company's
investment in Thermedics subordinated convertible debentures in 1994, and a
gain of $404,000 on the sale of 18,000 shares of Thermo Electron common
stock in 1993.
The effective tax rate was 39% in both fiscal 1994 and 1993. This
rate exceeded the statutory federal income tax rate primarily due to the
impact of state income taxes.
FINANCIAL CONDITION
Liquidity and Capital Resources
- -------------------------------
Working capital was $60,140,000 at September 30, 1995, compared with
$43,143,000 at October 1, 1994. Included in working capital are cash, cash
equivalents, and short-term
- A91 -
<PAGE>
investments of $34,170,000 at September 30, 1995, compared with $27,879,000
at October 1, 1994. Of the $34,170,000 balance at September 30, 1995,
$17,355,000 was held by ThermoLyte and the remainder was held by the
Company and its wholly owned subsidiaries. During fiscal 1995, $5,110,000
of cash was used in operating activities. Accounts receivable increased
reflecting a higher sales level, while inventories increased primarily due
to a build-up of inventory at Crusader in connection with several large
orders for engines. Crusader began shipping these orders in the first
quarter of fiscal 1996. In March 1995, ThermoLyte completed a private
placement for net proceeds of $17,253,000. In fiscal 1996, the Company
expects to make capital expenditures of approximately $4,500,000. The
Company believes its existing resources are sufficient to meet the capital
requirements of its existing operations for the foreseeable future.
SELECTED FINANCIAL INFORMATION
(In thousands
except per
share amounts) 1995(a) 1994(b) 1993(c) 1992 1991
- -------------- ------- ------- ------- ---- ----
STATEMENT OF INCOME
DATA:
Revenues $103,255 $ 89,334 $ 75,429 $ 34,137 $ 27,144
Net income
(loss) 4,188 3,248 1,923 355 (1,538)
Earnings
(loss) per
share .34 .26 .18 .04 (.20)
BALANCE SHEET DATA:
Working capital $ 60,140 $ 43,143 $ 50,467 $ 19,173 $ 26,667
Total assets 108,417 82,621 79,513 28,675 36,071
Long-term
obligations 364 344 3,395 3,000 12,274
Common stock of
subsidiary
subject to
redemption 17,435 - - - -
Shareholders'
investment 65,825 60,475 56,599 18,302 16,941
(a) Reflects the net proceeds of the Company's ThermoLyte Corporation
subsidiary private placement in fiscal 1995.
(b) Reflects the May 1994 acquisition of NuTemp, Inc.
(c) Reflects the October 1992 acquisition of FES and the net proceeds of
the Company's February 1993 public offering of common stock.
- A92 -
<PAGE>
Form 10-Q
March 30, 1996
THERMOTREX CORPORATION
----------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
DESCRIPTION OF BUSINESS
The Company's 91%-owned Trex Medical Corporation (Trex
Medical) subsidiary manufactures and markets mammography equipment and
minimally invasive stereotactic needle biopsy systems for the detection of
breast cancer, and also designs, manufactures, and markets general
radiography (X-ray) equipment. Through its 65%-owned ThermoLase Corporation
(ThermoLase) subsidiary, the Company has developed a laser-based system
called SoftLight (SM) for the removal of unwanted hair. Through
ThermoLase's wholly owned CBI Laboratories, Inc. (CBI) subsidiary, the
Company manufactures and markets skin-care, bath, and body products.
The Company also conducts advanced-technology research
and product development in telecommunications, avionics, X-ray detection,
signal processing, materials technology, and lasers. The Company has
developed its expertise in these core technologies in connection with
government-sponsored research and development.
RESULTS OF OPERATIONS
In September 1995, the Company changed its fiscal year
end from the Saturday nearest December 31 to the Saturday nearest September
30.
Three Months Ended March 30, 1996 Compared With Three Months Ended April
------------------------------------------------------------------------
1, 1995
- -------
Total revenues increased 62% to $42.7 million in the three months
ended March 30, 1996, from $26.3 million in the three months ended April 1,
1995. Revenues at Trex Medical, excluding intercompany sales, increased
101% to $32.4 million in the three months ended March 30, 1996, compared
with $16.1 million in the three months ended April 1, 1995, due to the
inclusion of $12.1 million in revenues from Trex Medical's Bennett X-Ray
Corporation (Bennett) subsidiary, which was acquired in September 1995, and
increased demand for mammography and biopsy systems manufactured by Trex
Medical's Lorad division. Revenues at ThermoLase increased to $7.0 million
in the three months ended March 30, 1996, from $6.1 million in the three
months ended April 1, 1995. The increase in revenues resulted primarily
from $667,000 in SoftLight licensing fees from a Japanese joint venture
established in January 1996 and revenues from hair-removal services at
ThermoLase's first Spa Thira salon. In October 1995, ThermoLase opened its
first Spa Thira salon in La Jolla, California. During the three months
ended March 30, 1996, ThermoLase
- A93 -
<PAGE>
collected $839,000 from Spa Thira clients and recognized $413,000 in
revenue. Under the current pricing structure, spa clients pay a fixed fee
in advance to receive a series of treatments, as necessary. Consequently,
ThermoLase defers revenue, which will be recognized over the anticipated
treatment period. As ThermoLase collects further data concerning the number
of treatments required and duration of the treatment period, the period of
revenue recognition may be affected.
In January 1996, ThermoLase entered into a joint venture
agreement, which is subject to certain conditions, to market its
SoftLight system in Japan. ThermoLase currently holds a 50% stake in the
joint venture with an option to increase its ownership to 51%. The
agreement calls for ThermoLase to receive additional minimum guaranteed
payments of $1.3 million during the remainder of fiscal 1996 and $1.0
million in fiscal 1997, msubject to certain conditions.
Advanced Technology Research revenues declined to $3.2
million in the three months ended March 30, 1996, from $4.1 million in the
three months ended April 1, 1995, due primarily to the sale of the
Company's thermoelectrics and thermionics businesses to two subsidiaries of
Thermo Electron Corporation (Thermo Electron). The Company estimates that
revenues from Advanced Technology Research will continue to decline as a
percentage of total revenues.
The gross profit margin was 41% in the three months ended
March 30, 1996, compared with 44% in the three months ended April 1, 1995.
The gross profit margin at Trex Medical, excluding intercompany sales,
declined to 43% in the three months ended March 30, 1996, from 50% in the
three months ended April 1, 1995, primarily due to the inclusion of
lower-margin revenues at Bennett. The gross profit margin at ThermoLase in
the three months ended March 30, 1996, was 37%, compared with 41% in the
three months ended April 1, 1995. The decline in the gross profit margin at
ThermoLase is primarily due to lower margins on the sale of skin-care and
other personal-care products at CBI due to a shift to higher-volume,
lower-margin products. In addition, the decline in the gross profit margin
resulted from the early operations of the Spa Thira business, as the
Company develops a client base and continues refining its operating
procedures, offset in part by the effect of revenues from the Japanese
joint venture. As the Company opens additional Spa Thira locations in
fiscal 1996, preopening costs will have a negative impact on the gross
profit margin.
Selling, general and administrative expenses as a percentage of
revenues decreased to 24% in the three months ended March 30, 1996, from
28% in the three months ended April 1, 1995, due to lower expenses as a
percentage of revenues at Bennett. Research and development expenses
increased to $5.5 million in the three months ended March 30, 1996, from
$3.4 million in the three months ended April 1, 1995, reflecting the
Company's continued efforts to develop and commercialize new products,
including Trex Medical's M-IV mammography system, full-breast digital
mammography system, and direct-detection X-ray sensor, and ThermoLase's
SoftLight system and laser-based skin rejuvenation processes.
- A94 -
<PAGE>
Interest income increased to $1.5 million in the three
months ended March 30, 1996, from $1.0 million in the three months ended
April 1, 1995, primarily as a result of interest income earned on invested
proceeds from the August 1995 public offering of ThermoLase common stock
and the November 1995 and January 1996 private placements of Trex Medical
common stock.
During the three months ended March 30, 1996, the Company
recorded a gain on issuance of stock by subsidiary of $0.7 million in
connection with the January 1996 private placement of Trex Medical common
stock.
The effective tax rates in both periods differ from the
statutory federal income tax rate due to nondeductible amortization of cost
in excess of net assets of acquired companies and the impact of state
income taxes, offset in part in fiscal 1996 by the nontaxable gain on
issuance of stock by subsidiary.
A former employee of Trex Medical has alleged that Trex
Medical's newly introduced High Transmission Cellular grid for its
mammography systems infringes two U.S. patents owned by the former
employee. Although the Company believes that its products do not infringe
any valid claim of these patents, if the patent holder were successful in
enforcing such patents, the Company could be subject to damages and
enjoined from manufacturing and selling this grid.
Six Months Ended March 30, 1996 Compared With Six Months Ended April 1,
-----------------------------------------------------------------------
1995
- ----
Total revenues increased 67% to $85.8 million in the six
months ended March 30, 1996, from $51.4 million in the six months ended
April 1, 1995. Revenues at Trex Medical, excluding intercompany sales,
increased 106% to $64.6 million in the six months ended March 30, 1996,
compared with $31.3 million in the six months ended April 1, 1995, due to
the inclusion of $23.3 million in revenues from Trex Medical's Bennett
subsidiary and increased demand for mammography and biopsy systems
manufactured by Trex Medical's Lorad division. Revenues at ThermoLase
increased 21% to $14.4 million in the six months ended March 30, 1996, from
$11.9 million in the six months ended April 1, 1995, primarily due to an
increase in demand for the Company's skin-care and other personal-care
products, as well as the inclusion of $667,000 in SoftLight licensing fees
from the
Japanese joint venture and $471,000 of revenues from the Company's first
Spa Thira salon. Advanced Technology Research revenues declined to $6.8
million in the six months ended March 30, 1996, from $8.1 million in the
six months ended April 1, 1995, primarily due to the sale of the Company's
thermoelectrics and thermionics businesses to two subsidiaries of Thermo
Electron.
The gross profit margin declined to 40% in the six months
ended March 30, 1996, compared with 43% in the six months ended April 1,
1995, due to the reasons discussed in the results of operations for the
three months ended March 30, 1996, as well as a decline in gross profit
margin from Advanced Technology Research revenues to 19% in the six
- A95 -
<PAGE>
months ended March 30, 1996, compared with 24% in the six months ended
April 1, 1995, as a result of a shift to lower-margin contracts and lower
revenues.
Selling, general and administrative expenses as a
percentage of revenues declined to 24% in the six months ended March 30,
pared with 26% in the six months ended April 1, 1995, due primarily to
lower expenses as a percentage of revenues at Bennett and CBI, offset in
part by increased expenses at Spa Thira. Research and development expenses
increased to $10.3 million in the six months ended March 30, 1996, from
$7.9 million in the six months ended April 1, 1995, due to the reasons
discussed in the results of operations for the three months ended March 30,
1996.
Interest income increased to $2.9 million in the six
months ended March 30, 1996, from $2.0 million in the six months ended
April 1, 1995, primarily as a result of interest income earned on invested
proceeds from the August 1995 public offering of ThermoLase common stock
and the November 1995 and January 1996 private placements of Trex Medical
common stock.
During the six months ended March 30, 1996, the Company
recorded a gain on issuance of stock by subsidiary of $13.5 million in
connection with the November 1995 and January 1996 private placements of
Trex Medical common stock.
The effective tax rates in both periods differ from the
statutory income tax rate due to nondeductible amortization of cost in
excess of net assets of acquired companies and the impact of state income
taxes, offset in part in fiscal 1996 by the nontaxable gain on issuance of
stock by subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $124.1 million at March
30, 1996, compared with $103.6 million at September 30, 1995. Included in
working capital are cash, cash equivalents, and available-for-sale
investments of $106.0 million at March 30, 1996, compared with $87.1
million at September 30, 1995. Of the $106.0 million balance at March 30,
1996, $64.9 million was held by ThermoLase, $19.2 million was held by Trex
Medical, and the remainder was held by the Company and its wholly owned
subsidiaries. Net cash provided by operating activities during the six
months ended March 30, 1996 was $3.3 million. During this period, the
Company expended $4.0 million on property, plant and equipment and raised
$19.6 million from the issuance of Company and subsidiary common stock.
Trex Medical has outstanding letters of intent to acquire
XRE Corporation for approximately $17.0 million in cash and Continental
X-Ray Corporation and affiliates for approximately $18.2 million in cash,
including the repayment of $5.7 million of indebtedness. There can be no
assurance that these acquisitions will be completed.
The Company's ThermoLase subsidiary has recently signed
leases in Dallas, Beverly Hills, and Denver, where it plans to open
- A96 -
<PAGE>
additional Spa Thira salons. ThermoLase plans to open additional spas in
various parts of the United States during the remainder of calendar 1996
and thereafter. Depending on the size of the salon, each facility will
require approximately $1.5 million to $2.5 million for such items as
leasehold improvements and laser systems.
On March 29, 1996, Trex Medical filed with the Securities
and Exchange Commission two registration statements related to an initial
public offering of 3,250,000 shares of its common stock.
The Company believes it has adequate resources to meet
its financial needs for the foreseeable future.
During the six months ended March 30, 1996, the Company
sold its thermoelectrics and thermionics businesses to two subsidiaries of
Thermo Electron. The purchase price for these transactions is the net book
value of the assets transferred, currently estimated to be an aggregate of
approximately $1.1 million. These businesses were not material to the
Company's results of operations or financial position.
- A97 -
<PAGE>
Transition Report
on Form 10-K
1/1/95 to 9/30/95
THERMOTREX CORPORATION
----------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company's Lorad division manufactures and markets mammography and
needle-biopsy systems for the early detection of breast cancer. Through its
65%-owned subsidiary, ThermoLase Corporation (ThermoLase), the Company has
developed a laser-based system for the removal of unwanted hair
(SoftLightSM). In April 1995, ThermoLase received clearance from the U.S.
Food and Drug Administration to commercially market services using the
SoftLight system. The Company anticipates earning revenues from the
SoftLight system in the first quarter of fiscal 1996, as a result of the
opening of its first "Spa Thira" salon in October 1995. The Company intends
to operate its first salon at below maximum capacity rates as it refines
the commercial operating procedures at the center. Through ThermoLase's
wholly owned CBI Laboratories, Inc. (CBI) subsidiary, which was acquired in
December 1993, the Company manufactures skin-care and other personal-care
products.
In September 1995, the Company acquired Bennett X-Ray Corporation
(Bennett), a manufacturer of specialty and general-purpose radiographic
X-ray equipment. In October 1995, the Company combined the operations of
its Lorad division, Bennett, and certain medical technologies in
development to form Trex Medical Corporation (Trex Medical).
The Company also conducts advanced technology research and product
development in electro-optic and electro-acoustic systems, signal
processing, materials technology, and lasers. The Company has developed its
expertise in these core technologies in connection with
government-sponsored research and development.
RESULTS OF OPERATIONS
In September 1995, the Company changed its fiscal year-end from the
Saturday nearest December 31 to the Saturday nearest September 30.
Accordingly, the results of operations for 1995 compares the nine months
ended September 30, 1995 (fiscal 1995) with the unaudited nine months ended
October 1, 1994 (fiscal 1994).
Fiscal 1995 Compared With Fiscal 1994
- -------------------------------------
Total revenues increased 31% to $86.5 million in fiscal 1995, from $66.0
million in fiscal 1994. Medical and Personal-care
- A98 -
<PAGE>
Products segment revenues increased to $72.5 million in 1995 from $52.1
million in 1994. Revenues at Lorad increased 36% to $53.5 million in 1995
from $39.2 million in 1994 as a result of increased demand for mammography
and biopsy systems. Exports of mammography and biopsy systems accounted for
19% of Lorad's revenues in 1995, compared with 11% in 1994. Revenues from
Philips Medical Systems North America Company (Philips) were $9.8 million
in 1995, compared with $6.0 million in 1994. In 1995, revenues from Philips
included $6.0 million of export revenues. Under an agreement with Philips,
Lorad will receive minimum orders for two models of imaging systems
totaling $40 million over a five-year period that began in January 1994,
subject to certain conditions. Revenues at CBI increased 36% to $17.5
million in 1995 from $12.9 million in 1994 principally due to an increase
in demand.
Advanced Technology Research and Product Development segment revenues
were $14.0 million in fiscal 1995, compared with $13.9 million in fiscal
1994, as funding levels for the Company's government-sponsored research and
development contracts remained relatively unchanged.
The gross profit margin for the Medical and Personal-care Products
segment declined to 46% in fiscal 1995 from 48% in fiscal 1994, due to
lower margins at CBI as a result of an increase in the price of raw
materials and, to a lesser extent, a shift in product mix. In addition, the
fiscal 1995 results include a nonrecurring adjustment to expense $308,000
of inventory revalued at the time of Bennett's acquisition by the Company.
The gross profit margin for the Advanced Technology Research and Product
Development segment decreased to 16% in 1995 from 17% in 1994, due to
overhead incurred in excess of amounts billable on government-sponsored
contracts.
Selling, general and administrative expenses as a percentage of
revenues declined to 24% in fiscal 1995 from 27% in fiscal 1994. The
decline is due to increased revenues at Lorad, partially offset by an
increase in expense at ThermoLase resulting from increased selling efforts
to expand the market for the Company's skin-care and other personal-care
products and the buildup of the infrastructure necessary for the operation
of a personal-care service network.
Research and development expenses increased to $13.4 million in fiscal
1995 from $9.6 million in fiscal 1994, reflecting the Company's expanded
efforts to develop and commercialize the SoftLight system and, to a lesser
extent, its continued efforts to develop Lorad's full-breast digital
mammography system, the Sonic CTTM medical imaging device, and the passive
microwave camera synthetic vision system.
In fiscal 1995 and 1994, the Company recorded restructuring expenses
of $1.0 million and $0.7 million, respectively, resulting from the decision
to close the Company's division
- A99 -
<PAGE>
located in Waltham, Massachusetts. During fiscal 1995 and 1994, this
division recorded revenues of $2.4 million and $2.0 million, respectively,
and incurred operating losses of $0.6 million and $0.8 million,
respectively.
Interest income increased to $3.2 million in fiscal 1995 from $2.3
million in fiscal 1994, primarily as a result of the interest earned on the
proceeds from the March 1994 public offering of Company common stock, the
July 1994 initial public offering of ThermoLase common stock and, to a
lesser extent, the June and August 1995 offerings of ThermoLase common
stock. This increase was offset slightly by lower invested amounts due to
the cash expended to acquire Bennett. Interest expense in 1995 represents
interest associated with an $8.0 million promissory note issued to Thermo
Electron Corporation (Thermo Electron) in September 1995. Interest expense
in the 1994 period represents interest associated with notes payable of
$6.7 million that were repaid in January 1994.
The Company has adopted a strategy of spinning out certain of its
businesses into separate subsidiaries and having these subsidiaries sell a
minority interest to outside investors. The Company believes that this
strategy provides additional motivation and incentives for the management
of the subsidiary through the establishment of subsidiary-level stock
option incentive programs, as well as capital to support the subsidiaries'
growth. As a result of the sale of stock by ThermoLase, the Company
recorded gains of $34.7 million and $8.6 million in fiscal 1995 and 1994,
respectively. These gains represent an increase in the Company's
proportionate share of the subsidiary's equity and are classified as gain
on issuance of stock by subsidiary in the accompanying statement of income.
The size and timing of these transactions are dependent on market and other
conditions that are beyond the Company's control. Accordingly, there can be
no assurance that the Company will be able to realize gains from such
transactions in the future.
Minority interest income in fiscal 1995 represents minority
shareholders' allocable share of a net loss at ThermoLase.
The effective tax rates in fiscal 1995 and 1994 differ from the
statutory federal income tax rate due to the nontaxable gain on issuance of
stock by subsidiary, offset in part by nondeductible amortization of cost
in excess of net assets of acquired companies and the impact of state
income taxes.
As previously reported, on April 1, 1992, prior to the Company's
acquisition of Lorad, Fischer Imaging Corporation (Fischer) sued Lorad,
alleging that Lorad infringed on a Fischer patent on a precision
mammographic needle-biopsy system. The Lorad product that is alleged to
infringe is the Company's StereoGuide(R) prone breast-biopsy system, which
accounted for
- A100 -
<PAGE>
approximately $10.3 million, $10.8 million, $9.0 million and $4.2 million
of the Company's revenues in fiscal 1995, 1994, 1993 and 1992,
respectively. The suit requests a permanent injunction, treble damages, and
attorneys' fees and expenses. Lorad has responded by denying infringement
and counterclaiming that the Fischer patent is invalid. While the Company
believes it has meritorious legal defenses to the allegation, due to the
inherent uncertainties of litigation, the Company is unable to predict the
outcome of this matter. Although an unsuccessful resolution could have a
material adverse effect on the Company's results of operations and cash
flows, in the opinion of management, any resolution will not have a
material adverse effect on the Company's financial position. The Company
had a reserve of $2.3 million at September 30, 1995, in connection with its
acquisition of Lorad, for future legal fees and other costs associated with
this matter.
1994 Compared With 1993
- -----------------------
Total revenues were $91.1 million in 1994, compared with $54.3 million in
1993. Medical and Personal-care Products segment revenues increased to
$73.1 million in 1994 from $38.1 million in 1993 due to the inclusion of an
additional $18.1 million in revenues from CBI, which was acquired in
December 1993, and due to a 45% increase in revenues at Lorad as a result
of increased demand for mammography and biopsy systems, including $6.0
million of sales to Philips and an overall increase in export revenues.
Advanced Technology Research and Product Development segment revenues
increased to $18.0 million in 1994 from $16.2 million in 1993 due to
increased funding levels for the Company's government-sponsored research
and development contracts and due to revenues generated during the first
quarter of 1994 from the pass-through of hardware purchases for the
Company's rapid optical beam steering (ROBS) laser radar system contract.
The gross profit margin for the Medical and Personal-care Products
segment was 47% in 1994, compared with 50% in 1993. The decline in gross
profit margin was due to the inclusion of lower-margin CBI revenues. The
gross profit margin for the Advanced Technology Research and Product
Development segment increased to 20% in 1994 from 17% in 1993 due to a more
favorable mix of contracts.
Selling, general and administrative expenses remained relatively
unchanged at 26% of revenues in 1994, compared with 25% in 1993. Research
and development expenses increased to $14.2 million in 1994 from $8.5
million in 1993, reflecting the Company's continued efforts to develop and
commercialize new products, particularly the SoftLight system, Lorad's
full-breast digital mammography system, and the Sonic CT medical imaging
device.
- A101 -
<PAGE>
The Company recorded restructuring expenses of $0.7 million in 1994,
resulting from the decision to close the Company's division located in
Waltham, Massachusetts.
As a result of the sale of stock by ThermoLase, the Company recorded a
gain of $8.6 million in 1994.
Interest income increased to $3.3 million in 1994 from $1.9 million in
1993. This reflects increased invested amounts principally derived from
private placements of the Company's common stock in August and October
1993, a public offering of the Company's common stock in March 1994, and an
initial public offering of ThermoLase's common stock in July 1994. Interest
expense represents interest associated with notes payable of $6.7 million
that were repaid in January 1994.
The effective tax rates were 17% and 67% in 1994 and 1993,
respectively. These rates differ from the statutory federal income tax rate
principally due to nondeductible amortization of cost in excess of net
assets of acquired companies, offset in 1994 by the nontaxable gain on
issuance of stock by subsidiary.
FINANCIAL CONDITION
Liquidity and Capital Resources
- -------------------------------
Working capital was $103.6 million at September 30, 1995, compared with
$82.8 million at December 31, 1994. Included in working capital are cash,
cash equivalents, and available-for-sale investments of $87.1 million at
September 30, 1995 and $71.1 million at December 31, 1994. Of the $87.1
million balance at September 30, 1995, $65.4 million was held by ThermoLase
and the remainder by the Company and its wholly owned subsidiaries.
During the nine months ended September 30, 1995, operating activities
provided $16,000 of cash and the Company expended $2.6 million for
purchases of property, plant and equipment. In March 1995, the Company paid
an aggregate of $2.3 million to dissenting shareholders to settle their
claim to appraisal rights in connection with the Company's acquisition of
Lorad. In June and August 1995, ThermoLase issued an aggregate of 2,450,000
shares of its common stock for net proceeds of $55.3 million. In September
1995, the Company acquired Bennett for approximately $42.9 million in cash.
In addition, in September 1995, the Company issued an $8.0 million
promissory note due September 1996, to Thermo Electron to be used for
general corporate purposes, including working capital. Subsequent to
year-end, Trex Medical completed a private placement of 1,862,000 shares of
its common stock for net proceeds of approximately $17.6 million. The
Company believes it has adequate resources to meet its financial needs for
the foreseeable future.
- A102 -
<PAGE>
SELECTED FINANCIAL INFORMATION
Nine Months Ended(a) Year Ended
-------------------- ----------------------------------
(In thousands
except per share Sept. 30, Oct. 1, Dec. 31, Jan. 1, Jan. 2, Dec. 28,
amounts) 1995(b) 1994 1994(c) 1994(d) 1993(e) 1991
- --------- ----------------------------------------------------------
(Unaudited)
STATEMENT OF INCOME DATA:
Revenues $86,531 $65,973 $91,052 $54,329 $19,843 $16,801
Income before
provision for
income taxes
and minority
interest 37,891 10,538 11,542 1,490 627 517
Net Income 36,341 9,285 9,602 495 280 252
Earnings per share 1.92 0.49 0.50 0.03 0.02 0.02
BALANCE SHEET DATA:
Working capital $103,637 $82,798 $45,103 $18,213 $28,224
Total Assets 230,781 154,984 117,335 67,904 36,863
Long-term
obligations - - - - -
Common stock of
subsidiary subject
to redemption - - 14,511 - -
Shareholders'
investment 162,388 123,271 77,594 48,735 34,450
(a) In September 1995, the Company changed its fiscal year-end from the
Saturday nearest December 31 to the Saturday nearest September 30.
Accordingly, the Company's 39-week transition period ended September
30, 1995, is presented.
(b) Reflects ThermoLase Corporation's 1995 private placements and public
offering, which resulted in nontaxable gains of $34,721,000, and
includes the results of operations of Bennett X-Ray Corporation
since its acquisition in September 1995.
(c) Reflects the net proceeds of the Company's 1994 public offering and
ThermoLase Corporation's 1994 initial public offering, which
resulted in a nontaxable gain of $8,609,000.
(d) Reflects the net proceeds of ThermoLase Corporation's 1993 private
placement and the Company's 1993 private placements and includes the
results of operations of CBI Laboratories since its acquisition in
December 1993.
(e) Reflects the net proceeds of the Company's 1992 private placement
and includes the results of operations of Lorad since its
acquisition in November 1992.
- A103 -
<PAGE>
Form 10-Q
March 30, 1996
THERMOLASE CORPORATION
----------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
DESCRIPTION OF BUSINESS
The Company has developed a laser-based system called
SoftLight (SM) for the removal of unwanted hair. The SoftLight system uses
a low-energy, dermatology laser in combination with a lotion that absorbs
the laser's energy to disable hair follicles. In April 1995, the Company
received clearance from the U.S. Food and Drug Administration (FDA) to
commercially market services using the SoftLight system. The Company began
earning revenue from the SoftLight system in the first quarter of fiscal
1996 as a result of opening its first commercial salon (Spa Thira) in La
Jolla, California, in October 1995 and treating paying clients
beginning in mid-November 1995. In addition, the Company has announced
plans to open three new salons. The Company is operating its first spa
below maximum capacity as it refines the commercial operating procedures at
the center. The Company has also commenced a program to license to doctors
the right to perform the Company's patented SoftLight hair-removal
procedure. Under the terms of this licensing arrangement, the Company will
provide doctors with use of the lasers and will charge them a per-procedure
fee, which will vary depending on location treated. The Company also
manufactures and markets skin-care, bath, and body products through its CBI
Laboratories, Inc. (CBI) subsidiary, which manufactures the lotion used in
the SoftLight hair-removal process.
RESULTS OF OPERATIONS
In September 1995, the Company changed its fiscal year
end from the Saturday nearest December 31 to the Saturday nearest September
30.
Three Months Ended March 30, 1996 Compared With Three Months
------------------------------------------------------------
Ended April 1, 1995
- -------------------
Revenues increased 15% to $7,020,000 in the three months
ended March 30, 1996, from $6,109,000 in the three months ended April 1,
1995. The increase in revenues resulted primarily from $667,000 in
SoftLight licensing fees from a Japanese joint venture established in
January 1996 and revenues from hair-removal services at the Company's first
Spa Thira salon. In October 1995, the Company opened its first Spa Thira
salon in La Jolla, California. During the three months ended March 30,
1996, the Company collected $839,000 from Spa Thira clients and
- A104 -
<PAGE>
recognized $413,000 in revenue. Under the current pricing structure, spa
clients pay a fixed fee in advance to receive a series of treatments, as
necessary. Consequently, the Company defers revenue, which is recognized
over the anticipated treatment period. As the Company collects further data
concerning the number of treatments required and duration of the treatment
period, the period of revenue recognition may be affected. Revenues from
CBI declined slightly to $5,940,000 for the three months ended March 30,
1996, from $6,109,000 for the three months ended April 1, 1995.
In January 1996, the Company entered into a joint venture
agreement, which is subject to certain conditions, to market its
SoftLight system in Japan. The Company currently holds a 50% stake in the
joint venture with an option to increase its ownership to 51%. The
agreement calls for the Company to receive additional minimum guaranteed
payments of $1.3 million during the remainder of fiscal 1996 and $1.0
million in fiscal 1997, subject to certain conditions.
The gross profit margin in the three months ended March
30, 1996, was 37%, compared with 41% in the three months ended April 1,
1995. The decline is primarily due to lower margins on the sale of
skin-care and other personal-care products at CBI due to a shift to
higher-volume, lower-margin products. In addition, the decline in the gross
profit margin resulted from the early operations of the Spa Thira business,
as the Company develops a client base and continues refining its operating
procedures, offset in part by the effect of revenues from the Japanese
joint venture. As the Company opens additional Spa Thira locations in
fiscal 1996, preopening costs will have a negative impact on the gross
profit margin.
Selling, general and administrative expenses increased to
$2,499,000 in the three months ended March 30, 1996, from $2,115,000 in the
three months ended April 1, 1995, primarily due to costs related to setting
up a personal-care service organization for Spa Thira, including the hiring
of senior management and administrative staff, as well as legal costs
associated with filing patents and expanding the Company's hair-removal
business domestically and internationally. The Company expects these costs
to continue at the current level.
Research and development expenses increased to $1,061,000
in the three months ended March 30, 1996, compared with $590,000 in the
three months ended April 1, 1995, due to increased clinical studies related
to laser-based skin rejuvenation, hair removal, and other skin-care
services.
Interest income increased to $907,000 in the three months
ended March 30, 1996, from $156,000 in the three months ended April 1,
1995, primarily as a result of interest income earned on invested proceeds
from the Company's August 1995 public offering of common stock.
- A105 -
<PAGE>
The effective tax rates in both periods differ from the
statutory federal income tax rate due to nondeductible amortization of cost
in excess of net assets of acquired company, incurred in connection with
the acquisition of CBI and the impact of CBI's state income taxes.
Six Months Ended March 30, 1996 Compared With Six Months Ended April 1,
-----------------------------------------------------------------------
1995
- ----
Revenues increased 21% to $14,420,000 in the six months
ended March 30, 1996, from $11,913,000 in the six months ended April 1,
1995, primarily due to an increase in demand for the Company's skin-care
and other personal-care products, as well as the inclusion of $667,000 in
SoftLight licensing fees from the Japanese joint venture and $471,000 of
revenues from the Company's first Spa Thira salon.
The gross profit margin in the six months ended March 30,
1996, was 34%, compared with 42% in the six months ended April 1, 1995.
The decline is due to the reasons discussed in the results of operations
for the three months ended March 30, 1996.
Selling, general and administrative expenses increased to
$5,098,000 in the six months ended March 30, 1996, from $4,085,000 in the
six months ended April 1, 1995, primarily due to costs related to setting
up a personal-care service organization for Spa Thira, including the hiring
of senior management and administrative staff, as well as legal costs
associated with filing patents and expanding the Company's
hair-removal business domestically and internationally, offset in part by
lower spending at CBI.
Research and development expenses increased to $1,586,000
in the six months ended March 30, 1996, from $1,213,000 in the six months
ended April 1, 1995, due to increased clinical studies related to
laser-based skin rejuvenation, hair removal, and other skin-care services.
Interest income increased to $1,845,000 in the six months
ended March 30, 1996, from $338,000 in the six months ended April 1, 1995,
primarily as a result of interest income earned on invested proceeds from
the Company's August 1995 public offering of common stock.
The effective tax rates in both periods differ from the
statutory federal income tax rate due to nondeductible amortization of cost
in excess of net assets of acquired company, incurred in connection with
the acquisition of CBI, and the impact of CBI's state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $66,068,000 at March 30, 1996,
compared with $68,691,000 at September 30, 1995. Included in
- A106 -
<PAGE>
working capital are cash, cash equivalents, and available-for-sale
investments of $64,858,000 at March 30, 1996, compared with $65,440,000 at
September 30, 1995. Net cash provided by operating activities was
$2,065,000 for the six months ended March 30, 1996.
During the six months ended March 30, 1996, the Company
expended $2,949,000 for purchases of property and equipment, which included
the purchase of 32 laser systems for an aggregate price of $2,240,000 from
the Lorad division of Trex Medical Corporation, a majority-owned subsidiary
of ThermoTrex Corporation. The Company has committed to purchase additional
lasers at an aggregate price of $6,460,000.
The Company has recently signed leases in Dallas, Beverly
Hills, and Denver, where it plans to open additional Spa Thira salons. The
Company plans to open additional spas in various parts of the United States
during the remainder of calendar 1996 and thereafter. Depending on the size
of the salon, each facility will require approximately $1,500,000 to
$2,500,000 for such items as leasehold improvements and laser systems.
Although the Company has no material commitments for capital expenditures,
except as noted above, such expenditures will largely be affected by the
number of Spa Thira locations that can be developed during the year. The
Company believes its existing resources will be sufficient to meet the
capital requirements of its existing businesses for the foreseeable future.
- A107 -
<PAGE>
Form 10-K
September 30, 1995
THERMOLASE CORPORATION
----------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company has developed a laser-based system for the removal of
unwanted hair (SoftLightSM). In April 1995, ThermoLase received clearance
from the U.S. Food and Drug Administration (FDA) to commercially market
services using the SoftLight system. The Company anticipates earning
revenue from the SoftLight system in the first quarter of fiscal 1996, as a
result of opening the first commercial outlet (Spa Thira) in La Jolla,
California in October 1995. The Company intends to operate its first salon
at below maximum capacity rates as it refines the commercial operating
procedures at the center. The SoftLight system uses a low-energy,
dermatology laser in combination with a lotion that absorbs the laser's
energy to disable hair follicles. The Company also manufactures and
markets skin-care, bath, and body products through its CBI Laboratories,
Inc. subsidiary (CBI), which also manufactures the lotion used in the
SoftLight hair-removal process. In November 1994, the Company acquired
Marcor Laboratories, Inc. (Marcor), which sells the Company's GlycoliqueTM
line of skin-care products.
RESULTS OF OPERATIONS
In September 1995, the Company changed its fiscal year-end from the
Saturday nearest December 31 to the Saturday nearest September 30.
Accordingly, the results of operations for 1995 compares the nine months
ended September 30, 1995 (fiscal 1995) with the unaudited nine months ended
October 1, 1994 (fiscal 1994).
Fiscal 1995 Compared With Fiscal 1994
- -------------------------------------
Revenues increased 36% to $17,544,000 in fiscal 1995 from
$12,878,000 in fiscal 1994, primarily due to an increase in demand as a
result of the Company's focus on designing and selling custom brands of its
skin-care and other personal-care products to large retailers and, to a
lesser extent, the inclusion of $1,025,000 in additional revenues from
Marcor, which was acquired in November 1994. The Company anticipates
earning nominal revenues from the SoftLight system in the first quarter of
fiscal 1996 as a result of opening its first Spa Thira salon.
- A108 -
<PAGE>
The gross profit margin was 35% in fiscal 1995, compared with 42% in
fiscal 1994. The decline in the gross profit margin in 1995 is due to
lower margins on the sale of skin-care and other personal-care products as
a result of an increase in the price of raw materials and a shift in
product mix. In addition, the decline in the gross profit margin resulted
from preopening costs of the first Spa Thira salon. These decreases were
offset in part by the inclusion in 1994 of a nonrecurring adjustment to
expense $250,000 of inventory revalued at the time of CBI's acquisition by
the Company. Effective during the second quarter of fiscal 1995, the
Company began to partially address the gross profit margin decline
attributable to higher raw material costs by increasing prices on certain
of the Company's products as well as making bulk purchases of raw
materials. The Company expects that the gross profit margin will be
negatively affected in fiscal 1996 by the impact of opening new Spa Thira
salons, which will incur preopening costs and whose success will be
dependent on their ability to draw clientele.
Selling, general and administrative expenses increased to $6,158,000
in fiscal 1995 from $3,774,000 in fiscal 1994, primarily due to increased
selling efforts to expand the market for the Company's skin-care and other
personal-care products. In addition, during the second quarter of 1995,
the Company hired a chief executive officer and a vice president of
operations, which resulted in an increase in the Company's administrative
expenses. The Company is continuing to recruit additional senior
management with experience in building a personal-care service
organization. The Company anticipates an increase in selling, general and
administrative expenses due to the development and implementation of a
personal-care service network to deliver its SoftLight service.
Research and development expenses increased to $3,151,000 in fiscal
1995 from $1,701,000 in fiscal 1994, due to the acceleration of the
Company's research and development efforts associated with the SoftLight
system, including process optimization studies. Research and development
expenditures are expected to continue at approximately the current level in
fiscal 1996, as the Company continues to optimize the hair-removal process.
Interest income increased to $789,000 in fiscal 1995 from $413,000
in fiscal 1994, as a result of the interest earned on the proceeds from the
Company's August 1995 public offering of common stock, June 1995 private
placement of common stock, and July 1994 initial public offering of common
stock. Interest expense, related party in 1994 represents interest
associated with a $5,000,000 promissory note issued to ThermoTrex
Corporation (ThermoTrex) in connection with the acquisition of CBI. This
note was repaid in full in July 1994.
- A109 -
<PAGE>
The effective tax rates in fiscal 1995 and fiscal 1994 differ from
the statutory federal income tax rate due to nondeductible amortization of
cost in excess of net assets of acquired company, incurred in connection
with the acquisition of CBI, and the impact of CBI's state income taxes.
1994 Compared With 1993
- -----------------------
Revenues of $18,682,000 in 1994 represent revenues from the sale of
skin-care and other personal-care products. Revenues of $625,000 in 1993
represent CBI's revenues from the sale of skin-care and other personal-care
products since its acquisition in December 1993. Due to the growth in
CBI's sales to department and specialty stores, the Company experienced a
significant increase in revenues in the fourth quarter of 1994 as a result
of holiday demand.
The gross profit margin on the sale of skin-care and other personal-
care products was 42% in 1994, compared with 30% in 1993. The 1994 results
included a nonrecurring adjustment to expense $250,000 of inventory
revalued at the time of CBI's acquisition by the Company.
Selling, general and administrative expenses increased to $5,744,000
in 1994 from $208,000 in 1993, primarily due to expenses incurred at CBI.
Research and development expenses increased to $2,324,000 in 1994 from
$536,000 in 1993, due to the acceleration of the Company's research and
development efforts associated with the development of the SoftLight
system, including expenses incurred by the Company relating to clinical
trials necessary for FDA clearance and, to a lesser extent, additional
research and development expenses of $409,000 incurred by CBI.
Interest income increased to $595,000 in 1994 from $560,000 in 1993
as a result of the interest earned on the proceeds invested from the
Company's March 1993 private placement and July 1994 initial public
offering of its common stock, partially offset by lower interest income as
a result of the cash expended to acquire CBI. Interest expense, related
party represents interest associated with a $5,000,000 promissory note
issued to ThermoTrex in connection with the acquisition of CBI. This note
was repaid in full in July 1994.
The effective tax rate in 1994 exceeded the statutory federal income
tax rate due to the nondeductible amortization of cost in excess of net
assets of acquired company, incurred in connection with the acquisition of
CBI, and the impact of CBI's state income taxes.
- A110 -
<PAGE>
FINANCIAL CONDITION
Liquidity and Capital Resources
- -------------------------------
Working capital was $68,691,000 at September 30, 1995, compared with
$16,325,000 at December 31, 1994. Included in working capital are cash,
cash equivalents, and available-for-sale investments of $65,440,000 at
September 30, 1995, compared with $12,655,000 at December 31, 1994. During
the nine months ended September 30, 1995, the Company used $1,352,000 of
cash in operating activities and expended $1,584,000 for purchases of
property and equipment. In June 1995, the Company sold 200,000 shares of
its common stock in private placements for net proceeds of $2,563,000. In
August 1995, the Company sold 2,250,000 shares of its common stock in a
public offering for net proceeds of $52,772,000.
The Company is currently negotiating with the Lorad division of Trex
Medical Corporation, a majority owned subsidiary of ThermoTrex, for the
purchase of 150 SoftLight laser systems. During fiscal 1994, the Company
committed to purchase ten such laser systems for $70,000 each, five of
which were received in fiscal 1995, and the remaining five in the first
quarter of fiscal 1996. In addition, the Company plans to implement
improved information technology systems at its Spa Thira salons and at its
CBI subsidiary.
The Company signed a letter of intent with a group of investors to
form a joint venture to market the Company's hair-removal process in Japan.
The Company expects that the Company's portion of any cash requirements of
the joint venture will not have a material impact on the Company's
financial position.
The Company plans to begin opening additional Spa Thira salons in
the second half of calendar 1996 in various parts of the United States.
These facilities will require funds for such items as leasehold
improvements and laser systems. Although the Company has no material
commitments for capital expenditures, except as noted above, such
expenditures will largely be affected by the number of Spa Thira locations
that can be developed during the year. The Company believes that it has
adequate resources to meet its financial needs for the foreseeable future.
- A111 -
<PAGE>
SELECTED FINANCIAL INFORMATION
(In
thousands Nine Months Ended (a) Year Ended
--------------------- ---------------------------------
except per
share Sept 30, Oct 1, Dec 31, Jan 1, Jan 2, Dec 28,
amounts) 1995(b) 1994 1994(c) 1994(d) 1993 1991
- -------- ------- ---- ------- ------- ---- ----
(Unaudited)
STATEMENT
OF OPERATIONS
DATA:
Revenues $ 17,544 $ 12,878 $ 18,682 $ 625 $ - $ -
Income (loss)
before
cumulative
effect of
change in
accounting
principle (1,679) 2 6 (16) (215) (31)
Net income
(loss) (1,679) 11 15 (16) (215) (31)
Earnings
(loss) per
share before
cumulative
effect of
change in
accounting
principle (0.04) - - - (0.01) -
Earnings
(loss) per
share (0.04) - - - (0.01) -
BALANCE SHEET
DATA:
Working
capital $ 68,691 $ 16,325 $3,610 $ - $ -
Total
assets 89,463 33,570 23,551 71 -
Long-term
obligations - - - - -
Common stock
subject to
redemption - - 14,511 - -
Shareholders'
investment 82,218 28,997 (189) 71 -
- A112 -
<PAGE>
(a) In September 1995, the Company changed its fiscal year-end from the
Saturday nearest December 31 to the Saturday nearest September 30.
Accordingly, the Company's 39-week transition period ended September
30, 1995, is presented.
(b) Reflects the net proceeds of the Company's private placements and
public offering of common stock.
(c) Reflects the net proceeds of the Company's initial public offering
and the adoption of Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
(d) Reflects the net proceeds of the Company's private placement and the
December 1993 acquisition of CBI Laboratories.
- A113 -
<PAGE>
Prospectus
June 27, 1996
TREX MEDICAL CORPORATION
------------------------
Management's Discussion And Analysis Of Financial Condition And Results Of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company designs, manufactures and markets mammography equipment and
minimally invasive stereotactic needle biopsy systems used for the
detection
of breast cancer, and also designs, manufactures and markets general
radiography (X-ray) equipment. The Company sells its systems worldwide
principally through a network of independent dealers. In addition, the
Company manufactures mammography and radiography systems as an original
equipment manufacturer for other medical equipment companies such as U.S.
Surgical, GE and Philips. The Company has two operating units, Lorad, a
manufacturer of mammography and stereotactic biopsy systems, and Bennett, a
manufacturer of general radiography and mammography equipment.
The Company conducts all of its manufacturing operations in the United
States and sells its products on a worldwide basis. The Company anticipates
that an increasing percentage of its revenues will be from export sales.
The
Company denominates its export sales in U.S. dollars and therefore, neither
its revenue nor earnings are significantly affected by exchange rate
fluctuations.
RESULTS OF OPERATIONS
In September 1995, the Company changed its fiscal year-end from the
Saturday nearest December 31 to the Saturday nearest September 30.
Accordingly, the results of operations for 1995 compares the nine months
ended September 30, 1995 ("fiscal 1995") with the unaudited nine months
ended October 1, 1994 ("fiscal 1994").
Six Months Ended March 30, 1996 Compared With Six Months Ended April 1,
- -----------------------------------------------------------------------
1995
- ----
Revenues increased 113% to $66.8 million in the six months ended March
30,
1996, from $31.3 million in the six months ended April 1, 1995, due
primarily
to the inclusion of $23.3 million in revenues from Bennett, which was
acquired in September 1995. Revenues at Lorad increased 39% to $43.5
million in the six months ended March 30, 1996 from $31.3 million in the
six months ended April 1, 1995 as a result of increased demand for
mammography and biopsy systems. Under an OEM agreement with Philips, Lorad
will receive minimum orders for two models of imaging systems totaling $40
million over a five-year period that began in January 1994, subject to
certain conditions. As of March 30, 1996, the Company had recognized
cumulative revenue of $21.3 million under this contract. Revenues from
Philips were $7.4 million in the six months ended March 30, 1996, compared
with $4.7 million in the six months ended April 1, 1995. Export sales
accounted for 28% of the Company's revenues in the six months ended March
30, 1996, compared with 26% in the six months ended April 1, 1995.
- A114 -
<PAGE>
The gross profit margin declined to 44% in the six months ended March 30,
1996, from 49% in the six months ended April 1, 1995, due to the inclusion
of lower-margin revenues at Bennett.
Selling, general and administrative expenses as a percentage of revenues
decreased to 20% in the six months ended March 30, 1996 from 23% in the six
months ended April 1, 1995, due to increased revenues at Lorad. Research
and development expenses increased to $8.2 million in the six months ended
March 30, 1996 from $6.3 million in the six months ended April 1, 1995,
reflecting the Company's continued efforts to develop and commercialize new
products including the Company's M-IV mammography system, full-breast digital
mammography system, and direct-detection X-ray sensor, as well as
enhancements of existing systems. Under a license agreement between the
Company and ThermoTrex, the Company may elect to expend approximately $2
million each year during fiscal 1996, 1997 and 1998 in order to expand the
field of use in which it is entitled to use the digital imaging detection
technology. See "Relationship and Potential Conflicts of Interest with
Thermo Electron and ThermoTrex."
Interest income in the six months ended March 30, 1996 represents
interest on the proceeds of the Company's private placements of Common Stock in
November 1995 and January 1996. Interest expense in the six months ended
March 30, 1996 represents interest associated with the $42 million
principal amount Convertible Note issued to ThermoTrex in October 1995 in
connection with the Bennett acquisition.
The effective tax rate was 46% in both periods. This tax rate differs
from the statutory federal income tax rate due to the impact of state income
taxes and nondeductible amortization of cost in excess of net assets of acquired
companies.
The Company is involved with certain patent litigation that arose at
Lorad prior to its acquisition by ThermoTrex. See Note 2 of Notes to
Consolidated Financial Statements. In addition, a third party has alleged that
the Company's mammography systems infringe a patent held by the third party.
See Note 8 of Notes to Consolidated Financial Statements. In another matter, a
former employee of the Company has asserted that a component of a newly
introduced product infringes two U.S. patents owned by the former employee.
See "Risk Factors--Risks Associated with Pending and Threatened Patent
Litigation" for a discussion of these matters.
Nine Months Ended September 30, 1995 ("Fiscal 1995") Compared With Nine
- -----------------------------------------------------------------------
Months Ended October 1, 1994 ("Fiscal 1994")
- --------------------------------------------
Revenues increased 41% to $55.3 million in fiscal 1995 from $39.2 million
in fiscal 1994. The increase resulted from higher demand across all product
lines, with significant growth coming from international sales through the
Company's OEM agreement with Philips. Revenues from Philips were $9.8
million in fiscal 1995, compared with $4.1 million in fiscal 1994. Export sales
accounted for 21% of the Company's revenues in fiscal 1995, compared with
11% in fiscal 1994.
The gross profit margin declined to 49% in fiscal 1995 from 50% in fiscal
1994, due to an adjustment to expense of $0.3 million for inventory
revalued at the time of Bennett's acquisition.
Selling, general and administrative expenses as a percentage of revenues
decreased to 22% in fiscal 1995 from 25% in fiscal 1994, due primarily to
- A115 -
<PAGE>
increased revenues. Research and development expenses increased to $8.6
million in fiscal 1995 from $7.3 million in fiscal 1994, reflecting the
Company's continued efforts to develop and commercialize the full-view
digital imaging mammography system, as well as efforts to enhance existing
systems.
The effective tax rate was 45% in fiscal 1995, compared with 55% in
fiscal 1994. These tax rates exceed the federal statutory federal income tax
rate due primarily to state income taxes and nondeductible amortization of cost
in excess of net assets of acquired companies. The decrease in the effective
tax rate in 1995 resulted from the lower relative impact of nondeductible
amortization of cost in excess of net assets of acquired companies and
state income taxes.
Twelve Months Ended December 31, 1994 Compared With Twelve Months Ended
- -----------------------------------------------------------------------
January 1, 1994
- ---------------
Revenues increased 45% to $54.4 million in 1994 from $37.5 million in
1993. The increase resulted from the initiation of OEM sales under the Philips
agreement, an increase in digital spot mammography sales and increased
demand for StereoGuide needle-biopsy, mammography and industrial imaging
equipment due to increased demand. Revenues from Philips were $5.8 million in
1994. Export sales accounted for 14% of the Company's revenues in 1994, compared
with 10% of revenues in 1993.
The gross profit margin declined to 49% in 1994 from 50% in 1993, due to
a change in sales mix.
Selling, general and administrative expenses as a percentage of revenues
declined to 24% in 1994 from 26% in 1993, due primarily to an increase in
total revenues. Research and development expenses increased to $10.7
million in 1994 from $7.2 million in 1993, reflecting the Company's continued
efforts to develop and commercialize the full-view digital imaging mammography
system and the Sonic CT system, and the development of the Philips OEM product.
The effective tax rate during 1994 was 55%, compared with 54% in 1993.
These rates exceed the statutory federal income tax rate due to nondeductible
amortization of cost in excess of net assets of acquired companies and the
impact of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $35.6 million at March 30, 1996,
compared with $13.2 million at September 30, 1995. Included in working capital
are cash and cash equivalents of $19.2 million at March 30, 1996 and $0.2
million at September 30, 1995. Cash provided by operating activities was
$1.8 million in the six months ended March 30, 1996. The Company used cash
of $4.1 million and $1.9 million to fund increases in accounts receivable
and inventories, respectively, during the first six months of fiscal 1996. The
increase in receivables resulted from higher sales while the inventory increase
resulted from business growth and a new product that will be shipped in the
third fiscal quarter. The Company expended $1.5 million on purchases of
property, plant and equipment during the first half of fiscal 1996. The Company
expects to expend approximately $1.4 million for additional purchases of
property, plant and equipment during the remainder of fiscal 1996.
- A116 -
<PAGE>
In connection with the transfer of the outstanding shares of capital
stock of Bennett, the Company issued to ThermoTrex the $42,000,000 principal
amount Convertible Note. In March 1996, ThermoTrex converted $3,000,000
principal amount of the Convertible Note into 254,452 shares of Common Stock. In
November 1995, the Company completed a private placement of 1,862,000 shares of
its Common Stock for net proceeds of approximately $17.6 million. In January
1996, the Company sold 100,000 shares of its Common Stock in a private
placement for net proceeds of $1.1 million.
In April 1996, the Company signed a non-binding letter of intent to
acquire Continental, an Illinois company that designs, manufactures and markets
general purpose and specialty X-ray systems for approximately $18.2 million
in cash, including the repayment of $5.7 million in debt. The purchase
price is subject to a post-closing adjustment based on the net asset value
of Continental as of the closing date. If the acquisition is completed, the
Company intends to finance the acquisition through the proceeds of the
Offerings.
In May 1996, the Company acquired substantially all of the assets of XRE,
a Massachusetts company that designs, manufactures and markets X-ray imaging
systems used for cardiac catheterization and angiographs, for approximately
$17.0 million in cash. In addition, the Company repaid approximately $1.8
million of XRE's debt. The purchase price is subject to a post-closing
adjustment based on the net asset value of XRE as of the closing date. The
Company financed the acquisition through its existing cash balances.
Working capital at March 30, 1996, on a pro forma basis assuming the
acquisitions of XRE and Continental, which are assumed to have been
financed through cash on hand and borrowings from Thermo Electron, had occurred
on that date, would have been $10.6 million. (See the pro forma combined
condensed balance sheet included elsewhere in this Prospectus.)
Although the Company expects to have positive cash flow from its existing
operations, the Company anticipates it will require significant amounts of
cash to pursue the acquisition of complementary businesses and
technologies. The Company expects that it will finance these acquisitions
through a combination of internal funds, the net proceeds of the Offerings,
additional debt or equity financing and/or short-term borrowings from ThermoTrex
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
believes that its existing resources are sufficient to meet the capital
requirements of its existing businesses for the foreseeable future,
including at least the next 24 months.
The selected financial information below as of and for the years ended
January 1, 1994 and December 31, 1994, and the nine months ended September
30, 1995 has been derived from the Company's Consolidated Financial
Statements, which have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report included elsewhere in this
Prospectus. The selected financial information for the fiscal years ended
December 28, 1991 and January 2, 1993, the nine months ended October 1,
1994 and the six month periods ended April 1, 1995 and March 30, 1996 has not
been audited but, in the opinion of the Company, includes all adjustments
(consisting only of normal, recurring adjustments) necessary to present
fairly such information in accordance with generally accepted accounting
principles applied on a consistent basis. The results of operations for the
six months ended March 30, 1996 are not necessarily indicative of results
for the entire year.
- A117 -
<PAGE>
FISCAL YEAR (1) NINE MONTHS ENDED (1)(2)
------------------------------- ------------------------
OCTOBER 1, SEPTEMBER 30,
1991 1992 (3) 1993 1994 1994 1995 (4)
------ -------- ------- ------- ---------- ------------
- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME DATA:
Revenues......... $ -- $ 4,128 $37,519 $54,410 $39,196 $ 55,291
------ ------- ------- ------- ------- --------
Costs and Operating
Expenses:
Cost of
revenues........ -- 2,164 18,589 27,794 19,654 28,180
Selling, general
and
administrative
expenses........ -- 1,027 9,788 13,272 9,794 12,174
Research and
development
expenses........ 313 1,683 7,182 10,662 7,320 8,595
------ ------- ------- ------- ------- --------
313 4,874 35,559 51,728 36,768 48,949
------ ------- ------- ------- ------- --------
Operating Income
(Loss)........... (313) (746) 1,960 2,682 2,428 6,342
Interest and
Other Income
(Expense), Net... -- -- (158) (22) (11) 22
------ ------- ------- ------- ------- --------
Income (Loss)
Before Income
Taxes............ (313) (746) 1,802 2,660 2,417 6,364
Income Tax
Provision
(Benefit)........ (123) (202) 975 1,466 1,332 2,881
------ ------- ------- ------- ------- --------
Net Income
(Loss)........... $ (190) $ (544) $ 827 $ 1,194 $ 1,085 $ 3,483
====== ======= ======= ======= ======= ========
Earnings (Loss)
per Share (6).... $ (.01) $ (.03) $ .04 $ .06 $ .05 $ .17
====== ======= ======= ======= ======= ========
Weighted Average
Shares (6)....... 20,151 20,151 20,151 20,151 20,151 20,151
====== ======= ======= ======= ======= ========
BALANCE SHEET
DATA (AT END OF PERIOD):
Working Capital.. $ -- $ 4,410 $ 6,148 $ 8,584 $ 7,333 $ 13,171
Total Assets..... -- 35,004 44,553 48,000 47,465 102,374
Long-term
Obligations...... -- -- -- -- -- --
Shareholders'
Investment....... (28) 28,636 36,694 37,033 37,471 80,010
- -----
- A118 -
<PAGE>
PRO FORMA COMBINED (5)
------------------------
SIX MONTHS ENDED (1) NINE MONTHS SIX MONTHS
---------------------- ENDED ENDED
APRIL 1, MARCH 30, SEPTEMBER 30, MARCH 30,
1995 1996 (4) 1995 1996
--------- ---------- ------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME DATA:
Revenues......... $ 31,315 $ 66,829 $126,185 $ 92,959
--------- ---------- -------- --------
Costs and Operating
Expenses:
Cost of
revenues........ 16,125 37,592 78,402 54,337
Selling, general
and
administrative
expenses........ 7,117 13,695 29,588 19,845
Research and
development
expenses........ 6,270 8,170 13,918 10,825
--------- ---------- -------- --------
29,512 59,457 121,908 85,007
--------- ---------- -------- --------
Operating Income
(Loss)........... 1,803 7,372 4,277 7,952
Interest and
Other Income
(Expense), Net... (2) (397) (1,809) (1,127)
Income (Loss)
Before Income
Taxes............ 1,801 6,975 2,468 6,825
Income Tax
Provision
(Benefit)........ 835 3,241 1,870 3,147
--------- ---------- -------- --------
Net Income
(Loss)........... $ 966 $ 3,734 $ 598 $ 3,678
========= ========== ======== ========
Earnings (Loss)
per Share (6).... $ .05 $ .17 $ .02 $ .15
========= ========== ======== ========
Weighted Average
Shares (6)....... 20,151 21,547 24,667 24,700
========= ========== ======== ========
BALANCE SHEET
DATA (AT END OF PERIOD)
Working Capital.. $ 35,555 $ 10,626
Total Assets..... 129,575 161,295
Long-term
Obligations...... 39,000 39,236
Shareholders'
Investment....... 63,432 63,432
- -----
- A119 -
<PAGE>
(1) All periods presented include ThermoTrex's research and development
business pertaining to its Sonic CT system.
(2) In September 1995, the Company changed its fiscal year-end from the
Saturday nearest December 31 to the Saturday nearest September 30.
Accordingly, the Company's transition period from January 1, 1995 to
September 30, 1995 ("fiscal 1995") is presented. The unaudited data
for the nine months ended October 1, 1994 is presented for
comparative purposes only.
(3) Includes the results of Lorad since its acquisition by ThermoTrex on
November 17, 1992.
(4) Includes the results of Bennett since its acquisition by ThermoTrex
on September 15, 1995.
(5) The pro forma combined statement of income data was derived from the
pro forma combined condensed statements of income included elsewhere
in this Prospectus. The pro forma combined statement of income data
sets forth the results of operations for the nine months ended
September 30, 1995 and six months ended March 30, 1996, as if the
acquisitions of Bennett, XRE and Continental had occurred on January
1, 1995. The pro forma combined balance sheet data is derived from
the pro forma combined condensed balance sheet included elsewhere in
this Prospectus, which was prepared as if the acquisitions of XRE
and Continental had occurred on March 30, 1996.
(6) Pursuant to Securities and Exchange Commission requirements,
earnings (loss) per share have been presented for all periods.
Weighted average shares for all periods include the 20,000,000
shares issued to ThermoTrex in connection with the initial
capitalization of the Company and the effect of the assumed exercise
of stock options issued within one year prior to the Company's
initial public offering.
- A120 -
<PAGE>
Form 10-Q
March 30, 1996
THERMO FIBERTEK INC.
--------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
DESCRIPTION OF BUSINESS
The Company designs and manufactures processing machinery
and accessories for the paper and paper-recycling industries. The
Company's principal products include custom-engineered systems and
equipment for the preparation of wastepaper for conversion into recycled
paper, and accessory equipment and related consumables important to the
efficient operation of papermaking machines. Because the Company has
significant foreign operations, particularly in Europe, the Company's
financial performance and competitive position can be affected by currency
exchange rate fluctuations affecting the relationship between the U.S.
dollar and foreign currencies. The Company reduces its exposure to
currency fluctuations through the use of forward contracts.
RESULTS OF OPERATIONS
First Quarter 1996 Compared With First Quarter 1995
---------------------------------------------------
Revenues increased 12% to $49.0 million in the first
quarter of 1996 from $43.7 million in the first quarter of 1995. Revenues
from the Company's North American and French accessories businesses
increased $2.3 million and $1.8 million, respectively, due principally to
an increase in demand. The favorable effects of currency translation due to
a weaker U.S. dollar increased revenues by $0.6 million.
The gross profit margin increased to 42% in the first
quarter of 1996 from 41% in the first quarter of 1995. Significant margin
improvement at the Company's North American accessories business and at the
Company's European subsidiaries was offset in part by a decrease in margins
at the Company's Fiberprep subsidiary as a result of warranty reserves
recorded in the first quarter of 1996 for a large de-inking project.
Selling, general and administrative expenses as a
percentage of revenues decreased to 24% in the first quarter of 1996 from
27% in the first quarter of 1995, due primarily to an increase in revenues.
Research and development expenses increased to $1.3 million in the first
quarter of 1996 from $0.9 million in the first quarter of 1995, largely due
to continued development in 1996 of technology to recover fiber and other
valuable
materials found in the residue of papermaking and paper-recycling
operations.
Interest expense decreased to $172,000 in 1996 from
$348,000 in 1995, due primarily to the January 1996 repayment of a $10.4
million promissory note to Thermo Electron Corporation (Thermo Electron).
- A121 -
<PAGE>
The effective tax rate was 39% in the first quarter of
1996 and 1995. This tax rate exceeds the statutory federal income tax rate
due primarily to state income taxes, offset in part by the effect of lower
foreign tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $76.2 million at March
30, 1996, compared with $70.9 million at December 30, 1995. Included in
working capital are cash, cash equivalents, and available-for-sale
investments of $55.4 million at March 30, 1996, compared with $59.8 million
at December 30, 1995. Of the $55.4 million balance at March 30, 1996, $3.0
million was held by Fiberprep, and the remainder by the Company and its
wholly owned subsidiaries. During the first quarter of 1996, $5.8 million
of cash was provided by operating activities. Cash provided by a decrease
in accounts receivable was substantially offset by the effect of a
reduction in accounts payable and other current liabilities. During the
first quarter of 1996 the Company repaid a $10.4 million promissory note to
Thermo Electron.
At March 30, 1996, $18.2 million of the Company's cash
and cash equivalents were held by its Lamort subsidiary. Repatriation of
this cash into the United States is subject to a 5% withholding tax in
France and could also be subject to a United States tax.
In the remainder of 1996, the Company plans to make
capital expenditures of approximately $3.9 million. The Company
believes that its existing resources are sufficient to meet the capital
requirements of its existing operations for the foreseeable future.
- A122 -
<PAGE>
Form 10-K
December 30, 1995
THERMO FIBERTEK INC.
--------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company designs and manufactures processing machinery and
accessories for the paper and paper-recycling industries. The Company's
principal products include custom-engineered systems and equipment for the
preparation of wastepaper for conversion into recycled paper, cleaning and
conditioning systems, formation systems, filtration systems, and accessory
equipment and related consumables of critical importance to the efficient
operation of papermaking machines. During 1995, approximately 41% of the
Company's sales originated outside the United States, primarily in Europe.
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 affecting
the relationship between the U.S. dollar and foreign currencies. The
Company reduces its exposure to currency fluctuations through the use of
forward contracts.
RESULTS OF OPERATIONS
1995 Compared With 1994
- -----------------------
Revenues increased 27% to $206.7 million in 1995 from $162.6 million
in 1994. Revenues from the Company's paper-recycling equipment business
increased $26.3 million primarily due to the inclusion of $14.7 million in
revenues earned by the Company's Fiberprep subsidiary under a subcontract
awarded in 1994 by Thermo Electron to supply, over a two-year period,
approximately $16 million in equipment and services for an office
wastepaper de-inking facility. In addition, paper-recycling equipment
revenues increased due to higher demand at the Company's subsidiary in
France. Revenues from the Company's North American accessories business
increased $17.3 million due principally to an increase in demand. The
favorable effects of currency translation, due to a weaker U.S. dollar,
increased revenues by $2.7 million.
The gross profit margin remained relatively unchanged at 40% in
1995, compared with 41% in 1994. A decrease in margins at the Company's
Fiberprep subsidiary due to the establishment of
- A123 -
<PAGE>
warranty reserves for certain large de-inking projects was largely offset
by an increase in margins at the Company's North American accessories
business.
Selling, general and administrative expenses as a percentage of
revenues decreased to 24% in 1995 from 27% in 1994, due primarily to an
increase in revenues. Research and development expenses remained
relatively unchanged at $4.1 million in 1995, compared with $3.8 million in
1994.
The Company licenses certain of its technologies to a small number
of third parties. The amount of royalty income fluctuates from period to
period since the royalties are based on the level of sales achieved by the
licensees in their designated territories.
Interest income increased to $3.5 million in 1995 from $2.0 million
in 1994 due to higher average invested cash balances and, to a lesser
extent, higher prevailing interest rates. Interest expense increased to
$1.4 million in 1995 from $0.9 million in 1994 due primarily to the
issuance of a $10.4 million promissory note to Thermo Electron in
connection with a partial redemption of Fiberprep stock in January 1995,
offset in part by the repayment in September 1994 of a $5.0 million
promissory note to Thermo Electron.
Minority interest expense decreased to $233,000 in 1995 from $1.5
million in 1994 due to the partial redemption of Fiberprep stock in January
1995, which increased the Company's ownership of Fiberprep from 51% to 95%,
offset in part by higher profits at Fiberprep in 1995.
The effective tax rate was 38% in 1995 and 1994. These rates exceed
the statutory federal income tax rate due primarily to state income taxes,
and the tax effect on a dividend from a foreign subsidiary, offset in part
by the effect of lower foreign tax rates.
1994 Compared With 1993
- -----------------------
Revenues increased to $162.6 million in 1994 from $137.1 million in
1993 due to an increase of $17.6 million in revenues as a result of the
acquisition of AES Engineered Systems (AES), which was acquired from Albany
International Corp. in June 1993; an increase of $7.9 million in revenues
from the Company's paper-recycling equipment business primarily as a result
of the receipt of three large contracts; and an increase of $4.1 million in
revenues from the Company's U.S. accessories business due to greater
demand. These increases were offset in part by a decline of $4.4 million
in revenues from the Company's environmental process systems business, to
$1.3 million in 1994. This decline
- A124 -
<PAGE>
resulted from a decrease in demand for these systems, which are sold by the
Company's U.K. subsidiary, due to changes in U.K. environmental regulations
that required modifications to that subsidiary's equipment.
The gross profit margin increased to 41% in 1994 from 40% in 1993,
due primarily to improved margins at the Company's cleaning, conditioning,
formation, and filtration systems business in the U.S.
Selling, general and administrative expenses as a percentage of
revenues decreased to 27% in 1994 from 28% in 1993, due to an increase in
revenues. Research and development expenses increased to $3.8 million in
1994 from $3.2 million in 1993, due primarily to the inclusion of AES's
research and development expenses for the full twelve months of 1994,
compared with six months in 1993.
Interest income increased to $2.0 million in 1994 from $1.7 million
in 1993, due primarily to higher average invested amounts in 1994.
Interest expense remained relatively unchanged at $0.9 million in 1994 and
$1.0 million in 1993.
Minority interest expense remained unchanged at $1.5 million in 1994
and 1993.
The effective tax rate was 38% in 1994, compared with 37% in 1993.
These rates exceed the statutory federal income tax rate due primarily to
state income taxes and other nondeductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $70.9 million at December 30, 1995,
compared with $54.9 million at December 31, 1994. Included in working
capital are cash, cash equivalents,and short-term investments of $59.8
million at December 30, 1995, compared with $44.9 million at December 31,
1994. Of the $59.8 million balance at December 30, 1995, $14.1 million was
held by Fiberprep, and the remainder by the Company and its wholly owned
subsidiaries. During 1995, $18.4 million of cash was provided by operating
activities, compared with $18.0 million of cash during 1994. During 1995,
the Company expended $3.5 million for the purchase of property, plant and
equipment.
At December 30, 1995, $16.3 million of the Company's cash and cash
equivalents were held by its Lamort subsidiary. Repatriation of this cash
into the United States would be subject to a 5% withholding tax in France
and could also be subject to a United States tax.
In January 1995, the Company increased its ownership of Fiberprep
from 51% to 95% through a redemption by Fiberprep of a portion of its stock
owned by Aikawa Iron Works Co., Ltd.
- A125 -
<PAGE>
(Aikawa) for a total purchase price equal to (a) $12.8 million in cash,
which included a royalty payment of $0.8 million, (b) a ten-year 1% royalty
on sales of certain Aikawa products, and (c) the issuance of 150,000 shares
of the Company's common stock. In connection with the redemption,
Fiberprep issued to Thermo Electron a $10.4 million promissory note due
January 4, 1996, which was repaid subsequent to year-end.
In 1996, the Company plans to make capital expenditures of
approximately $4.6 million. The Company believes that its existing
resources are sufficient to meet the capital requirements of its existing
operations for the foreseeable future.
- A126 -
<PAGE>
SELECTED FINANCIAL INFORMATION
(In thousands
except per
share amounts) 1995(a) 1994 1993(b) 1992(c) 1991
- -------------- ------- ---- ------- ------- ----
STATEMENT OF INCOME
DATA:
Revenues $206,743 $162,625 $137,088 $125,577 $124,731
Net income 20,249 10,894 7,442 7,702 6,708
Earnings per share:
Primary .50 .27 .18 .23 .23
Fully diluted .48 .27 .18 .23 .23
BALANCE SHEET DATA:
Working capital $ 70,882 $ 54,879 $ 37,442 $ 57,162 $27,319
Total assets 199,671 162,389 142,608 131,525 86,760
Long-term
obligations 15,041 15,406 15,806 16,220 26,552
Shareholder's
investment 109,631 84,696 `70,753 66,460 13,997
(a) Reflects the January 1995 redemption of a portion of Fiberprep's stock
and the issuance of a $10.4 million promissory note by Fiberprep to Thermo
Electron.
(b) Reflects the June 1993 acquisition of AES and the issuance of a $5.0
million promissory note to Thermo Electron.
(c) Reflects the September 1992 acquisition of Vickerys, the net proceeds
of the Company's private placements and initial public offering, and
conversion of a $10.0 million principal amount of 5% subordinated
convertible note held by Thermo Electron.
- A127 -
<PAGE>
Form 10-Q
March 30, 1996
THERMO ECOTEK CORPORATION
-------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company earns revenues from the operation of
independent electric power generation facilities through joint ventures,
limited partnerships or wholly owned subsidiaries (the Operating
Companies). Each Operating Company sells power under a long-term power sale
agreement. The profitability of operating the Company's facilities depends
on the price received for power under the power sale agreements with power
purchasers, on plant performance or availability, on the degree to which
utilities exercise curtailment rights granted under power sale agreements
and on the fuel, operating and maintenance costs for the facilities.
Curtailment rights allow a utility to require an Operating Company to
curtail power output up to pre-established annual levels during periods of
low system demand. A utility
commonly experiences low system demand during periods when
hydroelectric power is available, generally following periods of heavy rain
or snow. The contractually allowable maximum for such curtailment at each
of the Company's Woodland and Mendota plants is 1,000 hours per calendar
year, which was reached in calendar 1995. The Woodland and Mendota plants
each experienced approximately 425 hours of curtailment from January
through March 1996, and expect to experience curtailment during the
remainder of fiscal 1996. The Company earns a disproportionately high share
of its income in the months of May to October due to the rate structures
under the power sale agreements relating to its California plants, which
provide strong incentives to operate during this period of high demand.
Conversely, the Company has historically operated at a loss or marginal
profit during the second fiscal quarter due to the rate structure under
these agreements.
The Company's profitability is also dependent on the amount of
development expenses that it incurs.
RESULTS OF OPERATIONS
In June 1995, the Company changed its fiscal year-end from
the Saturday nearest December 31 to the Saturday nearest September 30.
- A128 -
<PAGE>
Three Months Ended March 30, 1996 Compared With Three Months
------------------------------------------------------------
Ended April 1, 1995
- -------------------
Revenues in the three months ended March 30, 1996 were
$33.5 million, compared with $31.0 million in the three months ended April
1, 1995, an increase of $2.5 million, or 8.1%. The increase is primarily
due to higher contractual energy rates at all of the Company's facilities,
except the Hemphill plant, as well as fewer days of scheduled and
unscheduled outages at the Delano plants, offset in part by higher
curtailment of power output at the Mendota and Woodland plants.
The Hemphill and Whitefield Operating Companies have
reached an agreement in principle with Public Service of New Hampshire
(PSNH) to settle certain rate order renegotiations initiated by PSNH. The
settlement agreement is subject to the approval of the New Hampshire Public
Utilities Commission on terms acceptable to both PSNH and the Company, and
the satisfaction of certain other conditions. The principal terms
of the agreement generally call for the Hemphill and Whitefield
Operating Companies to reduce the amount of power sold annually to PSNH to
70% of the plants' capacities, and to reduce the price per kilowatt paid by
PSNH to $.06 per kilowatt hour, escalating three percent per year for the
remainder of the term of the original, applicable rate order. In
consideration for these reductions, the Operating Companies would receive
certain cash settlement payments, paid over several years. The settlement,
if approved and executed, is not expected to have a material impact on the
Company's consolidated results of operations or financial condition.
The gross profit margin increased to 21% in the three
months ended March 30, 1996, compared with 17% in the three months ended
April 1, 1995. The improvement results primarily from the effect of higher
revenues described above and lower fuel and other operating costs at two of
the Company's California plants.
General and administrative expenses as a percentage of
revenues were 8.2% in the three months ended March 30, 1996,compared with
7.5% in the three months ended April 1, 1995. The change results primarily
from an ongoing increase in international business development efforts.
Interest income increased to $1.1 million in the three
months ended March 30, 1996, compared with $671,000 in the three months
ended April 1, 1995, primarily due to increased invested amounts as a
result of the Company's initial public offering in February 1995, which
raised net proceeds of $27.5 million, and approximatly $36 million of net
proceeds from the Company's issuance of convertible debentures in March
1996. Interest
- A129 -
<PAGE>
expense increased to $3.6 million in the three months ended March 30, 1996,
compared with $2.6 million in the three months ended
April 1, 1995, primarily due to the conversion of the Mendota plant lease
to a capital lease effective April 1995.
The effective tax rate was 45% in the three months ended
March 30, 1996, compared with 23% in the three months ended April 1, 1995.
The tax rate in 1996 exceeds the statutory federal rate due to state income
taxes. The 1995 effective tax rate reflects the benefit of tax credits
and loss carryforwards.
Minority interest expense represents the allocation of
income from plant operations to a minority partner in an Operating Company.
Six Months Ended March 30, 1996 Compared With Six Months Ended
--------------------------------------------------------------
April 1, 1995
- -------------
Revenues in the six months ended March 30, 1996 were $67.8
million, compared with $63.2 million in 1995, an increase of $4.6 million.
The increase is primarily due to higher contractual energy rates in 1996 at
all of the Company's facilities, except the Hemphill plant, as well as
fewer days of scheduled and unscheduled outages at the Delano plants,
offset in part by higher curtailment of power output at the Mendota and
Woodland plants.
The gross profit margin increased to 25% during the six
months ended March 30, 1996, compared with 20% in the six months ended
April 1, 1995. The improvement results largely from the effect of higher
revenues and lower fuel costs.
General and administrative expenses as a percentage of
revenues were 7.6% in the six months ended March 30, 1996, compared with
6.0% in the six months ended April 1, 1995. The change results primarily
from an ongoing increase in international business development efforts.
Interest income increased to $2.4 million in the six
months ended March 30, 1996, compared with $1.2 million in the six months
ended April 1, 1995 due to increased invested amounts as a result of the
Company's initial public offering in February 1995 and net proceeds from
the Company's issuance of convertible debentures in March 1996. Interest
expense increased to $7.5 million during the six months ended March 30,
1996, compared with $5.4 million in the six months ended April 1, 1995,
primarily due to the conversion of the Mendota plant lease to a capital
lease effective April 1995.
The effective tax rates were 38% and 29% in 1996 and 1995,
respectively. The rates in both years reflect the exclusion of
income taxed directly to minority partners, offset in part by state income
taxes. The 1995 effective tax rate also reflects the benefit of tax credits
and loss carryforwards.
- A130 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $77.8 million at March 30,
1996 from $62.0 million at September 30, 1995. The Company had cash, cash
equivalents, and current restricted funds of $88.6 million at March 30,
1996, compared with $61.2 million at September 30, 1995. At March 30, 1996,
current restricted funds held in trust pursuant to certain lease and debt
agreements totaled $7.2 million. The use of an additional $3.9 million of
cash and cash equivalents at March 30, 1996 was also restricted by the
terms of certain lease and financing agreements. These restrictions limit
the ability of the Operating Companies to transfer funds to the Company in
the form of dividends, loans, advances or other distributions.
During the six months ended March 30, 1996, the Company's
operating activities provided cash and restricted funds of $25.9
million. The Company received approximately $36 million of net proceeds
from the issuance of $37 million principal amount of noninterest-bearing
subordinated convertible debentures in March 1996. The Company used cash of
$18.9 million for the repayment of long-term obligations related to two of
its California plants. The Company also used cash of $3.0 million to
purchase an additional 1,500,000 shares of KFX Inc. (KFX) common stock
bringing its total equity interest in KFX to approximately 14%. Pursuant to
certain agreements with KFX, the Company has the right, but not the
obligation, to purchase an additional 1,250,000 shares of KFX common stock
for $2.00 per share in fiscal 1997, and to purchase up to a 51% equity
interest in KFX in fiscal 2000. In addition, during the six months ended
March
30, 1996, the Company expended $10.2 million for the construction of a
coal-beneficiation facility near Gillette, Wyoming and expended $.5 million
on the purchase of other property, plant and equipment. The Company is
committed to fund approximately an additional $31 million for construction
of the coal-beneficiation facility, primarily during the remainder of
fiscal 1996. During the first half of fiscal 1996, the Company distributed
$.7 million to a minority partner of one of its Operating Companies.
The Company is committed to contribute $15 million for a
minority interest in a 185 megawatt combined cycle, steam-turbine
electric-generation facility located in Puerta Plata, Dominican Republic.
Funding is expected to take place by the end of fiscal 1996 unless the
Company notifies its project partner of its intention not to provide
funding and, within 60 days following such notice, the project fails to
pass a prescribed performance test.
Pursuant to an Asset Purchase Agreement between two of
the Company's wholly owned subsidiaries and W.R. Grace & Co. - Conn.
(Grace), the Company agreed to pay $8.0 million, subject to certain
adjustments, for the acquisition of all net assets of Grace's business unit
specializing in the manufacture and distribution of botanical extracts and
microbial products used
- A131 -
<PAGE>
for pest control. The Company currently expects to complete this
acquisition during its third fiscal quarter, however, completion is subject
to obtaining regulatory approvals and consents of certain third parties, as
well as satisfaction of other closing conditions.
The Company expects to fund its existing commitments for
the remainder of fiscal 1996 through its current resources. Although the
Company's projects are designed to produce positive cash flow over the long
term, the Company will have to obtain significant amounts of funds from
time to time to meet project development requirements, including the
funding of equity investments. As the Company acquires, invests in or
develops
future plants or technologies, the Company expects to finance them with
nonrecourse debt and to fund equity contributions through internal funds,
raising additional equity or through borrowings from third parties or
Thermo Electron. While Thermo Electron has expressed its willingness to
provide funds to the Company to help finance the Company's equity
investments in
future projects, the Company has no agreements with Thermo Electron that
assure funds will be available on acceptable terms, or at all.
- A132 -
<PAGE>
Form 10-K
September 30, 1995
THERMO ECOTEK CORPORATION
-------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW
The Company earns revenues from the operation of independent electric
power generation facilities through the Operating Companies. Each
Operating Company sells power under a long-term power sale agreement. The
profitability of operating the Company's facilities depends on the price
received for power under the power sale agreements with power purchasers,
on plant performance or availability, on the degree to which utilities
exercise curtailment rights granted under power sale agreements and on the
fuel, operating and maintenance costs for the facilities. Curtailment
rights allow a utility to require an Operating Company to curtail power
output up to pre-established annual levels during periods of low system
demand. A utility commonly experiences low system demand during periods
when hydroelectric power is available, generally following periods of heavy
rain or snow. The contractually allowable maximum for such curtailment at
both the Woodland and Mendota plants is 1,000 hours per year, of which the
Company experienced approximately 950 hours at each of the two plants
during the nine months ended September 30, 1995. In November 1995, the
Woodland and Mendota plants reached the contractual limit of 1,000 hours of
curtailment for calendar 1995. In 1994, the Company experienced no
curtailment at these two plants. The Company earns a disproportionately
high share of its income in the months of May to October due to the rate
structures under the power sale agreements for its California plants, which
provide strong incentives to operate during this period of high demand.
Conversely, the Company has historically operated at a loss or marginal
profitability during its second fiscal quarter due to the rate structure
under these agreements. The Company's profitability is also dependent on
the amount of development expenses that it incurs.
The Company plans to expand its operations into international markets
and has begun business development efforts in India and the Czech Republic.
The cost of business development efforts is expected to increase as the
Company expands into these markets, due to increased complexity inherent in
foreign development. In addition, the amount of cash required to fund
equity investments is expected to increase, due to the financing
requirements of lenders in foreign markets.
- A133 -
<PAGE>
RESULTS OF OPERATIONS
In September 1995, the Company changed its fiscal year-end from the
Saturday nearest December 31 to the Saturday nearest September 30.
Accordingly,the results of operations for 1995 compares the nine months
ended September 30, 1995 ("fiscal 1995") with the unaudited nine months
ended October 1, 1994 ("fiscal 1994").
Fiscal 1995 Compared With Fiscal 1994
- -------------------------------------
Revenues in fiscal 1995 increased 5% to $107.1 million from $102.1
million in fiscal 1994. The increase is due primarily to the Whitefield,
New Hampshire, plant operating for the full 1995 period. During 1994, this
plant did not operate for most of the first six months due to major damage
to the turbine-generator. The plant returned to normal operations late in
the second quarter of 1994. In addition, higher contractual energy rates
in fiscal 1995 at all of the Company's facilities, except the Hemphill
plant, were largely offset by approximately 950 hours of utility imposed
curtailment of power output at the Mendota and Woodland plants in fiscal
1995, compared with no curtailment at these plants in fiscal 1994.
The gross margin increased to 31% in fiscal 1995 from 26% in fiscal
1994. Fiscal 1995 operating expenses were lower than fiscal 1994 largely
due to reduced fuel prices at two plants in California. The effect on the
gross profit margin of higher contractual energy rates in fiscal 1995 was
largely offset by utility imposed curtailment of power output at the
Mendota and Woodland plants. Lower lease expense in fiscal 1995 due to the
conversion of the Mendota operating lease to a capital lease was more than
offset by higher depreciation expense on the facility. Despite a loss of
revenues in fiscal 1994 resulting from the Whitefield turbine-generator
damage, the gross profit margin in 1994 was largely unaffected due to the
Company's business insurance coverage.
The Company's plants have power sale agreements under which utilities
presently purchase power at fixed rates. Certain of these arrangements
contain provisions under which the utilities will convert from fixed rates
to "avoided cost" rates at specified dates. Avoided cost rates are
currently substantially less than the Operating Companies' fixed rates.
The Woodland plant, which converts to avoided cost rates in March 2000, has
conditions in its nonrecourse lease agreement that require the funding of a
"power reserve" in years prior to 2000, based on projections of operating
cash flow shortfalls in 2000 and thereafter. The power reserve represents
funds available to make lease payments in the event that revenues are not
sufficient after the plant converts to avoided cost rates.
- A134 -
<PAGE>
Although it is difficult to predict future levels of avoided costs,
based on current estimates, avoided costs are expected to be lower in 2000
than the rates currently being paid. If the Woodland plant were to operate
at projected avoided cost levels, substantial losses would result,
primarily due to nonrecourse lease obligations that extend beyond 2000.
Absent sufficient reductions in fuel prices and other operating costs,
under such circumstances the Company would either renegotiate its
nonrecourse lease for the Woodland plant or forfeit its interest in the
plant. Beginning in the fourth quarter of fiscal 1996, the Company expects
to expense the funding of reserves required under its nonrecourse lease
agreement to cover projected shortfalls in lease payments beginning in
2000. As a result, the Company expects that the results of the Woodland
plant will be reduced to approximately breakeven beginning in fiscal 1997
and thereafter. During fiscal 1995, the Woodland plant contributed $4.8
million of operating income. As a result of the 1995 amendment to the
Mendota Operating Company's lease, which was previously discussed, no
funding of a power reserve will be required at the Mendota plant.
Public Service Company of New Hampshire is seeking to renegotiate the
rate orders applicable to the Company's two New Hampshire facilities. The
Company is currently negotiating with PSNH and expects that this matter may
reach resolution in fiscal 1996, although final resolution is subject to
approval of the New Hampshire Public Utilities Commission. Should
resolution not occur, the Company does not believe that PSNH has the right
to take unilateral action to reduce the price of purchased power under the
rate orders. An unfavorable resolution of this matter could materially
affect the Company's results of operations and cash flows, although the
Company believes that any resolution will not have a material adverse
impact on the Company's financial position.
General and administrative expenses as a percentage of revenues were
7% in fiscal 1995 and fiscal 1994.
Interest income increased to $2.8 million in fiscal 1995 from $1.1
million in fiscal 1994 due to increased invested amounts as a result of the
Company's initial public offering and higher prevailing interest rates.
The Company expects that interest income will decrease substantially in
fiscal 1996 as it anticipates investing available cash into project
development and equity investments. Interest expense increased to $10.6
million in fiscal 1995 from $8.4 million in fiscal 1994 largely due to the
conversion of the Mendota lease to a capital lease, offset in part by lower
outstanding debt at the Delano facilities.
The effective tax rates were 35% and 32% in fiscal 1995 and fiscal
1994, respectively. The effective tax rates were affected by the benefit
of tax credits and loss carryforwards and the exclusion of certain income
taxed directly to minority partners, offset in part by the effect of state
income taxes.
- A135 -
<PAGE>
1994 Compared With 1993
- -----------------------
Revenues in calendar 1994 increased 14% to $134.3 million from $117.7
million in calendar 1993. The increase results primarily from the addition
of the Delano II facility in California in January 1994 and, to a lesser
extent, from the absence of utility-imposed curtailments of power at the
Woodland and Mendota plants. In addition, improved operating performance
due to repairs made at the Woodland and Mendota plants in the first half of
1993 and annual contractual rate increases at each of the Company's plants,
except for Hemphill, resulted in higher revenues in 1994 compared with
1993. Offsetting part of the improvement was the inclusion of $9.8 million
of nonrecurring revenues during 1993 from the termination of the power sale
contract relating to a project in Staten Island, New York. Revenue in 1993
also included a one-time payment of $3.1 million received in connection
with the sale of pipeline rights acquired by the Company several years ago.
In addition, lower revenues resulted from the effect of major damage to the
turbine-generator at the Whitefield, New Hampshire plant in January 1994.
The gross margin increased to 25% in 1994 from 15% in 1993. The
improvement results primarily from the absence of power curtailments and
improved operating performance at the Woodland and Mendota plants and
higher contractual energy rates. In addition, lower lease expense, offset
in part by higher depreciation expense, as a result of the December 1993
purchase of the Delano I facility, contributed to the improvement. The
gross profit margin in 1993 included the effect of $5.4 million of
nonrecurring profit relating to the termination of the Staten Island power
sale agreement, as well as the $3.1 million from the sale of pipeline
rights.
General and administrative expenses as a percentage of revenues
increased to 6% in 1994 from 4% in 1993. The increase principally results
from the Company no longer allocating to Thermo Electron certain costs
incurred in connection with oversight of certain activities of the Energy
Systems Division of Thermo Electron, which were terminated by Thermo
Electron at the end of 1993. In addition, the increase results from higher
fees paid to Thermo Electron under the corporate services agreement, as
well as increased business development efforts.
Interest income increased to $1.6 million in 1994 from $0.5 million in
1993 as a result of higher cash balances and an increase in prevailing
interest rates, as well as from interest on a note receivable obtained in
connection with the termination of the Staten Island power sale agreement
in 1993. Interest expense increased to $11.1 million in 1994 from $2.0
million in 1993 as a result of borrowings associated with the purchase of
the Delano I and Delano II facilities, as well as the issuance of $68.5
million aggregate principal amount of subordinated convertible debentures
to Thermo Electron.
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<PAGE>
Equity in loss of joint venture in 1993 included the establishment of
a $1.6 million reserve for the Company's investment in a fuel supply joint
venture which ceased operations in 1993.
The effective tax rates were 32% and 25% in 1994 and 1993,
respectively. These rates were lower than the federal statutory rate of 34%
due to the benefit of tax credits and loss carryforwards and the exclusion
of certain income taxed directly to minority partners, offset in part by
state income taxes.
Minority interest expense represents the allocation of income from
plant operations to minority partners in certain Operating Companies.
Minority interest expense was $1.1 million in 1994, compared with $3.0
million in 1993. The 1993 amount includes a write-off of $1.5 million
relating to the minority interest associated with the Gorbell plant.
FINANCIAL CONDITION
Liquidity and Capital Resources
- -------------------------------
Working capital increased to $62.0 million at September 30, 1995 from
$28.4 million at December 31, 1994. The Company had cash, cash equivalents
and current restricted funds of $61.2 million at September 30, 1995,
compared with $33.3 million at December 31, 1994. At September 30, 1995,
current restricted funds held in trust pursuant to certain lease and debt
agreements totaled $12.0 million. Use of cash and cash equivalents of $6.4
million at September 30, 1995 was also restricted by the terms of certain
lease and financing agreements. These restrictions limit the ability of
the Operating Companies to transfer funds to the Company in the form of
dividends, loans, advances or other distributions. In addition until such
time, if ever, as projections of avoided costs change, all cash flows from
the Woodland Operating Company, other than cash distributed to the Company
for taxes on the income of the Operating Company, will be restricted from
distribution to the Company.
During fiscal 1995, the Company's operating activities provided cash
and restricted funds of $22.7 million, including $2.7 million as an
installment payment on a note receivable associated with the termination of
the Staten Island power sale agreement. The Company received $27.5 million
of net proceeds in 1995 from its initial public offering, which it plans to
use to fund project development activities, including equity investments in
development projects, possible acquisitions and for general corporate
purposes. The Company used cash and restricted funds of $6.0 million to
reduce debt and lease obligations related to the Delano and Mendota
facilities and $3.0 million for the purchase of KFX Inc. (KFX) common stock
(see discussion
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<PAGE>
following). In addition, the Company used cash and restricted funds of
$5.4 million for the purchase of property, plant and equipment and $1.1
million for distributions to a minority partner. Cash provided by
operating activities in fiscal 1995 was net of $11.1 million used for an
increase in accounts receivable and unbilled revenues. The increase in
receivables and unbilled revenues is due to the rate structure for the
Company's California plants, which results in higher revenues during the
summer months, as well as the timing of collections in fiscal 1995 compared
with fiscal 1994.
The Company's investing activities, other than for fixed asset
additions, have historically related to equity investments and plant
acquisitions. Fixed asset additions and routine maintenance are generally
financed through plant operating funds. During fiscal 1995, the Company
purchased 1.5 million shares of KFX common stock, representing an
approximate 7% equity interest in KFX, for $3.0 million. KFX is engaged in
the business of licensing and commercializing a technology that enhances
the combustion characteristics of coal and other carbonaceous fuels (the
"K-Fuel Technology"). Pursuant to certain agreements with KFX, the Company
has the right, but not the obligation, to purchase an aggregate of
2,750,000 shares of KFX common stock for $2.00 per share at specified times
in fiscal 1996 and fiscal 1997, and to purchase up to a 51% equity interest
in KFX in fiscal 2000. The Company is committed to contribute up to
approximately $42 million for construction of the first coal benefication
plant using K-Fuel Technology pursuant to a Limited Partnership Agreement
with KFX Wyoming, Inc., a wholly owned subsidiary of KFX. As of September
30, 1995, approximately $3.3 million had been funded. Total funding is
expected to be required by December 1996, and the Company will have a 95%
equity interest in the project. The Company expects to use internal funds
to finance this equity investment.
The Company is committed to contribute $15 million for a minority
interest in a 185 megawatt combined cycle, steam-turbine electric
generation facility located in Puerta Plata, Dominican Republic. Funding
is expected to take place by March 1996 unless the Company notifies its
project partner of its intention to not provide funding and, within 60 days
following such notice, the project fails to pass a prescribed performance
test.
The Company has also entered into a memorandum of understanding
concerning a coal-fired plant under development in Gouripore, India, that
may require the Company to make up to $60 million in equity investments
between 1996 and 1998 should development efforts be successful. In
addition, the Company is developing a gas-fired plant near Mysore, India,
which if successful, would require an equity contribution from the Company
of between $35-$60 million.
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<PAGE>
In addition, the Company is evaluating other project and acquisition
opportunities both domestically and internationally on an ongoing basis.
The Company's short-term financing requirements at September 30, 1995
consist primarily of $33.1 million, due in fiscal 1996, of principal and
interest payments related to the long-term financing provisions for the
Mendota and Delano projects. The Company expects that the cash flows of
its Mendota, Delano I and Delano II plants will be sufficient to make
future lease and debt payments. The Company believes that its short-term
liquidity needs will be met through cash flows from operating activities.
While the Company does not currently have any firm available credit
facilities, it does not expect to require funding for current operations in
the foreseeable future. Should the need for short-term funding arise,
however, the Company expects that such funds would be available from Thermo
Electron, although there is no agreement under which Thermo Electron is
obligated to lend funds to the Company. Although the Company's projects
are designed to produce cash flow over the long-term, the Company will have
to obtain significant additional funds from time to time to complete
acquisitions and to meet project development requirements, including the
funding of equity investments. As the Company acquires, invests in or
develops future plants, the Company expects to finance them with
nonrecourse debt, internal funds, raising additional equity or through
borrowings from third parties or Thermo Electron. While Thermo Electron
has expressed its willingness to provide funds to the Company to help
finance acquisitions and equity investments in future projects, the Company
has no agreements with Thermo Electron or third parties that assure funds
will be available on acceptable terms or at all.
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<PAGE>
SELECTED FINANCIAL INFORMATION
(In
thousands
except
per Nine Months Ended (a) Fiscal Year
share -------------------------- ---------------------------------
amounts) Sept 30 Oct. 1
- -------- 1995 1994 1994 1993(b) 1992 1991
---- ---- ---- ------- ---- ----
(Unaudited)
STATEMENT
OF INCOME
DATA:
Revenues $107,139 $102,081 $134,261 $117,691 $104,785 $ 92,383
Net Income
(Loss) 10,264 7,375 9,651 3,890 2,332 (579)
Earnings (Loss)
per Share:
Primary 0.68 0.55 0.72 0.29 0.17 (0.05)
Fully
diluted (c) 0.51 0.42 0.55 0.29 0.17 (0.05)
Weighted Average
Shares:
Primary 14,984 13,404 13,412 13,333 13,344 12,118
Fully
diluted(c) 22,530 20,614 20,795 13,333 13,344 12,118
BALANCE SHEET
DATA:
Working
capital $ 62,038 $ 28,418 $ 17,295 $ 5,014 $ 10,979
Total
assets 371,767 285,970 302,345 101,455 75,079
Nonrecourse
Tax Exempt
Obligations 94,700 95,300 108,800 - -
Subordinated
Convertible
Debentures,
due to
Parent
Company 68,500 68,500 68,500 - -
Other Long-
Term
Obligations - - - 20,188 -
Capital
Lease
Obligations(d)
39,160 - - - -
Redeemable
Convertible
Stock - - - 10,000 10,000
Shareholders'
Investment(e)92,985 55,146 45,495 31,605 29,273
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<PAGE>
(a) In June 1995, the Company changed its fiscal year-end from the
Saturday nearest December 31 to the Saturday nearest September 30.
Accordingly, the Company's 39-week transition period ended September
30, 1995 is presented.
(b) Reflects the issuance of $68.5 million aggregate principal amount of
4% subordinated convertible debentures to Thermo Electron and the
assumption of $128.5 million of nonrecourse tax exempt obligations.
(c) The 1995 and 1994 periods include the effect of shares of Company
common stock issuable upon conversion of the subordinated convertible
debentures held by Thermo Electron.
(d) In fiscal 1995, the Company entered into an amended lease agreement
for its Mendota facility which was accounted for as a capital lease.
(e) The Company has never paid any cash dividends.
- A141 -
