Investment Company Act File No. _______
Securities Act File No. _______
As filed with the Securities and Exchange Commission on May 17, 1996
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
--
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
--
Pre-Effective Amendment No.
Post-Effective Amendment No.
and/or
--
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
--
Amendment No.
(Check appropriate box or boxes)
THE THERMO OPPORTUNITY FUND, INC.
(Exact Name of Registrant as Specified in Charter)
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (513) 629-2000
Gregory E. Ratte[']
Brundage, Story and Rose, L.L.C.
One Broadway
New York, New York 10004
(Name and Address of Agent for Service)
Copies to:
David M. Leahy, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
If the securities being registered on this form are to be offered on
a delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. / /
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<CAPTION>
- --------------------------------------------------------------------------------------
Amount Proposed Maximum Proposed Maximum Amount of
Title of Securities Being Offering Price Aggregate Registration
Being Registered Registered Per Share Offering Price Fee
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
par value 8,000,000 $12.50 $100,000,000 $34,482.76
$.001 per share shares
- --------------------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
</TABLE>
<PAGE>
THE THERMO OPPORTUNITY FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A)
UNDER THE SECURITIES ACT OF 1933
PART A
ITEM NO. REGISTRATION STATEMENT CAPTION CAPTION IN PROSPECTUS
1. Outside Front Cover Registration Statement
Cover Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside
Cover Page Front Cover Pages of
Prospectus
3. Fee Table and Synopsis Fee Table
4. Financial Highlights Prospectus Summary; Risk
Factors; Investment
Objective and Policies
5. Plan of Distribution Prospectus Summary;
Underwriting
6. Selling Shareholders Inapplicable
7. Use of Proceeds Prospectus Summary; Use of
Proceeds
8. General Description of The Fund; Investment
the Registrant Objective and Policies;
Risk Factors
9. Management Operation of the Fund
10. Capital Stock, Long-Term Debt, and Capital Stock; Dividends
Other Securities and Distributions
11. Defaults and Arrears on Senior Not Applicable
Securities
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement Table of Contents of the
of Additional Information Statement of Additional
Information
(i)
<PAGE>
PART B
Caption in Statement
of Additional
ITEM NO. REGISTRATION STATEMENT CAPTION INFORMATION
14. Cover Page Cover Page
15. Table of Contents Table of Contents
16. General Information and History Not Applicable
17. Investment Objective and Policies The Thermo Electron
Subsidiaries; Certain
Portfolio Securities and
Investment Techniques;
Investment Restrictions;
Quality Ratings of
Corporate Bonds and
Preferred Stocks;
Portfolio Turnover;
Appendix
18. Management Directors and Officers
19. Control Persons and Principal Not Applicable
Holders of Securities
20. Investment Advisory and Other The Adviser; Custodian;
Services Auditors; MGF Service
Corp.
21. Brokerage Allocation and Other Securities Transactions
Practices
22. Tax Status Taxes
23. Financial Statements Statement of Assets and
Liabilities
PART C
The information required to be included in Part C is set
forth under the appropriate Item, so numbered, in Part C to this Registration
Statement.
(ii)
<PAGE>
_____________ SHARES
THE THERMO OPPORTUNITY FUND, INC.
COMMON STOCK
_____________________
PROSPECTUS
_____________________
NATWEST SECURITIES LIMITED
_____________ , 1996
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
TABLE OF CONTENTS
PAGE
FEE TABLE...................................................
PROSPECTUS SUMMARY..........................................
THE FUND....................................................
USE OF PROCEEDS.............................................
INVESTMENT OBJECTIVE AND POLICIES...........................
RISK FACTORS................................................
OPERATION OF THE FUND.......................................
CAPITAL STOCK...............................................
DIVIDENDS AND DISTRIBUTIONS.................................
TAXES.......................................................
UNDERWRITING................................................
EXPERTS.....................................................
LEGAL MATTERS...............................................
AVAILABLE INFORMATION.......................................
REPORTS TO STOCKHOLDERS.....................................
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS.......
_______________
UNTIL _____, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SUBJECT TO COMPLETION, DATED ________, 1996
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 PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
<PAGE>
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.
PROSPECTUS
_______, 1996
THE THERMO OPPORTUNITY FUND, INC.
_________ SHARES OF COMMON STOCK
- -----------------------------------------------------------------
The Thermo Opportunity Fund, Inc. (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. The Fund's
investment objective is to seek long-term capital appreciation. The Fund seeks
to achieve its investment objective by investing primarily in securities
issued by direct and indirect subsidiaries of Thermo Electron Corporation
("Thermo Electron"). The Fund may also invest in securities issued by
companies not affiliated with Thermo Electron which either (i) engage in the
same or related industries as Thermo Electron or one or more of its
subsidiaries or (ii) practice a spin-out strategy similar to that practiced by
Thermo Electron.
The Fund's investment adviser is Brundage, Story and Rose, L.L.C.,
One Broadway, New York, New York 10004.
Application has been made to list the shares of common stock of the
Fund (the "Shares") on the New York Stock Exchange under the symbol "____."
The minimum permitted subscription by an investor is ___ Shares.
See "Underwriting."
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE
SHARES. EQUITY SECURITIES OF CLOSED-END INVESTMENT COMPANIES HAVE IN THE PAST
FREQUENTLY TRADED AT DISCOUNTS FROM THEIR NET ASSET VALUES AND INITIAL
OFFERING PRICES. THIS RISK MAY BE GREATER FOR INITIAL INVESTORS EXPECTING TO
SELL SHARES OF A CLOSED-END INVESTMENT COMPANY SOON AFTER THE COMPLETION OF AN
INITIAL PUBLIC OFFERING OF SUCH SHARES. FOR A DISCUSSION OF OTHER RISKS THAT
SHOULD BE CONSIDERED BY POTENTIAL INVESTORS, SEE "RISK FACTORS."
THERMFND.PRS May 16, 1996
<PAGE>
This Prospectus sets forth concisely the information about the Fund
that you should know before investing. Please retain this Prospectus for
future reference. A Statement of Additional Information dated _______,
1996 has been filed with the United States Securities and Exchange
Commission and is hereby incorporated by reference in its entirety. The
Table of Contents of the Statement of Additional Information is reprinted
on page ___ of this Prospectus. A copy of the Statement of Additional
Information can be obtained at no charge by writing to the Fund at 312
Walnut Street, 21st Floor, Cincinnati, Ohio 45202, or by calling the telephone
number listed below.
- -----------------------------------------------------------------
For Information, Please Call:
Nationwide (Toll-Free) . . . . . . . . . . . . . . . 800-___-____
- -----------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SALES PROCEEDS TO
PRICE TO PUBLIC LOAD FUND(A)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE. . . . . . . . . . . . . . . . . . .
TOTAL MINIMUM . . . . . . . . . . . . . . . . TABLE TO BE SUPPLIED
TOTAL MAXIMUM(b) . . . . . . . . . . . . . . .
- --------------------------------------------------------------------------------------------
<FN>
(a) Before deducting organizational and offering expenses payable by the
Fund, estimated at $___________.
(b) Assuming exercise in full of the 30-day option granted by the Fund to
the several Underwriters to purchase up to an aggregate of additional
shares on the same terms, solely to cover over-allotments.
See "Underwriting."
The Shares are offered by the Underwriters, subject to prior sale,
when, as and if issued by the Fund, and acceptance by the Underwriters and to
certain further conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject any order in whole or in part. It is
expected that delivery of certificates for the Shares will be made at the
offices of Natwest Securities Limited, New York, New York, on or about
_________, 1996. See "Underwriting."
NATWEST SECURITIES LIMITED
The date of this Prospectus is _________________, 1996.
</FN>
</TABLE>
<PAGE>
FEE TABLE
STOCKHOLDER TRANSACTION EXPENSES
Maximum Sales Load
(as a percentage of offering price) ___%
Dividend Reinvestment Plan Fees None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS)
Management Fees .80%
Other Expenses .33%
----
Administrative Fee .15%
Estimated Additional Expenses .24%
Total Annual Expenses 1.19%
=====
EXAMPLE
An investor would pay the following cumulative expenses on a $1,000
investment, assuming a 5% annual return:
1 Year 3 Years 5 Years 10 Years
$ $ $ $
The purpose of this table is to assist each investor in understanding
the costs and expenses that an investor in the Fund will bear directly or
indirectly. Other expenses are based on estimated amounts for the current
fiscal year. See "Operation of the Fund." THE AMOUNTS LISTED IN THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE
ASSUMES A 5% ANNUAL RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY
RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN 5%.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT AND EFFECT
TRANSACTIONS ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE WHICH STABILIZE
OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZATION, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
- 3 -
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
THE FUND
THE THERMO OPPORTUNITY FUND, INC. (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. The Fund's
investment objective is to seek long-term capital appreciation. While
there is no assurance that the Fund will achieve its investment objective,
it endeavors to do so by following the investment policies described in
this Prospectus. See "The Fund."
INVESTMENT POLICIES
The Fund seeks to achieve its investment objective by investing
primarily in securities issued by direct and indirect subsidiaries (the
"Subsidiaries") of Thermo Electron Corporation ("Thermo Electron"), an
American Stock Exchange-listed company with a market capitalization exceeding
$5 billion. Over the past 13 years, Thermo Electron has engaged in a strategy
of selling to the public minority interests in operating divisions to raise
money, among other reasons, to finance research and development activities.
Over time, as this strategy has proven successful and has become more fully
implemented, the number of Subsidiaries has increased and their overall
activities have expanded considerably making an analysis of their businesses
more complex. The Fund's investment adviser, which has been following these
companies for more than 11 years with a staff that now includes 18 research
analysts and managers, believes that, based upon its research, greater
opportunities for long-term capital appreciation should arise from investment
in a managed pool of securities of the Subsidiaries than from less disciplined
investing in individual Subsidiaries.
The Fund will attempt to invest 75% or more of its total assets in
securities issued by the Subsidiaries and under normal market conditions at
least 65% of the Fund's total assets will be so invested. These securities
include common stock, preferred stock and securities convertible into common
stock, as well as warrants to purchase such securities. The Fund will not
invest in common stock of Thermo Electron.
The Fund may also invest in securities issued by companies not
affiliated with Thermo Electron which either (i) engage in the same or related
industries as Thermo Electron or one or more of the Subsidiaries or (ii)
practice a spin-out strategy similar to that practiced by Thermo Electron. See
"Investment Objective and Policies."
- 4 -
<PAGE>
INVESTMENT ADVISER
Brundage, Story and Rose, L.L.C. (the "Adviser"), One Broadway, New
York, New York 10004, serves as investment adviser to the Fund. For its
services, the Adviser receives compensation at the annual rate of .80% of the
average daily net assets of the Fund. The Adviser is an independent investment
counsel firm that has advised individual and institutional clients since 1932.
Currently, the Adviser employs 34 investment professionals and provides
investment advice to accounts having approximately $5.3 billion in assets,
including two open-end investment companies.
RISK FACTORS
Unlike other closed-end investment companies, the Fund's performance
will depend significantly on the performance of a relatively small number of
identified companies that have common ownership, business policies and risks.
These special risk factors are described more fully under "Risk Factors."
In addition, the Fund is subject to the typical risks of investing in
a closed-end, non-diversified investment company, including the following:
Prior to this offering, there has been no public market for the
Shares. Shares of closed-end investment companies have in the past frequently
traded at discounts from their net asset value and initial offering price.
This risk may be greater for initial investors expecting to sell shares of a
closed-end investment company soon after the completion of an initial public
offering of such shares.
The Fund is registered as a non-diversified, closed-end investment
company under the Investment Company Act of 1940, as amended. Accordingly, its
investments may be more concentrated in fewer issuers than those of a
diversified investment company. This concentration may cause greater
fluctuation in the value of the Fund's shares. Moreover, the Fund will
concentrate its investments in the instrumentation industry by investing at
least 25% of its net assets in securities of issuers within such industry.
The Fund's Articles of Incorporation contain certain anti-takeover
provisions that may have the effect of limiting the ability of other persons
to acquire control of the Fund.
See "Risk Factors" in this Prospectus and "The Thermo Electron
Subsidiaries" in the Statement of Additional Information.
- 5 -
<PAGE>
THE OFFERING
The Fund is offering ______________ Shares at $_______ per Share. The
Underwriters have been granted an option to purchase
additional Shares to cover overallotments. The minimum permitted
investment by an investor in this offering is ______ Shares ($ ). See
"Underwriting."
__________ STOCK EXCHANGE SYMBOL
Application has been made to list the Shares on the New York Stock
Exchange (the "Exchange") under the symbol "____."
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute annually substantially all of its net
investment income, and to distribute at least annually any net realized
capital gains to or to the accounts of holders of Shares. Under the Fund's
Dividend Reinvestment Plan (the "Plan"), all dividends and distributions will
be automatically reinvested by The Fifth Third Bank, as agent, to purchase
additional Shares from the Fund or in the open market unless the stockholder
affirmatively elects to receive cash. All dividends and distributions will be
taxable, whether reinvested pursuant to the Plan or distributed in cash. See
"Dividends and Distributions."
USE OF PROCEEDS
The net proceeds of this offering, estimated to be between
$__________, or $_____________ if the Underwriters exercise the over-allotment
option in full, will be invested in accordance with the Fund's investment
objective and policies set forth under "Investment Objective and Policies."
The Fund expects to invest in securities issued by the Subsidiaries gradually
by purchasing such securities on a selective basis in the open market and it
is anticipated that it may take up to three months to be fully invested in
accordance with the Fund's investment objective and policies. See "Use of
Proceeds."
ADMINISTRATOR
MGF Service Corp. will serve as the Fund's administrator pursuant to
the terms of an Administrative Services Agreement. MGF Service Corp.
provides administration, accounting and transfer agency services to
approximately 60 investment companies having aggregate assets in excess of
$7 billion. See "Operation of the Fund--Administrator."
- 6 -
<PAGE>
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Fifth Third Bank will act as custodian for the Fund's assets and
will also act as transfer agent, dividend paying agent and registrar for the
Fund's Shares.
SHARE REPURCHASES; CONVERSION TO OPEN-END COMPANY
If the Fund's Shares trade at a significant discount from net asset
value, the Board of Directors will consider taking action intended to reduce
or eliminate the discount. Such actions may include the repurchase of Shares
in the open market or in private transactions, the making of a tender offer
for such Shares, or the submission to stockholders of a proposal to convert
the Fund to an open-end investment company. There can be no assurance,
however, that the Board of Directors will decide to take any of these actions,
or that Share repurchases or tender offers, if undertaken, will reduce any
market discount.
- 7 -
<PAGE>
THE FUND
The Thermo Opportunity Fund, Inc. (the "Fund") is a non-diversified,
closed-end management investment company. The Fund was incorporated under the
laws of the State of Maryland on May 16, 1996 and has registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a newly
organized entity, the Fund has no operating history. The Fund's principal
office is located at 312 Walnut Street, Cincinnati, Ohio 45202, and its
telephone number is (800) ___-____. The Fund's investment adviser is Brundage,
Story and Rose, L.L.C. (the "Adviser"), One Broadway, New York, New York
10004.
The Fund invests primarily in securities issued by direct and
indirect subsidiaries (the "Subsidiaries") of Thermo Electron Corporation
("Thermo Electron"), an American Stock Exchange-listed company with a market
capitalization exceeding $5 billion. Over the past 13 years, Thermo Electron
has engaged in a strategy of selling to the public minority interests in
operating divisions to raise money, among other reasons, to finance research
and development activities. Over time, the number of the Subsidiaries has
increased and their overall activities have expanded considerably making an
analysis of their businesses more complex. The Adviser has been following
these companies for more than 11 years, and has 18 investment professionals
engaged in the equity research and portfolio management process. The Adviser
believes that, based upon its research, opportunities for long-term capital
appreciation may arise from investment in a managed pool of securities of
these companies.
USE OF PROCEEDS
The net proceeds of this offering, estimated to be $________
($__________ if the Underwriters exercise the over-allotment option in full),
will be invested in accordance with the Fund's investment objective and
policies. The Fund expects to invest in securities issued by the Subsidiaries
gradually by purchasing such securities on a selective basis in the open
market and that it may take up to three months to be fully invested in
accordance with its investment objective and policies. Pending such
investment, the proceeds will be invested in United States Government
securities or high quality, short-term money market securities, or shares of
money market funds which invest in such securities.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The Fund's investment objective is to seek long-term capital
appreciation. The Fund's investment objective cannot be changed without
approval by the holders of a majority (as defined in the 1940 Act) of the
Fund's outstanding voting shares. There is no assurance that the Fund will be
able to achieve its investment objective. Unless otherwise indicated, all
investment practices and limitations of the Fund are nonfundamental policies
which may be changed by the Board of Directors without stockholder
- 8 -
<PAGE>
approval.
The Fund seeks to achieve its investment objective by investing
primarily in securities issued by direct and indirect subsidiaries of Thermo
Electron. The Fund will attempt to invest 75% or more of its total assets in
securities issued by the Subsidiaries and under normal market conditions at
least 65% of the Fund's total assets will be so invested. The remainder of the
Fund's assets will be invested in securities issued by companies not
affiliated with Thermo Electron which either (i) engage in the same or related
industries as Thermo Electron or one or more of the Subsidiaries or (ii)
practice a spin-out strategy similar to that practiced by Thermo Electron.
These securities include common stock, preferred stock and securities
convertible into common stock, as well as warrants to purchase such
securities. The Fund may invest up to 20% of its total assets in securities
which are not publicly traded, including securities issued by the
Subsidiaries. The Fund also may invest in money market instruments for
temporary defensive purposes or in anticipation of investing cash positions.
The Fund will not invest in common stock of Thermo Electron.
Thermo Electron is a multifaceted, research and development based
company whose products and services -- provided directly and through the
Subsidiaries -- are currently divided into six segments: Instruments,
Alternative Energy Systems, Process Equipment, Bio-Medical Products,
Environmental Services, and Advanced Technologies. See "Risk Factors." The
Subsidiaries have also expanded into a variety of complementary businesses
that have provided additional technologies, specialized manufacturing or
product development expertise. Thermo Electron was founded by George
Hatsopoulos more than 30 years ago. It is incorporated in Delaware and based
in Waltham, Massachusetts. It has operations across the country and around the
world.
A key ingredient to the long-term strategy of Thermo Electron and the
Subsidiaries has been their relatively unique capital structure and ability to
fund innovations and finance growth. They are operated as a commonwealth of
companies, selling minority stakes in certain operating units to the public
and returning the cash raised from such sales to the Subsidiaries to fund
their growth. This equity "spin-out" strategy has permitted them to raise
low-cost capital, and is designed to foster a strong entrepreneurial culture,
with divisional managers owning stock in their own businesses. The Adviser
believes that, based upon its research, opportunities for long-term capital
appreciation may arise from investment in a managed pool of securities of the
Subsidiaries.
The Adviser believes that the Fund's strategy of investing in a
professionally managed portfolio of securities issued by the Subsidiaries
offers a significantly different investment opportunity from direct investment
in Thermo Electron's securities. As Thermo Electron has pursued its spin-out
strategy, more and more of the value of the opportunities developed by Thermo
Electron has accrued to the shareholders of the Subsidiaries. In addition, as
the Subsidiaries have multiplied, and the
- 9 -
<PAGE>
investment opportunities in the various companies have become more disparate
and their risks more pronounced, the level of complexity of analyzing Thermo
Electron as a whole has increased.
The Adviser intends to take a long-term approach to implementing the
Fund's strategy, using financial modeling and fundamental research to select
investment opportunities among the Subsidiaries that it believes will be
attractive. The Adviser also intends to apply a disciplined valuation approach
to determining which of the Subsidiaries or combination of Subsidiaries are
likely to offer attractive long-term return potential. The Adviser believes
that the market has at times inefficiently valued the various Subsidiaries and
intends to seek to exploit these historical inefficiencies to enhance the
returns of the Fund. The Fund may also invest, to the extent described above,
in Subsidiaries that, at the time of investment, are privately held. The
Adviser believes that such early stage investment, though not without risks,
has the potential to significantly enhance returns to the Fund.
While the Adviser believes currently that all of the Subsidiaries are
likely to provide attractive long-term growth opportunities, the Adviser
expects that there may be times when a substantial portion of the Fund's
assets may be concentrated in a smaller number of companies and that, at
times, the Fund may not hold the securities of certain Subsidiaries.
The Fund may invest without limitation in debentures of the
Subsidiaries, which are convertible into common stock of the Subsidiaries
without regard to quality ratings assigned by rating organizations such as
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group
("S&P"), Duff & Phelps Credit Rating Co. ("D&P") and Fitch Investors Service,
L.P. ("Fitch"). Convertible debentures may provide the Fund access to common
stock of the Subsidiaries whose shares are not publicly offered. As of the
date of this Prospectus, such debentures have been issued with a guarantee on
a subordinated basis by Thermo Electron and are currently rated "B2" by
Moody's, "A-" by S&P and BBB+ by Fitch. See the Statement of Additional
Information for a description of ratings.
The Fund may invest up to 35% of its net assets in securities issued
by companies not affiliated with Thermo Electron which either (i) engage in
the same or related industries as Thermo Electron or one or more of the
Subsidiaries or (ii) practice a spin-out strategy similar to that practiced by
Thermo Electron. Many of the risks associated with investments in such
securities may be similar to the risks described below (see "Risk Factors")
with respect to the Subsidiaries. There are no limitations on the types of
industries in which any such company may be engaged, and there are no
limitations on the products or services which any such company may manufacture
or provide.
THE SUBSIDIARIES
As of May 1, 1996, Thermo Electron had 18 Subsidiaries that have sold
minority equity interests, 14 of which are publicly traded and four of which
are privately held. These Subsidiaries are described in the consolidated
financial statements of Thermo Electron, excerpts of which are
- 10 -
<PAGE>
set forth below the following chart. For additional information about the
Subsidiaries, see the Statement of Additional Information. The Fund may invest
in the securities, including securities which are not publicly traded, of any
current or future Subsidiary. There are no limitations on the types of
industries in which any such Subsidiaries formed in the future may be engaged
and there are no limitations on the products or services which any such
Subsidiaries may manufacture or provide.
THERMO ELECTRON CORPORATE STRUCTURE
THERMO ELECTRON
Ticker TMO
Shares Out. 87.852
Market Cap. $5,567.6
Float 79.010
Float Cap. $5,007.3
Share Price $63.38
IPO Date Oct. 1967
THERMEDICS
Ticker TMD
% Ownership 51.0%
Shares Out. 33.984
Market Cap. $985.5
Float 14.820
Float Cap. $429.8
Share Price $29.00
IPO Date Aug. 1983
- 11 -
<PAGE>
THERMO CARDIOSYSTEMS
Ticker TCA
% Ownership(2) 53.0%
Shares Out. 24.109
Market Cap. $1,543.0
Float 10.370
Float Cap. $663.7
Share Price $64.00
TMO % Owned 2.7%
IPO Date Jan. 1989
THERMO SENTRON
Ticker TSR
% Ownership(2) 73.7%
Shares Out. 9.875
Market Cap. $153.1
Float 2.875
Float Cap. $44.6
Share Price $15.50
TMO % Owned 0.0%
IPO Date Mar. 1996
THERMO VOLTEK
Ticker TVL
% Ownership(2) 53.0%
Shares Out. 4.879
Market Cap. $100.0
Float 2.000
Float Cap. $41.0
Share Price $20.50
TMO % Owned 8.7%
IPO Date Mar. 1990
THERMO INSTRUMENTS
Ticker THI
% Ownership 85.6%
Shares Out. 91.648
Market Cap. $3,093.1
Float 10.190
Float Cap. $343.9
Share Price $33.75
IPO Date Aug. 1986
THERMOSPECTRA
Ticker THS
% Ownership(1) 72.0%
Shares Out. 12.432
Market Cap. $214.5
Float 3.430
Float Cap. $59.2
Share Price $17.25
TMO % Owned 0.0%
IPO Date Aug. 1995
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<PAGE>
THERMO BIOANALYSIS
Ticker n/a
% Ownership(1) 80.2%
Shares Out. n/a
Market Cap. n/a
Float n/a
Float Cap. n/a
Share Price n/a
TMO % Owned 0.0%
IPO Date n/a
THERMOQUEST
Ticker TMQ
% Ownership(1) 93.8%
Shares Out. 48.450
Market Cap. $799.4
Float 3.450
Float Cap. $56.9
Share Price $16.50
TMO % Owned 0.0%
IPO Date Mar. 1986
THERMO OPTEK
Ticker n/a
% Ownership(1) 100%
Shares Out. n/a
Market Cap. n/a
Float n/a
Float Cap. n/a
Share Price n/a
TMO % Owned 0.0%
IPO Date n/a
THERMO TERRATECH
Ticker TTT
% Ownership 80.9%
Shares Out. 17.454
Market Cap. $229.1
Float 2.560
Float Cap. $33.6
Share Price $13.13
IPO Date Aug. 1986
THERMO REMEDIATION
Ticker THN
% Ownership(4) 68.0%
Shares Out. 12.377
Market Cap. $162.4
Float 3.740
Float Cap. $49.1
Share Price $13.13
TMO % Owned 1.3%
IPO Date Dec. 1993
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<PAGE>
THERMO POWER
Ticker THP
% Ownership 63.1%
Shares Out. 12.452
Market Cap. $193.0
Float 4.570
Float Cap. $70.8
Share Price $15.50
IPO Date Jun. 1987
THERMOLYTE
Ticker n/a
% Ownership(5) 88.0%
Shares Out. n/a
Market Cap. n/a
Float n/a
Float Cap. n/a
Share Price n/a
TMO % Owned 0.0%
IPO Date n/a
THERMO TREX
Ticker TKN
% Ownership 50.8%
Shares Out. 19.043
Market Cap. $985.5
Float 7.710
Float Cap. $399.0
Share Price $51.75
IPO Date Jul. 1991
THERMOLASE
Ticker TLZ
% Ownership(3) 65.0%
Shares Out. 40.097
Market Cap. $1,323.2
Float 13.550
Float Cap. $447.2
Share Price $33.00
TMO % Owned 0.0%
IPO Date Jul. 1994
TREX MEDICAL
Ticker n/a
% Ownership(3) 91.5%
Shares Out. n/a
Market Cap. n/a
Float n/a
Float Cap. n/a
Share Price n/a
TMO % Owned 0.0%
IPO Date n/a
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<PAGE>
THERMO FIBERTEK
Ticker TFT
% Ownership 80.7%
Shares Out. 40.591
Market Cap. $1,014.8
Float 7.790
Float Cap. $194.8
Share Price $25.00
IPO Date Nov. 1992
THERMO ECOTEK
Ticker TCK
% Ownership 82.7%
Shares Out. 15.531
Market Cap. $380.5
Float 2.660
Float Cap. $65.2
Share Price $24.50
IPO Date Jan. 1995
Stock prices as of : 10-May-96
Note: All figures are in millions except for share price data.
(1) Direct THI Ownership
(2) Direct TMD Ownership
(3) Direct TKN Ownership
(4) Direct TTT Ownership
(5) Direct THP Ownership
Source: Brundage, Story and Rose, L.L.C.
THERMEDICS INC. develops, manufactures, and markets product
quality assurance systems, precision weighing and inspection equipment,
explosives-detection devices, microweighing and electrochemistry instruments,
as well as biomaterials and other biomedical products. It has three
majority-owned subsidiaries, Thermo Cardiosystems Inc., Thermo Sentron, Inc.
and Thermo Voltek Corp.
THERMO CARDIOSYSTEMS INC. develops, manufactures, markets, and sells
implantable left ventricular-assist systems 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.
THERMO SENTRON, INC. is a leading supplier of precision
weighing and inspection equipment for high speed and
industrial production and packaging lines. It supplies
two principal markets: packaged goods and bulk
materials. Products supplied to the packaged goods
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market include checkweighing equipment and metal detectors that are
integrated into high speed production lines and are capable of
classifying, weighing and rejecting goods. Its bulk materials product
line includes conveyor monitoring systems, conveyor belt scales and
various other related systems.
THERMO VOLTEK CORP. designs, manufactures, and markets instruments
that test electronic systems and components for electromagnetic
compatibility, and provides related distribution and consulting
services. Thermo Voltek also designs and manufactures high-voltage
power conversion systems for research and commercial applications,
and specialized power supplies for telecommunications equipment.
THERMO INSTRUMENT SYSTEMS INC. develops, manufactures, and markets
analytical, monitoring and process control instruments used to detect and
measure air pollution, radioactivity, complex chemical compounds, toxic
metals, and other elements in a wide range of materials, as well as to control
and monitor various industrial processes. It has three majority-owned
subsidiaries, ThermoSpectra Corporation, Thermo BioAnalysis Corporation and
ThermoQuest Corporation, and a wholly-owned subsidiary, Thermo Optek
Corporation.
THERMOSPECTRA CORPORATION develops, manufactures, and markets
precision imaging, inspection, and measurement instruments based on
high-speed data acquisition and digital processing technologies.
THERMO BIOANALYSIS CORPORATION, which is not a public company,
develops, manufactures, and sells instrumentation for the analytical
biochemistry, biopharmaceutical and health physics instrumentation
markets. It comprises four operations that specialize in: capillary
electrophoresis; matrix-assisted laser desorption/ionization
time-of-flight mass spectrometry; health physics instrumentation; and
immunoassays, which are analytical methods widely used in
pharmaceutical and biopharmaceutical research, as well as for
clinical testing of patient samples.
THERMOQUEST CORPORATION develops, manufactures, and sells mass
spectrometers, liquid chromatograph, and gas chromatograph for the
environmental, pharmaceutical and industrial marketplaces. These
analytical instruments are used in the quantitative and qualitative
chemical analysis of organic and inorganic compounds at ultratrace
levels of detection.
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<PAGE>
THERMO OPTEK CORPORATION, which is not a public company, is involved
in the development, manufacture, and marketing of optical and
energy-based analytical instruments. These instruments are used in
the quantitative and qualitative chemical analysis of elements and
molecular compounds in a variety of solids, liquids and gases.
THERMO TERATIC INC. provides environmental services and
infrastructure planning and design encompassing a range of specializations
within consulting and design, soil and water remediation, and laboratory
testing. Thermo Teratic also provides metal-treating services. It has one
majority-owned subsidiary, Thermo Remediation Inc.
THERMO REMEDIATION INC. provides services for the recycling of
petroleum-contaminated soils and fluids, as well as manufactured-gas
plant and refinery wastes. Thermo Remediation also supplies nuclear
remediation and safety services at radioactively contaminated sites,
and is a leader in the application of bioremediation technology.
THERMO POWER CORPORATION develops, manufactures, markets and services
industrial refrigeration equipment; natural gas engines for vehicular and
stationary applications; natural gas-fueled cooling and cogeneration systems;
lift-truck engines; and marine engines. Thermo Power also conducts sponsored
research and development on advanced systems for clean combustion and other
high-efficiency gas-fueled devices. It has one majority-owned subsidiary,
Thermolyte Corporation.
THERMOLYTE CORPORATION, which is not a public company, was formed to
develop and commercialize a line of propane-powered lighting
products, including flashlights, area lights or lanterns and hazard
lights.
THERMOTREX CORPORATION manufactures and markets mammography and
needle-biopsy systems for the early detection of breast cancer, and develops
advanced technologies that it is incorporating into commercial products for
the medical imaging, personal-care and avionics industries. It has two
majority-owned subsidiaries, ThermoLase Corporation and Trex Medical
Corporation.
THERMOLASE CORPORATION has developed a laser-based system for the
removal of unwanted hair, and manufactures skin-care and other
personal-care products sold through salons, spas and stores.
TREX MEDICAL CORPORATION, which is not a public
- 17 -
<PAGE>
company, designs, manufactures and markets mammography equipment and
minimally invasive stereotactic needle biopsy systems used for the
detection of breast cancer, as well as office-based general
radiography equipment.
THERMO FIBERTEK INC. develops, manufactures and markets a
range of equipment and accessory products for the domestic and
international paper industry, including de-inking and stock-
preparation equipment, and water-management systems for paper
recycling.
THERMO ECOTEK CORPORATION develops and operates independent
(nonutility) electric power plants that use environmentally responsible
combustion technology and alterative-energy sources, such as agricultural
waste. Thermo Ecotek also is involved in engineered clean fuels, as well as a
range of other environmentally sound technologies.
CERTAIN INVESTMENT TECHNIQUES
The Fund also may engage in the following investment techniques, each
of which may involve certain risks:
LENDING PORTFOLIO SECURITIES. The Fund may, from time to time, lend
securities on a short-term basis (i.e., for up to seven days) to banks,
brokers and dealers and receive as collateral cash, U.S. Government
obligations or irrevocable bank letters of credit (or any combination
thereof), which collateral will be maintained at all times in an amount equal
to at least 100% of the current value of the loaned securities plus accrued
interest. Loans of portfolio securities may not exceed 33-1/3% of the Fund's
net assets. Securities lending will afford the Fund the opportunity to earn
additional income because the Fund will continue to be entitled to the
interest payable on the loaned securities and also will either receive as
income all or a portion of the interest on the investment of any cash loan
collateral or, in the case of collateral other than cash, a fee negotiated
with the borrower. Such loans will be terminable at any time. Loans of
securities involve risks of delay in receiving additional collateral or in
recovering the securities loaned or even loss of rights in the collateral in
the event of the insolvency of the borrower of the securities. The Fund will
have the right to regain record ownership of loaned securities in order to
exercise beneficial rights. The Fund may pay reasonable fees in connection
with arranging such loans.
BORROWING AND PLEDGING. The Fund may borrow money from banks or as
may be necessary for the clearance of securities transactions, but only for
emergency or extraordinary purposes in an amount not exceeding 15% of the
Fund's total assets. While borrowings exceed 5% of the Fund's total assets,
the Fund will not make any additional investments. The Fund's policy on
borrowing is a fundamental policy which may not be changed
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<PAGE>
without the affirmative vote of a majority (as defined in the
1940 Act) of its outstanding shares.
SHORT SELLING. The Fund may sell securities short, but will only do
so "against the box" or as part of a hedging strategy. A short sale is
"against the box" if at all times when the short position is open the Fund
owns an equal amount of the securities or securities convertible into, or
exchangeable without further consideration for, securities of the same issue
as the securities sold short. When it engages in short sales which are not
"against the box," the Fund will maintain a segregated account while the short
position is open, consisting of cash or U.S. Government securities, at such a
level that the amount deposited in the account plus the amount deposited with
the broker as collateral always equals the current market value of the
securities sold short, or otherwise cover its short position. The Fund will
incur a loss as a result of a short sale if the price of the security
increases between the date of the short sale and the date on which the Fund
replaces the borrowed security. The Fund will realize a gain if the security
declines in price between such dates. The amount of any gain will be decreased
and the amount of any loss increased by the amount of any premium, dividends
or interest the Fund may be required to pay in connection with a short sale.
HEDGING STRATEGIES. The Fund is permitted to engage in options and
futures transactions to hedge against a decline in the value of securities
owned by it or an increase in the price of securities which it plans to
purchase. The Fund currently has no intention to engage in such transactions
but may do so in the future. The use of options and futures is a highly
specialized activity which involves investment risks and portfolio management
skills that are different from those associated with investments in equity
securities.
Engaging in these transactions involves risk of loss to the Fund
which could adversely affect the value of the Fund's net assets. Although the
Fund intends to purchase or sell options or futures contracts only if there is
an active market for such instruments, no assurance can be given that a liquid
market will exist for any particular instrument at any particular time.
Successful use of options and futures by the Fund also is subject to the
Adviser's ability to predict correctly movements in the direction of the
relevant market, and, to the extent the transaction is entered into for
hedging purposes, to ascertain the appropriate correlation between the
transaction being hedged and the price movements of the options or futures
contract. For example, if the Fund uses futures to hedge against the
possibility of a decline in the market value of securities held in its
portfolio and the prices of such securities instead increase, the Fund will
lose part or all of the benefit of the
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<PAGE>
increased value of securities which it has hedged because it will have
offsetting losses in its futures positions. Furthermore, if in such
circumstances the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. The Fund may have to sell such
securities at a time when it may be disadvantageous to do so.
PORTFOLIO TURNOVER. The Fund does not intend to use short-term
trading as a primary means of achieving its investment objective. However, the
Fund's rate of portfolio turnover will depend upon market and other
conditions, and it will not be a limiting factor when portfolio changes are
deemed necessary or appropriate by the Adviser. Although the annual portfolio
turnover rate of the Fund cannot be accurately predicted, it is not expected
to exceed 100%, but it may be either higher or lower. A 100% turnover rate
would occur, for example, if all the securities in the Fund's portfolio were
replaced once in a one-year period. High turnover involves correspondingly
greater commission expenses and transaction costs and increases the
possibility that the Fund would not qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund will not qualify as a regulated investment company if it
derives 30% or more of its gross income from gains (without offset for losses)
from the sale or other disposition of securities held for less than three
months. High turnover may result in the Fund recognizing greater amounts of
income and capital gains, which would increase the amount of income and
capital gains which the Fund must distribute to stockholders in order to
maintain its status as a regulated investment company and to avoid the
imposition of federal income or excise taxes. See "Taxes."
RISK FACTORS
Investors should recognize that an investment in the shares of the
Fund is subject to various risks. Investors should consider the Fund as a
supplement to an overall investment program and should invest only if they are
willing to undertake the risks involved. The risks that investors should take
into account include, but are not limited to, those set forth below which can
be divided broadly into (i) risks specific to the Fund's investment strategy
and (ii) risks associated generally with investing in closed-end investment
companies.
SPECIAL RISK FACTORS
Unlike other closed-end investment companies, the Fund's investment
policy of purchasing the securities of a limited number of identified
companies subjects it more directly to the risks associated with these
companies than typically is the case with closed-end investment companies. The
historical share prices of the Subsidiaries, from time to time, has been
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<PAGE>
volatile. See "The Thermo Electron Subsidiaries -- Historical Pricing of
Subsidiaries' Common Stock" in the Statement of Additional Information. The
risks associated with the Subsidiaries could apply in varying degrees to
future Subsidiaries and other companies in which the Fund may invest.
The following information is drawn from public documents of the
Subsidiaries available as of the date of this Prospectus. While the Fund has
not independently verified such information, it has no reason to believe that
such information is not correct in all material respects. See "The Thermo
Electron Subsidiaries -- Management's Discussion and Analysis and Selected
Financial Information for the Subsidiaries" in the Statement of Additional
Information.
COMPETITION; TECHNOLOGICAL CHANGE AND INDUSTRY ACCEPTANCE. Many of
the Subsidiaries encounter, and expect to continue to encounter, intense
competition in the sale of their current and future products. Some of the
Subsidiaries' competitors and potential competitors have greater resources,
manufacturing and marketing capabilities, research and development staff and
production facilities than those of the Subsidiaries. No assurance can be
given that the Subsidiaries' competitors will not develop products that will
be superior to the Subsidiaries' products. In addition, industry acceptance of
new technologies developed by the Subsidiaries may be slow to develop due to,
among other things, existing regulations written specifically for older
technologies and general unfamiliarity of users with new technologies.
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY. The Subsidiaries hold
many patents relating to various aspects of their products. In addition, the
Subsidiaries believe that proprietary technical know-how is critical to many
of their products. Proprietary rights relating to the Subsidiaries' products
are protected from unauthorized use by third parties only to the extent that
they are covered by valid and enforceable patents or are maintained in
confidence as trade secrets. There can be no assurance that any patents now or
hereafter owned by the Subsidiaries will afford protection against competitors
and, in the absence of patent protection, the Subsidiaries may be vulnerable
to competitors who attempt to copy the Subsidiaries' products or gain access
to their trade secrets and know-how. Proceedings initiated by the Subsidiaries
to protect their proprietary rights could result in substantial costs to the
Subsidiaries. There can be no assurance that competitors of the Subsidiaries
will not initiate litigation to challenge the validity of the Subsidiaries'
patents, or that they will not use their resources to design comparable
products that do not infringe the Subsidiaries' patents. There may also be
pending or
- 21 -
<PAGE>
issued patents of which a Subsidiary is not aware held by parties not
affiliated with such Subsidiary that relate to the Subsidiary's products or
technologies. The Subsidiaries may need to acquire licenses to, or contest the
validity of, any such patents. It is likely that significant funds would be
required to contest the validity of any such patents. There can be no
assurance that any license required under any such patent would be made
available on acceptable terms or that the Subsidiaries would prevail in any
such contest. Certain Subsidiaries are currently engaged in litigation
alleging that certain of their products infringe the intellectual property
rights of their competitors. See "The Thermo Electron Subsidiaries --
Management's Discussion and Analysis and Selected Financial Information" in
the Statement of Additional Information for more information on current
litigation involving the Subsidiaries.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY. Generally, a Subsidiary's
growth strategy is to supplement its internal growth with the acquisition of
businesses and technologies that complement or augment the Subsidiary's
existing product lines. The Subsidiaries may acquire businesses which have low
levels of profitability and businesses that the Subsidiaries may seek to
acquire in the future may also be marginally profitable or unprofitable. In
order for any acquired businesses to achieve the desired level of
profitability, the Subsidiaries must successfully reduce expenses and improve
operations. No assurance can be given that the Subsidiaries will be successful
in this regard. In addition, promising acquisitions are difficult to identify
and complete for a number of reasons, including competition among prospective
buyers and the need for regulatory approvals, including antitrust approvals.
There can be no assurance that a Subsidiary will be able to complete pending
or future acquisitions. In order to finance any such acquisitions, it may be
necessary for a Subsidiary to raise additional funds either through public or
private financings. Any equity or debt financing, if available at all, may be
on terms which are not favorable to the Subsidiary and may result in dilution
to the Subsidiary's shareholders.
GOVERNMENT REGULATION. The largest single market for certain
Subsidiaries' products is the pharmaceutical industry. Certain of the
Subsidiaries' products will be subject to the United States Food and Drug
Administration ("FDA") approval. Any material change by a pharmaceutical
company in its manufacturing process or equipment could necessitate additional
FDA review and approval, which is costly and time consuming. Such requirements
may make it more difficult for a Subsidiary to sell its products to
pharmaceutical customers that have already applied for or obtained approval
for production processes using different equipment and supplies. Any changes
in the regulations that apply to the processes and production facilities used
to
- 22 -
<PAGE>
manufacture pharmaceutical products may adversely affect the market for a
Subsidiary's products. In addition, from time to time as a result of industry
consolidation and other factors, the pharmaceutical industry has reduced its
capital expenditures for equipment, and there can be no assurance that further
changes in the pharmaceutical industry will not adversely affect demand for a
Subsidiary's products.
Another large market for certain Subsidiaries' products is
environmental analysis. Most air, water and soil analysis is conducted to
comply with Federal, state, local and foreign environmental regulations. These
regulations are frequently specific as to the type of technology required for
a particular analysis and the level of detection required for that analysis.
These regulations may be amended or eliminated in response to new scientific
evidence or political or economic considerations. Existing laws and
regulations and new laws and regulations, may require the Subsidiaries to
modify, supplement, replace or curtail their operating methods, facilities or
equipment at costs which may be substantial without any corresponding increase
in revenue. Any significant change in environmental regulations could result
in a reduction in demand for the Subsidiaries' products. The Subsidiaries are
also potentially subject to monetary fines, penalties, remediation, clean-up
or stop orders, injunctions or orders to cease or suspend certain of their
practices. The outcome of any proceedings and associated costs and expenses
could have a material adverse impact on a Subsidiary's business.
POTENTIAL PRODUCT LIABILITY. The testing, marketing and sale of
instruments and other products such as those sold by many of the Subsidiaries
entail an inherent risk of product liability, and there can be no assurance
that product liability claims will not be asserted against the Subsidiaries.
While the Subsidiaries attempt to maintain reasonable and adequate product
liability insurance coverage, there can be no assurance that the Subsidiaries
will be able to maintain such insurance on reasonable terms or that current
insurance or insurance subsequently obtained will provide adequate coverage
against any or all potential claims.
POSSIBLE ADVERSE IMPACT OF SIGNIFICANT INTERNATIONAL OPERATIONS.
International sales have accounted for a large percentage of certain
Subsidiaries' revenues, and international sales may continue to account for a
significant portion of the Subsidiaries' revenues in the future. Sales to
customers in foreign countries are subject to a number of risks, including the
following: agreements may be difficult to enforce, and receivables difficult
to collect through a foreign country's legal system; foreign customers may
have longer payment cycles; and foreign countries could impose withholding
taxes or otherwise
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<PAGE>
tax a Subsidiary's foreign income, impose tariffs, embargoes or exchange
controls or adopt other restrictions on foreign trade. Additionally, the U.S.
dollar value of the Subsidiaries' net sales varies with currency exchange rate
fluctuations. Significant increases in the value of the U.S. dollar relative
to certain foreign currencies could have a material adverse effect on a
Subsidiary's competitive position and results of operations.
POTENTIAL CONFLICTS OF INTEREST. For financial reporting purposes,
the financial results of the Subsidiaries are included in Thermo Electron's
consolidated financial statements. Certain officers of a Subsidiary are also
officers of Thermo Electron and/or other Subsidiaries of Thermo Electron. The
members of the Board of Directors and officers of a Subsidiary who are also
affiliated with Thermo Electron or other Subsidiaries may consider not only
the short-term and the long-term impact of operating decisions on the
Subsidiary, but also the impact of such decisions on the consolidated
financial results of Thermo Electron. In some cases the impact of such
decisions could be disadvantageous to the Subsidiary while advantageous to
Thermo Electron. Each Subsidiary is a party to various agreements with Thermo
Electron that may limit the Subsidiaries' operating flexibility.
LACK OF VOTING CONTROL. Generally, a Subsidiary's shareholders do not
have the right to cumulate votes for the election of directors. Thermo
Electron, which owns directly or indirectly a majority of the voting stock of
the Subsidiaries and which currently intends to maintain at least a majority
interest in the Subsidiaries in the future, has the power to elect the entire
Board of Directors of each Subsidiary and to approve or disapprove any
corporate actions submitted to a vote of each Subsidiary's shareholders.
LACK OF DIVIDENDS. Most of the Subsidiaries have never paid any cash
dividends on their Common Stock. It is anticipated that for the foreseeable
future earnings of the Subsidiaries, if any, will be retained for use in the
business and that no cash dividends will be paid on the Common Stock.
CONCENTRATION IN A SINGLE INDUSTRY. The Fund will invest at least 25%
of its net assets, and thus concentrate its investments, in the
instrumentation industry. This industry is characterized by changing
technology, evolving industry standards and new product introductions. For
each Subsidiary, future success in this industry depends in large part upon
its ability to enhance its existing products and to develop and introduce new
products and technologies to meet changing customer requirements. No assurance
can be given that the Subsidiaries or any other companies in which the Fund
invests will successfully complete the enhancement and development of these
products in a timely
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<PAGE>
fashion or that their current or future products will satisfy the needs of the
markets in which the Subsidiaries operate.
CUSTOMARY RISK FACTORS
NO PRIOR HISTORY; DISCOUNT FROM NET ASSET VALUE. The Fund is a newly
organized, closed-end investment company with no prior operating history.
Prior to this offering, there has been no public market for the shares. Shares
of closed-end investment companies have in the past frequently traded at a
discount from their net asset value and initial offering price. This
characteristic of shares of a closed-end fund is a risk separate and distinct
from the risk that the Fund's net asset value will decline. The risk of loss
associated with purchasing shares of a closed-end investment company may be
more pronounced for investors who purchase in the initial public offering and
who expect to sell their shares in a relatively short period of time. The Fund
is designed for long-term investors and not as a trading vehicle.
NON-DIVERSIFIED STATUS. The classification of the Fund as a
"non-diversified" investment company means that the proportion of the Fund's
assets that may be invested in the securities of a single issuer is not
limited by the 1940 Act. A "diversified" investment company is required by the
1940 Act generally, with respect to 75% of its total assets, to invest not
more than 5% of such assets in the securities of a single issuer. Since a
relatively high percentage of the Fund's assets may be invested in the
securities of a limited number of issuers, some of which may be within the
same industry, the Fund's portfolio may be more sensitive to changes in the
market value of a single issuer or industry. However, to meet federal tax
requirements, at the close of each quarter the Fund may not, among other
things, have more than 25% of its total assets invested in any one issuer and,
with respect to 50% of the Fund's total assets, not more than 5% of its total
assets invested in any one issuer. These limitations do not apply to U.S.
Government securities.
DIVERSIFICATION REQUIREMENTS FOR TAX PURPOSES. In order to maintain
its status as a regulated investment company for Federal income tax purposes
so that it does not pay taxes on income and capital gains distributed to
shareholders, the Fund must diversify its holdings so that at the end of each
quarter of its taxable year the following two conditions are met: (1) at least
50% of the value of the Fund's total assets is represented by cash, U.S.
Government securities, securities of other regulated investment companies and
other securities limited in respect to any single issuer to an amount not
greater than 5% of the Fund's assets and 10% of the outstanding voting
securities of such issuer; and (2) not more than 25% of the value of the
Fund's assets is invested in securities of any one issuer (other than
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<PAGE>
U.S. Government securities or securities of other regulated investment
companies). Because of the concentration of the Fund's investment activities
in the securities of the Subsidiaries, the risk of failure to satisfy the
foregoing diversification tests is higher than it is in a regulated investment
company which is not so concentrated.
ANTI-TAKEOVER PROVISIONS. The Fund's Articles of
Incorporation contain certain anti-takeover provisions that may
have the effect of limiting the ability of other persons to
acquire control of the Fund. In certain circumstances, these
provisions might also inhibit a sale of Fund shares at a premium
over prevailing market prices, if such a premium develops. The
Fund's Board of Directors has determined that these provisions
are in the best interests of the stockholders generally. See
"Capital Stock--Anti-takeover Provisions."
OPERATION OF THE FUND
INVESTMENT ADVISER
Pursuant to a Management Agreement between the Fund and the Adviser,
Brundage, Story and Rose, L.L.C., the Adviser will provide investment
management services to the Fund. The Adviser will be responsible on a
day-to-day basis for investing the Fund's assets in accordance with the
investment objective and policies of the Fund and subject to any directions
that the Adviser may receive from the Board of Directors of the Fund, which
will periodically review investments included in the portfolio. The Adviser
will have discretion over investment decisions for the Fund and, in that
connection, will initiate purchase and sale orders for the Fund's portfolio
securities. The Adviser also will provide investment advisory research and
statistical services to the Fund. The Adviser will pay the reasonable salaries
and expenses of such of the Fund's officers and employees and any fees and
expenses of such of the Fund's directors who are directors, officers or
employees of the Adviser.
The Adviser is an independent investment counsel firm, headquartered
at One Broadway, New York, New York 10004, that has advised individual and
institutional clients since 1932. Currently, the Adviser employs 34 investment
professionals and provides investment advice to accounts having approximately
$5.3 billion in assets, including two open-end investment companies.
Gregory E. Ratte, a principal of the Adviser, is primarily
responsible for overseeing the management of the Fund's
portfolio. Mr. Ratte has been employed by the Adviser since
1989.
As compensation for its services, the Adviser will receive
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<PAGE>
from the Fund monthly fees at an annual rate of .80% of the Fund's Average Net
Assets as determined for such calendar month. MGF Service Corp. will determine
the "Average Net Assets" of the Fund for each calendar month by computing the
arithmetic average of the Fund's net assets as of each of the dates during
such month that such net assets are computed.
The Fund is responsible for the payment of all operating expenses,
including brokerage fees and commissions, legal, auditing and accounting
expenses, expenses of registering shares under federal and state securities
laws, fees and expenses incurred in connection with listing the Fund's shares
on any stock exchange, insurance expenses, fees and expenses in connection
with membership in investment company organizations, taxes or governmental
fees, fees and expenses of the custodian, registrar, transfer agent, dividend
disbursing agent and dividend reinvestment plan agent, and administrative
services agent of the Fund, fees and expenses of members of the Board of
Directors who are not "interested persons" of the Fund (as such term is
defined in the 1940 Act), the cost of preparing and distributing prospectuses,
stock certificates, statements, reports and other documents to stockholders,
expenses of stockholders' meetings and proxy solicitations, and such
extraordinary or non-recurring expenses as may arise, including litigation to
which the Fund may be a party and indemnification of the Fund's officers and
directors with respect thereto.
ADMINISTRATOR
MGF Service Corp., 312 Walnut Street, 21st Floor, Cincinnati, Ohio
45202, will serve as the Fund's administrator pursuant to an Administrative
Services Agreement with the Fund. As compensation for its services, MGF
Service Corp. will receive from the Fund monthly fees at an annual rate of
.15% of the Fund's Average Net Assets for such calendar month.
MGF Service Corp. will perform various administrative services for
the Fund, including providing the Fund with the services of persons to perform
administrative and clerical functions, maintenance of the Fund's books and
records, preparation of various filings, reports, statements and returns filed
with government authorities, preparation of financial information for the
Fund's proxy statements and semiannual and annual reports to stockholders.
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<PAGE>
MGF Service Corp. provides administration, accounting and
transfer agency services to approximately 60 investment companies
having aggregate assets in excess of $7 billion. MGF Service
Corp. is a subsidiary of Leshner Financial, Inc., of which Robert
H. Leshner is the controlling shareholder.
CUSTODIAN/TRANSFER AGENT
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio
45263, will act as custodian for the Fund's assets and may employ
sub-custodians approved by the Board of Directors of the Fund in accordance
with the 1940 Act. The Fifth Third Bank will act as the transfer agent,
dividend paying agent and registrar for the Fund's Common Stock and as Plan
Agent under the Fund's Dividend Reinvestment Plan.
CAPITAL STOCK
CAPITALIZATION
The Fund was incorporated in Maryland on May 16, 1996. The authorized
capital stock of the Fund is 16,000,000 Shares of Common Stock ($.001 par
value per share).
The shares of Common Stock outstanding prior to the date of this
Prospectus are, and the Shares, when issued, will be, fully paid and
nonassessable. All shares of Common Stock have equal dividends, distributions
and voting privileges. There are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of Common Stock
is entitled to its proportion of the Fund's assets after debts and expenses.
There are no cumulative voting rights for the election of directors. Prior to
the offering, the Adviser will own all of the outstanding shares of Common
Stock of the Fund and, consequently, will be the controlling person of the
Fund until the Shares offered hereby are issued and sold.
The Fund has no present intention of offering additional shares of
its Common Stock other than as provided in the Fund's Dividend Reinvestment
Plan. Other offerings of its Common Stock, if made, will require approval of
the Fund's Board of Directors. Any additional offering will be subject to the
requirements of the 1940 Act that shares of Common Stock may not be sold at a
price below the then current net asset value (exclusive of underwriting
discounts and commissions) except in connection with an offering to existing
stockholders or with the consent of the holders of a majority of the Fund's
outstanding Common Stock.
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<PAGE>
SHARE REPURCHASES; CONVERSION TO OPEN-END INVESTMENT COMPANY
The Fund is a closed-end management investment company and as such
its stockholders do not have the right to present their Shares for redemption
by the Fund. Instead, Shares trade in the open market at a price that will be
a function of several factors, including net asset value. If the Shares trade
at a significant discount from net asset value, the Board of Directors of the
Fund is authorized to take action intended to reduce or eliminate the
discount, which may include the repurchase of Shares in the open market or in
private transactions, or the making of a tender offer for Shares. There can be
no assurance, however, that the Board of Directors will decide to take any of
these actions, or that Share repurchases or tender offers, if undertaken, will
reduce any market discount. The staff of the Securities and Exchange
Commission (the "SEC") currently requires that any tender offer made by a
closed-end investment company for shares of its stock must be at a price equal
to the net asset value of such stock on the close of business on the last day
of the tender offer. Any service fees incurred in connection with any tender
offer made by the Fund will be borne by the Fund and will not reduce the
stated consideration to be paid to tendering stockholders.
Although the decision to take action in response to a significant
discount from net asset value will be made by the Board of Directors at the
time it considers the matter, it is the Board's present policy, which may be
changed by the Board, not to authorize repurchases of Shares or a tender offer
for Shares if (i) such transactions, if consummated, would (a) result in the
delisting of the Shares from any stock exchange, or (b) impair the Fund's
status as a regulated investment company under the Code (which would make the
Fund a taxable entity, causing the Fund's income to be taxed at the corporate
level in addition to the taxation of stockholders who receive dividends from
the Fund) or as a registered closed-end investment company under the 1940 Act;
(ii) the Fund would not be able to liquidate portfolio securities in an
orderly manner and consistent with the Fund's investment objective and
policies in order to repurchase Shares; or (iii) there is, in the judgment of
the Directors, any (a) material legal action or proceeding instituted or
threatened challenging such transactions or otherwise materially adversely
affecting the Fund, (b) general suspension of or limitation on prices for
trading securities on any stock exchange, (c) declaration of a banking
moratorium by federal or state authorities or any suspension of payment by
United States or New York State banks in which the Fund invests, (d) material
limitation affecting the Fund or the issuers of its portfolio securities by
federal or state authorities on the extension of credit by lending
institutions or on the exchange of foreign currency, (e) commencement of war,
armed hostilities or other
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<PAGE>
international or national calamity directly or indirectly involving the United
States, or (f) other event or condition that would have a material adverse
effect (including any adverse tax effect) on the Fund or its stockholders if
Shares were repurchased. The Board of Directors may in the future modify these
conditions in light of experience.
The repurchase by the Fund of Shares at prices below net asset value
would result in an increase in the net asset value of those Shares that remain
outstanding. However, there can be no assurance that Share repurchases or
tenders would reduce or eliminate a market discount from net asset value.
Nevertheless, the fact that the Shares may be the subject of repurchase or
tender offers from time to time may reduce any spread between market price and
net asset value that might otherwise exist. A purchase by the Fund of Shares
will decrease the Fund's total assets which would likely have the effect of
increasing the Fund's expense ratio.
If the Shares are trading at a significant discount from net asset
value, the Board also may consider submission to stockholders of a proposal to
amend the Fund's Articles of Incorporation to convert the Fund to an open-end
investment company. The Articles of Incorporation provide that such an
amendment would require the approval of the holders of at least 75% of the
votes then entitled to be cast by stockholders and at least 75% of the entire
Board of Directors, unless such conversion was previously approved by a vote
of at least 75% of the Fund's Continuing Directors (defined as those Directors
who either are members of the Board of Directors on the date of the closing of
this offering or subsequently became Directors and whose election is approved
by a majority of the Continuing Directors then on the Board), in which case
only the affirmative vote of a majority of the votes entitled to be cast by
shareholders would be necessary. See "Anti-takeover Provisions" below. If the
Fund converted to an open-end investment company, the Shares would no longer
be listed on any stock exchange and the Fund's Dividend Reinvestment Plan, as
described herein, would be terminated. Shareholders of an open-end investment
company may require the company to redeem their shares at any time (except in
certain circumstances as authorized by or under the 1940 Act) at their net
asset value, less any applicable redemption charge or contingent deferred
sales load, as might be in effect at the time of redemption. In order to avoid
maintaining large cash positions or liquidating favorable investments to meet
redemptions, open-end companies typically engage in a continuous offering of
their shares. Open-end investment companies are thus subject to periodic asset
in-flows and out-flows which can complicate portfolio management. Open-end
investment companies are also prohibited from investing more than 15% of their
net assets in illiquid securities.
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<PAGE>
Accordingly, if the Fund converted to an open-end company, the Fund's
investments in restricted and other illiquid securities would be subject to
this limitation and as a practical matter, it is unlikely that the Fund would
be able to continue to pursue its investment objective in the manner described
herein.
Before deciding whether to take any action in response to a discount
from net asset value, the Board would consider all relevant factors, including
the extent and duration of the discount, the liquidity of the Fund's
portfolio, the impact of any action that might be taken on the Fund or its
stockholders and market considerations. Based on these considerations, even if
the Shares should trade at a significant discount, the Board of Directors may
determine that, in the interest of the Fund and its stockholders, no action
should be taken.
ANTI-TAKEOVER PROVISIONS
The Fund presently has provisions in its Articles of Incorporation
and Bylaws (commonly referred to as "anti-takeover" provisions) that may have
the effect of limiting the ability of other entities or persons to acquire
control of the Fund, to cause it to engage in certain transactions or to
modify its structure.
The Board of Directors is divided into three classes. At the annual
meeting of stockholders each year, the term of one class will expire and
Directors will be elected to serve in that class for terms of three years.
This provision could delay for up to two years the replacement of a majority
of the Board of Directors.
Pursuant to the Fund's Articles of Incorporation, the affirmative
vote of the holders of at least 75% of the Shares entitled to vote in
elections of directors is required to authorize any of the following
transactions unless such action has been approved, adopted or authorized by
the affirmative vote of at least 75% of the total number of Continuing
Directors, in which case the affirmative vote of at least a majority of the
outstanding Shares is required:
(i) merger or consolidation or statutory share exchange
of the Fund with or into any other corporation, or the sale
of substantially all of the Fund's assets to any other
corporation;
(ii) the liquidation or dissolution of the Fund;
(iii) any stockholder proposal as to specific investment
decisions made or to be made with respect to the Fund's
assets; or
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<PAGE>
(iv) any amendment to the Fund's Articles of Incorporation to make
the Shares "redeemable securities" (i.e., to cause the Fund to become
an open-end investment company).
Reference is made to the Articles of Incorporation and Bylaws of the
Fund, on file with the SEC, for the full text of these provisions. See
"Available Information." The percentage of votes required under these
provisions, which is greater than the minimum requirements under Maryland law,
will make a change in the Fund's business or management more difficult and may
have the effect of depriving stockholders of an opportunity to sell shares at
a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund in a tender offer or similar
transaction.
In the opinion of the Adviser, the foregoing provisions offer several
advantages. Such provisions may require persons seeking control of the Fund to
negotiate with the management of the Fund regarding the price to be paid for
the shares required to obtain such control, they promote continuity and
stability and they enhance the Fund's ability to pursue long-term strategies
that are consistent with its investment objective.
DIVIDENDS AND DISTRIBUTIONS
GENERAL
The Fund intends to distribute annually substantially all of its net
investment income, and to distribute at least annually any net realized
capital gains to or to the accounts of holders of Shares. Under the Fund's
Dividend Reinvestment Plan, all dividends and distributions will be
automatically reinvested by The Fifth Third Bank, the Plan Agent, to purchase
additional Shares from the Fund or in the open market unless a stockholder
affirmatively elects to receive cash. All dividends and distributions will be
taxable, whether reinvested pursuant to the Dividend Reinvestment Plan or
distributed in cash.
DIVIDEND REINVESTMENT PLAN
Pursuant to the Dividend Reinvestment Plan (the "Plan"), stockholders
whose Shares are registered in their own names will be deemed to have elected
to have all dividends and distributions automatically reinvested by the Plan
Agent in Shares pursuant to the Plan, unless a stockholder elects to receive
distributions in cash. Stockholders who elect to receive distributions in cash
will receive all distributions in cash paid by check mailed directly to the
stockholders by The Fifth Third Bank, as dividend paying agent. In the case of
stockholders, such as banks, brokers or nominees, that hold shares for others
who are beneficial owners, the Plan Agent will administer the Plan on the
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<PAGE>
basis of the number of Shares certified from time to time by the stockholders
as representing the total amount registered in such stockholders' names and
held for the account of beneficial owners that have not elected to receive
distributions in cash. Investors that own Shares registered in the name of a
bank, broker or other nominee should consult with such nominee as to
participation in the Plan through such nominee, and may be required to have
their Shares registered in their own names in order to participate in the
Plan.
The Plan Agent serves as agent for the stockholders in administering
the Plan. If the Directors of the Fund declare an income dividend or a capital
gains distribution payable either in Shares or in cash, nonparticipants in the
Plan will receive cash and participants in the Plan will receive Shares, to be
issued by the Fund or purchased by the Plan Agent in the open market, as
provided below. If the market price per share on the applicable valuation date
equals or exceeds net asset value per share on that date, the Fund will issue
new Shares to participants at net asset value; provided, however, that if the
net asset value is less than 95% of the market price on the valuation date,
then such Shares will be issued at 95% of the market price. The valuation date
will be the dividend or distribution payment date, or if that date is not a
New York Stock Exchange trading day, the next preceding trading day. If net
asset value exceeds the market price of the Shares on the valuation date, or
if the Fund should declare an income dividend or capital gains distribution
payable only in cash, the Plan Agent will, as agent for the participants, buy
Shares in the open market, on the New York Stock Exchange or elsewhere, for the
participants' accounts on, or shortly after, the payment date. If, before the
Plan Agent has completed its purchases, the market price exceeds the net asset
value of the Shares, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Shares, resulting in the
acquisition of fewer Shares than if the distribution had been paid in Shares
issued by the Fund on the dividend payment date. Because of the foregoing
difficulty with respect to open market purchases, the Plan provides that if
the Plan Agent is unable to invest the full dividend amount in open market
purchases during the purchase period or if the market discount shifts to a
market premium during the purchase period, the Plan Agent will cease making
open-market purchases and will invest the uninvested portion of the dividend
amount in newly issued Shares at the close of business on the last purchase
date.
The Plan Agent maintains all stockholder accounts in the Plan and
furnishes written confirmations of all transactions in an account, including
information needed by stockholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in the name of
the participant, and each stockholder's proxy will include those purchased
pursuant to the Plan.
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<PAGE>
There is no charge to participants for reinvesting dividends or
capital gains distributions. The Plan Agent's fees for the reinvestment of
dividends and capital gains distributions will be paid by the Fund. There will
be no brokerage charges with respect to shares issued directly by the Fund as
a result of dividends or capital gains distributions payable either in stock
or in cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends and capital gains distributions
made by the participant. Brokerage charges for purchasing small amounts of
stock for individual accounts through the Plan are expected to be less than
the usual brokerage charges for such transactions, because the Plan Agent will
be purchasing stock for all participants in larger blocks and prorating the
lower commission attributable to such purchases.
The receipt and reinvestment by the Plan Agent of a participant's
dividends and distributions will not relieve the participant of any income tax
which may be payable on such dividends or distributions.
Experience under the Plan may indicate that changes in the Plan are
desirable. Accordingly, the Fund and the Plan Agent reserve the right to
terminate the Plan as applied to any dividend or distribution paid subsequent
to notice of the termination sent to Plan participants at least 30 days before
the record date for such dividend or distribution. Stockholders may terminate
their participation in the Plan by providing 30 days' written notice to the
Plan Agent. The Plan also may be amended by the Fund and the Plan Agent, but
(except when necessary or appropriate to comply with applicable law, rules or
policies of a regulatory authority) only by at least 30 days' written notice
to participants in the Plan. All correspondence concerning the Plan should be
directed to The Fifth Third Bank, as Plan Agent, at 38 Fountain Square Plaza,
Cincinnati, Ohio 45263.
TAXES
The Fund intends to qualify 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 stockholders.
The Fund intends to distribute substantially all of its net investment income
and any realized capital gains to its stockholders. Distributions of net
investment income as well as from net realized short-term capital gains, if
any, are taxable to investors as ordinary income. Dividends distributed from
net investment income may be eligible, in whole or in part, for the dividends
received deduction available to corporations. Distributions of net realized
long-term capital gains are taxable as long-term capital gains
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<PAGE>
regardless of how long a stockholder has held shares of the Fund. If a
stockholder sells Fund shares held for six months or less at a loss, the loss
will be a long-term capital loss to the extent of any long-term capital gains
distributions received.
An amount received by a stockholder from the Fund in exchange for
Shares of the Fund (pursuant to a repurchase of Shares or a tender offer or
otherwise) generally will be treated as a payment in exchange for the Shares
tendered, which may result in taxable gain or loss as described above.
However, if the amount received by a stockholder exceeds the fair market value
of the Shares tendered, or if a stockholder does not tender all of the Shares
of the Fund owned or deemed to be owned by the stockholder, all or a portion
of the amount received may be treated as a dividend taxable as ordinary income
or as a return of capital. In addition, if a tender offer is made, any
stockholders who do not tender their Shares could be deemed, under certain
circumstances, to have received a taxable distribution of Shares of the Fund
as a result of their increased proportionate interest in the Fund.
The Fund will mail to each of its stockholders a statement indicating
the amount and federal income tax status of all distributions made during the
year. In addition to federal taxes, stockholders of the Fund may be subject to
state and local taxes on distributions. Stockholders should consult their tax
advisers about the tax effect of distributions and withdrawals from the Fund
and the use of the Plan. The tax consequences described in this section apply
whether distributions are taken in cash or reinvested in additional shares.
See the Statement of Additional Information for a further description
of the tax consequences of an investment in the Fund.
UNDERWRITING
The Underwriters named below, for whom NatWest Securities Limited
("NatWest"), 175 Water Street, New York, New York 10038, is acting as
representative, have severally agreed, subject to the terms and conditions of
the Underwriting Agreement, to purchase from the Fund the numbers of Shares
set forth opposite their respective names:
UNDERWRITER NUMBER OF SHARES
NatWest Securities Limited
[TO BE SUPPLIED]
The Underwriters are committed to purchase all the Shares offered
hereby, if any Shares are purchased.
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<PAGE>
The Underwriters propose to offer the Shares directly to the public
at the public offering price set forth on the cover page of this Prospectus
and to certain securities dealers at such price less a concession not in
excess of $_____ per Share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $_______ per Share to certain brokers
and dealers.
The Fund has granted the Underwriters an option, exercisable within
30 days from the date of this Prospectus, to purchase up to ________
additional Shares at the public offering price, less the underwriting
discount, as set forth on the cover page of this Prospectus. If the
Underwriters exercise their option to purchase any of the additional Shares,
each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof which the
number of Shares to be purchased by each of them as shown in the above table
bears to the ______ Shares offered hereby. The Underwriters may exercise such
option only to cover over-allotments in connection with the sale of the
________ Shares offered hereby.
The Fund and the Adviser have agreed in the Underwriting Agreement to
indemnify the several Underwriters against certain liabilities, including
civil liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Fund has agreed that, until [180] days after the date of this
Prospectus, it will not, without the consent of NatWest, sell, offer to sell,
issue, distribute or otherwise dispose of in the United States any Shares or
any securities or interests convertible into, or exercisable or exchangeable
for, Shares, other than the Shares offered hereby and Shares issued pursuant
to the Fund's Dividend Reinvestment Plan.
Prior to this offering, there has been no public market for the Shares.
Application has been made to list the Shares on the New Yrok Stock Exchange
under the symbol "______." [In order to meet the requirements for listing the
Shares on the New York Stock Exchange, the Underwriters have undertaken to sell
lots of 100 or more shares to a minimum of 2,000 beneficial owners in the
United States.] During the period that the Underwriters will be soliciting
indications of interest, the Fund and the Underwriters will evaluate the
market for such Shares as well as the market for the Fund's contemplated
investments. If changes in existing market and other conditions make it
impractical or inadvisable to proceed with the offering of the Shares, the
offering may not be made.
NatWest, a United Kingdom broker-dealer and a member of the
Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Shares offered hereby and subject to certain exceptions,
it will not offer or sell any Shares
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<PAGE>
within the United States, its territories or possessions or to persons who are
citizens thereof or residents therein. The Underwriting Agreement does not
limit the sale of the Shares offered hereby outside of the United States.
NatWest has further represented and agreed that (a) it has not
offered or sold and will not offer or sell in the United Kingdom by means of
any document, any Shares other than to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments
(whether as principal or agent) or in circumstances which do not constitute an
offer to the public within the meaning of the Public Offers of Securities
Regulations 1995 or the Financial Services Act 1986 (the "Act"); (b) it has
complied and will comply with all applicable provisions of the Act with
respect to anything done by it in relation to the Shares in, from or otherwise
involving the United Kingdom; and (c) it has only issued or passed on and will
only issue or pass on in the United Kingdom any document required or permitted
to be published by listing rules under Part IV of the Act to a person who is
of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1995 or is a person to whom the
document may otherwise lawfully be issued or passed on.
EXPERTS
The Statement of Assets and Liabilities of the Fund included in the
Statement of Additional Information has been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report thereon and has
been so included in reliance on the authority of said firm as experts in
auditing and accounting.
LEGAL MATTERS
The validity of the issuance of the shares offered hereby will be
passed upon for the Fund by Sullivan & Worcester LLP, Washington, D.C. Certain
legal matters in connection with the issuance of the Shares offered hereby
will be passed upon for the Underwriters by Stroock & Stroock & Lavan, New
York, New York.
AVAILABLE INFORMATION
As of the effective date of this Prospectus, the Fund will be subject
to the informational requirements of the Securities Exchange Act of 1934 and
the 1940 Act, and in accordance therewith will file reports, proxy statements
and other information with the SEC. The reports, proxy statements and annual
reports and other information filed by the Fund can 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.
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<PAGE>
REPORTS TO STOCKHOLDERS
The Fund will furnish to its stockholders annual reports containing
audited financial statements, periodic unaudited reports containing financial
statements and such other periodic reports as it may determine to furnish or
as may be required by law.
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<PAGE>
THE FOLLOWING IS THE TABLE OF CONTENTS CONTAINED IN THE STATEMENT
OF ADDITIONAL INFORMATION FILED AS PART OF THE FUND'S REGISTRATION STATEMENT.
PAGE
THE THERMO ELECTRON SUBSIDIARIES.........................................
A. Management's Discussion and Analysis and
Selected Financial Information for the Subsidiaries.......
B. Historical Pricing of Common Stock........................
C. The Subsidiaries' Convertible Debentures..................
CERTAIN PORTFOLIO SECURITIES AND INVESTMENT TECHNIQUES...................
INVESTMENT RESTRICTIONS..................................................
DIRECTORS AND OFFICERS...................................................
THE ADVISER..............................................................
SECURITIES TRANSACTIONS..................................................
PORTFOLIO TURNOVER.......................................................
TAXES....................................................................
CUSTODIAN................................................................
AUDITORS . ..............................................................
MGF SERVICE CORP.........................................................
QUALITY RATINGS OF CORPORATE BONDS AND PREFERRED STOCKS..................
STATEMENT OF ASSETS AND LIABILITIES......................................
APPENDIX.................................................................
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<PAGE>
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 PROSPECTUS 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 ________, 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.
theroppt.sai
May 16, 1996
- 40 -
<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....................................
B. Historical Pricing of Subsidiaries' Common Stock....................
C. The Subsidiaries' Convertible Debentures............................
CERTAIN PORTFOLIO SECURITIES AND INVESTMENT TECHNIQUES.......................
INVESTMENT RESTRICTIONS......................................................
DIRECTORS AND OFFICERS.......................................................
THE INVESTMENT ADVISER.......................................................
SECURITIES TRANSACTIONS......................................................
PORTFOLIO TURNOVER...........................................................
TAXES........................................................................
CUSTODIAN....................................................................
AUDITORS.....................................................................
MGF SERVICE CORP.............................................................
QUALITY RATINGS OF CORPORATE BONDS AND PREFERRED STOCKS......................
STATEMENT OF ASSETS AND LIABILITIES..........................................
APPENDIX.....................................................................
- 41 -
<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 (NO CURRENT FINANCIAL
INFORMATION IS AVAILABLE FOR THERMOLYTE CORPORATION):
PAGE
Thermedics Inc. . . . . . . . . . . . . . . . . . .
Thermo Cardiosystems Inc. . . . . . . . . . . . . .
Thermo Sentron, Inc.. . . . . . . . . . . . . . . .
Thermo Voltek Corp. . . . . . . . . . . . . . . . .
Thermo Instrument Systems Inc.. . . . . . . . . . .
ThermoSpectra Corporation . . . . . . . . . . . . .
Thermo BioAnalysis Corporation. . . . . . . . . . .
ThermoQuest Corporation . . . . . . . . . . . . . .
Thermo Optek Corporation. . . . . . . . . . . . . .
Thermo TerraTech Inc. . . . . . . . . . . . . . . .
Thermo Remediation Inc. . . . . . . . . . . . . . .
Thermo Power Corporation. . . . . . . . . . . . . .
ThermoTrex Corporation. . . . . . . . . . . . . . .
ThermoLase Corporation. . . . . . . . . . . . . . .
Trex Medical Corporation. . . . . . . . . . . . . .
Thermo Fibertek Inc.. . . . . . . . . . . . . . . .
Thermo Ecotek Corporation . . . . . . . . . . . . .
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.
- 42 -
<PAGE>
<TABLE>
Quarterly Price Ranges
<CAPTION>
SUBSIDIARY 1996 1995 1994
- ---------- ---- ---- ----
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
Thermedics
First 30.5000 23.250 17.500 12.500 15.000 11.750
Second 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
First 30.5000 24.625 18.868 15.867 18.534 15.067
Second 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
First 14.625 10.875 8.875 7.750 9.250 7.875
Second 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
First 16.125 11.375 10.375 8.875 9.875 7.375
Second 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
First 83.000 59.000 29.750 15.625 23.375 16.000
Second 39.125 28.250 23.125 18.875
Third 49.750 36.250 21.375 17.625
Fourth 77.250 42.625 22.000 15.000
Thermo Voltek
First 21.125 15.375 11.750 7.875 10.375 8.375
Second 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
First 50.875 41.375 16.625 12.000 16.625 13.500
Second 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
- 43 -
<PAGE>
<CAPTION>
SUBSIDIARY 1996 1995 1994
- ---------- ---- ---- ----
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
Thermo Fibertek
First 24.000 21.000 11.751 10.251 10.751 9.334
Second 13.584 11.251 10.417 9.334
Third 17.584 13.001 10.084 8.834
Fourth 22.750 15.625 10.751 9.417
Thermo Remediation
First 16.250 13.250 13.584 10.751 9.917 8.417
Second 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
First 31.000 20.875 6.938 3.625
Second 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
First 21.000 16.125 13.375 11.000
Second 14.500 12.375
Third 17.375 13.250
Fourth 16.750 13.375
ThermoSpectra
First 18.875 14.625
Second
Third 19.500 16.000
Fourth 17.625 14.750
ThermoQuest
First 18.375 16.250
Second
Third
Fourth
Thermo Sentron
First 16.375 16.000
Second
Third
Fourth
- 44 -
</TABLE>
<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.
- 45 -
<PAGE>
<TABLE>
<CAPTION>
31-DEC-95
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 91,648,000 95,640,111
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 48,450,000 53,677,276
5% Sub. Convertible Debentures, Due 2000
Convertible Into Thermo Optek* 85,000 86,250 5.000% Optek n/a n/a n/a n/a
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 12,377,000 14,327,336
6 1/2% Sub. Convertible Debentures, Due 1998
Convertible Into TMD @ $10.42 per share 35,000 8,037 6.500% TMD 96.0061 771,601 33,984,000 34,755,601
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 17,454,000 18,754,290
Non-Int Bearing Sub. Convertible Debentures,
Due 1997
Convertible Into TCA @ $21.74 per share 33,000 11,642 0.000% TCA 45.9982 535,511 24,109,000 24,644,511
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 4,879,000 7,027,086
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 17,454,000 25,043,598
- -----------------------------------------------------------------------------------------------------------------------------------
___Total Subsidiary Convertible Obligations $433,401
LEGEND
<FN>
Conversion Ratio = number of common stock shares to be received in exchange
for each $10.00 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
* Conversion information is not available, as Thermo Optek shares have not yet
been issued
</FN>
- 46 -
</TABLE>
<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 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
- 47 -
<PAGE>
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.
- 48 -
<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
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.
- 49 -
<PAGE>
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.
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
- 50 -
<PAGE>
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.
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
- 51 -
<PAGE>
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
*Francis S. Branin 49 Director
One Broadway
New York, New York 10004
*Cheryl L. Grandfield 44 Director
One Broadway
New York, New York 10004
[other Directors to be supplied]
Gregory E. Ratte' 35 President
One Broadway
New York, New York 10004
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. Branin and Miss Grandfield, 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:
[other Directors to be supplied]
Gregory E. Ratte' is a principal of the Adviser and the portfolio
manager of the Fund.
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
- 52 -
<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.
[disclose Director compensation]
THE INVESTMENT ADVISER
Brundage, Story and Rose, L.L.C. (the "Adviser") is the Fund's
investment adviser. Mr. Branin and Miss Grandfield, 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 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.
- 53 -
<PAGE>
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 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
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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 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
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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 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
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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.
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 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,
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<PAGE>
Cincinnati, Ohio, 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 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
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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 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
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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 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
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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 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:
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<PAGE>
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.
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.
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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.
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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.
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.
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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 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 _______, 1996 is
presented below.
[to be inserted]
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APPENDIX
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
<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
<PAGE>
accounting associations, expressed their disagreement 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.
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.
<PAGE>
The increase in revenues from Thermo Cardiosystems was partially 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.
The effective tax rate was 32% in 1995, compared with 38%
<PAGE>
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.
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
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
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.
<PAGE>
- 66 -
<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.
<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
<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.
<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.
<PAGE>
- 67 -
<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
- 68 -
<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.
- 69 -
<PAGE>
- 70 -
<PAGE>
<TABLE>
<CAPTION>
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
------------- ------------ ------------ ----- ------------
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= =======
- 71 -
</TABLE>
<PAGE>
Most recent Thermo Sentron quarterly information is contained in the Company's
Form 10-Q to be inserted.
- 72 -
<PAGE>
Form 10-K
December 30, 1995
THERMO VOLTEK CORPORATION
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.
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
- 73 -
<PAGE>
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.
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
- 74 -
<PAGE>
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 $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, plan 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.
- 75 -
<PAGE>
<TABLE>
SELECTED FINANCIAL INFORMATION
<CAPTION>
(In thousands except
PER SHARE AMOUNTS) 1995(a) 1994(b) 1993(c) 1992(d) 1991
- ------------------ ------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
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
<FN>
(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.
</FN>
</TABLE>
- 76 -
<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
- 77 -
<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
- 78 -
<PAGE>
Company's operations in 1994, offset in part by the inclusion of amortization
of cost in excess of net assets 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
- 79 -
<PAGE>
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 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.
- 80 -
<PAGE>
Most recent Thermo Voltek quarterly information is contained in the Company's
Form 10-Q to be inserted.
- 81 -
<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
<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
<PAGE>
of debt incurred in connection with acquisitions.
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%
<PAGE>
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 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
<PAGE>
Laboratories Worldwide (DLW) from Dynatech Corporation for $43 million in
cash, subject to post-closing adjustments. To 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.
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
<PAGE>
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.
- 82 -
<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 relatively poor profitability because of high
manufacturing and operating
- 83 -
<PAGE>
expenses. The Company's goal is to gradually reduce these expenses and thereby
improve the acquired companies' profitability. Business 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.
Selling, general and administrative expenses as a percentage of revenues
increased to 31% in 1995 from 29% in 1994 due principally to
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<PAGE>
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 9.5% 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.
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
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<PAGE>
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 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
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<PAGE>
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.
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
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<PAGE>
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.
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<PAGE>
<TABLE>
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)
- --------- ------- ------- ---- ------ ----------
<S> <C> <C> <C> <C> <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
<FN>
(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.
</FN>
</TABLE>
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<PAGE>
Most recent ThermoSpectra quarterly information is contained in the Company's
Form 10-Q to be inserted.
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<PAGE>
Confidential Offering Memorandum
Private Placement
dated February 28, 1995
THERMO BIOANALYSIS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company was formed as a wholly owned subsidiary of Thermo
Instrument in February 1995, and comprises three lines of business formerly
operated by Thermo Instrument: the CE product line of Thermo Separation
Products Inc.; the MALDI-TOF division of Finnigan MAT Ltd.; and the Eberline
Instruments health physics instrumentation division of Thermo Instrument. The
CE and MALDI-TOF divisions are bioinstrumentation businesses that sell
products to the biopharmaceutical industry as well as to academic and research
laboratories. The health physics division sells products primarily to the U.S.
Department of Energy and the nuclear power industry. The following discussion
refers to the results of operations of the Company's three divisions as
conducted by their respective predecessors.
RESULTS OF OPERATIONS
1994 COMPARED WITH 1993
Revenues remained relatively unchanged at $24.6 million in 1994 and
$24.7 million in 1993. MALDI-TOF division revenues increased by approximately
$1.5 million, or 45%, due to increased acceptance of these products. This
increase was offset by a 7% decrease in health physics division revenues, to
$18.4 million, due to reduced spending by the U.S. Department of Energy and
the nuclear power industry.
The Company's gross profit margin decreased to 43% in 1994 from 45%
in 1993. This decrease was due primarily to lower margins in the health
physics division caused by lower sales of one of the Company's high-margin
health physics instruments. The Company is in the process of relocating the
manufacturing of its VISION 2000 MALDI-TOF instrument from Bremen, Germany, to
its Hemel Hempstead, England factory. The Company expects to improve gross
profit margins for the VISION 2000 due to the lower manufacturing costs in the
Hemel Hempstead factory.
Selling, general and administrative expenses as a percentage of
revenues decreased slightly to 19% in 1994 from 20% in 1993 due to reduced
administrative expenditures at the Company's health physics division.
1993 COMPARED WITH 1992
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<PAGE>
Revenues increased $4.5 million, or 23%, to $24.7 million in 1993
from $20.1 million in 1992. The increase was due to increased revenues in the
health physics division due to the introduction of a new personnel
contamination monitor, the acquisition of the CE product line, and increased
revenues in the MALDI-TOF division due to the introduction of the
high-resolution VISION 2000 MASS spectrometer.
The Company's gross profit margin decreased slightly to 45% in 1993
from 46% in 1992. This decrease was due primarily to lower margins on the new
personnel contamination monitor referred to in the preceding paragraph, but
was offset in part by higher margins in the MALDI-TOF division due to higher
volumes of products shipped and to efforts to reduce product costs.
Selling, general and administrative expenses as a percentage of
revenues decreased slightly to 20% in 1993 from 21% in 1992. This decrease
resulted primarily from reduced selling costs for certain health physics
instruments. Research and development expenses decreased in 1993 due to the
completion of the VISION 2000 and certain health physics instrumentation
development projects.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $9.5 million at December 31, 1994,
compared with $8.3 million at January 1, 1994. Included in working capital are
cash and cash equivalents of $300,000 at December 31, 1994. The increase in
working capital is the result of higher level of receivables and inventory to
support the higher level of sales in the MALDI-TOF division.
The Company believes that its existing resources are sufficient to
meet the capital requirements of its existing businesses for the foreseeable
future.
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<PAGE>
Prospectus
of ThermoQuest
Corporation dated
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 that periodically introduces newer, more
technologically capable products, the Company
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<PAGE>
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.
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
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<PAGE>
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.
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<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.
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<PAGE>
Most recent ThermoQuest quarterly information is contained in the Company's
Form 10-Q to be inserted.
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<PAGE>
Preliminary Offering Circular
September 8, 1995
THERMO OPTEK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The principal operating units within the Company are Thermo Jarrell
Ash, a manufacturer and distributor of AA and AE spectrometry products, and
Nicolet, a manufacturer and marketer of FT-IR and FT-Raman spectrometry
products. Nicolet was acquired by the Company in August 1992. In January 1995,
the Company acquired the analytical instruments division of Baird, a
manufacturer of arc/spark spectrometers.
The Company's strategy is to combine internal growth with
acquisitions of complementary businesses. The Company, through Thermo Electron
and Thermo Instrument, is a party to a letter of intent and an acquisition
agreement relating to the acquisition of several businesses with aggregate
1994 revenues of approximately $150 million. In general, the businesses which
the Company seeks to acquire have a strong reputation in the markets in which
they compete but relatively poor profitability because of high manufacturing
and operating expenses. The Company believes it can gradually reduce these
expenses and improve the acquired businesses' profitability. The Company
expects that the acquisition of these businesses will temporarily reduce its
operating margins until such time as it has improved their profitability to
levels that are comparable with the Company's existing businesses.
RESULTS OF OPERATIONS
FIRST SIX MONTHS 1995 COMPARED WITH FIRST SIX MONTHS 1994
Revenues for the first six months of 1995 were $101.1 million,
compared with $80.4 million for the first six months of 1994, an increase of
25.7%. Revenues increased $13.5 million due to the acquisition of Baird in
January 1995. In addition, revenues from the Company's Nicolet subsidiary
increased $6.5 million due to increased demand for its products, particularly
in Japan and the Pacific Rim and, to a lesser extent, currency fluctuations.
Revenues increased $3.8 million in 1995 due to the weakness of the U.S. dollar
in relation to foreign currencies.
The gross profit margin declined to 50.5% in the first six months of
1995 from 51.3% in the first six months of 1994. The decline in gross profit
margin is primarily attributable to the inclusion of low margin products from
Baird, offset in part by improved margins at the Company's Nicolet subsidiary
due primarily to the weakness of the U.S. dollar in relation to foreign
currencies.
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<PAGE>
Selling, general and administrative expenses as a percentage of
revenues increased to 29.0% in the first six months of 1995, compared with
28.1% in 1994, as a result of higher selling, general and administrative
expenses at Baird and higher international selling expenses due to the
Company's expanded selling efforts in China and Brazil. Research and
development expenses as a percentage of revenues were relatively unchanged at
6.5% in the first six months of 1995 and 6.7% in 1994. As of July 1995, the
Company combined the manufacturing operations of Baird and Thermo Jarrell Ash,
resulting in reduced general and administrative expenses.
Interest income represents interest earned on cash held by the
Company's European operations. Interest expense in the first six months of
1995 and 1994 includes working capital borrowings by the Company's foreign
subsidiaries from local banks and, to a lesser extent, mortgage payments on
the Company's Japanese facility. Interest expense in 1994 also included
interest on a $7.0 million note to the State of Wisconsin that was repaid in
September 1994.
The effective tax rate was 41.5% in the first six months of 1995 and
41.4% in the first six months of 1994. 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.
1994 COMPARED WITH 1993
Revenues for 1994 were $165.4 million, compared with $161.4 million
for 1993. An increase in revenues at the Company's Thermo Jarrell Ash
subsidiary due to increased demand, a $4.6 million increase in revenues due to
the acquisitions of Hilger Analytical and CID Technologies Inc. in July 1993
and October 1994, respectively, and a $2.1 million increase due to the
weakness of the U.S. dollar in relation to foreign currencies, were offset by
a decline in revenues at the Company's Nicolet subsidiary due to two large
orders which were shipped during 1993.
The gross profit margin declined to 50.3% in 1994 from 52.2% in 1993
due to lower margins at the Company's Thermo Jarrell Ash subsidiary caused by
changes in product mix and lower margins on sales in Europe due to the
European recession.
Selling, general and administrative expenses and research and
development expenses as percentages of revenues remained relatively unchanged
at 28.1% in 1994 and 27.8% in 1993, and 6.3% in 1994 and 6.5% in 1993,
respectively.
Interest expense declined to $1.7 million in 1994 from $2.2 million
in 1993 due to the repayment of the State of Wisconsin loan 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 40.6% in
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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.
1993 COMPARED WITH 1992
Revenues increased to $161.4 million in 1993 from $102.2 million in
1992, an increase of 57.8%. Revenues increased by $57.1 million due to the
acquisition of Nicolet in August 1992, and by $3.3 million due to the
acquisition of Hilger Analytical in July 1993.
The gross profit margin improved to 52.2% in 1993 from 50.3% in 1992
due to higher gross profit margins from a new product line which was
introduced by Thermo Jarrell Ash in 1993. Selling, general and administrative
expenses and research and development expenses as percentages of revenues
remained relatively unchanged at 27.8% in 1993 and 26.8% in 1992 and 6.5% in
1993 and 7.0% in 1992, respectively.
Interest expense increased to $2.2 million in 1993 from $1.4 million
in 1992 due to borrowings at Nicolet, which was acquired in August 1992.
The effective tax rate was 40.6% in 1993, compared with 46.2% in
1992. 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 in 1992, the inability to
provide a tax benefit on losses incurred at certain of the Company's overseas
operations.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital at July 1, 1995 was $46.5 million,
compared with $33.8 million at December 31, 1994. Included in working capital
are cash and cash equivalents of $7.5 million at July 1, 1995, compared with
$3.3 million at December 31, 1994. During the first six months of 1995, $7.5
million of cash was provided by the Company's operating activities.
Though the Company expects positive cash flow from its existing
operations, the Company anticipates that it will require at least $100 million
of cash to pursue the acquisition of complementary businesses that are
currently subject to a letter of intent and an acquisition agreement. The
Company expects that it will finance these acquisitions through the net
proceeds from the sale of Debentures and short-term borrowings from Thermo
Instrument or Thermo Electron. In addition, the completion of other
acquisitions in the future will be contingent on the ability of the Company to
obtain additional funds either through borrowings from Thermo Electron or
Thermo Instrument or through the capital markets. The Company expects to make
approximately $2.0 million in capital expenditures in 1995. The Company
believes that its existing resources, the proceeds from this offering and the
cash provided by operations are sufficient to meet the capital requirements
- 100 -
<PAGE>
of its existing businesses for the foreseeable future.
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<PAGE>
Form 10-K
April 1, 1995
THERMO PROCESS SYSTEMS INC.
(currently known as THERMO TERRATECH INC.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's majority-owned public subsidiary, Thermo Remediation
Inc. (Thermo Remediation), provides soil-remediation services through a
network of regional centers. These soil-remediation centers thermally treat
soil to remove and destroy petroleum contamination caused by leaking storage
tanks, spills, and other sources. Through Thermo Remediation's November 1993
acquisition of Thermo Fluids, the Company also collects and recycles used
motor oil and provides services such as wastewater processing. In February
1995, the Company acquired Elson T. Killam Associates, Inc. (Killam
Associates), a leading provider of comprehensive environmental consulting and
professional engineering services in selected areas of the United States. The
Company's majority-owned J. Amerika N.V. (J. Amerika) subsidiary is a provider
in the Netherlands of underground tank and other environmental services. In
March 1995, J. Amerika acquired Refining and Trading Holland B.V. (North
Refinery), which specializes in processing "off-spec" and contaminated
petroleum fluids into usable products. In recognition of its changing focus,
J. Amerika intends to change its name to Thermo EuroTech, N.V. The Company's
Thermo Terra Tech businesses provide environmental science and consulting
services, laboratory-based testing, and nuclear-radiation safety services.
Terra Tech Labs, Inc. (later renamed Thermo Analytical Inc.), which was
acquired in January 1994, specializes in fast-response testing of
petroleum-contaminated soils and groundwater. In August 1994, Thermo Terra
Tech acquired RMC Environmental Services, Inc. (RMC), an environmental
consulting and analytical laboratory services firm specializing in
environmental science, hydropower consulting, and analytical laboratory
services. The Company also performs metallurgical processing services, using
thermal-treatment equipment owned by the Company and designs, manufactures,
and installs advanced custom-engineered thermal-processing systems.
RESULTS OF OPERATIONS
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%. Service revenues increased
27% to $119.4 million in fiscal 1995 from $94.3 million in fiscal 1994.
Revenues from analytical and consulting services increased 29% to $70.9
million in fiscal 1995 from $54.8 million in fiscal 1994. This increase is due
to the inclusion of approximately $13.2 million in revenues from businesses
acquired in late fiscal 1994 and in fiscal 1995 and, to a lesser extent,
revenues generated from a
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<PAGE>
long-term environmental restoration contract for the U.S. Department of
Energy's Hanford site. Revenues from the Company's remediation services
increased 27% to $36.5 million in fiscal 1995, due primarily to an increase in
the volume of soil processed at the Company's soil-remediation centers located
in Southern California and Florida and, to a lesser extent, additional
revenues of $3.8 million from businesses acquired in late fiscal 1994 and in
fiscal 1995. Metallurgical processing services revenues increased 15% to $12.3
million in fiscal 1995 from $10.7 million in fiscal 1994, due primarily to the
Company's efforts to increase its nongovernment business.
"Contract revenues from related party" in fiscal 1994 and 1993
represents funding under an agreement between the Company and Thermo Electron
Corporation (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.
Product revenues from sales of custom-engineered thermal-processing
systems were $14.4 million in fiscal 1995, compared with $15.0 million in
fiscal 1994. Although this business remains depressed and is subject to
intense competition, backlog increased to $4.4 million at April 1, 1995,
compared with $3.5 million at April 2, 1994.
The gross profit margin increased to 26% in fiscal 1995 from 24% in
fiscal 1994. The gross profit margin on service revenues increased to 28% in
fiscal 1995 from 26% in fiscal 1994. The gross profit margin on analytical and
consulting services improved to 25% in fiscal 1995 from 23% in fiscal 1994 due
to higher gross margins at businesses acquired during the year. The gross
profit margin on remediation services remained relatively constant at 37% in
fiscal 1995, compared with 36% in fiscal 1994. The gross profit margin on
metallurgical processing services increased to 14% in fiscal 1995 from 8% in
fiscal 1994 as a result of the Company's efforts to increase nongovernment
business. The gross profit margin on product revenues increased to 17% in
fiscal 1995 from 13% in fiscal 1994 as a result of more profitable contracts
in process during fiscal 1995, compared with fiscal 1994.
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
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<PAGE>
investment in Thermo Terra Tech and in February 1995 to fund the Company's
acquisition of Killam Associates was offset in part by higher average
investment balances.
FISCAL 1994 COMPARED WITH FISCAL 1993
Total revenues were $110.1 million in fiscal 1994, compared with
$104.9 million in fiscal 1993, an increase of 5%. Service revenues increased
9% to $94.3 million in fiscal 1994 from $86.3 million in fiscal 1993.
Remediation services contributed approximately $9.7 million of additional
revenues, while revenues from analytical and consulting services were
virtually unchanged from the prior year. The increase in revenues from
remediation services is primarily attributable to the first full year of
operations at three new soil-remediation centers and, to a lesser extent, the
November 1993 acquisition of Thermo Fluids. The increase in service revenues
is also due to the January 1994 acquisition of Terra Tech Labs, Inc., which
contributed revenues of $0.8 million. Metallurgical processing services
revenues declined approximately $1.4 million as a result of continued
slowdowns in the aerospace and defense industries.
"Contract revenues from related party" in fiscal 1994 and fiscal 1993
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.
Product revenues from sales of custom-engineering thermal-processing
systems were $15.0 million in fiscal 1994, compared with $16.9 million in
fiscal 1993. This business remains depressed. As a result of the continued
worldwide overcapacity in the automotive and heave-equipment industries,
recent increases in automobile sales have not generated corresponding
increases in capital spending on products such as those offered by the
Company's Holcroft division. In addition, the Company has encountered
significant competition in this business. As a result of these market
conditions, backlog declined to $3.5 million at April 2, 1994, from $6.7
million at April 3, 1993.
The gross profit margin increased to 24% in fiscal 1994 from 20% in
fiscal 1993. The gross profit margin on service revenues increased to 26% in
fiscal 1994 from 22% in fiscal 1993 due to higher gross profit margins from
remediation services and analytical and consulting services. The gross profit
margin on remediation services improved due primarily to an increase in the
volume of soil processed and operational efficiencies achieved through the
introduction of more automated and efficient remediation equipment during
fiscal 1994. Improvements from analytical and consulting services relate to
ongoing cost-containment programs. These increases were offset in part by
lower gross profit margins at the metallurgical processing services operations
as a result of a decline in revenues. The gross profit margin on product
revenues increased slightly to 13% in fiscal 1994 from 12% in fiscal 1993.
Despite reduced volume at the Company's Holcroft division, actions to reduce
costs have allowed the Company to improve its gross profit margin.
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<PAGE>
Selling, general and administrative expenses increased to $21.2
million in fiscal 1994 from $17.0 million in fiscal 1993 due to the operation
of six soil-remediation centers for the full year in fiscal 1994, compared
with four centers for the majority of fiscal 1993; the inclusion of $506,000
of Thermo Fluids' and Terra Tech Labs, Inc.'s selling, general and
administrative expenses; as well as expanded efforts for a national marketing
program and marketing efforts at planned remediation site locations.
"Costs associated with divisional restructuring" in fiscal 1994
represents a one-time noncash charge for the write-off of mobile
soil-remediation assets and other related expenses. The Company has decided to
no longer actively pursue mobile soil-remediation projects.
The Company recorded gains on the issuance of stock by subsidiaries
of $4.5 million in fiscal 1994 and $2.3 million in fiscal 1993.
Net interest income decreased to $0.6 million in fiscal 1994 from
$0.8 million in fiscal 1993, primarily as a result of lower prevailing
interest rates.
The Company recorded a tax benefit of $40,000 in fiscal 1994,
compared with a tax provision of $1.0 million in fiscal 1993.
During the first quarter of fiscal 1994, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which resulted in a cumulative tax benefit of $0.5 million.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital, including cash, cash equivalents, and
short-term available-for-sale investments, increased to $64.7 million at April
1, 1995 from $51.6 million at April 2, 1994. Cash, cash equivalents, and
short- and long-term available-for-sale investments were $51.5 million at
April 1, 1995, compared with $50.5 million at April 2, 1994. In addition, at
April 1, 1995, the Company had $22.6 million of long-term held-to-maturity
investments. Of the $51.5 million balance at April 1, 1995, $16.9 million was
held by the Company's majority-owned subsidiaries, $31.0 million was held by
the Thermo Terra Tech joint venture, and the remainder by the Company and its
wholly owned subsidiaries. In May 1994, the Company borrowed $15 million from
Thermo Electron to fund the Company's investment in Thermo Terra Tech. In
February 1995, the Company borrowed $38 million from Thermo Electron to fund
the Company's acquisition of Killam Associates. In connection with the
financing of acquisitions, Thermo Remediation issued to Thermo Electron a $4
million promissory note. During fiscal 1995, the Company expended $38.2
million, net of cash, for acquisitions. In September 1994 and October 1994,
the Company's J. Amerika subsidiary completed private placements of its common
stock for net proceeds of $2.4 million. In May 1994, the Company's Thermo
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<PAGE>
Remediation subsidiary completed a private placement of its common stock for
net proceeds of $0.7 million.
Subsequent to the end of fiscal 1995, the Company agreed to dissolve
the Thermo Terra Tech joint venture and to purchase from Thermo Instrument the
businesses formerly operated by the joint venture for $34.3 million in cash.
To fund the purchase, the Company borrowed $35 million from Thermo Electron
through the issuance of a promissory note due May 1997. Also subsequent to the
end of fiscal 1995, the Company acquired Lancaster Laboratories, Inc. and its
affiliate Clewmark Holdings for approximately $16.8 million in cash, plus the
assumption of approximately $5.4 million in bank indebtedness. The purchase
price is subject to a post-closing adjustment, yet in no event will the
aggregate purchase price exceed $25 million.
Also subsequent to the end of fiscal 1995, the Company's Thermo
Remediation subsidiary issued and sold in Europe $38 million principal amount
of 4 7/8% subordinated debentures due 2000 and convertible into shares of
Thermo Remediation common stock. In addition, Thermo Remediation sold 500,000
shares of its common stock in a private placement for net proceeds of
approximately $6.6 million. In June 1995, Thermo Remediation repaid its $4
million note payable to Thermo Electron with proceeds from the offering.
Although the Company has no material capital expenditure commitments,
such expenditures will largely be affected by the number of soil-remediation
centers that can be developed or acquired during the year, as well as
acquisitions of companies that are consistent with the Company's strategic
plan for growth. The Company believes that it has adequate resources to meet
the financial needs of its current operations for the foreseeable future.
<TABLE>
SELECTED FINANCIAL INFORMATION
<CAPTION>
(In thousands except
PER SHARE AMOUNTS) 1995(a) 1994(b) 1993 1992 1991
- ------------------ ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Income
Data:
Revenues $133,803 $110,131 $104,949 $103,019 $113,430
Income before
cumulative
effect of change
in accounting
principle 4,115 3,409 3,164 1,035 4,463
Net income 4,115 3,909 3,164 1,035 4,463
Earnings per share
before cumulative
effect of change
in accounting
principle .24 .20 .19 .06 .27
Earnings per share .24 .23 .19 .06 .27
- 106 -
<CAPTION>
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital $ 64,696 $ 51,612 $ 49,542 $ 53,481 $ 52,998
Total assets 271,673 155,434 134,114 129,230 130,473
Long-term
obligations 96,851 18,732 18,743 18,918 23,239
Shareholders'
investment 77,601 62,559 57,619 54,820 48,498
<FN>
(a) Reflects the acquisitions of RMC Environmental Services, Inc. in
August 1994 and Engineering, Technology and Knowledge Corporation
in February 1995 and the issuance of $53 million of long-term
promissory notes to Thermo Electron Corporation.
(b) Reflects Thermo Remediation Inc.'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."
</FN>
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</TABLE>
<PAGE>
Form 10-Q
December 30, 1995
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, encompassing a range of specializations
within the consulting and design, remediation and recycling, laboratory
testing, and metal-treating industries. 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 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 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, EuroTech acquired Refining and Trading Holland B.V. (North
Refinery), which specializes in converting "off-spec" and contaminated
petroleum fluids into usable oil products.
- 1 -
<PAGE>
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 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.
RESULTS OF OPERATIONS
THIRD QUARTER FISCAL 1996 COMPARED WITH THIRD QUARTER FISCAL 1995
Total revenues in the third quarter of fiscal 1996 increased 58% to
$54.9 million from $34.7 million in the third quarter of fiscal 1995.
Consulting and design services revenues were $17.9 million in fiscal 1996,
compared with $9.1 million in fiscal 1995. This increase results from the
inclusion of $10.2 million in revenues from Killam Associates, which was
acquired in February 1995, offset in part by a decline in revenues due to the
completion of a major contract in early fiscal 1995, and delays in contract
approval by state governments due to budget constraints. Revenues from
remediation and recycling services were $19.7 million in fiscal 1996, compared
with $15.9 million in fiscal 1995. The increase in revenues was primarily due
to the inclusion of $6.9 million in revenues from businesses acquired in
fiscal 1995 and 1996, and an increase of $0.8 million in revenues from a
long-term environmental restoration contract for the U.S. Department of
Energy's (DOE's) Hanford site (Hanford). These increases were offset in part
by lower soil-remediation services revenues resulting from competitive pricing
pressures and a decrease in the volume of soil processed as a result of the
ongoing regulatory uncertainties at two sites. Revenues from radiochemistry
laboratory work decreased, reflecting a reduction in spending at the DOE.
Revenues from laboratory testing services, excluding the radiochemistry
laboratory services included in remediation and recycling services, increased
to $9.8 million in fiscal 1996 from $2.5 million in fiscal 1995, reflecting
the inclusion of $8.2 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
$7.7 million in fiscal 1996 from $7.2 million in fiscal 1995, due primarily to
an increase in equipment sales.
The gross profit margin increased to 29% in the third quarter of
fiscal 1996 from 24% in the third quarter of fiscal 1995, due to the
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<PAGE>
inclusion of higher-margin revenues from Killam Associates, offset in part by
lower margins from remediation and recycling services revenues due primarily
to a lower gross profit margin associated with the newly acquired ReTec,
competitive pricing pressures, and a reduction in radiochemistry laboratory
work.
Selling, general and administrative expenses as a percentage of
revenues increased to 20% in the third quarter of fiscal 1996 from 15% in the
third quarter of fiscal 1995 due primarily to the inclusion of higher selling,
general and administrative expenses as a percentage of revenues at Killam
Associates.
Net interest expense was $1.6 million in the third quarter of
fiscal 1996, compared with net interest income of $219,000 in the third
quarter of fiscal 1995. This change resulted primarily from funds expended to
purchase the businesses formerly operated by the Thermo Terra Tech joint
venture from Thermo Instrument Systems Inc. (Thermo Instrument), as well as
Killam Associates and Lancaster Laboratories. These expenditures were made
from existing funds and borrowings from Thermo Electron Corporation (Thermo
Electron). In addition, interest expense increased in fiscal 1996 due to the
issuance of $38 million principal amount of 4 7/8% subordinated convertible
debentures by Thermo Remediation in May 1995.
As a result of the sale of stock by Thermo EuroTech, the Company
recorded a gain of $161,000 in the third quarter of fiscal 1995. The gain
represents an increase in the Company's proportionate share of the
subsidiary's equity and is classified as gain on issuance of stock by
subsidiaries in the accompanying statement of income.
The effective tax rate in the third quarter of fiscal 1996 was
higher than the statutory federal income tax rate due primarily to state
income taxes and the nondeductible amortization of cost in excess of net
assets of acquired companies. In fiscal 1995, the effective tax rate was less
than the statutory federal income tax rate due to the exclusion of income
taxed directly to a minority partner.
Minority interest expense decreased to $295,000 in the third
quarter of fiscal 1996 from $1.4 million in the third quarter of fiscal 1995
due primarily to the Company's purchase of the businesses formerly operated by
the Thermo Terra Tech joint venture from Thermo Instrument, effective April 2,
1995.
FIRST NINE MONTHS FISCAL 1996 COMPARED WITH FIRST NINE MONTHS FISCAL 1995
Total revenues in the first nine months of fiscal 1996 increased
68% to $158.5 million from $94.6 million in the first nine months of fiscal
1995. Consulting and design services revenues were $56.1 million in fiscal
1996, compared with $25.3 million in fiscal 1995. This increase results from
the inclusion of $30.5 million in revenues
- 3 -
<PAGE>
from Killam Associates, which was acquired in February 1995. Revenues from
remediation and recycling services were $52.2 million in fiscal 1996, compared
with $43.2 million in fiscal 1995. The increase in revenues was primarily due
to the inclusion of $11.3 million in revenues from businesses acquired in
fiscal 1995 and 1996, and an increase of $3.1 million in revenues from the
Hanford contract. These increases were offset in part by lower
soil-remediation services revenues resulting from a decrease in the volume of
soil processed as a result of regulatory uncertainties at several sites,
severe weather conditions at another site, and competitive pricing pressures.
Revenues from radiochemistry laboratory work decreased, reflecting a reduction
in spending at the DOE. Revenues from laboratory testing services, excluding
the radiochemistry laboratory services included in remediation and recycling
services, increased to $27.4 million in fiscal 1996 from $6.5 million in
fiscal 1995, reflecting the inclusion of $22.1 million in revenues from
Lancaster Laboratories, which was acquired in May 1995, offset in part by the
reasons discussed in the results of operations for the third quarter. Metal
treating revenues increased to $23.0 million in fiscal 1996 from $19.6 million
in fiscal 1995, due primarily to an increase in equipment sales.
The gross profit margin increased to 30% in the first nine months
of fiscal 1996 from 25% in the first nine months of fiscal 1995, due to the
inclusion of higher-margin revenues from Killam Associates, offset in part by
lower margins from remediation and recycling services revenues primarily due
to competitive pricing pressures, and a reduction in radiochemistry laboratory
work.
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 the first nine months of fiscal 1996 from 18% in
the first nine months of fiscal 1995 due primarily to the inclusion of higher
selling, general and administrative expenses as a percentage of revenues at
Killam Associates.
Net interest expense was $4.0 million in the first nine months of
fiscal 1996, compared with net interest income of $684,000 in the first nine
months of fiscal 1995, due to the reasons discussed in the results of
operations for the third quarter.
As a result of the sale of stock by Thermo Remediation in fiscal
1996 and 1995 and by Thermo EuroTech in fiscal 1995, the Company recorded
gains of $2,742,000 in the fist nine months of fiscal 1996 and $1,058,000 in
the first nine months of fiscal 1995. These gains
- 4 -
<PAGE>
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 rate in the first nine months of fiscal 1996 was
higher than the statutory federal income tax rate due primarily 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. In fiscal 1995, the effective tax rate was
less 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 $1.1 million in the first
nine months of fiscal 1996 from $3.9 million in the first nine months of
fiscal 1995 due primarily to the Company's purchase of the businesses formerly
operated by the Thermo Terra Tech joint venture.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital, including cash, cash equivalents, and
short-term available-for-sale investments, was $70.2 million at December 30,
1995, compared with $64.7 million at April 1, 1995. Cash, cash equivalents,
and short- and long-term available-for-sale investments were $46.1 million at
December 30, 1995, compared with $51.5 million at April 1, 1995. Of the $46.1
million balance at December 30, 1995, $37.0 million was held by Thermo
Remediation, $0.4 million by Thermo EuroTech, and the remainder by the Company
and its wholly owned subsidiaries. During the first nine months of fiscal
1996, the Company expended an aggregate of $77.4 million, net of cash
acquired, to purchase Lancaster Laboratories, ReTec, and the businesses
formerly operated by the Thermo Terra Tech joint venture from Thermo
Instrument. Changes in balance sheet accounts between April 1, 1995 and
December 30, 1995 primarily reflect the acquisitions of Lancaster Laboratories
and ReTec, and Thermo Remediation's issuance of subordinated convertible
debentures and private placement of common stock discussed below. In addition,
the Company expended $12.1 million on purchases of property, plant and
equipment primarily relating to two new soil-remediation sites under
construction. The Company plans to expend an additional $2.0 million on one of
these sites still under construction in the fourth quarter of fiscal 1996.
- 5 -
<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.
As of December 30, 1995, the Company had outstanding obligations to
Thermo Electron Corporation, through the issuance of promissory notes due
April 1996 through June 1997, of $88 million. 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.
Although the Company has no material capital expenditure commitments, except
as noted above, 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.
- 6 -
<PAGE>
Form 10-K
April 1, 1995
THERMO REMEDIATION INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is an environmental remediation company that operates a
network of soil-remediation centers that service customers in more than a
dozen states. At the soil-remediation centers, soil is thermally treated to
remove and destroy petroleum contamination caused by leaking underground
storage tanks, aboveground storage tanks, spills, and other sources. The
Company acquired sites in South Tacoma, Washington, and Baltimore County,
Maryland in October, 1994 and December 1994, respectively. Through its
November 1993 acquisition of Thermo Fluids, the Company also collects and
recycles used motor oil and provides services such as wastewater processing.
The Company's soil remediation business is effected by several
factors including enactment and enforcement of environmental legislation
regarding underground storage tanks, the availability of state funding for
environmental cleanup, economic cycles, and local competition. Since the
soil-remediation centers compete in a local area, these factors vary from site
to site.
RESULTS OF OPERATIONS
FISCAL 1995 COMPARED WITH FISCAL 1994
Total revenues in fiscal 1995 were $29,871,000, compared with
$23,945,000 in fiscal 1994. Service revenues increased 28% to $29,871,000 in
fiscal 1995 from $23,339,000 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 a
lesser extent, additional revenues of $3,805,000 from businesses acquired in
late fiscal 1994 and in fiscal 1995. These increases were offset in part by
competitive pricing pressures at several of the Company's centers.
"Revenues from related party" in fiscal 1994 and 1993 represent
reimbursements for services provided by the Company under an agreement between
Thermo Electron Corporation (Thermo Electron) and Thermo Process Systems, Inc.
(Thermo Process) 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
- 7 -
<PAGE>
"New business development expenses" in the accompanying statement of
income.
The gross profit margin on service revenues was 41% in fiscal 1995,
compared with 42% in fiscal 1994. The decline was due primarily to competitive
pricing pressures at several of the Company's soil-remediation centers.
Selling, general and administrative expenses as a percentage of
service revenues decreased 21% in fiscal 1995 from 23% 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 investment balances.
Interest expense in both 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 Process 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. "Interest expense,
related party" in fiscal 1994 also includes interest on the $2,000,000
promissory note issued to Thermo Process in December 1992 in connection with
the Company's acquisition of soil-remediation centers in South Carolina. The
Company repaid the $2,000,000 promissory note in full in October 1993.
FISCAL 1994 COMPARED WITH FISCAL 1993
Total revenues in fiscal 1994 were $23,945,000, compared with
$15,371,000 in fiscal 1993. Service revenues increased 67% to $23,339,000 in
fiscal 1994 from $14,002,000 in fiscal 1993. The increase in service revenues
was primarily due to additional revenues from the Company's soil-remediation
centers in Southern California and Florida, which started operation late in
the first and second quarters of fiscal 1993, respectively. The increase was
also due, to a lesser extent, to the December 1992 acquisition of a
soil-remediation center in Portland, Oregon and the November 1993 acquisition
of Thermo Fluids, which together contributed additional revenues of $4,169,000
in fiscal 1994. These increases were offset in part by lower revenues from the
Company's soil-remediation centers in Virginia and South Carolina.
"Revenues from related party" in fiscal 1994 and 1993 represent
reimbursements for services provided by the Company under an agreement between
Thermo Electron and Thermo Process discussed above.
The gross profit margin on service revenues increased to 42% in
- 8 -
<PAGE>
fiscal 1994 from 36% in fiscal 1993, due primarily to an increase in the
volume of soil remediated and operational efficiencies achieved through the
introduction of more automated and efficient remediation equipment during
fiscal 1994.
Selling, general and administrative expenses increased to
$5,268,000 in fiscal 1994 from $1,983,000 in fiscal 1993, due to the operation
of six soil-remediation centers for the full year in fiscal 1994, compared
with four centers for the majority of fiscal 1993; the inclusion of $386,000
of Thermo Fluids' selling, general and administrative expenses; and expanded
efforts for a national marketing program and marketing efforts at planned
remediation center locations.
Interest income increased to $443,000 in fiscal 1994 from $136,000
in fiscal 1993 as a result of higher average investment balances following
private placements and the initial public offering of the Company's common
stock. Interest expense of $73,000 in fiscal 1994 and $18,000 in fiscal 1993
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. "Interest expense, related party"
includes interest on a $2,000,000 promissory note issued to Thermo Process in
December 1992 in connection with the Company's acquisition of soil-remediation
centers in South Carolina. The Company repaid the $2,000,000 promissory note
in full in October 1993. In fiscal 1994, "Interest expense, related party"
also includes interest on a $2,650,000 subordinated convertible note issued to
Thermo Process in November 1993 in connection with the Company's acquisition
of Thermo Fluids.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Working capital, including cash, cash equivalents, and short-term
available-for-sale investments, decreased to $1,665,000 at April 1, 1995 from
$12,764,000 at April 2, 1994. Cash, cash equivalents, and short- and long-term
available-for-sale investments were $15,925,000 at April 1, 1995, compared
with $22,933,000 at April 2, 1994. During fiscal 1995, the Company expended
$13,391,000 for acquisitions. In March 1995, the Company repaid the remaining
balance of $975,000 of short-term notes payable. In connection with the
financing of acquisitions completed during fiscal 1995, the Company issued to
Thermo Electron a $4,000,000 promissory note due June 1995. In June 1995, the
Company repaid the note in full. In May 1994, the Company completed a private
placement of 75,000 shares of common stock for net proceeds of $715,000.
Subsequent to year end, the Company issued and sold in Europe $37,950,000
principal amount of 4 7/8% subordinated convertible debentures due 2000. In
addition, the Company sold 500,000 shares of its common stock in a private
placement for net proceeds of approximately $6,600,000.
- 9 -
<PAGE>
<TABLE>
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
<CAPTION>
(In thousands except
PER SHARE AMOUNT) 1995(a) 1994(b)(c) 1993d) 1992(e) 1991(f)
- -------------------- ------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Income
Data:
Revenues $29,871 $23,945 $15,371 $ 5,793 $ 2,111
Income (loss)
before cumulative
effect of change
in accounting
principle 3,643 2,510 1,868 (75) (1,888)
Net income (loss) 3,643 2,567 1,868 (75) (1,888)
Earnings per share 0.36
Balance Sheet Data:
Working capital $ 1,665 $12,764 $ 7,001 $ 3,212 $ 1,431
Total assets 68,019 58,748 33,294 15,022 12,562
Long-term
obligations 2,650 2,650 - - -
Shareholders'
investment 52,607 47,638 26,600 13,161 11,336
Other Data:
Cash dividends
declared $ 2,012 $ 2,127 $ 1,586 $ 69 $ 62
<FN>
(a) Includes the October 1994 acquisition of TPST Woodworth and the
December 1994 acquisition of TPST Maryland.
(b) Reflects the December 1993 initial public offering of the Company's
common stock for net proceeds of $13,505,000, and the November 1993
acquisition of Thermo Fluids and issuance of a $2,650,000 principal
amount 3.875% subordinated convertible note.
(c) Reflects the adoption of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities."
(d) Includes 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 that
opened in fiscal 1993.
- 10 -
<PAGE>
(e) Includes operations from the Company's center in Chester,
Virginia that opened in fiscal 1992.
(f) Includes revenues from Thermo Process relating to the management
and operation of its mobile soil-remediation business and the
operations from the Company's first facility, originally opened in
Sumter, South Carolina in fiscal 1991.
</FN>
- 11 -
</TABLE>
<PAGE>
Form 10-Q
December 30, 1995
THERMO REMEDIATION INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is an environmental remediation company that operates a
network of soil-remediation centers serving customers in more than a dozen
states. At the soil-remediation centers, soil is thermally treated to remove
and destroy petroleum contamination caused by leaking underground storage
tanks, aboveground storage tanks, spills, and other sources. The Company
acquired sites in South Tacoma, Washington, and Baltimore County, Maryland, in
October 1994 and December 1994, respectively. Through its Thermo Fluids
subsidiary, the Company also collects and recycles used motor oil and provides
services such as wastewater processing. Through its Thermo Nutech subsidiary,
the Company provides services to remove radioactive contaminants from sand,
gravel, and soil, as well as health physics services, radiochemistry
laboratory services, radiation dosimetry services, and other services. In
December 1995, the Company acquired Remediation Technologies, Inc. (ReTec),
which provides integrated environmental services such as remediation of
industrial sites contaminated with organic wastes and residues. ReTec brings
particular experience in managing wastes from manufactured-gas plants and
refineries, and bioremediation technology, to the Company's expanding array of
services.
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, weather, and local competition. Since
the soil-remediation centers compete locally, these factors vary from site to
site. The Thermo Nutech and ReTec businesses are affected by several factors,
most particularly, extreme weather variations, government spending, and
deregulation of remediation activities.
RESULTS OF OPERATIONS
THIRD QUARTER FISCAL 1996 COMPARED WITH THIRD QUARTER FISCAL 1995
Revenues in the third quarter of fiscal 1996 were $16,308,000,
compared with $13,933,000 in the third quarter of fiscal 1995, an increase of
17%. Revenues increased primarily due to the inclusion of $4,084,000 in
revenues from ReTec, which was acquired in December 1995, and the inclusion of
$1,479,000 in revenues from other businesses acquired in fiscal 1995. These
increases were offset in part by lower
- 12 -
<PAGE>
revenues from the Company's soil-remediation services resulting from
competitive pricing pressures and a decrease in the volume of soil processed
as a result of ongoing regulatory uncertainties at two sites. Revenues from
nuclear services decreased primarily due to a decrease in radiochemistry
laboratory work, reflecting a reduction in spending at the U.S. Department of
Energy (DOE) and increased competition and, to a lesser extent, lower revenues
from health physics services. These decreases were offset in part by higher
revenues from a long-term environmental restoration contract for the DOE
Hanford site (Hanford), which began in the second quarter of fiscal 1995.
The gross profit margin decreased to 28% in the third quarter of
fiscal 1996 from 35% in the third quarter of fiscal 1995. The decrease in
gross profit margin was due in part to a lower gross profit margin associated
with the newly acquired ReTec and, to a lesser extent, lower gross profit
margins on soil-remediation and fluids-recycling services revenues primarily
due to competitive pricing pressures, offset in part by operational savings.
The gross profit margin on nuclear services revenues decreased primarily due
to lower revenues from higher-margin radiochemistry laboratory work and health
physics services and, to a lesser extent, a lower gross profit margin
associated with revenues from the Hanford contract.
Selling, general and administrative expenses as a percentage of
revenues decreased to 12% in the third quarter of fiscal 1996 from 16% in the
third quarter of fiscal 1995, due to an increase in total revenues and, to a
lesser extent, operational efficiencies, including work force reductions.
Interest income increased to $642,000 in the third quarter of
fiscal 1996 from $256,000 in the third quarter of fiscal 1995 as a result of
higher average invested balances following the issuance of subordinated
convertible debentures and a private placement of 500,000 shares of the
Company's stock in May 1995. Interest expense increased to $543,000 in fiscal
1996 from $43,000 in fiscal 1995 primarily due to the issuance of the
subordinated convertible debentures in May 1995.
Minority interest expense in fiscal 1995 represents Thermo Nutech's
net income which was allocated to its joint venture partner.
FIRST NINE MONTHS FISCAL 1996 COMPARED WITH FIRST NINE MONTHS FISCAL 1995
Revenues in the first nine months of fiscal 1996 were $43,955,000,
compared with $38,033,000 in the first nine months of fiscal 1995, an increase
of 16%. Revenues increased primarily due to the inclusion of $10,133,000 in
revenues from businesses acquired during fiscal 1995 and 1996. This increase
was offset in part by lower revenues from the Company's soil-remediation
services resulting from a decrease in the volume of soil processed as a result
of ongoing regulatory uncertainties at several sites, severe weather
conditions at
- 13 -
<PAGE>
another site, and competitive pricing pressures. Revenues from nuclear
services increased due to revenues from the Hanford site and, to a lesser
extent, higher revenues from health physics services, offset in part by a
decrease in radiochemistry laboratory work, reflecting a reduction in spending
at the DOE.
The gross profit margin decreased to 29% in the first nine months
of fiscal 1996 from 35% in the first nine months of fiscal 1995. The gross
profit margin on soil-remediation and fluids-recycling services revenues
decreased primarily due to competitive pricing pressures, offset in part by
operational savings. The gross profit margin on nuclear services revenues
decreased primarily due to lower revenues from high-margin radiochemistry
laboratory work.
Selling, general and administrative expenses as a percentage of
revenues decreased to 14% in the first nine months of fiscal 1996 from 16% in
the first nine months of fiscal 1995, due to an increase in total revenues
and, to a lesser extent, operational efficiencies, including work force
reductions.
Interest income increased to $1,970,000 in the first nine months of
fiscal 1996 from $781,000 in the first nine months of fiscal 1995 as a result
of higher average invested balances following the issuance of subordinated
convertible debentures and shares of the Company's stock in May 1995. Interest
expense increased to $1,457,000 in fiscal 1996 from $128,000 in fiscal 1995
due primarily to the issuance of the subordinated convertible debentures in
May 1995 and, to a lesser extent, the issuance of a $4,000,000 note payable to
Thermo Electron Corporation (Thermo Electron) in December 1994 in connection
with acquisitions. The Company repaid the $4,000,000 note payable in full in
June 1995.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Working capital, including cash, cash equivalents, and short-term
available-for-sale investments, increased to $46,294,000 at December 30, 1995
from $3,384,000 at April 1, 1995. Cash, cash equivalents, and short- and
long-term available-for-sale investments were $37,001,000 at December 30,
1995, compared with $16,511,000 at April 1, 1995. Changes in balance sheet
accounts between April 1, 1995 and December 30, 1995 primarily reflect the
acquisition of ReTec, and the Company's issuance of subordinated convertible
debentures and private placement of common stock discussed below. During the
nine months ended December 30, 1995, the Company expended $17,713,000, net of
cash acquired, for the acquisition of ReTec and $6,615,000 for purchases of
property, plant and equipment, primarily relating to two soil-remediation
sites under construction. The Company expects to expend an additional
$2,000,000 on one of the sites still under construction during the fourth
quarter of fiscal 1996.
- 14 -
<PAGE>
In May 1995, the Company issued and sold $37,950,000 principal
amount of 4 7/8% subordinated convertible debentures due 2000. In addition,
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 the $4,000,000
note payable to Thermo Electron with proceeds from the offerings.
Although the Company has no material commitments for capital
expenditures, except as noted above, such expenditures will largely be
affected by the number and size of complementary businesses, including
soil-remediation centers and fluid-collection businesses, that can be acquired
or developed during the year, as well as the capital requirements of the
nuclear services businesses. The Company believes that it has adequate
resources to meet its financial needs for the foreseeable future.
- 15 -
<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.
- 16 -
<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 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
- 17 -
<PAGE>
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.
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,
- 18 -
<PAGE>
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 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
- 19 -
<PAGE>
expects to make capital expenditures of approximately $4,500,000. The Company
believes its existing resources are sufficient to met the capital requirements
of its existing operations for the foreseeable future.
- 20 -
<PAGE>
<TABLE>
SELECTED FINANCIAL INFORMATION
(In thousands
except per
SHARE AMOUNTS) 1995(a) 1994(b) 1993(c) 1992 1991
- -------------- ------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C>
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
<FN>
(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.
</FN>
- 21 -
</TABLE>
<PAGE>
Form 10-Q
December 30, 1995
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
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 also conducts research and development on applications of
thermal 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 for the three-month
periods ended December 30, 1995 and December 31, 1994, are shown in the
following table.
<TABLE>
THREE MONTHS ENDED
- 22 -
<PAGE>
(IN THOUSANDS) DECEMBER 30, 1995 DECEMBER 3, 1994
- -------------- ----------------- ----------------
<S> <C> <C>
Industrial Refrigeration
Systems $17,071 $14,178
Engines 7,253 5,155
Cooling and Cogeneration
Systems 3,610 3,380
Intersegment sales
elimination (482) (399)
----- -----
$27,452 $22,314
====== ======
</TABLE>
RESULTS OF OPERATIONS
FIRST QUARTER FISCAL 1996 COMPARED WITH FIRST QUARTER FISCAL 1995
Total revenues increased 23% to $27,452,000 in the first quarter of
fiscal 1996 from $22,314,000 in the first quarter of fiscal 1995. Industrial
Refrigeration Systems segment revenues increased 20% to $17,071,000 in 1996
from $14,178,000 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 competition in the
refrigeration industry and lower demand for screw compressor packages.
Revenues at NuTemp decreased by $405,000 due to generally lower temperatures
in fiscal 1996 compared with fiscal 1995, which resulted in lower demand for
rental equipment and remanufactured equipment. Engines segment revenues
increased 41% to $7,253,000 in 1996 from $5,155,000 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
$908,000 in revenues from marine-engine related products. Cooling and
Cogeneration Systems segment revenues increased 7% to $3,610,000 in 1996 from
$3,380,000 in 1995 primarily due to an increase in revenues from gas-fueled
cooling systems and, to a lesser extent, packaged cogeneration systems.
Results for the Cooling and Cogeneration Systems segment in 1995 include an
$875,000 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 quarter of
fiscal 1996 from 24% in the first quarter of fiscal 1995. The gross profit
margin for the Industrial Refrigeration Systems segment decreased to 21% in
1996 from 25% in 1994. The decrease is primarily due to lower prices at FES
resulting from increased competition in the refrigeration industry, higher
warranty expenses at FES in 1996 compared with unusually low warranty expenses
in 1995 and, to a lesser
- 23 -
<PAGE>
extent, lower revenues at NuTemp. In the second quarter of fiscal 1996, a cost
increase in one of the major components of the Company's industrial
refrigeration packages will take effect. The gross profit margin for the
Engines segment decreased to 5% in 1996 from 12% in 1995 primarily due to
higher warranty expenses in 1996 compared with 1995 and, to a lesser extent,
startup costs associated with the introduction of lift-truck engines. This
higher level of warranty expense is expected to continue into the second
quarter of fiscal 1996. The gross profit margin for the Cooling and
Cogeneration Systems segment decreased to 24% in 1996 from 32% 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 quarter of fiscal 1996 from 17% in the
first quarter of fiscal 1995 primarily due to an increase in total revenues.
Research and development expenses increased to $738,000 in 1996 from $530,000
in 1995 primarily due to development costs associated with gas-fueled lighting
products and, to a lesser extent, natural gas-engine products.
Interest income increased to $437,000 in the first quarter of fiscal
1996 from $300,000 in the first quarter of fiscal 1995, reflecting interest
income earned on the proceeds from ThermoLyte's March 1995 private placement.
The Company holds certain investments in companies affiliated with Thermo
Electron Corporation (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, in 1996 primarily represents a gain of $344,000 relating to
the sale of the Company's remaining investment in Thermo Electron common
stock. As of December 30, 1995, the Company owned $426,000 of 6.5%
subordinated convertible debentures due 1997 issued by Thermo TerraTech Inc.
(formerly Thermo Process Systems Inc.) that were purchased for $365,000.
Thermo TerraTech Inc. is a majority-owned subsidiary of Thermo Electron. The
Company may sell these investments from time to time in the future.
The effective tax rate was 38% in the first quarters of fiscal 1996
and 1995. 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 $58,445,000 at December 30, 1995, compared with
$60,140,000 at September 30, 1995. Included in working capital are cash, cash
equivalents, and available-for-sale investments of $33,800,000 at December 30,
1995, compared with $34,170,000 at September 30, 1995. Of the $33,800,000
balance at December 30, 1995, $17,337,000 was held by ThermoLyte and the
remainder was held by the
- 24 -
<PAGE>
Company and its wholly owned subsidiaries. During the first three months of
fiscal 1996, $43,000 of cash was used in operating activities primarily due to
a decrease in accounts payable. During the first quarter of fiscal 1996, the
Company acquired the thermoelectrics cooling module business of ThermoTrex
Corporation, a majority-owned subsidiary of Thermo Electron. The purchase
price has not yet been finalized, but will be equal to the net book value of
the assets transferred, currently estimated to be approximately $800,000.
During the remainder of fiscal 1996, the Company expects to make capital
expenditures of approximately $4,100,000, 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.
- 25 -
<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,
<PAGE>
from $66.0 million in fiscal 1994. Medical and Personal-care 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,
<PAGE>
resulting from the decision to close the Company's division 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
approximately $10.3 million, $10.8 million, $9.0 million and $4.2
<PAGE>
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.
The Company recorded restructuring expenses of $0.7 million in 1994,
resulting from the decision to close the Company's
<PAGE>
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.
<PAGE>
<TABLE>
SELECTED FINANCIAL INFORMATION
<CAPTION>
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:
<S> <C> <C> <C> <C> <C> <C>
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 9,602 495 252
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
<FN>
(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.
</FN>
</TABLE>
<PAGE>
- 26 -
<PAGE>
Form 10-Q
December 30, 1995
THERMOTREX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DESCRIPTION OF BUSINESS
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 began earning revenues from the SoftLight system in the first quarter
of fiscal 1996, as a result of opening its first commercial outlet (Spa Thira)
in La Jolla, California, in October 1995, and treating paying clients
beginning in mid-November 1995. The Company is operating its first spa below
maximum capacity as it refines the commercial operating procedures at the
center. Through ThermoLase's wholly owned CBI Laboratories, Inc. (CBI)
subsidiary, the Company manufactures skin-care, bath and body 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. In
describing the results of operations below, the three-month period ended
December 30, 1995 is referenced as fiscal 1996, and the three-month period
ended December 31, 1994 is referenced as fiscal 1995.
THREE MONTHS ENDED DECEMBER 30, 1995 COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1994
Total revenues increased 72% to $43.1 million in fiscal 1996 from
- 27 -
<PAGE>
$25.1 million in fiscal 1995. Medical and Personal-care Products segment
revenues increased to $39.6 million in fiscal 1996 from $21.0 million in
fiscal 1995. Revenues from Trex Medical's Bennett subsidiary, acquired in
September 1995, were $11.2 million in fiscal 1996. In addition, revenues at
Lorad increased 39% to $21.1 million in fiscal 1996 from $15.2 million in
fiscal 1995 as a result of increased demand for mammography and biopsy
systems. Lorad's revenues from Philips Medical Systems North America were $4.1
million in fiscal 1996, compared with $1.7 million in fiscal 1995. Revenues at
ThermoLase's CBI subsidiary increased to $7.3 million in fiscal 1996 from $5.8
million in fiscal 1995 due principally to an increase in demand for the
Company's skin-care and other personal-care products. In October 1995,
ThermoLase opened its first Spa Thira salon in La Jolla, California. During
the three months ended December 30, 1995, the Company collected $295,000 from
Spa Thira clients and recognized $58,000 in revenue from initial treatments.
Under the current pricing structure, spa clients pay a fixed fee in advance to
receive a series of treatments, as necessary. Consequently, the Company has
deferred recognition of $237,000, to be recognized over the anticipated
treatment period. As the Company collects further data concerning the duration
of the treatment period and number of treatments required, the period of
revenue recognition may be affected. Advanced Technology Research and Product
Development segment revenues decreased to $3.5 million in fiscal 1996 from
$4.1 million in fiscal 1995 due primarily to the closing of the Company's
facility in Waltham, Massachusetts, and, to a lesser extent, lower funding
levels for the Company's government-sponsored research and development
contracts. The Company estimates that revenues from the Advanced Technology
Research and Product Development segment will continue to decline as a
percentage of total revenues.
In January 1996, Thermolase entered into a joint venture agreement,
which is subject to certain conditions, to market is SoftLight hair-removal
process in Japan. ThermoLase will initially hold a 50% stake in the venture
with an option to increase its ownership to 51%. The agreement calls for
ThermoLase to receive minimum guaranteed payments of $2 million during the
remainder of fiscal 1996 and $1 million in fiscal 1997, subject to certain
conditions.
The gross profit margin for the Medical and Personal-care Products
segment declined to 41% in fiscal 1996 from 46% in fiscal 1995 due in
part to the inclusion of lower-margin revenues of Bennett. The gross
profit margin on revenues at the Company's CBI subsidiary was lower due
to an increase in the price of raw materials and shift to higher-
volume, lower-margin products. The
gross profit margin for the Advanced Technology Research and Product
Development segment was 12% in fiscal 1996, compared with 27% in fiscal 1995,
as a result of a shift to lower-margin contracts and a reduction in revenues.
- 28 -
<PAGE>
Selling, general and administrative expenses as a percentage of
revenues declined to 24% in fiscal 1996 from 25% in fiscal 1995 due to
increased revenues at Lorad and, to a lesser extent, CBI. Research and
development expenses increased to $4.8 million in fiscal 1996 from $4.5
million in fiscal 1995, reflecting the Company's continued efforts to develop
and commercialize new products, particularly the full-breast digital
mammography system, the passive microwave camera, the SoftLight system, and
advanced-materials technology.
Interest income increased to $1.4 million in fiscal 1996 from $1.0
million in fiscal 1995 as a result of interest earned on the proceeds from the
August 1995 public offering of ThermoLase common stock and the November 1995
private placement of Trex Medical common stock. These increases were partially
offset by the effect of lower invested balances due to cash expended for the
acquisition of Bennett. Interest expense in fiscal 1996 is associated with the
Company's $8,000,000 note payable to Thermo Electron, issued in September
1995.
During fiscal 1996, the Company recorded a gain on issuance of stock
by subsidiary of $12,770,000 in connection with the November 1995 private
placement of Trex Medical.
The effective tax rates in fiscal 1996 and fiscal 1995 differ from
the statutory federal income tax rate due to the nontaxable gain on issuance
of subsidiary stock in fiscal 1996, and nondeductible amortization of cost in
excess of net assets of acquired companies and the impact of state income
taxes in both periods.
The owner of a U.S. patent entitled "Method and Structure for
Optimizing Radiographic Quality by Controlling X-Ray Tube Voltage, Current
Focal Spot Size and Exposure Time" has claimed that Lorad's and Bennett's
mammography systems infringe this patent. The patent owner has offered a
non-exclusive license under the patent on terms not acceptable to the Company.
Although the Company believes that its products do not infringe any valid
claim of this patent, given the complexities of patent disputes the Company
cannot predict the outcome of this matter.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $121.4 million at December 30, 1995, compared
with $103.6 million at September 30, 1995. Included in working capital are
cash, cash equivalents, and available-for-sale investments of $105.0 million
at December 30, 1995, compared with $87.1 million at September 30, 1995. Of
the $105.0 million balance at December 30, 1995, $63.5 million was held by
ThermoLase, $21.3 million was held by Trex Medical, and the remainder was held
by the Company and its wholly owned subsidiaries.
- 29 -
<PAGE>
During the three months ended December 30, 1995, operating activities
provided $1.3 million of cash, and the Company expended $1.7 million for
purchases of property, plant and equipment. In November 1995, 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.
During the three months ended December 30, 1995, the Company sold two
businesses to majority-owned subsidiaries of Thermo Electron. The purchase
prices for these transactions have not been finalized, but will be equal to
the net book value of the assets transferred, currently estimated to be an
aggregate of approximately $1,100,000. These businesses were not material to
the Company's results of operations or financial position.
- 30 -
<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.
The gross profit margin was 35% in fiscal 1995, compared with 42%
- 31 -
<PAGE>
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.
- 32 -
<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.
- 33 -
<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.
- 34 -
<PAGE>
<TABLE>
SELECTED FINANCIAL INFORMATION
<CAPTION>
(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)
<S> <C> <C> <C> <C> <C> <C>
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 -
- 35 -
<FN>
<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.
- 36 -
</FN>
</TABLE>
<PAGE>
Form 10-Q
December 30, 1995
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 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 began earning revenue from the
SoftLight system in the first quarter of fiscal 1996, as a result of opening
its first commercial outlet (Spa Thira) in La Jolla, California, in October
1995 and treating paying clients beginning in mid-November 1995. The Company
is operating its first spa below maximum capacity 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 Glycolique 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.
THREE MONTHS ENDED DECEMBER 30, 1995 COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1994
Revenues increased 27% to $7,400,000 in the three months ended
December 30, 1995, from $5,804,000 in the three months ended December 31,
1994, primarily due to an increase in the demand for the Company's skin-care
and other personal-care products and, to a lesser extent, the inclusion of
$354,000 in additional revenues from Marcor, which was acquired in November
1994. In October 1995, the Company opened its first Spa Thira salon in La
Jolla, California. During the three months ended December 30, 1995, the
Company collected $295,000 from Spa Thira clients and recognized $58,000 in
revenue from initial treatments. Under the current pricing structure, spa
clients pay a fixed fee in advance to receive a series of treatments, as
necessary. Consequently, the Company has deferred recognition of $237,000, to
be recognized over the anticipated treatment period. As the Company collects
further data concerning the duration of the treatment period and umber of
treatments required, the
- 37 -
<PAGE>
period of revenue recognition may be affected.
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 will initially hold a 50% stake in the venture
with an option to increase its ownership to 51%. The agreement calls for the
Company to receive minimum guaranteed payments of $2 million during the
remainder of fiscal 1996 and $1 million in fiscal 1997, subject to certain
conditions.
The gross profit margin in the three months ended December 30, 1995
was 30%, compared with 43% in the three months ended December 31, 1994. The
decline in the gross profit margin in fiscal 1996 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 to higher-volume,
lower-margin products. The Company is addressing this decline by instituting
cost reduction strategies and increasing prices on certain of the Company's
products. In addition, the decline in the gross profit margin resulted from
the startup of the first Spa Thira, as the Company hired staff and established
an infrastructure in anticipation of its opening. 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
$2,599,000 in the three months ended December 30, 1995, from $1,970,000 in the
three months ended December 31, 1994, primarily due to costs related to
setting up a personal-care service organization, including the hiring of
senior management and administrative staff, as well as the cost of filing
patents.
Research and development expenses declined to $525,000 in the three
months ended December 30, 1995 from $623,000 in the three months ended
December 31, 1994 due to the completion of certain clinical studies related to
the SoftLight system. Research and development expenditures are expected to
increase above current levels for the remainder of fiscal 1996, as the Company
continues to optimize the hair-removal process, conduct studies of the
laser-based skin-rejuvenation system, and improve laser performance.
Interest income increased to $938,000 in the three months ended
December 30, 1995 from $182,000 in the three months ended December 31, 1994,
primarily as a result of the interest earned on the proceeds from the
Company's August 1995 public offering of common stock.
The effective tax rates in fiscal 1996 and fiscal 1995 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.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
- 38 -
<PAGE>
Working capital was $68,019,000 at December 30, 1995, compared with
$68,691,000 at September 30, 1995. Included in working capital are cash, cash
equivalents, and available-for-sale investments of $63,489,000 at December 30,
1995, compared with $65,440,000 at September 30, 1995. The decline in cash,
cash equivalents, and available-for-sale investments is due principally to
higher accounts receivable to support the higher sales level for the Company's
skin-care and other personal-care products and services.
Subsequent to December 30, 1995, the Company placed an order with
the Lorad division of Trex Medical Corporation, a majority-owned subsidiary of
ThermoTrex, for the purchase of 60 SoftLight Laser systems for $70,000 each,
and is negotiating for the purchase of additional lasers. The Company
purchased five such laser systems for $70,000 each in fiscal 1995 and five
more at the same price during the first quarter of fiscal 1996.
The Company has recently signed leases in Dallas and Beverly Hills,
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. 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.
- 39 -
<PAGE>
Private Placement
July 1, 1995
TREX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1995 COMPARED WITH FIRST SIX MONTHS OF 1994
Revenues represent sales from Lorad's mammography, needle-biopsy,
digital spot mammography and other X-ray products. Revenues increased 33% to
$33,298,000 in the first six months of 1995 from $25,100,000 in the first six
months of 1994. The increase resulted from higher sales across all product
lines, with significant growth coming from international sales through the
Company's OEM agreement with Philips Medical Systems North America Company
(Philips). Revenues from Philips were $6.5 million in the first six months of
1995, compared with $2.1 million for the first six months of 1994. Under the
agreement with Philips, Lorad will receive minimum orders to develop and
market two imaging system product lines totaling $40 million over a five-year
period that began in January 1994, subject to certain conditions. Exports of
mammography and biopsy systems accounted for 21% of Lorad's revenues in the
first six months of 1995, compared with 11% in the first six months of 1994.
The gross profit margin remained unchanged at 50% for the first six
months of 1995 and 1994.
Selling, general and administrative expenses as a percentage of
revenues declined to 23% in the first six months of 1995, compared with 26% in
the first six months of 1994, due primarily to an increase in total revenues.
Research and development expenses increased to $5,057,000 in the first six
months of 1995 from $4,554,000 in the first six months of 1994 as the Company
continued efforts to commercialize new products, particularly its full-view
digital mammography system and the laser to be sold to ThermoLase Corporation
for use in ThermoLase's hair-removal system.
The effective tax rate in the first six months of 1995 was 45%,
compared with 57% in the first six months of 1994. These rates exceed the
federal statutory rate due primarily to state income taxes and nondeductible
amortization of "Cost in excess of net assets of acquired company." Such
amortization had a greater effect on the effective tax rate in 1994 due to
lower income before income taxes.
1994 COMPARED WITH 1993
Revenues increased 45% to $54,410,000 in 1994 from $37,519,000 in
- 40 -
<PAGE>
1993. The increase resulted from the start of OEM sales under the Philips
agreement, an increase in digital spot mammography sales and increases in
StereoGuide needle-biopsy, mammography and industrial imaging equipment due to
increased demand. Export sales of mammography and biopsy systems accounted for
13% of revenues in 1994, compared with 10% of revenues in 1993. Revenues from
Philips were $5,813,000 in 1994 which includes $1,605,000 of export sales.
There were no revenues from Philips in 1993.
The gross profit margin declined to 49% in 1994, compared with 50%
in 1993 due to a change in sales mix.
Selling, general and administrative expenses as a percentage of
revenues declined to 25% in 1994 from 27% in 1993 due primarily to an increase
in total revenues. Research and development expenses increased to $10,260,000
in 1994 from $6,982,000 in 1993 reflecting the Company's continued efforts to
develop and commercialize the full-view digital mammography 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 rate for reasons discussed in
the results for the six months periods.
1993 COMPARED WITH 1992
Revenues of $37,519,000 for 1993 represent the first full year of
revenues from the Company's Lorad division. Revenues of $4,128,000 for 1992
represent seven weeks of Lorad's operations from its acquisition on November
17, 1992.
The gross profit margin was 50% in 1993 and 48% in 1992. The 1992
results included a nonrecurring adjustment to expense $225,000 of inventory
revalued at the time of Lorad's acquisition by the Company.
Selling, general and administrative expenses of $10,146,000 for
1993 represent a full year of Lorad's operations compared with $1,372,000 for
seven weeks of Lorad's operations and the full year of the Company's other
operations in 1992. Research and development expense increased to $6,982,000
in 1993, compared with $1,338,000 in 1992, reflecting the Company's continued
efforts to develop and commercialize the Sonic CTTM medical imaging device and
the full-view digital mammography system, as well as the inclusion of a full
year of Lorad's expenses in 1993, compared with seven weeks of expenses in
1992.
The effective tax rate in 1993 was 54%, compared with a benefit of
27% in 1992. The rate in 1993 exceeds the federal statutory rate for the
reasons discussed in the results for the six month periods.
LIQUIDITY AND CAPITAL RESOURCES
- 41 -
<PAGE>
Working capital was $10,072,000 at July 1, 1995, compared with
$8,469,000 at December 31, 1994. An increase in accounts receivable resulting
from the higher sales level was more than offset by increased payables and
accrued expenses. Capital expenditures were $515,000 for the first six months
of 1995. During the remainder of 1995, the Company plans to make expenditures
of approximately $500,000 for property, plant and equipment.
In connection with the acquisition of Bennett in September 1995,
the Company issued a $42,000,000 convertible debenture to ThermoTrex
Corporation. The debenture matures on December 31, 2000, bears interest at a
rate of 4.2% per annum and is convertible into shares of Common Stock at a
price of $11.79 per share.
- 42 -
<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 warranty reserves for certain
large de-inking projects was largely offset by an increase in margins at the
Company's North American accessories business.
- 43 -
<PAGE>
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 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
- 44 -
<PAGE>
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. (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.
<TABLE>
SELECTED FINANCIAL INFORMATION
- 45 -
<PAGE>
<CAPTION>
(In thousands
except per
SHARE AMOUNTS) 1995(a) 1994 1993(b) 1992(c) 1991
- -------------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C>
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
<FN>
(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.
</FN>
- 46 -
</TABLE>
<PAGE>
Most recent Thermo Fibertek Inc. quarterly information is contained in
the Company's Form 10-Q to be inserted.
- 47 -
<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.
RESULTS OF OPERATIONS
- 48 -
<PAGE>
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.
- 49 -
<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.
- 50 -
<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.
- 51 -
<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
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
- 52 -
<PAGE>
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.
In addition, the Company is evaluating other project and acquisition
opportunities both domestically and internationally on an ongoing basis.
- 53 -
<PAGE>
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.
- 54 -
<PAGE>
<TABLE>
SELECTED FINANCIAL INFORMATION
<CAPTION>
(In
thousands
except
per NINE MONTHS ENDED (a) FISCAL YEAR
share Sept 30 Oct. 1
AMOUNTS) 1995 1994 1994 1993(b) 1992 1991
- -------- ---- ---- ---- ------- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
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
- 55 -
<PAGE>
Shareholders'
Investment
(e) 92,985 55,146 45,495 31,605 29,273
<FN>
(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.
</FN>
</TABLE>
- 56 -
<PAGE>
Form 10-Q
December 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 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 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
75 hours of curtailment in January 1996, and may continue 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.
THREE MONTHS ENDED DECEMBER 30, 1995 COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1994
Revenues in the three months ended December 30, 1995 were $34.3
million, compared with $32.2 million in the three months ended December 31,
1994, an increase of $2.1 million, or 6.5%. The increase is primarily due to
higher contractual energy rates at all of the Company's facilities, except the
Hemphill plant, as well as improved operations at the Delano plants.
- 57 -
<PAGE>
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 29% in the three months ended
December 30, 1995, compared with 23% in the three months ended December 31,
1994. The improvement results primarily from the effect of the higher revenues
described above and lower fuel costs at all of the Company's California
plants.
General and administrative expenses as a percentage of revenues were
7.1% in the three months ended December 30, 1995, compared with 4.5% in the
three months ended December 31, 1994. The change results primarily from
increased international and domestic business development efforts.
Interest income increased to $1.3 million in the three months ended
December 30, 1995, compared with $520,000 in the three months ended December
31, 1994, primarily due to increased invested amounts as a result of the
Company's February 1995 initial public offering, which resulted in net
proceeds of $27.5 million. Interest expense increased to $3.8 million in the
three months ended December 30, 1995, compared with $2.8 million in the three
months ended December 31, 1994, primarily due to the conversion of the Mendota
plant lease to a capital lease effective April 1995.
The effective tax rate was 35% in the three months ended December
30, 1995, compared with 31% in the three months ended December 31, 1994. The
effective tax rates reflect 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.
Minority interest expense represents the allocation of income from
plant operations to a minority partner in an Operating Company
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
- 58 -
<PAGE>
Working capital increased to $64.9 million at December 30, 1995 from
$62.0 million at September 30, 1995. The Company had cash, cash equivalents
and current restricted funds of $77.1 million at December 30, 1995, compared
with $61.2 million at September 30, 1995. At December 30, 1995, current
restricted funds held in trust pursuant to certain lease and debt agreements
totaled $27.2 million. The use of an additional $12.0 million of cash and cash
equivalents at December 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. During the three months ended December
30, 1995, the Company's operating activities provided cash and restricted
funds of $23.4 million. The Company 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, the Company expended $3.9 million for the construction of a coal
beneficiation facility in Gillette, Wyoming and expended $.4 million on other
property, plant and equipment. The Company is committed to fund an additional
$37 million for construction of the coal beneficiation facility, primarily
during the remainder of fiscal 1996.
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 not to provide funding and, within 60 days following such
notice, the project fails to pass a prescribed performance test.
The Company expects to fund its commitments for the remainder of
fiscal 1996 through its current resources and through borrowings from Thermo
Electron.
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 for
projects other than those identified above that assure funds will be available
on acceptable terms, or at all.
- 59 -
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) (a) Financial Statements included in Part A:
None
(b) Financial Statements included in Part B:
Statement of Assets and Liabilities, ___________, 1996*
Notes to Financial Statements*
Report of Independent Accountants*
(2) Exhibits
(a) Articles of Incorporation
(b) Bylaws
(c) Inapplicable
(d) (1) Form of Subscription Certificate*
(2) Form of Notice of Guaranteed Delivery*
(3) Form of Nominee Holder Over-Subscription Exercise
Form*
(e) Form of Dividend Reinvestment Plan*
(f) Inapplicable
(g) Form of Investment Management Agreement
(h) Form of Underwriting Agreement*
(i) Inapplicable
(j) Form of Custody Agreement*
(k) (1) Form of Registrar and Transfer Agency Agreement*
(2) Form of Administrative Services Agreement
(l) Opinion and Consent of Counsel*
(m) Inapplicable
- 60 -
<PAGE>
(n) Consent of Independent Public Accountants*
(o) Inapplicable
(p) Form of Subscription Agreement for Initial Capital
(q) Inapplicable
(r) Financial Data Schedule*
-------------------------------------
* To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
See exhibit 2(h) of this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in
connection with the issuance and distribution of the securities covered by
this Registration Statement:
Securities and Exchange Commission Fees *
---
Blue Sky Fees and Expenses *
---
Cost of Stock Certificates *
---
Printing *
---
Legal Fees and Expenses *
---
Independent Auditor's Fees and Expenses *
---
Miscellaneous, Including Marketing Expenses *
---
* To be filed by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
After commencement of the public offering of the Registrant's
shares, the Registrant expects that no person will be directly or indirectly
controlling, controlled by or under common control with the Registrant.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
As of May 15, 1996, there are no record holders of the
securities of the Registrant.
- 61 -
<PAGE>
ITEM 29. INDEMNIFICATION
Article Seventh of the Registrant's Articles of Incorporation
provides for indemnification of officers and Directors as follows:
"SEVENTH: (1) To the fullest extent that limitations on the
liability of Directors and officers are permitted by the MGCL,
no Director or officer of the Corporation will have any
liability to the Corporation or its Shareholders for money
damages. This limitation on liability applies to events
occurring at the time a person serves as a Director or officer
of the Corporation whether or not the person is a Director or
officer at the time of any proceeding in which liability is
asserted.
(2) Any person who was or is a party or is threatened to be
made a party in any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that the person is a
current or former Director or officer of the Corporation, or is
or was serving while a Director or officer of the Corporation
at the request of the Corporation as a director, officer,
partner, trustee, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust, enterprise or
employee benefit plan, will be indemnified by the Corporation
against judgments, penalties, fines, excise taxes, settlements
and reasonable expenses (including attorneys' fees) actually
incurred by the person in connection with the action, suit or
proceeding to the fullest extent permissible under the MGCL,
the 1933 Act and the 1940 Act, as those statutes are now or are
hereafter in force. In addition, the Corporation will advance
expenses to its currently acting and its former Directors and
officers to the fullest extent that indemnification of
directors and officers is permitted by the MGCL, the 1933 Act
and the 1940 Act. The Board may by Bylaw, resolution or
agreement make further provision for indemnification of
Directors, officers, employees and agents to the fullest extent
permitted by the MGCL.
(3) No provision of this Article SEVENTH shall be effective to
protect or purport to protect any director or officer of the
Corporation against any liability to the Corporation or the
Shareholders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
(4) References to the MGCL in this Article SEVENTH are to
the law as from time to time amended. No amendment to the
Articles of Incorporation of the Corporation will affect
any right of any person under this Article SEVENTH based
- 62 -
<PAGE>
on any event, omission or proceeding prior to the
amendment."
Article 5.2 of the Registrant's Bylaws provides for
indemnification of the officers and Directors as follows:
"ARTICLE 5.2 INDEMNITY
(a) The Company shall indemnify its Directors to the fullest
extent that indemnification of Directors is permitted by the Maryland General
Corporation Law. The Company shall indemnify its Officers to the same extent
as its Directors and to such further extent as is consistent with law. The
Company shall indemnify its Directors and Officers who, while serving as
Directors or Officers, also serve at the request of the Company as a director,
officer, partner, trustee, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan to the fullest extent consistent with law. The indemnification
and other rights provided by this Article shall continue as to a person who
has ceased to be a Director or Officer and shall inure to the benefit of the
heirs, executors and administrators of such a person. This Article shall not
protect any such person against any liability to the Company or any
Stockholder thereof to which such person would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office ("disabling conduct").
(b) Any current or former Director or Officer of the Company
seeking indemnification within the scope of this Article shall be entitled to
advances from the Company for payment of the reasonable expenses incurred by
him in connection with the matter as to which he is seeking indemnification in
the manner and to the fullest extent permissible under the Maryland General
Corporation Law. The person seeking indemnification shall provide to the
Company a written affirmation of his good faith belief that the standard of
conduct necessary for indemnification by the Company has been met and a
written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. In addition, at
least one of the following additional conditions shall be met: (i) the person
seeking indemnification shall provide security in form and amount acceptable
to the Company for his undertaking; (ii) the Company is insured against losses
arising by reason of the advance; or (iii) a majority of a quorum of Directors
of the Company who are neither "interested persons" as defined in Section
2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the
proceeding ("disinterested non-party Directors"), or independent legal
counsel, in a written opinion, shall have determined, based on a review of
facts readily available to the Company at the time the advance is proposed to
be made, that there is reason to believe that the person seeking
indemnification will ultimately be found to be entitled to indemnification.
(c) At the request of any person claiming indemnification under
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this Article, the Board of Directors shall determine, or cause to be
determined, in a manner consistent with the Maryland General Corporation Law,
whether the standards required by this Article have been met. Indemnification
shall be made only following: (i) a final decision on the merits by a court or
other body before whom the proceeding was brought that the person to be
indemnified was not liable by reason of disabling conduct or (ii) in the
absence of such a decision, a reasonable determination, based upon a review of
the facts, that the person to be indemnified was not liable by reason of
disabling conduct by (i) the vote of a majority of a quorum of disinterested
non-party Directors or (ii) an independent legal counsel in a written opinion.
(d) Employees and agents who are not Officers or Directors of
the Company may be indemnified, and reasonable expenses may be advanced to
such employees or agents, as may be provided by action by the Board of
Directors or by contract, subject to any limitations imposed by the Investment
Company Act of 1940, as amended.
(e) The Board of Directors may make further provision
consistent with law for indemnification and advance of expenses to Directors,
Officers, employees and agents by resolution, agreement or otherwise. The
indemnification provided by this Article shall not be deemed exclusive of any
other right, with respect to indemnification or otherwise, to which those
seeking indemnification may be entitled under any insurance or other agreement
or resolution of Stockholders or disinterested Directors or otherwise.
(f) References in this Article are to the Maryland General
Corporation Law and to the Investment Company Act of 1940, as amended. No
amendment of these Bylaws shall affect any right of any person under this
Article based on any event, omission or proceeding prior to the amendment."
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to Directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The Registrant will maintain a standard mutual fund and
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investment advisory professional and directors and officers liability policy.
The policy will provide coverage to the Registrant, its Directors and officers
and its Adviser. Coverage under the policy includes losses by reason of any
act, error, omission, misstatement, misleading statement, neglect or breach of
duty.
The Investment Advisory Agreement with Brundage, Story
and Rose, L.L.C. (the "Adviser") provides that the Adviser shall not be liable
for any action taken, omitted or suffered to be taken by it in its reasonable
judgment, in good faith and believed by it to be authorized or within the
discretion or rights or powers conferred upon it by the Agreement, or in
accordance with (or in the absence of) specific directions or instructions
from Registrant, provided, however, that such acts or omissions shall not have
resulted from Adviser's willful misfeasance, bad faith or gross negligence, a
violation of the standard of care established by and applicable to the Adviser
in its actions under the Agreement or breach of its duty or of its obligations
thereunder.
The Underwriting Agreement with NatWest Securities
Limited provides that the Registrant shall indemnify and hold harmless each
underwriter and each person, if any, who controls any of the underwriters
("controlling person") from and against any loss, claim, damage or liability,
joint or several, and any action in respect thereof, to which each underwriter
or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon the matters to which the Agreement relates. Registrant
shall reimburse, as incurred, each underwriter and controlling person for any
legal and other expenses reasonably incurred by that underwriter or
controlling person in connection with investigating or defending or appearing
as a third-party witness in connection with any such loss, claim, damage,
liability or action. However, the Registrant shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action
arises out of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Registrant by such
underwriter or controlling person specifically for inclusion in the
Registrant's prospectus, registration statement or any amendment or supplement
thereto.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
See "Operation of the Fund" in Part A to this Registration
Statement on Form N-2.
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(a) The Adviser is a registered investment adviser
providing investment advisory services to the
Registrant and to the Brundage, Story and Rose
Investment Trust, an open-end management
investment company (the "BSR Trust"). The Adviser
has been engaged since 1932 in the business of
providing investment advisory services to
individual and institutional clients.
(b) The following list sets forth the principals
of the Adviser and any other business,
profession, vocation or employment of a
substantial nature in which each was engaged
during the past two years, if any. The
business address of each principal of the
Adviser is One Broadway, New York, New York
10004
(1) Charles G. Watson - Vice President and a
Trustee of the BSR Trust.
(2) Malcolm D. Clarke, Jr. - President and a
Trustee of the BSR Trust.
(3) Jeanne M. Harrington
(4) James G. Pepper - Vice President and a
Trustee of the BSR Trust.
(5) Francis S. Branin, Jr. - Vice President and a
Trustee of the BSR Trust.
(6) Cheryl L. Grandfield - Vice President and a
Trustee of the BSR Trust.
(7) Paul R. Barkus
(8) Brandon Reid
(9) H. Dean Benner
(10) Gregory E. Ratte'
(11) Deborah C. Foord
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
Accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder will be maintained by the Registrant at its
principal office located at 312 Walnut Street,
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<PAGE>
Cincinnati, Ohio 45202 as well as at the office of the Adviser located at One
Broadway, New York, New York 10004.
ITEM 32. MANAGEMENT SERVICES NOT DISCUSSED IN PARTS A OR B
Inapplicable
ITEM 33. UNDERTAKINGS
(1) Registrant undertakes to suspend offering of the
shares covered hereby until it amends its
Prospectus contained herein if (1) subsequent to
the effective date of this Registration Statement,
its net asset value per share declines more than
ten percent from its net asset value per share as
of the effective date of this Registration
Statement, or (2) its net asset value per share
increases to an amount greater than its net
proceeds as stated in the Prospectus contained
herein.
(2) Inapplicable
(3) Inapplicable
(4) Inapplicable
(5) Inapplicable
(6) The Registrant undertakes to send by first
class mail or other means designed to ensure
equally prompt delivery, within two business
days of receipt of a written or oral request,
any Statement of Additional Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Registration Statement to be signed below on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and State of
New York, on the 17th day of May, 1996.
THE THERMO OPPORTUNITY FUND, INC.
By:/S/ GREGORY E. RATTE'
---------------------
Gregory E. Ratte', President
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE
/S/ FRANCIS S. BRANIN Director May 17, 1996
- ------------------------
Francis S. Branin
/S/ CHERYL L. GRANDFIELD Director May 17, 1996
- ------------------------
Cheryl Grandfield
/S/ MARK J. SEGER Treasurer May 17, 1996
- ------------------------
Mark J. Seger
<PAGE>
INDEX TO EXHIBITS
(a) Articles of Incorporation
(b) Bylaws
(c) Inapplicable
(d)(1) Form of Subscription Certificate*
(2) Form of Notice of Guaranteed Delivery*
(3) Form of Nominee Holder Over-Subscription Exercise Form*
(e) Form of Dividend Reinvestment Plan*
(f) Inapplicable
(g) Form of Investment Management Agreement
(h) Form of Underwriting Agreement*
(i) Inapplicable
(j) Form of Custody Agreement*
(k) (1) Form of Registrar and Transfer Agency Agreement*
(2) Form of Administrative Services Agreement
(l) Opinion and Consent of Counsel*
(m) Inapplicable
(n) Consent of Independent Public Accountants*
(o) Inapplicable
(p) Form of Subscription Agreement for Initial Capital
(q) Inapplicable
(r) Financial Data Schedule*
- --------------------------------
* To be filed by amendment.
<PAGE>
ARTICLES OF INCORPORATION
OF
THE THERMO OPPORTUNITY FUND, INC.
FIRST: The undersigned, John F. Splain, whose address is c/o
MGF Service Corp., 312 Walnut Street, Cincinnati, Ohio 45202, being at least
eighteen years of age, forms a corporation under the Maryland General
Corporation Law (the "MGCL").
SECOND: The name of the corporation (the
"Corporation") is The Thermo Opportunity Fund, Inc.
THIRD: The purpose or purposes for which the Corporation is
formed is to act as a closed-end, management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and to exercise
and enjoy all of the powers, rights, and privileges granted to, or conferred
upon, corporations by the MGCL, now or hereafter in force. The enumeration of
the powers, rights and privileges described in this Article THIRD should not
be deemed to exclude any powers, rights or privileges granted by the MGCL or
otherwise.
FOURTH: The post office address of the principal office of
the Corporation within the State of Maryland, and the name and post office
address of the resident agent of the Corporation within the State of Maryland,
is The Corporation Trust Incorporated, 32 South Street, Baltimore, MD 21202.
FIFTH: (1) The total number of Shares that the Corporation
has authority to issue is sixteen million (16,000,000) Shares, having a par
value of one-tenth of one cent ($.001) per Share and of the aggregate par
value of sixteen thousand dollars ($16,000), all of which sixteen million
(16,000,000) Shares are designated Common Stock.
(2) All persons who acquire Shares ("Shareholders")
<PAGE>
will acquire the same subject to the provisions of these Articles of
Incorporation and the Bylaws of the Corporation, as from time to time amended.
(3) The Board of Directors of the Corporation (the "Board")
is authorized to classify or to reclassify unissued Shares by setting or
changing the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, prior to issuance.
(4) Notwithstanding any provisions of the MGCL requiring a
greater proportion of shareholder votes than a majority of all the votes
entitled to be cast in order to take or authorize any action, any such action
shall be taken or authorized upon the concurrence of a majority of all the
votes entitled to be cast on the matter, except as otherwise provided in these
Articles of Incorporation.
(5) The presence in person or by proxy of the holders of a
majority of the Shares entitled to vote (without regard to class) will
constitute a quorum at any meeting of the Shareholders, except with respect to
any matter that, under applicable statutes or regulatory requirements,
requires approval by a separate vote of one or more classes of stock, in which
case the presence in person or by proxy of the holders of a majority of the
Shares entitled to vote on the matter will constitute a quorum.
(6) The Corporation may issue Shares in fractional
denominations to the same extent as its whole Shares, and Shares in fractional
denominations will be Shares having proportionately to the respective
fractions represented thereby all the rights of whole Shares, including,
without limitation, the right to vote,
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the right to receive dividends and distributions and the right to participate
upon liquidation of the Corporation, but excluding the right to receive a
certificate evidencing a fractional Share.
(7) No Shareholder will have, by virtue of being a
Shareholder, any right to purchase or subscribe for any Shares or any other
security that the Corporation may issue or sell other than a right that the
Board in its discretion may determine to grant.
SIXTH: (1) The number of directors of the Corporation
("Directors") will be five (5), except that the number of Directors shall
initially be two (2) until the organizational meeting of the Board. The number
of Directors may be changed by the Bylaws or by the Board pursuant to
authority provided by the Bylaws. The number of Directors will not be less
than the minimum number prescribed by the MGCL nor more than fifteen (15).
(2) The names of the persons who will act as Directors until
the Corporation's first annual meeting or until their successors are duly
chosen and qualify are as follows:
Francis S. Branin
Cheryl L. Grandfield
(3) Beginning with the first annual meeting of Shareholders
held after the initial public offering of the shares of the Corporation (the
"Initial Annual Meeting"), the Board will be divided into three classes: Class
I, Class II and Class III. The term of office of one class of Directors
elected at the Initial Annual Meeting will expire each year. At the Initial
Annual Meeting, Directors of Class I will be elected to hold office for a term
expiring at the next succeeding annual meeting, Directors of Class II will be
elected to hold office for a term
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expiring at the second succeeding annual meeting and Directors of Class III
will be elected to hold office for a term expiring at the third succeeding
annual meeting. At each subsequent annual meeting of Shareholders, the
Directors chosen to succeed those whose terms are expiring will be identified
as being of the same class as the Directors whom they succeed and will be
elected for a term expiring at the time of the third succeeding annual meeting
of Shareholders, or thereafter in each case when their respective successors
are elected and qualified. If the number of Directors is changed, any increase
or decrease will be apportioned among the classes by resolution of the Board
so as to maintain the number of Directors in each class as nearly equal as
possible, but in no case will a decrease in the number of Directors shorten
the term of any incumbent director.
(4) Any vacancy occurring in the Board may be
filled by a majority of the Directors in office.
(5) A Director may be removed from office with or without
cause, but only by vote of Shareholders holding at least seventy-five percent
(75%) of the outstanding Shares entitled to vote in an election of Directors.
(6) The initial Bylaws of the Corporation will be adopted by
the Directors at their organizational meeting or by their informal written
action. Thereafter, the power to make, alter, and repeal the Bylaws of the
Corporation will be vested in the Board.
(7) In furtherance, and not in limitation, of the
powers conferred by the laws of the State of Maryland, the Board
is expressly authorized:
(a) to make, alter or repeal the Bylaws of the
Corporation, except as otherwise required by the 1940 Act;
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(b) from time to time to determine whether and to what
extent and at what times and places and under what conditions and regulations
the books and accounts of the Corporation, or any of them, other than the
stock ledger, will be open to the inspection of the Shareholders. No
Shareholder will have any right to inspect any account or book or document of
the Corporation, except as conferred by law or authorized by resolution of the
Board;
(c) without the assent or vote of the Shareholders, to
authorize the issuance from time to time of shares of the stock of any class
of the Corporation, whether now or hereafter authorized, and securities
convertible into shares of stock of the Corporation of any class or classes,
whether now or hereafter authorized, for such consideration as the Board
may deem advisable;
(d) without the assent or vote of the Shareholders, to
authorize and issue obligations of the Corporation, secured and unsecured, as
the Board may determine, and to authorize and cause to be executed mortgages
and liens upon the real or personal property of the Corporation;
(e) from time to time to determine the net asset value
per share of the Corporation's stock or to establish methods to be used by the
Corporation's officers, employees or agents for determining the net asset
value per share of the Corporation's stock; and
(f) in addition to the powers and authorities granted
in these Articles of Incorporation and by statute expressly conferred upon
it, the Board is authorized to exercise all powers and do all acts that may
be exercised or done by the Corporation pursuant to the provisions of the
laws of the
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State of Maryland, these Articles of Incorporation and the Bylaws of the
Corporation.
(8) Any determination made in good faith by or pursuant to
the direction of the Board, with respect to the amount of assets, obligations
or liabilities of the Corporation, as to the amount of net income of the
Corporation from dividends and interest for any period or amounts at any time
legally available for the payment of dividends, as to the amount of any
reserves or charges set up and the propriety thereof, as to the time of or
purpose for creating reserves or as to the use, alteration or cancellation of
any reserves or charges (whether or not any obligation or liability for which
the reserves or charges have been created has been paid or discharged or is
then or thereafter required to be paid or discharged), as to the value of any
security owned by the Corporation or as to the determination of the net asset
value of Shares of any class, will be final and conclusive, and will be
binding upon the Corporation and all holders of Shares, past, present and
future, and Shares are issued and sold on the condition and understanding,
evidenced by the purchase of Shares or acceptance of Share certificates, that
any and all such determinations will be binding as described in this paragraph
(8). No provision of these Articles of Incorporation of the Corporation will
be effective to (a) require a waiver of compliance with any provision of the
Securities Act of 1933, as amended (the "1933 Act"), or the 1940 Act, or of
any valid rule, regulation or order of the Securities and Exchange Commission
under those Acts or (b) protect or purport to protect any Director or officer
of the Corporation against any liability to the Corporation or its
Shareholders to which the Director or officer would otherwise be subject by
reason of willful
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misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
SEVENTH: (1) To the fullest extent that limitations on the
liability of Directors and officers are permitted by the MGCL, no Director or
officer of the Corporation will have any liability to the Corporation or its
Shareholders for money damages. This limitation on liability applies to events
occurring at the time a person serves as a Director or officer of the
Corporation whether or not the person is a Director or officer at the time of
any proceeding in which liability is asserted.
(2) Any person who was or is a party or is threatened to be
made a party in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that the person is a current or former Director or officer
of the Corporation, or is or was serving while a Director or officer of the
Corporation at the request of the Corporation as a director, officer, partner,
trustee, employee, agent or fiduciary of another corporation, partnership,
joint venture, trust, enterprise or employee benefit plan, will be indemnified
by the Corporation against judgments, penalties, fines, excise taxes,
settlements and reasonable expenses (including attorneys' fees) actually
incurred by the person in connection with the action, suit or proceeding to
the fullest extent permissible under the MGCL, the 1933 Act and the 1940 Act,
as those statutes are now or are hereafter in force. In addition, the
Corporation will advance expenses to its currently acting and its former
Directors and officers to the fullest extent that indemnification of directors
and officers is permitted by the MGCL, the 1933 Act and
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the 1940 Act. The Board may by Bylaw, resolution or agreement make further
provision for indemnification of Directors, officers, employees and agents to
the fullest extent permitted by the MGCL.
(3) No provision of this Article SEVENTH shall be effective
to protect or purport to protect any director or officer of the Corporation
against any liability to the Corporation or the Shareholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
(4) References to the MGCL in this Article SEVENTH are to
the law as from time to time amended. No amendment to the Articles of
Incorporation of the Corporation will affect any right of any person under
this Article SEVENTH based on any event, omission or proceeding prior to the
amendment.
EIGHTH: (a) Except as otherwise provided in this Article
EIGHTH, at least seventy-five percent (75%) of the votes entitled to be cast
by Shareholders, in addition to the affirmative vote of at least seventy-five
percent (75%) of the entire Board of Directors, shall be necessary to effect
any of the following actions:
(i) any amendment to these Articles to make
the Corporation's Common Stock a "redeemable security" or to convert the
Corporation from a "closed-end company" to an "open-end company" (as such
terms are defined in the 1940 Act) or any amendment to Article THIRD, unless
the Continuing Directors (as hereinafter defined) of the Corporation, by a
vote of at least seventy-five percent (75%) of such Directors, approve such
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amendment in which case the affirmative vote of a majority of the votes
entitled to be cast by Shareholders shall be required to approve such
transactions;
(ii) any Shareholder proposal as to specific
investment decisions made or to be made with respect to the
Corporation's assets;
(iii) any proposal as to the voluntary
liquidation or dissolution of the Corporation or any amendment to these
Articles of Incorporation to terminate the existence of the Corporation,
unless the Continuing Directors of the Corporation, by a vote of at least
seventy-five percent (75%) of such Directors, approve such proposals in which
case the affirmative vote of a majority of the votes entitled to be cast by
Shareholders shall be required to approve such transaction; or
(iv) any Business Combination (as hereinafter
defined) unless the Business Combination shall have been approved by a vote of
at least seventy-five percent (75%) of the Continuing Directors, in which case
paragraph (c) below shall apply.
(b) For the purposes of this Article:
(i) "Business Combination" shall mean any of
the transactions described or referred to in any one or more of
the following paragraphs:
(A) any merger, consolidation or share
exchange of the Corporation with or into any other person;
(B) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition (in one transaction or a
series of transactions in any 12 month period) to or with any other person of
any assets of the Corporation having an aggregate Fair Market Value of
$1,000,000 or more
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except for portfolio transactions of the Corporation affected in the ordinary
course of the Corporation's business and except with respect to repurchases or
redemptions of shares of the Corporation;
(C) the issuance or transfer by the
Corporation (in one transaction or a series of transactions in any 12 month
period) of any securities of the Corporation to any other person in exchange
for cash, securities or other property (or a combination thereof) having an
aggregate Fair Market Value of $1,000,000 or more excluding (x) sales of any
securities of the Corporation in connection with a public offering thereof,
(y) issuances of any securities of the Corporation pursuant to a dividend
reinvestment plan adopted by the Corporation or pursuant to a stock dividend
and (z) issuances of any securities of the Corporation upon the exercise of
any stock subscription rights distributed by the Corporation.
(ii) "Continuing Director" means any member
of the Board of Directors of the Corporation who is not an Interested Party or
an Affiliate (as hereinafter defined) of an Interested Party and has been a
member of the Board of Directors for a period of at least 12 months (or since
the Corporation's commencement of operations, if that period is less than 12
months), or is a successor of a Continuing Director who is unaffiliated with
an Interested Party and is recommended to succeed a Continuing Director by a
majority of the Continuing Directors then on the Board of Directors.
(iii) "Interested Party" shall mean any
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person, other than an investment company advised by the Corporation's initial
investment manager or any of its Affiliates, which enters, or proposes to
enter, into a Business Combination with the Corporation.
(iv) "Person" shall mean an individual, a
corporation, a trust or a partnership.
(v) "Affiliate" shall have the meaning
ascribed to such term in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "1934 Act").
(vi) "Fair Market Value" means:
(A) in the case of stock, the highest
closing sale price during the 30-day period immediately preceding the relevant
date of a share of such stock on the New York Stock Exchange, or if such stock
is not listed on such Exchange, on the principal United States securities
exchange registered under the 1934 Act on which such stock is listed, or, if
such stock is not listed on any such exchange, the highest closing sale price
(if such stock is a National Market System security) or the highest closing
bid quotation (if such stock is not a National Market System security) or the
highest closing bid quotation (if such stock is not a National Market System
security) with respect to a share of such stock during the 30-day period
preceding the relevant date on the National Association of Securities Dealers,
Inc. Automated Quotation Systems (NASDAQ) or any system then in use, or if no
such quotations are available, the fair market
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value on the relevant date of the share of such stock as
determined by at least 75% of the Continuing Directors in good
faith, and
(B) in the case of property other than
cash or stock, the fair market value of such property on the relevant date as
determined by at least 75% of the Continuing Directors in good faith.
(vii) Continuing Directors of the Corporation,
acting by a vote of at least 75%, shall have the power and duty to determine,
on the basis of information known to them after reasonable inquiry, all facts
necessary to determine (a) whether a person is an Affiliate of another, and
(b) whether the assets which are the subject of any Business Combination have,
or the consideration to be received for the issuance or transfer of securities
by the Corporation in any Business Combination has, an aggregate Fair Market
Value of $1,000,000 or more.
(c) If any Business Combination described in paragraph
(b)(i)(A) or (B) of this Article EIGHTH (if the merger, consolidation, share
exchange or transfer or other disposition constitutes a merger, consolidation,
share exchange or transfer of all or substantially all of the assets of the
Corporation with respect to which Shareholder approval is required under
Maryland law) is approved by a vote of 75% of the Continuing Directors, a
majority of the votes entitled to be cast by Shareholders shall be required to
approve such transaction. If any other Business Combination is approved by a
vote of 75% of the Continuing Directors, no Shareholder vote shall be required
to approve such
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transaction unless otherwise provided in these Articles of
Incorporation or required by law.
NINTH: (1) The Corporation reserves the right from time to
time to make any amendment to these Articles of Incorporation, now or
hereafter authorized by law, including any amendment that alters the contract
rights, as expressly set forth in these Articles of Incorporation, of any
outstanding Shares.
(2) Notwithstanding Paragraph (1) of this Article or any
other provision of these Articles of Incorporation, no amendment to these
Articles of Incorporation shall amend, alter, change or repeal any of the
provisions of paragraphs (1), (3) or (5) of Article SIXTH unless the amendment
effecting such amendment, alteration, change or repeal shall receive the
affirmative vote of at least seventy-five percent (75%) of the votes entitled
to be cast by Shareholders and the affirmative vote of at least seventy-five
percent (75%) of the entire Board of Directors, unless the amendment shall
have been approved by at least 75% of the Continuing Directors, in which case
the affirmative vote of a majority of the Shareholder votes entitled to be
cast on the matter shall be sufficient to approve the amendment, and no
amendment to these Articles of Incorporation shall amend, alter, change or
repeal Articles EIGHTH or NINTH unless the amendment effecting such amendment,
alteration, change or repeal shall receive the affirmative vote of at least
seventy-five percent (75%) of the votes entitled to be cast by Shareholders
and a vote of at least seventy-five percent (75%) of
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the entire Board of Directors.
IN WITNESS WHEREOF, I have adopted and signed these Articles
of Incorporation and acknowledge that the adoption and signing are my acts.
Dated: May 15, 1996
/S/ JOHN F. SPLAIN
----------------------------
John F. Splain, Incorporator
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BYLAWS
OF
THE THERMO OPPORTUNITY FUND, INC.
BYLAW-ONE: NAME OF COMPANY, LOCATION OF OFFICES AND SEAL.
ARTICLE 1.1. NAME. The name of the Company is The Thermo Opportunity
Fund, Inc.
ARTICLE 1.2. PRINCIPAL OFFICE. The principal office of the Company in the
State of Maryland shall be located in Baltimore, Maryland. The Company may, in
addition, establish and maintain such other offices and places of business
within or outside the State of Maryland as the Board of Directors
may from time to time determine.
ARTICLE 1.3. SEAL. The corporate seal of the Company shall be circular in
form and shall bear the name of the Company, the year of its incorporation and
the words "Corporate Seal, Maryland." The form of the seal shall be subject to
alteration by the Board of Directors and the seal may be used by causing it or
a facsimile to be impressed or affixed or printed or otherwise reproduced. Any
Officer or Director of the Company shall have authority to affix the corporate
seal of the Company to any document requiring the same.
BYLAW-TWO: STOCKHOLDERS.
ARTICLE 2.1. PLACE OF MEETINGS. All meetings of the Stockholders shall be
held at such place within the United States, whether within or outside the
State of Maryland, as the
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Board of Directors shall determine, which shall be stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
ARTICLE 2.2. ANNUAL MEETING. The annual meeting of the Stockholders of
the Company shall be held at such place as the Board of Directors shall select
on such date as may be fixed by the Board of Directors each year, at which
time the Stockholders shall elect Directors by plurality vote, and
transact such other business as may properly come before the
meeting. Any business of the Company may be transacted at the
annual meeting without being specially designated in the notice
except as otherwise provided by statute, by the Articles of
Incorporation or by these Bylaws.
ARTICLE 2.3. SPECIAL MEETINGS. Special meetings of the Stockholders for
any purpose or purposes, unless otherwise prescribed by statute or by the
Articles of Incorporation, may be called by resolution of the Board of
Directors or by the President, and shall be called by the Secretary at the
request of a majority of the Board of Directors or at the request, in writing,
of Stockholders owning at least 25% of the votes entitled to be cast at the
meeting upon payment by such Stockholders to the Company of the reasonably
estimated cost of preparing and mailing a notice of the meeting (which
estimated cost shall be provided to such Stockholders by the Secretary of the
Company). Notwithstanding the foregoing, unless requested by Stockholders
entitled to cast a majority of the votes entitled to
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be cast at the meeting, a special meeting of the Stockholders need not be
called at the request of Stockholders to consider any matter that is
substantially the same as a matter voted on at any special meeting of the
Stockholder held during the preceding 12 months. A written request shall state
the purpose or purposes of the proposed meeting.
ARTICLE 2.4. NOTICE. Written notice of every meeting of Stockholders,
stating the purpose or purposes for which the meeting is called, the time when
and the place where it is to be held, shall be served, either personally or by
mail, not less than ten nor more than ninety days before the meeting, upon
each Stockholder as of the record date fixed for the meeting who is entitled
to notice of or to vote at such meeting. If mailed (i) such notice shall be
directed to a Stockholder at his address as it shall appear on the books of
the Company (unless he shall have filed with the Transfer Agent of the Company
a written request that notices intended for him be mailed to some
other address, in which case it shall be mailed to the address designated in
such request) and (ii) such notice shall be deemed to have been given as of
the date when it is deposited in the United States mail with first-class
postage thereon prepaid.
ARTICLE 2.5. NOTICE OF STOCKHOLDER BUSINESS. At any annual or special
meeting of the Stockholders, only such business shall be conducted as shall
have been properly brought before the meeting. To be properly brought before
an annual or special meeting, the business must be (i) specified in the notice
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of meeting (or any supplement thereto) given by or at the direction of the
Board of Directors, (ii) otherwise properly brought before the meeting by or
at the direction of the Board of Directors, or (iii) otherwise properly
brought before the meeting by a Stockholder.
For business to be properly brought before an annual or special meeting
by a Stockholder, the Stockholder must have given timely notice thereof in
writing to the Secretary of the Company. To be timely, any such notice must be
delivered to or mailed and received at the principal executive offices of the
Company not later than 60 days prior to the date of the meeting; provided,
however, that if less than 70 days' notice or prior public disclosure of the
date of the meeting is given or made to Stockholders, any such notice by a
Stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which notice of the date of the
annual or special meeting was given or such public disclosure was made.
Any such notice by a Stockholder shall set forth as to each matter the
Stockholder proposes to bring before the annual or special meeting (i) a brief
description of the business desired to be brought before the annual or special
meeting and the reasons for conducting such business at the annual or special
meeting, (ii) the name and address, as they appear on the Company's books, of
the Stockholder proposing such business,
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(iii) the class and number of shares of the capital stock of the Company which
are beneficially owned by the Stockholder, and (iv) any material interest of
the Stockholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at any annual or special meeting except in accordance with
the procedures set forth in this Article 2.5. The chairman of the annual or
special meeting shall, if the facts warrant, determine and declare to the
meeting that business was not properly brought before the meeting in
accordance with the provisions of this Article 2.5, and, if he should so
determine, he shall so declare to the meeting that any such business not
properly brought before the meeting shall not be considered or transacted.
ARTICLE 2.6. QUORUM. The holders of a majority of the stock issued and
outstanding and entitled to vote, present in person or represented by proxy,
shall be requisite and shall constitute a quorum at all meetings of the
Stockholders for the transaction of business except as otherwise provided by
statute, by the Articles of Incorporation or by these Bylaws. If a quorum
shall not be present or represented, the Stockholders entitled to vote
thereat, present in person or represented by proxy, shall have the power to
adjourn the meeting from time to time, without notice other than announcement
at the meeting, to a date not more than 120 days after the original record
date, until a quorum shall be present or represented. At such adjourned
meeting, at
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which a quorum shall be present or represented, any business which might have
been transacted at the original meeting may be transacted.
ARTICLE 2.7. VOTE OF THE MEETING. When a quorum is present or represented
at any meeting, the vote of the holders of a majority of the votes cast shall
decide any question brought before such meeting, unless the question is one
upon which, by express provisions of applicable statutes, the Articles of
Incorporation or of these Bylaws, a different vote is required, in which case
such express provisions shall govern and control the decision of such
question.
ARTICLE 2.8. VOTING RIGHTS OF STOCKHOLDERS. Each Stockholder of record
having the right to vote shall be entitled at every meeting of the
Stockholders of the Company to one vote for each share of stock having voting
power standing in the name of such Stockholder on the books of the Company on
the record date fixed in accordance with Article 6.5 of these Bylaws, with pro
rata voting rights for any fractional shares, and such votes may be cast
either in person or by written proxy.
ARTICLE 2.9. ORGANIZATION. At every meeting of the Stockholders, the
Chairman of the Board, or in his absence or inability to act, a chairman
chosen by the Stockholders, shall act as chairman of the meeting. The
Secretary, or in his absence or inability to act, a person appointed by the
chairman of the meeting, shall act as secretary of the meeting and keep the
minutes of the meeting.
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ARTICLE 2.10. PROXIES. Every proxy must be executed in writing by the
Stockholder or by his duly authorized attorney-in-fact. No proxy shall be
valid after the expiration of eleven months from the date of its execution
unless it shall have specified therein its duration. Every proxy shall be
revocable at the pleasure of the person executing it or of his personal
representatives or assigns. Proxies shall be delivered prior to the meeting to
the Secretary of the Company or to the person acting as Secretary of the
meeting before being voted. A proxy with respect to stock held in the name of
two or more persons shall be valid if executed by one of them unless, at or
prior to exercise of such proxy, the Company receives a specific written
notice to the contrary from any one of them. A proxy purporting to be executed
by or on behalf of a Stockholder shall be deemed valid unless challenged at or
prior to its exercise.
ARTICLE 2.11. STOCK LEDGER AND LIST OF STOCKHOLDERS. It shall be the duty
of the Secretary or Assistant Secretary of the Company to cause an original or
duplicate stock ledger to be maintained at the office of the Company's
Transfer Agent.
ARTICLE 2.12. ACTION WITHOUT MEETING. Any action to be taken by
Stockholders may be taken without a meeting if (1) all Stockholders entitled
to vote on the matter consent to the action in writing, (2) all Stockholders
entitled to notice of the meeting but not entitled to vote at it sign a
written waiver of any right to dissent and (3) said consents and waivers are
filed
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with the records of the meetings of Stockholders. Such consent
shall be treated for all purposes as a vote at a meeting.
BYLAW-THREE: BOARD OF DIRECTORS.
ARTICLE 3.1. GENERAL POWERS. Except as otherwise provided in the Articles
of Incorporation, the business and affairs of the Company shall be managed
under the direction of the Board of Directors. All powers of the Company may
be exercised by or under authority of the Board of Directors except as
conferred on or reserved to the Stockholders by law, by the Articles of
Incorporation or by these Bylaws.
ARTICLE 3.2. BOARD OF THREE TO TWELVE DIRECTORS. The Board of Directors
shall consist of not less than three (3) nor more than fifteen (15) Directors;
provided that if there are less than three Stockholders, the number of
Directors may be the same number as the number of Stockholders but not less
than one. Directors need not be Stockholders. The majority of the entire Board
of Directors shall have power from time to time, and at any time when the
Stockholders as such are not assembled in a meeting, regular or special, to
increase or decrease the number of Directors. If the number of Directors is
increased, the additional Directors may be elected by a majority of the
Directors in office at the time of the increase. If such additional Directors
are not so elected by the Directors in office at the time they increase the
number of places on the Board, then the additional Directors shall be elected
or
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reelected by the Stockholders at their next annual meeting or at an earlier
special meeting called for that purpose.
Beginning with the first annual meeting of Stockholders held after the
initial public offering of the shares of the Company (the "initial annual
meeting"), the Board of Directors shall be divided into three classes: Class
I, Class II and Class III. The terms of office of the classes of Directors
elected at the initial annual meeting shall expire at the times of the annual
meetings of the Stockholders as follows: Class I on the next annual meeting,
Class II on the second next annual meeting and Class III on the third next
annual meeting, or thereafter in each case when their respective successors
are elected and qualified. At each subsequent annual election, the Directors
chosen to succeed those whose terms are expiring shall be identified as being
of the same class as the Directors whom they succeed, and shall be elected for
a term expiring at the time of the third succeeding annual meeting of
Stockholders, or thereafter in each case when their respective successors are
elected and qualified. The number of directorships shall be apportioned among
the classes so as to maintain the classes as nearly equal in number as
possible.
ARTICLE 3.3. DIRECTOR NOMINATIONS.
(a) Only persons who are nominated in accordance with the procedures set
forth in this Article 3.3 shall be eligible for election or reelection as
Directors. Nominations of persons for election or reelection to the
Board of Directors of the
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Company may be made at a meeting of Stockholders by or at the direction of the
Board of Directors or by any Stockholder of the Company who is entitled to
vote for the election of such nominee at the meeting and who complies with the
notice procedures set forth in this Article 3.3.
(b) Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice
delivered in writing to the Secretary of the Company. To be timely, any such
notice by a Stockholder must be delivered to or mailed and received at the
principal executive offices of the Company not later than 60 days prior to the
meeting; provided, however, that if less than 70 days' notice or prior public
disclosure of the date of the meeting is given or made to Stockholders, any
such notice by a Stockholder to be timely must be so received not later than
the close of business on the 10th day following the day on which notice of the
date of the meeting was given or such public disclosure was made.
(c) Any such notice by a Stockholder shall set forth (i) as
to each person whom the Stockholder proposes to nominate for election or
reelection as a Director, (A) the name, age, business address and residence
address of such person, (B) the principal occupation or employment of such
person, (C) the class and number of shares of the capital stock of the Company
which are beneficially owned by such person and (D) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for the election of
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Directors pursuant to Regulation 14A under the Securities Exchange Act of 1934
or any successor regulation thereto (including without limitation such
person's written consent to being named in the proxy statement as a nominee
and to serving as a Director if elected and whether any person intends to seek
reimbursement from the Company of the expenses of any solicitation of proxies
should such person be elected a Director of the Company); and (ii) as to the
Stockholder giving the notice (A) the name and address, as they appear on the
Company's books, of such Stockholder and (B) the class and number of shares of
the capital stock of the Company which are beneficially owned by such
Stockholder. At the request of the Board of Directors any person nominated by
the Board of Directors for election as a Director shall furnish to the
Secretary of the Company that information required to be set forth in a
Stockholder's notice of nomination which pertains to the nominee.
(d) If a notice by a Stockholder is required to be given
pursuant to this Article 3.3, no person shall be entitled to receive
reimbursement from the Company of the expenses of a solicitation of proxies
for the election as a Director of a person named in such notice unless such
notice states that such reimbursement will be sought from the Company. The
Chairman of the meeting shall, if the facts warrant, determine and declare to
the meeting that a nomination was not made in accordance with the
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procedures prescribed by the Bylaws, and, if he should so determine, he shall
so declare to the meeting and the defective nomination shall be disregarded
for all purposes.
ARTICLE 3.4. VACANCIES. Subject to the provisions of the Investment
Company Act of 1940, as amended, if the office of any Director or Directors
becomes vacant for any reason (other than an increase in the number of
Directors), the Directors in office, although less than a quorum, shall
continue to act and may choose a successor or successors by majority vote, who
shall hold office until the next election of Directors. A majority of the
entire Board of Directors in office at the time of the increase may fill a
vacancy which results from an increase in the number of Directors.
ARTICLE 3.5. REMOVAL. At any meeting of Stockholders duly called and at
which a quorum is present, the Stockholders may, by the affirmative vote of
the holders of at least three-fourths of the votes entitled to be cast
thereon, remove any Director or Directors from office, with or without cause,
and may elect a successor or successors to fill any resulting vacancies for
the unexpired term of the removed Director.
ARTICLE 3.6. RESIGNATION. A Director may resign at any time by giving
written notice of his resignation to the Board of Directors or the Chairman of
the Board or the Secretary of the Company. Any resignation shall take effect
at the time specified in it or, should the time when it is to become
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effective not be specified in it, immediately upon its receipt. Acceptance of
a resignation shall not be necessary to make it effective unless the
resignation states otherwise.
ARTICLE 3.7. PLACE OF MEETINGS. The Directors may hold their meetings at
the principal office of the Company or at such other places, either within or
outside the State of Maryland, as they may from time to time determine.
ARTICLE 3.8. REGULAR MEETINGS. Regular meetings of the Board may be held
at such date and time as shall from time to time be determined by resolution
of the Board.
ARTICLE 3.9. SPECIAL MEETINGS. Special meetings of the Board may be
called by order of the Chairman of the Board on one day's notice given to each
Director either in person or by mail, telephone, telegram, cable or wireless
to each Director at his residence or regular place of business. Special
meetings will be called by the Chairman or Vice Chairman, if any, of the Board
or Secretary in a like manner on the written request of a majority of the
Directors.
ARTICLE 3.10. QUORUM. At all meetings of the Board, the presence of
one-third of the number of Directors then in office (but not less than two
Directors) shall be necessary to constitute a quorum and sufficient for the
transaction of business, and any act of a majority present at a meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute, by the Articles of
Incorporation or by these Bylaws. If a quorum
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shall not be present at any meeting of Directors, the Directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
ARTICLE 3.11. ORGANIZATION. The Board of Directors shall designate one of
its members to serve as Chairman of the Board. The Chairman of the Board shall
be Chief Executive Officer of the Corporation, shall preside at all meetings
of the Stockholders and the Board of Directors and shall have the same powers
and duties as those of the President. In the absence or inability of the
Chairman of the Board to act, another Director chosen by a majority of the
Directors present shall act as chairman of the meeting and preside at the
meeting. The Secretary (or, in his absence or inability to act, any person
appointed by the chairman) shall act as secretary of the meeting and keep the
minutes of the meeting.
ARTICLE 3.12. INFORMAL ACTION BY DIRECTORS AND COMMITTEE. Any action
required or permitted to be taken at any meeting of the Board of Directors or
of any committee thereof may, except as otherwise required by statute, be
taken without a meeting if a written consent to such action is signed by all
members of the Board, or of such committee, as the case may be, and filed with
the minutes of the proceedings of the Board or committee.
Subject to the Investment Company Act of 1940, as
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amended, members of the Board of Directors or a committee thereof may
participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time.
ARTICLE 3.13. EXECUTIVE COMMITTEE. There may be an Executive Committee of
two or more Directors appointed by the Board who may meet at stated times or
on notice to all by any of their own number. The Executive Committee shall
consult with and advise the Officers of the Company in the management of its
business and exercise such powers of the Board of Directors as may be lawfully
delegated by the Board of Directors. Vacancies shall be filled by the Board of
Directors at any regular or special meeting. The Executive Committee shall
keep regular minutes of its proceedings and report the same to the Board when
required.
ARTICLE 3.14. AUDIT COMMITTEE. There shall be an Audit Committee of two
or more Directors who are not "interested persons" of the Company (as defined
in the Investment Company Act of 1940, as amended) appointed by the Board who
may meet at stated times or on notice to all by any of their own number. The
Committee's duties shall include reviewing both the audit and other work of
the Company's independent accountants, recommending to the Board of Directors
the independent accountants to be retained, and reviewing generally the
maintenance and safekeeping of the Company's records and documents.
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ARTICLE 3.15. OTHER COMMITTEES. The Board of Directors may appoint other
committees which shall in each case consist of such number of members (but not
less than two) and shall have and may exercise, to the extent permitted by
law, such powers as the Board may determine in the resolution appointing them.
A majority of all members of any such committee may determine its action, and
fix the time and place of its meetings, unless the Board of Directors shall
otherwise provide. The Board of Directors shall have power at any time to
change the members and, to the extent permitted by law, to change the powers
of any such committee, to fill vacancies and to discharge any such committee.
ARTICLE 3.16. COMPENSATION OF DIRECTORS. The Board may, by resolution,
determine what compensation and reimbursement of expenses of attendance at
meetings, if any, shall be paid to Directors in connection with their service
on the Board. Nothing herein contained shall be construed to preclude any
Director from serving the Company in any other capacity or from receiving
compensation therefor.
BYLAW-FOUR: OFFICERS.
ARTICLE 4.1. OFFICERS. The Officers of the Company shall be fixed by the
Board of Directors and shall include a President, Secretary and Treasurer. Any
two offices may be held by the same person except the offices of President and
Vice President. A person who holds more than one office in the Company may not
act in more than one capacity to execute,
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acknowledge or verify an instrument required by law to be executed,
acknowledged or verified by more than one officer.
ARTICLE 4.2. APPOINTMENT OF OFFICERS. The Directors shall appoint the
Officers, who need not be members of the Board.
ARTICLE 4.3. ADDITIONAL OFFICERS. The Board may appoint such other
Officers and agents as it shall deem necessary who shall exercise such powers
and perform such duties as shall be determined from time to time by the Board.
ARTICLE 4.4. SALARIES OF OFFICERS. The salaries of all Officers of the
Company shall be fixed by the Board of Directors.
ARTICLE 4.5. TERM, REMOVAL, VACANCIES. The Officers of the Company shall
serve at the pleasure of the Board of Directors and hold office for one year
and until their successors are chosen and qualify in their stead. Any Officer
elected or appointed by the Board of Directors may be removed at any time by
the affirmative vote of a majority of the Directors. If the office of any
Officer becomes vacant for any reason, the vacancy shall be filled by the
Board of Directors.
ARTICLE 4.6. PRESIDENT. The President shall have, subject to the control
of the Board of Directors, general charge of the business and affairs of the
Corporation, and may employ and discharge employees and agents of the
Corporation, except those appointed by the Board, and he may delegate these
powers.
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ARTICLE 4.7. VICE PRESIDENT. Any Vice President shall, in the absence or
disability of the President, perform the duties and exercise the powers of the
President and shall perform such other duties as the Board of Directors shall
prescribe.
ARTICLE 4.8. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Company and shall deposit
all moneys and other valuable effects in the name and to the credit of the
Company in such depositories as may be designated by the Board of Directors.
He shall disburse the funds of the Company as may be ordered by the Board,
taking proper vouchers for such disbursements, and shall render to the
Chairman of the Board and Directors at the regular meetings of the Board, or
whenever they may require it, an account of the financial condition of the
Company.
Any Assistant Treasurer may perform such duties of the Treasurer as the
Treasurer or the Board of Directors may assign, and, in the absence of the
Treasurer, may perform all the duties of the Treasurer.
ARTICLE 4.9. SECRETARY. The Secretary shall attend meetings of the Board
and meetings of the Stockholders and record all votes and the minutes of all
proceedings in a book to be kept for that purpose, and shall perform like
duties for the Executive Committee of the Board when required. He shall give
or cause to be given notice of all
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meetings of Stockholders and special meetings of the Board of Directors and
shall perform such other duties as may be prescribed by the Board of
Directors. He shall keep in safe custody the seal of the Company and affix it
to any instrument when authorized by the Board of Directors.
Any Assistant Secretary may perform such duties of the Secretary as the
Secretary or the Board of Directors may assign, and, in the absence of the
Secretary, may perform all the duties of the Secretary.
ARTICLE 4.10. SUBORDINATE OFFICERS. The Board of Directors from time to
time may appoint such other officers or agents as it may deem advisable, each
of whom shall serve at the pleasure of the Board of Directors and have such
title, hold office for such period, have such authority and perform such
duties as the Board of Directors may determine. The Board of Directors from
time to time may delegate to one or more officers or agents the power to
appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities and duties.
ARTICLE 4.11. SURETY BONDS. The Board of Directors may require any
officer or agent of the Company to execute a bond (including, without
limitation, any bond required by the Investment Company Act of 1940, as
amended, and the rules and regulations of the Securities and Exchange
Commission) to the Company in such sum and with such surety or sureties as the
Board of Directors may determine, conditioned upon the faithful
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performance of his duties to the Company, including responsibility for
negligence and for the accounting of any of the Company's property, funds or
securities that may come into his hands.
BYLAW-FIVE: GENERAL PROVISIONS.
ARTICLE 5.1. WAIVER OF NOTICE. Whenever the Stockholders or the Board of
Directors are authorized by statute, the provisions of the Articles of
Incorporation or these Bylaws to take any action at any meeting after notice,
such notice may be waived, in writing, before or after the holding of the
meeting, by the person or persons entitled to such notice, or, in the case of
a Stockholder, by his duly authorized attorney-in-fact.
ARTICLE 5.2. INDEMNITY. (a) The Company shall indemnify its Directors to
the fullest extent that indemnification of Directors is permitted by the
Maryland General Corporation Law. The Company shall indemnify its Officers to
the same extent as its Directors and to such further extent as is consistent
with law. The Company shall indemnify its Directors and Officers who, while
serving as Directors or Officers, also serve at the request of the Company as
a director, officer, partner, trustee, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan to the fullest extent consistent with law. The indemnification
and other rights provided by this Article shall continue as to a person who
has
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ceased to be a Director or Officer and shall inure to the benefit of the
heirs, executors and administrators of such a person. This Article shall not
protect any such person against any liability to the Company or any
Stockholder thereof to which such person would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office ("disabling conduct").
(b) Any current or former Director or Officer of the Company seeking
indemnification within the scope of this Article shall be entitled to advances
from the Company for payment of the reasonable expenses incurred by him in
connection with the matter as to which he is seeking indemnification in the
manner and to the fullest extent permissible under the Maryland General
Corporation Law. The person seeking indemnification shall provide to the
Company a written affirmation of his good faith belief that the standard of
conduct necessary for indemnification by the Company has been met and a
written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. In addition, at
least one of the following additional conditions shall be met: (i) the person
seeking indemnification shall provide security in form and amount acceptable
to the Company for his undertaking; (ii) the Company is insured against losses
arising by reason of the advance; or (iii) a majority of a quorum of Directors
of the Company who are neither "interested persons" as defined in
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Section 2(a)(19) of the Investment Company Act of 1940, as amended, nor
parties to the proceeding ("disinterested non-party Directors"), or
independent legal counsel, in a written opinion, shall have determined, based
on a review of facts readily available to the Company at the time the advance
is proposed to be made, that there is reason to believe that the person
seeking indemnification will ultimately be found to be entitled to
indemnification.
(c) At the request of any person claiming indemnification under this
Article, the Board of Directors shall determine, or cause to be determined, in
a manner consistent with the Maryland General Corporation Law, whether the
standards required by this Article have been met. Indemnification shall be
made only following: (i) a final decision on the merits by a court or other
body before whom the proceeding was brought that the person to be indemnified
was not liable by reason of disabling conduct or (ii) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that
the person to be indemnified was not liable by reason of disabling conduct by
(i) the vote of a majority of a quorum of disinterested non-party Directors or
(ii) an independent legal counsel in a written opinion.
(d) Employees and agents who are not Officers or Directors of the Company
may be indemnified, and reasonable expenses may be advanced to such employees
or agents, as may be provided by action by the Board of Directors or by
contract,
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subject to any limitations imposed by the Investment Company Act
of 1940, as amended.
(e) The Board of Directors may make further provision consistent with law
for indemnification and advance of expenses to Directors, Officers, employees
and agents by resolution, agreement or otherwise. The indemnification provided
by this Article shall not be deemed exclusive of any other right, with respect
to indemnification or otherwise, to which those seeking indemnification may be
entitled under any insurance or other agreement or resolution of Stockholders
or disinterested Directors or otherwise.
(f) References in this Article are to the Maryland General Corporation
Law and to the Investment Company Act of 1940, as amended. No amendment of
these Bylaws shall affect any right of any person under this Article based on
any event, omission or proceeding prior to the amendment.
ARTICLE 5.3. INSURANCE. The Company may purchase and maintain insurance
on behalf of any person who is or was a Director, Officer, employee or agent
of the Company or who, while a Director, Officer, employee or agent of the
Company, is or was serving at the request of the Company as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan, against any liability asserted against and incurred by such
person in any such capacity or arising out of such person's position; PROVIDED
that no
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insurance may be purchased by the Company on behalf of any person against any
liability to the Company or to its Stockholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
ARTICLE 5.4. CHECKS. All checks or demands for money and notes of the
Company shall be signed by such Officer or Officers or such other person or
persons as the Board of Directors may from time to time designate.
ARTICLE 5.5. FISCAL YEAR. The fiscal year of the Company shall be
determined by resolution of the Board of Directors.
BYLAW-SIX: CERTIFICATES OF STOCK
ARTICLE 6.1. CERTIFICATES OF STOCK. The interest of each Stockholder of
the Company shall be evidenced by certificates for shares of stock in such
form as the Board of Directors may from time to time prescribe. The
certificates shall be numbered and entered in the books of the Company as they
are issued. They shall exhibit the stockholder's name and the number of whole
shares and no certificate shall be valid unless it has been signed by the
President, Vice President or Chairman and the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary and bears the corporate
seal. Such seal may be a facsimile, engraved or printed. Where any such
certificate is signed by a Transfer Agent or by a Registrar, the signatures of
any such Officer may be facsimile, engraved or
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printed. In case any of the Officers of the Company whose mutual or facsimile
signature appears on any stock certificate delivered to a Transfer Agent of
the Company shall cease to be such Officer prior to the issuance of such
certificate, the Transfer Agent may nevertheless countersign and deliver such
certificate as though the person signing the same or whose facsimile signature
appears thereon had not ceased to be such Officer, unless written instructions
of the Company to the contrary are delivered to the Transfer Agent.
ARTICLE 6.2. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of
Directors, or the President together with the Treasurer or Secretary, may
direct a new certificate to be issued in place of any certificate theretofore
issued by the Company, alleged to have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming the certificate
of stock to be lost, stolen or destroyed, or by his legal representative. When
authorizing such issue of a new certificate, the Board of Directors, or the
President and Treasurer or Secretary, may, in its or their discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate, or his legal representative, to advertise the
same in such manner as it or they shall require and/or give the Company a bond
in such sum and with such surety or sureties as it or they may direct as
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indemnity against any claim that may be made against the Company with respect
to the certificate alleged to have been lost, stolen or destroyed for such
newly issued certificate.
ARTICLE 6.3. TRANSFER OF STOCK. Shares of the Company shall be
transferable on the books of the Company by the holder thereof in person or by
his duly authorized attorney or legal representative upon surrender and
cancellation of a certificate or certificates for the same number of shares of
the same class, duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, with such proof of the authenticity of
the signature as the Company or its agents may reasonably require. The shares
of stock of the Company may be freely transferred, and the Board of Directors
may, from time to time, adopt rules and regulations with reference to the
method of transfer of the shares of stock of the Company.
ARTICLE 6.4. REGISTERED HOLDER. The Company shall be entitled to treat
the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person whether or not it shall have express or other notice thereof, except as
expressly provided by statute.
ARTICLE 6.5. RECORD DATE. The Board of Directors may fix a time not less
than 10 nor more than 90 days prior to the date of any meeting of Stockholders
or prior to the last day on which the consent or dissent of Stockholders may
be
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effectively expressed for any purpose without a meeting, as the time as of
which Stockholders entitled to notice of, and to vote at, such a meeting or
whose consent or dissent is required or may be expressed for any purpose, as
the case may be, shall be determined; and all such persons who were holders of
record of voting stock at such time, and no other, shall be entitled to notice
of, and to vote at, such meeting or to express their consent or dissent, as
the case may be. If no record date has been fixed, the record date for the
determination of Stockholders entitled to notice of, or to vote at, a meeting
of Stockholders shall be the later of the close of business on the day on
which notice of the meeting is mailed or the thirtieth day before the meeting,
or, if notice is waived by all Stockholders, at the close of business on the
tenth day next preceding the day on which the meeting is held. The Board of
Directors may also fix a time not exceeding 90 days preceding the date fixed
for the payment of any dividend or the making of any distribution, or for the
delivery of evidences of rights, or evidences of interests arising out of any
change, conversion or exchange of capital stock, as a record time for the
determination of the Stockholder entitled to receive any such dividend,
distribution, rights or interests.
ARTICLE 6.6. STOCK LEDGERS. The stock ledgers of the Company, containing
the names and addresses of the Stockholders and the number of shares held by
them respectively, shall be kept at the principal offices of the Company or at
the
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offices of the Transfer Agent of the Company or at such other location as may
be authorized by the Board of Directors from time to time.
ARTICLE 6.7. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may
from time to time appoint or remove Transfer Agents and/or Registrars of
transfers (if any) of shares of stock of the Company, and it may appoint the
same person as both Transfer Agent and Registrar. Upon any such appointment
being made, all certificates representing shares of capital stock thereafter
issued shall be countersigned by one of such Transfer Agents or by one of such
Registrars of transfers (if any) or by both and shall not be valid unless so
countersigned. If the same person shall be both Transfer Agent and Registrar,
only one countersignature by such person shall be required.
BYLAW-SEVEN: AMENDMENTS.
ARTICLE 7.1. GENERAL. Except as provided in the next succeeding sentence
and in the Articles of Incorporation, all Bylaws of the Company, whether
adopted by the Board of Directors or the Stockholders, shall be subject to
amendment, alteration or repeal, and new Bylaws may be made, by the
affirmative vote of a majority of either: (a) the holders of record of the
outstanding shares of stock of the Company entitled to vote, at any annual or
special meeting, the notice or waiver of notice of which shall have specified
or summarized the proposed amendment, alteration, repeal or new Bylaw; or (b)
the Directors, at any regular or special meeting, the notice or
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waiver of notice of which shall have specified or summarized the proposed
amendment, alteration, repeal or new Bylaw. The provisions of Articles 2.5,
3.2, 3.3, 7.1 and 8.1 of these Bylaws shall be subject to amendment,
alteration or repeal by: (i) the affirmative vote of the holders of record of
75% of the outstanding shares of stock of the Company entitled to vote, at any
annual or special meeting, the notice or waiver of notice of which shall have
specified or summarized the proposed amendment, alteration or repeal or (ii)
the Board of Directors including the affirmative vote of 75% of the Continuing
Directors (as such term is defined in Article EIGHTH of the Company's Articles
of Incorporation), at any regular or special meeting, the notice or waiver of
notice of which shall have specified or summarized the proposed amendment,
alteration or repeal.
BYLAW-EIGHT: SPECIAL PROVISIONS.
ARTICLE 8.1. ACTIONS RELATING TO DISCOUNT IN PRICE OF THE COMPANY'S
SHARES. In the event that at any time after the second anniversary of the
initial public offering of shares of the Company's Common Stock such shares
publicly trade for a substantial period of time at a substantial discount from
the Company's then current net asset value per share, the Board of Directors
shall consider, at its next regularly scheduled meeting, taking various
actions designed to eliminate the discount. The actions considered by the
Board of Directors may include periodic repurchases by the Company of its
shares of Common Stock or an amendment to the Company's Articles of
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Incorporation to make the Company's Common Stock a "redeemable security" (as
such term is defined in the Investment Company Act of 1940, as amended),
subject in all events to compliance with all applicable provisions of the
Company's Articles of Incorporation, these Bylaws, The Maryland General
Corporation Law and the Investment Company Act of 1940, as amended.
Dated: May ____, 1996
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INVESTMENT MANAGEMENT AGREEMENT
Brundage, Story and Rose, L.L.C.
One Broadway
New York, New York 10004
Ladies and Gentlemen:
The Thermo Opportunity Fund, Inc. (the "Fund") is a non-
diversified, closed-end management investment company registered under the
Investment Company Act of 1940, as amended (the "Act"), and subject to the
rules and regulations promulgated thereunder.
1. APPOINTMENT AS MANAGER. The Fund being duly
authorized hereby appoints and employs Brundage, Story and Rose,
L.L.C. ("the Manager") as the discretionary portfolio manager of
the Fund, on the terms and conditions set forth herein.
2. ACCEPTANCE OF APPOINTMENT; STANDARD OF
PERFORMANCE. The Manager accepts the appointment as the
discretionary portfolio manager and agrees to use its best
professional judgment to make timely investment decisions for the
Fund in accordance with the provisions of this Agreement.
3. PORTFOLIO MANAGEMENT SERVICES OF MANAGER. The
Manager is hereby employed and authorized to select portfolio
securities for investment by the Fund, to purchase and sell
securities of the Fund, and upon making any purchase or sale
decision, to place orders for the execution of such portfolio
transactions in accordance with paragraphs 5 and 6 hereof. In
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providing portfolio management services to the Fund, the Manager shall be
subject to such investment restrictions as are set forth in the Act and the
rules thereunder, the Internal Revenue Code, applicable state securities laws,
the supervision and control of the Board of Directors of the Fund, such
specific instructions as the Board of Directors may adopt and communicate to
the Manager, the investment objectives, policies and restrictions of the Fund
furnished pursuant to paragraph 4, and the provisions of Schedule A hereto.
The Manager is not authorized by the Fund to take any action, including the
purchase or sale of securities for the Fund, in contravention of any
restriction, limitation, objective, policy or instruction described in the
previous sentence. The Manager shall maintain on behalf of the Fund the
records listed in Schedule A hereto (as amended from time to time).
4. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS. The
Fund will provide the Manager with the statement of investment objectives,
policies and restrictions applicable to the Fund as contained in the Fund's
registration statements under the Act and the Securities Act of 1933, which
may consist of Parts A and B of the Fund's Registration Statement as filed
with the Securities and Exchange Commission ("SEC") on Form N-2, and any
instructions adopted by the Board of Directors supplemental thereto. The Fund
will provide the Manager with such further information concerning the
investment objectives, policies and restrictions applicable thereto as the
Manager may from time to time reasonably request. The Fund retains the right,
on written
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notice to the Manager, to modify any such investment objectives, policies or
restrictions in any manner at any time.
5. TRANSACTION PROCEDURES. All transactions will be
consummated by payment to or delivery by The Fifth Third Bank or any successor
custodian (the "Custodian"), or such depositories or agents as may be
designated by the Custodian in writing, as custodian for the Fund, of all cash
and/or securities due to or from the Fund, and the Manager shall not have
possession or custody thereof. The Manager shall advise the Custodian and
confirm in writing to the Fund all investment orders for the Fund placed by it
with brokers and dealers. The Manager shall issue to the Custodian such
instructions as may be appropriate in connection with the settlement of any
transaction initiated by the Manager. It shall be the responsibility of the
Manager to take appropriate action if the Custodian fails to confirm in
writing proper execution of the instructions.
6. ALLOCATION OF BROKERAGE. The Manager shall have
the authority and discretion to select brokers and dealers to
execute portfolio transactions initiated by the Manager, and for
the selection of the markets on or in which the transactions will
be executed.
A. In doing so, the Manager will attempt to
obtain the best overall results taking into account the execution and
operational facilities of the broker or dealer, the type of transaction
involved and other factors. Consistent with this policy, the Manager may
select a broker or dealer that also provides brokerage and research services
(as those terms are
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defined in Section 28(e) of the Securities Exchange Act of 1934, as amended)
to any other accounts over which the Manager exercises investment discretion.
It is understood that neither the Fund nor the Manager has adopted a formula
for the allocation of the Fund's investment transaction business. It is also
understood that it is desirable for the Fund that the Manager have access to
supplemental investment and market research and security and economic analyses
provided by certain brokers and dealers who may execute transactions for the
Fund and that the commissions paid to such brokers and dealers may be higher
than those which the Fund might otherwise have paid to another broker or
dealer if such services had not been provided. Therefore, the Manager is
authorized to place orders for the purchase and sale of securities for the
Fund with such certain brokers or dealers, subject to review by the Fund's
Board of Directors from time to time with respect to the extent and
continuation of this practice and provided the Manager determines in good
faith that the amount of the commission is reasonable in relation to the value
of the brokerage and research services provided by the executing broker or
dealer. The determination may be viewed in terms of either a particular
transaction or the Manager's overall responsibilities with respect to the Fund
and to any other accounts over which it exercises investment discretion.
Information so received will be in addition to, and not in lieu of, the
services required to be performed by the Manager under this Investment
Management Agreement, and the expenses of the Manager will not necessarily
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be reduced as a result of the receipt of such supplemental information.
Research services furnished to the Manager by brokers who effect securities
transactions for the Fund may be used by the Manager in providing services to
other investment companies and accounts which the Manager may manage.
Similarly, research services furnished to the Manager by brokers who effect
securities transactions for other investment companies and accounts which the
Manager manages now or in the future may be used by the Manager in servicing
the Fund. Not all of these research services are used by the Manager in
managing any particular account, including the Fund. It is understood that
although the information may be useful to the Fund and the Manager, it is not
possible to place a dollar value on such information.
On occasions when the Manager deems the purchase or sale of
a security to be in the best interest of the Fund as well as any other
clients, the Manager, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the
securities to be sold or purchased in order to obtain the most favorable price
or lower brokerage commissions and efficient execution. In such event,
allocation of the securities so purchased or sold, as well as expenses
incurred in the transaction, will be made by the Manager, insofar as feasible,
in the manner it considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients.
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For each fiscal quarter of the Fund, the Manager shall
prepare and render reports to the Fund's Board of Directors of the total
brokerage business placed and the manner in which the allocation has been
accomplished. Such reports shall set forth at a minimum the information
required to be maintained by Rule 31a-1(b)(9) under the Act.
B. The Manager may execute any portfolio
transactions for the Fund's account with a broker or dealer which is an
"affiliated person" (as defined in the Act) of the Fund, the Manager or any
portfolio manager of the Fund subject to Paragraph 6(A) above and provisions
adopted by the Board of Directors pursuant to Rule 17e-1 under the 1940 Act.
In order for such an affiliated person to be permitted to effect any portfolio
transactions for the Fund, the commissions, fees or other remuneration
received by such affiliated person must be reasonable and fair compared to the
commissions, fees or other remuneration received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time.
This standard would allow such an affiliated person to receive no more than
the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arm's-length transaction. The Fund agrees that it
will provide the Manager with a list of brokers and dealers which are
"affiliated persons" of the Fund or the Manager.
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7. PROXIES. The Fund will vote all proxies solicited
by or with respect to the issuers of securities in which assets
of the Fund may be invested from time to time. At the Fund's
request, the Manager shall provide the Fund with its recommendations as to the
voting of such proxies.
8. REPORTS TO THE MANAGER. The Fund will provide the
Manager with such periodic reports concerning the status of the
Fund as the Manager may reasonably request.
9. FEES FOR SERVICES. For the services provided to the Fund,
the Fund shall pay the Manager, on the first business day following the end of
each month, a fee equal to one twelfth (1/12) of the annual rate of .8% of the
Fund's average weekly net assets during such month.
10. EXPENSES. During the term of this Agreement, the
Manager will pay all expenses incurred by it in connection with
its portfolio management services pertaining to the Fund.
Notwithstanding the foregoing, the Fund shall pay all of its own
expenses, including the following:
(a) Organizational and offering expenses of the Fund;
(b) Brokerage fees and commissions with regard to
portfolio transactions of the Fund;
(c) Fees and expenses of the custodian of the Fund's
portfolio securities;
(d) Fees and expenses of the Fund's administrative
agent, the Fund's stock transfer and dividend
paying agent, the Fund's accounting agent and the
plan agent for the Fund's Dividend Reinvestment
Plan or, if the Fund performs any such services
without an agent, the costs of the same;
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(e) Auditing and legal expenses;
(f) Insurance expenses, including the expense of
officer and director insurance;
(g) Cost of maintenance of the Fund's existence as a
legal entity;
(h) Compensation and expenses of directors of the Fund
who are not interested persons of the Manager as
that term is defined by law;
(i) Costs of stockholders' meetings and other
stockholder relations functions;
(j) Federal and State registration or qualification
fees and expenses;
(k) Dues and expenses incurred in connection with
listing the Fund's shares on any stock exchange;
(l) Dues and expenses incurred in connection with
membership in investment company organizations;
(m) Costs of setting in type, printing and mailing
Prospectuses, reports and notices to existing
shareholders;
(n) Taxes, interest charges and extraordinary
expenses;
(o) The portfolio management fee payable to the
Manager, as provided in paragraph 9 herein; and
(p) other extraordinary or nonrecurring expenses.
It is understood that the Fund may desire to register the
Fund's shares for sale in certain states which impose expense limitations on
investment companies. The Manager agrees to reimburse the Fund an amount equal
to any excess expenses incurred over the most stringent of such states'
limitations in which the Fund's shares are registered. The Manager shall in no
event be required to reimburse an amount greater than its fees received from
the Fund pursuant to paragraph 9, above.
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11. OTHER INVESTMENT ACTIVITIES OF THE MANAGER. The
Fund acknowledges that the Manager or one or more of its affiliates may
have investment responsibilities or render investment advice to or perform
other portfolio management services for other individuals or entities and that
the Manager, its affiliates or any of its or their directors, officers, agents
or employees may buy, sell or trade in any securities for its or their
respective accounts ("Affiliated Accounts"). Subject to the provisions of
paragraph 2 hereof, the Fund agrees that the Manager or its affiliates may
give advice or exercise investment responsibility and take such other action
with respect to other Affiliated Accounts which may differ from the advice
given or the timing or nature of action taken with respect to the Fund,
provided that the Manager acts in good faith, and provided further, that it is
the Manager's policy to allocate, within its reasonable discretion, investment
opportunities to the Fund over a period of time on a fair and equitable basis
relative to the Affiliated Accounts, taking into account the investment
objectives and policies of the Fund and any specific investment restrictions
applicable thereto, each as described in the Fund's Prospectus under the
heading "Investment Objective and Policies." If any Affiliated Account or
Accounts are prepared to invest in, or desire to dispose of, the same security
at the same time as the Fund, transactions in such securities will be made,
insofar as feasible, for the Fund and the Affiliated Accounts in a manner
deemed equitable to all. In some cases, this procedure may
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adversely affect the size of the position obtained for or disposed of by the
Fund or the price paid or received by the Fund. In addition, because of
different investment objectives, a particular security may be purchased for
one or more funds or accounts when one or more funds or accounts are selling
the same security. The Fund acknowledges that one or more of the Affiliated
Accounts may at any time hold, acquire, increase, decrease, dispose of or
otherwise deal with positions in investments in which the Fund may have an
interest from time to time, whether in transactions which involve the Fund or
otherwise. The Manager shall have no obligation to acquire for the Fund a
position in any investment which any Affiliated Account may acquire, and the
Fund shall have no first refusal, co-investment or other rights in respect of
any such investment, either for the Fund or otherwise.
12. CERTIFICATES OF AUTHORITY. The Fund and the Manager
shall furnish to each other from time to time certified copies of the
resolutions of their Boards of Directors or executive committees, as the case
may be, evidencing the authority of officers and employees who are authorized
to act on behalf of the Fund and/or the Manager.
13. LIMITATION OF LIABILITY. The Manager shall not be
liable for any action taken, omitted or suffered to be taken by
it in its reasonable judgment, in good faith and believed by it
to be authorized or within the discretion or rights or powers
conferred upon it by this Agreement, or in accordance with (or in
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the absence of) specific directions or instructions from the Fund; PROVIDED,
HOWEVER, that such acts or omissions shall not have resulted from the
Manager's willful misfeasance, bad faith or gross negligence, a violation of
the standard of care established by and applicable to the Manager in its
actions under this Agreement or breach of its duty or of its obligations
hereunder. Nothing in this paragraph 13 shall be construed in a manner
inconsistent with Sections 17(h) and (i) of the Act.
14. CONFIDENTIALITY. Subject to the duty of the
Manager and the Fund to comply with applicable law, including any
demand of any regulatory or taxing authority having jurisdiction,
the parties hereto shall treat as confidential all information
pertaining to the Fund and the actions of the Manager and the
Fund in respect thereof.
15. ASSIGNMENT. No assignment of this Agreement shall be
made by the Manager, and this Agreement shall terminate automatically in the
event of assignment. The Manager shall notify the Fund in writing sufficiently
in advance of any proposed change of control, as defined in Section 2(a)(9) of
the Act, as will enable the Fund to consider whether an assignment will occur,
and to take the steps necessary to enter into a new contract with the Manager.
16.REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE
FUND. The Fund represents, warrants and agrees that:
A. The Manager has been duly appointed by the
Board of Directors of the Fund to provide portfolio management services to the
Fund as contemplated hereby.
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B. The Fund will deliver to the Manager a true
and complete copy of its then current prospectus and statement of additional
information as effective from time to time and such other documents or
instruments governing the investments of the Fund and such other information
as is necessary for the Manager to carry out its obligations under this
Agreement.
C. The Fund is currently in compliance and shall
at all times comply with the requirements imposed upon the Fund by applicable
laws and regulations.
17. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE
MANAGER. The Manager represents, warrants and agrees that:
A. The Manager is registered as an "investment
adviser" under the Investment Advisers Act of 1940, as amended.
B. The Manager will maintain, keep current and
preserve on behalf of the Fund, in the manner and for the time periods
required or permitted by the Act, the records identified in Schedule A. The
Manager agrees that such records (unless otherwise indicated on Schedule A)
are the property of the Fund, and will be surrendered to the Fund promptly
upon request.
C. The Manager will complete such reports
concerning purchases or sales of securities on behalf of the Fund as the Fund
may from time to time require to ensure compliance with the Act, the Internal
Revenue Code and applicable state securities laws.
D. The Manager will adopt a written code of
ethics complying with the requirements of Rule 17j-1 under the
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Act and will provide the Fund with a copy of such code of ethics and evidence
of its adoption. Within forty-five (45) days of the end of each calendar
quarter of each year while this Agreement is in effect, the Manager shall
certify to the Fund that the Manager has complied with the requirements of
Rule 17j-1 during the previous quarter and that there has been no violation of
the Manager's code of ethics or, if such a violation has occurred, that
appropriate action was taken in response to such violation. Upon the written
request of the Fund, the Manager shall submit to the Fund the reports required
to be made by Rule 17j-1(c)(1) under the Act.
E. The Manager will, promptly after filing with
the Securities and Exchange Commission any amendment to its Form ADV, furnish
a copy of such amendment to the Fund.
F. Upon request of the Fund, the Manager will
provide assistance to the Custodian in the collection of income
due or payable to the Fund.
G. The Manager will immediately notify the Fund
of the occurrence of any event which would disqualify the Manager from serving
as an investment adviser to an investment company pursuant to Section 9(a) of
the Act or otherwise.
18. AMENDMENT. This Agreement may be amended at any time,
but only by written agreement between the Manager and the Fund, which
amendment, other than amendments to Schedule A, is subject to the approval of
the Board of Directors and the shareholders of the Fund in the manner required
by the Act and
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the rules thereunder, subject to any applicable exemptive order of the
Securities and Exchange Commission modifying the provisions of the Act with
respect to approval of amendments to this Agreement.
19. EFFECTIVE DATE; TERM. This Agreement shall become
effective on the date of its execution and shall remain in force for two years
from the date thereof, and from year to year thereafter but only so long as
such continuance is specifically approved at least annually by the vote of a
majority of the Directors of the Fund who are not interested persons of the
Fund or the Manager, cast in person at a meeting called for the purpose of
voting on such approval, and by a vote of the Directors of the Fund or of a
majority of the outstanding voting securities of the Fund. The aforesaid
requirement that this Agreement may be continued "annually" shall be construed
in a manner consistent with the Act and the rules and regulations thereunder.
20. TERMINATION. This Agreement may be terminated by either
party hereto, without the payment of any penalty, immediately upon written
notice to the other in the event of a material breach of any provision thereof
by the party so notified, or otherwise upon sixty (60) days' written notice to
the other, but any such termination shall not affect the status, obligations
or liabilities of any party hereto to the other.
21. DEFINITIONS. As used in paragraphs 15 and 19 of
this Agreement, the terms "assignment," interested person" and
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"vote of a majority of the outstanding voting securities" shall have the
meanings set forth in the Act and the rules and regulations thereunder.
22. APPLICABLE LAW. To the extent that state law is
not preempted by the provisions of any law of the United States
heretofore or hereafter enacted, as the same may be amended from
time to time, this Agreement shall be administered, construed and
enforced according to the laws of the State of New York.
BRUNDAGE, STORY AND ROSE, L.L.C. THE THERMO OPPORTUNITY FUND,
INC.
By:____________________________ By:____________________________
Title:_________________________ Title: President
Date: , 1996 Date: , 1996
____________ ___________
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SCHEDULE A
RECORDS TO BE MAINTAINED BY THE MANAGER
1. (Rule 31a-1(b)(5) and (6)) A record of each brokerage order,
and all other portfolio purchases or sales, given by the
Manager on behalf of the Fund for, or in connection with,
the purchase or sale of securities, whether executed or
unexecuted. Such records shall include:
A. The name of the broker;
B. The terms and conditions of the order and of any
modification or cancellation thereof;
C. The time of entry or cancellation;
D. The price at which executed;
E. The time of receipt of a report of execution; and
F. The name of the person who placed the order on
behalf of the Fund.
2. (Rule 31a-1(b)(9)) A record for each fiscal quarter,
completed within ten (10) days after the end of the
quarter, showing specifically the basis or bases upon
which the allocation of orders for the purchase and
sale of portfolio securities to named brokers or
dealers was effected, and the division of brokerage
commissions or other compensation on such purchase and
sale orders. Such record:
A. Shall include the consideration given to:
(i) The sale of shares of the Fund by brokers or
dealers.
(ii) The supplying of services or benefits by
brokers or dealers to:
(a) The Fund;
(b) the Manager;
(c) any other portfolio manager of the Fund;
and
(d) any person affiliated with the foregoing
persons.
(iii) Any other consideration other than the technical
qualifications of the brokers and dealers as such.
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B. Shall show the nature of the services or benefits
made available.
C. Shall describe in detail the application of any
general or specific formula or other determinant
used in arriving at such allocation of purchase and
sale orders and such division of brokerage
commissions or other compensation.
D. The name of the person responsible for making the
determination of such allocation and such division
of brokerage commissions or other compensation.
3. (Rule 31a-1(b)(10)) A record in the form of an
appropriate memorandum identifying the person or
persons, committees or groups authorizing the purchase
or sale of portfolio securities. Where an
authorization is made by a committee or group, a record
shall be kept of the names of its members who
participate in the authorization. There shall be
retained as part of this record: any memorandum,
recommendation or instruction supporting or authorizing
the purchase or sale of portfolio securities and such
other information as is appropriate to support the
authorization, including such information as is
appropriate to support the determination that such
security is a permitted investment for the Fund.*
4. (Rule 31a-1(f)) Such accounts, books and other
documents as are required to be maintained by
registered investment advisers by rules adopted under
Section 204 of the Investment Advisers Act of 1940, to
the extent such records are necessary or appropriate to
record the Manager's transactions with respect to the
Fund.
_________________
*Such information might include: the current Form 10- K,
annual and quarterly reports, press releases, reports by analysts and from
brokerage firms (including their recommendation; i.e., buy, sell, hold) or any
internal reports or portfolio manager reviews.
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ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT dated as of_____________________, 1996 between The
Thermo Opportunity Fund, Inc. (the "Fund"), a Maryland corporation, and
MGF Service Corp. ("MGF"), an Ohio corporation.
WHEREAS, the Fund has been organized to operate as a
non-diversified, closed-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund wishes to avail itself of the information,
advice, assistance and facilities of MGF to perform on behalf of the Fund the
services as hereinafter described; and
WHEREAS, MGF wishes to provide such services to the Fund
under the conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained in this Agreement, the Fund and MGF agree as follows:
1. EMPLOYMENT. The Fund, being duly authorized, hereby
employs MGF to perform those services described in this Agreement. MGF
shall perform the obligations thereof upon the terms and conditions
hereinafter set forth.
2. FUND ADMINISTRATION. Subject to the direction and control
of the Fund, MGF shall supervise the Fund's business affairs not otherwise
supervised by other agents of the Fund. MGF shall (1) prepare all reports
required to be filed by the Fund with the Securities and Exchange Commission
("SEC") on Form N-SAR, or such other form as the SEC may substitute for Form
N-SAR; (2) prepare and file the Fund's federal, state and local tax returns,
and review such returns after they are prepared; (3) respond to certain
inquiries from the Fund's stockholders in connection with proxies, rights
offerings and other such events; (4) assist in the preparation and
dissemination to stockholders of any Fund proxy materials and rights offering
materials and oversee the tabulation of proxies by the Fund's transfer agent,
(5) negotiate contractual arrangements with the Fund's agents, including
custodians, transfer agents, dividend paying agents, independent accountants
and printing companies, monitor the performance of such agents pursuant to
such arrangements, and make such reports and recommendations to the Board of
Directors concerning the provision of such services as the Fund reasonably
requests or MGF deems appropriate; (6) assist in preparing financial
information relating to the Fund for the Fund's periodic reports to
stockholders, prospectuses, proxy materials and earnings releases; (7) assist
in monitoring compliance of the Fund's operations with the 1940 Act and with
its investment policies and limitations; (8) assist in the calculation of the
Fund's net asset value in accordance with the Fund's registration statement
under the 1940 Act and the Securities Act of 1933 and make the Fund's
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net asset value available for public dissemination; (9) assist in establishing
the accounting policies of the Fund; (10) assist the Fund in determining the
amount of dividends or other distributions available to be paid by the Fund to
its stockholders; (11) arrange for the printing (at the Fund's expense) of
financial reports, prospectuses, proxy materials and dividend notices to
stockholders; (12) provide the Fund's transfer agent, dividend paying agent
and custodian with such information as is required for such parties to effect
the payment of dividends and other distributions and implementing the Fund's
Dividend Reinvestment Plan; and (13) assist in the preparation and
dissemination of press releases regarding such dividends and other
distributions. Although this Agreement does not specify the level of
assistance to be provided by MGF, it does obligate MGF to render such services
when, as and to the extent that the Fund deems appropriate in order for the
Fund to obtain the benefits of the Agreement. MGF shall provide personnel to
serve as officers of the Fund if so elected by the Board of Directors of the
Fund; provided, however, that the Fund shall reimburse MGF for the expenses
incurred by such personnel in attending Board of Directors' meetings and any
shareholders' meetings of the Fund.
3. RECORD KEEPING AND OTHER INFORMATION. MGF shall create
and maintain all necessary records in accordance with all applicable laws,
rules and regulations, including but not limited to records required by
Section 31(a) of the 1940 Act and the rules thereunder, as the same may be
amended from time to time, pertaining to the various functions performed by it
and not otherwise created and maintained by another party pursuant to contract
with the Fund. Where applicable, such records shall be maintained by MGF for
the periods and in the places required by Rule 31a-2 under the 1940 Act.
4. AUDIT, INSPECTION AND VISITATION. MGF shall make
available to the Fund during regular business hours all records and other data
created and maintained pursuant to the foregoing provisions of this Agreement
for audit and inspection by the Fund or any regulatory agency having authority
over the Fund.
5. COMPENSATION. For the performance of MGF's obligations
under this Agreement, the Fund shall pay MGF, on the first business day
following the end of each month, a fee equal to one twelfth (1/12) of the
annual rate of .15% of the Fund's average weekly net assets during such month.
MGF shall not be required to reimburse the Fund or the Fund's investment
adviser for (or have deducted from its fees) any expenses in excess of expense
limitations imposed by certain state securities commissions having
jurisdiction over the Fund.
6. INDEMNIFICATION OF MGF. MGF may rely on information
reasonably believed by it to be accurate and reliable. Except as may otherwise
be required by the 1940 Act and the rules thereunder, neither MGF nor its
shareholders, officers, directors, employees, agents, control persons or
affiliates of any thereof shall be subject to any liability for, or any
damages, expenses or losses incurred by the Fund in connection with, any error
of judgment, mistake of law, any act or omission connected with or arising out
of any services rendered under or payments made pursuant to this Agreement or
any other matter to
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<PAGE>
which this Agreement relates, except by reason of willful misfeasance, bad
faith or gross negligence on the part of any such persons in the performance
of the duties of MGF under this Agreement or by reason of reckless disregard
by any of such persons of the obligations and duties of MGF under this
Agreement.
Any person, even though also a director, officer,
employee, shareholder or agent of MGF, or any of its affiliates, who may be or
become an officer, director, employee or agent of the Fund, shall be deemed,
when rendering services to the Fund or acting on any business of the Fund, to
be rendering such services to or acting solely as an officer, director,
employee or agent of the Fund and not as a director, officer, employee,
shareholder or agent of or one under the control or direction of MGF or any of
its affiliates, even though paid by one of those entities.
Notwithstanding any other provision of this Agreement,
the Fund shall indemnify and hold harmless MGF, its directors, officers,
employees, shareholders, agents, control persons and affiliates, from and
against any and all claims, demands, expenses and liabilities (whether with or
without basis in fact or law) of any and every nature which MGF may sustain or
incur or which may be asserted against MGF by any person, by reason of, or as
a result of: (i) any action taken or omitted to be taken by MGF in good faith
in reliance upon any certificate, instrument, order or stock certificate
believed by it to be genuine and to be signed, countersigned or executed by
any duly authorized person, upon the oral instructions or written instructions
of an authorized person of the Fund or upon the opinion of legal counsel for
the Fund or its own counsel; or (ii) any action taken or omitted to be taken
by MGF in connection with its appointment in good faith in reliance upon any
law, act, regulation or interpretation of the same even though the same may
thereafter have been altered, changed, amended or repealed. However,
indemnification under this subparagraph shall not apply to actions or
omissions of MGF or its directors, officers, employees, shareholders or agents
in cases of its or their own gross negligence, willful misconduct, bad faith,
or reckless disregard of its or their own duties hereunder.
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<PAGE>
7. SERVICES FOR OTHERS. Nothing in this Agreement shall
prevent MGF or any affiliated person of MGF from providing services for any
other person, firm or corporation, including other investment companies;
provided, however, that MGF expressly represents that it will undertake no
activities which, in its judgment, will adversely affect the performance of
its obligations to the Fund under this Agreement.
8. COMPLIANCE WITH THE 1940 ACT. The parties hereto
acknowledge and agree that nothing contained herein shall be construed to
require MGF to perform any services for the Fund which services could cause
MGF to be deemed an "investment adviser" of the Fund within the meaning of
Section 2(a)(20) of the Investment Company Act of 1940 or to supersede or
contravene the Prospectus or Statement of Additional Information of the Fund
or any provisions of the 1940 Act and the rules thereunder.
9. RENEWAL AND TERMINATION. This Agreement shall become
effective on the date first above written and shall remain in force for a
period of two (2) years from such date, and from year to year thereafter, but
only so long as such continuance is specifically approved at least annually by
the vote of a majority of the Fund's Directors who are not interested persons
of the Fund or MGF, cast in person at a meeting called for the purpose of
voting on such approval and by a vote of the Board of Directors or of a
majority of the Fund's outstanding voting securities. This Agreement may be
terminated without the payment of any penalty by either party upon sixty (60)
days' written notice to the other party. This Agreement shall terminate
automatically in the event of its assignment. Upon the termination of this
Agreement, the Fund shall pay MGF such compensation as may be payable for the
period prior to the effective date of such termination.
10. MISCELLANEOUS. Each party agrees to perform such further
acts and execute such further documents as are necessary to effectuate the
purposes hereof. This Agreement shall be construed and enforced in accordance
with and governed by the laws of the State of Ohio. The captions in this
Agreement are included for convenience of reference only and in no way define
or delimit any of the provisions hereof or otherwise affect their construction
or effect.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the day and year first above written.
THE THERMO OPPORTUNITY FUND, INC.
By: ________________________________
Its: President
MGF SERVICE CORP.
By: ________________________________
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<PAGE>
Its: President
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AGREEMENT RELATING TO INITIAL CAPITAL
______________ , 1996
THE THERMO OPPORTUNITY FUND, INC.
312 Walnut Street, 21st Floor
Cincinnati, OH 45202
Ladies and Gentlemen:
In conjunction with the purchase by Brundage, Story and Rose
(the "Purchaser") of___shares of beneficial interest of The Thermo Opportunity
Fund, Inc. (The "Shares"), the Purchaser hereby represents that it is
acquiring the Shares for investment with no intention of reselling or
otherwise distributing the Shares. The Purchaser hereby further agrees that
any transfer of any of the Shares or any interest therein shall be subject to
the following conditions:
1. The Purchaser shall furnish you and counsel
satisfactory to you prior to the time of transfer,
a written description of the proposed transfer
specifying its nature and consequence and giving
the name of the proposed transferee.
2. You shall have obtained from your counsel a written
opinion stating whether in the opinion of such
counsel the proposed transfer may be effected
without registration under the Securities Act of
1933. If such opinion states that such transfer
may be so effected, the Purchaser shall then be
entitled to transfer the Shares in accordance with
the terms specified in its description of the
transaction to you. If such opinion states that
the proposed transfer may not be so effected, the
Purchaser will not be entitled to transfer the
Shares unless the Shares are registered.
The Purchaser hereby authorizes you to take such action as
you shall reasonably deem appropriate to prevent any violation of the
Securities Act of 1933 in connection with the transfer of the Shares,
including the imposition of a requirement that any transferee of the Shares
sign a letter agreement similar to this one. The Purchaser agrees that in the
event the Shares are sold by the Purchaser or its successors or any current
holder prior to the complete amortization of organization expenses by The
Thermo Opportunity Fund, Inc., the proceeds payable in respect of the Shares
shall be reduced by the pro-rata share (based on the proportionate share of
the Shares sold to the
<PAGE>
total number of the Shares outstanding at the time of sale) of the then
unamortized deferred organization expenses as of the date of such redemption.
Very truly yours,
BRUNDAGE, STORY AND ROSE LLC
By:
---------------------------
Its: President
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