SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-K
(mark one)
[X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 2, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-13085
METRIKA SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 33-0733537
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5788 Pacific Center Boulevard
San Diego, CA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of January 29, 1999, was approximately $15,780,000.
As of January 29, 1999, the Registrant had 7,714,028 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
January 2, 1999, are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 27, 1999, are incorporated by reference into
Part III.
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PART I
Item 1. Business
(a) General Development of Business.
The businesses of Metrika Systems Corporation (the Company or the
Registrant) operate in two segments: On-line Raw Materials Analysis and On-line
Finished Materials Quality Control. The Company's Raw Materials segment consists
of Gamma-Metrics, which designs, develops, manufactures, and sells on-line
process-optimization systems that provide real-time, nondestructive analysis of
the composition of raw materials in basic-materials production processes,
including coals, cement, and minerals. In October 1998, this segment acquired MF
Physics Corporation for $2 million. MF Physics manufactures neutron generators,
pneumatic sample-transfer systems, and a number of neutron-activation analysis
products for raw materials.
The Company's Finished Materials segment consists of Radiometrie, which
manufactures advanced systems used to measure and control parameters such as
materials thickness, coating thickness, and coating weight in web-type materials
such as metal strip, rubber, and plastic foils. Customers use these systems to
improve product quality and consistency, lower material costs, reduce energy
consumption, and minimize waste. In July 1998, this segment acquired the stock
of Honeywell-Measurex Data Measurement Corporation from Honeywell-Measurex
Corporation for $29.0 million in cash. This business was renamed Radiometrie
Corporation (Radiometrie U.S.). Radiometrie U.S. manufactures and sells
computerized noncontact thickness, coating, and other measurement systems for
the flat metal processing industry.
The Company's systems make real-time, on-line, precise measurements of
materials using advanced scientific measurement techniques, including gamma
spectroscopy, beta particle detection, laser spectroscopy, X-ray fluorescence,
and ultrasound that allow noninvasive and nondestructive analysis. The Company's
systems incorporate proprietary intelligent sensors that have been developed for
specific production processes along with ultra high-speed signal-processing
electronics. These systems can be combined with the Company's proprietary
real-time software to form integrated process optimization systems designed to
fit the customer's specific application.
The Company was incorporated as a Delaware corporation in November
1996. In connection with the Company's incorporation, Thermo Instrument
Systems Inc. transferred to the Company the assets, liabilities, and
business of its Gamma-Metrics subsidiary and Radiometrie division in
exchange for 5,000,000 shares of the Company's common stock. As of
January 2, 1999, Thermo Instrument owned 5,219,600 shares of the Company's
common stock, representing 67% of such stock outstanding. During 1998*,
Thermo Instrument purchased 219,600 shares in the open market for a total
purchase price of $2.3 million. Thermo Instrument develops, manufactures,
markets, and services instruments and software used for identification and
quantification of complex molecular compounds and elements in gases,
liquids, and solids. Uses include pharmaceutical research and clinical
diagnostics, monitoring and measuring environmental pollutants, industrial
inspection, and test and control for quality assurance and productivity
improvement. In addition, Thermo Instrument develops, manufactures,
markets, and services equipment for the measurement, preparation, storage,
and automation of sample materials and photonics and vacuum components for
original equipment manufacturers. Thermo Instrument is an 85%-owned
subsidiary of Thermo Electron Corporation. As of January 2, 1999, Thermo
Electron owned 627,100 shares of common stock of the Company, representing
8% of such stock outstanding. During 1998, Thermo Electron purchased
these shares in the open market for $8.9 million. Thermo Electron is a
world leader in monitoring, analytical, and biomedical instrumentation;
biomedical products including heart-assist devices, respiratory-care
equipment, and mammography systems; and paper recycling and papermaking
equipment. Thermo Electron also develops alternative-energy systems and
clean fuels, provides a range of services including industrial outsourcing
and environmental-liability management, and conducts research and
development in advanced imaging, laser, and electronic
information-management technologies.
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* References to 1998, 1997, and 1996 herein are for the fiscal years ended
January 2, 1999, January 3, 1998, and December 28, 1996, respectively.
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Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Annual Report on Form
10-K. For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects,"
"seeks," "estimates," and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause the results of the Company to differ materially from those indicated by
such forward-looking statements, including those detailed under the caption
"Forward-looking Statements" in the Registrant's 1998 Annual Report to
Shareholders, which statements are incorporated herein by reference.
(b) Financial Information About Industry Segments
Financial information concerning the Company's industry segments is
summarized in Note 11 to Consolidated Financial Statements in the Registrant's
1998 Annual Report to Shareholders, which information is incorporated herein by
reference.
(c) Description of Business
(i) Principal Products and Services
On-line Raw Materials Analysis
The Company manufactures on-line process optimization systems that
noninvasively measure and analyze the physical and chemical properties of a
stream of bulk solid materials in real time. The systems are primarily used to
analyze the composition of raw materials for certain basic industries, such as
coal, cement, and minerals. The analysis technique used in the Company's process
optimization systems involves neutron interrogation. Under neutron
interrogation, each element, when activated by neutrons, emits gamma rays of
unique characteristics that allow identification and quantification of the
elements present. Neutron interrogation allows the entire stream of the material
to be analyzed and eliminates the need for sampling. In addition, it provides
accurate analysis of the materials, especially those that are nonhomogeneous,
and can be used to analyze a broad range of substances. The systems contain
proprietary sensors that detect gamma rays emitted from the material being
analyzed, which is activated by the neutron source within the analyzer. This
yields a composite gamma ray spectrum of the material. Through on-line
high-speed spectroscopy, this spectrum is then decomposed into its constituent
parts by using microprocessors and sophisticated real-time analytical software.
The analyzer can then translate this data into the elemental composition of the
raw materials and can also use the information to infer certain quality-control
parameters specific to the process.
The Company currently markets the following family of products based on its
neutron-interrogation technology:
On-line Coal Analyzer. The Company's on-line coal analyzer can examine
entire streams of coal at a rate of up to four hundred tons per hour, determine
the sulfur and ash concentration of the coal on a continuous basis, and can also
simultaneously compute the calorific value of the coal, among other quality
parameters. Customers can use the data to blend or sort the coal depending on
its quality. The Company has developed proprietary high-speed software that can
be incorporated into the system to enable the customer to automatically adjust
and control the coal blending and sorting process on-line.
Coal analyzers are currently used by coal mines and coal-burning utilities.
Coal mines can use the coal analyzer to improve profitability by blending coals
of different quality to meet specific contract requirements or environmental
regulatory standards, by sorting out low-sulfur coal which can be sold for a
premium or by controlling the specific gravity of separation in a coal-cleaning
plant to ensure that quality specifications are met without over-cleaning. In
addition to ensuring more consistent quality, on-line coal analysis improves
recovery or yield from the mine, thus
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extending the life of a mine by reducing the risk of premature exhaustion of
low-sulfur reserves that are required to balance high-sulfur reserves.
Coal-burning utilities use the coal analyzers to reduce costs while satisfying
environmental emissions regulations.
CrossBelt Analyzer. The Company's CrossBelt Analyzer (CBA) is used primarily
by the cement industry to analyze the composition of raw materials used in
cement production. The CBA is essentially a horizontal tunnel that is assembled
around a customer's conveyor belt. The CBA analyzes materials traveling on a
conveyor belt at speeds of up to 600 feet per minute and with material flow
rates in excess of 1,000 tons per hour. The system generates data on the
elemental composition of the entire stream of materials, and can use the
information to infer certain quality-control parameters such as lime-saturation
factor and silica ratio. The CBA can incorporate high-speed proprietary
software, which allows the customer to automatically control production
processes. The CBA is incorporated on-line into their production process, which
enables them to control the mix of raw materials at the beginning of the
production line or to automatically control the blending of additives with
crushed limestone and clay further down the line. Both approaches enable the
producer to achieve more uniform cement quality. The CBA controls the production
process by using the analytical data it compiles to automatically adjust the
composition of the additive mix to achieve target quality levels. This approach
helps reduce variations in the materials fed into the cement kiln yielding
several benefits: lower energy consumption, greater throughput, and extended
refractory life.
Mineral Slurry Analyzers. The Company's on-line analyzers use neutron
interrogation to analyze mineral slurry, a mixture of fine insoluble materials
and water, for the mineral extraction industry. The recovery of almost all
minerals and metals involves multi-step beneficiation processes. In most cases
the beneficiation begins by milling the ore and adding water to form a slurry.
Additional steps to concentrate the element of interest often include size and
mass classification, and froth flotation involving reagents. The Company's
neutron-based mineral slurry analyzer, which analyzes the entire elemental
composition of the slurry, can greatly improve the efficiency of the
beneficiation process by using the collected data to automatically adjust
various process parameters, including the amount of reagents used. The Company
believes its neutron-based mineral slurry analyzer is suitable for controlling
the beneficiation process for a wide variety of minerals.
The Company also manufactures on-line X-ray slurry analyzers and on-line
particle-size analyzers. The X-ray slurry analyzers are used in the mineral
processing industry, primarily for copper, zinc, lead, molybdenum, and uranium,
to measure the concentration of certain elements. The equipment can also be
designed to automatically control and adjust the amount of reagents used in the
mineral beneficiation process. The X-ray slurry analyzer provides customers who
do not require a comprehensive analysis system a cost-effective alternative to
the Company's neutron-based mineral slurry analyzer. The on-line particle-size
analyzers are real-time measuring instruments. The on-line particle-size
analyzers use ultrasound together with proprietary models to determine the
particle-size distribution and percent solids in mineral slurries.
Software Products. The Company complements its application-specific sensor
technology with process optimization software. These systems use adaptive and
predictive controls to maximize use of materials, as well as to blend raw
materials to meet certain requirements in a cost-effective manner. The process
of extracting, beneficiating, and utilizing raw materials is difficult to
control due to variances in chemistry, size, and shape and time delays in the
transport of materials from different points within the handling system. The
Company's proprietary process control software can accomplish these optimization
tasks by performing a model-based estimation and by adaptively controlling
source materials.
FastLab. The Company offers its FastLab analyzer for rapid analysis of
samples off-line, with minimal sample preparation. The FastLab can be used for
numerous applications such as spot-check analysis of raw materials, core hole
analysis, fuel analysis, and chemical additives analysis. This product is
suitable for the same markets that use on-line elemental analysis.
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Process Safety Instrumentation. The Company is a supplier of process safety
instrumentation in the nuclear power industry. The Company's instrumentation is
designed to improve the safety and efficiency of nuclear power plants. In
addition, the Company offers automated test equipment and safety-related
computer software for nuclear power plants and other facilities where
radioactive materials are used.
Neutron Generators. The Company is a supplier of neutron generators for the
mining industry, national laboratories, and high-tech manufacturers. The
Company's product is used as part of a system to detect or measure elements of
interest in a variety of applications including mineral exploration, oil well
logging, explosives detection, and nuclear waste management.
On-line Finished Materials Quality Control
The Company develops, manufactures, and markets gauges and process
optimization systems for industrial manufacturing lines for continuous
production of certain web-type materials. Web-type materials are flat sheet
materials like paper, metal strip, plastic foil, rubber, and glass. Typical
high-volume products made from web-type materials include all types of vehicle
bodies and other parts, metals used for refrigerators and similar products,
beverage and food cans, cladding for buildings, and rubber tires. The Company's
instruments measure the total thickness, basis weight, and coating thickness of
web-type materials such as plastic foils, hot and cold metal strip, rubber,
glass, and non-woven fabrics, and are also capable of detecting pinholes in
these webs. The measuring technology incorporated in the Company's products is
based on partial absorption, reflection, or change in ionizing or infrared
radiation, as well as white light, ultraviolet light, and laser beams, by the
materials to be measured. The Company's systems can measure a single point on
the material to be measured, several points, or generate a "profile" of the web.
Measured values are acquired without contact and without interfering with the
production process, have high measurement accuracy, and are extremely reliable
despite hostile environments. The Company offers its measuring gauges with or
without its process optimization systems, which can be used to automatically
regulate the customer's production process.
The Company's products incorporate a variety of measurement gauges such as
X-ray thickness gauges, isotope thickness gauges, X-ray fluorescence coating
gauges, or beta-backscatter gauges, depending on the application. The thickness
gauges manufactured by the Company basically function by measuring partial
absorption of energy by the material to be measured. The change in the intensity
of the energy emitted is detected by application-specific sensors, then
processed by high-speed microprocessors, before emerging as the measured value.
These instruments can incorporate the Company's high-speed proprietary software
to form a fully integrated process optimization system for continuous
manufacturing processes and improved product quality.
The Company's products reduce the use of raw materials and energy,
maximizing productivity, and product quality. The total thickness of web-type
material, or the coating on it, is measured accurately at the point of
manufacture by the Company's products and compared with an input target value.
Adjustments can be made early in the process because the Company's products can
accurately measure materials closer to the origin of the strip, thus reducing
material waste.
(ii) and (xi) New Products; Research and Development
The Company maintains active programs for the development and introduction
of new products and it has various ongoing programs for improvements to existing
products. The Company also seeks to develop new applications for its existing
products and technology. In particular, the Company is actively seeking new
applications for its non-invasive, nondestructive analysis technologies.
Research and development expenses for the Company were $4.8 million, $3.8
million, and $3.0 million in 1998, 1997, and 1996, respectively.
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(iii) Raw Materials
Various components of the Company's products are supplied by sole-source
vendors. The Company has not experienced significant difficulty in obtaining
adequate supplies from these vendors, and has identified alternate suppliers.
However, there can be no assurance that the unanticipated loss of a single
vendor would not result in delays in shipments or the introduction of new
products.
(iv) Patents, Licenses, and Trademarks
The Company's policy is to protect its intellectual property rights,
including applying for and obtaining patents, when appropriate. The Company is
the owner of a number of patents expiring at various dates. Patent protection is
believed to provide the Company with competitive advantages with respect to
certain instruments. The Company also considers technical know-how, trade
secrets, and trademarks to be important to its business.
(v) Seasonal Influences
The Company's Finished Materials segment experiences a slowdown in revenues
during the first quarter of each calendar year primarily because its customers
tend to place their orders earlier in the year so that they can have the systems
installed either during the slow period of the summer or between Christmas and
the New Year.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on the Company's working
capital.
(vii) Dependency on a Single Customer
No single customer accounted for more than 10% of the Company's total
revenues in any of the past three years.
(viii) Backlog
The Company's backlog of firm orders was:
(In thousands) 1998 1997
- --------------------------------------------- -------- ---------
Raw Materials $ 7,145 $ 17,515
Finished Materials 23,645 9,414
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$30,790 $ 26,929
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The Company includes in backlog only those orders for which it has received
firm purchase orders and for which delivery has been specified within twelve
months. Certain of these orders are subject to cancellation by the customer upon
payment of a cancellation charge. Because of the possibility of customer changes
in delivery schedules, cancellation of orders, and potential delays in product
shipments, the Company's backlog as of any particular date may not be
representative of actual sales for any succeeding period. The decrease in
backlog in the Raw Materials segment was primarily due to a reduction in
spending by raw-material producers and increased competition.
(ix) Government Contracts
Not applicable.
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(x) Competition
In the Raw Materials segment, the Company competes primarily on performance
and to a lesser extent on price. Competition regarding on-line coal and cement
material analyzers is limited at present. Scantech Limited (Australia) is the
Company's principal competitor in the on-line coal and cement material analysis
markets. More recently, Polysius and Lucchin entered the cement market. The
Company is a recent entrant into the on-line mineral slurry analysis market
where it competes primarily with Outokumpu (Finland). The market for solids and
multiphase analyzers for process control generally is fragmented, with numerous
competitors. The Company believes it is a market leader in the segment of the
solids and multiphase analyzer market for on-line bulk-materials analyzers using
neutron interrogation.
Competition in the Finished Materials segment is highly fragmented with
numerous competitors competing in various end-use market segments. As a result,
competition varies according to the end-use segment. The Company competes based
upon quality, performance, and price. The Company's largest competitors are
Honeywell (U.S.), Toshiba (Japan), and Yokogawa (Japan). Honeywell, through its
Ohmart division is a supplier to the plastics industry. Toshiba and Yokogawa are
at present competing with the Company in Asia in the metals industry. IMS
(Germany) and IRM (Belgium/U.S.), compete with the Company worldwide in the
metals industry. There are a number of competitors such as NDC (US), Eurotherm
(U.K.), and Infrared Engineering (U.K.), which compete with the Company in the
plastics and rubber industry.
Certain of the Company's competitors have greater resources, manufacturing
and marketing capabilities, technical staff, and production facilities than
those of the Company. As a result, they may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the promotion and sale of their products than the Company.
Further, competition with respect to all of the Company's products could
increase if new companies enter the market or if existing competitors expand
their product lines. There can be no assurance that competitors of the Company
will not develop technological innovations that will render products of the
Company obsolete.
(xii) Environmental Protection Regulations
The Company believes that compliance by the Company with federal, state, and
local environmental protection regulations will not have a material adverse
effect on its capital expenditures, earnings, or competitive position.
(xiii) Number of Employees
As of January 2, 1999, the Company had a total of 508 employees. The Company
has had no work stoppages and considers its relations with employees to be good.
(d) Financial Information About Exports by Domestic Operations and About
Foreign Operations
Financial information about exports by domestic operations and about foreign
operations is summarized in Note 11 to Consolidated Financial Statements in the
Registrant's 1998 Annual Report to Shareholders, and is incorporated herein by
reference.
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(e) Executive Officers of the Registrant
Name Age Present Title (Fiscal Year First
Became Executive Officer)
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Ernesto A. Corte 60 President and Chief Executive Officer (1997)
Werner G. Kramer 52 Executive Vice President (1997)
Theo Melas-Kyriazi 39 Chief Financial Officer (1998)
Paul F. Kelleher 56 Chief Accounting Officer (1997)
Each executive officer serves until his successor is chosen or
appointed by the Board of Directors and qualified or until earlier
resignation, death, or removal. Mr. Kelleher has held comparable
positions for at least five years with Thermo Instrument or Thermo
Electron. Mr. Corte has been President of the Company since its inception
in November 1996, and Chief Executive Officer since February 1998. Mr.
Corte has been President of the Company's Gamma-Metrics subsidiary since
1993. Mr. Kramer has been Executive Vice President of the Company since
its inception in November 1996 and President of the Company's Eberline
Radiometrie Instruments GmbH subsidiary and Radiometrie's parent company,
Thermo Instrument Systems GmbH, since 1993. Mr. Melas-Kyriazi was
appointed Chief Financial Officer of the Company and Thermo Electron on
January 1, 1999. Mr. Melas-Kyriazi joined Thermo Electron in 1986 as
Assistant Treasurer, and became Treasurer in 1988. He was named President
and Chief Executive Officer of ThermoSpectra Corporation, a public
subsidiary of Thermo Instrument, in 1994. In 1998, he became Vice
President of Corporate Strategy for Thermo Electron. Messrs. Corte and
Kramer are full-time employees of the Company. Messrs. Melas-Kyriazi and
Kelleher are full-time employees of Thermo Electron, but devote such time
to the affairs of the Company as the Company's needs reasonably require.
Item 2. Properties
The Company leases approximately 44,900 square feet in San Diego,
California, pursuant to a lease that expires in 2003 and leases 9,300 square
feet in Colorado Springs, Colorado, pursuant to a lease that expires in 2003.
The Company uses these facilities for manufacturing, sales, and administration
for its Raw Materials segment.
The Company also leases approximately 98,900 square feet in Gaithersburg,
Maryland, pursuant to leases expiring in 1999 through 2002, approximately 24,000
square feet in Gloucester, England, pursuant to a lease expiring in 2001, and
owns a facility with approximately 110,000 square feet in Erlangen, Germany, of
which approximately 55,100 square feet are utilized by the Company, with the
balance being utilized by another Thermo Instrument subsidiary. These facilities
are used by the Company for manufacturing, sales, and administration for its
Finished Materials segment. The Company believes that its facilities are in good
condition and are suitable and adequate for its present operations. With respect
to leases expiring in the near future, in the event the Company does not renew
such leases, the Company believes suitable alternate space is available for
lease on acceptable terms.
In addition, the Company leases office space throughout the world for its
sales and service operations. The Company believes that these facilities are
adequate for its present operations.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information concerning the market and market price for the Registrant's
common stock, $.01 par value, and related matters, is included under the
sections labeled "Common Stock Market Information" and "Dividend Policy" in the
Registrant's 1998 Annual Report to Shareholders
and is incorporated herein by reference.
Item 6. Selected Financial Data
The information required under this item is included under the sections
labeled "Selected Financial Information" and "Dividend Policy" in the
Registrant's 1998 Annual Report to Shareholders and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1998 Annual Report to Shareholders and
is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1998 Annual Report to Shareholders and
is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements as of January 2, 1999,
and Supplementary Data are included in the Registrant's 1998 Annual Report to
Shareholders and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the caption
"Election of Directors" in the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year. The information
concerning delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated herein by reference from the material contained under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance" under the caption
"Stock Ownership" in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
The information required under this item is incorporated herein by reference
from the material contained under the caption "Executive Compensation" in the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated herein by reference
from the material contained under the caption "Stock Ownership" in the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required under this item is incorporated herein by reference
from the material contained under the caption "Relationship with Affiliates" in
the Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a,d) Financial Statements and Schedules
(1)The consolidated financial statements set forth in the list below are
filed as part of this Report.
(2)The consolidated financial statement schedule set forth in the list below
is filed as part of this Report.
(3)Exhibits filed herewith or incorporated herein by reference are set forth
in Item 14(c) below.
List of Financial Statements and Schedules Referenced in this Item 14
Information incorporated by reference from Exhibit 13 filed herewith:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Comprehensive Income and Shareholders'
Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules filed herewith:
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or in the notes thereto.
(b) Reports on Form 8-K
On December 10, 1998, the Company filed a Current Report on Form 8-K dated
December 10, 1998, with respect to an update to Thermo Electron's proposed
corporate reorganization announced on August 12, 1998.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 15, 1999 METRIKA SYSTEMS CORPORATION
By: /s/ Ernesto A. Corte
Ernesto A. Corte
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of March 15, 1999.
Signature Title
By: /s/ Ernesto A. Corte President, Chief Executive Officer, and Director
Ernesto A. Corte
By: /s/ Theo Melas-Kyriazi Chief Financial Officer
Theo Melas-Kyriazi
By: /s/ Paul F. Kelleher Chief Accounting Officer
Paul F. Kelleher
By: /s/ Joseph A. Baute Director
Joseph A. Baute
By: /s/ Willard R. Becraft Director
Willard R. Becraft
By: /s/ Denis A. Helm Chairman of the Board and Director
Denis A. Helm
By: /s/ John T. Keiser Director
John T. Keiser
By: /s/ Earl R. Lewis Director
Earl R. Lewis
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Report of Independent Public Accountants
To the Shareholders and Board of Directors of Metrika Systems Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Metrika Systems Corporation's
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 16, 1999. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in Item 14 on page 11 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the consolidated financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
February 16, 1999
13
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
METRIKA SYSTEMS CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Description Provision Accounts Accounts Other (a) Balance
Balance at Charged Recovered Written at End
Beginning to Off of Year
of Expense
Year
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Allowance for Doubtful Accounts
Year Ended January 2, 1999 $ 671 $ 470 $ 40 $(606) $ 1,711 $ 2,286
Year Ended January 3, 1998 $ 440 $ 633 $ 209 $(713) $ 102 $ 671
Year Ended December 28, 1996 $ 478 $ - $ - $ (36) $ (2) $ 440
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Description Balance at Established Activity Balance
Beginning as Cost of Charged at End
of Year Acquisitions to of Year
Reserve
- --------------------------------------------------- ------------- ------------- ------------- -------------
Accrued Acquisition Expenses (b)
Year Ended January 2, 1999 $ 68 $1,350 $(755) $ 663
Year Ended January 3, 1998 $ - $ 350 $(282) $ 68
Description Balance at Provision for Balance
Beginning Restructuring Cash Payments at End
of Year Costs Other (d) of Year
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
Accrued Restructuring Costs (c)
Year Ended January 2, 1999 $ - $ 624 $(100) $ 28 $ 552
(a) Includes allowance of businesses acquired during the year as described in
Note 3 to Consolidated Financial Statements in the Registrant's 1998 Annual
Report to Shareholders and the effect of foreign currency translation.
(b) The nature of activity in this account is described in Note 3 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders.
(c) The nature of activity in this account is described in Note 12 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders.
(d) Primarily the effect of foreign currency translation.
</TABLE>
14
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2 Stock Purchase Agreement dated as of May 6, 1998, by and between the
Company and Honeywell-Measurex Corporation (filed as Exhibit 2 to the
Registrant's Current Report on Form 8-K for events occurring on July
5, 1998, and incorporated herein by reference).
3.1* Certificate of Incorporation of the Company, as amended.
3.2* By-Laws of the Company.
4* Specimen Common Stock Certificate.
10.1* Corporate Services Agreement dated as of November 26, 1996, between
Thermo Electron Corporation and the Company.
10.2 Thermo Electron Corporate Charter, as amended and restated effective
January 3, 1993 (filed as Exhibit 10.1 to Thermo Electron's Annual
Report on Form 10-K for the fiscal year ended January 3, 1993 [File
No. 1-8002] and incorporated herein by reference).
10.3* Tax Allocation Agreement dated as of November 26, 1996, between
Thermo Electron and the Company.
10.4* Master Repurchase Agreement dated as of November 26, 1996, between
Thermo Electron and the Company.
10.5 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 3, 1997, between Thermo Electron and
the Company (filed as Exhibit 10.7 to Thermo Instrument's Annual
Report on Form 10-K for fiscal year ended January 3, 1998 [File No.
1-9786] and incorporated herein by reference).
10.6 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 3, 1997, between Thermo Instrument and
the Company (filed as Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the year ended January 3, 1998, and incorporated
herein by reference).
10.7* Deferred Compensation Plan for Directors of the Company.
10.8* Indemnification Agreement dated as of November 26, 1996, between
Thermo Instrument and the Company.
10.9* Letter Agreement dated as of December 4, 1996, between Thermo
Instrument and the Company.
10.10* Indemnification Agreement dated as of December 4, 1996, between
Thermo Instrument and the Company.
10.11* Triple Net Lease Agreement dated January 1, 1995, between
Gamma-Metrics, as lessee and Radnor/Collins/Sorrento Partnership, as
lessor, for property located at 5788 Pacific Center Boulevard, San
Diego, California.
10.12* Form of Indemnification Agreement for Officers and Directors.
<PAGE>
Exhibit
Number Description of Exhibit
10.13* Equity Incentive Plan of the Company (maximum number of shares
issuable is 800,000 shares after adjustment to reflect share increase
approved in 1998).
In addition to the stock-based compensation plans of the Registrant,
the executive officers of the Registrant may be granted awards under
stock-based compensation plans of Thermo Electron and Thermo
Instrument for services rendered to the Registrant or such affiliated
corporations. The terms of such plans are substantially the same as
those of the Registrant's Equity Incentive Plan.
10.14* Lease Agreement dated as of October 1, 1993, between Thermo
Instrument Systems GmbH (the Company's subsidiary), as lessor, and
ESM Eberline Instruments Strahlen and Umweltmesstechnik GmbH, as
lessee.
10.15 Restated Stock Holding Assistance Plan and Form of Promissory Note
(filed as Exhibit 10.16 to the Registrant's Annual Report on Form
10-K for the year ended January 3, 1998, and incorporated herein by
reference).
13 Annual Report to Shareholders for the year ended January 2, 1999
(only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
Each exhibit above which is marked with an asterisk (*) is
incorporated herein by reference to the correspondingly numbered
exhibit to the Company's Registration Statement on Form S-1 [File No.
333-25243].
Exhibit 13
Metrika Systems Corporation
Consolidated Financial Statements
1998
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Metrika Systems Corporation 1998 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------------- -------- --------- -------
Revenues (Note 11) $70,029 $ 56,714 $52,047
------- -------- -------
Costs and Operating Expenses:
Cost of revenues 40,537 29,928 28,527
Selling, general, and administrative expenses (Note 7) 15,250 14,367 13,395
Research and development expenses 4,773 3,815 3,024
Restructuring costs (Note 12) 624 - -
------- -------- -------
61,184 48,110 44,946
------- -------- -------
Operating Income 8,845 8,604 7,101
Interest Income 1,897 2,013 101
Interest Expense (Note 8) (449) (838) (796)
------- -------- -------
Income Before Provision for Income Taxes 10,293 9,779 6,406
Provision for Income Taxes (Note 6) 3,950 3,920 2,561
------- -------- -------
Net Income $ 6,343 $ 5,859 $ 3,845
======= ======== =======
Basic and Diluted Earnings per Share (Note 13) $ .77 $ .82 $ .76
======= ======== =======
Weighted Average Shares (Note 13)
Basic 8,195 7,143 5,032
======= ======== =======
Diluted 8,204 7,147 5,032
======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
Metrika Systems Corporation 1998 Financial Statements
Consolidated Balance Sheet
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Assets
Current Assets:
Cash and cash equivalents (includes $12,752 and $40,173 under repurchase $ 15,093 $ 44,044
agreement with affiliated company)
Available-for-sale investments, at quoted market value (amortized cost of - 6,245
$6,231 in 1997)
Accounts receivable, less allowances of $2,286 and $671 25,066 17,377
Unbilled contract costs and fees 7,224 2,476
Inventories 12,257 7,145
Prepaid income taxes (Note 6) 4,439 1,226
Prepaid expenses 806 395
-------- --------
64,885 78,908
-------- --------
Property, Plant, and Equipment, at Cost, Net 11,824 10,373
-------- --------
Other Assets 4,087 727
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 3) 24,648 12,944
-------- --------
$105,444 $102,952
======== ========
3
<PAGE>
Metrika Systems Corporation 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable and current maturities of long-term obligation (Note 8) $ 6,303 $ 9,895
Accounts payable 3,291 2,308
Accrued payroll and employee benefits 2,589 2,322
Accrued income taxes 1,024 2,445
Customer deposits 1,302 3,576
Billings in excess of contract costs and fees 2,163 769
Accrued installation and warranty costs 3,508 2,132
Other accrued expenses (Note 3) 4,986 3,302
Due to parent company and affiliated companies (Note 7) 3,901 4,184
-------- --------
29,067 30,933
-------- --------
Deferred Income Taxes (Note 6) 1,572 -
-------- --------
Accrued Pension Costs (Note 4) 4,983 4,356
-------- --------
Long-term Obligation (Note 8) 3,437 3,858
-------- --------
Commitments (Note 9)
Shareholders' Investment (Notes 4 and 5):
Common stock, $.01 par value, 25,000,000 shares authorized; 8,267,828 83 83
shares issued
Capital in excess of par value 58,641 58,555
Retained earnings 12,500 6,157
Treasury stock at cost, 533,700 shares in 1998 (4,620) -
Accumulated other comprehensive items (219) (990)
-------- --------
66,385 63,805
-------- --------
$ 105,444 $ 102,952
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Metrika Systems Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------- ---------- --------- ---------
Operating Activities
Net income $ 6,343 $ 5,859 $ 3,845
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,069 1,630 1,792
Provision for losses on accounts receivable 470 633 -
Deferred income tax expense 2,488 482 69
Other noncash items 376 104 (87)
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable 3,231 (6,987) 307
Inventories and unbilled contract costs and fees 35 (1,323) 2,708
Other current assets (541) (162) 208
Accounts payable (287) (190) 842
Other current liabilities (9,812) 3,053 (1,878)
-------- -------- --------
Net cash provided by operating activities 4,372 3,099 7,806
-------- -------- --------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (30,129) (1,344) -
Purchases of available-for-sale investments - (6,091) -
Proceeds from maturities of available-for-sale investments 6,245 - -
Purchases of property, plant, and equipment (731) (674) (671)
Other 118 63 26
-------- -------- --------
Net cash used in investing activities (24,497) (8,046) (645)
-------- -------- --------
Financing Activities
Net proceeds from issuance of Company common stock (Note 5) - 32,528 13,528
Purchases of Company common stock (4,620) - -
Net transfers to parent company prior to capitalization of the - - (2,398)
Company
Increase (decrease) in due to parent company and affiliated - (1,770) 2,683
companies
Decrease in short-term obligations (3,940) (489) (1,886)
Repayment of long-term obligation (712) (662) (791)
-------- -------- --------
Net cash provided by (used in) financing activities (9,272) 29,607 11,136
-------- -------- --------
Exchange Rate Effect on Cash 446 (845) 630
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents (28,951) 23,815 18,927
Cash and Cash Equivalents at Beginning of Year 44,044 20,229 1,302
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 15,093 $ 44,044 $ 20,229
======== ======== ========
5
<PAGE>
Metrika Systems Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------- ---------- --------- ---------
Cash Paid For
Interest $ 533 $ 749 $ 794
Income taxes $ 2,912 $ 2,314 $ 393
Noncash Activities
Fair value of assets of acquired companies $ 42,746 $ 2,387 $ -
Cash paid for acquired companies (31,000) (1,347) -
--------- -------- --------
Liabilities assumed of acquired companies $ 11,746 $ 1,040 $ -
========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Metrika Systems Corporation 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Comprehensive Income
Net Income $ 6,343 $ 5,859 $ 3,845
--------- --------- ---------
Other Comprehensive Items, Net:
Foreign currency translation adjustment 780 548 504
Unrealized gain (loss) on available-for-sale investments (9) 9 -
--------- --------- ---------
771 557 504
--------- --------- ---------
$ 7,114 $ 6,416 $ 4,349
========= ========= =========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning of year $ 83 $ 60 $ -
Capitalization of the Company - - 50
Net proceeds from issuance of Company common stock (Note 5) - 23 10
--------- --------- ---------
Balance at end of year 83 83 60
--------- --------- ---------
Capital in Excess of Par Value:
Balance at beginning of year 58,555 26,050 -
Capitalization of the Company - - 12,532
Net proceeds from issuance of Company common stock (Note 5) 32,505 13,518
Tax benefit related to employees' and directors' stock plans 86 - -
--------- --------- ---------
Balance at end of year 58,641 58,555 26,050
--------- --------- ---------
Retained Earnings:
Balance at beginning of year 6,157 298 -
Net income 6,343 5,859 298
--------- --------- ---------
Balance at end of year 12,500 6,157 298
--------- --------- ---------
Treasury Stock:
Balance at beginning of year - - -
Purchases of Company common stock (4,620) - -
--------- --------- ---------
Balance at end of year (4,620) - -
--------- --------- ---------
Accumulated Other Comprehensive Items:
Balance at beginning of year (990) (1,547) (2,051)
Other comprehensive items, net 771 557 504
--------- --------- ---------
Balance at end of year (219) (990) (1,547)
--------- --------- ---------
Net Parent Company Investment:
Balance at beginning of year - - 11,433
Net income prior to capitalization of the Company - - 3,547
Net transfer to parent company prior to capitalization of the - - (2,398)
Company
Capitalization of the Company - - (12,582)
--------- --------- ---------
Balance at end of year - - -
--------- --------- ---------
$ 66,385 $ 63,805 $ 24,861
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
Metrika Systems Corporation 1998 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Metrika Systems Corporation (the Company) develops, manufactures, and
markets on-line process optimization systems that employ proprietary ultra
high-speed advanced scientific measurement technologies. The Company operates in
two segments: On-line Raw Materials Analysis and On-line Finished Materials
Quality Control. The Company manufactures process optimization systems that
provide real-time, nondestructive analysis of the composition of raw materials
in basic-materials production processes, including coal, cement, and minerals.
The Company also manufactures advanced systems that measure and control
parameters such as material thickness, coating thickness, and coating weight in
web-type materials, such as metal strip, rubber, and plastic foils. Customers
use these systems to improve product quality and consistency, lower material
costs, reduce energy consumption, and minimize waste.
Relationship with Thermo Instrument Systems Inc. and Thermo Electron Corporation
The Company operated as two divisions of Thermo Instrument Systems Inc.
until its incorporation as a Delaware corporation in November 1996. In
connection with the Company's incorporation, Thermo Instrument transferred to
the Company the assets, liabilities, and businesses of its Gamma-Metrics
subsidiary and Radiometrie division in exchange for 5,000,000 shares of the
Company's common stock. As of January 2, 1999, Thermo Instrument owned 5,219,600
shares of the Company's common stock, representing 67% of such stock
outstanding. Thermo Instrument is an 85%-owned subsidiary of Thermo Electron
Corporation. As of January 2, 1999, Thermo Electron owned 627,100 shares of the
Company's common stock, representing 8% of such stock outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1998, 1997, and 1996 are for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996, respectively. Fiscal years 1998
and 1996 each included 52 weeks; fiscal 1997 included 53 weeks.
Revenue Recognition
Generally, the Company recognizes product revenues upon shipment of its
products. The Company provides a reserve for its estimate of warranty and
installation costs at the time of shipment. Revenues and profits on contracts,
which due to their complexity extend over multiple quarterly reporting periods,
are recognized using the percentage-of-completion method. Such contracts include
all manufacturing contracts of the Company's On-line Finished Materials Quality
Control segment, which commonly are of 5 to 10 months in duration, as well as
certain contracts of similar duration or longer at the Company's On-line Raw
Materials Analysis segment. Revenues recorded under the percentage-of-completion
method were $27,316,000 in 1998, $20,421,000 in 1997, and $18,611,000 in 1996.
The percentage of completion is determined by relating the actual costs incurred
to date to management's estimate of total costs to be incurred on each contract.
If a loss is indicated on any contract in process, a provision is made currently
for the entire loss. Contracts generally provide for the billing of customers
upon the attainment of certain milestones in each contract. Revenues earned on
contracts in process in excess of billings are classified as unbilled contract
costs and fees, and amounts billed in excess of revenues are classified as
billings in excess of contract costs and fees in the accompanying balance sheet.
There are no significant amounts included in the accompanying balance sheet that
are not expected to be recovered from existing contracts at current contract
values, or that are not expected to be collected within one year, including
amounts that are billed but not paid under retainage provisions.
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 4). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
Income Taxes
The Company, Thermo Instrument, and Thermo Electron entered into a tax
allocation agreement under which the Company and Thermo Instrument were included
in Thermo Electron's consolidated federal and certain state income tax returns.
The agreement provided that in years in which the Company had taxable income, it
would pay to Thermo Electron amounts comparable to the taxes the Company would
have paid if it had filed separate tax returns. Subsequent to the Company's
initial public offering in June 1997, Thermo Instrument's ownership of the
Company was reduced below 80% and, as a result, the Company is required to file
its own federal income tax returns.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
Earnings per Share
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the year. For periods prior
to the Company's November 1996 capitalization, shares issued in connection with
such capitalization have been shown as outstanding for purposes of computing
earnings per share. Diluted earnings per share have been computed assuming the
exercise of stock options, as well as their related income tax effects.
Stock Split
In May 1997, the Company declared and effected a one-for-two reverse stock
split. All share and per share information was restated in 1997 to reflect the
stock split.
Cash and Cash Equivalents
At year-end 1998 and 1997, $12,752,000 and $40,173,000, respectively, of
the Company's cash equivalents were invested in a repurchase agreement with
Thermo Electron. Under this agreement, the Company in effect lends excess cash
to Thermo Electron, which Thermo Electron collateralizes with investments
principally consisting of corporate notes, U.S. government-agency securities,
commercial paper, money market funds, and other marketable securities, in the
amount of at least 103% of such obligation. The Company's funds subject to the
repurchase agreement are readily convertible into cash by the Company. The
repurchase agreement earns a rate based on the 90-day Commercial Paper Composite
Rate plus 25 basis points, set at the beginning of each quarter. At year-end
1998 and 1997, the Company's cash equivalents also included investments in
interest-bearing accounts at the Company's foreign operations, which have an
original maturity of three months or less. Cash and cash equivalents are carried
at cost, which approximates market value.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost (on a weighted average basis)
or market value and include materials, labor, and manufacturing overhead. The
components of inventories are:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- --------
Raw Material and Supplies $ 8,036 $ 4,077
Work in Process 3,746 2,416
Finished Goods 475 652
------- -------
$12,257 $ 7,145
======= =======
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: buildings, 40 years; machinery and
equipment, 3 to 10 years; and leasehold improvements, the shorter of the term of
the lease or the life of the asset. Property, plant, and equipment consists of:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Land $ 1,734 $ 1,613
Buildings 8,102 7,534
Machinery, Equipment, and Leasehold Improvements 7,760 5,622
------- --------
17,596 14,769
Less: Accumulated Depreciation and Amortization 5,772 4,396
------- --------
$11,824 $ 10,373
======= ========
Other Assets
Other assets in the accompanying balance sheet consists primarily of
acquired technology and other intangibles, including the cost of acquired
patents, that are being amortized using the straight-line method over their
estimated useful lives, ranging from 5 to 20 years. Accumulated amortization was
$1,634,000 and $1,371,000 at year-end 1998 and 1997, respectively.
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method over 40 years. Accumulated
amortization was $2,544,000 and $2,007,000 at year-end 1998 and 1997,
respectively. The Company assesses the future useful life of this asset whenever
events or changes in circumstances indicate that the current useful life has
diminished. The Company considers the future undiscounted cash flows of the
acquired companies in assessing the recoverability of this asset. If impairment
has occurred, any excess of carrying value over fair value is recorded as a
loss.
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year, in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment.
Foreign currency transaction gains and losses are included in the accompanying
statement of income and are not material for the three years presented.
Comprehensive Income
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"Other comprehensive items," which represents certain amounts that are reported
as components of shareholders' investment in the accompanying balance sheet,
including foreign currency translation adjustments and, in 1997, unrealized net
of tax gains on available-for-sale investments of $9,000.
Forward Contracts
The Company uses short-term forward foreign exchange contracts to manage
certain exposures to foreign currencies. The Company enters into forward foreign
exchange contracts to hedge firm purchase and sale commitments denominated in
currencies other than its subsidiaries' local currencies. These contracts
principally hedge transactions denominated in United States dollars and German
deutsche marks. The purpose of the Company's foreign currency hedging activities
is to protect the Company's local currency cash flows related to these
commitments from fluctuations in foreign exchange rates. Gains and losses
arising from forward foreign exchange contracts are recognized as offsets to
gains and losses resulting from the transactions being hedged. The Company does
not enter into speculative foreign currency agreements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
Certain amounts in 1997 and 1996 have been reclassified to conform to the
presentation in the 1998 financial statements.
2. Available-for-sale Investments
The Company's investments in debt securities are considered
available-for-sale investments in the accompanying 1997 balance sheet and are
carried at market value, with the difference between cost and market value, net
of related tax effects, recorded in the "Accumulated other comprehensive items"
component of shareholders' investment.
11
<PAGE>
2. Available-for-sale Investments (continued)
The aggregate market value, cost basis, and gross unrealized gains of
available-for-sale investments by major security type are:
(In thousands) Gross
Market Cost Unrealized
Value Basis Gains
- ----------------------------------------------------------------------- ----------- ----------- -----------
1997
Corporate Bonds $6,105 $6,091 $ 14
Other 140 140 -
------ ------ ------
$6,245 $6,231 $ 14
====== ====== ======
</TABLE>
3. Acquisitions
In October 1998, the Company acquired the assets, subject to certain
liabilities, of MF Physics Corporation for $2,000,000 in cash. MF Physics
manufactures neutron generators and neutron activation analysis systems.
In July 1998, the Company acquired the stock of Honeywell-Measurex Data
Measurement Corporation (DMC), a wholly owned subsidiary of Honeywell-Measurex
Corporation, for $29,000,000 in cash. Accounts receivable in the accompanying
1998 balance sheet includes $574,000 related to a purchase price adjustment for
the acquisition of DMC, which was received subsequent to year-end. This business
has been renamed Radiometrie Corporation (Radiometrie U.S.). Radiometrie U.S.
manufactures computerized, noncontact thickness, coating, and other measurement
systems for the worldwide web-processing industry.
On December 31, 1996, the Company acquired the assets, subject to certain
liabilities, of the Autometrics division of Svedala Industries Inc. for
$1,347,000 in cash. Autometrics is a manufacturer and marketer of on-line
analysis instruments for the minerals-processing industry.
These acquisitions have been accounted for using the purchase method of
accounting and their results have been included in the accompanying financial
statements from their respective dates of acquisition. The aggregate cost of
these acquisitions exceeded the estimated fair value of the acquired net assets
by $13,604,000, which is being amortized over 40 years. Allocation of the
purchase price was based on an estimate of the fair value of the net assets
acquired.
The Company has undertaken a restructuring in connection with its
acquisition of Radiometrie U.S. The restructuring activities include a reduction
in staffing levels, relocation of certain Radiometrie U.S. personnel, and
abandonment of excess facilities of the acquired business. The Company
established $1,300,000 of reserves for such actions as part of the cost of the
acquisition in accordance with Emerging Issues Task Force (EITF) Pronouncement
No. 95-3. Unresolved matters at January 2, 1999, included completing planned
severances and abandonment or consolidation of excess facilities. In accordance
with the requirements of EITF No. 95-3, the Company will finalize its
restructuring plan no later than one year from the date of acquisition. During
1998, the Company expended $682,000 of the established reserves, primarily for
severance and abandoned-facility payments. As of January 2, 1999, the Company
had remaining accrued acquisition costs of $663,000 for all of its acquisitions,
including Radiometrie U.S., included in other accrued expenses in the
accompanying balance sheet as of January 2, 1999.
12
<PAGE>
3. Acquisitions (continued)
Based on unaudited data, the following table presents selected financial
information on a pro forma basis, assuming the Company and Radiometrie U.S. had
been combined since the beginning of 1997, and the Company and Autometrics had
been combined since the beginning of 1996. The effect of the acquisition of MF
Physics was not included in the pro forma data, because it was not material to
the Company's results of operations.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------- -------------- -------------- ---------------
Revenues $84,323 $90,791 $54,746
Net Income 4,586 1,450 3,170
Basic and Diluted Earnings per Share .56 .20 .63
</TABLE>
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition of
Radiometrie U.S. been made at the beginning of 1997 or the acquisition of
Autometrics been made at the beginning of 1996.
4. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has stock-based compensation plans for its key employees,
directors, and others, which permits the grant of stock and stock-based awards
as determined by the human resources committee of the Company's Board of
Directors (the Board Committee), including restricted stock, stock options,
stock bonus shares, or performance-based shares. The option recipients and the
terms of options granted under this plan are determined by the Board Committee.
As of year-end 1998, only nonqualified stock options have been awarded under
these plans. Generally, options granted to date are exercisable immediately, but
are subject to certain transfer restrictions and the right of the Company to
repurchase shares issued upon exercise of the options at the exercise price,
upon certain events. The restrictions and repurchase rights generally lapse
ratably over a one- to ten-year period, depending on the term of the option,
which generally ranges from five to twelve years. Nonqualified stock options may
be granted at any price determined by the Board Committee, although incentive
stock options must be granted at not less than the fair market value of the
Company's stock on the date of grant. To date, all options have been granted at
fair market value. In addition to the Company's stock-based compensation plans,
certain officers and key employees may also participate in the stock-based
compensation plans of Thermo Electron and Thermo Instrument.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 75,000 shares at a weighted average exercise price of $15.02 elected to
participate in this exchange and, as a result, received options to purchase
38,000 shares of Company common stock at $8.58 per share, which are included in
the 1998 grants in the table below. The other terms of the new options are the
same as the exchanged options except that the holders may not sell shares
purchased pursuant to such new options for six months from the exchange date.
The options exchanged were canceled by the Company.
13
<PAGE>
4. Employee Benefit Plans (continued)
<TABLE>
<CAPTION>
A summary of the Company's stock option activity is:
<S> <C> <C> <C> <C>
1998 1997
------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Price Price
Number Number
of of
(Shares in thousands) Shares Shares
- ---------------------------------------------- --------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 301 $15.00 - $ -
Granted 143 8.99 303 15.00
Forfeited (23) 14.79 (2) 15.00
Canceled due to exchange (75) 15.02 - -
--- ----
Options Outstanding, End of Year 346 $12.52 301 $15.00
=== ====== ==== ======
Options Exercisable 346 $12.52 301 $15.00
=== ====== ==== ======
Options Available for Grant 104 49
=== ====
</TABLE>
A summary of the status of the Company's stock options at January 2, 1999,
is:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Options Outstanding and Exercisable
------------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- -------------------------------------------- ---------------------- ------------------- -------------------
$ 8.58 - $10.21 143 6.5 years $ 8.99
13.49 - 15.11 203 9.8 years 15.00
----
$ 8.58 - $15.11 346 8.4 years $12.52
====
</TABLE>
Employee Stock Purchase Program
Substantially all of the Company's full-time U.S. employees are eligible
to participate in an employee stock purchase program sponsored by Thermo
Instrument and Thermo Electron. Prior to the 1998 program year, the applicable
shares of common stock could be purchased at the end of a 12-month period at 95%
of the fair market value at the beginning of the period, and the shares
purchased were subject to a six-month resale restriction. Effective November 1,
1998, the applicable shares of common stock may be purchased at 85% of the lower
of the fair market value at the beginning or end of the period, and the shares
purchased are subject to a one year resale restriction. Shares are purchased
through payroll deductions of up to 10% of each participating employee's gross
wages.
14
<PAGE>
4. Employee Benefit Plans (continued)
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
under the Company's stock-based compensation plans been determined based on the
fair value at the grant dates consistent with the method set forth under SFAS
No. 123, the effect on the Company's net income and earnings per share would
have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1998 1997
- ----------------------------------------------------------------------- ----------- ----------- -----------
Net Income:
As reported $6,343 $5,859
Pro forma 6,130 5,712
Basic and Diluted Earnings per Share:
As reported .77 .82
Pro forma .75 .80
Pro forma compensation expense for options granted is reflected over the
vesting period; therefore, future pro forma compensation expense may be greater
as additional options are granted.
The weighted average fair value per share of options granted in 1998 and
1997 was $2.81 and $7.51. The fair value of each option grant was estimated on
the grant date using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1998 1997
- -------------------------------------------------------------------------- --------- ----------- ----------
Volatility 29% 29%
Risk-free Interest Rate 4.4% 6.2%
Expected Life of Options 4.5 years 8.3 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plan
Substantially all of the Company's full-time U.S. employees are eligible
to participate in Thermo Electron's 401(k) savings plan. Contributions to the
401(k) savings plan are made by both the employee and the Company. Company
contributions are based upon the level of employee contributions. For this plan,
the Company contributed and charged to expense $316,000, $215,000, and $176,000
in 1998, 1997, and 1996, respectively.
15
<PAGE>
4. Employee Benefit Plans (continued)
Defined Benefit Pension Plan
The Company's German subsidiary has an unfunded defined benefit pension
plan covering substantially all of its full-time employees. Benefits are based
on a percentage of eligible earnings for each year of service in excess of ten
years of service.
Net periodic benefit costs included the following components:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Service Cost $ 128 $ 120 $ 186
Interest Cost 220 203 293
Recognized Net Actuarial Gain (39) (45) -
------ ------ ------
$ 309 $ 278 $ 479
====== ====== ======
The Company's defined benefit plan activity was:
(In thousands) 1998 1997
- ----------------------------------------------------------------------- ----------- ----------- -----------
Change in Benefit Obligation:
Benefit obligation at beginning of year $3,325 $3,477
Service cost 128 120
Interest cost 220 203
Cumulative translation adjustment 274 (476)
Actuarial (gain) loss (13) 25
Benefits paid (25) (24)
------ ------
Benefit obligation at end of year 3,909 3,325
------ ------
Unrecognized Net Actuarial Loss 1,074 1,031
------ ------
Accrued Pension Costs $4,983 $4,356
====== ======
Actuarial assumptions used to determine the net periodic pension costs were:
1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Discount Rate 6.5% 6.5% 6.5%
Rate of Increase in Salary Levels 2.5% 2.5% 1.5%
Defined Contribution Pension Plan
In addition, the Company's United Kingdom subsidiary participates in a
multi-employer, defined contribution pension plan covering substantially all of
its full-time employees. For this plan, the Company contributed and charged to
expense $172,000, $161,000, and $134,000 in 1998, 1997, and 1996, respectively.
16
<PAGE>
5. Common Stock
Sale of Common Stock
In June 1997, the Company sold 2,300,000 shares of its common stock in an
initial public offering at $15.50 per share for net proceeds of $32,528,000.
In December 1996, the Company sold 967,828 shares of its common stock in a
private placement at $15.00 per share for net proceeds of $13,528,000.
Reserved Shares
At January 2, 1999, the Company had reserved 1,025,000 unissued shares of
its common stock for possible issuance under stock-based compensation plans.
6. Income Taxes
The components of income before provision for income taxes are:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Domestic $ 6,762 $6,460 $4,583
Foreign 3,531 3,319 1,823
------- ------ ------
$10,293 $9,779 $6,406
======= ====== ======
The components of the provision for income taxes are:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Currently Payable:
Federal $ 694 $ 2,616 $ 1,864
State 33 134 363
Foreign 735 688 265
------- ------- -------
1,462 3,438 2,492
------- ------- -------
Net Deferred (Prepaid):
Federal 1,772 (80) (273)
State 106 (17) (40)
Foreign 610 579 382
------- ------- -------
2,488 482 69
------- ------- -------
$ 3,950 $ 3,920 $ 2,561
======= ======= =======
The Company receives a tax deduction upon exercise of nonqualified stock
options by employees for the difference between the exercise price and the
market price of the underlying common stock on the date of exercise. The
provision for income taxes that is currently payable does not reflect $86,000 of
such benefits that have been allocated to capital in excess of par value in
1998.
17
<PAGE>
6. Income Taxes (continued)
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 34% to income before provision for income taxes due to:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Provision for Income Taxes at Statutory Rate $ 3,500 $ 3,325 $ 2,178
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 92 77 213
Foreign tax rate and tax law differential 144 139 27
Tax benefit of foreign sales corporation (142) (173) (140)
Amortization of cost in excess of net assets of acquired 195 117 111
companies
Other 161 435 172
------- ------- -------
$ 3,950 $ 3,920 $ 2,561
======= ======= =======
Prepaid and deferred income taxes in the accompanying balance sheet
consist of:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ----------- -----------
Prepaid Income Taxes:
Reserves and accruals $ 2,433 $ 626
Inventory basis difference 1,646 381
Accrued compensation 360 219
Foreign tax loss carryforwards 1,943 1,943
------- -------
6,382 3,169
Less: Valuation allowance 1,943 1,943
------- -------
$ 4,439 $ 1,226
======= =======
Deferred Income Taxes:
Depreciation and amortization $ 1,572 $ -
======= =======
</TABLE>
The valuation allowance relates to uncertainties surrounding the
realization of foreign net operating losses, which is dependent on the future
income of certain subsidiaries of the Company. The Company believes that it is
more likely than not that these deferred tax assets will not be realized. As of
January 2, 1999, the Company had $4,318,000 of foreign tax loss carryforwards
which do not expire.
A provision has not been made for U.S. or additional foreign taxes on
$5,947,000 of undistributed earnings of foreign subsidiaries that could be
subject to taxation if remitted to the U.S. because the Company plans to keep
these amounts permanently reinvested overseas.
7. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In 1997 and 1996 the Company paid an amount equal to
1.0% of the Company's
18
<PAGE>
7. Related-party Transactions (continued)
revenues. For these services, the Company was charged $560,000, $567,000, and
$520,000 in 1998, 1997, and 1996, respectively. The annual fee is reviewed and
adjusted annually by mutual agreement of the parties. The corporate services
agreement is renewed annually but can be terminated upon 30 days' prior notice
by the Company or upon the Company's withdrawal from the Thermo Electron
Corporate Charter (the Thermo Electron Corporate Charter defines the
relationships among Thermo Electron and its majority-owned subsidiaries).
Management believes that the service fee charged by Thermo Electron is
reasonable and that such fees are representative of the expenses the Company
would have incurred on a stand-alone basis. For additional items such as
employee benefit plans, insurance coverage, and other identifiable costs, Thermo
Electron charges the Company based upon costs attributable to the Company.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
Due to Parent Company and Affiliated Companies
The Company had $3,901,000 and $4,184,000 of noninterest-bearing advances
from Thermo Instrument and affiliated companies at year-end 1998 and 1997,
respectively, which are due on demand.
Related-party Lease
The Company leases office and manufacturing space in Germany to a wholly
owned subsidiary of Thermo Instrument pursuant to an arrangement whereby the
subsidiary is charged its share of the occupancy expenses of the facility, based
on space utilized. Pursuant to this arrangement, the Company recorded $386,000,
$472,000, and $368,000 in 1998, 1997, and 1996, respectively, as a reduction in
selling, general, and administrative expenses in the accompanying statement of
income.
Other Related-party Transactions
In 1997 and 1996, the Company paid commissions totaling $83,000 and
$70,000, respectively, to Thermo Sentron Inc., an affiliated company.
In 1998 and 1997, the Company purchased products for $180,000 and
$267,000, respectively, from ThermoSpectra Corporation, an affiliated company.
8. Short- and Long-term Obligations
Short-term Obligations
Notes payable and current maturities of long-term obligation in the
accompanying balance sheet includes $5,592,000 and $9,233,000 at year-end 1998
and 1997, respectively, of amounts borrowed under lines of credit. The weighted
average interest rate for these borrowings at year-end 1998 and 1997 was 4.5%
and 4.6%, respectively. Unused lines of credit aggregated $18,986,000 at January
2, 1999. As of January 2, 1999, $2,273,000 of the total lines of credit is
secured by real estate at the Company's German subsidiary and the remainder is
guaranteed by Thermo Instrument or Thermo Electron.
Long-term Obligation
In October 1994, the Company's German subsidiary borrowed 11,500,000
German deutsche marks pursuant to a promissory note, payable in monthly
installments of 99,200 German deutsche marks with a final payment in October
2004. The balance outstanding was $4,148,000 and $4,520,000 at year-end 1998 and
1997, respectively. The loan is secured by real estate at the Company's German
subsidiary with a net book value of $8,725,000 at year-end 1998. The note bears
interest at a variable rate, which was 4.0% at year-end 1998 and 1997.
19
<PAGE>
9. Commitments
The Company leases portions of its office and operating facilities under
various operating lease arrangements. The accompanying statement of income
includes expenses from operating leases of $881,000, $882,000, and $632,000 in
1998, 1997, and 1996, respectively. Future minimum payments due under
noncancelable operating leases at January 2, 1999, are $757,000 in 1999,
$714,000 in 2000, $653,000 in 2001, $527,000 in 2002, $510,000 in 2003, and
$511,000 in 2004 and thereafter. Total future minimum lease payments are
$3,672,000.
Outstanding letters of credit, principally related to performance bond
obligations, totaled $8,214,000 at January 2, 1999.
10. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, notes payable and current maturities of
long-term obligation, accounts payable, due to parent company and affiliated
companies, and long-term obligation. Available-for-sale investments are carried
at fair value in the accompanying 1997 balance sheet (Note 2). The fair values
were determined based on quoted market prices. The Company's long-term
obligation bears interest at a variable market rate, therefore the carrying
amount approximates fair value (Note 8). The carrying amounts of the Company's
remaining financial instruments approximate fair value due to their short-term
nature.
The Company had forward foreign exchange contracts of $1,050,000 at
year-end 1998. The fair value of such contracts is the estimated amount that the
Company would receive upon termination of the contract, taking into account the
change in foreign exchange rates. The fair value of the Company's forward
foreign exchange contracts receivable was approximately nil at year-end 1998.
11. Business Segments, Geographical Information, and Concentration of Risk
The Company organizes and manages its business by individual functional
operating entity. The Company operates in two segments: On-line Finished
Materials Quality Control and On-line Raw Materials Analysis. In classifying
operational entities into a particular segment the Company aggregates businesses
with similar economic characteristics, products and services, production
processes, customers, and methods of distribution.
The Finished Materials segment manufactures advanced systems that are used
to measure and control parameters such as material thickness, coating thickness,
and coating weight in web-type materials. The Raw Materials segment develops
process-optimization systems that provide real-time, nondestructive analysis of
the composition of raw materials in basic-materials production processes.
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
11. Business Segments, Geographical Information, and Concentration of Risk (continued)
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Business Segment Information
Revenues:
Finished Materials $ 42,153 $ 28,663 $ 29,172
Raw Materials 27,876 28,051 22,875
--------- -------- ---------
$ 70,029 $ 56,714 $ 52,047
========= ======== =========
Income Before Provision for Income Taxes:
Finished Materials $ 4,488 $ 4,001 $ 2,546
Raw Materials 5,431 5,714 5,083
Corporate (a) (1,074) (1,111) (528)
--------- -------- ---------
Total operating income 8,845 8,604 7,101
Interest income (expense), net 1,448 1,175 (695)
--------- -------- ---------
$ 10,293 $ 9,779 $ 6,406
========= ======== =========
Total Assets:
Finished Materials $ 67,455 $ 31,859 $ 31,416
Raw Materials 23,420 23,389 18,584
Corporate (b) 14,569 47,704 16,766
--------- -------- ---------
$ 105,444 $102,952 $ 66,766
========= ======== =========
Depreciation and Amortization:
Finished Materials $ 1,275 $ 825 $ 993
Raw Materials 794 805 799
--------- -------- ---------
$ 2,069 $ 1,630 $ 1,792
========= ======== =========
Capital Expenditures:
Finished Materials $ 591 $ 417 $ 419
Raw Materials 136 257 252
Corporate 4 - -
--------- -------- ---------
$ 731 $ 674 $ 671
========= ======== =========
21
<PAGE>
11. Business Segments, Geographical Information, and Concentration of Risk (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Geographical Information
Revenues (c):
United States $40,729 $28,051 $ 22,875
Germany 19,968 16,934 18,279
England 9,938 10,817 8,679
France 1,880 1,885 2,385
Transfers among geographical areas (d) (2,486) (973) (171)
------- ------ --------
$70,029 $56,714 $ 52,047
======= ======= ========
Long-lived Assets (e):
United States $ 1,783 $ 664 $ 453
Germany 9,763 9,416 11,339
Other 278 293 309
------- ------ --------
$11,824 $10,373 $ 12,101
======= ======= ========
Export Revenues Included in United States Revenues Above (f) $22,987 $18,915 $ 13,419
======= ======= ========
(a) Primarily general and administrative expenses.
(b) Primarily cash, cash equivalents and, in 1997, available-for-sale
investments. (c) Revenues are attributed to countries based on selling location.
(d) Transfers among geographical areas are accounted for at prices that are
representative of
transactions with unaffiliated parties.
(e) Includes property, plant, and equipment, net.
(f) In general, export revenues are denominated in U.S. dollars.
Various components of the Company's products are supplied by sole-source
vendors. The Company has not experienced significant difficulty in obtaining
adequate supplies from these vendors, and has identified alternate suppliers.
However, there can be no assurance that the unanticipated loss of a single
vendor would not result in delays in shipments or in the introduction of new
products.
12. Restructuring Costs
During 1998, the Company recorded pre-tax restructuring costs of $624,000
related to severance costs for 35 employees, primarily in manufacturing
positions, 29 of whom were terminated prior to January 2, 1999. The affected
employees are primarily located in the United States at the Company's Raw
Materials segment. The Company plans to complete implementation of its
restructuring plan during the first half of 1999. As of January 2, 1999,
$100,000 of the total charge had been expended and the remaining reserve of
$552,000, as adjusted for the impact of currency translation, is included in
other accrued expenses in the accompanying balance sheet.
22
<PAGE>
13. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Basic
Net Income $6,343 $5,859 $3,845
------ ------ ------
Weighted Average Shares 8,195 7,143 5,032
------ ------ ------
Basic Earnings per Share $ .77 $ .82 $ .76
====== ====== ======
Diluted
Net Income $6,343 $5,859 $3,845
------ ------ ------
Weighted Average Shares 8,195 7,143 5,032
Effect of Stock Options 9 4 -
------ ------ ------
Weighted Average Shares, as Adjusted 8,204 7,147 5,032
------ ------ ------
Diluted Earnings per Share $ .77 $ .82 $ .76
====== ====== ======
The computation of diluted earnings per share excludes the effect of
assuming the exercise of certain outstanding stock options, because the effect
would be antidilutive. As of January 2, 1999, there were 308,240 of such options
outstanding with exercise prices ranging from $8.98 to $15.11 per share.
14. Unaudited Quarterly Information
(In thousands except per share amounts)
1998 First Second Third(a) Fourth(b)
- ---------------------------------------------------------------- ---------- ---------- ---------- ----------
Revenues $14,712 $14,384 $20,345 $20,588
Gross Profit 6,538 6,656 7,939 8,359
Net Income 1,414 2,035 1,251 1,643
Basic and Diluted Earnings per Share .17 .25 .15 .21
1997 First Second Third Fourth
- ---------------------------------------------------------------- ---------- ---------- ---------- ----------
Revenues $12,592 $14,133 $14,886 $15,103
Gross Profit 5,556 6,504 7,268 7,458
Net Income 715 1,227 1,843 2,074
Basic and Diluted Earnings per Share .12 .20 .22 .25
(a) Reflects the July 1998 acquisition of Radiometrie U.S. and restructuring costs of $0.6 million.
(b) Reflects the October 1998 acquisition of MF Physics.
23
<PAGE>
Metrika Systems Corporation 1998 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Metrika Systems Corporation:
We have audited the accompanying consolidated balance sheet of Metrika
Systems Corporation (a Delaware corporation and 67%-owned subsidiary of Thermo
Instrument Systems Inc.) and subsidiaries as of January 2, 1999, and January 3,
1998, and the related consolidated statements of income, cash flows, and
comprehensive income and shareholders' investment for each of the three years in
the period ended January 2, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Metrika
Systems Corporation and subsidiaries as of January 2, 1999, and January 3, 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended January 2, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 16, 1999
24
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Conditions and Results of Operations under
the heading "Forward-looking Statements."
Overview
The Company develops, manufactures, and markets on-line
process-optimization systems that employ proprietary ultrahigh-speed advanced
scientific measurement technologies. The Company operates in two segments:
On-line Raw Materials Analysis and On-line Finished Materials Quality Control.
The Company's Raw Materials segment is a pioneer in the development of process
optimization systems that provide real-time, nondestructive analysis of the
composition of raw materials in basic-materials production processes, including
coal, cement, and minerals. The Company's Finished Materials segment
manufactures advanced systems that measure and control parameters such as
material thickness, coating thickness, and coating weight in web-type materials,
such as metal strip, rubber, and plastic foils. Customers use these systems to
improve product quality and consistency, lower material costs, reduce energy
consumption, and minimize waste.
The Company intends to supplement its internal growth with strategic
acquisitions of complementary businesses. In July 1998, the Company acquired the
stock of Honeywell-Measurex Data Measurement Corporation, a wholly owned
subsidiary of Honeywell-Measurex Corporation (Note 3). This business, renamed
Radiometrie Corporation (Radiometrie U.S.), manufactures computerized,
noncontact thickness, coating, and other measurement systems for the flat metal
processing industry. In October 1998, the Company acquired MF Physics
Corporation (Note 3). MF Physics manufactures neutron generators and neutron
activation analysis systems. There can be no assurance that additional
businesses will be available at prices attractive to the Company.
A significant portion of the Company's sales are of large systems, the
timing of which can lead to variability in the Company's quarterly revenues and
income. In addition, in 1998, approximately 43% of the Company's revenues
originated outside the U.S. and approximately 33% were exports from the U.S.
Sales originating outside the U.S. represent revenues of the Company's Finished
Materials segment, the operations of which are located in Germany, the United
Kingdom, and France. These business units principally sell in their local
currencies.
Exports from the Company's U.S. operations are denominated in U.S.
dollars. The Company generally seeks to charge its customers in the same
currency as its operating costs. However, the Company's financial performance
and competitive position can be affected by currency exchange rate fluctuations.
Since the operations of the Finished Materials segment are conducted primarily
in Europe, the Company's operating results could be adversely affected by
capital spending and economic conditions in Europe. The Company's strategy is to
expand its Finished Materials segment in geographic areas outside of Europe,
with particular emphasis on North America, which in turn may reduce the
Company's exposure to European market conditions. The Company's acquisition of
Maryland-based Honeywell-Measurex Data Measurement Corporation was part of this
strategy.
Results of Operations
1998 Compared With 1997
Revenues increased 23% to $70.0 million in 1998 from $56.7 million in
1997. Finished Materials segment revenues increased principally due to the
inclusion of $13.7 million in revenues from the acquisition of Radiometrie U.S.
in July 1998. This increase was offset in part by the unfavorable effects of
currency translation as a result of the strengthening of the U.S. dollar
relative to foreign currencies in countries in which the Company operates, which
decreased revenues by $0.2 million. Raw Materials segment revenues decreased
$0.2 million, primarily due to a reduction in spending by raw-material producers
and increased competition resulting from the entry of new
25
<PAGE>
1998 Compared With 1997 (continued)
competitors into the market place, offset in part by the inclusion of $0.4
million in revenues from the acquisition of MF Physics in October 1998. As a
result of these factors, backlog at the Raw Materials segment decreased to $7.1
million at year-end 1998 from $17.5 million at year-end 1997, which may
adversely affect comparative sales in this segment in the first half of 1999.
The gross profit margin decreased to 42% in 1998 from 47% in 1997. The
gross profit margin at the Raw Materials segment decreased primarily due to
reduced revenues and increased competition. The overall decrease in gross profit
margin was due, to a lesser extent, to a decrease in the gross profit margin at
the Finished Materials segment, principally due to the inclusion of lower-margin
revenues from Radiometrie U.S.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 22% in 1998 from 25% in 1997. This decrease was primarily due to
reductions in headcount and travel expense in the Raw Materials segment and, to
a lesser extent, lower expenses as a percentage of revenues due to the
integration of Radiometrie U.S. in the Finished Materials segment.
Research and development expenses increased to $4.8 million in 1998 from
$3.8 million in 1997, primarily due to the inclusion of research and development
expenses at Radiometrie U.S., offset in part by reduced spending due to the
completion of the development of new products introduced in 1997.
During 1998, the Company recorded restructuring costs of $0.6 million
related to severance costs for 35 employees (Note 12).
Interest income remained relatively unchanged at $1.9 million in 1998
compared with $2.0 million in 1997, primarily due to the use of cash for the
July 1998 acquisition of Radiometrie U.S., which was raised through the
Company's initial public offering in June 1997 (Note 5). Interest expense
decreased to $0.4 million in 1998 from $0.8 million in 1997, primarily due to a
decrease in short-term borrowings at foreign divisions.
The effective tax rate was 38% and 40% in 1998 and 1997, respectively. The
effective tax rate decreased in 1998 due to a decrease in other nondeductible
expenses. 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 foreign tax rate and tax
law differences.
1997 Compared With 1996
Revenues increased 9% to $56.7 million in 1997 from $52.0 million in 1996,
reflecting an increase of $5.2 million in the Raw Materials segment, primarily
due to increased sales in international markets and the inclusion of $2.0
million in revenues from the acquisition of Autometrics in December 1996.
Finished Materials segment revenues decreased principally due to the unfavorable
effects of currency translation, which decreased revenues by $2.3 million. This
decrease was offset in part by an increase in demand in the U.S., which resulted
primarily from the strengthening of the U.S. dollar relative to the German
deutsche mark.
The gross profit margin increased to 47% in 1997 from 45% in 1996. The
gross profit margin at the Raw Materials segment increased primarily due to
volume and a change in product mix, offset in part by the inclusion in 1997 of
lower-margin revenues at Autometrics. The gross profit margin at the Finished
Materials segment improved due to higher costs incurred in the 1996 period
relating to the introduction of new products and an increase in higher-margin
sales in 1997 resulting from sales of such new products.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 25% in 1997 from 26% in 1996. The decrease was due to an increase
in revenues, offset in part by an increase in legal expenses in connection with
an ongoing patent infringement lawsuit initiated by the Company's Gamma-Metrics
subsidiary, relating to its on-line raw-materials cement-analysis systems.
Research and development expenses increased to $3.8 million in 1997 from
$3.0 million in 1996, primarily due to an increase in product development
expenses in the Raw Materials segment.
Interest income increased to $2.0 million in 1997 from $0.1 million in
1996, primarily due to interest income earned on the invested proceeds from the
Company's December 1996 private placement and June 1997 initial public offering
(Note 5).
26
<PAGE>
1997 Compared With 1996 (continued)
The effective tax rate was 40% in 1997 and 1996. The effective tax rate
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 foreign tax rate and tax law differences.
Liquidity and Capital Resources
Consolidated working capital was $35.8 million at January 2, 1999,
compared with $48.0 million at January 3, 1998. Included in working capital are
cash, cash equivalents, and available-for-sale investments of $15.1 million at
January 2, 1999, compared with $50.3 million at January 3, 1998. During 1998,
$4.4 million of cash was provided by operating activities. The Company funded a
$9.8 million decrease in other current liabilities primarily due to a decrease
in customer deposits and commissions as a result of lower bookings and revenues
and due to lower amounts accrued in 1998 for income taxes and certain employee
benefits. Cash of $3.2 million was provided by a decrease in accounts
receivable, principally due to lower revenues at the Raw Materials segment in
the fourth quarter of 1998, compared with the fourth quarter of 1997 and due to
the timing of cash collections.
During 1998, the Company used net cash of $24.5 million for investing
activities. Excluding available-for-sale investments activity, the Company's
primary investing activity was acquisitions, which used $30.1 million in cash,
net of cash acquired (Note 3). In addition, the Company expended $0.7 million
for purchases of property, plant, and equipment during 1998 and plans to make
capital expenditures of approximately $0.9 million during 1999.
The Company's financing activities used $9.3 million of cash in 1998,
principally to fund repurchases of Company common stock and a decrease in
short-term borrowings. The Company's Board of Directors has authorized the
repurchase by the Company, through September 1999, of up to $10.0 million of its
own securities. Through January 2, 1999, the Company had expended $4.6 million
under this authorization. Any such purchases are funded from working capital.
Although the Company expects to have positive cash flow from its existing
operations, the Company may require significant amounts of cash for the
acquisition of complementary businesses. The Company expects that it will
finance any such acquisitions through a combination of internal funds and/or
short-term borrowings from Thermo Instrument Systems Inc. or Thermo Electron
Corporation, although it has no agreement with these companies to ensure that
funds will be available on acceptable terms, or at all. The Company believes
that its existing resources are sufficient to meet the capital requirements of
its existing businesses for the foreseeable future.
Market Risk
The Company is exposed to market risk from changes in foreign currency
exchange rates, which could affect its future results of operations and
financial condition. The Company manages its exposure to this risk through its
regular operating and financing activities. Additionally, the Company uses
short-term forward contracts to manage certain exposures to foreign currencies.
The Company enters into forward foreign exchange contracts to hedge firm
purchase and sale commitments denominated in currencies other than its
subsidiaries' local currencies. The Company does not engage in extensive foreign
currency hedging activities. The purpose of the Company's foreign currency
hedging activities is to protect the Company's local currency cash flows related
to these commitments from fluctuations in foreign exchange rates. The Company's
forward foreign exchange contracts principally hedge transactions denominated in
U.S. dollars and German deutsche marks. Gains and losses arising from forward
contracts are recognized as offsets to gains and losses resulting from the
transactions being hedged. The Company does not enter into speculative foreign
currency agreements.
27
<PAGE>
Market Risk (continued)
Foreign Currency Exchange Rates
Forward foreign exchange contracts are sensitive to changes in foreign
currency exchange rates. The fair value of forward foreign exchange contracts is
the estimated amount that the Company would pay or receive upon termination of
the contract, taking into account the change in foreign exchange rates. A 10%
depreciation in year-end 1998 foreign currency exchange rates related to the
Company's contracts would result in a decrease in the unrealized gain on forward
foreign exchange contracts of $0.1 million. Since the Company uses forward
foreign exchange contracts as hedges of firm purchase and sale commitments, the
unrealized gain or loss on forward foreign currency exchange contracts resulting
from changes in foreign currency exchange rates would be offset by a
corresponding change in the fair value of the hedged item.
The Company generally views its investment in foreign subsidiaries with a
functional currency other than the Company's reporting currency as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in British pound sterling,
German deutsche marks, Dutch guilders, and French francs. The effect of a change
in foreign exchange rates on the Company's net investment in foreign
subsidiaries is recorded as a separate component of shareholders' investment. A
10% depreciation in year-end 1998 functional currencies, relative to the U.S.
dollar, would result in a $1.3 million reduction of shareholders' investment.
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 on the Company's
internal business systems, products, and operations. The Company'syear 2000
initiatives include (i) testing and upgrading significant information
technology systems and facilities; (ii) testing and developing upgrades, if
necessary, for the Company's current products and certain discontinued products;
(iii) contacting key suppliers and vendors to determine their year 2000
compliance status; and (iv) developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing, and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical facilities. The Company is currently in phase two of its
program, during which any noncompliant systems or facilities that were
identified during phase one are prioritized and remediated. The Company is
currently upgrading or replacing such noncompliant information technology
systems, and this process was approximately 80% complete as of January 2, 1999.
In many cases, such upgrades or replacements are being made in the ordinary
course of business, without accelerating previously scheduled upgrades or
replacements. As for the Company's critical facilities, the Company is in the
process of upgrading and/or replacing, for example, elevators, thermostats, and
security systems. The Company expects that all of its material information
technology systems and critical facilities will be year 2000 compliant by
September 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact
with, or incorporate third-party products, and operate on computer systems that
are not under the Company's control, there can be no assurance that the Company
has identified all of the year 2000 problems with its current products. The
Company believes that certain of its older products, which it no longer
manufactures or sells, may not be year 2000 compliant. The Company is continuing
to test and evaluate such products. The Company is focusing its efforts on
products that are still under warranty and/or are early in their expected life.
The Company is offering upgrades and/or identifying potential solutions where
reasonably practicable.
28
<PAGE>
Year 2000 (continued)
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. The Company is now following-up and
monitoring the year 2000 compliance progress of significant suppliers and
vendors that indicate that they are not year 2000 compliant or that do not
respond to the Company's questionnaires. The Company has commenced its
assessment of third-party risk, and expects to be substantially completed by
September 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required.
Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
were funded from working capital. All internal costs and related external costs,
other than capital additions, related to year 2000 remediation have been and
will continue to be expensed as incurred. The Company does not track internal
costs incurred for its year 2000 compliance project. Such costs are principally
the related payroll costs for its information systems group.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
material suppliers or vendors experience business disruptions due to year 2000
issues, the Company might also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
29
<PAGE>
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in 1999 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Dependence on Capital Spending Policies. The Company's customers include
coal-burning utilities, coal mines, cement manufacturers, and manufacturers of
web-type materials such as metal strip, rubber, and plastic foils. The capital
spending policies of these companies can have a significant effect on the demand
for the Company's products. Such policies are based on a wide variety of
factors, including the resources available to make such purchases, the spending
priorities among various types of process control equipment or techniques, and
policies regarding capital expenditures during recessions. Any decrease in
capital spending by these customers could have a material adverse effect on the
Company's business and results of operations. Further, the Company's growth is
dependent in part on construction and upgrade of manufacturing plants in the
basic-materials industries. A recession in one or more markets could cause a
slowdown or reduction in capital spending and in new-plant construction.
Uncertainty of Market Acceptance of New Products. Certain of the Company's
products represent alternatives to traditional instruments and methods. As a
result, such products may be slow to achieve, or may not achieve, market
acceptance, as customers may seek further validation of the efficiency and
efficacy of the Company's technology. This is particularly true where the
purchase of the product requires a significant capital commitment. Further,
because on-line process control systems are incorporated into a customer's
production line, a decision to invest in these systems involves significant
operating risks if the system fails or shuts down. The Company intends to expand
its product base by adapting its proprietary technologies for new applications
in broader industry segments including the pharmaceutical, agrochemical, and
industrial chemical industries. The Company believes that, to a significant
extent, its growth prospects depend on the continuing acceptance by a broader
group of customers and by broader industry segments of its new products and
technologies. There can be no assurance that the Company will be successful in
adapting its proprietary technologies for new applications, in obtaining these
acceptances or, if obtained, that such acceptances will be sustained. The
failure of the Company to obtain and sustain such acceptances could have a
material adverse effect on the Company's business and results of operations.
Technological Change and New Products. The market for on-line process
optimization systems is characterized by changing technology, evolving industry
standards, and new-product introductions. The Company's future success will
depend in part upon its ability to enhance its existing products and to develop
and introduce new products and technologies to meet changing customer
requirements and to successfully serve broader industry segments. The Company is
currently devoting significant resources toward the enhancement of its existing
products and the development of new products and technologies. There can be no
assurance that the Company will successfully complete the enhancement and
development of these products in a timely fashion or that the Company's current
or future products will satisfy the needs of the on-line process optimization
systems markets. Any failure to complete the enhancement and development of
these products or the failure of the Company's current or future products to
satisfy market needs could have a material adverse effect on the Company's
business and results of operations.
Risks Associated with Acquisition Strategy. The Company's strategy
includes the acquisition of businesses and technologies that complement or
augment the Company's existing product lines. Promising acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers, the need for regulatory approvals,
including antitrust approvals, and the high valuations of businesses resulting
from historically high stock prices in many countries. There can be no assurance
that the Company will be able to complete future acquisitions or that the
Company will be able to successfully integrate any acquired business. In order
to finance such acquisitions, it may be necessary for the Company to raise
additional funds through public or private financings. Any equity or debt
financing, if available at all, may be on terms that are not favorable to the
Company and, in the case of equity financing, may result in dilution to the
Company's shareholders.
30
<PAGE>
International Operations and International Sales. In 1998, 1997, and 1996,
sales originating outside the U.S. accounted for 43%, 51%, and 56%,
respectively, of the Company's total revenues. In addition, in 1998, 1997, and
1996, U.S. export sales accounted for 33%, 33%, and 26%, respectively, of the
Company's total revenues. The Company anticipates that sales outside the U.S.
and U.S. export sales will continue to account for a significant percentage of
the Company's total revenues. The Company intends to continue to expand its
presence in international markets. International revenues are subject to a
number of risks, including the following: agreements may be difficult to enforce
and receivables difficult to collect through a foreign country's legal system;
foreign customers may have longer payment cycles; foreign countries may impose
additional withholding taxes or otherwise tax the Company's foreign income,
impose tariffs, or adopt other restrictions on foreign trade; U.S. export
licenses may be difficult to obtain; the protection of intellectual property in
foreign countries may be more difficult to enforce; and fluctuations in exchange
rates may affect product demand and may adversely affect the profitability in
U.S. dollars of products and services provided by the Company in foreign markets
where payment for the Company's products and services is made in the local
currency. In 1998, effects of currency translation, primarily due to a stronger
U.S. dollar, decreased revenues by $0.2 million. Further, a significant portion
of the Company's business is conducted in foreign countries, particularly
Germany. Foreign operations are also subject to certain risks such as general
economic conditions in the countries in which the Company operates, unexpected
changes in regulatory requirements, compliance with a variety of foreign laws
and regulations, and overlap of different tax structures. Tax rates in certain
foreign countries exceed that of the U.S. and foreign earnings may be subject to
withholding requirements or the imposition of tariffs, exchange controls, or
other restrictions. There can be no assurance that any of these factors will not
have a material adverse effect on the Company's business and results of
operations.
Competition. The Company encounters intense competition in the sale of
products from the Finished Materials segment. The Company believes that the
principal competitive factors affecting the market for on-line process
optimization systems include quality and reliability, accuracy, price, customer
service and support, ease of use, distribution channels, technical features, and
compatibility with customers' manufacturing processes. Certain of the Company's
competitors have greater resources, manufacturing and marketing capabilities,
technical staff, and production facilities than those of the Company. As a
result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
promotion and sale of their products than can the Company. Further, competition
with respect to all of the Company's products could increase if new companies
enter the market or if existing competitors expand their product lines. There
can be no assurance that competitors of the Company will not develop
technological innovations that will render products of the Company obsolete.
Proprietary Rights. Proprietary rights relating to the Company's products
will be protected from unauthorized use by third parties only to the extent that
they are covered by valid and enforceable patents or are maintained in
confidence as trade secrets. There can be no assurance that any patents now or
hereafter owned by the Company will afford protection against competitors.
Proceedings initiated by the Company to protect its proprietary rights could
result in substantial costs to the Company. There can be no assurance that
competitors of the Company, some of whom have substantially greater resources
than those of the Company, will not initiate litigation to challenge the
validity of the Company's patents, or that they will not use their resources to
design comparable products that do not infringe upon the Company's patents. The
Company could incur substantial costs and diversion of management resources with
respect to the defense of any such claims, which could have a material adverse
effect on the Company's business, financial condition, and results of
operations. Furthermore, parties making such claims could secure a judgment
awarding substantial damages, as well as injunctive or other equitable relief,
which could effectively block the Company's ability to make, use, sell,
distribute, or market its products and services in the U.S. and abroad. There
may also be pending or issued patents held by parties not affiliated with the
Company that relate to the
31
<PAGE>
Company's products or technologies. In the event that a claim relating to
proprietary technology or information is asserted against the Company, the
Company may need to acquire licenses to, or contest the validity of, any such
competitor's proprietary technology. It is likely that significant funds would
be required to contest the validity of any such competitor's proprietary
technology. There can be no assurance that the Company would prevail in any such
contest or that any license required under any such competitor's proprietary
technology would be made available on acceptable terms. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate to prevent misappropriation of its technology or independent
development by others of similar technology. In addition, the laws of some
jurisdictions do not protect the Company's proprietary rights to the same extent
as the laws of the U.S. There can be no assurance that these protections will be
adequate.
Dependence on Sole-source Suppliers. Various components of the Company's
products are supplied by sole-source vendors. The Company has not experienced
significant difficulty in obtaining adequate supplies from these vendors, and
has identified alternate suppliers. However, there can be no assurance that the
unanticipated loss of a single vendor would not result in delays in shipment or
in the introduction of new products. Any such delays could have a material
adverse effect on the Company's business or results of operations.
Government Regulations and Approvals. The market for certain of the
Company's products, both in the U.S. and abroad, is subject to, or influenced
by, various domestic and foreign clean air and consumer protection laws. The
Company designs, develops, and markets its products, in part, to meet customer
needs created by existing and anticipated regulations, and any changes in these
regulations may adversely affect consumer demand for the Company's products.
Potential Fluctuations in Quarterly Performance. Many of the Company's
products are large systems that may require significant capital expenditures.
Consequently, the timing of sales of these systems could affect the Company's
quarterly earnings. Further, the Company's quarterly operating results may also
vary significantly depending on a number of other factors, including the size,
timing, and shipment of individual orders, changes in pricing by the Company or
its competitors, discount levels, seasonality of revenue, foreign currency
exchange rates, the mix of products sold, introduction and delivery of new
product enhancements by the Company and its competitors, and general economic
conditions. Generally, the Company recognizes product revenues upon shipment of
its products. Revenues on substantially all contracts are recognized using the
percentage-of-completion method. Typically, the Company experiences higher
revenues in the second half of each year due to seasonality experienced by its
Finished Materials segment, primarily because customers tend to place their
orders earlier in the year so that they can have the systems installed either
during the holiday season in the third quarter or between Christmas and the New
Year. Because certain operating expenses of the Company are based on anticipated
capacity levels and a high percentage of the Company's expenses are fixed for
the short term, a small variation in the timing of recognition of revenue can
cause significant variations in operating results from quarter to quarter. There
can be no assurance that any of these factors will not have a material adverse
effect on the Company's business or results of operations.
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 problems will
not have a material adverse impact on the Company's business, operations, or
financial condition. While the Company expects that upgrades to its internal
business systems will be completed in a timely fashion, there can be no
assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
material suppliers or vendors
32
<PAGE>
experience business disruptions due to year 2000 issues, the Company might also
be materially adversely affected. There is expected to be a significant amount
of litigation relating to the year 2000 issue and there can be no assurance that
the Company will not incur material costs in defending or bringing lawsuits. In
addition, if any year 2000 issues are identified, there can be no assurance that
the Company will be able to retain qualified personnel to remedy such issues.
Any unexpected costs or delays arising from the year 2000 issue could have a
significant adverse impact on the Company's business, operations, and financial
condition in amounts that cannot be reasonably estimated at this time.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Information
<S> <C> <C> <C> <C> <C>
(In thousands except per share amounts) 1998 (a) 1997 (b) 1996 (c) 1995 1994
- -------------------------------------------------- ---------- ----------- ---------- ---------- ----------
Statement of Income Data
Revenues $ 70,029 $ 56,714 $ 52,047 $ 46,032 $ 38,612
Income Before Provision for Income Taxes 10,293 9,779 6,406 4,920 3,256
Net Income 6,343 5,859 3,845 2,852 1,767
Basic and Diluted Earnings per Share .77 .82 .76 .57 .35
Balance Sheet Data
Working Capital $ 35,818 $ 47,975 $ 8,705 $ (8,070) $ (4,665)
Total Assets 105,444 102,952 66,766 53,974 49,261
Long-term Obligation 3,437 3,858 5,223 6,470 6,780
Shareholders' Investment 66,385 63,805 24,861 9,382 14,095
(a) Reflects the July 1998 acquisition of Radiometrie U.S.
(b) Reflects the December 31, 1996, acquisition of Autometrics, and the June
1997 initial public offering of Company common stock.
(c) Reflects the December 1996 private placement of Company common stock.
34
<PAGE>
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol MKA. The following table sets forth the high and low sale prices of
the Company's common stock since June 20, 1997, the date the Company's common
stock began trading on that exchange, as reported in the consolidated
transaction reporting system.
1998 1997
------------------- ------------------
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
First $16 1/4 $12 7/8 $ - $ -
Second 18 14 15/16 15 5/8 15 1/2
Third 17 8 1/2 16 13 7/8
Fourth 9 3/8 8 18 1/2 14
</TABLE>
As of January 29, 1999, the Company had 46 holders of record of its common
stock. This does not include holdings in street or nominee names. The closing
market price on the American Stock Exchange for the Company's common stock on
January 29, 1999, was $8 1/2 per share.
Shareholder Services
Shareholders of Metrika Systems Corporation who desire information about
the Company are invited to contact the Investor Relations Department, Metrika
Systems Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts
02454-9046, (781) 622-1111. A mailing list is maintained to enable shareholders
whose stock is held in street name, and other interested individuals, to receive
quarterly reports, annual reports, and press releases as quickly as possible.
Distribution of printed quarterly reports is limited to the second quarter only.
All material is available from Thermo Electron's Internet site
(http://www.thermo.com/subsid/mka1.html).
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent and
maintains shareholder activity records. The agent will respond to questions on
issuance of stock certificates, change of ownership, lost stock certificates,
and change of address. For these and similar matters, please direct inquiries
to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Board of Directors and will depend upon, among other factors,
the Company's earnings, capital requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended January
2, 1999, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, Metrika Systems
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.
Annual Meeting
The annual meeting of shareholders will be held on Thursday, May 27, 1999,
at 11 a.m. at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.
35
<TABLE>
<CAPTION>
METRIKA SYSTEMS CORPORATION
Subsidiaries of the Registrant
<S> <C> <C>
As of February 28, 1999, Metrika Systems Corporation owned the following
companies:
STATE OR
JURISDICTION PERCENT OF
NAME OF OWNERSHIP
INCORPORATION
Radiometrie RM GmbH Germany 100
Eberline Radiometrie S.A. France 100
Gamma-Metrics California 100
MF Physics Corporation Delaware 100
Radiometrie Corporation Delaware 100
DMC Mess & Regeltechnik GmbH Germany 100
Radiometrie U.S.A., Inc. California 100
Radiometrie Limited United Kingdom 100
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
by reference of our reports dated February 16, 1999, included in or incorporated
by reference into Metrika Systems Corporation's Annual Report on Form 10-K for
the year ended January 2, 1999, into the Company's previously filed Registration
Statement No. 333-58255 on Form S-8 and Registration Statement No.
333-38371 on Form S-3.
Arthur Andersen LLP
Boston, Massachusetts
March 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM METRIKA
SYSTEMS CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 2,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
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0
0
<COMMON> 83
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