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 1-13975
ONIX SYSTEMS INC.
(Exact name of Registrant as specified in its charter)
Delaware 76-0546330
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22001 North Park Drive
Kingwood, TX 77339-3804
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
---------------------------- -----------------------------------------
Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, 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 $17,621,000.
As of January 29, 1999, the Registrant had 14,357,524 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.
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
The businesses of ONIX Systems Inc. ( the Company or the Registrant) operate
in two segments: Measurement Instruments and Industry-specific Systems. Through
its Measurement Instruments segment, the Company manufactures field measurement
instruments and on-line sensors in four general product areas: flow, level and
density, composition analysis, and data acquisition and display instruments.
Flow instruments consist of a range of instruments designed to measure and
control the flow of liquids and gases. These instruments include gas flow
computers, noncontacting ultrasonic flow meters, turbine flow meters, and air
flow measurement systems. Level and density instruments incorporate
sophisticated technologies that measure and control the level and density of
liquid and solid materials and the density of gaseous materials. These
instruments include intelligent point-level and continuous-level measurement
instruments. The composition analysis instruments are used for on-line analysis
of the chemical composition of solids, liquids, and gases and include sulfur
analyzers, infrared and ultraviolet spectrometers, gas chromatographs, portable
elemental analysis instruments, and on-line mass spectrometers. Data acquisition
and display instruments gather information from process sensors and record,
display, and present the information for analysis, control, and historical data
storage. The Company's instruments include strip chart recorders, paperless
recorders, AC harmonic analyzers, and data acquisition and analysis systems.
Through its Industry-specific Systems segment, the Company offers
sophisticated sensor systems that are used to provide real-time measurement,
data collection, recording, analysis, and local control of process functions.
These special purpose instruments and sensors include rod pump controllers,
remote terminal units, gas-injection systems, and wellhead safety systems. In
July 1998, the Company's Industry-specific Systems segment acquired certain
businesses of the Mid-South Companies for $12.6 million in cash, including
Mid-South Controls and Services Inc., which specializes in the assembly and
service of wellhead measurement, control, and safety shutdown systems that are
required by oil and gas companies operating offshore platforms, and Mid-South
Power Systems Inc., which provides electrical generators, switchgear, and motor
control units that are used in a wide variety of industrial applications.
The Company was incorporated in August 1997. In connection with the
Company's incorporation, Thermo Instrument Systems Inc., a majority-owned
subsidiary of Thermo Electron Corporation, transferred to the Company all of the
stock of CAC Inc., CAC Limited, Flow Automation Inc., Flow Automation U.K.
Limited, VG Gas Analysis Systems Inc., Westronics Inc., Houston Atlas Inc., TN
Technologies Inc., and Kay-Ray/Sensall Inc. in exchange for 10,666,667 shares of
the Company's common stock. The Company acquired the Peek Measurement Business
from Thermo Power Corporation effective November 1997, and both the Rustrak
Ranger Logger product line from a subsidiary of Danaher Corporation and the
business of Fluid Data, Inc. from Elsag-Bailey, Inc in December 1997. On March
30, 1998, the Company sold 3,300,000 shares of its common stock in an initial
public offering at $14.50 per share for net proceeds of $43.7 million. As of
January 2, 1999, Thermo Instrument owned 11,524,867 shares of the Company's
common stock, representing 80% of such stock outstanding. During 1998*, Thermo
Instrument purchased 858,200 shares of the Company's common stock on the open
market for $5.3 million. Thermo Instrument is a worldwide leader in the
development, manufacture, and marketing of measurement instruments used to
monitor, collect, and analyze information. These systems are used for multiple
applications in a range of industries, including industrial processing, food and
beverage production, life sciences research, and medical diagnostics. Thermo
Instrument is an 85%-owned subsidiary of Thermo Electron. As of January 2, 1999,
Thermo Electron owned 104,700 of the Company's outstanding common stock
representing 1% of such stock outstanding. During 1998, Thermo Electron
purchased these shares in the open market at a total cost of $0.7 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.
- --------------------
* 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 Segments
Financial information concerning the Company's segments is summarized in
Note 9 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
Measurement Instruments
Flow Instruments
The Company designs, develops, markets, and services a broad product line of
mechanical and electronic flow measurement instruments that measure and control
the flow of liquids and gases. The Company's flow measurement instruments
include intelligent microprocessor-controlled flow computers, which are remotely
installed electronic flow metering instruments, often solar powered, that are
connected to the primary flow meters installed directly in the customer's
pipeline; noncontacting flow meters that use ultrasonic technology mounted
outside a customer's pipe; in-line turbine meters, which are designed to
function in a wide variety of operating conditions, including corrosive fluids,
high pressure gases, extreme temperatures, and sanitary and hazardous
environments; and insertion turbine meters for use where in-line monitoring is
not economically or operationally viable, such as in large pipelines or where
pressure drop is critical.
The Company's field flow computers are primarily used by customers in the
natural gas industry to monitor, record, and communicate the flow of natural gas
at custody transfer points in the natural gas distribution chain. The Company's
ultrasonic flow meters, utilizing both transit time and Doppler technologies,
are sold primarily to customers in the water and wastewater industry for a
variety of applications. The Company believes that it is the world leader in
Doppler ultrasonic flow meters. The Company sells its turbine and impeller
meters to customers throughout the world in a diverse range of industries,
including the oil and gas, chemical processing, petrochemical, pharmaceutical,
semiconductor, pulp and paper, aerospace, automotive, food and beverage, power
generation, and water and wastewater industries. The Company's air flow
measurement systems are used for a variety of air flow applications, including
drying, paint spraying, combustion, and clean room pressurization.
The Company's flow instruments for the oil and gas industry are primarily
sold through a direct sales force. The Company's flow instruments for other
industries are primarily sold through independent sales representatives or
distributors supported by local sales managers and application specialists.
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Level and Density Instruments
The Company designs, develops, markets, and services intelligent
point-level, continuous-level, and density measurement instruments that use a
variety of sophisticated technologies, including gamma, radar, ultrasonic, and
vibrational measurement techniques, to meet the cost and application-specific
needs of process industry participants within targeted markets. The Company
believes that it is the world leader in level measurement instruments
incorporating gamma measuring technology and point-level measurement instruments
incorporating ultrasonic measuring technology and that it is the only U.S.
manufacturer of continuous-level instruments incorporating radar measuring
technology. The Company's level and density measurement instruments are designed
to ensure increased accuracy and reliability despite harsh process environments.
In addition, they are primarily noncontacting and, therefore, well-suited for
use in industrial processes that involve harmful or toxic materials, which cause
maintenance problems for traditional contacting techniques. The Company's
point-level instruments measure the presence or absence of a substance, while
its continuous-level instruments measure the changing level of a substance on an
ongoing basis.
The Company's level measurement instruments are used by several targeted
industries, including the oil and gas, chemical, mineral and mining, iron and
steel, pharmaceutical, water and wastewater, and pulp and paper industries.
Customers in these industries store large quantities of materials in tanks or
other storage vessels and use the Company's instruments to either continuously
measure and monitor levels of the stored materials or to ensure the presence of
either a minimum or maximum amount of the material. The Company's density
measurement products are used primarily in the paper industry to measure pulp
consistency and in the oil and gas industry by pipeline companies responsible
for transporting refined petroleum products.
The Company's level and density instruments are primarily sold through
independent sales representatives or distributors supported by local sales
managers and application specialists.
Composition Analysis Instruments
The Company designs, develops, markets, and services a variety of
instruments designed to analyze the chemical composition of solids, liquids, and
gases. These products include lead acetate-based and chemiluminescent sulfur
analyzers, which utilize fiber optics and precision colorimetry for field and
on-line measurement of the sulfur content in liquid and gaseous materials; a
photodiode spectrometer used for gasoline blending optimization; on-line gas
chromatographs, which are utilized in content and purity analysis of natural gas
and light hydrocarbon liquids, including butane and propane; portable
XRF-elemental analysis instruments that use proprietary sensors to provide
accurate, real-time analysis of the presence of metals and the composition of
alloys; and on-line mass spectrometers that provide highly accurate, real-time
analysis of the type and content of a variety of gases at multiple points within
a customer's operations. The Company believes that it is a leader in the market
for portable elemental analysis instruments, process sulfur monitors, and
on-line mass spectrometers.
Customers use the Company's portable elemental analysis instruments for
field composition analysis of alloys, analysis of the presence of lead within
paint, and composition analysis of the metallic content of soil, particularly at
Superfund sites. The Company's mass spectrometers are used in a variety of
process industries, including the petrochemical, pharmaceutical, iron and steel,
and semiconductor industries for real-time, ultrasensitive measurement of gases.
The Company's composition analysis instruments are primarily sold through
independent sales representatives or distributors supported by local sales
managers and application specialists.
Data Acquisition and Display Instruments
The Company also offers data acquisition systems, paper and paperless strip
chart recorders, process alarm monitors, current-to-pressure and
pressure-to-current transducers, and AC-power monitoring instruments to
customers in the power generation and transmission, petrochemical, chemical,
pulp and paper, water and wastewater, and pharmaceutical industries. The
Company's strip chart recorders are designed to continuously and accurately
measure,
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display, and record critical variables within an industrial or manufacturing
process and provide plant managers with valuable information regarding flow,
level, density, temperature, and pressure. The Company's alarm monitoring
systems provide an interface for sensors measuring pressure, temperature,
vibration, or gas detection, which in turn allow critical alarm conditions to be
displayed or communicated to a centralized control system. The Company's
current-to-pressure and pressure-to-current transducers are used for valve
positioning in processing plants for the chemical, petrochemical, power
generation, pulp and paper, and pharmaceutical industries.
The Company's data acquisition and display instruments are primarily sold
through independent sales representatives or distributors supported by local
sales managers and application specialists.
Industry-specific Systems
The Company's industry-specific systems segment specializes in the
development, installation, and service of scalable and redundant rod pump
controllers and RTUs that are utilized to automate the measurement, control,
safety, and environmental protection needs in onshore and offshore oil and gas
production and pipeline transmission. These products incorporate
microprocessor-based, smart technologies to provide customers with a variety of
functions, including gas flow measurement and custody transfer data.
In addition, the Company offers a range of wellhead safety control products
that monitor, control, and provide failsafe shutdown of oil and gas production
wells. To complement these products, the Company developed a subsea control
system to assist in oil production from reserves below the ocean floor. The
control system, designed to operate at a maximum depth of 3,000 meters, rests on
the ocean floor to monitor, analyze, and locally control the level and flow of
oil in up to four oil wells. It is connected to operations located on the ocean
surface by an umbilical line with electrical and hydraulic connections. This
product is designed to offer a more efficient and cost-effective alternative to
traditional offshore drilling, which requires substantial time and expense in
building and later disassembling surface drilling platforms. The control system
also allows oil companies to access oil reserves that would otherwise be
inaccessible either because of their location or cost. The control system was
first presented and exhibited in late 1997 at an offshore engineering conference
in Aberdeen, Scotland.
The Company's industry-specific systems are primarily sold through a
direct sales force with industry-specific expertise.
(ii) and (xi) New Products; Research and Development
The Company maintains active programs for the development and introduction
of new products and improvements to existing products. In 1998, the Company
introduced several new products to serve various industries. The Company has
received its first order for Artemis, its new subsea control system, which rests
on the ocean floor and controls safety valves and the flow of oil from an
offshore oil well for economical offshore oil production. The Hydra SX, a
patented dual-frequency, ultrasonic doppler flowmeter, is used in the water and
wastewater industry. This noncontacting measurement instrument is positioned
outside the pipe for ease of use and maintenance, without touching the measured
materials. Also introduced in 1998 was the Metallurgist Pro, a portable metals
analyzer for immediate determination of material composition in industrial
facilities. The Company also launched the patented Zircon point-level
capacitance sensor, a measurement sensor that makes point-level measurements of
liquids and solids for process control industry applications.
During 1998, 1997, and 1996, research and development expenses were $9.2
million, $6.8 million, and $5.6 million, respectively.
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(iii) Raw Materials
The Company believes that there is more than one source for the major
components of its products. If, however, the Company were to experience any
shortage in any of the major components of its products due to supply shortages
or other reasons, including reasons beyond its control, the Company's business,
financial condition, and results of operations would be adversely affected.
(iv) Patents, Licenses, and Trademarks
The Company's success depends in part on the strength and protection of its
proprietary methodologies and designs and other proprietary intellectual rights.
The Company relies upon a combination of patent, trade secret, nondisclosure and
other contractual arrangements, and copyright and trademark laws, to protect its
proprietary rights. The Company seeks to limit access to and distribution of its
proprietary information. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter the misappropriation of its
proprietary information, that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights, or
that competitors will not be able to develop similar technology independently.
(v) Seasonal Influences
There are no significant seasonal influences on the Company's sales of its
products.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on the Company's working
capital.
(vii) Dependency on a Single Customer
No customer represented 10% or more of the Company's total revenues in any
of the past three years.
(viii) Backlog
<TABLE>
<CAPTION>
<S> <C> <C>
The Company's backlog of firm orders at year-end 1998 and 1997 was:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Measurement Instruments $13,613 $ 17,097
Industry-specific Systems 10,942 9,409
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$24,555 $ 26,506
======= ========
</TABLE>
The Company believes that substantially all of the backlog as of January 2,
1999, will be shipped during 1999. Certain of such firm orders are cancelable by
the customer upon payment of a cancellation charge. The decrease in the backlog
in the Measurement Instruments segment resulted from a worldwide decrease in
capital spending in the oil and gas, chemical, semiconductor, and iron and steel
industries.
(ix) Government Contracts
Not applicable.
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(x) Competition
The Company believes that its ability to compete successfully in the market
for field measurement instruments and on-line sensors depends upon a number of
factors both within and beyond its control, including quality and reliability;
technical features; accuracy; ease of use; product pricing; reputation for
aftermarket service; timing of new product releases and enhancements by the
Company and its competitors; name recognition; the establishment of strategic
alliances; and industry and general economic trends. In addition, the Company
competes with companies using proprietary technologies that may be viewed as
cost-effective alternatives to the technologies incorporated into the Company's
products.
In both its Measurement Instruments and Industry-specific Systems segments,
the Company competes with a few large competitors, including Fisher-Rosemount, a
division of Emerson Electric Co., and Asea Brown Boveri (Holding) Ltd. (ABB).
Within its Measurement Instruments segment, the Company also competes with such
large companies as Elsag Bailey Process Automation N.V., a division of ABB, and
Yokogawa Electric Corporation, as well as smaller-sized competitors. The field
measurement instruments and on-line sensors market segment of the process
control market is highly fragmented and intensely competitive, and the Company
expects competition to continue to increase. The Company's Industry-specific
Systems segment competes with many companies within specific industries. As the
technologies used within the process measurement industry continue to develop,
the Company expects to face increasing competition in the future from emerging
competitors.
Certain of the Company's current and potential competitors have
significantly greater financial, marketing, technical, and other competitive
resources, as well as greater name recognition, than the Company. As a result,
the Company's competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, and may be able to devote
greater resources to the promotion and sale of their products. There can be no
assurance that the Company will be able to compete successfully with existing or
new competitors. An increase in competition could result in price reductions and
loss of market share, which could have a material adverse effect on the
Company's business, financial condition, or results of operations.
(xii) Environmental Protection Regulations
The Company believes that compliance by the Company with federal, state, and
local environmental protection regulations will not have a material adverse
effect on its capital expenditures, earnings, or competitive position.
(xiii) Number of Employees
As of January 2, 1999, the Company employed approximately 900 people.
(d) Financial Information About Geographic Areas
Financial information about geographic areas is summarized in Note 9 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders, which information is incorporated herein by
reference.
(e) Executive Officers of the Registrant
Name Age Present Title (Fiscal Year First
Became Executive Officer)
-----------------------------------------------------------------
William J. Zolner 55 President, Chief Executive Officer,
and Director (1997)
C.R. (Neil) Duarte 55 Vice President (1997)
B.C. Holstead 63 Vice President (1997)
Mark Whitman 44 Vice President (1997)
Theo Melas-Kyriazi 39 Chief Financial Officer (1998)
Paul F. Kelleher 56 Chief Accounting Officer (1997)
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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. Dr. Zolner has been President, Chief
Executive Officer, and a Director of the Company since its inception. Mr.
Duarte has served as Vice President of the Company since its inception and
as President of the Company's Flow Automation subsidiary since 1992. Mr.
Holstead has served as Vice President of the Company since its inception
and has served as President of CAC since October 1997. Mr. Holstead
served in various positions with CAC from 1991 to October 1997. Mr.
Whitman has served as Vice President of the Company since its inception,
President of TN Technologies since 1994, and in various positions at a
number of subsidiaries of the Company since 1981. Mr. Melas-Kyriazi was
appointed Chief Financial Officer of the Company and Thermo Electron on
January 1, 1999. He joined Thermo Electron in 1986 as Assistant
Treasurer, and became Treasurer in 1988. In 1994, he was named President
and Chief Executive Officer of ThermoSpectra Corporation, a public
subsidiary of Thermo Instrument. In 1998, he became Vice President of
Corporate Strategy for Thermo Electron. Mr. Melas-Kyriazi remains a Vice
President of Thermo Electron. Mr. Kelleher has held comparable positions
for at least five years with Thermo Instrument or Thermo Electron. Mr.
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
Measurement Instruments
The Measurement Instruments segment leases approximately 365,000 square feet
of office, engineering, laboratory, and production space, principally in Texas,
Illinois, North Carolina, the United Kingdom, and Canada, under leases expiring
from 1999 to 2007, and owns approximately 67,000 square feet of office,
engineering, and production space in Indiana.
Industry-specific Systems
The Industry-specific Systems segment leases approximately 97,000 square
feet of office, engineering, production, laboratory, and warehouse space,
principally in Texas, New Jersey, Louisiana, and Mexico, under leases expiring
from 1999 to 2007, and owns approximately 42,000 square feet of office,
engineering, and production space in the United Kingdom and Louisiana.
The Company believes that both the Measurement Instruments and
Industry-specific Systems segments' 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.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of the Security Holders
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Information concerning the market and market price for the Registrant's
common stock, $.01 par value, and divided policy is included under the sections
labeled "Common Stock Market Information" and "Dividend Policy" in the
Registrant's 1998 Annual Report to Shareholders and is incorporated herein by
reference.
(b) Use of Proceeds
The Company sold 3,300,000 shares of common stock, par value $.01 per share,
pursuant to a Registration Statement on Form S-1 (File No. 333-45333), which was
declared effective by the Securities and Exchange Commission on March 24, 1998.
The managing underwriters of the offering were Donaldson, Lufkin & Jenrette
Securities Corporation, Lazard Freres & Co. LLC, and Gruntal & Co., L.L.C. The
aggregate gross proceeds of the offering were $47,850,000. The Company's total
expenses in connection with the offering were $4,166,000, of which $3,349,500
was for underwriting discounts and commissions; $699,500 was for other expenses
paid to persons other than directors or officers of the Company, persons owning
more than 10 percent of any class of equity securities of the Company, or
affiliates of the Company (collectively, Affiliates); and $117,000 was paid to
Thermo Electron, the Company's ultimate parent company, for certain corporate
services rendered in connection with the offering. The Company's net proceeds
from the offering were $43,684,000. On April 10, 1998, $12,000,000 of such net
proceeds was expended to repay the outstanding indebtedness owed to Thermo
Instrument in connection with the acquisition of the Peek Measurement Business.
On July 7, 1998, $12,509,000 of such net proceeds was expended to acquire the
capital stock of certain businesses of the Mid-South Companies. As of January 2,
1999, the Company had also expended $1,064,000 of such net proceeds for the
purchase of property, plant, and equipment; $7,055,000 for research and
development; and $2,366,000 for working capital needs. As of January 2, 1999,
the Company had expended an aggregate of $34,994,000 of such net proceeds. The
Company invested the remaining net proceeds pursuant to a repurchase agreement
with Thermo Electron. As of January 2, 1999, the Company had $33,373,000 of cash
and cash equivalents.
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, with
respect to a proposed reorganization by the Company's ultimate parent
corporation, Thermo Electron, involving certain of Thermo Electron's
subsidiaries, including the Company.
(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 29, 1999 ONIX SYSTEMS INC.
By: /s/ William J. Zolner
William J. Zolner
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 29, 1999.
Signature Title
By: /s/ William J. Zolner President, Chief Executive Officer, and Director
William J. Zolner
By: /s/ Theo Melas-Kyriazi Chief Financial Officer
Theo Melas-Kyriazi
By: /s/ Paul F. Kelleher Chief Accounting Officer
Paul F. Kelleher
By: /s/ David J. Beaubien Director
David J. Beaubien
By: /s/ Frank Jungers Director
Frank Jungers
By: /s/ Earl R. Lewis Chairman of the Board and Director
Earl R. Lewis
By: /s/ Arvin H. Smith Director
Arvin H. Smith
12
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of ONIX Systems Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in ONIX Systems Inc.'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>
<S> <C> <C> <C> <C> <C> <C>
SCHEDULE II
ONIX SYSTEMS INC.
Valuation and Qualifying Accounts
(In thousands)
Description Provision Accounts Accounts Other (a) Balance
Balance at Charged to Recovered Written at End
Beginning Expense Off of Year
of
Year
- ----------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Allowance for Doubtful Accounts
Year Ended January 2, 1999 $2,155 $ 423 $ 45 $ (926) $ 244 $1,941
Year Ended January 3, 1998 $1,347 $ 674 $ 9 $ (488) $ 613 $2,155
Year Ended December 28, 1996 $1,360 $ 283 $ 7 $ (667) $ 364 $1,347
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Description Balance at Established Activity Other (c) Balance
Beginning as Cost of Charged at End
of Year Acquisitions to of Year
Reserve
- ------------------------------------- ------------- ------------- ------------ ------------- -------------
Accrued Acquisition Expenses (b)
Year Ended January 2, 1999 $ 312 $ 686 $ (657) $ - $ 341
Year Ended January 3, 1998 $ 1,396 $ 329 $ (408) $(1,005) $ 312
Year Ended December 28, 1996 $ 852 $ 1,220 $ (653) $ (23) $ 1,396
Description Balance at Restructuring Cash Other (f) Balance
Beginning Costs Payments at End
of Year Charged to of Year
Expense (e)
- ------------------------------------- ------------- ------------- ------------ ------------- -------------
Accrued Restructuring Costs (d)
Year Ended January 2, 1999 $ - $ 742 $ (310) $ 3 $ 435
(a) Includes allowances of businesses acquired during the year as described in
Note 2 to Consolidated Financial Statements in the Registrant's 1998 Annual
Report to Shareholders and the effect of foreign currency translation.
(b) The nature of activity in this account is described in Note 2 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders.
(c) Represents reversal of accrued acquisition expenses and corresponding
reduction of cost in excess of net assets of acquired companies resulting
from finalization of restructuring plans and the effect of foreign currency
translation.
(d) The nature of activity in this account is described in Note 8 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders.
(e) Excludes provision of $0.2 million for fixed asset write-downs.
(f) Includes the effect of foreign currency translation.
</TABLE>
14
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2* Share Purchase Agreement dated January 29, 1998, between Thermo Power
Corporation and the Registrant relating to the acquisition of the
Peek Measurement Business.
3.1* Certificate of Incorporation of the Registrant.
3.2* By-laws of the Registrant.
4* Specimen Common Stock Certificate.
10.1* Corporate Services Agreement dated as of August 21, 1997, between
Thermo Electron Corporation and the Registrant.
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 August 21, 1997, between Thermo
Electron and the Registrant.
10.4* Master Repurchase Agreement dated as of August 21, 1997, between
Thermo Electron and the Registrant.
10.5* Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of January 5, 1998, between Thermo Electron
and the Registrant.
10.6* Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of January 5, 1998, between Thermo
Instrument Systems Inc. and the Registrant.
10.7* Stock Transfer Agreement dated August 21, 1997, between Thermo
Instrument and the Registrant.
10.8* Indemnification Agreement dated as of August 21, 1997, between Thermo
Instrument and the Registrant.
10.9* Form of Deferred Compensation Plan for Directors of the
Registrant.
10.10* Form of Indemnification Agreement for Officers and Directors of
the Registrant.
10.11* Lease Agreement dated June 4, 1990, between Crow-Gottesman-Hill #43,
as landlord and TN Technologies Inc., as tenant for property located
in the City of Round Rock, Williamson County, Texas.
10.12* Equity Incentive Plan of the Registrant.
In addition to the stock-based compensation plans of the Registrant,
the executive officers of the Registrant may be granted awards under
stock-based compensation plans of Thermo Electron and Thermo
Instrument for services rendered to the Registrant or to such
affiliated corporations. The terms of such plans are substantially
the same as those of the Registrant's Equity Incentive Plan.
10.13* Lease Agreement dated as of November 1, 1997, between Thermo
Instrument, as landlord, and CAC Inc., as tenant.
15
<PAGE>
Exhibit
Number Description of Exhibit
10.14* Lease Agreement dated as of January 1, 1998, between Peek Traffic
Ltd., as landlord, and Peek Measurement Ltd., as tenant.
13 Annual Report to Shareholders for the year ended January 2, 1999
(only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
Each exhibit above which is marked with an asterisk (*) is incorporated by
reference to the correspondingly numbered exhibit to the Registrant's
Registration Statement on Form S-1 [File No. 333-45333].
16
Exhibit 13
ONIX Systems Inc.
Consolidated Financial Statements
1998
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ONIX Systems Inc. 1998 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Revenues (Notes 6 and 9) $ 153,653 $121,525 $ 95,316
--------- -------- ---------
Costs and Operating Expenses:
Cost of revenues 93,082 72,006 59,715
Selling, general, and administrative expenses (Note 6) 38,870 28,201 21,935
Research and development expenses 9,232 6,830 5,568
Restructuring costs (Note 8) 905 - -
--------- ------- ---------
142,089 107,037 87,218
--------- ------- ---------
Operating Income 11,564 14,488 8,098
Interest Income 1,990 344 -
Interest Expense, Related Party (Note 2) (332) (113) -
--------- -------- ---------
Income Before Provision for Income Taxes 13,222 14,719 8,098
Provision for Income Taxes (Note 4) 5,222 5,920 3,240
--------- ------- ---------
Net Income $ 8,000 $ 8,799 $ 4,858
========= ======= =========
Basic and Diluted Earnings per Share (Note 10) $ .55 $ .79 $ .46
========= ======= =========
Weighted Average Shares (Note 10)
Basic 14,515 11,083 10,667
========= ======= =========
Diluted 14,520 11,083 10,667
========= ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
ONIX Systems Inc. 1998 Financial Statements
Consolidated Balance Sheet
(In thousands except share amounts) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Assets
Current Assets:
Cash and cash equivalents (includes $30,743 and $19,618 under repurchase $ 33,373 $ 24,960
agreements with affiliated company)
Accounts receivable, less allowances of $1,941 and $2,155 34,476 32,583
Inventories 32,000 32,932
Deferred tax asset (Note 4) 4,772 3,531
Prepaid expenses and other current assets 1,241 1,032
-------- --------
105,862 95,038
-------- --------
Property, Plant, and Equipment, at Cost, Net 10,136 9,145
-------- --------
Other Assets 302 87
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 2) 64,278 55,439
-------- --------
$180,578 $159,709
======== ========
Liabilities and Shareholders' Investment
Current Liabilities:
Borrowings under overdraft facility $ 1,017 $ 23
Accounts payable 9,408 12,752
Accrued payroll and employee benefits 3,981 3,811
Accrued installation and warranty costs 1,294 1,583
Accrued income taxes 1,262 3,455
Deferred revenue 5,429 3,624
Other accrued expenses 7,347 8,335
Due to parent company and affiliated companies 1,281 19,508
-------- --------
31,019 53,091
-------- --------
Deferred Income Taxes (Note 4) 2,837 1,680
-------- --------
Other Deferred Items 175 -
-------- --------
Commitments (Note 5)
Shareholders' Investment (Notes 3 and 7):
Common stock; $.01 par value, 50,000,000 shares authorized; 15,606,307 156 123
and 12,306,307 shares issued
Capital in excess of par value 144,752 100,966
Retained earnings 11,150 3,150
Treasury stock at cost, 1,255,783 shares in 1998 (9,995) -
Accumulated other comprehensive items 484 699
-------- --------
146,547 104,938
-------- --------
$180,578 $159,709
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ONIX Systems Inc. 1998 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- --------- ----------
Operating Activities
Net income $ 8,000 $ 8,799 $ 4,858
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,406 3,172 2,530
Provision for losses on accounts receivable 423 674 283
Deferred income tax expense 358 (818) 820
Other noncash items (7) (7) -
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable 572 1,746 (2,857)
Inventories and unbilled costs and fees 445 (4,991) (1,517)
Other current assets (146) (600) 2,674
Accounts payable (4,426) (227) 2,824
Other current liabilities (2,094) 5,248 (1,752)
Other (26) 328 (155)
--------- -------- ---------
Net cash provided by operating activities 7,505 13,324 7,708
--------- -------- ---------
Investing Activities
Acquisitions, net of cash acquired (Note 2) (12,509) (9,660) -
Payment to affiliated company for acquired business (Note 2) (19,117) - -
Refund of acquisition purchase price (Note 2) 424 - -
Purchases of property, plant, and equipment (1,470) (1,868) (1,505)
Proceeds from sale of property, plant, and equipment 445 240 -
--------- -------- ---------
Net cash used in investing activities (32,227) (11,288) (1,505)
--------- -------- ---------
Financing Activities
Net proceeds from issuance of Company common stock (Note 7) 43,684 21,955 -
Issuance of note payable to parent company (Note 2) 12,000 - -
Repayment of note payable to parent company (Note 2) (12,000) - -
Purchases of Company common stock (9,995) - -
Net transfers to parent company prior to capitalization of the - (865) (4,662)
--------- -------- ---------
Company
Net cash provided by (used in) financing activities $ 33,689 $ 21,090 $ (4,662)
--------- -------- ---------
4
<PAGE>
ONIX Systems Inc. 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- --------- ----------
Exchange Rate Effect on Cash $ (554) $ (552) $ 182
--------- -------- ---------
Increase in Cash and Cash Equivalents 8,413 22,574 1,723
Cash and Cash Equivalents at Beginning of Year 24,960 2,386 663
--------- -------- ---------
Cash and Cash Equivalents at End of Year $ 33,373 $ 24,960 $ 2,386
========= ======== =========
Cash Paid For
Income taxes $ 6,244 $ 6,341 $ 1,938
Interest $ 332 $ 113 $ -
Noncash Activities (Note 2)
Transfer of acquired businesses from parent company $ - $ 1,913 $ 12,345
Fair value of assets of acquired companies $ 14,664 $ 34,989 $ -
Cash paid for acquired companies (12,624) (9,889) -
Payable to affiliated company for acquired company - (19,117) -
--------- -------- ---------
Liabilities assumed of acquired companies $ 2,040 $ 5,983 $ -
========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
ONIX Systems Inc. 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Comprehensive Income
Net Income $ 8,000 $ 8,799 $ 4,858
---------- ------- ---------
Other Comprehensive Items:
Foreign currency translation adjustment (215) 26 778
--------- ------- ---------
$ 7,785 $ 8,825 $ 5,636
========= ======= =========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning of year $ 123 $ - $ -
Capitalization of the Company - 107 -
Net proceeds from issuance of Company common stock (Note 7) 33 16
--------- ------- ---------
Balance at end of year 156 123 -
--------- ------- ---------
Capital in Excess of Par Value:
Balance at beginning of year 100,966 - -
Capitalization of the Company - 79,027 -
Net proceeds from issuance of Company common stock (Note 7) 43,651 21,939 -
Tax benefit related to employees' and directors' stock plans (Note 4) 135 - -
--------- ------- ---------
Balance at end of year 144,752 100,966 -
--------- ------- ---------
Retained Earnings:
Balance at beginning of year 3,150 - -
Net income 8,000 3,150 -
--------- ------- ---------
Balance at end of year 11,150 3,150 -
--------- ------- ---------
Treasury Stock:
Balance at beginning of year - - -
Purchases of Company common stock (9,995) - -
Balance at end of year (9,995) - -
--------- ------- ---------
Accumulated Other Comprehensive Items:
Balance at beginning of year 699 673 (105)
Other comprehensive items (215) 26 778
--------- ------- ---------
Balance at end of year $ 484 $ 699 $ 673
--------- ------- ---------
Net Parent Company Investment:
Balance at beginning of year $ - $72,437 $ 59,896
Net income prior to capitalization of the Company - 5,649 4,858
Transfer of acquired businesses from parent company (Note 2) - 1,913 12,345
Net transfers to parent company prior to capitalization of the - (865) (4,662)
Company
Capitalization of the Company - (79,134) -
--------- ------- ---------
Balance at end of the year - - 72,437
--------- ------- ---------
$ 146,547 $104,938 $ 73,110
========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ONIX Systems Inc. 1998 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
ONIX Systems Inc. (the Company) designs, develops, markets, and services
sophisticated field measurement instruments and on-line sensors for the process
control industry. Incorporating advanced measurement technologies, the Company's
products provide real-time data collection, analysis, and local control
functions to enhance production efficiency, improve process and quality control,
ensure regulatory compliance, and increase employee safety in industries where
production processes require continuous monitoring, analysis, and measurement.
The Company's products and services are offered through two segments:
Measurement Instruments, which serve the process analysis and measurement needs
of a range of process industries, and Industry-specific Systems, which are
developed to meet the specific process analysis needs of select industries,
principally oil and gas producers.
Relationship With Thermo Instrument Systems Inc. and Thermo Electron Corporation
The Company operated as a division of Thermo Instrument Systems Inc. until
its incorporation as a Delaware corporation in August 1997 as a wholly owned
subsidiary of Thermo Instrument. At that time, Thermo Instrument contributed all
of the stock of CAC Inc., CAC Limited, Flow Automation Inc., Flow Automation
U.K. Limited, TN Technologies Inc., Kay-Ray/Sensall Inc., Houston Atlas Inc.,
Westronics Inc., and VG Gas Analysis Systems Inc. to the Company in exchange for
10,666,667 shares of the Company's common stock. The transfer of stock from
Thermo Instrument was recorded at historical cost. As of January 2, 1999, Thermo
Instrument owned 11,524,867 shares of the Company's outstanding common stock,
representing 80% of such stock outstanding. Thermo Instrument is an 85%-owned
subsidiary of Thermo Electron Corporation. As of January 2, 1999, Thermo
Electron owned 104,700 shares of the Company's common stock, representing 1% 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 1996
and 1998 each included 52 weeks; 1997 included 53 weeks.
Revenue Recognition
The Company recognizes product revenues upon shipment of its products. The
Company provides a reserve for its estimate of warranty costs at the time of
shipment. The Company recognizes service revenues over the term of the contract.
Deferred revenue in the accompanying balance sheet consists of unearned revenue
on service contracts which is recognized over the life of the service contract.
Revenues and profits on long-term contracts are recognized using the
percentage-of-completion method. Revenues recorded under the
percentage-of-completion method were $8,415,000 and $2,610,000 in 1998 and 1997,
respectively. 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 on a cost-plus-fixed-fee basis as costs are incurred. Revenues
earned on contracts in process in excess of billings are classified as unbilled
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.
7
<PAGE>
Notes to Consolidated Financial Statements
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 3). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
Income Taxes In the periods prior to its initial public offering, the Company
was included in Thermo Electron's consolidated federal and certain state income
tax returns. Subsequent to the Company's initial public offering in March 1998,
Thermo Instrument's equity ownership of the Company fell below 80% and the
Company filed its own federal income tax return until the fourth quarter of
1998, at which time Thermo Electron's and Thermo Instrument's equity ownership
again exceeded 80%. Accordingly, the Company intends to request permission from
the Internal Revenue Service (IRS) to be included in Thermo Electron's
consolidated federal income tax return. Assuming the IRS grants the request, the
Company will again be included in Thermo Electron's consolidated tax return,
effective as of the date Thermo Electron's and Thermo Instrument's combined
stock ownership exceeded 80%. The tax allocation agreement between the Company
and Thermo Electron provides that, in years that the Company has taxable income,
the Company will pay to Thermo Electron amounts comparable to the taxes the
Company would have paid if it had filed separate 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. Diluted earnings
per share in 1998 have been computed assuming the exercise of stock options and
their related income tax effect.
Cash and Cash Equivalents Including Repurchase Agreement
At year-end 1998 and 1997, $30,454,000 and $19,618,000, 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. Thermo Electron maintains possession
of the underlying securities and has the right of substitution at its
discretion. The Company's funds subject to the repurchase agreement are readily
convertible on demand 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, $289,000 of the Company's cash equivalents, denominated
in Dutch guilders, were invested in a repurchase agreement with a wholly owned
subsidiary of Thermo Electron. Under this agreement, the Company in effect lends
excess cash to the subsidiary, which Thermo Electron collateralizes with
investments principally consisting of corporate notes, U.S. government-agency
securities, commercial paper, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The Company's
funds subject to the repurchase agreement are readily convertible into cash by
the Company. The repurchase agreement earns a rate based on Netherlands market
rates, set at the beginning of each month.
At year-end 1998 and 1997, the Company's cash equivalents also include
investments in short-term certificates of deposit of the Company's foreign
subsidiaries, which have an original maturity of three months or less. Cash
equivalents are carried at cost, which approximates market value.
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Borrowings Under Overdraft Facility
The Company, along with other subsidiaries of Thermo Electron,
participates in a notional pool arrangement with Barclays Bank, which includes a
$71,017,000 credit facility. The Company has access to $3,007,000 under this
credit facility. Only U.K.-based subsidiaries of Thermo Electron participate in
this arrangement. Under this arrangement, Barclays notionally combines the
positive and negative cash balances held by the participants to calculate the
net interest yield/expense for the group. The benefit derived from this
arrangement is then allocated based on balances attributable to the respective
participants. Thermo Electron guarantees all of the obligations of each
participant in this arrangement. At year-end 1998 and 1997, the Company had
borrowings of $1,017,000 and $23,000, respectively, under this arrangement. The
borrowings at year-end 1998 and 1997 carried a weighted average interest rate of
7.7% and 7.2%, respectively.
In addition, the Company has unused lines of credit available through
third parties totaling $2,991,000 at year-end 1998.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out or
weighted average basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Raw Materials $13,928 $ 18,095
Work in Process 11,596 8,033
Finished Goods 6,476 6,804
------- --------
$32,000 $ 32,932
======= ========
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, 30
to 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
- ---------------------------------------------------------------------------------------- -------- ---------
Buildings $ 2,605 $ 1,485
Machinery, Equipment, and Leasehold Improvements 14,961 12,928
------- --------
17,566 14,413
Less: Accumulated Depreciation and Amortization 7,430 5,268
------- --------
$10,136 $ 9,145
======= ========
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 $5,263,000 and
$3,488,000 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.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Stock Split
In January 1998, the Company declared and effected a two-for-three reverse
stock split. All share and per share information has been restated to reflect
the reverse stock split.
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 as a
separate component of shareholders' investment titled "Accumulated other
comprehensive items." 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 foreign currency translation
adjustments, reported as a component of shareholders' investment in the
accompanying balance sheet. At year-end 1998 and 1997, the balance of
accumulated other comprehensive items represents the Company's cumulative
translation adjustment.
Forward Contracts
The Company uses short-term forward foreign exchange contracts to manage
certain exposures to foreign currencies. The Company enters into forward foreign
exchange contracts to hedge firm purchase and sale commitments denominated in
currencies other than its subsidiaries' local currencies. The notional amounts
of forward foreign exchange contracts outstanding totaled $400,000 at year-end
1998. These contracts principally hedge transactions denominated in U.S.
dollars. 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.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, borrowings under overdraft facility, accounts
payable, due to parent company and affiliated companies, and forward foreign
exchange contracts. The unrealized gain on forward foreign exchange contracts at
year-end 1998 was $1,000, which is the estimated amount that the Company would
pay upon termination of the contracts, taking into account the change in foreign
currency exchange rates. The carrying amounts of the Company's remaining
financial instruments approximate fair value due to their short-term nature.
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.
10
<PAGE>
2. Acquisitions
In July 1998, the Company acquired the capital stock of certain businesses
of the Mid-South Companies for $12,624,000 in cash. The businesses include
Mid-South Controls and Services Inc., which specialize in the assembly and
service of wellhead measurement, control, and safety shutdown systems that are
required by oil and gas companies operating offshore platforms, and Mid-South
Power Systems Inc., which provides electrical generators, switchgear, and motor
control units that are used in a wide variety of industrial applications.
On November 6, 1997, Thermo Power Corporation, a majority-owned
subsidiary of Thermo Electron, acquired Peek plc. Thereafter, the Company
acquired from Thermo Power the stock of three businesses comprising the Peek
Measurement Business for $19,117,000. The purchase price was determined based on
the net book value of the Peek Measurement Business at November 6, 1997, a pro
rata allocation of Thermo Power's total cost in excess of net assets of acquired
companies recorded in connection with its acquisition of Peek plc, based on 1997
revenues of the Peek Measurement Business relative to the total revenues of Peek
plc, plus an estimate of Thermo Power's tax liability that arose from the sale
of the business to the Company. The Peek Measurement Business manufactures flow
and density measurement systems for use in the water and wastewater and oil and
gas industries. In January 1998, the Company paid $19,117,000 to Thermo Power
for the purchase of the Peek Measurement Business. The Company borrowed
$12,000,000 from Thermo Instrument to partially fund this payment, which was
subsequently repaid in April 1998.
On March 29, 1996, Thermo Instrument acquired a substantial portion of the
businesses constituting the Scientific Instruments Division of Fisons plc
(Fisons), a wholly owned subsidiary of Rhone-Poulenc Rorer, Inc. Thereafter,
Thermo Instrument contributed the business of VG Gas Analysis (VG Gas), the
on-line process analysis division of Fisons, to the Company. The amount of net
assets transferred, $5,921,000, was determined based on the net book value of VG
Gas at March 29, 1996, and a pro rata allocation of Thermo Instrument's total
cost in excess of net assets of acquired companies recorded in connection with
its acquisition of the Fisons businesses, based on the revenues of VG Gas
relative to the total revenues of all of the Fisons businesses purchased by
Thermo Instrument. The amount of net assets transferred has been adjusted to
reflect a $424,000 refund, received in 1998, of the $6,345,000 purchase price.
Because the Company, the Peek Measurement Business, and VG Gas were deemed
for accounting purposes to be under control of their common majority owner,
Thermo Electron, the transactions have been accounted for in a manner similar to
a pooling of interests. Accordingly, the Company's financial statements include
the results of the Peek Measurement Business and VG Gas from November 6, 1997,
and March 29, 1996, the respective dates the Peek Measurement Business and VG
Gas were acquired by Thermo Electron's majority-owned subsidiaries.
In May 1997, Thermo Instrument acquired the Angus Electronics division of
Eberline Technologies Corporation for $1,913,000 in cash and the assumption of
certain liabilities totaling $823,000, primarily consisting of trade payables
and other accrued expenses. Angus manufactures and distributes analog and
digital data acquisition and recorder products and power measurement
instruments. In December 1997, the Company acquired the assets comprising the
Rustrak Ranger Logger product line (Ranger) for $1,803,000 and the assumption of
certain liabilities totaling $91,000, primarily consisting of trade payables and
other accrued expenses. Also, in December 1997, the Company acquired
substantially all of the assets of Fluid Data, Inc. for $8,500,000 in cash and
the assumption of certain liabilities totaling $2,661,000, primarily consisting
of trade payables and other accrued expenses, subject to a post-closing
adjustment. Fluid Data is a manufacturer and distributor of pyrolysis gas
sampling systems, on-line process gas chromatographs, chemiluminescent sulfur
chromatography systems and high speed calorimeters.
In October 1996, Thermo Instrument acquired Kay-Ray/Sensall from Rosemount
Inc., a division of Emerson Electric Co., Inc., for $6,000,000 in cash.
Kay-Ray/Sensall is a manufacturer and distributor of nuclear gauges and
ultrasonic point level and continuous level switches.
These acquisitions, except for the Peek Measurement Business and VG Gas,
have been accounted for using the purchase method of accounting and their
results of operations 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 $38,931,000, which is being amortized over 40 years. Allocation of the
purchase price for these acquisitions was based on estimates of the fair value
of the net assets acquired and, for the businesses acquired in 1998, is subject
to adjustment upon finalization of the purchase price allocation. The Company
has gathered no information that indicates that the final allocation will differ
materially from the preliminary estimates.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
2. Acquisitions (continued)
The assets and liabilities were recorded at their estimated fair values as
follows:
(In thousands) Mid-South Peek VG Gas Fluid Data Kay-Ray/ Other
Companies Measurement Sensall
- -------------------- -------------- ------------- -------------- ------------- ------------- --------------
Purchase Price $ 12,624 $19,117 $ 5,921 $ 8,500 $ 6,000 $ 3,716
-------- ------- -------- ------- ------- --------
Allocation to:
Current assets $ 4,650 $ 6,712 $ 4,072 $ 5,665 $ 3,393 $ 1,913
Long-lived assets 2,675 1,100 404 593 589 1,356
Current (2,041) (4,487) (2,159) (3,748) (2,626) (1,114)
liabilities
Cost in excess 7,340 15,792 3,604 5,990 4,644 1,561
of net
assets
acquired
In connection with these acquisitions, the Company has undertaken
restructuring activities at the acquired businesses. The Company's restructuring
activities, which were accounted for in accordance with Emerging Issues Task
Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing
levels and the abandonment of excess facilities. In connection with these
restructuring activities, as part of the cost of the acquisitions, the Company
established reserves as detailed below, primarily for severance and excess
facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. A summary of the changes in accrued acquisition expenses is:
Abandonment
of Excess
(In thousands) Severance Facilities Total
- ------------------------------------------------------------- -------------- -------------- ---------------
Balance at December 30, 1995 $ 219 $ 633 $ 852
Reserves established 720 500 1,220
Usage (146) (507) (653)
Decrease due to finalization of restructuring plan, - (23) (23)
recorded as a decrease to cost in excess of net assets of
acquired companies
------ ------ -------
Balance at December 28, 1996 793 603 1,396
Reserves established 162 167 329
Usage (322) (86) (408)
Decrease due to finalization of restructuring plan, (488) (517) (1,005)
recorded as a decrease to cost in excess of net assets
of acquired companies
------ ------ -------
Balance at January 3, 1998 145 167 312
Reserves established 580 106 686
Usage (554) (103) (657)
------ ------ -------
Balance at January 2, 1999 $ 171 $ 170 $ 341
====== ====== =======
</TABLE>
12
<PAGE>
2. Acquisitions (continued)
Unresolved matters at January 2, 1999, include completion of planned
severances and abandonment of excess facilities for acquisitions completed in
1998. Accrued acquisition expenses are included in other accrued expenses in the
accompanying balance sheet.
Based on unaudited data, the following table presents selected financial
information for the Company, Peek Measurement, Fluid Data, VG Gas, and
Kay-Ray/Sensall on a pro forma basis, assuming that these businesses had been
combined since the beginning of 1996. The effect of the acquisitions not
included in the pro forma data was not material to the Company's results of
operations.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Revenues $153,877 $ 142,206
Net Income 6,087 3,679
Basic and Diluted Earnings per Share .55 .34
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had these acquisitions been made
at the beginning of 1996.
3. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has a stock-based compensation plan 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 were determined by the Board Committee.
As of year-end 1998, only non-qualified stock options have been awarded under
this plan. Generally, options granted are exercisable immediately but, are
subject to certain transfer restrictions and the right of the Company to
repurchase shares issued upon exercise of the options at the exercise price,
upon certain events. The restrictions and repurchase rights generally will be
deemed to have lapsed ratably over periods ranging from one to ten years,
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 granted have been at fair market value. In addition to the Company's
stock-based compensation plan, certain officers and key employees may also
participate in the stock-based compensation plans of Thermo Instrument and
Thermo Electron. Participation in these plans is accounted for in accordance
with APB No. 25.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 213,000 shares at a weighted average exercise price of $14.25 per share
elected to participate in this exchange and, as a result, received options to
purchase 106,000 shares of Company common stock at $6.80 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>
3. Employee Benefit Plans (continued)
A summary of the Company's stock option activity is:
1998
Weighted
Number Average
of Exercise
(Shares in thousands) Shares Price
- ---------------------------------------------- --------- ---------- -------- --------- --------- ---------
Options Outstanding, Beginning of Year - $ -
Granted 905 12.03
Forfeited (33) 13.66
Canceled due to exchange (213) 14.25
-----
Options Outstanding, End of Year 659 $11.24
===== ======
Options Exercisable 659 $11.24
===== ======
Options Available for Grant 940
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
A summary of the status of the Company's stock options at January 2, 1999,
is:
Options Outstanding and Exercisable
-----------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ---------------------------------------------- ------------------- -------------------- -------------------
$ 5.89 - $ 7.98 108 9.3 years $ 6.78
7.99 - 10.07 201 4.8 years 8.94
12.17 - 14.25 350 8.0 years 13.95
---
$ 5.89 - $ 14.25 659 7.2 years $ 11.24
===
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 will be subject to a one-year resale restriction. Shares are purchased
through payroll deductions of up to 10% of each participating employee's gross
wages.
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 stock-based
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
3. Employee Benefit Plans (continued)
compensation plans. Had compensation cost for awards after 1994 under
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:
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Net Income:
As reported $8,000 $ 8,799 $4,858
Pro forma 7,305 8,484 4,721
Basic and Diluted Earnings per Share:
As reported .55 .79 .46
Pro forma .50 .77 .44
Compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $4.64 in
fiscal 1998. 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
- ----------------------------------------------------------------------- ----------- ----------- -----------
Volatility 28%
Risk-free Interest Rate 4.0%
Expected Life of Options 6.0 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
401(k) Savings Plan
The majority 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. The Company
contributed and charged to expense for this plan $873,000, $727,000, and
$829,000 in 1998, 1997, and 1996, respectively.
4. Income Taxes
The components of income before provision for income taxes are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Domestic $10,327 $ 10,239 $ 5,587
Foreign 2,895 4,480 2,511
------- -------- -------
$13,222 $ 14,719 $ 8,098
======= ======== =======
15
<PAGE>
4. Income Taxes (continued)
The components of the provision for income taxes are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Currently Payable:
Federal $ 3,407 $ 4,372 $ 1,373
State 440 909 272
Foreign 1,017 1,457 775
------- -------- -------
4,864 6,738 2,420
------- -------- -------
Net Deferred (Prepaid):
Federal 255 (740) 633
State 103 (112) 108
Foreign - 34 79
------- -------- -------
358 (818) 820
------- -------- -------
$ 5,222 $ 5,920 $ 3,240
======= ======== =======
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 $135,000
of such benefits that have been allocated to capital in excess of par value in
1998.
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income before provision for income taxes due to:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Provision for Income Taxes at Statutory Rate $ 4,628 $ 5,152 $ 2,834
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 353 518 247
Amortization of cost in excess of net assets of acquired companies 318 128 100
Net foreign losses not benefited and tax rate differential 3 (77) (24)
Tax benefit of foreign sales corporation (171) (114) (131)
Other, net 91 313 214
------- -------- -------
$ 5,222 $ 5,920 $ 3,240
======= ======== =======
16
<PAGE>
4. Income Taxes (continued)
Deferred tax asset and deferred income taxes in the accompanying balance
sheet consist of:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Deferred Tax Asset:
Inventory basis difference $2,142 $ 1,993
Reserves and accruals 1,738 1,035
Accrued compensation 890 564
Other, net 2 (61)
------ -------
$4,772 $ 3,531
====== =======
Deferred Income Taxes:
Intangible assets $2,642 $ 1,617
Depreciation 195 63
------ -------
$2,837 $ 1,680
====== =======
A provision has not been made for U.S. or additional foreign taxes on
$9,198,000 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. The Company believes that any
additional U.S. tax liability due upon remittance of such earnings would be
immaterial.
5. Commitments
Operating Leases
The Company leases portions of its office and operating facilities under
various operating lease arrangements. The accompanying statement of income
includes expenses from operating leases of $2,863,000, $2,230,000, and
$1,559,000 in 1998, 1997, and 1996, respectively. Future minimum payments due
under noncancelable operating leases at January 2, 1999, are $2,105,000 in 1999,
$2,020,000 in 2000, $1,944,000 in 2001, $1,456,000 in 2002, $1,241,000 in 2003,
and $2,187,000 in 2004 and thereafter. Total future minimum lease payments are
$10,953,000. See Note 6 for related-party leases.
Sublease Commitments
The Company subleases facility space to third parties under sublease
arrangements that carry commitments of approximately $324,000 in 1999, $263,000
in 2000, and $22,000 in 2001. The accompanying 1998 statement of income includes
$310,000 of income from sublease arrangements. The operating lease expense and
commitments above have not been reduced by sublease rental income.
6. 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
17
<PAGE>
6. Related-party Transactions (continued)
revenues. For these services, the Company was charged $1,229,000, $1,215,000,
and $953,000 in 1998, 1997, and 1996, respectively. The fee is reviewed and
adjusted annually by mutual agreement of the parties. 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. The corporate services agreement is renewed annually but can be
terminated upon 30 days' prior notice by the Company or upon the Company's
withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron
Corporate Charter defines the relationship among Thermo Electron and its
majority-owned subsidiaries). For additional items such as employee benefit
plans, insurance coverage, and other identifiable costs, Thermo Electron charges
the Company based upon costs attributable to the Company.
Operating Leases
The Company began leasing office and manufacturing space from Thermo
Power on a monthly basis effective November 1997. The Company pays Thermo Power
rent in an amount that is approximately equal to its pro rata share of Thermo
Power's occupancy costs. The Company's expense for this facility totaled
$220,000 in 1998.
In addition, the Company began leasing office and manufacturing space from
Thermo Instrument and is charged its share of occupancy costs on a monthly basis
in October 1997. The Company's expense for this facility totaled $202,000 and
$45,000 in 1998 and 1997, respectively.
Other Related-party Transactions
The Company sells products in the ordinary course of business to other
subsidiaries of Thermo Electron. Sales of such products to affiliated companies
totaled $1,858,000, $2,550,000, and $4,126,000 in 1998, 1997, and 1996,
respectively.
Repurchase Agreements
The Company invests excess cash in repurchase agreements and has the
ability to invest or borrow cash under a notional pool arrangement with Thermo
Electron as discussed in Note 1.
7. Common Stock
Sale of Common Stock
In March 1998, the Company sold 3,300,000 shares of its common stock in an
initial public offering at $14.50 per share for net proceeds of $43,684,000.
In September and October 1997, the Company sold 1,639,640 shares of its
common stock in a private placement at $14.25 per share for net proceeds of
$21,955,000.
Reserved Shares
As of January 2, 1999, the Company had reserved 1,625,000 unissued shares
of its common stock for possible issuance under its stock-based compensation
plans.
8. Restructuring Costs
During 1998, the Company recorded restructuring costs of $905,000 relating
to the consolidation of facilities and outsourcing of certain services. The
restructuring costs, which were accounted for in accordance with EITF 94-3,
consist of $673,000 related to severance costs for approximately 90 employees
across all functions, $163,000 to write off fixed assets no longer of use, and
$69,000 for abandoned-facility payments in connection with these activities. The
Company plans to complete implementation of such restructuring plan in early
1999. As of January 2, 1999, the Company had terminated 46 employees and had
expended $310,000 of the reserve established primarily for severance. The
remaining liability for severance and abandoned-facility payments of $435,000,
as adjusted for the impact of currency translation, is included in other accrued
expenses in the accompanying 1998 balance sheet.
</TABLE>
18
<PAGE>
9. Business Segments, Geographical Information, and Concentrations of Risk
The Company organizes and manages its businesses by individual functional
operating entity. The Company's businesses operate in two segments: Measurement
Instruments and Industry-specific Systems. In classifying operational entities
into a particular segment, the Company aggregated businesses with similar
economic characteristics, products and services, production processes,
customers, and methods of distribution.
Through its Measurement Instruments segment, the Company manufactures
field measurement instruments and on-line sensors in four general product areas
of flow, level and density, composition analysis, and data acquisition and
display instruments. Through its Industry-specific Systems segment, the Company
offers sophisticated sensor systems that are used in specific industries, for
example, oil and gas production, to provide real-time measurement, analysis, and
local control of process functions. These special-purpose instruments and
sensors include rod pump controllers, remote terminal units, gas-injection
systems, and wellhead safety systems.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------- ------------ ----------- ------------
Business Segment Information
Revenues:
Measurement Instruments $ 105,113 $87,318 $ 66,169
Industry-specific Systems 48,540 34,207 29,147
--------- ------- ---------
$ 153,653 $121,525 $ 95,316
========= ======== =========
Income Before Provision for Income Taxes:
Measurement Instruments $ 7,180 $10,977 $ 7,569
Industry-specific Systems 6,756 5,261 2,685
Corporate (a) (2,372) (1,750) (2,156)
--------- ------- ---------
Total operating income 11,564 14,488 8,098
Interest income, net 1,658 231 -
--------- ------- ---------
$ 13,222 $14,719 $ 8,098
========= ======= =========
Total Assets:
Measurement Instruments $ 97,143 $98,868 $ 61,082
Industry-specific Systems 49,189 37,613 33,377
Corporate (b) 34,246 23,228 2,551
--------- ------- ---------
$ 180,578 $159,709 $ 97,010
========= ======== =========
Depreciation and Amortization:
Measurement Instruments $ 3,449 $ 2,341 $ 1,670
Industry-specific Systems 948 831 860
Corporate 9 - -
--------- ------- ---------
$ 4,406 $ 3,172 $ 2,530
========= ======= =========
Capital Expenditures:
Measurement Instruments $ 1,039 $ 1,285 $ 1,187
Industry-specific Systems 388 583 318
Corporate 43 - -
--------- ------- ---------
$ 1,470 $ 1,868 $ 1,505
========= ======= =========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
9. Business Segments, Geographical Information, and Concentrations of Risk (continued)
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- --------- ----------
Geographical Information
Revenues (c):
United States $ 127,087 $99,144 $ 70,569
United Kingdom 26,789 23,941 22,413
Other 6,936 6,696 4,708
Transfers among geographical areas (d) (7,159) (8,256) (2,374)
--------- ------- ---------
$ 153,653 $121,525 $ 95,316
========= ======== =========
Long-lived Assets (e):
United States $ 7,630 $ 7,115 $ 4,412
United Kingdom 2,415 1,978 1,805
Other 91 52 48
--------- ------- ---------
$ 10,136 $ 9,145 $ 6,265
========= ======= =========
Export Revenues Included in United States Revenues Above (f) $ 41,253 $19,510 $ 18,503
========= ======= =========
(a) Primarily general and administrative expenses.
(b) Primarily cash and cash equivalents.
(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) Represents property, plant, and equipment, net.
(f) In general, export revenues are denominated in U.S. dollars.
Concentrations of Credit Risk
The Company's Industry-specific Systems segment sells a majority of its
products and services to customers in the oil and gas industries, while its
Measurement Instruments segment sells products and services to a wider variety
of process industries. The Company does not normally require collateral or other
security to support its accounts receivable. Management does not believe that
this concentration of credit risk has or will have a significant negative effect
on the Company.
20
<PAGE>
10. 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 $ 8,000 $ 8,799 $ 4,858
------- -------- -------
Weighted Average Shares 14,515 11,083 10,667
------- -------- -------
Basic Earnings per Share $ .55 $ .79 $ .46
======= ======== =======
Diluted
Net Income $ 8,000 $ 8,799 $ 4,858
------- -------- -------
Weighted Average Shares 14,515 11,083 10,667
Effect of Stock Options 5 - -
------- -------- -------
Weighted Average Shares, as Adjusted 14,520 11,083 10,667
------- -------- -------
Diluted Earnings per Share $ .55 $ .79 $ .46
======= ======== =======
</TABLE>
The computation of diluted earnings per share for each period 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 659,345 of such
options outstanding, with exercise prices ranging from $6.80 to $14.25 per
share.
11. Unaudited Quarterly Information
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(In thousands except per share amounts)
1998 First Second Third (a) Fourth
- ---------------------------------------------------------------- ----------- ----------- ----------- -----------
Revenues $37,144 $38,439 $39,851 $38,219
Gross Profit 15,520 16,509 14,827 13,715
Net Income 2,217 3,203 1,114 1,466
Basic and Diluted Earnings per Share .18 .21 .07 .10
1997 First Second Third Fourth (b)
- ---------------------------------------------------------------- ----------- ----------- ----------- -----------
Revenues $26,429 $28,962 $29,240 $36,894
Gross Profit 10,426 11,883 11,955 15,255
Net Income 1,606 2,135 2,031 3,027
Basic and Diluted Earnings per Share .15 .20 .19 .25
(a) Reflects the July 1998 acquisition of the Mid-South Companies.
(b) Reflects the acquisition of the Peek Measurement Business effective November
1997 and the December 1997 acquisition of Fluid Data.
</TABLE>
21
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of ONIX Systems Inc.:
We have audited the accompanying consolidated balance sheet of ONIX
Systems Inc. (a Delaware corporation and 80%-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 ONIX Systems
Inc. 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
22
<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
ONIX Systems Inc. (the Company) designs, develops, markets, and services
sophisticated field measurement instruments and on-line sensors for the process
control industry. Incorporating advanced measurement technologies, the Company's
products provide real-time data collection, analysis, and local control
functions to enhance production efficiency, improve process and quality control,
ensure regulatory compliance, and increase employee safety in industries where
production processes require continuous monitoring, analysis, and measurement.
The Company's products and services are offered through two segments:
Measurement Instruments, which serve the process analysis and measurement needs
of a range of process industries, and Industry-specific Systems, which are
developed to meet the specific process measurement and analysis needs of select
industries, principally oil and gas producers.
An element of the Company's strategy is to supplement its internal growth
with the acquisition of businesses with complementary products and technologies.
The Company has successfully completed several such acquisitions, having
purchased the businesses of VG Gas in March 1996, Kay-Ray/Sensall in October
1996, Angus in May 1997, the Peek Measurement Business effective November 1997,
the Ranger product line in December 1997, Fluid Data in December 1997, and the
Mid-South Companies in July 1998.
The Company's products are sold primarily to participants in process
industries, including oil and gas producers, processors, refiners, and
distributors, and chemical and petrochemical companies, as well as water and
wastewater, iron and steel, semiconductor, minerals and mining, and pulp and
paper companies. In 1998, customers in the oil and gas industries accounted for
approximately 67% of the Company's total revenues, with such revenues derived
from both the production and the refining and petrochemical sectors of the
industry. Demand for the Company's products and services within the oil and gas
industry is dependent upon the level of capital spending by oil and gas
companies for production and distribution. This in turn is affected by current
and anticipated oil and gas prices; the discovery rate of new oil and gas
reserves; political, regulatory, and economic conditions; and the ability of oil
and gas companies to obtain capital. Energy prices declined precipitously in
1998. The resulting decrease in oil and gas activities adversely affected the
Company's results in 1998 and is expected to have a material adverse effect on
the Company's results of operations in 1999.
Sales originating outside of the United States and export revenues from
the United States accounted for approximately 17% and 27%, respectively, of
total revenues in 1998. Export sales in 1998 were made primarily to the United
Kingdom, Mexico, and the Middle East. During 1998, exports from the Company's
U.S. and foreign operations to the Far East were approximately 5% of total
revenues. The Far East is experiencing a severe economic crisis, which has been
characterized by sharply reduced economic activity and liquidity, highly
volatile foreign-currency-exchange and interest rates, and unstable stock
markets. Although the Company's export sales to the Far East were not materially
affected in 1998, future sales could be adversely affected by the unstable
economic conditions there. Although the Company seeks to charge its customers in
the same currency as its operating costs, the Company's financial performance
and competitive position can be affected by currency exchange rate fluctuations
affecting the relationship between the U.S. dollar and foreign currencies.
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Results of Operations
1998 Compared With 1997
Revenues increased 26% to $153.7 million in 1998 from $121.5 million in
1997. Revenues increased $33.7 million due to the inclusion of revenues from
acquired businesses, consisting principally of $14.8 million from the Peek
Measurement Business, acquired effective November 1997, $7.6 million from Fluid
Data, acquired in December 1997, and $9.3 million from the Mid-South Companies,
acquired in July 1998 (Note 2). Revenues from existing businesses decreased
primarily due to the effect of companies in the process sector reducing
discretionary capital spending in anticipation of difficult market conditions.
The gross profit margin decreased to 39% in 1998 from 41% in 1997,
primarily from the Industry-specific Systems segment's inclusion of lower-margin
revenues at the Mid-South Companies and, to a lesser extent, an increase in
lower-margin revenues from composition analysis instruments in the Measurement
Instruments segment.
Selling, general, and administrative expenses as a percentage of revenues
increased to 25% in 1998 from 23% in 1997, primarily from the Measurement
Instruments segment's inclusion of higher selling, general, and administrative
expenses as a percentage of revenues at the Peek Measurement Business.
Research and development expenses increased to $9.2 million during 1998
from $6.8 million in 1997, primarily due to the inclusion of expenses at
acquired businesses.
During 1998, the Company recorded restructuring costs of $0.9 million
related to the consolidation of facilities and outsourcing of certain services
(Note 8).
Interest income increased to $2.0 million in 1998 from $0.3 million in
1997 due to higher invested balances following the Company's March 1998 initial
public offering and third quarter 1997 private placement of common stock.
Interest expense, related party primarily represents interest on indebtedness
relating to the acquisition of the Peek Measurement Business, which was repaid
in January 1998.
The effective tax rate was 39% in 1998, compared with 40% in 1997. The
effective tax rates exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes and nondeductible amortization of cost in
excess of net assets of acquired companies.
1997 Compared With 1996
Revenues increased 27% to $121.5 million in 1997 from $95.3 million in
1996, primarily due to increased revenues at the Measurement Instruments
segment. Revenues from the Measurement Instruments segment increased $19.7
million from acquisitions, which consisted of $8.1 million from Kay-Ray/Sensall,
$4.2 million from the Peek Measurement Business, $3.3 million from VG Gas, $3.1
million from Angus, and $1.0 million from other acquisitions. Revenues from
existing businesses grew approximately 7%, primarily due to an increase in sales
of instruments at the Industry-specific Systems segment as a result of an
increase in spending by the production sector of the oil and gas industry.
The gross profit margin increased to 41% in 1997 from 37% in 1996,
primarily due to an increase in the gross profit margin at the Industry-specific
Systems segment, principally as a result of an increase in revenues. In
addition, the gross profit margin increased at the Measurement Instruments
segment due to the inclusion of higher-margin revenues at Kay-Ray/Sensall,
acquired in October 1996, as well as an increase in sales of certain new
higher-margin flow instruments.
Selling, general, and administrative expenses as a percentage of revenues
remained consistent at 23% in both 1997 and 1996.
Research and development expenses increased to $6.8 million in 1997 from
$5.6 million in 1996, primarily due to acquisitions at the Measurement
Instruments segment and, to a lesser extent, an increase in spending at certain
Industry-specific Systems businesses.
Interest income primarily represents interest earned on the invested
proceeds from the third quarter 1997 private placement of the Company's common
stock. Interest expense, related party represents interest on indebtedness
relating to the acquisition of the Peek Measurement Business.
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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 and nondeductible amortization of cost in excess of net
assets of acquired companies.
Liquidity and Capital Resources
Consolidated working capital was $74.8 million as of January 2, 1999,
compared with $41.9 million as of January 3, 1998. Included in working capital
are cash and cash equivalents of $33.4 million as of January 2, 1999, compared
with $25.0 million as of January 3, 1998.
During 1998, the Company's operating activities provided $7.5 million of
cash. Cash of $6.5 million was used to fund a decrease in accounts payable and
other current liabilities, primarily due to the timing of payments.
The Company's investing activities used $32.2 million of cash during 1998.
The Company expended $12.5 million, net of cash acquired, for the acquisition of
certain businesses of the Mid-South Companies (Note 2). In January 1998, the
Company paid $19.1 million for the purchase of the Peek Measurement Business,
which was acquired effective November 1997. The Company expended $1.5 million
for purchases of property, plant, and equipment during 1998. The Company expects
to expend approximately $2.5 million for capital expenditures during 1999.
The Company's financing activities provided $33.7 million of cash during
1998. The Company completed an initial public offering of common stock in March
1998, for net proceeds of $43.7 million (Note 7). The Company borrowed $12.0
million from Thermo Instrument Systems Inc. to partially fund the acquisition of
the Peek Measurement Business. The $12.0 million note was repaid in April 1998,
following the Company's initial public offering.
In September 1998, the Company's Board of Directors authorized the
repurchase by the Company of up to $10.0 million of its own stock, through
September 25, 1999, in the open market, or in negotiated transactions. Through
January 2, 1999, the Company had expended approximately the full amount under
this authorization.
Although the Company expects to have positive cash flow from its existing
operations, the Company anticipates it will require significant amounts of cash
for the possible acquisition of complementary businesses and technologies. The
Company expects that it will finance these acquisitions through a combination of
internal funds or short-term borrowings from Thermo Instrument or Thermo
Electron Corporation, although there is no agreement with these companies to
ensure that funds will be available on acceptable terms or at all. The Company
believes that its existing resources are sufficient to meet the capital
requirements of its existing businesses for the foreseeable future.
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 these risks through its
regular operating and financing activities. Additionally, the Company uses
short-term forward contracts to manage certain exposures to foreign currencies.
The Company enters into forward foreign exchange contracts to hedge firm
purchase and sale commitments denominated in currencies other than its
subsidiaries' local currencies. The Company does not engage in extensive foreign
currency hedging activities; however, the purpose of the Company's foreign
currency hedging activities is to protect the Company's local currency cash
flows related to these commitments from fluctuations in foreign currency
exchange rates. The Company's forward foreign exchange contracts principally
hedge transactions denominated in U.S. dollars. 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.
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Market Risk (continued)
The Company views its investment in its foreign subsidiaries as long-term.
The Company's investment in its foreign subsidiaries is sensitive to
fluctuations in foreign currency exchange rates. The functional currencies of
the Company's foreign subsidiaries are denominated principally in British
sterling. The effect of a change in foreign currency exchange rates on the
Company's net investment in its foreign subsidiaries is reflected in the
"Accumulated other comprehensive items" component of shareholders' investment. A
10% depreciation in fiscal year-end 1998 functional currencies, relative to the
U.S. dollar, would result in a $2.7 million reduction of the Company's
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's year 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 60% 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, telephone 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.
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 has started to follow-up and
monitor the year 2000 compliance progress of significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. The Company has not completed its assessment of
third-party risk, but expects to be substantially completed by September 1999.
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Year 2000 (continued)
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.
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
are 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.
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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 Oil and Gas Industry. Historically, a substantial portion of
the Company's total revenues has been attributable to the sale of products and
related services to customers in the oil and gas industry. In 1998, customers in
the oil and gas industry accounted for approximately 67% of the Company's total
revenues. Demand for the Company's products and services within the oil and gas
industry is dependent upon the level of capital spending by oil and gas
companies for exploration, production, and distribution. These activities depend
in part on oil and gas prices; expectations about future prices; the cost of
exploring for, producing, and delivering oil and gas; the discovery rate of new
oil and gas reserves; local and international political, regulatory, and
economic conditions; and the ability of oil and gas companies to obtain capital.
There can be no assurance that current levels of oil and gas activities will be
maintained or that demand for the Company's products and related services will
reflect the level of such activities. Decreases in oil and gas activities could
have a significant adverse effect upon the demand for the Company's products and
related services, which would materially adversely affect the Company's
business, financial condition, and results of operations.
Market Acceptance of New Products. The Company develops products that
represent alternatives to traditional instruments and methods, and as a result,
its products may be slow to achieve, or may not achieve, market acceptance since
customers may seek further validation of the efficiency and efficacy of the
Company's technology before making an investment. This is particularly true
where the purchase of the product requires a significant capital commitment.
Further, because on-line process measurement instruments are incorporated into a
customer's production line, a decision to invest in these instruments involves
significant operating risks if the instrument fails or shuts down. In addition,
the Company believes that, to a significant extent, its growth prospects depend
on its ability to gain acceptance of its technologies and product applications
by a broader group of customers and broader industry segments. There can be no
assurance that the Company will be successful in obtaining broad acceptance of
its products.
Dependence on Capital Spending Policies of Customers. The Company's
customers include oil and gas production, processing, refining and distribution
facilities, and iron and steel, pulp and paper, minerals and mining, water and
wastewater, semiconductor, and petrochemical and chemical companies. 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, financial condition, and results of operations.
No Assurance of a Successful Acquisition Strategy. An element of the
Company's strategy includes the acquisition of businesses and technologies that
complement or augment the Company's existing product lines. Attractive
acquisitions are difficult to identify and complete for a number of reasons,
including competition among prospective buyers and the need for regulatory
approvals, including antitrust approvals. Acquisitions completed by the Company
may be made at substantial premiums over the fair value of the net assets of the
acquired companies. 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, including the recently acquired businesses,
into its existing business or that the Company will be able to retain key
personnel and customers, or adequately improve the financial performance, of any
acquired business, including the recently acquired businesses. 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 an equity financing, may result in dilution to the
Company's stockholders.
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Risks Associated With International Sales. Sales originating outside of
the United States and export revenues from the United States accounted for
approximately 17% and 27%, respectively, of total revenues in 1998. The Company
intends to continue to expand its presence in markets outside of the United
States. International revenues are subject to a number of risks, however,
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 and impose
tariffs or adopt other restrictions on foreign trade; fluctuations in exchange
rates may affect product demand and adversely affect the profitability in U.S.
dollars of products and services provided by the Company in foreign markets
where payment for the Company's products and services is made in the local
currency; U.S. export licenses may be difficult to obtain or enforce; and
intellectual property rights in foreign countries may be more difficult to
enforce. Further, a significant portion of the Company conducts a large portion
of its business in, and exports to, foreign countries including the United
Kingdom, Mexico, Canada, and the United Arab Emirates. Foreign operations are
also subject to various risks, including potentially unstable economic
conditions, unexpected changes in regulatory requirements, compliance with a
variety of foreign laws and regulations, and the existence of different tax
structures. Tax rates in certain foreign countries exceed those in the United
States 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 or other factors will not have a material adverse
effect on the Company's business, financial condition, and results of
operations.
Technological Change and New Products. The markets for the Company's
products are characterized by changing technology, evolving industry standards,
and new product introductions and enhancements. The Company's future success
will depend in part upon its ability to enhance its existing products, to
develop and introduce new products and technologies, and to successfully expand
its aftermarket support services for such new or enhanced products in order to
meet changing customer requirements and serve broader industry segments. The
Company is currently devoting significant resources toward the enhancement of
its existing products, the development of new products and technologies, and the
expansion of its preventive maintenance and aftermarket support activities.
There can be no assurance, however, that the Company will successfully complete
the enhancement and development of these products and the expansion of its
services in a timely fashion or that the Company's current or future products
and services will satisfy the process measurement needs of participants in the
Company's targeted markets.
Intense Competition. The Company encounters and expects to continue to
encounter intense competition in the sale of its products. The Company believes
that its ability to compete successfully in the market for field measurement
instruments and sensors depends upon a number of factors both within and beyond
its control, including quality and reliability; technical features; accuracy;
ease of use; product pricing; reputation for aftermarket service; timing of new
product releases and enhancements by the Company and its competitors; name
recognition; the establishment of strategic alliances; and industry and general
economic trends. In addition, the Company competes with companies utilizing
competing technologies that may be viewed as cost-effective alternatives to the
technologies incorporated into the Company's products. Certain of the Company's
current and potential competitors have significantly greater financial,
marketing, technical and other competitive resources, as well as greater name
recognition, than the Company. As a result, the Company's competitors may be
able to adapt more quickly to new or emerging technologies and changes in
customer requirements, and may be able to devote greater resources to the
promotion and sale of their products. There can be no assurance that the Company
will be able to compete successfully with existing or new competitors. An
increase in competition could result in price reductions and loss of market
share, which could have a material adverse effect on the Company's business,
financial condition, or results of operations.
Risks of Gamma Technology. Certain of the Company's level and density
measurement instruments incorporate gamma technologies that are subject to
health and safety risks in connection with the use and handling of possible
radioactive emissions associated with gamma materials. The Company believes that
it conducts its operations prudently and the Company maintains both general
liability insurance and nuclear liability insurance in amounts it
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believes to be commercially reasonable. However, there can be no assurance that
this insurance will be sufficient to protect the Company from liability claims,
or that liability insurance will continue to be available to the Company at a
reasonable cost, or at all. In addition, the manufacture and sale of products
that utilize gamma technology may subject the Company to extensive federal,
state, local, and foreign regulations that could increase the costs of producing
the Company's products, or otherwise materially adversely affect the demand for
the Company's gamma measurement instruments.
Limited Sources of Supply. The Company currently contracts with local
subcontractors for the manufacture of certain major components incorporated into
its products. The Company has experienced no significant disruption or delay in
obtaining required components for its products, and believes that it could
develop other sources of supply or qualify other suppliers for such components.
A prolonged inability to obtain adequate deliveries, however, could require the
Company to pay more for inventory, parts, and other supplies or to seek
alternative sources of supply, which could delay the Company's ability to ship
its products and could damage its relationships with current and prospective
customers. Any such delay or damage could have a material adverse effect on the
Company's business, financial condition, and results of operations.
Dependence on Key Personnel. The Company's success depends to a
significant extent upon a number of key employees, including members of senior
management. The loss of the services of one or more of these key employees could
have a material adverse effect on the Company. The Company does not have
employment contracts with any of its key employees and it has not obtained, and
does not intend to obtain, key-man life insurance policies for any key employee.
The Company believes that its future success will depend in part on its ability
to attract, motivate, and retain highly skilled technical, managerial, and
marketing personnel. Competition for such personnel is intense and there can be
no assurance that the Company will be successful in attracting, motivating, and
retaining key personnel.
Uncertain Protection of Proprietary Rights. Proprietary rights relating to
the Company's products are protected from unauthorized use by third parties only
to the extent that they are covered by valid and enforceable patents or are
maintained in confidence as trade secrets. The Company has several issued U.S.
patents and patent applications pending. The Company also owns corresponding
foreign patents in a number of jurisdictions throughout the world. 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 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, that 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 of which the Company is not
aware held by parties not affiliated with the Company that relate to the
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 any license required under any such
competitor's proprietary technology would be made available on acceptable terms
or that the Company would prevail in any such contest. 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. and there can be no assurance that the available
protections will be adequate.
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The Company also relies on trade secrets and proprietary know-how that it
seeks to protect, in part, by confidentiality agreements with its employees and
consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or independently
developed by competitors.
Government Regulations and Approvals. The demand for certain of the
Company's products, both in the United States and abroad, is subject to or
influenced by various domestic and foreign environmental and consumer protection
laws. The Company designs, develops, and markets these 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. In addition, the manufacture and sale of products that
utilize gamma technology is subject to certain federal, state, local, and
foreign regulations including licensing and other regulatory approvals. In
particular, the Company is required, and has obtained, licenses from the Nuclear
Regulatory Commission (NRC) and the State of Texas for the storage and handling
of the nuclear sources used in its gamma measurement instruments at its Round
Rock, Texas facility. These licenses are subject to periodic review and renewal
and the facility is subject to periodic inspection. Failure of the Company to
maintain such licenses or to comply with applicable regulations could have a
material adverse effect on the Company's business, financial condition, and
results of operations. Further, new or more stringent regulations may be adopted
or imposed by the NRC or other applicable regulatory authorities and there can
be no assurance that the Company will be able to comply with such changes, the
result of which could have a material adverse effect on the Company's business,
financial condition, and results of operation.
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 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.
31
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Selected Financial Information
(In thousands except per share amounts) 1998(a) 1997(b) 1996(c) 1995(d) 1994
- ------------------------------------------------- ----------- ----------- ---------- ---------- ----------
Statement of Income Data
Revenues $153,653 $ 121,525 $ 95,316 $ 72,105 $ 62,059
Income Before Provision for Income Taxes 13,222 14,719 8,098 6,117 2,012
Net Income 8,000 8,799 4,858 3,627 1,264
Basic and Diluted Earnings per Share .55 .79 .46 .34 .12
Balance Sheet Data
Working Capital $ 74,843 $ 41,947 $ 29,873 $ 26,199 $ 13,327
Total Assets 180,578 159,709 97,010 76,221 71,710
Shareholders' Investment 146,547 104,938 73,110 59,791 50,795
(a) Reflects the July 1998 acquisition of the Mid-South Companies and the March
1998 initial public offering of Company common stock.
(b) Reflects the acquisition of the Peek Measurement Business effective in
November 1997, the December 1997 acquisition of Fluid Data, and the
September and October 1997 private placements of Company common stock.
(c) Reflects the October 1996 acquisition of Kay-Ray/Sensall and the March 1996
acquisition of VG Gas.
(d) Reflects the July 1995 acquisition of Flow Automation.
32
<PAGE>
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol ONX. The following table sets forth the high and low sale prices of
the Company's common stock since March 25, 1998, the date the Company's common
stock began trading on that exchange, as reported in the consolidated
transaction reporting system.
1998
Quarter High Low
- ------------------------------------------------------------------------------------ ---------- -----------
First $15 3/4 $ 14 1/2
Second 16 12 15/16
Third 12 7/8 6
Fourth 9 5 1/8
</TABLE>
As of January 29, 1999, the Company had 62 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 $7 per share.
Shareholder Services
Shareholders of ONIX Systems Inc. who desire information about the Company
are invited to contact the Investor Relations Department, ONIX Systems Inc., 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/onx1.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, ONIX Systems Inc.,
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.
33
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit 21
ONIX SYSTEMS INC.
Subsidiaries of the Registrant
At February 28, 1999, the Registrant owned the following companies:
STATE OR REGISTRANT'S
JURISDICTION OF PERCENT OF OWNERSHIP
NAME INCORPORATION
- -------------------------------------------------------------------------------------------------------------
Brandt Instruments, Inc. Delaware 100
CAC Inc. Delaware 100
Flow Automation Inc. Texas 100
Lots 82 and 83, Inc. Louisiana 100
Mid-South Power Systems, Inc. Louisiana 100
Mid-South Controls & Services, Inc. Louisiana 100
Thermo Instrument Controls de Mexico, S.A. de C.V. Mexico 100
(1% of which shares are owned directly by ONIX Systems Inc.)
ONIX Process Analysis Inc. Texas 100
OnIX Holdings Limited England 100
CAC Limited England and Wales 100
ONIX Measurement Limited England and Wales 100
Peek Environmental Limited England and Wales 100
Sarasota Data Products Limited England and Wales 100
Sarasota Instrumentation Limited England and Wales 100
VG Gas Analysis Limited England and Wales 100
Polysonics, Inc. Texas 100
TN Spectrace Europe B.V. Netherlands 100
TN Technologies Inc. Texas 100
Kay-Ray/Sensall, Inc. Delaware 100
TN Technologies Canada Inc. Canada 100
Westronics Inc. Texas 100
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ONIX SYSTEMS
INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 2, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 33,373
<SECURITIES> 0
<RECEIVABLES> 36,417
<ALLOWANCES> 1,941
<INVENTORY> 32,000
<CURRENT-ASSETS> 105,862
<PP&E> 17,566
<DEPRECIATION> 7,430
<TOTAL-ASSETS> 180,578
<CURRENT-LIABILITIES> 31,019
<BONDS> 0
0
0
<COMMON> 156
<OTHER-SE> 146,391
<TOTAL-LIABILITY-AND-EQUITY> 180,578
<SALES> 153,653
<TOTAL-REVENUES> 153,653
<CGS> 93,082
<TOTAL-COSTS> 93,082
<OTHER-EXPENSES> 9,232
<LOSS-PROVISION> 423
<INTEREST-EXPENSE> 332
<INCOME-PRETAX> 13,222
<INCOME-TAX> 5,222
<INCOME-CONTINUING> 8,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,000
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
</TABLE>
