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 October 3, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-10573
THERMO POWER CORPORATION
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2891371
(State or other jurisdiction
of incorporation or organization (I.R.S. Employer Identification No.)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(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 exchange on which registered
---------------------------- ------------------------------------
Common Stock, $.10 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 October 30, 1998, was approximately $18,451,000.
As of October 30, 1998, the Registrant had 11,830,163 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended October 3, 1998, 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 March 10, 1999, are incorporated by reference into
Part III.
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
Thermo Power Corporation (the Company or the Registrant) develops and
commercializes intelligent traffic-control systems and related products,
industrial refrigeration equipment, and commercial cooling and cogeneration
systems. The Company also conducts research and development on advanced power
and pollution-control technologies, and offers propane-powered lighting products
as well as lighting products for the automotive, sporting goods, and marine
markets. The Company's business is divided into three segments. The Traffic
Control segment develops, manufactures, markets, installs, and services
equipment that monitors and regulates vehicular traffic flow in cities and towns
around the world. The Industrial Refrigeration Systems segment develops,
manufactures, markets, services, and rents industrial refrigeration and
commercial cooling equipment. The Cooling and Cogeneration Systems segment
develops, manufactures, markets, and services natural gas cooling and
cogeneration systems, and conducts research and development on applications of
thermal energy and pollution control. Through its majority-owned ThermoLyte
Corporation subsidiary, formed in March 1995, the Company is developing and
commercializing various propane-powered lighting products, and provides lights
for the automotive, sporting goods, and marine markets.
The results of operations of the Engines segment, which consists of the
Crusader Engines division, have been classified as discontinued operations in
the financial statements as a result of the Company's decision to divest this
business. In December 1998, the Company completed the sale of the industrial and
marine engine product lines of its Crusader Engines division to two unrelated
third parties. Such sale represents a complete divestiture of the Engines
segment. The aggregate sales price for the two product lines consists of $6.4
million in cash, the assumption of certain liabilities, and a receivable of $1.0
million. The receivable is due in December 1999 and is secured by an irrevocable
letter of credit. The aggregate sales price is subject to certain post-closing
adjustments as defined in the respective agreements. See Note 4 to Consolidated
Financial Statements in the Registrant's Fiscal 1998* Annual Report to
Shareholders, which information is incorporated herein by reference.
On November 6, 1997, the Company declared unconditional in all respects
its cash tender offer for the outstanding ordinary shares of Peek plc. The
aggregate cost to acquire all outstanding Peek ordinary shares, including
related expenses, was $166.7 million. The purchase price includes $2.3 million
that was paid for shares acquired in fiscal 1997. The Company made final
payments for the Peek ordinary shares outstanding in the second quarter of
fiscal 1998. To finance the Peek acquisition, the Company borrowed $160.0
million from Thermo Electron Corporation. Peek develops, manufactures, markets,
installs, and services equipment that monitor and regulate vehicular traffic
flow in cities and towns around the world. Subsequent to Peek's acquisition by
the Company, the Company sold Peek's Measurement business to ONIX Systems Inc.,
a majority-owned subsidiary of Thermo Instrument Systems Inc., effective
November 6, 1997, for $19.1 million in cash. Thermo Instrument is a
majority-owned subsidiary of Thermo Electron. The components of the sales price
for the Measurement business consisted of the net tangible book value of the
Measurement business, cost in excess of net assets of acquired company, and the
estimated tax liability relating to the sale. The cost in excess of net assets
of acquired company was determined based upon a percentage of the Company's
total cost in excess of net assets of acquired company associated with its
acquisition of Peek, based on the 1997 revenues of the Measurement business
relative to Peek's total 1997 consolidated revenues. The Measurement business
developed and marketed field measurement products. During fiscal 1998, the
Company also sold the stock of Peek Fleetlogic B.V. for $1.1 million in cash.
In addition, in March 1998, the Company acquired the assets, subject to
certain liabilities, of Traffic Control Technology, Inc. for $1.3 million in
cash and, in July 1998, ThermoLyte acquired the outstanding stock of Optronics,
Inc. for $6.7 million in cash, including the repayment of $1.2 million of debt.
The Optronics acquisition is subject to a post-closing adjustment. Traffic
Control Technology is a manufacturer of traffic control equipment and Optronics
is a manufacturer of lighting products for the automotive, sporting goods, and
marine markets.
- ------------------
* References to fiscal 1998, 1997, and 1996 herein are for the fiscal years
ended October 3, 1998, September 27, 1997, and September 28, 1996,
respectively.
2
<PAGE>
As of October 3, 1998, the Company owned 6,500,000 shares of ThermoLyte
common stock, representing 78% of such stock outstanding. The remaining
1,845,000 shares of ThermoLyte common stock which are outstanding at October 3,
1998, are subject to redemption at the option of the holder at a price of $10.00
per share in December 1998 or December 1999, for a total redemption value of
$18.5 million. The Company plans to continue operating ThermoLyte as a wholly
owned subsidiary in the event that all of its shares are redeemed.
The Company was originally incorporated in Massachusetts in June 1985 under
the name Tecogen Inc., as a wholly owned subsidiary of Thermo Electron to
succeed the business of Thermo Electron's Thermal Products Division. In March
1993, the Company's name was changed to Thermo Power Corporation. As of October
3, 1998, Thermo Electron owned 9,300,806 shares of the Company's common stock,
representing 79% of such stock outstanding. 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
communications, and electronic information-management technologies. During
fiscal 1998, Thermo Electron purchased 1,174,400 shares of the Company's common
stock in the open market at a total price of $11,132,000.
On August 12, 1998, Thermo Electron announced a proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company. As
part of this reorganization, Thermo Electron announced that the Company may be
taken private and become a wholly owned subsidiary of Thermo Electron. It is
currently contemplated that the Company's shareholders would receive cash in
exchange for their shares of common stock of the Company. The completion of this
transaction is subject to numerous conditions, including the establishment of
the price; the approval of the Board of Directors of Thermo Electron; the
negotiation and execution of a definitive purchase and sale or merger agreement;
the receipt of a fairness opinion from an investment banking firm that the
transaction is fair to the Company's shareholders (other than Thermo Electron)
from a financial point of view; the approval of the Company's Board of
Directors, including its independent directors; and clearance by the Securities
and Exchange Commission of any necessary documents regarding the proposed
transaction.
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Annual Report on Form
10-K. For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects,"
"seeks," "estimates," and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause the results of the Company to differ materially from those indicated by
such forward-looking statements, including those detailed under the heading
"Forward-looking Statements" in the Registrant's Fiscal 1998 Annual Report to
Shareholders, which statements are incorporated herein by reference.
(b) Financial Information About Industry Segments
Financial information concerning the Company's industry segments is
summarized in Note 12 to Consolidated Financial Statements in the Registrant's
Fiscal 1998 Annual Report to Shareholders, which information is incorporated
herein by reference.
3
<PAGE>
(c) Description of Business
(i) Principal Products and Services
Traffic Control
The Company's Peek subsidiary develops, manufactures, markets, installs, and
services equipment that monitors and regulates vehicular traffic flow in cities
and towns around the world. Peek offers hardware products, software, and traffic
management systems to reduce roadway congestion, fuel consumption, and travel
time; improve motorist and pedestrian safety; collect data; and improve the
efficiency and attractiveness of public transportation.
Hardware Products. Hardware products include vehicle detectors, traffic
controllers, conflict monitors, traffic signals, vehicle counters, classifiers,
weigh-in-motion systems, and an automated vehicular law enforcement system.
Vehicle detectors determine presence, speed, size, and direction of travel of
vehicles, and include the Company's VideoTrak(R) video vehicle tracking and
detection system, microwave inductive loop detectors, and electric sensors.
Traffic controllers are electronic devices that automatically control the timing
of roadway signals to optimize the flow of traffic, thereby reducing traffic
congestion, fuel consumption, and motorist travel time. These devices also
coordinate pedestrian crossing intervals to improve safety. Traffic controllers
are manufactured to meet various worldwide operational and hardware/software
standards. Conflict monitors continually evaluate the functions of traffic
controllers to ensure that, if a traffic controller malfunctions, conflicting
signal indications are not passed on to motorists. Peek manufactures and markets
traffic signals with advanced optical designs for both vehicle intersections and
pedestrian crossways. Vehicle counters and classifiers analyze the data provided
by vehicle detectors in order to determine traffic flow patterns and vehicle
type on roadways for traffic planning. Weigh-in-motion systems consist of
electronic equipment and in-road sensors that determine a vehicle's weight,
classification, and speed. Weigh-in-motion systems are used on highways to guard
against premature wear and tear of pavement from overweight trucks and to
protect the integrity of small roads and bridges. Peek's automated vehicular law
enforcement system, the Peek Guardian(TM), detects and records digital video
images of motorist infractions such as speeding and red light violations in
accordance with local, state, or provincial traffic laws. Prices for Peek's
hardware products range from approximately $60 for a simple loop detector
amplifier to approximately $20,000 for a more complex VideoTrak camera system.
Peek also manufactures variable message signs advising motorists of roadway
hazards. The price for a large variable message sign can exceed $60,000.
Traffic Management Systems. Peek produces four types of traffic
systems: urban traffic control, motorway management, public transport
management, and parking guidance.
Urban Traffic Control (UTC). Peek offers two types of UTC systems:
real-time adaptive control systems and traffic-responsive systems.
Real-time Adaptive Control Systems. These systems measure traffic
speed, occupancy, and flow collected over specified time periods to
optimize traffic signal timing to improve traffic capacity and overall
traffic flow across a city or within a specified region. Peek's SCOOT
system runs algorithms on a central computer and communicates traffic
signal timing to traffic controllers to optimize traffic flow. Peek's
SPOT system uses a distributed approach to optimize traffic flow,
whereby signal timing is calculated by an individual traffic controller
using its data and data from nearby traffic controllers. Prices for a
SCOOT or SPOT system vary greatly depending on the scope and complexity
of the project, and can range from $150,000 to $25 million.
4
<PAGE>
-Traffic-responsive Systems. These systems analyze current traffic
detector information and dynamically select optimal intersection
signal-timing plans from a set of patterns that have been generated and
reviewed off-line. The Multi-Arterial Traffic System (MATS)(TM), sold
predominantly in North America, has closed-loop and central system
configurations. The Electronic Traffic Control (ETC) system, which is
sold predominantly in Scandinavia and the Netherlands, caters to
asymmetrical town plans. Prices for traffic-responsive systems are
dependent upon the scope and complexity of the project and can range
from $10,000 to $1.6 million.
Motorway Management. These systems identify when congestion, accidents, or
other traffic disruptions occur using traffic detectors, and generate
information for message signs that can be used to broadcast messages imposing
speed restrictions or advising travelers of lane closures and other hazards.
Peek provides systems, predominantly in the Netherlands, that have direct
control over message signs. Peek also offers systems in the United Kingdom that
provide central control over message signs and are controlled by an operator.
The third type of motorway management system is a low-cost PC-based system,
which directly controls message signs and is sold predominantly in developing
markets. Prices for motorway management systems typically range from $500,000 to
$8 million depending on the scope and the complexity of the project.
Public Transport Management. Peek provides a range of public transport
management systems, including intersection priority systems, passenger
information systems, fleet management systems, and bus terminal systems.
Intersection priority systems use electronic tags on buses that communicate with
intersection controllers to ensure that buses are not delayed. The level of
priority can be adjusted based on occupancy levels and adherence to schedules.
Passenger information systems track the position of buses along a route in order
to provide anticipated arrival times to passengers waiting at stops. Fleet
management systems use electronic tags on buses to monitor the adherence to bus
schedules and occupancy levels of buses in order to monitor the operating
performance of the fleet, set vehicle maintenance schedules, and optimize the
size of the fleet to achieve a desired level of service. Peek also designs and
supplies electronic systems to bus terminals to provide information to waiting
passengers and, as a result, to allow the size of the terminals to be minimized.
Prices for public transport management systems vary greatly depending on the
scope and complexity of the project and can range from $5,000 for a simple
intersection priority system to several million dollars for an integrated public
transportation solution for a city.
Parking Guidance. Peek's parking guidance systems give drivers real-time
information on parking availability in parking areas through the use of traffic
detectors at each space and strategically located variable message signs. These
systems are designed to minimize unnecessary signage, as well as unnecessary
searching and, as a result, minimize the number of vehicles circulating the
parking area.
Industrial Refrigeration Systems
Industrial Refrigeration Packages. The Company's FES division designs,
engineers, manufactures, and services industrial refrigeration equipment used
for cooling, freezing, and cold-storage applications primarily in the
food-processing, chemical, petrochemical, and pharmaceutical industries. FES
supplies complete industrial refrigeration systems and various components for
these systems.
FES equipment for food and beverage customers consists primarily of standard
industrial refrigeration products, such as screw-compressor packages,
liquid-refrigerant pump packages, state-of-the-art control systems, plate and
frame heat exchangers, and ASME (American Society of Mechanical Engineers)
pressure vessels. The screw-compressor package, which consists of a screw
compressor, an electric-drive motor, an oil separator, a control panel, and
piping and tubing, constitutes the majority of this equipment. FES also
manufactures screw-compressor packages powered by natural gas engines. Examples
of applications of industrial refrigeration equipment used by food and beverage
processors include the freezing, storing, and warehousing of meats, fish,
fruits, prepared meals, and vegetables; freezing of fruit juice concentrates;
and controlling process temperatures in brewing and wine-making, soft drink
carbonization, and in dairy applications.
5
<PAGE>
FES supplies custom-designed industrial refrigeration packages to chemical,
petrochemical, pharmaceutical, and other industries for integration into their
plants' refrigeration systems. These higher-cost packages require significant
design engineering and are used in a wide variety of applications, such as
chilling brine that cools chemicals used in the production of penicillin. In
another application of a custom package, FES units are used to chill and
condense toxic effluent gases normally released to flare.
Approximately 83% of the Industrial Refrigeration segment revenues are of
industrial refrigeration packages, of which approximately 60% are standard units
for the food and beverage industry, and approximately 40% are of custom units
for the chemical, petrochemical, and pharmaceutical industries. The average
price for a standard food and beverage refrigeration package is approximately
$50,000, and a representative price for a custom unit would be approximately
$400,000, although prices for these units often exceed $1 million. FES
refrigeration packages can be designed for use with any common refrigerant, but
the majority of FES's units operate on ammonia. FES's utilization of ammonia, a
cost-effective and environmentally safe substance compared with conventional
chlorofluorocarbon (CFC)-based refrigerants, places FES in a leadership position
to target the reduction of CFC systems. The production of CFCs was phased out in
January 1996. Ammonia does not harm the ozone layer, costs much less than
conventional refrigerants, and is widely available on a global basis.
The Company's NuTemp subsidiary is a supplier of rental cooling and
industrial refrigeration equipment. The Company also offers custom-made and
remanufactured equipment for sale. NuTemp serves numerous markets with its
equipment, including the commercial heat, ventilating, and air conditioning
(HVAC) market, as well as the food-processing, chemical, petrochemical, and
pharmaceutical industries. The commercial cooling industry is continuing to come
into compliance with the Montreal Protocol which prohibits the production of CFC
refrigerants effective January 1996. This retrofit process is continuing to
create an increase in the rental market for NuTemp's commercial cooling systems,
which operate on alternative refrigerants, while customers install new
equipment. Its commercial cooling equipment is used primarily in institutions
and commercial buildings, as well as by service contractors. Additionally, one
of NuTemp's key services is responding to emergency cooling situations by
providing large-capacity cooling equipment on short notice. The demand for
NuTemp's equipment is typically highest in the summer period and can be
adversely affected by cool summer weather.
Cooling and Cogeneration Systems
The Company develops, manufactures, markets, and services preassembled
cooling and cogeneration systems fueled principally by natural gas for sale to a
wide range of commercial, institutional, industrial, and multi-unit residential
users. The Company's Tecochill(R) commercial cooling equipment includes, as a
component, TecoDrive natural gas engines supplied by the Crusader Engines
division. The Company sold the industrial engine product line, which includes
TecoDrive engines, of the Crusader Engines division in December 1998 and plans
to continue purchasing engines from the acquirer of this business in the future.
The Company's Tecochill(R) commercial cooling and Tecogen(R) cogeneration
products incorporate several proprietary features that are the result of the
Company's advances in engine, thermal, and control technologies. One such
proprietary feature is the Company's microprocessor-based control module, which
automates the operation of such systems and can also include remote control,
monitoring, and diagnostic capabilities. The standardized design of the
Company's products also enable rapid installation and startup, facilitate
maintenance, and allow competitive delivery time. The Company supports its
customers by offering a comprehensive maintenance contract under which the
Company assumes responsibility for substantially all maintenance, repairs, and
replacement parts.
The cost savings that result from use of the Company's packaged cooling and
cogeneration systems are directly related to the retail price of electricity.
Given prevailing rate structures, demand for the Company's cooling and
cogeneration systems has remained relatively unchanged.
6
<PAGE>
The Company's ThermoLyte subsidiary is developing and commercializing
various propane-powered lighting products, including four styles of a
decorative, tabletop accent light, as well as a camping light. These lighting
products are based on the Company's patented technology for a rigid mantle, the
"bulb" in gas lights. This durable mantle allows the Company to design products
that are portable, and use propane as a power source instead of batteries. Using
propane offers several advantages over batteries, including a very long shelf
life, substantially longer operating hours, constant brightness, and no battery
disposal.
Optronics, Inc., acquired by ThermoLyte in July 1998, also offers over 400
lighting and associated products for the automotive, sporting goods, and marine
markets. Examples include tail lights and turn-signal lights for trailers,
portable lights for fishing and hunting, and docking lights.
Sponsored Research and Development. The Company conducts research and
development supported by outside sponsors. Revenues from sponsored
research and development contracts were $4,220,000, $4,688,000, and
$5,836,000 in fiscal 1998, 1997, and 1996, respectively. See "Research
and Development."
Regulation
The demand for certain of the Company's products is affected by various
federal, state, and local energy and environmental laws and regulations. All of
these laws and regulations are subject to revocation or amendment, and the
Company cannot predict what effect revocation or amendment may have on the
Company's sales, business, or operations.
Industrial Refrigeration Systems
The Company's ammonia-based refrigeration equipment and
alternative-refrigerant commercial cooling systems benefit from the worldwide
phaseout of CFC refrigerants. The Montreal Protocol was negotiated in 1987 under
the sponsorship of the United Nations Environmental Program (UNEP) to protect
the ozone layer. This agreement establishes a process to control substances that
could deplete the ozone layer, including CFCs. Regulations have been promulgated
by the EPA implementing these protocols in this country through limits on the
production and consumption of CFCs and other ozone-depleting substances.
Cooling and Cogeneration Systems
The passage by Congress of the Public Utility Regulatory Policies Act of
1978 (PURPA), the adoption of regulations thereunder by the Federal Energy
Regulatory Commission (FERC), and related state laws and regulations provide
incentives for the development of qualifying small-power production and
cogeneration systems such as those offered by the Company. PURPA and FERC
regulations promulgated thereunder address three issues of importance to users
that own or operate cogeneration systems, including those sold by the Company.
First, PURPA exempts qualifying users from many federal and state regulations
that pertain to electric utilities. Second, PURPA requires electric utilities to
allow qualifying cogeneration providers to connect their cogeneration facilities
to utilities' electric power systems. This mandatory connection enables users to
purchase utility-generated electricity to start their cogeneration systems and
assures users of a back-up source of electricity during peak periods of use and
when the cogeneration systems are shut down for maintenance and repair. Third,
PURPA requires utilities to purchase electricity produced by qualifying
cogeneration providers at a price equivalent to utilities' avoided costs.
Like all electric power-generating and other fossil fuel-burning systems,
the Company's cooling and cogeneration products must comply with federal, state,
and local environmental laws and regulations. Regulation of systems such as
those sold by the Company is conducted primarily at the state and local level,
where standards can vary. In particular, applicable environmental standards in
California are stricter than comparable federal guidelines. The Company believes
that its existing Tecochill and other Tecogen products comply with applicable
federal and state environmental standards, including those currently in effect
in California, although the Company cannot predict whether its products will
comply with all environmental standards promulgated in the future.
7
<PAGE>
(ii) and (xi) New Products; Research and Development
In fiscal 1998, the Traffic Control segment continued development of its
VideoTrak video vehicle tracking and detection system, the Peek Guardian
automated vehicular law enforcement system, the EuroSignal, the EuroController,
and several other traffic management products, systems, and data collection
devices.
The Company has conducted research and development on applications of
thermal energy for more than 30 years. The Company's research and development
capability and expertise in instrumentation, control, and heat-recovery
technologies have enabled it to obtain support from outside sponsors, develop
new products, and support existing products. The Company has continued to
experience a decrease in sponsored research and development due to a reduction
in funding. See "Description of Business Principle Products and Services -
Cooling and Cogeneration Systems."
The Company's sponsored programs have been supported principally by the
domestic natural gas industry and the federal government. Within the natural gas
industry, the Company's principal sponsors have been the Gas Research Institute
(GRI) and the Southern California Gas Company, which is the nation's largest gas
utility. The Company has also obtained research and development funding from
state governments and industrial companies. Sponsors of the Company's research
and development generally own the rights to technology that is developed under
these programs.
ThermoLyte introduced a line of propane-powered accent lights in the fall of
1997. The accent light is a decorative, contemporary-style area light suitable
for providing an alternative to candles, oil lamps, or
battery-powered lights in the home or backyard. In the summer of 1998,
ThermoLyte introduced the Backpacker. Created as an alternative to existing
camping lights, the Backpacker is designed to deliver up to 10 hours of light
from a single propane canister. In addition, the Backpacker's compact design and
light weight (less than 1 1/2 pounds) make it easy to pack and transport.
During fiscal 1998, 1997, and 1996, the Company's continuing operations
expended $7,921,000, $1,929,000, and $2,633,000, respectively, on internally
funded research and development, and $3,874,000, $3,776,000, and $4,475,000,
respectively, on research and development sponsored by others. During fiscal
1998, 1997, and 1996, the Company's discontinued operations expended $411,000,
$367,000, and $581,000 on internally funded research and development. The
Company's discontinued operations had no expenditures on research and
development sponsored by others in fiscal 1998, 1997, and 1996.
(iii) Raw Materials
Raw materials, components, and supplies for all the Company's significant
products are available either from a number of different suppliers or from
alternative sources that could be developed without a material adverse effect on
the Company's business.
(iv) Patents, Licenses, and Trademarks
The Company considers its patents and licenses to be important in the
present operation of its business. The Company, however, does not consider any
one of its patents or related group of patents to be of such importance that its
expiration, termination, or invalidity would materially affect the Company's
business.
The Company has research and development arrangements with the natural gas
industry and various governmental agencies, and is required to pay royalties for
any technologies developed or products commercialized under several of these
arrangements.
8
<PAGE>
(v) Seasonal Influences
The quarterly revenues and income of the Traffic Control segment fluctuate
significantly based on funding patterns of governmental entities and
seasonality. As a result of these factors, Peek has historically experienced
higher sales and income in the first and third fiscal quarters and lower sales
and income in the second and fourth fiscal quarters. Additionally, a portion of
the Traffic Control segment's revenues result from the sale of large systems,
the timing of which can lead to variability in the Company's quarterly revenues
and income. In addition, the demand for NuTemp's equipment is typically highest
in the summer period and can be adversely affected by cool summer weather.
(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
Sales to governmental entities accounted for 26% of the Company's total
revenues in fiscal 1998, of which 92% related to sales to foreign governmental
entities. Sales to governmental entities related principally to the Traffic
Control segment, representing 39% of its revenues in fiscal 1998. A decrease in
sales to governmental entities could have an adverse effect on the Company's
business and future results of operations.
(viii) Backlog
The backlog of firm orders for the Traffic Control segment, which consists
of the Company's Peek subsidiary, was $50.7 million as of October 3, 1998,
compared with $64.4 million at the date of acquisition, excluding $15.8 million
of backlog of businesses sold and divested. The $13.7 million decrease in
backlog occurred principally in the Netherlands and United Kingdom and was
primarily due to a decrease in orders from foreign governmental entities as a
result of a reduction in funding allocated by those entities to traffic control
projects. The backlog of firm orders for the Industrial Refrigeration Systems
segment was $22.2 million as of October 3, 1998, compared with $15.7 million as
of September 27, 1997. The backlog of firm orders for the Cooling and
Cogeneration Systems segment was $8.2 million as of October 3, 1998, compared
with $2.5 million as of September 27, 1997. The Company believes that the
majority of this backlog will be shipped during fiscal 1999. A significant
portion of the Company's sales within the Traffic Control and Industrial
Refrigeration segments are large orders, the timing of which can lead to
variability in the Company's quarterly revenues and net income.
(ix) Government Contracts
Approximately 2% of the Company's total revenues in fiscal 1998 were derived
from contracts or subcontracts with the federal government, which are subject to
renegotiation of profits or termination. The Company does not have any knowledge
of threatened or pending renegotiation or terminations of any material contract
or subcontract.
(x) Competition
The Company experiences competition in most of its product lines. Additional
competition may arise if markets in which the Company is active develop
significantly. The Company is aware of several competitors for its product
lines, some of whom have financial, marketing, and other resources greater than
those of the Company.
9
<PAGE>
Traffic Control
The market for traffic products and services is extremely competitive, and
the Company expects that competition will continue to increase. The Company
believes that the principal competitive factors in the traffic industry are
price, functionality, reliability, service, technical support, and training, as
well as vendor and product reputation. The Company believes that its ability to
compete successfully will depend on a number of factors both within and outside
its control, including the pricing policies of its competitors and suppliers,
the timing and quality of products introduced by the Company and others, the
Company's ability to maintain a strong reputation in the traffic industry, and
general industry and economic trends. The Company believes that it is a leading
manufacturer and supplier of traffic products and systems and considers its
major competitors to be Siemens Corporation and Econolite Control Products, Inc.
However, the traffic market is geographically fragmented and competition varies
significantly by product line and market niche.
Industrial Refrigeration Systems
The Company's sale of industrial refrigeration systems is subject to intense
competition. The industrial refrigeration market is mature, highly fragmented,
and extremely dependent on close customer contacts. Major industrial
refrigeration companies, of which FES is one, account for approximately one-half
of worldwide sales, with the balance generated by many smaller companies. The
worldwide market is characterized by strong local manufacturers. The market
leader worldwide, as well as in North America, is Frick Company and its
affiliates, subsidiaries of York International Corporation. The Company believes
that FES competes on the basis of its advanced control systems and overall
quality, reliability, service, and to a lesser extent, price.
The Company believes NuTemp is a leader in remanufactured refrigeration
equipment. As part of its rental program, NuTemp offers an option to buy its
equipment, a service that is unique in the industry. NuTemp's largest competitor
is Aggreko. Aggreko is a major supplier of rental equipment for the industrial
refrigeration and commercial cooling markets. The Company believes that NuTemp
competes on the basis of price, delivery time, and customized equipment.
Cooling and Cogeneration Systems
The Company's Tecochill products are subject to competition from absorption
air conditioning systems and electric motor-driven vapor compressor systems.
Other manufacturers of natural gas-fueled engine-driven cooling systems have
also entered the market. The Company believes it competes with producers of
conventional cooling equipment on the basis of relative operating costs at times
of peak electrical demand, and with other producers of natural gas-fueled
cooling systems on the basis of quality, reliability, service, operational
savings, and track record. In addition, the Company's sale of cogeneration
systems is subject to intense competition, both direct and indirect. Direct
competitors consist of companies that sell cogeneration products resembling
those sold by the Company. Also, electric utility pricing programs provide
competition for the Company's cogeneration products. Indirect competitors
include manufacturers of conventional water heaters, air conditioners, and
electric generator sets, since the economic benefits of the Company's
cogeneration and cooling systems depend on the cost of conventional energy
systems. The Company believes that it competes on the basis of several factors,
including product quality and reliability, operational savings, ease of
installation, service, and price.
(xii) Environmental Protection Regulations
The Company believes that compliance with federal, state, and local
environmental regulations will not have a material adverse effect on its capital
expenditures, earnings, or competitive position.
10
<PAGE>
(xiii) Number of Employees
As of October 3, 1998, the Company employed approximately 1,589 people,
excluding employees of the Company's discontinued Engines segment. Of these
employees, 90 people located in Denmark, the Netherlands, Sweden, Croatia, and
Finland were represented by labor unions. The Company has experienced no work
stoppages, and considers its relations with employees to be good.
(d) Financial Information about Exports by Domestic Operations
Financial information about exports by domestic operations and about foreign
operations is summarized in Note 12 to Consolidated Financial Statements in the
Registrant's Fiscal 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)
-----------------------------------------------------------------
J. Timothy Corcoran 52 President and Chief Executive Officer
(1992)
John N. Hatsopoulos* 64 Chief Financial Officer and Senior
Vice President (1988)
Paul F. Kelleher 56 Chief Accounting Officer (1985)
* John Hatsopoulos will retire as Chief Financial Officer and Senior
Vice President on December 31, 1998. Theo Melas-Kyriazi has been
appointed to succeed Mr. Hatsopoulos as Chief Financial Officer.
Each executive officer serves until his successor is chosen or appointed by
the Board of Directors and qualified or until earlier resignation, death, or
removal. Mr. Corcoran is a full-time employee of the Company. Messrs.
Hatsopoulos 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. Mr. Melas-Kyriazi joined Thermo Electron in 1986 as Assistant
Treasurer, and became Treasurer in 1988. He was named President and Chief
Executive Officer of ThermoSpectra Corporation, a public subsidiary of Thermo
Instrument Systems Inc., in 1994. In 1997, he became Vice President of Corporate
Strategy for Thermo Electron. Mr. Melas-Kyriazi will remain a full-time employee
of Thermo Electron, and, when he succeeds Mr. Hatsopoulos as Chief Financial
Officer, will also devote such time to the affairs of the Company as the
Company's needs reasonably require.
Item 2. Properties
The location and general character of the Company's principal properties by
industry segment as of October 3, 1998, are as follows:
Traffic Control
The Company owns approximately 101,000 square feet of office, laboratory,
and production space in Florida and the United Kingdom, and leases approximately
297,000 square feet of office, laboratory, and production space principally in
California, Florida, the Netherlands, the United Kingdom, Finland, Norway, and
Sweden, under leases expiring from fiscal 2001 to 2021.
Industrial Refrigeration Systems
The Company owns approximately 158,000 square feet of office and
manufacturing space in Pennsylvania, subject to a mortgage on the property, and
approximately 15,000 square feet of manufacturing space in Texas. The Company
also occupies approximately 172,000 square feet of office and manufacturing
space in Illinois and Louisiana under leases expiring from fiscal 2000 and 2006.
11
<PAGE>
Cooling and Cogeneration Systems
The Company owns approximately 65,000 square feet of office and
manufacturing space in Oklahoma. In addition, the Company leases approximately
40,000 square feet of office and laboratory space in Massachusetts under an
agreement providing for the sublease of the facility from Thermo Electron
expiring in 2002, and leases approximately 8,000 square feet of office and
manufacturing space in Maryland under a lease agreement expiring in 1999.
Other
The Company's discontinued Engines segment occupies approximately 104,000
square feet of manufacturing, engineering, and office space in Michigan under a
lease expiring in 2004. The Company sold the industrial and marine engine
product lines of this division in December 1998. The acquirer of the industrial
engine product line will sublease the facility from the Company through December
1999. Subsequent to the expiration of the sublease, the Company intends to
either renew the sublease with the acquirer or sublet the facility to a third
party, although the Company currently has no such agreement to do so.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
12
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Information concerning the market and market price for the Registrant's
Common Stock, $.10 par value, and related matters, is included under the
sections labeled "Common Stock Market Information" and "Dividend Policy" in the
Registrant's Fiscal 1998 Annual Report to Shareholders and is incorporated
herein by reference.
Item 6. Selected Financial Data
The information required under this item is included under the sections
labeled "Selected Financial Information" and "Dividend Policy" in the
Registrant's Fiscal 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 Fiscal 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 Fiscal 1998 Annual Report to Shareholders and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements and Supplementary Data
are included in the Registrant's Fiscal 1998 Annual Report to Shareholders and
are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
13
<PAGE>
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.
14
<PAGE>
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 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 August 13, 1998, the Company filed a Current Report on Form 8-K dated
August 12, 1998, with respect to a proposed corporate reorganization by
the Company's parent corporation, Thermo Electron Corporation, involving
certain of Thermo Electron's subsidiaries, including the Company.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
15
<PAGE>
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 by
the undersigned, thereunto duly authorized.
Date: December 23, 1998 THERMO POWER CORPORATION
By:/s/ J. Timothy Corcoran
-----------------------------
J. Timothy Corcoran
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 December 23, 1998.
Signature Title
By: /s/ J. Timothy Corcoran President, Chief Executive
Officer, and Director
J. Timothy Corcoran
By: /s/ John N. Hatsopoulos Senior Vice President,
Chief Financial Officer, and
John N. Hatsopoulos Director
By: /s/ Paul F. Kelleher Chief Accounting Officer
Paul F. Kelleher
By: /s/ Brian D. Holt Chairman of the Board and
Director
Brian D. Holt
By: /s/ Marshall J. Armstrong Director
Marshall J. Armstrong
By: /s/ Peter O. Crisp Director
Peter O. Crisp
By: /s/ Donald E. Noble Director
Donald E. Noble
By: /s/ John J. Setnicka Director
John J. Setnicka
16
<PAGE>
Report of Independent Public Accountants To the Shareholders
and Board of Directors of Thermo Power Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Thermo Power Corporation's
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated November 9, 1998 (except with respect to
certain matters discussed in Notes 4 and 16, as to which the date is December
18, 1998). 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 15 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
November 9, 1998
17
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
THERMO POWER CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Description Balance Provision
at Charged
Beginning to Accounts Balance
of Expense Accounts Written at End
Year Recovered Off Other (a) of Year
- ----------------------------------- ---------- ------------- ----------- ---------- ----------- -----------
Allowance for Doubtful Accounts
Year Ended October 3, 1998 $ 757 $ 200 $ 208 $ (491) $ 9,625 $10,299
Year Ended September 27, 1997 $ 589 $ 252 $ 3 $ (87) $ - $ 757
Year Ended September 28, 1996 $ 530 $ 191 $ 26 $ (158) $ - $ 589
Description Balance Established Activity Other (c) Balance
at as Cost of Charged at End
Beginning Acquisitions to of Year
of Reserve
Year
- ----------------------------------- ---------- ------------- ----------- ---------- -----------
Accrued Acquisition Expenses (b)
Year Ended October 3, 1998 $ 33 $ 21,607 $(10,557) $ - $11,083
Year Ended September 27, 1997 $ 519 $ - $ (7) $ (479) $ 33
Year Ended September 28, 1996 $ 680 $ - $ (109) $ (52) $ 519
Description Balance Provision Activity Other Balance
at Charged Charged at End
Beginning to to of Year
of Expense Reserve
Year
- ----------------------------------- ---------- ------------- ----------- ---------- -----------
Reserve for Discontinued
Operations (d)
Year Ended October 3, 1998 $ - $ 993 $ - $ - $ 993
(a) Includes allowances of businesses acquired and discontinued during the year
as described in Notes 3 and 4, respectively, to Consolidated Financial
Statements in the Registrant's Fiscal 1998 Annual Report to Shareholders and
the effect of foreign currency translation.
(b) The nature of activity in this account is described in Note 3 to
Consolidated Financial Statements in the Registrant's Fiscal 1998 Annual
Report to Shareholders.
(c) Represents reductions of cost in excess of net assets of acquired companies
for accrued acquisition expenses no longer considered necessary.
(d) The nature of activity in this account is described in Note 4 to
Consolidated Financial Statements in the Registrant's Fiscal 1998 Annual
Report to Shareholders.
</TABLE>
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2.1 Share Purchase Agreement dated as of January 29, 1998, among the
Company, ONIX Systems Inc., Radley services Ltd., and Peek
Corporation (filed as Exhibit 2.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 3, 1998 [File No.
1-10573] and incorporated herein by reference).
3.1 Articles of Organization of the Registrant, as amended (filed as
Exhibit 3(a) to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended April 3, 1993 [File No. 1-10573] and incorporated
herein by reference).
3.2 By-laws of the Registrant, as amended (filed as Exhibit 3(b) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
October 2, 1993 [File No. 1-10573] and incorporated
herein by reference).
4.1 Specimen Common Stock Certificate (filed as Exhibit 4(b) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
October 2, 1993 [File No. 1-10573] and incorporated
herein by reference).
10.1 $160,000,000 Promissory Note dated as of November 17, 1997, issued by
the Registrant to Thermo Electron (filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated November 6, 1997 [File
No. 1-10573] and incorporated herein by reference).
10.2 Amended and Restated Corporate Services Agreement between the
Registrant and Thermo Electron, dated as of January 3, 1993 (filed as
Exhibit 10(b) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 26, 1992 [File No. 1-10573] and
incorporated herein by reference).
10.3 First Amendment to Lease dated September 30, 1994, between the
Registrant and Thermo Electron Corporation (filed as Exhibit 10.2 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
October 1, 1994 [File No. 1-10573] and incorporated herein by
reference).
10.4 Form of Indemnification Agreement between the Registrant and
its directors and officers (filed as Exhibit 10(e) to the
Registrant's Registration Statement on Form S-1 [Reg. No.
33-14017] and incorporated herein by reference).
10.5 Tax Allocation Agreement dated September 25, 1985, between the
Registrant and Thermo Electron (filed as Exhibit 10(f) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
October 3, 1987 [File No. 0-15920] and incorporated
herein by reference).
10.6 Thermo Electron Corporate Charter, as amended and restated effective
January 3, 1993 (filed as Exhibit 10(n) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 26, 1992
[File No. 1-10573] and incorporated
herein by reference).
10.7 Master Repurchase Agreement dated January 1, 1994, between the
Registrant and Thermo Electron Corporation (filed as Exhibit 10.7 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 27, 1997 [File No. 1-10573] and incorporated herein by
reference).
19
<PAGE>
Exhibit
Number Description of Exhibit
10.8 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 10, 1997, between the Registrant and
Thermo Electron Corporation (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
January 3, 1998 [File No. 1-10573] and incorporated herein by
reference).
10.9 Lease, dated as of January 20, 1988, between Thermo Electron
Corporation and Michael I. Gilson, Trustee (subsequently assigned to
the Registrant; filed as Exhibit 10(q) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 26, 1992
[File No. 1-10573] and incorporated
herein by reference).
10.11 Form of Redemption Rights of ThermoLyte Corporation and related
Guarantee of Thermo Electron Corporation (filed as Exhibit 10.11 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995 [File No. 1-10573] and incorporated herein by
reference).
10.12 Guarantee Agreement between ThermoLyte Corporation and Thermo
Electron Corporation (filed as Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30,
1995 [File No. 1-10573] and incorporated
herein by reference).
10.13 Incentive Stock Option Plan of the Registrant, as amended
(filed as Exhibit 10(h) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 3, 1993 [File No.
1-10573] and incorporated herein by reference). (Maximum
number of shares issuable in the aggregate under this plan and
the Registrant's Nonqualified Stock Option Plan is 950,000
shares, after adjustment to reflect share increases approved in
1990, 1992, and 1993.)
10.14 Nonqualified Stock Option Plan of the Registrant, as amended
(filed as Exhibit 10(i) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 3, 1993 [File No.
1-10573] and incorporated herein by reference). (Maximum
number of shares issuable in the aggregate under this plan and
the Registrant's Incentive Stock Option Plan is 950,000 shares,
after adjustment to reflect share increases approved in 1990,
1992, and 1993.)
10.15 Equity Incentive Plan of the Registrant (filed as Attachment A to the
Proxy Statement dated February 18, 1994, of the Registrant [File No.
1-10573] and incorporated herein by reference).
10.16 Deferred Compensation Plan for Directors of the Registrant
(filed as Exhibit 10(k) to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-14017] and incorporated
herein by reference).
10.17 Directors' Stock Option Plan of the Registrant, as amended (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended April 1, 1995 [File No. 1-10573] and incorporated
herein by reference).
10.18 ThermoLyte Corporation Equity Incentive Plan (filed as Exhibit 10.71
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1995 [File No. 1-10573] and incorporated herein
by reference).
20
<PAGE>
Exhibit
Number Description of Exhibit
10.19 Thermo Power - ThermoLyte Corporation Nonqualified Stock Option Plan
(filed as Exhibit 10.84 to Thermo Cardiosystems' Annual Report on
Form 10-K for the fiscal year ended December 30, 1995 [File No.
1-10114] and incorporated herein by reference).
In addition to the stock-based compensation plans of the Registrant,
the executive officers of the Registrant may be granted awards under
stock-based compensation plans of Thermo Electron for services
rendered to the Registrant. The terms of such plans are substantially
the same as those of the Registrant's Equity Incentive Plan.
10.20 Amended and Restated Stock Holding Assistance Plan and Form of
Promissory Note (filed as Exhibit 10.20 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 27, 1997
[File No. 1-10573] and incorporated herein by reference).
13 Annual Report to Shareholders for the fiscal year ended October 3,
1998 (only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule for the fiscal year ended October 3, 1998.
27.2 Financial Data Schedule for the fiscal year ended September 28, 1996
(restated for discontinued operations).
27.3 Financial Data Schedule for the quarter ended December 28, 1996
(restated for discontinued operations).
27.4 Financial Data Schedule for the six months ended March 29, 1997
(restated for discontinued operations).
27.5 Financial Data Schedule for the nine months ended June 28, 1997
(restated for discontinued operations).
27.6 Financial Data Schedule for the fiscal year ended September 27, 1997
(restated for discontinued operations).
27.7 Financial Data Schedule for the quarter ended January 3, 1998
(restated for discontinued operations).
27.8 Financial Data Schedule for the six months ended April 4, 1998
(restated for discontinued operations).
27.9 Financial Data Schedule for the nine months ended July 4, 1998
(restated for discontinued operations).
Exhibit 13
Thermo Power Corporation
Consolidated Financial Statements
Fiscal Year 1998
<PAGE>
<TABLE>
<CAPTION>
Thermo Power Corporation 1998 Financial Statements
Consolidated Statement of Income
<S> <C> <C> <C>
Year Ended
-------------------------------
In (In thousands except per share amounts) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Revenues (Notes 7 and 12) $ 245,692 $ 91,881 $ 93,058
--------- -------- ---------
Costs and Operating Expenses:
Cost of revenues 172,055 72,725 74,289
Selling, general, and administrative expenses (Note 7) 50,801 14,265 13,874
Research and development expenses 7,921 1,929 2,633
--------- -------- ---------
230,777 88,919 90,796
--------- -------- ---------
Operating Income 14,915 2,962 2,262
Interest Income (includes $257 from related parties in fiscal 1,930 1,829 1,714
1998; Note 3)
Interest Expense (includes $8,146 to related party in fiscal 1998; (8,998) (18) (26)
Note 10)
Gain on Sale of Investments, Net (includes $53 and $469 on sale of 11 53 208
--------- -------- ---------
related-party investments in fiscal 1997 and 1996; Notes 2 and 7)
Income from Continuing Operations Before Income Taxes and Minority 7,858 4,826 4,158
Interest
Provision for Income Taxes (Note 6) 4,082 2,223 1,772
Minority Interest Expense 423 312 312
--------- -------- ---------
Income from Continuing Operations 3,353 2,291 2,074
Loss from Discontinued Operations (net of benefit for income taxes (381) (187) (1,189)
of $215, $105, and $669; Note 4)
Provision for Loss on Disposal of Discontinued Operations (net of (636) - -
benefit for income taxes of $357; Note 4)
--------- -------- ---------
Net Income $ 2,336 $ 2,104 $ 885
========= ======== =========
Earnings per Share from Continuing Operations (Note 13)
Basic $ .28 $ .19 $ .17
========= ======== =========
Diluted $ .28 $ .19 $ .16
========= ======== =========
Basic and Diluted Earnings per Share (Note 13) $ .20 $ .17 $ .07
========= ======== =========
Weighted Average Shares (Note 13)
Basic 11,838 12,212 12,466
========= ======== =========
Diluted 11,908 12,218 12,707
========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
Thermo Power Corporation 1998 Financial Statements
Consolidated Balance Sheet
(In thousands) Oct. 3, Sept. 27,
1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Assets
Current Assets:
Cash and cash equivalents (includes $11,459 and $17,994 under repurchase $ 22,240 $ 19,347
agreement with parent company)
Available-for-sale investments, at quoted market value (amortized cost 4,018 9,171
of $4,017 and $9,129; Notes 2 and 7)
Accounts receivable, less allowances of $10,299 and $757 52,098 21,012
Unbilled contract costs and fees 10,718 4,856
Inventories 43,984 19,884
Prepaid income taxes (Note 6) 11,205 3,118
Net assets of discontinued operations (Note 4) 8,525 -
Other current assets 2,421 219
Due from parent company and affiliated companies 732 -
--------- ---------
155,941 77,607
--------- ---------
Rental Assets, at Cost, Net 10,118 10,276
--------- ---------
Property, Plant, and Equipment, at Cost, Net 24,871 10,591
--------- ---------
Long-term Available-for-sale Investments, at Quoted Market Value - 2,200
(amortized cost of $2,301 in fiscal 1997; Notes 2 and 3)
Other Assets 282 236
--------- ---------
Cost in Excess of Net Assets of Acquired Companies (Note 3) 160,423 7,082
--------- ---------
$ 351,635 $ 107,992
========= =========
3
<PAGE>
Thermo Power Corporation 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) Oct. 3, Sept. 27,
1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Liabilities and Shareholders' Investment
Current Liabilities:
Current maturities of long-term obligations (Note 10) $ 396 $ -
Accounts payable 30,899 9,622
Accrued payroll and employee benefits 7,885 3,133
Billings in excess of contract costs and fees 8,517 1,353
Accrued income taxes 10,048 1,620
Accrued warranty costs 6,293 3,435
Common stock of subsidiary subject to redemption ($18,450 redemption 18,372 -
value)
Accrued acquisition expenses (Note 3) 11,083 33
Other accrued expenses (Note 4) 26,686 3,207
Due to parent company and affiliated companies - 496
--------- ---------
120,179 22,899
--------- ---------
Deferred Income Taxes (Note 6) 1,093 114
--------- ---------
Long-term Obligations (Note 10) 160,499 252
--------- ---------
Commitments and Contingency (Notes 7 and 8)
Common Stock of Subsidiary Subject to Redemption ($18,450 redemption value) - 18,059
--------- ---------
Shareholders' Investment (Notes 5 and 9):
Common stock, $.10 par value, 30,000,000 shares authorized; 12,493,371 1,249 1,249
shares issued
Capital in excess of par value 55,401 55,283
Retained earnings 16,147 13,811
Treasury stock at cost, 663,208 and 578,124 shares (4,600) (3,636)
Net unrealized gain (loss) on available-for-sale investments (Note 2) 1 (39)
Cumulative translation adjustment 1,666 -
--------- ---------
69,864 66,668
--------- ---------
$ 351,635 $ 107,992
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
Thermo Power Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows
<S> <C> <C> <C>
Year Ended
---------------------------------
(In thousands) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- ------------------------------------------------------------------------- ---------- ----------- ----------
Operating Activities
Net income $ 2,336 $ 2,104 $ 885
Adjustments to reconcile net income to income from continuing
operations:
Loss from discontinued operations (Note 4) 381 187 1,189
Provision for loss on disposal of discontinued operations (Note 4) 636 - -
--------- --------- ---------
Income from continuing operations 3,353 2,291 2,074
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities of continuing
operations:
Depreciation and amortization 10,477 2,837 2,738
Provision for losses on accounts receivable 200 207 185
Minority interest expense 423 312 312
Deferred income tax expense (benefit) (371) (403) 372
Other noncash items 112 (184) (262)
Changes in current accounts, excluding the effects of acquisitions,
dispositions, and discontinued operations:
Accounts receivable 5,018 (2,600) (498)
Inventories 1,008 695 (685)
Unbilled contract costs and fees (2,660) 2,254 (766)
Other current assets (1,466) 55 226
Accounts payable (3,717) (3,743) 2,512
Other current liabilities (8,778) 2,728 82
--------- --------- ---------
Net cash provided by continuing operations 3,599 4,449 6,290
Net cash provided by (used in) discontinued operations 5,662 (2,241) 920
--------- --------- ---------
Net cash provided by operating activities 9,261 2,208 7,210
--------- --------- ---------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (156,815) - (860)
Proceeds from sale of acquired business to related party 19,117 - -
(Note 3)
Proceeds from sale of acquired business (Note 3) 1,075 - -
Purchases of available-for-sale investments - (11,301) (5,000)
Proceeds from sale and maturities of available-for-sale investments 5,011 6,000 8,982
Proceeds from sale of related-party investments (Notes 2 and 7) - 262 852
Purchases of property, plant, and equipment (6,159) (1,778) (2,384)
Proceeds from sale of property, plant, and equipment 2,179 - -
Increase in rental assets (2,872) (3,191) (4,849)
Proceeds from sale of rental assets 1,239 1,522 2,268
Other - (2) 140
--------- --------- ---------
Net cash used in continuing operations (137,225) (8,488) (851)
Net cash used in discontinued operations (144) (630) (329)
--------- --------- ---------
Net cash used in investing activities $(137,369) $ (9,118) $ (1,180)
--------- --------- ---------
5
<PAGE>
Thermo Power Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
Year Ended
---------------------------------
(In thousands) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- ------------------------------------------------------------------------- ---------- ----------- ----------
Financing Activities
Issuance of long-term obligation to parent company (Note 10) $ 160,000 $ - $ -
Decrease in short-term obligations (Note 10) (28,274) - -
Purchases of Company common stock (1,380) (3,613) -
Net proceeds from issuance of Company common stock 534 71 377
Repayment of long-term obligations (162) (53) (59)
---------- --------- ---------
Net cash provided by (used in) financing activities 130,718 (3,595) 318
of continuing operations
--------- --------- ---------
Exchange Rate Effect on Cash 283 - -
--------- ---------- ---------
Increase (Decrease) in Cash and Cash Equivalents 2,893 (10,505) 6,348
Cash and Cash Equivalents at Beginning of Year 19,347 29,852 23,504
--------- ---------- ---------
Cash and Cash Equivalents at End of Year $ 22,240 $ 19,347 $ 29,852
========= ========== =========
Cash Paid For
Interest $ 8,370 $ 18 $ 26
Income taxes $ (1,368) $ 445 $ 894
Noncash Activities
Fair value of assets of acquired companies $ 298,141 $ - $ 860
Cash paid for acquired companies (172,412) - (860)
Cash paid in prior year for acquired company (2,301) - -
--------- ---------- ---------
Liabilities assumed of acquired companies $ 123,428 $ - $ -
========= ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
<TABLE>
<CAPTION>
Thermo Power Corporation 1998 Financial Statements
Consolidated Statement of Shareholders' Investment
<S> <C> <C> <C>
Year Ended
---------------------------
(In thousands) Oct. 3, Sept. 27, Sept. 28,
1998 1997 1996
- ------------------------------------------------------------------------------ -------- --------- --------
Common Stock, $.10 Par Value
Balance at beginning of year $ 1,249 $ 1,249 $ 1,248
Issuance of stock under employees' and directors' stock plans - - 1
------- -------- -------
Balance at end of year 1,249 1,249 1,249
------- -------- -------
Capital in Excess of Par Value
Balance at beginning of year 55,283 54,448 53,898
Issuance of stock under employees' and directors' stock plans 118 71 58
Tax benefit related to employees' and directors' stock plans (Note 6) - 764 492
------- -------- -------
Balance at end of year 55,401 55,283 54,448
------- -------- -------
Retained Earnings
Balance at beginning of year 13,811 11,707 10,822
Net income 2,336 2,104 885
------- -------- -------
Balance at end of year 16,147 13,811 11,707
------- -------- -------
Treasury Stock
Balance at beginning of year (3,636) (23) (341)
Purchases of Company common stock (1,380) (3,613) -
Issuance of stock under employees' and directors' stock plans 416 - 318
------- -------- -------
Balance at end of year (4,600) (3,636) (23)
------- -------- -------
Net Unrealized Gain (Loss) on Available-for-sale Investments
Balance at beginning of year (39) (13) 198
Change in net unrealized gain (loss) on available-for-sale 40 (26) (211)
investments (Note 2)
------- -------- -------
Balance at end of year 1 (39) (13)
------- -------- -------
Cumulative Translation Adjustment
Balance at beginning of year - - -
Translation adjustment 1,666 - -
------- -------- -------
Balance at end of year 1,666 - -
------- -------- -------
Total Shareholders' Investment $69,864 $ 66,668 $67,368
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
Thermo Power Corporation 1998 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Power Corporation (the Company) manufactures, markets, and services
intelligent traffic-control systems and related products, industrial
refrigeration equipment, and commercial cooling and cogeneration systems. The
Company also conducts research and development on advanced power and
pollution-control technologies, and offers propane-powered lighting products as
well as lighting products for the automotive, sporting goods, and marine
markets.
Relationship with Thermo Electron Corporation
The Company was incorporated on June 6, 1985, as a wholly owned subsidiary
of Thermo Electron Corporation. As of October 3, 1998, Thermo Electron owned
9,300,806 shares of the Company's common stock, representing 79% of such stock
outstanding. On August 12, 1998, Thermo Electron announced a proposed
reorganization involving certain of Thermo Electron's subsidiaries, including
the Company. As part of this reorganization, Thermo Electron announced that the
Company may be taken private and become a wholly owned subsidiary of Thermo
Electron (Note 14).
Principles of Consolidation
The accompanying financial statements include the accounts of the Company,
its wholly owned subsidiaries, and its 78%-owned privately held subsidiary,
ThermoLyte Corporation. All material intercompany accounts and transactions have
been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest
September 30. References to fiscal 1998, 1997, and 1996 are for the fiscal years
ended October 3, 1998, September 27, 1997, and September 28, 1996, respectively.
Fiscal 1998 included 53 weeks; 1997 and 1996 each included 52 weeks.
Revenue Recognition
The Company recognizes revenues upon shipment of its products or upon
completion of services it renders, and recognizes rental revenues on a
straight-line basis over the term of the rental contract. The Company provides a
reserve for its estimate of warranty costs at the time of shipment. In addition,
revenues and profits on substantially all contracts are recognized using the
percentage-of-completion method. Revenues recorded under the
percentage-of-completion method, including revenues from research and
development contracts, were $83,773,000, $60,590,000, and $57,842,000 in fiscal
1998, 1997, and 1996, 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. The Company's
contracts generally provide for billing of customers upon the attainment of
certain milestones specified in each contract. Revenues earned on contracts in
process in excess of billings are classified as unbilled contract costs and
fees, and amounts billed in excess of revenues are classified as billings in
excess of contract costs and fees in the accompanying balance sheet. There are
no significant amounts included in the accompanying balance sheet that are not
expected to be recovered from existing contracts at current contract values or
that are not expected to be collected within one year, including amounts that
are billed but not paid under retainage provisions.
Research and Development Arrangements
The Company has research and development arrangements with the natural gas
industry and various government agencies. Revenues in the accompanying statement
of income include $4,220,000, $4,688,000, and $5,836,000 and cost of revenues
include $3,874,000, $3,776,000, and $4,475,000 related to these arrangements in
fiscal 1998, 1997, and 1996, respectively. The Company is required to pay
royalties for any technologies developed or products commercialized under
several of these arrangements. Selling, general, and administrative expenses in
the accompanying statement of income include royalty expense related to these
arrangements of $41,000, $65,000, and $71,000 in fiscal 1998, 1997, and 1996,
respectively.
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans (Note 5). 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 equity.
Income Taxes
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
During the first quarter of fiscal 1998, the Company adopted SFAS No. 128,
"Earnings per Share" (Note 13). As a result, all previously reported earnings
per share have been restated; however, basic and diluted earnings per share
equal the Company's previously reported earnings per share for the fiscal 1997
and 1996 periods. Basic earnings per share have been computed by dividing net
income by the weighted average number of shares outstanding during the period.
Diluted earnings per share have been computed assuming the exercise of stock
options and their related income tax effect.
Cash and Cash Equivalents
At fiscal year-end 1998 and 1997, $11,459,000 and $17,994,000,
respectively, of the Company's cash equivalents were invested in a repurchase
agreement with Thermo Electron. Under this agreement, the Company in effect
lends excess cash to Thermo Electron, which Thermo Electron collateralizes with
investments principally consisting of corporate notes, U.S. government-agency
securities, commercial paper, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The Company's
funds subject to the repurchase agreement are readily convertible into cash by
the Company. The repurchase agreement earns a rate based on the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the beginning of
each quarter. Cash equivalents are carried at cost, which approximates market
value. The Company's cash equivalents also include $8,270,000 of money market
fund investments of the Company's foreign subsidiaries at October 3, 1998.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market value and include materials, labor, and manufacturing overhead.
The components of inventories are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Raw Materials and Supplies $21,549 $ 17,570
Work in Process 14,422 1,077
Finished Goods 8,013 1,237
------- --------
$43,984 $ 19,884
======= ========
Rental Assets
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation on rental assets over an estimated useful life of seven years.
Accumulated depreciation was $4,766,000 and $3,369,000 at fiscal year-end 1998
and 1997, respectively.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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, 20 to 50 years; machinery
and equipment, 2 to 12 years; and leasehold improvements, the shorter of the
term of the lease or the life of the asset. Property, plant, and equipment
consists of the following:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Land $ 2,595 $ 252
Buildings 7,782 5,731
Machinery, Equipment, and Leasehold Improvements 24,056 13,654
------- --------
34,433 19,637
Less: Accumulated Depreciation and Amortization 9,562 9,046
------- --------
$24,871 $ 10,591
======= ========
</TABLE>
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 periods of 15 to 40 years.
Accumulated amortization was $4,586,000 and $710,000 at fiscal 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.
Common Stock of Subsidiary Subject to Redemption
In March 1995, ThermoLyte sold 1,845,000 units, each unit consisting of
one share of ThermoLyte common stock, $.001 par value, and one redemption right,
at $10.00 per unit, for net proceeds of $17,253,000. Holders of the common stock
purchased in the offering have the option to require ThermoLyte to redeem in
December 1998 or December 1999 any or all of their shares at $10.00 per share.
The redemption rights are guaranteed on a subordinated basis by Thermo Electron.
The Company has agreed to reimburse Thermo Electron in the event Thermo Electron
is required to make a payment under the guarantee. The difference between the
redemption value and the original carrying amount of common stock of subsidiary
subject to redemption is accreted using the straight-line method over the period
ending December 1998, which corresponds to the first redemption period. The
accretion is charged to minority interest expense in the accompanying statement
of income.
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 "Cumulative translation
adjustment." Foreign currency transaction gains and losses in fiscal 1998 are
included in the accompanying statement of income and are not material. The
Company had no foreign subsidiaries in fiscal 1997 and 1996.
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Forward Contracts
The Company uses short-term forward foreign exchange contracts to manage
certain exposures to foreign currencies. The Company enters into forward foreign
exchange contracts to hedge certain firm purchase and sale commitments
denominated in currencies other than its subsidiaries' local currencies. These
contracts principally hedge transactions denominated in Dutch guilders. The
purpose of the Company's foreign currency hedging activities is to protect the
Company's local currency cash flows related to these commitments from
fluctuations in foreign exchange rates. Gains and losses arising from forward
foreign exchange contracts are recognized as offsets to gains and losses
resulting from the transactions being hedged. The Company does not enter into
speculative foreign currency agreements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
Certain amounts in fiscal 1997 and 1996 have been reclassified to conform
to the presentation in the fiscal 1998 financial statements. In addition, the
results of operations of the Company's Engine segment have been classified as
discontinued operations as a result of the Company's decision to divest this
business (Note 4).
2. Available-for-sale Investments
The Company's debt and marketable equity securities are considered
available-for-sale investments in the accompanying balance sheet and are carried
at market value, with the difference between cost and market value, net of
related tax effects, recorded as a component of shareholders' investment titled
"Net unrealized gain (loss) on available-for-sale investments."
The aggregate market value, cost basis, and gross unrealized gains and
losses of short- and long-term available-for-sale investments by major security
type are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(In thousands) Gross Gross
Market Cost Unrealized Unrealized
Value Basis Gains Losses
- -------------------------------------------------- ------------- ------------- ------------- --------------
1998
Corporate Bonds $ 4,002 $ 4,001 $ 1 $ -
Other 16 16 - -
------- ------- ------- -------
$ 4,018 $ 4,017 $ 1 $ -
======= ======= ======= =======
1997
Government-agency Securities $ 5,008 $ 4,982 $ 26 $ -
Corporate Bonds 4,068 4,052 16 -
Other 2,295 2,396 - (101)
------- ------- ------- -------
$11,371 $11,430 $ 42 $ (101)
======= ======= ======= =======
</TABLE>
11
<PAGE>
2. Available-for-sale Investments (continued)
Short-term available-for-sale investments in the accompanying fiscal 1998
balance sheet represent debt securities with contractual maturities of less than
one year.
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains and losses recorded in the
accompanying statement of income. Gain on sale of investments, net, in the
accompanying fiscal 1998 and 1997 statement of income resulted from gross
realized gains relating to the sale of available-for-sale investments. Gain on
sale of investments, net, in the accompanying fiscal 1996 statement of income
resulted from gross realized gains of $469,000 and gross realized losses of
$18,000 relating to the sale of available-for-sale investments, and a write-down
of other investments of $243,000.
In fiscal 1998, Peek plc ordinary shares acquired in fiscal 1997,
purchased for $2,301,000, were reclassified from long-term available-for-sale
investments and were included in the purchase price for Peek (Note 3).
3. Acquisitions and Dispositions
On November 6, 1997, the Company declared unconditional in all respects
its cash tender offer for the outstanding ordinary shares of Peek. The aggregate
cost to acquire all outstanding Peek ordinary shares, including related
expenses, was $166,736,000. The purchase price includes $2,301,000 that was paid
for shares acquired in fiscal 1997, classified as long-term available-for-sale
investments in the accompanying fiscal 1997 balance sheet. The Company made
final payments for the Peek ordinary shares outstanding in the second quarter of
fiscal 1998. To finance the Peek acquisition, the Company borrowed $160,000,000
from Thermo Electron (Note 10). Peek develops, manufactures, markets, installs,
and services equipment to monitor and regulate traffic flow in cities and towns
around the world.
Subsequent to Peek's acquisition by the Company, the Company sold its
Measurement business to ONIX Systems Inc., a majority-owned subsidiary of Thermo
Instrument Systems Inc., effective November 6, 1997, for $19,117,000 in cash.
Thermo Instrument is a majority-owned subsidiary of Thermo Electron. The
components of the sales price for the Measurement business consisted of the net
tangible book value of the Measurement business, cost in excess of net assets of
acquired company, and the estimated tax liability relating to the sale. The cost
in excess of net assets of acquired company was determined based upon a
percentage of the Company's total cost in excess of net assets of acquired
company associated with its acquisition of Peek, based on the 1997 revenues of
the Measurement business relative to Peek's total 1997 consolidated revenues.
The Measurement business developed and marketed field measurement products.
During fiscal 1998, the Company also sold the stock of Peek Fleetlogic B.V. for
$1,075,000 in cash. The purchase price approximated the book value of the net
assets of Fleetlogic and the Company recorded no gain or loss on the sale. As a
result of the Company's planned divestiture of this business, its operating
losses were recorded as a reduction of previously established accrued
acquisition expenses.
In addition, in March 1998, the Company acquired the assets, subject to
certain liabilities, of Traffic Control Technology, Inc. for $1,299,000 in cash
and, in July 1998, ThermoLyte acquired the outstanding stock of Optronics, Inc.
for $6,662,000 in cash, including the repayment of $1,184,000 of debt. The
Optronics acquisition is subject to a post-closing adjustment. Traffic Control
Technology is a manufacturer of traffic control equipment and Optronics is a
manufacturer of lighting products for the automotive, sporting goods, and marine
markets.
These acquisitions have been accounted for using the purchase method of
accounting, and their results have been included in the accompanying financial
statements from their respective dates of acquisition. The aggregate cost of the
acquisitions exceeded the estimated fair value of the acquired net assets by
$156,766,000, which is being amortized over periods of 15 to 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 Optronics, is subject to
adjustment upon finalization of the purchase price allocation. The Company has
no information that indicates the final purchase price allocation will differ
materially from the preliminary estimates.
12
<PAGE>
3. Acquisitions and Dispositions (continued)
In the first quarter of fiscal 1996, the Company acquired the
thermoelectric cooling module business of ThermoTrex Corporation, a
majority-owned subsidiary of Thermo Electron, for $860,000, which was the net
book value of the business acquired. Because the Company and the thermoelectric
cooling module business were deemed for accounting purposes to be under control
of their common majority owner, Thermo Electron, the transaction has been
accounted for at historical cost in a manner similar to a pooling of interests.
The results of the thermoelectric cooling module business were not material to
the Company's results, and therefore the Company's historical financial
information for periods prior to fiscal 1996 has not been restated. The results
of the thermoelectric cooling module business have been included in the
accompanying financial statements from the date of acquisition.
Based on unaudited data, the following table presents selected financial
information for the Company and Peek on a pro forma basis, assuming the
companies had been combined since the beginning of fiscal 1997. The results of
Peek exclude the results of businesses sold by Peek prior to its acquisition by
the Company and Peek's Measurement business, which was sold to ONIX. 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>
(In thousands except per share amounts) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Revenues $ 263,778 $ 286,533
Income (Loss) from Continuing Operations 2,693 (20,441)
Net Income (Loss) 1,676 (20,628)
Basic and Diluted Earnings (Loss) per Share from Continuing Operations .23 (1.67)
Basic and Diluted Earnings (Loss) per Share .14 (1.69)
</TABLE>
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition of Peek been
made at the beginning of fiscal 1997.
In connection with the acquisition of Peek, the Company has undertaken a
restructuring of the acquired business. In accordance with Emerging Issues Task
Force Pronouncement 95-3, the Company is in the process of completing a plan
that primarily includes reductions in staffing levels, abandonment of excess
facilities, and the sale or closure of certain businesses. All material
components of the plan had been determined by October 3, 1998. In connection
with these restructuring activities, as part of the cost of the acquisition, the
Company established reserves totaling $21,481,000, primarily for acquired loss
contracts at business locations being closed, severance, excess facilities, and
operating losses at Fleetlogic, which was sold in fiscal 1998. During fiscal
1998, the Company expended $10,511,000 of the established reserves, which
consisted principally of $4,690,000 of costs incurred to complete acquired loss
contracts at businesses being closed, $3,934,000 of severance costs, and
$521,000 of operating losses from Fleetlogic. At October 3, 1998, the remaining
reserve for restructuring the Peek businesses was $10,970,000 and is primarily
for estimated costs for the completion of acquired loss contracts at a business
location which the Company intends to close, estimated losses on an acquired
contract at a business location the Company has closed, and, to a lesser extent,
ongoing payments for abandoned facilities and severance.
4. Discontinued Operations
In September 1998, the Company adopted a plan to divest its Engines
segment, which consists of its Crusader Engines division. In accordance with the
provisions of APB No. 30 concerning reporting the effect of disposal of a
segment of a business, the Company has classified the fiscal 1998 results of
operations of the Engines segment, and the results for all prior periods
presented, as discontinued in the accompanying statement of income. Revenues
from the Engines segment were $24,723,000, $30,801,000, and $29,265,000 in
fiscal 1998, 1997, and 1996, respectively. In addition, the net assets of the
Engines segment have been classified as net assets of discontinued operations in
the accompanying fiscal 1998 balance sheet, and primarily consist of
inventories, accounts receivable, and machinery and equipment, net of certain
current liabilities, principally accounts payable. The net assets of the Engines
segment at fiscal year-end 1997 totaled $14,043,000.
13
<PAGE>
4. Discontinued Operations (continued)
In December 1998, the Company completed the sale of the industrial and
marine engine product lines of its Crusader Engines division to two unrelated
third parties. Such sale represents a complete divestiture of the Engines
segment. The aggregate sales price for the two product lines consists of
$6,393,000 in cash, the assumption of certain liabilities of the Crusader
Engines division, and a receivable of $1,035,000. The receivable is due in
December 1999 and is secured by an irrevocable letter of credit. The aggregate
sales price is subject to certain post-closing adjustments as set forth in the
respective agreements. In fiscal 1998, the Company provided $636,000, net of a
tax benefit of $357,000, for the estimated loss on disposal of the Engines
segment. This amount includes $448,000, net of a tax benefit of $252,000, for
estimated losses from operations of the Engines segment through the expected
date of disposition. The estimated loss on disposal of the Engines segment is
included in other accrued expenses in the accompanying fiscal 1998 balance
sheet.
5. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has stock-based compensation plans for its key employees,
directors, and others. The Company's equity incentive plan permits the grant of
a variety of stock and stock-based awards as determined by the human resources
committee of the Company's Board of Directors (the Board Committee), including
restricted stock, stock options, stock bonus shares, or performance-based
shares. To date, only nonqualified stock options have been awarded under these
plans. The option recipients and the terms of options granted under these plans
are determined by the Board Committee. Generally, options granted to date are
exercisable immediately, but are subject to certain transfer restrictions and
the right of the Company to repurchase shares issued upon exercise of the
options at the exercise price, upon certain events. The restrictions and
repurchase rights generally lapse ratably over periods ranging from one to ten
years after the first anniversary of the grant date, depending on the term of
the option, which may range from three to twelve years. Nonqualified stock
options may be granted at any price determined by the Board Committee, although
incentive stock options must be granted at not less than the fair market value
of the Company's stock on the date of grant. To date, all options have been
granted at fair market value. The Company also has a directors' stock option
plan that provides for the grant of stock options in the Company and its
majority-owned subsidiary to outside directors pursuant to a formula approved by
the Company's shareholders. Options in the Company awarded under this plan are
exercisable six months after the date of grant and expire three or seven years
after the date of grant. In addition to the Company's stock-based compensation
plans, certain officers and key employees may also participate in the
stock-based compensation plans of Thermo Electron.
14
<PAGE>
5. Employee Benefit Plans (continued)
A summary of the Company's stock option information is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
------------------ ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- -------- ---------- -------- ---------- --------- ----------
Options Outstanding, Beginning of Year 1,283 $ 9.32 1,342 $ 9.35 1,406 $ 9.24
Granted 550 11.30 68 8.07 12 13.07
Exercised (56) 8.40 (1) 5.45 (40) 6.76
Forfeited (223) 11.32 (126) 9.03 (36) 8.98
---- ----- -----
Options Outstanding, End of Year 1,554 9.77 1,283 $ 9.32 1,342 $ 9.35
===== ====== ===== ====== ===== ======
Options Exercisable 1,554 9.77 1,283 $ 9.32 1,342 $ 9.35
===== ====== ===== ====== ===== ======
Options Available for Grant 226 49 75
==== ===== =====
</TABLE>
A summary of the status of the Company's stock options at October 3, 1998,
is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Options Outstanding and Exercisable
------------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ---------------------------------------------- ------------------- ------------------- --------------------
$ 6.40 - $ 8.34 109 1.9 years $ 7.58
8.35 - 10.27 930 5.9 years 9.13
10.28 - 12.21 508 6.4 years 11.34
12.22 - 14.15 7 3.2 years 13.77
----
$ 6.40 - $14.15 1,554 5.8 years $ 9.77
=====
</TABLE>
Employee Stock Purchase Program
Substantially all of the Company's full-time employees are eligible to
participate in an employee stock purchase program sponsored by the Company and
Thermo Electron. Under this program, shares of the Company's and Thermo
Electron's common stock can 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 are subject to a six-month resale restriction. Beginning in November
1998, shares of the Company's and Thermo Electron's common stock can 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. During fiscal 1998, 1997, and 1996,
the Company issued 7,835 shares, 4,622 shares, and 18,012 shares, respectively,
of its common stock under this program.
15
<PAGE>
5. Employee Benefit Plans (continued)
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards after
fiscal 1995 under the Company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method set forth
under SFAS No. 123, the effect on the Company's net income and earnings per
share would have been as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Income from Continuing Operations:
As reported $3,353 $2,291 $2,074
Pro forma 2,900 2,085 1,904
Basic Earnings per Share from Continuing Operations:
As reported .28 .19 .17
Pro forma .24 .17 .15
Diluted Earnings per Share from Continuing Operations:
As reported .28 .19 .16
Pro forma .24 .17 .15
Net Income:
As reported $2,336 $2,104 $ 885
Pro forma 1,866 1,883 708
Basic and Diluted Earnings per Share:
As reported .20 .17 .07
Pro forma .16 .15 .06
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
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 $4.86,
$3.45, and $4.83 in fiscal 1998, 1997, and 1996, respectively.
The fair value of each option grant was estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Volatility 41% 43% 43%
Risk-free Interest Rate 5.5% 6.0% 5.7%
Expected Life of Options 4.8 years 4.2 years 3.3 years
16
<PAGE>
5. Employee Benefit Plans (continued)
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plan
The majority of the Company's domestic subsidiaries participate in Thermo
Electron's 401(k) savings plan. Contributions to the 401(k) savings plan are
made by both the employee and the Company. Company contributions are based upon
the level of employee contributions. For this plan, the Company contributed and
charged to expense $979,000, $666,000, and $674,000 in fiscal 1998, 1997, and
1996, respectively.
Other Retirement Plans
In addition, the majority of the Company's foreign subsidiaries offer
defined contribution plans. Company contributions to these plans are based on
formulas determined by the Company. For these plans, the Company contributed and
charged to expense $1,094,000 in fiscal 1998. No such plans existed prior to
fiscal 1998.
6. Income Taxes
The components of income from continuing operations before income taxes
and minority interest are as follows:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Domestic $(2,695) $ 4,826 $ 4,158
Foreign 10,553 - -
------- ------- -------
$ 7,858 $ 4,826 $ 4,158
======= ======= =======
The components of the provision for income taxes for continuing operations
are as follows:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Currently Payable (Refundable):
Federal $ (404) $2,159 $1,268
Foreign 4,690 - -
State 167 467 132
------ ------ ------
4,453 2,626 1,400
------ ------ ------
Deferred (Prepaid), Net:
Federal (312) (316) 305
Foreign - - -
State (59) (87) 67
------ ------ ------
(371) (403) 372
------ ------ ------
$4,082 $2,223 $1,772
====== ====== ======
17
<PAGE>
6. Income Taxes (continued)
The total provision (benefit) for income taxes included in the
accompanying statement of income was as follows:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Continuing Operations $4,082 $2,223 $1,772
Discontinued Operations (572) (105) (669)
------ ------ ------
$3,510 $2,118 $1,103
====== ====== ======
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 Company's common stock on the date of exercise. The
provision for income taxes that is currently payable does not reflect $764,000
and $492,000 of such benefits that have been allocated to capital in excess of
par value in fiscal 1997 and 1996, respectively.
The provision for income taxes from continuing operations in the
accompanying statement of income differs from the provision calculated by
applying the statutory federal income tax rate of 34% to income from continuing
operations before income taxes and minority interest due to the following:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Provision for Income Taxes at Statutory Rate $2,672 $1,641 $1,414
Increases (Decreases) Resulting from:
State income taxes, net of federal benefit 71 251 131
Amortization of cost in excess of net assets of acquired 1,287 67 72
companies
Foreign tax rate and tax law differential (21) - -
Losses not benefited 194 258 214
Other (121) 6 (59)
------ ------ ------
$4,082 $2,223 $1,772
====== ====== ======
Prepaid and deferred income taxes in the accompanying balance sheet
consist of the following:
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------- ----------- -----------
Prepaid (Deferred) Income Taxes:
Tax loss carryforwards $ 34,137 $ 444
Reserves and accruals 11,659 2,449
Inventory basis difference 1,205 807
Other 5,588 (114)
-------- ------
52,589 3,586
Less: Valuation allowance 42,477 582
-------- ------
$ 10,112 $3,004
======== ======
18
<PAGE>
6. Income Taxes (continued)
The valuation allowance primarily relates to uncertainty surrounding the
realization of certain tax assets, including $85 million of foreign capital loss
carryforwards and $8 million of federal and state operating loss carryforwards
at October 3, 1998. The foreign capital loss carryforwards do not expire. The
realization of the federal and state operating loss carryforwards is limited to
the future income of certain subsidiaries, and expire from fiscal 1999 through
2013. Any future tax benefits realized on $41,473,000 of the valuation allowance
will be used to reduce cost in excess of net assets of acquired companies. The
increase in the valuation allowance in fiscal 1998 resulted primarily from
preacquisition losses of Peek, acquired November 1997.
A provision has not been made for U.S. or additional foreign taxes on $5.9
million of undistributed earnings of foreign subsidiaries that could be subject
to taxation if remitted to the U.S. because the Company currently plans to keep
these amounts permanently reinvested overseas.
7. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company pays Thermo Electron annually an amount equal to 0.8% of the
Company's revenues. In calendar 1997 and 1996, the Company paid an amount equal
to 1.0% of the Company's revenues. Prior to January 1996, the Company paid an
annual fee equal to 1.2% of the Company's revenues. The annual fee is reviewed
and adjusted annually by mutual agreement of the parties. For these services,
the Company was charged $2,277,000, $1,210,000, and $1,262,000 in fiscal 1998,
1997, and 1996, respectively, including amounts charged relating to discontinued
operations. 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 relationships 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.
Long-term Obligations
During fiscal 1998, the Company borrowed $160.0 million from Thermo
Electron to finance its acquisition of Peek (Note 10).
Revenues
The Company sells products in the ordinary course of business to certain
subsidiaries of Thermo Electron. Sales of such products to related parties
totaled $66,000, $423,000, and $104,000 in fiscal 1998, 1997, and 1996,
respectively.
Other Services
The Company provides contract administration, data processing, and other
services to certain companies affiliated with Thermo Electron. The Company is
reimbursed for costs incurred based on actual usage. For these services, the
Company was reimbursed $127,000, $105,000, and $167,000 in fiscal 1998, 1997,
and 1996, respectively.
19
<PAGE>
7. Related-party Transactions (continued)
Leases
The Company leases an office and laboratory facility from Thermo Electron
under an agreement expiring in 2002. The accompanying statement of income
includes expenses from this operating lease of $326,000 in fiscal 1998, and
$170,000 in fiscal 1997 and 1996. The future minimum payments due under this
operating lease as of October 3, 1998, are $326,000 per year through fiscal
2002. Total future minimum lease payments are $1,304,000.
During fiscal 1998, the Company sublet office and manufacturing space in
the United Kingdom to ONIX Systems pursuant to an arrangement whereby the
Company charges ONIX Systems its allocated share of occupancy expenses. ONIX
Systems has indicated its intention to relocate its operations to a new facility
during fiscal 1999. Pursuant to this arrangement, the Company recorded $166,000
in fiscal 1998 as a reduction in selling, general, and administrative expenses.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
Other Transactions
In May 1997, the Company sold 420,000 shares of common stock of The
Randers Group Incorporated to Thermo TerraTech Inc., a majority-owned subsidiary
of Thermo Electron, for proceeds of $262,000, resulting in a gain of $53,000.
In February 1996, the Company sold $365,000 principal amount of 6.5%
subordinated convertible debentures to an unrelated party for net proceeds of
$490,000, resulting in a gain of $125,000. The debentures were issued by Thermo
TerraTech.
In December 1995, the Company sold 10,969 shares of Thermo Electron common
stock to an unrelated party for net proceeds of $362,000, resulting in a gain of
$344,000.
8. Commitments and Contingency
Commitments
In addition to the lease described in Note 7, the Company leases equipment
and manufacturing, service, and office facilities under various operating
leases. The accompanying statement of income includes expenses from operating
leases of $4,208,000, $1,219,000, and $1,166,000 in fiscal 1998, 1997, and 1996,
respectively. Future minimum payments due under noncancellable operating leases
as of October 3, 1998, are $2,102,000 in fiscal 1999; $1,777,000 in fiscal 2000;
$1,257,000 in fiscal 2001; $1,027,000 in fiscal 2002; $1,020,000 in fiscal 2003;
and $2,568,000 in fiscal 2004 and thereafter. Total future minimum lease
payments are $9,751,000. Future minimum rental income to be received under
noncancellable operating leases as of October 3, 1998, is $392,000 in fiscal
1999.
Contingency
In 1994, a former employee of a divested subsidiary of Peek brought a
wrongful discharge claim against Peek. The claim, which alleges $2.5 million
plus punitive damages, was dismissed on summary judgment in 1996. An appeal is
currently pending. The Company intends to vigorously defend this matter. In the
opinion of management, the ultimate liability for such matter will not be
material to the Company's financial position, but an unfavorable outcome could
materially affect the Company's results of operations or cash flows for a
particular quarter or annual period.
9. Common Stock
At October 3, 1998, the Company had reserved 1,928,775 unissued shares of
its common stock for possible issuance under stock-based compensation plans.
20
<PAGE>
10. Short- and Long-term Obligations
Short-term Obligations
As of October 3, 1998, the Company's foreign subsidiaries had unused lines
of credit totaling approximately $12.0 million. Borrowings under the lines of
credit generally bear interest at variable rates and are payable on demand.
During fiscal 1998, the Company repaid $28,407,000 of short-term
obligations assumed in connection with the Peek acquisition.
Long-term Obligations
To finance the acquisition of Peek, the Company borrowed $160,000,000 from
Thermo Electron pursuant to a promissory note due November 1999, and bearing
interest at the 90-day Commercial Paper Composite Rate plus 25 basis points, set
at the beginning of each quarter, which was 5.73% at October 3, 1998.
The Company assumed a $250,000 mortgage loan in connection with its
acquisition of Optronics. The loan bears interest at a fixed rate of 6% and
matures in fiscal 2007. In addition, at October 3, 1998, long-term obligations
include a $222,000 mortgage loan which matures in fiscal 2001. The interest rate
on this loan is 75% of the prime rate, which was 6.38% at fiscal year-end 1998
and 1997. These obligations are secured by property with a net book value of
$4,969,000.
The annual requirements for long-term obligations are as follows:
(In thousands)
- ------------------------------------------------------------------------------------- ---------- ----------
1999 $ 70
2000 160,073
2001 154
2002 25
2003 25
Thereafter 125
--------
$160,472
========
In addition, in connection with its acquisition of Peek, the Company
assumed capital lease obligations. The carrying amount of the property leased is
$0.5 million, which is included in property, plant, and equipment in the
accompanying balance sheet.
The future minimum lease payments under the lease obligation are as
follows:
(In thousands)
- ------------------------------------------------------------------------------------- ---------- ----------
1999 $ 332
2000 65
2001 42
2002 30
------
469
Less: Amount Representing Interest 46
------
Present Value of Minimum Lease Payments 423
Less: Current Portion 326
------
Long-term Capital Lease Obligation $ 97
======
See Note 11 for information pertaining to the fair value of the Company's
long-term obligations.
21
<PAGE>
11. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, available-for-sale investments, accounts receivable, current
maturities of long-term obligations, accounts payable, common stock of
subsidiary subject to redemption, due to/from parent company and affiliated
companies, long-term obligations, and forward foreign exchange contracts. The
carrying amounts of these financial instruments, with the exception of
available-for-sale investments, long-term obligations, and forward foreign
exchange contracts, approximate fair value due to their short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on quoted
market prices. See Note 2 for fair value information pertaining to these
financial instruments.
The carrying amounts of the Company's long-term obligations, which
approximate fair value, were $160,499,000 and $252,000 at fiscal year-end 1998
and 1997, respectively. The fair value of the Company's long-term obligations
was determined based on borrowing rates available to the Company at the
respective year-ends.
The Company had forward foreign exchange contracts of $942,000 outstanding
at October 3, 1998. The fair value of such contracts was approximately $9,000,
which represents the amount the Company would pay upon termination of the
contract, taking into account the change in foreign exchange rates.
12. Business Segment and Geographical Information, and Concentrations of Risk
The Company's continuing operations are divided into three segments.
Through the Company's Peek subsidiary, acquired November 1997, the Traffic
Control segment develops, manufactures, markets, installs, and services
equipment to monitor and regulate traffic flow in cities and towns around the
world. The Industrial Refrigeration Systems segment develops, manufactures,
markets, services, and rents industrial refrigeration and commercial cooling
equipment. The Cooling and Cogeneration Systems segment develops, manufactures,
markets, and services gas cooling and cogeneration systems, conducts research
and development on advanced power and pollution-control technologies, is
developing and commercializing a family of propane-powered lighting products,
and offers automotive, sporting goods, and marine lighting products.
The results of operations of the Engines segment have been classified as
discontinued operations as a result of the Company's decision to divest this
business (Note 4).
22
<PAGE>
12. Business Segment and Geographical Information, and Concentrations of Risk
(continued)
Information for fiscal 1998, 1997, and 1996, with respect to the Company's
business segments, is shown in the following table.
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------ ---------- ----------- ---------
Business Segment Information
Revenues:
Traffic Control $ 152,368 $ - $ -
Industrial Refrigeration Systems 76,160 74,843 73,312
Cooling and Cogeneration Systems 17,678 17,819 20,477
Intersegment sales elimination (a) (514) (781) (731)
--------- -------- ---------
$ 245,692 $ 91,881 $ 93,058
========= ======== =========
Income from Continuing Operations Before Income Taxes and Minority
Interest:
Traffic Control $ 11,635 $ - $ -
Industrial Refrigeration Systems 6,782 5,331 4,403
Cooling and Cogeneration Systems (269) (647) 122
Corporate (b) (3,233) (1,722) (2,263)
--------- -------- ---------
Total operating income 14,915 2,962 2,262
Interest and other income (expense), net (7,057) 1,864 1,896
--------- -------- ---------
$ 7,858 $ 4,826 $ 4,158
========= ======== =========
Identifiable Assets:
Traffic Control $ 261,671 $ - $ -
Industrial Refrigeration Systems 51,895 52,157 52,707
Cooling and Cogeneration Systems 21,254 22,178 22,953
Corporate (c) 8,290 17,129 21,134
Discontinued operations (d) 8,525 16,528 13,917
--------- -------- ---------
$ 351,635 $107,992 $ 110,711
========= ======== =========
Depreciation and Amortization:
Traffic Control $ 6,949 $ - $ -
Industrial Refrigeration Systems 3,111 2,606 2,501
Cooling and Cogeneration Systems 341 198 214
Corporate 76 33 23
--------- -------- ---------
$ 10,477 $ 2,837 $ 2,738
========= ======== =========
Capital Expenditures:
Traffic Control $ 4,204 $ - $ -
Industrial Refrigeration Systems 3,974 4,558 6,959
Cooling and Cogeneration Systems 559 382 240
Corporate 294 29 34
--------- -------- ---------
$ 9,031 $ 4,969 $ 7,233
========= ======== =========
</TABLE>
23
<PAGE>
12. Business Segment and Geographical Information, and Concentrations of Risk
(continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Geographical Information
Revenues:
United States $ 137,250 $ 91,881 $ 93,058
The Netherlands 42,468 - -
United Kingdom 40,024 - -
Other Europe 31,364 - -
Other 1,677 - -
Transfers among geographic areas (a) (7,091) - -
--------- -------- ---------
$ 245,692 $ 91,881 $ 93,058
========= ======== =========
Income from Continuing Operations Before Income Taxes and Minority
Interest:
United States $ 6,959 $ 4,684 $ 4,525
The Netherlands 9,292 - -
United Kingdom (1,201) - -
Other Europe 3,172 - -
Other (74) - -
Corporate (b) (3,233) (1,722) (2,263)
--------- -------- ---------
Total operating income 14,915 2,962 2,262
Interest and other income (expense), net (7,057) 1,864 1,896
--------- -------- ---------
$ 7,858 $ 4,826 $ 4,158
========= ======== =========
Identifiable Assets:
United States $ 139,148 $ 74,335 $ 75,660
The Netherlands 68,623 - -
United Kingdom 75,102 - -
Other Europe 47,995 - -
Other 3,952 - -
Corporate (c) 8,290 17,129 21,134
Discontinued operations (d) 8,525 16,528 13,917
--------- -------- ---------
$ 351,635 $107,992 $ 110,711
========= ======== =========
Export Revenues Included in United States Revenue Above (e):
Asia $ 10,626 $ 16,430 $ 7,821
Other 8,183 4,271 6,054
--------- -------- ---------
$ 18,809 $ 20,701 $ 13,875
========= ======== =========
(a) Intersegment sales and transfers among geographic areas are accounted for at
prices that are representative of transactions with unaffiliated parties.
(b) Primarily corporate general and administrative expenses.
(c) Primarily cash, cash equivalents, and available-for-sale investments.
(d) Net of liabilities at October 3, 1998.
(e) In general, export revenues are denominated in U.S. dollars.
24
<PAGE>
12. Business Segment and Geographical Information, and Concentrations of Risk
(continued)
Sales to governmental entities accounted for 26% of the Company's total
revenues in fiscal 1998, of which 92% related to sales to foreign governmental
entities. Sales to governmental entities related principally to the Traffic
Control segment and represented 39% of its revenues in fiscal 1998. A decrease
in sales to governmental entities could have an adverse effect on the Company's
business and future results of operations.
13. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Income from Continuing Operations $ 3,353 $ 2,291 $ 2,074
Loss from Discontinued Operations (381) (187) (1,189)
Provision for Loss on Disposal of Discontinued Operations (636) - -
------- ------- -------
Net Income $ 2,336 $ 2,104 $ 885
------- ------- -------
Basic
Weighted Average Shares 11,838 12,212 12,466
------- ------- -------
Basic Earnings (Loss) per Share:
Continuing operations $ .28 $ .19 $ .17
Discontinued operations (.08) (.02) (.10)
------- ------- -------
$ .20 $ .17 $ .07
======= ======= =======
Diluted
Weighted Average Shares 11,838 12,212 12,466
Effect of Stock Options 70 6 241
------- ------- -------
Weighted Average Shares, as Adjusted 11,908 12,218 12,707
------- ------- -------
Diluted Earnings (Loss) per Share:
Continuing operations $ .28 $ .19 $ .16
Discontinued operations (.08) (.02) (.09)
------- ------- -------
$ .20 $ .17 $ .07
======= ======= =======
</TABLE>
The computation of diluted earnings per share excludes the effect of
assuming the exercise of certain stock options because the effect would be
antidilutive. As of October 3, 1998, there were 1,336,499 such options
outstanding, with exercise prices ranging from $8.92 to $14.15 per share.
25
<PAGE>
14. Proposed Reorganization
On August 12, 1998, Thermo Electron announced a proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company. As
part of this reorganization, Thermo Electron announced that the Company may be
taken private and become a wholly owned subsidiary of Thermo Electron. It is
currently contemplated that the Company's shareholders would receive cash in
exchange for their shares of common stock of the Company. The completion of this
transaction is subject to numerous conditions, including the establishment of
the price; the approval of the Board of Directors of Thermo Electron; the
negotiation and execution of a definitive purchase and sale or merger agreement;
the receipt of a fairness opinion from an investment banking firm that the
transaction is fair to the Company's shareholders (other than Thermo Electron)
from a financial point of view; the approval of the Company's Board of
Directors, including its independent directors; and clearance by the Securities
and Exchange Commission of any necessary documents regarding the proposed
transaction.
15. Unaudited Quarterly Information
(In thousands except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1998 First (a) Second Third Fourth (b)
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
Revenues $58,696 $62,005 $58,345 $ $ 66,646
Gross Profit 17,913 16,231 19,020 20,473
Income (Loss) from Continuing Operations 1,280 (1,134) 1,350 1,857
Net Income (Loss) 1,055 (1,288) 1,391 1,178
Basic and Diluted Earnings (Loss) per Share from .11 (.10) .11 .16
Continuing Operations
Basic and Diluted Earnings (Loss) per Share .09 (.11) .12 .10
1997 First Second Third Fourth
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
Revenues $23,547 $21,322 $24,919 $ 22,093
Gross Profit 4,092 4,673 4,976 5,415
Income from Continuing Operations 325 388 633 945
Net Income 4 375 716 1,009
Basic and Diluted Earnings per Share from Continuing .03 .03 .05 .08
Operations
Basic and Diluted Earnings per Share - .03 .06 .08
(a) Reflects the November 1997 acquisition of Peek plc and borrowings to finance
such acquisition. (b) Reflects provision for loss on disposal of discontinued
operations, net of tax, of $636,000.
</TABLE>
16. Subsequent Event
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 179,085 shares at a weighted average exercise price of $11.08 elected to
participate in this exchange and, as a result, received options to purchase
89,543 shares of Company common stock at $8.09 per share. 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.
26
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Power Corporation:
We have audited the accompanying consolidated balance sheet of Thermo
Power Corporation (a Massachusetts corporation and 79%-owned subsidiary of
Thermo Electron Corporation) and subsidiaries as of October 3, 1998, and
September 27, 1997, and the related consolidated statements of income,
shareholders' investment, and cash flows for each of the three years in the
period ended October 3, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermo Power
Corporation and subsidiaries as of October 3, 1998, and September 27, 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended October 3, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts November 9, 1998 (except with respect to certain matters
discussed in Notes 4 and 16, as to which the date is December 18, 1998)
27
<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 Condition and Results of Operation under
the heading "Forward-looking Statements."
Overview
The Company's continuing operations are divided into three segments:
Traffic Control, Industrial Refrigeration Systems, and Cooling and Cogeneration
Systems. Through the Company's Peek subsidiary, acquired November 1997, the
Traffic Control segment develops, manufactures, markets, installs, and services
equipment to monitor and regulate traffic flow in cities and towns around the
world. Peek offers a wide range of products, including hardware, such as vehicle
detectors, counters, classifiers, traffic signals and controllers, video
cameras, and variable message signs, as well as traffic management systems that
integrate these products to ease roadway congestion, improve safety, and collect
data. Traffic management systems include variable message systems to advise
drivers of accidents and other roadway hazards, traffic signal-timing systems
that adapt continuously to changing conditions to minimize delays, parking
guidance systems, and public transportation-management systems that give buses
priority at intersections. The Company also offers high-resolution video
equipment to aid police officers in capturing the information necessary to
charge individuals with motor vehicle violations such as speeding and red light
violations.
Sales to governmental entities accounted for 26% of the Company's total
revenues in fiscal 1998, of which 92% related to sales to foreign governmental
entities. Sales to governmental entities related principally to the Traffic
Control segment and represented 39% of its revenues in fiscal 1998. A decrease
in sales to governmental entities could have an adverse effect on the Company's
business and future results of operations.
The quarterly revenues and income of the Traffic Control segment fluctuate
significantly based on funding patterns of governmental entities and
seasonality. As a result of these factors, Peek has historically experienced
higher sales and income in the first and third fiscal quarters and lower sales
and income in the second and fourth fiscal quarters. Additionally, a portion of
the Traffic Control segment's revenues result from the sale of large systems,
the timing of which can lead to variability in the Company's quarterly revenues
and income.
In fiscal 1998, approximately 44% of the Company's revenues originated
outside the U.S., principally in Europe, and approximately 8% of the Company's
revenues were exports from the U.S. Foreign divisions and subsidiaries
principally sell in their local currencies and generally seek to charge their
customers in the same currency as their operating costs. However, the Company's
financial performance and competitive position can be affected by currency
exchange rate fluctuations affecting the relationship between the U.S. dollar
and foreign currencies. The Company seeks to reduce its exposure to currency
fluctuations through the use of forward contracts. Since the operations of the
Traffic Control segment are conducted principally in Europe, the Company's
operating results could be adversely affected by capital spending levels and
economic conditions in Europe. In addition, the Company's results of operations
could be adversely affected by possible costs related to the Euro currency's
introduction beginning January 1, 1999.
Through the Company's FES division, the Industrial Refrigeration Systems
segment supplies standard and custom-designed industrial refrigeration systems
used primarily by the food-processing, chemical, petrochemical, and
pharmaceutical industries. NuTemp, Inc. is a supplier of rental cooling and
industrial refrigeration equipment. The Company also offers custom-made and
remanufactured equipment for sale. NuTemp's industrial refrigeration equipment
is used primarily in the food-processing, chemical, petrochemical, and
pharmaceutical industries, and its commercial cooling equipment is used
primarily in institutions and commercial buildings, as well as by service
contractors. The demand for NuTemp's equipment is highest in the summer months
and can be adversely affected by cool summer weather.
28
<PAGE>
Overview (continued)
The Cooling and Cogeneration Systems segment consists of the Company's
Tecogen division and the Company's ThermoLyte Corporation subsidiary. Tecogen
develops, markets, and services preassembled cooling and cogeneration systems
fueled principally by natural gas for sale to a wide range of commercial,
institutional, industrial, and multi-unit residential users. Certain
large-capacity cooling systems are manufactured for Tecogen by FES. Tecogen also
conducts research and development on natural gas-engine technology, applications
of thermal energy, and pollution-control technologies. ThermoLyte is developing
and commercializing various propane-powered lighting products. In July 1998,
ThermoLyte acquired the outstanding stock of Optronics, Inc. Optronics makes
over 400 lighting and associated products, including tail-lights and turn-signal
lights for trailers, portable lights for fishing and hunting, and docking
lights, and serves the automotive, sporting goods, and marine markets.
Results of Operations
Fiscal 1998 Compared With Fiscal 1997
Total revenues increased to $245.7 million in fiscal 1998 from $91.9
million in fiscal 1997, primarily due to the acquisition of Peek in November
1997, which contributed $152.4 million of revenues in fiscal 1998. Industrial
Refrigeration Systems segment revenues increased to $76.2 million in fiscal 1998
from $74.8 million in fiscal 1997, primarily due to increased demand at FES.
Cooling and Cogeneration Systems segment revenues were relatively unchanged at
$17.7 million in fiscal 1998 and $17.8 million in fiscal 1997. A decrease in
revenues from gas-fueled cooling systems was substantially offset by the
inclusion of $2.3 million of revenues from Optronics, acquired in July 1998.
Peek's backlog decreased to $50.7 million at October 3, 1998, from $64.4
million at the date of acquisition, excluding backlog of businesses sold and
divested. The $13.7 million decrease in backlog occurred principally in the
Netherlands and United Kingdom, and was primarily due to a decrease in orders
from foreign governmental entities as a result of a reduction in funding
allocated by those entities to traffic control projects. The decrease in backlog
at Peek was substantially offset by an aggregate increase in backlog at the
Company's other businesses totaling $12.2 million.
The gross profit margin increased to 30% in fiscal 1998 from 21% in fiscal
1997, primarily due to a 34% gross profit margin at Peek. The gross profit
margin for the Industrial Refrigeration Systems segment increased to 23% in
fiscal 1998 from 21% in fiscal 1997, primarily due to manufacturing efficiencies
and lower warranty expenses at FES, and an increase in higher-margin rental
revenues at NuTemp. The gross profit margin for the Cooling and Cogeneration
Systems segment increased to 21% in fiscal 1998 from 19% in fiscal 1997,
primarily due to the inclusion of higher-margin revenues at Optronics.
Selling, general, and administrative expenses as a percentage of revenues
increased to 21% in fiscal 1998 from 16% in fiscal 1997, principally due to
amortization expense related to the excess cost over acquired net assets of Peek
and relatively higher selling, general, and administrative expenses as a
percentage of revenues at Peek. Research and development expenses increased to
$7.9 million in fiscal 1998 from $1.9 million in fiscal 1997, due to the
inclusion of $6.4 million of research and development expenses at Peek.
Interest income increased to $1.9 million in fiscal 1998 from $1.8 million
in fiscal 1997, principally due to an increase in average invested balances.
Interest expense increased by $9.0 million in fiscal 1998 due to borrowings from
Thermo Electron to finance the acquisition of Peek (Note 10) and the inclusion
of $0.8 million of interest expense at Peek.
The effective tax rate increased to 52% in fiscal 1998 from 46% in fiscal
1997. The effective tax rate for fiscal 1998 exceeded the statutory federal
income tax rate primarily due to the impact of nondeductible amortization of
cost in excess of net assets of acquired companies on the Company's pretax
income. The effective tax rate for fiscal 1997 exceeded the statutory federal
income tax rate primarily due to an increase in the valuation allowance for net
operating loss carryforwards and other tax assets of the Company's ThermoLyte
subsidiary, and the impact of state income taxes. The effective tax rate
increased from fiscal 1997 to fiscal 1998 principally due to the relative impact
of nondeductible amortization of cost in excess of net assets of acquired
companies relating to the Peek acquisition.
29
<PAGE>
Fiscal 1998 Compared With Fiscal 1997 (continued)
Minority interest expense increased to $0.4 million in fiscal 1998 from
$0.3 million in fiscal 1997 due to minority interest expense on Peek's earnings
relating to Peek shares tendered after November 6, 1997, through January 16,
1998. As of January 16, 1998, the Company had acquired all of the Peek
outstanding ordinary shares.
The results of operations of the Engines segment have been classified as
discontinued operations as a result of the Company's decision to divest this
business (Note 4). The loss from discontinued operations was $0.4 million in
fiscal 1998 and $0.2 million in fiscal 1997. In addition, in fiscal 1998, the
Company provided $0.6 million, net of tax, for the estimated loss on disposal of
discontinued operations, which includes a provision for estimated losses from
operations through the expected date of disposition. The Company completed the
divestiture of the Engines segment in December 1998 in the form of a sale of the
assets of the segment's two product lines.
Fiscal 1997 Compared With Fiscal 1996
Total revenues were $91.9 million in fiscal 1997 and $93.1 million in
fiscal 1996. Industrial Refrigeration Systems segment revenues increased to
$74.8 million in fiscal 1997 from $73.3 million in fiscal 1996, primarily due to
greater demand for custom-designed industrial refrigeration packages and product
services at FES and, to a lesser extent, increased demand for rental equipment
at NuTemp. These improvements were offset in part by a decrease in demand for
standard industrial refrigeration packages at FES. Cooling and Cogeneration
Systems segment revenues were $17.8 million in fiscal 1997, compared with $20.5
million in fiscal 1996. Decreased revenues from sponsored research and
development, gas-fueled cooling systems, and thermoelectric devices were offset
in part by increased service revenues in fiscal 1997.
The gross profit margin increased to 21% in fiscal 1997 from 20% in fiscal
1996. The gross profit margin for the Industrial Refrigeration Systems segment
increased to 21% in fiscal 1997 from 20% in fiscal 1996, primarily due to higher
margins at FES, resulting from lower warranty expenses, manufacturing
efficiencies, and a decrease in the cost of a major component, and higher
margins at NuTemp resulting from increased revenues. FES experienced a cost
increase for a major component in fiscal 1996, for which the Company had begun
receiving deliveries from an additional supplier at a lower cost. The gross
profit margin for the Cooling and Cogeneration Systems segment decreased to 19%
in fiscal 1997 from 22% in fiscal 1996, primarily due to lower revenues and
higher warranty expenses for gas-fueled cooling systems.
Selling, general, and administrative expenses as a percentage of revenues
increased to 16% in fiscal 1997 from 15% in fiscal 1996, primarily due to an
increase in marketing expenses associated with the introduction of the Company's
propane-powered lighting products. Research and development expenses decreased
to $1.9 million in fiscal 1997 from $2.6 million in fiscal 1996, primarily due
to lower spending on natural gas-engine products and propane-powered lighting
products, primarily due to the completion of a phase of development efforts for
these products.
Net gain on sale of investments in fiscal 1996 primarily represents a gain
of $344,000 relating to the sale of the Company's remaining investment in Thermo
Electron common stock and a gain of $125,000 relating to the sale of the
Company's remaining investment in subordinated convertible debentures issued by
Thermo TerraTech, a majority-owned subsidiary of Thermo Electron (Note 7). These
gains were largely offset by a write-down of other investments.
The effective tax rate increased to 46% in fiscal 1997 from 43% in fiscal
1996. These rates exceeded the statutory federal income tax rate primarily due
to the impact of an increase, in both periods, in the valuation allowance for
net operating loss carryforwards and other tax assets of the Company's
ThermoLyte subsidiary, and the impact of state income taxes. The effective tax
rate increased in fiscal 1997 from fiscal 1996 primarily due to the larger
impact of the increase in the valuation allowance on ThermoLyte tax assets
relative to income for continuing operations.
The loss from discontinued operations decreased to $0.2 million in fiscal
1997 from $1.2 million in fiscal 1996, principally as a result of increased
revenues from lift-truck and TecoDrive(R) engine sales and margin improvement as
a result of a reduction in warranty expenses and lower overhead expenses,
resulting primarily from the consolidation of facilities.
30
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $35.8 million at October 3, 1998,
compared with $54.7 million at September 27, 1997. Included in working capital
are cash, cash equivalents, and available-for-sale investments of $26.3 million
at October 3, 1998, compared with $28.5 million at September 27, 1997. Of the
$26.3 million balance at October 3, 1998, $7.1 million was held by ThermoLyte,
and the remainder was held by the Company and its wholly owned subsidiaries. At
October 3, 1998, $8.3 million of the Company's cash and cash equivalents was
held by its foreign subsidiaries. While this cash can be used outside of the
United States, repatriation of this cash into the United States would be subject
to a United States tax. Additionally, working capital at October 3, 1998, was
reduced by common stock of subsidiary subject to redemption of $18.4 million,
which represents ThermoLyte's common stock and is redeemable at the option of
the holder in December 1998 or December 1999, for a total redemption value of
$18.5 million.
During fiscal 1998, $9.3 million of cash was provided by operating
activities, which consisted of $3.6 million provided by continuing operations
and $5.7 million provided by discontinued operations. Cash provided by
continuing operations was reduced by a decrease in accounts payable of $3.7
million, principally at Peek due to the timing of payments, and a decrease in
other current liabilities of $8.8 million, principally at Peek due to a
reduction in accrued acquisition expenses (Note 3). Cash flow provided by
continuing operations was improved by a decrease in accounts receivable of $5.0
million, primarily due to a decrease at Peek, as well as the timing of billings
on percentage-of-completion contracts. In addition, $5.7 million of cash was
provided by discontinued operations principally as a result of efforts to reduce
working capital at that business.
During fiscal 1998, the primary investing activities, excluding
available-for-sale investments activity, included acquisitions for $156.8
million in cash, net of cash acquired, and dispositions for $20.2 million in
cash (Note 3). The Company also expended $9.0 million for purchases of property,
plant, and equipment and rental assets, and received $3.4 million in proceeds
from the sale of property, plant, and equipment and rental assets. In fiscal
1999, the Company expects to make capital expenditures for the purchase of
property, plant, and equipment and rental assets of approximately $9 million.
In December 1998, the Company completed the sale of its industrial and
marine engine product lines of its Crusader Engines division, classified as
discontinued operations in the accompanying financial statements, for $6.4
million in cash, the assumption of certain liabilities, and a receivable of $1.0
million (Note 4). The receivable is due in December 1999 and is secured by an
irrevocable letter of credit. The aggregate sales price is subject to certain
post-closing adjustments. In addition, in December 1998, the Company acquired
the assets, subject to certain liabilities, of Linne Trafiksystem AB, a
subsidiary of LinneData, for approximately $1.6 million in cash. The purchase
price is subject to a post-closing adjustment. Linne Trafiksystem is located in
Sweden and develops specialized public transportation systems.
The Company's financing activities, all of which related to continuing
operations, provided $130.7 million of cash in fiscal 1998. The Company borrowed
$160.0 million from Thermo Electron to finance the acquisition of Peek and used
$28.3 million to fund a decrease in short-term borrowings (Note 10). In
addition, the Company expended $1.4 million of cash to purchase its common stock
pursuant to an authorization by its Board of Directors. At October 3, 1998, the
Company has no remaining authorizations to purchase Company common stock.
The Company's $160.0 million promissory note to Thermo Electron is due in
November 1999. Thermo Electron has indicated that it intends to refinance the
promissory note, on its maturity date, with the net proceeds from its October
1998 offering of 7.625% Notes due 2008, and other available cash. The new
promissory note from the Company to Thermo Electron would be due in 2008 and
bear interest at a rate of 7.625%. In addition, ThermoLyte's common stock is
subject to redemption at the option of the holder in December 1998 or December
1999, for a total redemption value of $18.5 million. The Company's Board of
Directors has authorized additional borrowings of up to $10 million from Thermo
Electron to fund working capital requirements. The Company believes its existing
resources, together with the funding expected from Thermo Electron as described
above, are sufficient to meet the capital requirements of its existing
operations for the foreseeable future.
31
<PAGE>
Market Risk
The Company is exposed to market risk from changes in foreign currency
exchange rates and interest 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 exchange rates.
The Company's forward foreign exchange contracts principally hedge transactions
denominated in Dutch guilders. Gains and losses arising from forward contracts
are recognized as offsets to gains and losses resulting from the transactions
being hedged.
The Company does not enter into speculative foreign currency agreements.
Foreign Currency Exchange Rates
The fair value of forward foreign exchange contracts is sensitive to
changes in foreign currency exchange rates. The fair value of forward foreign
exchange contracts is the estimated amount that the Company would pay or receive
upon termination of the contract, taking into account the change in foreign
exchange rates. A 10% depreciation in fiscal year-end 1998 foreign currency
exchange rates related to the Company's contracts would result in an increase in
the unrealized loss on forward foreign exchange contracts of $0.1 million. Since
the Company uses forward foreign exchange contracts as hedges of firm purchase
and sale commitments, the unrealized gain or loss on forward foreign currency
exchange contracts resulting from changes in foreign currency exchange rates
would be offset by a corresponding change in the fair value of the hedged item.
The Company generally views its investment in foreign subsidiaries with a
functional currency other than the Company's reporting currency as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in British pounds sterling,
Dutch guilders, Swiss francs, Norwegian kroner, Danish kroner, and Finnish
markkaa. The effect of a change in foreign exchange rates on the Company's net
investment in foreign subsidiaries is recorded as a separate component of
shareholders' investment. A 10% depreciation in 1998 functional currencies,
relative to the U.S. dollar, would result in a $7.1 million reduction of
shareholders' investment.
Interest Rates
The Company's cash and cash equivalents and certain long-term obligations
are sensitive to changes in interest rates. Interest rate changes would result
in a change in interest income and expense due to the difference between the
current interest rates on these financial instruments and the variable rate that
these financial instruments may adjust to in the future. A 10% increase in
fiscal year-end 1998 interest rates would result in a negative impact of $0.5
million on the Company's net income.
32
<PAGE>
Year 2000
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 internal business
systems and facilities; (ii) testing and developing necessary upgrades for the
Company's current products and certain discontinued products; (iii) contacting
key suppliers, vendors, and customers to determine their year 2000 compliance
status; and (iv) developing a contingency plan.
The Company's State of Readiness
The Company has tested and evaluated its critical information-technology
systems for year 2000 compliance, including its significant computer systems,
software applications, and related equipment. The Company is currently in the
process of upgrading or replacing its noncompliant systems. The Company expects
that all of its material information-technology systems will be year 2000
compliant by the end of 1999. The Company is also evaluating the potential year
2000 impact on its facilities, including its buildings and utility systems. Any
problems that are identified will be prioritized and remediated based on their
assigned priority. The Company will continue periodic testing of its critical
internal business systems and facilities in an effort to minimize operating
disruptions due to year 2000 issues.
The Company believes that all of the material products that it currently
sells are year 2000 compliant. However, as many of the Company's products are
complex, interact with 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 and may offer upgrades or alternative
products where reasonably practicable.
The Company is in the process of identifying and contacting suppliers,
vendors, and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company has developed and is distributing questionnaires
relating to year 2000 compliance to its significant suppliers, vendors, and
customers. The Company intends to follow-up and monitor the year 2000 compliant
progress of significant suppliers, vendors, and customers that indicate that
they are not year 2000 compliant or that do not respond to the Company's
questionnaires.
Contingency Plan
The Company intends to develop 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, vendors, and
customers, it will modify and adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred expenses related to year 2000 issues of
approximately $1.2 million as of October 3, 1998, and the total cost of year
2000 remediation is expected to be approximately $2.3 million. Of the costs
incurred as of October 3, 1998, approximately $0.6 million was spent on testing
and upgrading internal business systems and facilities and approximately $0.6
million was spent on evaluating and upgrading products. The Company does not
track the internal costs incurred for its year 2000 compliance project. Such
costs are principally the related payroll costs for its information systems
group.
33
<PAGE>
Year 2000 (continued)
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, vendors, or customers 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. 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.
34
<PAGE>
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in fiscal 1999 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Company.
Reliance on Sales to Governmental Entities. Sales to governmental entities
accounted for 26% of the Company's total revenues in fiscal 1998, of which 92%
related to sales to foreign governmental entities. Sales to governmental
entities related principally to the Traffic Control segment and represented 39%
of its revenues in fiscal 1998. The Company continues to focus its marketing of
its Traffic Control segment's products and services on various governmental
entities, including the U.S. Federal Highway Administration and comparable
overseas agencies, regional counties of governments, state and city traffic
engineers, public transit authorities, public toll operators, law enforcement
agencies, and tunnel and bridge authorities. Any decrease in purchases by these
government bodies, including, without limitation, decreases as the result of a
shift in priorities or overall budgeting limitations, could have an adverse
effect on the Company's business, financial condition, and results of
operations. Peek's backlog decreased $13.7 million from the date of acquisition
to October 3, 1998. The decrease in backlog occurred principally in the
Netherlands and United Kingdom, and was primarily due to a decrease in orders
from foreign governmental entities as a result of a reduction in funding
allocated by those entities to traffic control projects. Sales of the Company's
Traffic Control segment's products and services in the United States are largely
dependent on federal funding of transportation projects, such as appropriations
and allocations to states under the Transportation Equity Act for the 21st
Century. Contracts with governmental entities often permit the purchaser to
cancel the agreement at any time. Cancellation of a significant contract could
also result in a material adverse effect on the Company's business and future
results of operations.
Customized Contracts. A significant portion of the Company's contracts for
traffic control systems require the development and integration of customized
products for a fixed fee. Due to the complexity of the Company's traffic control
systems, the Company may experience delays from time to time in developing,
manufacturing, and installing such systems. In addition, the Company may incur
substantial unanticipated costs that cannot be passed on to the customer. The
Company's inability to deliver customized systems in a timely manner and within
budget could result in a material adverse affect on the Company' business,
financial condition, and results of operations.
Competition. The market for traffic products and services is extremely
competitive, and the Company expects that competition will continue to increase.
The Company believes that the principal competitive factors in the traffic
industry are price, functionality, reliability, service and support, and vendor
and product reputation. The Company believes that its ability to compete
successfully will depend on a number of factors both within and outside its
control, including the pricing policies of its competitors and suppliers, the
timing and quality of products introduced by the Company and others, the
Company's ability to maintain a strong reputation in the traffic industry, and
industry and general economic trends. In the traffic market, the Company
currently competes with companies with greater financial resources and name
recognition. The introduction by one of these competitors or a new competitor of
a technologically superior product would have a material adverse effect on the
Company's business, financial condition, and results of operations. There can be
no assurance that the Company will be able to compete successfully with existing
or new competitors.
The Company encounters and expects to continue to encounter intense
competition for the sale of its cooling and cogeneration products. The Company's
products are subject to competition from absorption air conditioning systems and
electric motor-driven vapor compressor systems, as well as other natural
gas-fueled engine-driven cooling systems. Although the Company has a proprietary
position with respect to certain features of its products, the core technologies
relating to its cooling and cogeneration products are mature and available to
other companies. A number of companies, including companies with greater
financial resources than those of the Company, offer products that compete with
those offered by the Company, and there can be no assurance that other companies
will not develop competitive products. In addition, electric utility pricing
programs provide competition for the Company's cooling and cogeneration
products.
35
<PAGE>
The Company's sale of industrial refrigeration systems is subject to
intense competition. The industrial refrigeration market is mature, highly
fragmented, and extremely dependent on close customer contacts. There can be no
assurance that the Company will be able to continue to successfully compete in
the worldwide industrial refrigeration market, which is characterized by strong
local manufacturers.
Transition of Product Focus; Dependence on New Products. From its
inception through November 1997, the Company derived a substantial majority of
its revenues from development and commercialization of power generation,
refrigeration and cooling, engine, and related products. While power generation
and refrigeration and cooling products are expected to continue to generate a
significant amount of the Company's revenues for the foreseeable future, a
substantial portion of the Company's revenues are now derived from the sale of
electronics and associated hardware and software for the traffic industry, as
well as from providing integration services for such electronics, hardware, and
software, through the Company's Peek subsidiary. A substantial portion of the
Company's efforts, particularly its product development and marketing efforts,
is now focused on the traffic market. Prior to the Peek acquisition, the Company
had no prior experience in the traffic industry, and there can be no assurance
that the Company will be able to successfully market and sell Peek's products
and services. The Company's future success will depend significantly on its
ability to develop, introduce, and integrate new products in the traffic market
and to continue to improve the performance, features, and reliability of Peek's
current products. In order for Peek to achieve the level of profitability
desired by the Company, the Company must successfully reduce Peek's expenses and
improve market penetration. No assurance can be given that the Company will be
successful in this regard. Any failure or inability of the Company's traffic
products to perform substantially as anticipated or to achieve market acceptance
would have a material adverse effect on the Company's business, financial
condition, and results of operations.
Risks Associated with International Operations. The Company intends to
continue to expand its presence in international markets. In fiscal 1998,
approximately 44% of the Company's revenues originated outside the U.S.,
principally in Europe, and approximately 8% of the Company's revenues were
exports from the U.S. International revenues are subject to a number of risks,
including the following: 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; agreements may be
difficult to enforce and receivables difficult to collect through a foreign
country's legal system; foreign customers may have longer payment cycles;
foreign countries may impose additional withholding taxes or otherwise tax the
Company's foreign income, impose tariffs, or adopt other restrictions on foreign
trade; U.S. export licenses, if required, may be difficult to obtain; the
protection of intellectual property in foreign countries may be more difficult
to enforce; and the Company may incur costs related to the Euro currency's
introduction beginning January 1, 1999. There can be no assurance that any of
these factors will not have a material adverse impact on the Company's business,
financial condition, and results of operations.
The Company has recently made an effort to expand its traffic control
business in Asia. However, Asia is currently experiencing a severe economic
crisis, which has been characterized by sharply reduced economic activity and
liquidity, highly volatile foreign currency exchange and interests rates, and
unstable stock markets. In fiscal 1998, the Company discontinued certain
operations located in Asia. The economic crisis in Asia may adversely affect the
Company's ability to expand its Traffic Control business.
Ability to Manage Change. In November 1997, the Company acquired Peek plc,
a public company in the United Kingdom, which currently has more than 1,100
employees located principally in Europe and the United States, and had revenues
in fiscal 1998, from the date of its acquisition, of $152.4 million. This
acquisition has resulted in new and increased responsibilities for the Company's
administrative, operational, development, and financial personnel. In order to
manage the Company's changing business, Peek's management and other employees
must be assimilated into the Company's existing operations. There can be no
assurance that the Company will be successful in retaining Peek's key employees
and integrating them into the Company. The Company's success depends to a
significant extent on the ability of its officers and key employees to operate
effectively, both independently and as a group, and this ability may
36
<PAGE>
be impeded by the Company's rapid geographic expansion, potential disruption of
the Company's business, and diversion of management's attention from other
business concerns due to the Peek acquisition. In addition, there can be no
assurance that the Company's systems, procedures, and controls will be adequate
to support the significant expansion of the Company's operations. Any failure of
the Company's management to manage change effectively could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Significant Quarterly Fluctuations in Operating Results. The quarterly
revenues and income of the Company's Traffic Control segment fluctuate
significantly based on funding patterns of governmental entities as well as
seasonality. As a result of these factors, Peek has historically experienced
higher sales and income in the first and third fiscal quarters and lower sales
and net income in the second and fourth fiscal quarters. A portion of the
Traffic Control segment's revenues result from the sale of large systems, the
timing of which can lead to variability in the Company's quarterly revenues and
income. In addition, the demand for the Company's NuTemp subsidiary's equipment
is typically highest in the summer period and can be adversely affected by cool
summer weather.
Dependence of Markets on Government Regulation. The Public Utility
Regulatory Policies Act of 1978 (PURPA) and state laws and regulations
implementing PURPA prohibit discrimination by electric utilities against
cogeneration providers and require utilities to purchase co-generated
electricity under certain conditions. Under these regulations, certain classes
of facilities are exempt from the provisions of the Public Utility Holding
Company Act, as well as many state laws and regulations regarding the setting of
electricity rates and the financial and organizational regulation of electric
utilities, and certain provisions of the Federal Power Act. Because the
Company's current customers typically do not sell power to electric utilities,
the Company does not rely to a significant extent on the provisions of PURPA
that require utilities to purchase electricity from cogeneration providers.
However, recent bills in Congress have proposed amendments to, and in some
cases, the repeal of, certain of these laws or regulations. Any such amendment
or repeal could have a material adverse effect on the Company's cogeneration
business.
Importance of Energy Prices. The cost savings that result from use of the
Company's packaged cooling and cogeneration systems are directly related to the
retail price of electricity. Given prevailing rate structures, demand for the
Company's cooling and cogeneration systems has been less than anticipated.
Although the Company believes that increases in demand, as well as potential
increases in the cost of fuel, will lead to eventual increases in electricity
rates, there can be no assurance that electricity prices will increase in the
future. The economic benefits of the Company's natural gas engine products and
packaged cooling and cogeneration systems are also affected by the cost of
natural gas. A significant increase in the relative cost of natural gas could
also have a material adverse effect on the sale of certain of the Company's
products.
Incentives for Cooling Systems. Purchasers of the Company's Tecochill(R)
cooling systems often receive investment incentives for the purchase of
Tecochill equipment from gas utilities or state or municipal governments.
Although the Company has no reason to believe these incentives will be
discontinued, elimination of these incentives could have a material adverse
effect on sales of the Company's Tecochill systems.
Risks Associated with Protection, Defense, and Use of Intellectual
Property and Ownership of Technology Rights. The Company holds several patents
relating to various aspects of its products. Proprietary rights relating to the
Company's products are protected from unauthorized use by third parties only to
the extent that they are covered by valid and enforceable patents or are
maintained in confidence as trade secrets. There can be no assurance that
patents will be issued from any pending or future patent applications owned by
or licensed to the Company or that the claims allowed under any issued patents
will be sufficiently broad to protect the Company's technology and, in the
absence of patent protection, the Company may be vulnerable to competitors who
attempt to copy the Company's products or gain access to its trade secrets and
know-how. Proceedings initiated by the Company to protect its proprietary rights
could result in substantial costs to the Company. There can be no assurance that
competitors of the Company will not initiate
37
<PAGE>
litigation to challenge the validity of the Company's patents, or that they will
not use their resources to design comparable products that do not infringe the
Company's patents. There may also be pending or issued patents held by parties
not affiliated with the Company that relate to the Company's products or
technologies. The Company may need to acquire licenses to, or contest the
validity of, any such patents. There can be no assurance that any license
required under any such patent would be made available on acceptable terms or
that the Company would prevail in any such contest. The Company could incur
substantial costs in defending itself in suits brought against it or in suits in
which the Company may assert its patent rights against others. If the outcome of
any such litigation is unfavorable to the Company, the Company's business and
results of operations could be materially adversely affected. In addition, the
Company relies on trade secrets and proprietary know-how which it seeks to
protect, in part, by confidentiality agreements with its collaborators,
employees, and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.
In addition, a significant percentage of the Company's research and
development is sponsored by third parties. Sponsors of these programs generally
own the rights to technology that is developed as a result of the Company's work
under the programs. These rights could limit the Company's ability to
commercialize any technological breakthroughs made in the course of such work.
No Assurance of Development and Commercialization of ThermoLyte Products;
Uncertain Market Acceptance; Potential Product Liability. The Company's
ThermoLyte subsidiary is developing and commercializing propane-fueled lighting
products. Product development involves a high degree of risk, and returns to
investors are dependent upon successful development and commercialization of the
ThermoLyte products. There can be no assurance that the Company will be able to
build the sales and marketing organization necessary for the successful
commercialization of its products. In addition, as with any new technology,
there is substantial risk that the marketplace may not accept or be receptive to
the potential benefits of such technology. Market acceptance of the Company's
proposed products will depend, in large part, upon the ability of the Company to
demonstrate the safety of such products and their advantages over commercially
available alternatives. There can be no assurance that the ThermoLyte products
will be accepted by the public. Finally, because the ThermoLyte products will be
powered by propane or a similar fuel that is combustible, the Company may be
subject to potential product liability damages. The Company intends to design
the ThermoLyte products to minimize these effects and believes that it will be
able to obtain insurance against such liabilities on terms acceptable to the
Company. However, no assurance can be given that damages from product liability
will not have a material adverse impact on the results of operations, financial
condition, or reputation of the Company.
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, vendors, or customers 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. 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.
38
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Information
<S> <C> <C> <C> <C> <C>
(In thousands except per share amounts) 1998 (a) 1997 1996 1995 (b) 1994
- --------------------------------------------------- ---------- ---------- ----------- ---------- ----------
Statement of Income Data
Revenues $245,692 $91,881 $ 93,058 $79,113 $ 69,833
Income from Continuing Operations 3,353 2,291 2,074 4,447 3,199
Net Income 2,336 2,104 885 4,188 3,248
Earnings per Share from Continuing Operations:
Basic .28 .19 .17 .36 .26
Diluted .28 .19 .16 .35 .26
Earnings per Share:
Basic .20 .17 .07 .34 .26
Diluted .20 .17 .07 .33 .26
Balance Sheet Data
Working Capital (c) $ 35,762 $54,708 $ 57,719 $60,140 $ 43,143
Total Assets 351,635 107,922 110,711 108,417 82,621
Long-term Obligations 160,499 252 305 364 344
Common Stock of Subsidiary Subject to Redemption - 18,059 17,747 17,435 -
Shareholders' Investment 69,864 66,668 67,368 65,825 60,475
</TABLE>
(a) Reflects the November 1997 acquisition of Peek plc and borrowings to finance
such acquisition. (b) Reflects the net proceeds from the private placement of
shares of ThermoLyte Corporation in March
1995.
(c) In fiscal 1998, includes common stock of subsidiary subject to redemption,
redeemable in December 1998 or December 1999.
39
<PAGE>
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol THP. The following table sets forth the high and low sale prices of
the Company's common stock for fiscal 1998 and 1997, as reported in the
consolidated transaction reporting system.
<TABLE>
<CAPTION>
1998 1997
------------------- ------------
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
First $10 1/4 $ 7 1/4 $11 1/4 $ 7 3/4
Second 12 1/8 8 1/2 9 1/4 6 1/8
Third 11 9/16 10 1/4 7 5 1/2
Fourth 11 1/4 7 5/8 9 7/8 5 5/8
</TABLE>
As of October 30, 1998, the Company had 392 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 October 30, 1998, was $7 1/2 per share.
Shareholder Services
Shareholders of Thermo Power Corporation who desire information about the
Company are invited to contact the Investor Relations Department, Thermo Power
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046,
(781) 622-1111. A mailing list is maintained to enable shareholders whose stock
is held in street name, and other interested individuals, to receive quarterly
reports, annual reports, and press releases as quickly as possible. Distribution
of printed quarterly reports is limited to the second quarter only. All material
is available from Thermo Electron's Internet site
(http://www.thermo.com/subsid/thp1.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 October
3, 1998, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, Thermo Power
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.
Annual Meeting
The annual meeting of shareholders will be held on Wednesday, March 10,
1999, at 10:00 a.m. at Thermo Electron Corporation, 81 Wyman Street, Waltham,
Massachusetts.
Exhibit 21
THERMO POWER CORPORATION SUBSIDIARIES
As of November 19,1998, the Registrant owned the following subsidiaries:
<TABLE>
<CAPTION>
<S> <C> <C>
STATE OR
JURISDICTION PERCENT OF
NAME OF OWNERSHIP
INCORPORATION
NuTemp, Inc. Illinois 100
Peek plc Scotland 100
Peek Data Limited England 100
Peek Group Services Limited England 100
Dubilier Warminster Limited England 100
International Resistance Co Limited England 100
Minicircuits Limited England 100
Peek International Limited England 100
Peek Corporation Delaware 100
Peek Traffic Inc. Delaware 100
Peek Traffic Systems Inc. Florida 100
Saratec Measurement Inc. Florida 100
Signal Control Company Delaware 100
Signal Maintenance, Inc. Delaware 100
Peek Traffic USA Inc. Florida 100
Peek Traffic GmbH Germany 100
Peek International B.V. Netherlands 100
Peek Projects BV Netherlands 100
Peek Promet doo Croatia 100
Peek Traffic A.B. Sweden 100
Peek Trafikk AS Norway 100
Peek Parking Systems AB Sweden 100
Peek Trafik a-s Denmark 100
Peek Traffic B.V. Netherlands 100
Peek Projects B.V. Netherlands 100
Peek Limited Hong Kong 100
Peek Trafikk Sendirian Bermad Malaysia 100
Peek Traffic (Thailand) Limited Thailand 100
Sichuan Modern Control System Engineering Company
Limited China 41*
Peek Traffic OY Finland 100
Peek Investments, Limited England 100
Dubilier America, Inc. Delaware 100
Automatic Connector Inc. New York 100
Peek Systems Limited England 100
Sotwell Limited England 100
Peek Technology Limited England 100
Peek Traffic Limited England 100
GK Instruments Limited England 100
Sarasota Traffic Limited England 100
Streeteramet Limited England 100
Weighwrite Limited England 100
Radley Services Limited England 100
Atest Electronics Limited England 100
Bartsign Limited England 100
Greenpar Holdings Limited England 100
Helvetia Automatic Products Limited England 100
Peek Field Services Limited England 100
Peek Traffic Systems B.V. Netherlands 100
Radley (1) Limited England 100
Smartways Limited England 100
Tollstar Limited England 100
Takepine Limited United Kingdom 100
Tecogen Securities Corporation Massachusetts 100
ThermoLyte Corporation Delaware 78**
Optronics, Inc. Oklahoma 100
* Joint Venture/Partnership ** As of 10/03/98
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation by reference of our reports dated November 9, 1998 (except
with respect to certain matters discussed in Notes 4 and 16, as to which
the date is December 18, 1998), included in or incorporated by reference
into Thermo Power Corporation's Annual Report on Form 10-K for the year
ended October 3, 1998, into the Company's previously filed Registration
Statements as follows: Registration Statement No. 33-19061 on Form S-8,
Registration Statement No. 33-19062 on Form S-8, Registration Statement
No. 33-25051 on Form S-8, Registration Statement No. 33-52814 on Form S-8,
Registration Statement No. 33-87674 on Form S-8, Registration Statement
No. 33-87686 on Form S-8, Registration Statement No. 33-87692 on Form S-8,
and Registration Statement No. 33-65273 on Form S-8.
Arthur Andersen LLP
Boston, Massachusetts
December 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO POWER
CORPORATION'S REPORT ON FORM 10-K FOR THE YEAR ENDED OCTOBER 3, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> OCT-03-1998
<CASH> 22,240
<SECURITIES> 4,018
<RECEIVABLES> 62,397
<ALLOWANCES> 10,299
<INVENTORY> 43,984
<CURRENT-ASSETS> 155,941
<PP&E> 34,433
<DEPRECIATION> 9,562
<TOTAL-ASSETS> 351,635
<CURRENT-LIABILITIES> 120,179
<BONDS> 499
0
0
<COMMON> 1,249
<OTHER-SE> 68,615
<TOTAL-LIABILITY-AND-EQUITY> 351,635
<SALES> 245,692
<TOTAL-REVENUES> 245,692
<CGS> 172,055
<TOTAL-COSTS> 172,055
<OTHER-EXPENSES> 7,921
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 8,998
<INCOME-PRETAX> 7,858
<INCOME-TAX> 4,082
<INCOME-CONTINUING> 3,353
<DISCONTINUED> (1,017)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,336
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO POWER
CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 28, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-END> SEP-28-1996
<CASH> 29,852
<SECURITIES> 6,028
<RECEIVABLES> 18,643
<ALLOWANCES> 589
<INVENTORY> 18,637
<CURRENT-ASSETS> 82,926
<PP&E> 17,580
<DEPRECIATION> 7,813
<TOTAL-ASSETS> 110,711
<CURRENT-LIABILITIES> 25,207
<BONDS> 305
0
0
<COMMON> 1,249
<OTHER-SE> 66,119
<TOTAL-LIABILITY-AND-EQUITY> 110,711
<SALES> 93,058
<TOTAL-REVENUES> 93,058
<CGS> 74,289
<TOTAL-COSTS> 74,289
<OTHER-EXPENSES> 2,633
<LOSS-PROVISION> 185
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> 4,158
<INCOME-TAX> 1,772
<INCOME-CONTINUING> 2,074
<DISCONTINUED> (1,189)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 885
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO POWER
CORPORATION'S REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 28, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-END> DEC-28-1996
<CASH> 29,664
<SECURITIES> 5,070
<RECEIVABLES> 19,029
<ALLOWANCES> 589
<INVENTORY> 16,628
<CURRENT-ASSETS> 81,662
<PP&E> 18,336
<DEPRECIATION> 8,174
<TOTAL-ASSETS> 109,340
<CURRENT-LIABILITIES> 23,669
<BONDS> 291
0
0
<COMMON> 1,249
<OTHER-SE> 66,192
<TOTAL-LIABILITY-AND-EQUITY> 109,340
<SALES> 23,547
<TOTAL-REVENUES> 23,547
<CGS> 19,455
<TOTAL-COSTS> 19,455
<OTHER-EXPENSES> 557
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 776
<INCOME-TAX> 373
<INCOME-CONTINUING> 325
<DISCONTINUED> (321)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
POWER CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH
29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-END> MAR-29-1997
<CASH> 36,768
<SECURITIES> 0
<RECEIVABLES> 19,765
<ALLOWANCES> 571
<INVENTORY> 16,494
<CURRENT-ASSETS> 83,070
<PP&E> 19,045
<DEPRECIATION> 8,571
<TOTAL-ASSETS> 110,820
<CURRENT-LIABILITIES> 26,659
<BONDS> 278
0
0
<COMMON> 1,249
<OTHER-SE> 64,616
<TOTAL-LIABILITY-AND-EQUITY> 110,820
<SALES> 44,869
<TOTAL-REVENUES> 44,869
<CGS> 36,104
<TOTAL-COSTS> 36,104
<OTHER-EXPENSES> 1,038
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 1,698
<INCOME-TAX> 830
<INCOME-CONTINUING> 712
<DISCONTINUED> (333)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 379
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO POWER
CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 28, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-END> JUN-28-1997
<CASH> 25,129
<SECURITIES> 9,168
<RECEIVABLES> 19,489
<ALLOWANCES> 679
<INVENTORY> 21,630
<CURRENT-ASSETS> 85,669
<PP&E> 19,284
<DEPRECIATION> 8,756
<TOTAL-ASSETS> 115,119
<CURRENT-LIABILITIES> 31,795
<BONDS> 263
0
0
<COMMON> 1,249
<OTHER-SE> 63,716
<TOTAL-LIABILITY-AND-EQUITY> 115,119
<SALES> 69,788
<TOTAL-REVENUES> 69,788
<CGS> 56,047
<TOTAL-COSTS> 56,047
<OTHER-EXPENSES> 1,474
<LOSS-PROVISION> 157
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 3,002
<INCOME-TAX> 1,422
<INCOME-CONTINUING> 1,346
<DISCONTINUED> (251)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,095
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO POWER
CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 27, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-END> SEP-27-1997
<CASH> 19,347
<SECURITIES> 9,171
<RECEIVABLES> 21,769
<ALLOWANCES> 757
<INVENTORY> 19,884
<CURRENT-ASSETS> 77,607
<PP&E> 19,637
<DEPRECIATION> 9,046
<TOTAL-ASSETS> 107,992
<CURRENT-LIABILITIES> 22,899
<BONDS> 252
0
0
<COMMON> 1,249
<OTHER-SE> 65,419
<TOTAL-LIABILITY-AND-EQUITY> 107,992
<SALES> 91,881
<TOTAL-REVENUES> 91,881
<CGS> 72,725
<TOTAL-COSTS> 72,725
<OTHER-EXPENSES> 1,929
<LOSS-PROVISION> 207
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> 4,826
<INCOME-TAX> 2,223
<INCOME-CONTINUING> 2,291
<DISCONTINUED> (187)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,104
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO POWER
CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JANUARY 3,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Oct-03-1998
<PERIOD-END> JAN-03-1998
<CASH> 39,667
<SECURITIES> 9,169
<RECEIVABLES> 71,674
<ALLOWANCES> 13,699
<INVENTORY> 42,646
<CURRENT-ASSETS> 184,482
<PP&E> 33,935
<DEPRECIATION> 9,313
<TOTAL-ASSETS> 376,458
<CURRENT-LIABILITIES> 148,182
<BONDS> 160,392
0
0
<COMMON> 1,249
<OTHER-SE> 65,642
<TOTAL-LIABILITY-AND-EQUITY> 376,458
<SALES> 58,696
<TOTAL-REVENUES> 58,696
<CGS> 40,783
<TOTAL-COSTS> 40,783
<OTHER-EXPENSES> 1,630
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 1,425
<INCOME-PRETAX> 2,664
<INCOME-TAX> 1,195
<INCOME-CONTINUING> 1,280
<DISCONTINUED> (225)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,055
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO POWER
CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL 4, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> APR-03-1998
<CASH> 29,797
<SECURITIES> 4,059
<RECEIVABLES> 71,154
<ALLOWANCES> 13,703
<INVENTORY> 42,726
<CURRENT-ASSETS> 148,689
<PP&E> 33,518
<DEPRECIATION> 8,961
<TOTAL-ASSETS> 339,001
<CURRENT-LIABILITIES> 112,316
<BONDS> 333
0
0
<COMMON> 1,249
<OTHER-SE> 64,000
<TOTAL-LIABILITY-AND-EQUITY> 339,001
<SALES> 120,701
<TOTAL-REVENUES> 120,701
<CGS> 86,557
<TOTAL-COSTS> 86,557
<OTHER-EXPENSES> 4,184
<LOSS-PROVISION> 158
<INTEREST-EXPENSE> 4,061
<INCOME-PRETAX> 1,613
<INCOME-TAX> 1,200
<INCOME-CONTINUING> 146
<DISCONTINUED> (379)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (233)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO POWER
CORPORATION'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED JULY 4, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> JUL-04-1998
<CASH> 25,920
<SECURITIES> 4,114
<RECEIVABLES> 67,912
<ALLOWANCES> 13,556
<INVENTORY> 47,487
<CURRENT-ASSETS> 147,596
<PP&E> 38,641
<DEPRECIATION> 13,255
<TOTAL-ASSETS> 339,190
<CURRENT-LIABILITIES> 112,463
<BONDS> 435
0
0
<COMMON> 1,249
<OTHER-SE> 63,948
<TOTAL-LIABILITY-AND-EQUITY> 339,190
<SALES> 179,046
<TOTAL-REVENUES> 179,046
<CGS> 125,883
<TOTAL-COSTS> 125,883
<OTHER-EXPENSES> 6,031
<LOSS-PROVISION> 167
<INTEREST-EXPENSE> 6,544
<INCOME-PRETAX> 4,408
<INCOME-TAX> 2,568
<INCOME-CONTINUING> 1,496
<DISCONTINUED> (338)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,158
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
