SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
AMENDMENT NO. 3 ON FORM 10-K/A
(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 theAct:
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.
<PAGE>
FORM 10-K/A
THERMO POWER CORPORATION
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a, d) Financial Statements and Schedules
Financial Statement Schedules filed herewith:
Schedule II: Valuation and Qualifying Accounts. See attached.
(c) Exhibits
13 Annual Report to Shareholders for the Fiscal Year Ended October 3, 1998
(only these portions incorporated herein by reference).
23 Consent of Arthur Andersen LLP.
Attached is Exhibit 13 and Schedule II of the Registrant's Form 10-K for
the year ended October 3, 1998. The Registrant's financial statements have been
amended principally to modify disclosures concerning certain restructuring
actions and other subsequent events. This amended information replaces the
corresponding information filed originally in the Form 10-K.
2
<PAGE>
FORM 10-K/A
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: September 22, 1999 THERMO POWER CORPORATION
By: /s/ J. Timothy Corcoran
J. Timothy Corcoran
President and Chief Executive Officer
3
<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 Amendment No. 3
on Form 10-K/A, and have issued our report thereon dated November 9, 1998
(except with respect to certain matters discussed in Notes 4 and 15, as to which
the date is July 3, 1999). Our audits were made for the purpose of forming an
opinion on those statements taken as a whole. The schedule listed in Item 14 on
page 2 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
4
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II FORM 10-K/A
THERMO POWER CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance
at Provision
Beginning Charged Accounts Balance
of to Accounts Written at End
Description Year Expense 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 at Established Activity Balance
Beginning as Cost of Charged at End
of Year Acquisitions to Reserve Other (c) of Year
- ----------------------------------- ---------- ------------- ----------- ---------- -----------
Accrued Acquisition Expenses (b)
Year Ended October 3, 1998 $ 33 $ 7,364 $ (5,311) $ - $ 2,086
Year Ended September 27, 1997 $ 519 $ - $ (7) $ (479) $ 33
Year Ended September 28, 1996 $ 680 $ - $ (109) $ (52) $ 519
Description Balance at Provision Activity Balance
Beginning Charged to Charged to at End
of Year Expense Reserve Other of 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>
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 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; Note 15)
Available-for-sale investments, at quoted market value (amortized cost of 4,018 9,171
$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 4,976 236
--------- ---------
Cost in Excess of Net Assets of Acquired Companies (Note 3) 155,729 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 costs for acquired contracts (Note 3) 8,906 -
Accrued acquisition expenses (Note 3) 2,086 33
Other accrued expenses (Note 4) 26,777 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 (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
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Thermo Power Corporation 1998 Financial Statements
<S> <C> <C> <C>
Consolidated Statement of Cash Flows
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 (Note 3) 19,117 - -
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 $ - $ -
========= ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Thermo Power Corporation 1998 Financial Statements
<S> <C> <C> <C>
Consolidated Statement of Shareholders' Investment
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 investments 40 (26) (211)
(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
======== ======== ========
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 15).
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 (Note 15). 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
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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.
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 (Note 15). 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:
(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
======= ========
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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.
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
======= ========
Other Assets
Other assets in the accompanying fiscal 1998 balance sheet consists
primarily of acquired technology and other intangibles, including the cost of
acquired patents, that are being amortized over their estimated useful lives,
primarily 15 years. Accumulated amortization was $314,000 at fiscal year-end
1998.
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 25 to 40 years.
Accumulated amortization was $4,280,000 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
(Note 15). 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.
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year, in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected 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.
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."
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
2. Available-for-sale Investments (continued)
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:
<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)
======= ======= ======= =======
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 (Notes 10 and 15). The cost of this acquisition exceeded
the estimated fair value of the acquired net assets by $147,884,000, which is
being amortized over 40 years. 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
12
<PAGE>
3. Acquisitions and Dispositions (continued)
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. The cost of
Traffic Control Technology exceeded the estimated fair value of the acquired net
assets by $750,000 and the cost of Optronics exceeded the estimated fair value
of the acquired net assets by $3,132,000. These amounts are being amortized over
25 years. 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. 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.
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 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>
<TABLE>
<CAPTION>
(In thousands except per share amounts) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
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)
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.
13
<PAGE>
3. Acquisitions and Dispositions (continued)
Following the acquisition of Peek, the Company undertook a broad
restructuring of Peek's business. This included severance of 87 employees at
Peek, including closure of its former corporate headquarters in London and
termination of most of the staff there. In addition, the Company decided to sell
or close several businesses. Peek's Fleetlogic BV subsidiary, a
Netherlands-based developer, manufacturer, and distributor of "in vehicle"
traffic information systems was sold in August 1998. Signal Control Corporation,
an Oregon-based manufacturer of an earlier generation traffic controller was
closed in December 1998. In addition, Peek's operations in Hong Kong were closed
in August 1998 and operations in Thailand were scaled back to complete
outstanding contracts. The Company has abandoned leased facilities in Oregon,
Florida, London, and Hong Kong as a result of decisions to exit certain
operations of Peek.
During fiscal 1998, the Company expended $3.9 million for severance and
$1.4 million of lease costs for abandoned facilities, principally in connection
with the actions described above. The lease costs paid in fiscal 1998 primarily
related to Peek's former London headquarters. At October 3, 1998, the Company
had accrued additional costs which will require future outlays of cash of $0.6
million for severance which will be paid in fiscal 1999. In addition, the
Company had accrued $1.4 million for abandoned facilities, principally for an
Oregon facility that requires payments through 2006, in the event that the
Company's efforts to sublease or buyout the arrangement prove unsuccessful. The
severance and lease costs were accounted for in accordance with Emerging Issues
Task Force Pronouncement (EITF) 95-3 and are detailed in the table that follows.
The Company finalized its plan for restructuring Peek in fiscal 1998 and all
substantive actions were completed in early fiscal 1999.
In addition, the Company acquired certain loss contracts as a result of
the Peek acquisition. The loss contracts relate principally to work in Hong Kong
and Signal Control Corporation, which were exited in calendar 1998, and in
Thailand. The Company is currently in the process of completing contracts in
Thailand assumed at the date of acquisition. The timing of completion is
dependent on the completion of certain aspects of Thailand's infrastructure
performed by third parties and ongoing negotiations with the customer. In
connection with these contracts, in the allocation of purchase price for the
Peek acquisition, the Company recorded $13.6 million of liability as a cost of
the acquisition. This amount includes $8.0 million for liability assumed at
acquisition for liquidated damages and performance bond obligations related to
these contracts. The balance of the costs, $5.6 million, represents estimated
losses to complete contracts outstanding at the date of acquisition, of which
$4.1 million had been accrued by Peek prior to its acquisition. During fiscal
1998, the Company made cash expenditures of $4.7 million associated with these
contracts and expects future expenditures of $8.9 million, primarily through the
first half of fiscal 2000.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
3. Acquisitions and Dispositions (continued)
A summary of the changes in accrued acquisition expenses follows:
<S> <C> <C> <C> <C>
Abandonment
of Excess
(In thousands) Facilities Severance Other Total
- --------------------------------- -------------- -------------- ------------- -------------- --------------
Balance at September 30, 1995 $ 458 $ - $ 222 $ 680
Usage - - (109) (109)
Decrease due to finalization (52) - - (52)
of restructuring plans,
recorded as a decrease in
cost in excess of net
assets of acquired
companies
-------- ------- -------- --------
Balance at September 28, 1996 406 - 113 519
Usage - - (7) (7)
Decrease due to finalization (406) - (73) (479)
of restructuring plans,
recorded as a decrease in
cost in excess of net
assets of acquired
companies
-------- ------- -------- --------
Balance at September 27, 1997 - - 33 33
Reserves established 2,791 4,573 - 7,364
Usage (1,366) (3,934) (11) (5,311)
-------- ------- -------- --------
Balance at October 3, 1998 $ 1,425 $ 639 $ 22 $ 2,086
======== ======= ======== ========
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.
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 Company
retained liability for certain warranty obligations of this business. The
Company does not expect that this obligation or other costs associated with
winding down this business will materially affect its results of operations or
cash flows.
15
<PAGE>
4. Discontinued Operations (continued)
In fiscal 1998, the Company provided $636,000, net of a tax benefit of
$357,000, for the estimated loss on disposal of discontinued operations. This
amount includes $448,000, net of a tax benefit of $252,000, for estimated losses
from operations of discontinued operations through the expected date of
disposition. During the first nine months of fiscal 1999, the unaudited activity
recorded to the reserve was as follows: the reserve was increased by a pretax
gain on the sale of the net assets of the industrial and marine engine product
lines of $508,000 and was reduced by pretax operating losses of discontinued
operations of $645,000. The unaudited remaining reserve on July 3, 1999, was
$896,000, primarily representing continuing warranty obligations and a reserve
for estimated losses from operations as the Company winds down this business,
following its divestiture. The tax effect on these items was recorded as an
adjustment to accrued income taxes. The reserve for estimated losses on disposal
of the Engines segment is included in other accrued expenses in the accompanying
and fiscal 1998 balance sheets.
The Engines segment had unaudited revenues through the date of disposition
and an unaudited net loss for the first nine months of fiscal 1999 of $2,695,000
and $413,000, respectively. The net loss of the Engines segment for the first
nine months of 1999 was recorded as a reduction of previously established
reserves as discussed above. The unaudited revenues and net loss from the
Engines segment for the first nine months of fiscal 1998 were $17,993,000 and
$338,000, respectively.
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.
</TABLE>
16
<PAGE>
5. Employee Benefit Plans (continued)
<TABLE>
<CAPTION>
A summary of the Company's stock option information is as follows:
<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>
<TABLE>
<CAPTION>
A summary of the status of the Company's stock options at October 3, 1998,
is as follows:
Options Outstanding and Exercisable
-----------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ---------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
$ 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
=====
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.
17
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
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:
<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
18
<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
======= ======= =======
19
<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
======= =======
20
<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.
21
<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 pursuant to an arrangement whereby the Company
charges ONIX its allocated share of occupancy expenses. 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 Killam Group Inc. 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
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 $4,107,000, $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.
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.
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.
22
<PAGE>
10. Short- and Long-term Obligations (continued)
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 (Note 15).
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.
23
<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).
24
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
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.
<S> <C> <C> <C>
(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
========= ======== =========
25
<PAGE>
12. Business Segment and Geographical Information, and Concentrations of Risk (continued)
(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.
26
<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. In addition,
a significant portion of the Traffic Control segment's revenues are generated by
sales to distributors whose customers are governmental entities. 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
======= ======= =======
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.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
14. Unaudited Quarterly Information
<S> <C> <C> <C> <C>
(In thousands except per share amounts)
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.
15. Subsequent Events
Proposed Merger
On May 5, 1999, the Company entered into a definitive agreement and plan
of merger with Thermo Electron, under which Thermo Electron would acquire all of
the outstanding shares of Company common stock held by minority shareholders.
The Board of Directors of the Company unanimously approved the merger agreement
based on a recommendation by a special committee of the Board of Directors,
consisting solely of outside directors of the Company. Under the terms of the
merger agreement, the Company would become a wholly owned subsidiary of Thermo
Electron. Each issued and outstanding share of Company common stock not already
owned by Thermo Electron would be converted into the right to receive $12.00 in
cash. Following the merger, the Company's common stock would cease to be
publicly traded. The completion of this merger is subject to, among other
things, shareholder approval of the merger agreement. Thermo Electron intends to
vote all of its shares of common stock of the Company in favor of approval of
the merger agreement and, therefore, approval of the merger agreement is
assured. This merger is expected to be completed by the beginning of the fourth
quarter of calendar 1999.
Option Exchange
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
28
<PAGE>
15. Subsequent Events (continued)
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.
Redemption of ThermoLyte Common Stock
In December 1998, holders of 1,707,000 shares of ThermoLyte common stock
redeemed their shares for $10.00 per share in cash or an aggregate of
$17,070,000. Subsequent to such redemption, 138,000 redeemable shares of
ThermoLyte common stock remained outstanding and are redeemable in December 1999
at $10.00 per share. The Company's ownership of ThermoLyte increased to 98% as a
result of such redemption.
Promissory Note Refinancing
The Company's $160.0 million promissory note to Thermo Electron is due in
November 1999. In February 1999, Thermo Electron issued a commitment letter to
the Company pursuant to which Thermo Electron has agreed to refinance the
promissory note at the option of the Company, on its maturity date, with the net
proceeds from its October 1998 offering of 7.625% Notes due 2008, and other
available cash. In accordance with the commitment letter, the new promissory
note from the Company to Thermo Electron would be due in 2008 and bear interest
at a rate of 7.625%.
Restructuring Actions
During the third quarter of fiscal 1999, the Company undertook certain
restructuring actions, which included a decision by the Cooling and Cogeneration
Systems segment to divest its ThermoLyte Corporation subsidiary, as well as a
decision by the Traffic Control segment to outsource certain manufacturing and
warranty functions and reduce staffing levels, and a decision by the Industrial
Refrigeration Systems segment to reduce staffing levels. In addition, the
Traffic Control segment wrote down certain assets at Peek's sales and service
subsidiaries located in Malaysia and Croatia that have become impaired due to
business conditions in those regions. In connection with these actions, the
Company recorded restructuring and related costs of $12,633,000, including
$8,913,000 of restructuring costs, inventory provisions of $2,988,000, costs for
outsourcing certain warranty repairs of $483,000, and a provision for
uncollectible accounts receivable of $249,000. Of the restructuring and related
costs of $12,633,000, $7,916,000, $4,662,000, and $55,000 were recorded by the
Traffic Control, Cooling and Cogeneration Systems, and Industrial Refrigeration
Systems segments, respectively. Restructuring costs include $4,079,000 for the
write-off of cost in excess of net assets of acquired companies, of which
$2,911,000 was to reduce the carrying value of ThermoLyte to the estimated
proceeds from its sale and $1,168,000 was to reduce the carrying value of Peek's
subsidiaries located in Malaysia and Croatia due to projected undiscounted cash
flows from their operations being insufficient to recover the Company's
investment. In addition, restructuring costs include $2,040,000 of severance
costs for approximately 63 employees across all functions; $1,550,000 for the
write-down of certain fixed assets, principally at operations being exited; and
$1,244,000 for lease costs at facilities being abandoned. Provisions for
severance and leases were accounted for in accordance with EITF 94-3. Inventory
provisions represent a write-down of inventories to estimated salvage value and
consist of $1,826,000 for raw materials for product lines being outsourced,
$1,042,000 for a discontinued product line, and $120,000 for inventories at
Malaysia and Croatia. Unaudited revenues and operating losses for ThermoLyte,
excluding restructuring and related costs, were $9,822,000 and $103,000,
respectively, for the first nine months of fiscal 1999, and $3,065,000 and
$1,361,000, respectively, for fiscal 1998. The Company is actively seeking a
buyer for ThermoLyte's principal operations and expects to complete a
transaction in the next twelve months, although there can be no assurance that
this will occur.
29
<PAGE>
15. Subsequent Events (continued)
During the second quarter of fiscal 1999, the Company recorded
restructuring costs of $701,000 related to actions taken at its Peek subsidiary.
The restructuring costs, which were accounted for in accordance with EITF 94-3,
consisted of $389,000 related to severance costs for approximately 70 employees
across all functions, $222,000 for lease costs at facilities being abandoned in
connection with the consolidation of facilities, and an asset write-down of
$90,000 related to the consolidation of such facilities.
The Company expects to incur additional restructuring costs totaling
approximately $2.5 million, principally at the Traffic Control segment, through
December 1999 for costs that will be recorded when incurred, such as additional
severance and fees associated with outsourcing certain product lines. Completion
of the Company's restructuring plans is expected to occur by December 1999. As
of July 3, 1999, the Company had terminated 49 employees of the 133 employees
for whom severance had been provided in the first nine months of fiscal 1999. A
summary of the changes in accrued restructuring costs is as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Severance Abandonment
of Excess
(In thousands) Facilities Total
- --------------------------------------------------------------- -------------- ------------- -------------
(Unaudited)
Balance at October 3, 1998 $ - $ - $ -
Provision charged to expense 2,430 1,465 3,895
Usage (246) (28) (274)
Currency translation (58) (38) (96)
------ ----- ------
Balance at July 3, 1999 $2,126 $1,399 $3,525
====== ====== ======
Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement (Note 1). Under the new arrangement,
amounts advanced to Thermo Electron by the Company for domestic cash management
purposes bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis
points, set at the beginning of each month. Thermo Electron is contractually
required to maintain cash, cash equivalents, and/or immediately available bank
lines of credit equal to at least 50% of all funds invested under this cash
management arrangement by all Thermo Electron subsidiaries other than wholly
owned subsidiaries. The Company has the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice. The
Company will report amounts invested in this arrangement as "advance to
affiliate" in its balance sheet beginning in the third quarter of fiscal 1999.
In addition, under the new domestic cash management arrangement, amounts
borrowed from Thermo Electron by the Company for domestic cash management
purposes bear interest at the 30-day Dealer Commercial Paper Rate plus 150 basis
points, set at the beginning of each month. The Company will report amounts
borrowed under this arrangement as "notes payable and current maturities of
long-term obligations" in its balance sheet beginning in the third quarter of
fiscal 1999.
30
<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 15, as to which the date is July 3, 1999)
31
<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. In addition,
a significant portion of the Traffic Control segment's revenues are generated by
sales to distributors whose customers are governmental entities. 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, on January 1, 1999, several member
countries of the European Union established fixed conversion rates between their
existing sovereign currencies, and adopted the Euro as their new common
currency. As of that date, the Euro traded on currency exchanges although the
legacy currencies will remain legal tender in the participating countries
through 2001. Based on its current assessment, the Company does not expect that
the transition to the Euro will materially affect its results of operations or
cash flows.
32
<PAGE>
Overview (continued)
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.
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. In
connection with restructuring actions commenced during the third quarter of
fiscal 1999, the Company had decided to divest its ThermoLyte subsidiary (Note
15). Unaudited revenues and operating losses for ThermoLyte, excluding
restructuring and related costs, were $9.8 million and $0.1 million,
respectively, for the first nine months of fiscal 1999, and $3.1 million and
$1.4 million, respectively, for fiscal 1998.
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.
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Fiscal 1998 Compared With Fiscal 1997 (continued)
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.
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.
In accordance with the provisions of Accounting Principles Board Opinion
No. 30 concerning reporting the effect of disposal of a segment of a business,
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 retained
liability for certain warranty obligations of this business. The Company does
not expect that this obligation or other costs associated with winding down this
business will materially affect its results of operations or cash flows. 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.
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Fiscal 1997 Compared With Fiscal 1996 (continued)
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.
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. In December 1998, holders of 1,707,000 shares of ThermoLyte
common stock redeemed their shares for $10.00 per share in cash, for an
aggregate price of $17,070,000 (Note 15).
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 costs for acquired contracts and 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
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Liquidity and Capital Resources (continued)
approximately $9 million. In addition, in connection with certain restructuring
actions undertaken during fiscal 1999, the Company expects to incur cash
expenditures of approximately $3.6 million during the remainder of fiscal 1999
and $3.1 million during fiscal 2000.
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.
Following the acquisition of Peek, the Company undertook a broad
restructuring of Peek's business. This included severance of 87 employees at
Peek, including closure of its former corporate headquarters in London and
termination of most of the staff there. In addition, the Company decided to sell
or close several businesses. Peek's Fleetlogic BV subsidiary, a
Netherlands-based developer, manufacturer, and distributor of "in vehicle"
traffic information systems was sold in August 1998. Signal Control Corporation,
an Oregon-based manufacturer of an earlier generation traffic controller was
closed in December 1998. In addition, Peek's operations in Hong Kong were closed
in August 1998 and operations in Thailand were scaled back to complete
outstanding contracts. The Company has abandoned leased facilities in Oregon,
Florida, London, and Hong Kong as a result of decisions to exit certain
operations of Peek.
During fiscal 1998, the Company expended $3.9 million for severance and
$1.4 million of lease costs for abandoned facilities, principally in connection
with the actions described above. The lease costs paid in fiscal 1998 primarily
related to Peek's former London headquarters. At October 3, 1998, the Company
had accrued additional costs which will require future outlays of cash of $0.6
million for severance which will be paid in fiscal 1999. In addition, the
Company had accrued $1.4 million for abandoned facilities, principally for an
Oregon facility that requires payments through 2006, in the event that the
Company's efforts to sublease or buyout the arrangement prove unsuccessful. The
Company finalized its plan for restructuring Peek in fiscal 1998 and all
substantive actions were completed in early fiscal 1999. The accounting for this
restructuring was in accordance with Emerging Issues Task Force Pronouncement
95-3.
In addition, the Company acquired certain loss contracts as a result of
the Peek acquisition. The loss contracts relate principally to work in Hong Kong
and Signal Control Corporation, which were exited in calendar 1998, and
Thailand. The Company is currently in the process of completing contracts in
Thailand assumed at the date of acquisition. The timing of completion is
dependent on the completion of certain aspects of Thailand's infrastructure
performed by third parties and ongoing negotiations with the customer. In
connection with these contracts, in the allocation of purchase price for the
Peek acquisition, the Company recorded $13.6 million of liability as a cost of
the acquisition. This amount includes $8.0 million for liability assumed at
acquisition for liquidated damages and performance bond obligations related to
these contracts. The balance of the costs, $5.6 million, represents estimated
losses to complete contracts outstanding at the date of acquisition, of which
$4.1 million had been accrued by Peek prior to its acquisition. During fiscal
1998, the Company made cash expenditures of $4.7 million associated with these
contracts and expects future expenditures of $8.9 million, primarily through the
first half of fiscal 2000.
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Liquidity and Capital Resources (continued)
The Company's $160.0 million promissory note to Thermo Electron is due in
November 1999. Subsequent to fiscal year-end 1998, Thermo Electron issued a
commitment letter to the Company pursuant to which Thermo Electron has agreed to
refinance the promissory note at the option of the Company, on its maturity
date, with the net proceeds from its October 1998 offering of 7.625% Notes due
2008, and other available cash (Note 15). In accordance with the commitment
letter, the new promissory note from the Company to Thermo Electron would be due
in 2008 and bear interest at a rate of 7.625%. 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.
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.
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Market Risk (continued)
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.
Year 2000
The following constitutes a "Year 2000 Readiness Disclosure" under Year
2000 Information and Readiness Disclosure Act. The Company continues to assess
the potential impact of the year 2000 date recognition issue on the Company's
internal business systems, products, and operations. The Company's year 2000
initiatives include (i) testing and upgrading significant information technology
systems and facilities; (ii) testing and developing upgrades, if necessary, for
the Company's current products and certain discontinued products; (iii)
assessing the year 2000 readiness of its key suppliers and vendors to determine
their year 2000 compliance status; and (iv) developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems for year 2000 compliance, has largely been
completed. During phase one, the Company tested and evaluated its significant
computer systems, software applications, and related equipment for year 2000
compliance. The Company also evaluated the potential year 2000 impact on its
critical non-information technology systems, which efforts included testing the
year 2000 readiness of its manufacturing, utility, and telecommunications
systems at its critical facilities. The Company is currently in phase two of its
program, during which any material noncompliant information technology systems
or non-information technology systems that were identified during phase one are
prioritized and remediated. Based on its evaluations, the Company does not
believe it is required to make any material upgrades to its critical
non-information technology systems. The Company is currently upgrading or
replacing its material noncompliant information technology systems, and this
process was approximately 80% complete as of July 3, 1999. The Company expects
that all of its material information technology systems and critical
non-information technology systems will be year 2000 compliant by October 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third-party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 2000 problems with its current products. The Company
believes that certain of its older products, which it no longer manufactures or
sells, may not be year 2000 compliant. The Company is continuing to test and
evaluate such products. The Company is focusing its efforts on products that are
still under warranty, early in their expected life, and/or may pose a safety
risk. The Company is offering upgrades and/or identifying potential solutions
where reasonably practicable.
The Company also identified and assessed the year 2000 readiness of key
suppliers and vendors that are believed to be significant to the Company's
business operations. As part of this effort, the Company developed and
distributed questionnaires relating to year 2000 compliance to its significant
suppliers and vendors. To date, no significant supplier or vendor has indicated
that it believes its business operations will be materially disrupted by the
year 2000 issue. The Company has substantially completed the majority of its
assessment of third-party risk.
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Year 2000 (continued)
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required. The Company expects to complete
its contingency plan by October 1999.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred expenses to third parties (external costs)
related to year 2000 issues of approximately $1.4 million as of July 3, 1999,
and the total external costs of year 2000 remediation are expected to be
approximately $1.9 million. Of the external costs incurred as of July 3, 1999,
approximately $0.7 million had been spent on testing and upgrading information
technology systems, which represents approximately 25% of the Company's total
information technology budget. In addition, as of July 3, 1999, $0.6 million had
spent on testing and upgrading products and $0.1 million had been spent to test
and upgrade facilities. Year 2000 costs were funded from working capital. All
internal costs and related external costs, other than capital additions, related
to year 2000 remediation have been and will continue to be expensed as incurred.
The Company does not track the internal costs incurred for its year 2000
compliance project. Such costs are principally the related payroll costs for its
information systems group.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's material
suppliers or vendors experience business disruptions due to the year 2000 issue
and would be unable to provide materials and services to the Company on time.
The Company's operations could be delayed or temporarily shut down, and it could
be unable to meet its obligations to customers in a timely fashion. The
Company's business, operations, and financial condition could be adversely
affected in amounts that cannot be reasonably estimated at this time. If the
Company believes that any of its key suppliers or vendors may not be year 2000
compliant, it will seek to identify and secure other suppliers or vendors as
part of its contingency plan.
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. As discussed above, if any of
the Company's material suppliers or vendors experience business disruptions due
to year 2000 issues, the Company might also be materially adversely affected. If
any countries in which the Company operates experience significant year 2000
disruption, the Company could also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a material adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
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Forward-looking Statements
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company wishes to caution readers
that the following important factors, among others, in some cases have affected,
and in the future could affect, the Company's actual results and could cause its
actual results in 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. In addition, a significant portion of the
Company's revenues in the Traffic Control segment are generated by sales to
distributors whose customers are governmental entities. 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. 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.
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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.
Dependence on New Products. A substantial portion of the Company's
revenues are 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 United
States, principally in Europe, and approximately 8% of the Company's revenues
were exports from the United States 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; United States export licenses, if required, may
be difficult to obtain; the protection of intellectual property in foreign
countries may be more difficult to enforce. 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. In addition, on January
1, 1999, several member countries of the European Union established fixed
conversion rates between their existing sovereign currencies, and adopted the
Euro as their new common currency. As of that date, the Euro traded on currency
exchanges although the legacy currencies will remain legal tender in the
participating countries through 2001. Based on its current assessment, the
Company does not expect that the transition to the Euro will materially affect
its results of operations or cash flows.
The Company had planned 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, a
public company in the United Kingdom, which had, as of July 3, 1999,
approximately 1,000 employees located principally in Europe and the United
States, and had revenues in fiscal 1998, from the date of its acquisition, and
in the first nine months of fiscal 1999, of $152.4 million and $119.6 million,
respectively. 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
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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 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 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
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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 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.
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. As discussed above, if any of
the Company's material suppliers or vendors experience business disruptions due
to year 2000 issues, the Company might also be materially adversely affected. If
any countries in which the Company operates experience significant year 2000
disruption, the Company could also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a material adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
Risks Associated with Cash Management Arrangement with the Parent Company.
Effective June 1, 1999, the Company began participating in a cash management
arrangement with its parent company, Thermo Electron. Under this cash management
arrangement, the Company lends its excess cash to Thermo Electron on an
unsecured basis. The Company has the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice. Thermo
Electron is contractually required to maintain cash, cash equivalents, and/or
immediately available bank lines of credit equal to at least 50% of all funds
invested under the cash management arrangement by all Thermo Electron
subsidiaries other than wholly owned subsidiaries. The funds are held on an
unsecured basis and therefore are subject to the credit risk of Thermo Electron.
The Company's ability to receive its cash upon notice of withdrawal could be
adversely affected if participants in the cash management arrangement demand
withdrawal of their funds in an aggregate amount in excess of the 50% reserve
required to be maintained by Thermo Electron. In the
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event of a bankruptcy of Thermo Electron, the Company would be treated as an
unsecured creditor and its rights to receive funds from the bankruptcy estate
would be subordinated to secured creditors and would be treated on a pari passu
basis with all other unsecured creditors. Further, all cash withdrawn by the
Company from the cash management arrangement within one year before the
bankruptcy would be subject to rescission. The inability of Thermo Electron to
return the Company's cash on a timely basis or at all could have a material
adverse effect on the Company's results of operations and financial position.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Selected Financial Information
(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
(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.
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</TABLE>
<TABLE>
<CAPTION>
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.
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
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 amended, 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 was held on Wednesday, March 10, 1999,
at 10:00 a.m. at Thermo Electron Corporation, 81 Wyman Street, Waltham, Massachusetts.
</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 15, as to which the date is July 3,
1999), 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
September 21, 1999
