<PAGE>
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
Check the appropriate box:
Preliminary Proxy Statement [X]
Definitive Proxy Statement [ ]
Definitive Additional Materials [ ]
Soliciting Material Pursuant to Section240.14a-11(c) or Section240.14a-12 [ ]
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[ ]
ThermoSpectra Corporation
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
N/A
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
_ No fee required.
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock
(2) Aggregate number of securities to which transaction applies: 2,759,042
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined): The filing fee of $14,950.00
represents 1/50 of 1% of the sum of (a) $45,000,000, which is the debt component
of the consideration to be paid for the entities being acquired by the
registrant in the transaction and (b) $29,745,921.56, which amount is the value
of the securities to be issued by the registrant as consideration in the
transaction (as calculated by multiplying the average of the high and low prices
of the registrant's common stock on July 22, 1998 by the number of shares to be
issued: $10.78125 x 2,759,042 = $29,745,921.56).
(4) Proposed maximum aggregate value of transaction: $74,745,921.56
(5) Total fee paid: $14,950.00.
X Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
[LOGO]
August 24, 1998
Dear Stockholder:
The enclosed Notice calls a Special Meeting of the Stockholders of
ThermoSpectra Corporation. I respectfully request that all Stockholders attend
this meeting, if possible.
Enclosed with this letter is a proxy authorizing three officers of the
Company to vote your shares for you if you do not attend the meeting. Whether or
not you are able to attend the Meeting, I urge you to complete your proxy and
return it to our transfer agent, American Stock Transfer & Trust Company, in the
enclosed addressed, postage-paid envelope, as a quorum of the Stockholders must
be present at the meeting, either in person or by proxy.
I would appreciate your immediate attention to the mailing of this proxy.
Yours very truly,
BARRY S. HOWE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
[LOGO]
NOTICE OF SPECIAL MEETING
August 24, 1998
To the Holders of the Common Stock of
THERMOSPECTRA CORPORATION
A Special Meeting of the Stockholders (the "Meeting") of ThermoSpectra
Corporation (the "Company") will be held on Tuesday, September 22, 1998, at
10:00 a.m. local time at the offices of Thermo Electron Corporation, 81 Wyman
Street, Waltham, MA 02454. The purpose of the Meeting is to consider and vote
upon a proposal to approve the listing on the American Stock Exchange, Inc. of
2,759,042 shares of the Company's common stock to be issued in connection with
the acquisition by the Company of NESLAB Instruments, Inc., a manufacturer and
supplier of temperature-control products, pursuant to a Share Purchase Agreement
dated as of July 30, 1997 between the Company and Thermo Instrument Systems Inc.
The transfer books of the Company will not be closed prior to the Meeting,
but, pursuant to appropriate action by the Board of Directors, the record date
for the determination of the Stockholders entitled to receive notice of and to
vote at the Meeting is July 24, 1998.
The By-laws require that the holders of a majority of the stock issued and
outstanding and entitled to vote be present or represented by proxy at the
Meeting in order to constitute a quorum for the transaction of business. It is
important that your stock be represented at the Meeting regardless of the number
of shares you may hold. Whether or not you are able to be present in person,
please sign and return promptly the enclosed proxy in the accompanying envelope,
which requires no postage if mailed in the United States.
This Notice, the proxy and proxy statement enclosed herewith are sent to you
by order of the Board of Directors.
SANDRA L. LAMBERT
SECRETARY
<PAGE>
PROXY STATEMENT
The enclosed proxy is solicited by the Board of Directors of ThermoSpectra
Corporation (the "Company" or "ThermoSpectra") for use at the Special Meeting of
the Stockholders (the "Meeting") to be held on Tuesday, September 22, 1998, at
10:00 a.m. local time at the offices of Thermo Electron Corporation, 81 Wyman
Street, Waltham, MA 02454, and any adjournment thereof. The mailing address of
the executive office of the Company is 81 Wyman Street, Waltham, Massachusetts
02454, and its telephone number is (781) 622-1000. This proxy statement and the
enclosed proxy were first furnished to Stockholders of the Company on or about
August 26, 1998.
VOTING PROCEDURES
The Board of Directors intends to present to the Meeting a proposal to
approve the listing on the American Stock Exchange, Inc. of 2,759,042 shares
(the "THS Shares") of the Company's common stock, $.01 par value per share
("Common Stock") to be issued in connection with the acquisition by the Company
of NESLAB Instruments, Inc., a manufacturer and supplier of temperature-control
products, its related sales and service entity, NESLAB Instruments Europa BV,
and NESLAB Instruments Ltd. (together, "NESLAB"), pursuant to a Share Purchase
Agreement dated as of July 30, 1997 (the "Share Purchase Agreement") between the
Company and Thermo Instrument Systems Inc. ("Thermo Instrument"), a publicly
held subsidiary of Thermo Electron Corporation ("Thermo Electron"). A copy of
the Share Purchase Agreement is attached hereto as Appendix A.
The purchase price for NESLAB is $76,222,000. The purchase price represents
the sum of the net operating assets of NESLAB as of June 28, 1997, plus a
percentage of Thermo Instrument's total cost in excess of net tangible assets
acquired associated with its acquisition, in March 1997, of Life Sciences
International PLC ("LSI"), the former parent company of NESLAB, based on
NESLAB's 1996 revenues relative to LSI's 1996 consolidated revenues.
The representation in person or by proxy of a majority of the outstanding
shares of Common Stock entitled to vote at the Meeting is necessary to provide a
quorum for the transaction of business at the Meeting. Shares can only be voted
if the Stockholder is present in person or is represented by returning a
properly signed proxy. Each Stockholder's vote is very important. Whether or not
you plan to attend the Meeting in person, please sign and promptly return the
enclosed proxy card, which requires no postage if mailed in the United States.
All signed and returned proxies will be counted towards establishing a quorum
for the Meeting, regardless of how the shares are voted. Proxies are being
solicited by the Company.
Shares represented by proxy will be voted in accordance with your
instructions. You may specify your choice by marking the appropriate box on the
proxy card. If your proxy card is signed and returned without specifying
choices, your shares will be voted for the management proposal and as the
individuals named as proxy holders on the proxy deem advisable on all other
matters as may properly come before the Meeting.
The proposal to be voted upon at the Meeting must receive the affirmative
vote of a majority of shares present in person or represented by proxy, and
entitled to vote on the matter, for approval. An instruction to abstain from
voting on the proposal will be treated as shares present and entitled to vote
and, for purposes of determining the outcome of the vote, will have the same
effect as a vote against the proposal. A broker "non-vote" occurs when a nominee
holding shares for a beneficial holder does not have discretionary voting power
and does not receive voting instructions from the beneficial owner. Broker
"non-votes" will not be treated as shares present and entitled to vote on a
voting matter and will have no effect on the outcome of the vote.
A Stockholder who returns a proxy may revoke it at any time before the
Stockholder's shares are voted at the Meeting by written notice to the Secretary
of the Company received prior to the Meeting, by executing and returning a
later-dated proxy or by voting by ballot at the Meeting. Representatives of
Arthur Andersen LLP, the Company's independent public accountants since its
inception in 1994, are not expected to be present at the Meeting.
The outstanding stock of the Company entitled to vote (excluding shares held
in treasury by the Company) as of July 24, 1998, consisted of 12,567,892 shares
of Common Stock. Only Stockholders of record at the close of business on July
24, 1998, are entitled to vote at the Meeting. Each share is entitled to one
vote.
<PAGE>
PROPOSAL TO APPROVE THE LISTING OF SHARES
ISSUABLE IN CONNECTION WITH AN ACQUISITION
SUMMARY OF TRANSACTIONS CONTEMPLATED BY THE SHARE PURCHASE AGREEMENT
On July 30, 1997, the Company agreed to purchase from LSI, a wholly owned
subsidiary of Thermo Instrument, or from LSI's wholly owned subsidiaries, NESLAB
Instruments, Inc., a global manufacturer and supplier of temperature-control
products, its related sales and service entity, NESLAB Instruments Europa BV,
and NESLAB Instruments Ltd. (together, "NESLAB" or the "Acquired Company").
Approval of the Share Purchase Agreement and the transactions contemplated
thereby (the "Acquisition") by the Stockholders of the Company is not required
by the General Corporation Law of the State of Delaware or by the Company's
Certificate of Incorporation or By-laws, as amended. However, the rules of the
American Stock Exchange, Inc. (the "AMEX"), on which the Company's Common Stock
is listed for trading, require that the holders of a majority of the Company's
outstanding shares present and voting at a shareholders' meeting approve the
listing of the THS Shares to be issued pursuant to the Share Purchase Agreement
prior to their issuance. This approval is required pursuant to Section 712 of
the AMEX Company Guide, which requires shareholder approval prior to listing of
shares to be issued as partial consideration for an acquisition if any
substantial shareholder of the listed company has a five percent or greater
interest in the company to be acquired and the issuance of such shares as
consideration could result in an increase in the outstanding shares of the
listed company of five percent or more. Thermo Instrument is a "substantial
shareholder" of the Company and also has a greater than five percent interest in
the Acquired Company. Moreover, the issuance of the 2,759,042 THS Shares would
result in an increase in the Company's outstanding shares of more than five
percent. Thermo Instrument has agreed to vote all of the shares of the Company's
Common Stock held by it as of the record date of the Meeting (the "Record Date")
in favor of the listing of the THS Shares and all matters related thereto. As of
June 30, 1998 (without giving effect to the issuance of the THS Shares), Thermo
Instrument owned approximately 71.6% of the outstanding Common Stock of the
Company. After giving effect to the issuance of the THS Shares pursuant to the
Share Purchase Agreement, Thermo Instrument will own approximately 76.7% of such
outstanding Common Stock.
BACKGROUND OF THE SHARE PURCHASE AGREEMENT
In January 1997, Thermo Instrument initiated a tender offer to acquire all
of the issued and outstanding shares of LSI, a London Stock Exchange-listed
company, for 135 pence per share. In March 1997, Thermo Instrument acquired
164,126,284 shares, or approximately 95%, of LSI for an aggregate of
approximately $355,000,000, in completion of its tender offer for the shares of
LSI. Thermo Instrument has subsequently acquired the remaining LSI shares
pursuant to the compulsory acquisition rules applicable to United Kingdom
companies.
Subsequent to the acquisition of LSI, Thermo Instrument and its subsidiaries
evaluated the various component businesses of LSI for their most appropriate
strategic fit within Thermo Instrument and its subsidiary companies. In October
1996, prior to LSI's acquisition by Thermo Instrument, LSI underwent a
reorganization into four distinct product groups. One of these groups, the
Industrial Products group, contained the Acquired Company. During May and June
1997, following Thermo Instrument's acquisition of LSI, officers of both the
Company and Thermo Instrument, including Mr. Theo Melas-Kyriazi, the then
President and Chief Executive Officer of the Company, and Mr. Earl R. Lewis,
President and Chief Executive Officer of Thermo Instrument, met to discuss the
sale of the Acquired Company to the Company. Those officers of the Company and
Thermo Instrument determined that the operations of the Acquired Company could
be more easily integrated with the operations of the Company than with those of
Thermo Instrument, based on the location of the Acquired Company's manufacturing
facilities, the types of products manufactured by the Acquired Company and the
Company, and the Acquired Company's distribution network. In July 1997, the
decision was made by Messrs. Melas-Kyriazi and Lewis on behalf of
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<PAGE>
the Company and Thermo Instrument, respectively, to present the proposed sale of
the Acquired Company to the Boards of Directors of the Company and Thermo
Instrument for their consideration. On July 8 and July 11, 1997, the Boards of
Directors of the Company and Thermo Instrument, respectively, both unanimously
determined that a transfer of the businesses conducted by the Acquired Company
from Thermo Instrument to the Company would enable the Company to develop its
presence as a supplier of specialized instrumentation and equipment to the
semiconductor industry. The Board of Directors of Thermo Instrument is comprised
of Mr. Arvin H. Smith, Col. Frank Borman, Dr. George N. Hatsopoulos, Mr. John N.
Hatsopoulos, Mr. Polyvios C. Vintiadis, and, effective January 1, 1998, Mr. Earl
R. Lewis. The Board of Directors of the Company is comprised of Dr. Robert E.
Finnigan, Dr. Elias P. Gyftopoulos, Mr. Earl R. Lewis, Mr. Theo Melas-Kyriazi,
Mr. Arvin H. Smith and, effective March 11, 1998, Mr. Barry S. Howe.
Accordingly, the Company and Thermo Instrument entered into the Share
Purchase Agreement on July 30, 1997.
CALCULATION OF THE PURCHASE PRICE FOR THE ACQUIRED COMPANY
The purchase price (the "Purchase Price") for the Acquired Company is
$76,222,000. The purchase price represents the sum of the net operating assets
of NESLAB as of June 28, 1997, plus a percentage of Thermo Instrument's total
cost in excess of net tangible assets acquired associated with its acquisition,
in March 1997, of Life Sciences International PLC ("LSI"), the former parent
company of NESLAB, based on NESLAB's 1996 revenues relative to LSI's 1996
consolidated revenues. The Purchase Price was subject to a post-closing
adjustment based on a final determination of the net operating assets of the
Acquired Company and a final calculation of Thermo Instrument's total cost in
excess of net tangible assets acquired associated with its acquisition of LSI.
See "Summary of the Share Purchase Agreement--Certain Adjustments."
Of the aggregate Purchase Price of $76,222,000, the Company assumed
$44,907,000 of debt to Thermo Instrument and will issue 2,759,042 THS Shares,
valued at $31,315,000 at the time the Share Purchase Agreement was executed, to
Thermo Instrument. To repay the debt assumed from Thermo Instrument, the Company
borrowed $45,000,000 from Thermo Electron, pursuant to a promissory note that
bears interest at the 90-day commercial paper composite rate plus 25 basis
points, and is due in July 1999. Such rate was 5.70% on the first business day
of the fiscal quarter ended July 4, 1998. The 90-day commercial paper composite
rate is determined by the Federal Reserve Bank from its database of transactions
in commercial paper that are cleared through a system operated by the Depository
Trust Company.
REASONS FOR THE ACQUISITION/RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors believes that the acquisition of the
Acquired Company complements the Company's existing product lines and services
and is consistent with its long-term strategy. The Company's long-term strategy
includes the development and marketing of new applications for its advanced
instrumentation technologies and the acquisition of complementary businesses and
technologies. The Company presently develops, manufactures and markets imaging
and inspection instruments and test and measurement instruments, which are
generally combined with proprietary operations and analysis software to address
the specific needs of the Company's customers. The Company plans to integrate
the products manufactured by the Acquired Company for use by semiconductor
manufacturers and industrial research and development laboratories into the
Company's existing product lines. The Company's Board of Directors believes that
the Company's acquisition of the Acquired Company will enable the Company to
enter new markets for its products in which it is not well represented and to
strengthen its presence in markets in which it already operates.
In making the decision to engage in the Acquisition, the Company's Board of
Directors considered the following factors, which were considered to have a
material bearing on the Board's decision: the types of
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<PAGE>
products manufactured by the Acquired Company; the potential to integrate those
products with those manufactured by the Company; the ability to expand the
Company's existing technological and research capabilities; the geographic
presence of sales, manufacturing, distribution and other facilities of the
Acquired Company as compared with the existing geographic presence of the
Company; perceived strengths of the management, research and other personnel of
the Acquired Company; the financial history and financial projections of the
Acquired Company; and the Company's ability to expand its market share, research
capabilities, and technological capacity through integration of the Acquired
Company with the Company's existing operations.
The Company's Board of Directors considers attractive acquisition
opportunities from time to time that are identified by the Company for the
Board's review. The Board of Directors decided to proceed with the Acquisition
because it perceived synergies between the Company and the Acquired Company, as
described above, that would make the Acquisition beneficial for the Company and
its stockholders. At the time the Board decided to approve the Acquisition, the
Company had not identified any acquisition candidates that it believed to be as
attractive as the Acquired Company. Consequently, the Board had not considered
at length any alternative transactions to the Acquisition at the time it voted
to approve the Acquisition.
As with any acquisition, however, there can be no assurance that the Company
will be successful in integrating the businesses of the Acquired Company with
its current operations, nor that the benefits which the Company's Board of
Directors expects from the Acquisition, as described above, will be achieved. If
the Company were unsuccessful in achieving such integration, such failure could
adversely affect the Company's performance. See "Forward-Looking Statements--
Risks Associated with Acquisition Strategy."
The Board of Directors has unanimously approved the Share Purchase Agreement
and the transactions contemplated thereby and believes that the Share Purchase
Agreement is fair to and in the best interests of the Company and its
Stockholders. THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR
OF THE LISTING OF THE THS SHARES TO BE ISSUED IN CONNECTION WITH THE SHARE
PURCHASE AGREEMENT.
ACCOUNTING TREATMENT OF THE ACQUISITION
Because the Company and NESLAB were deemed for accounting purposes to be
under control of their common majority owner, Thermo Instrument, the Acquisition
has been accounted for in a manner similar to a pooling of interests.
Accordingly, the Company's financial statements include the results of NESLAB
from the March 1997 date on which Thermo Instrument acquired LSI. The THS Shares
have been deemed to be outstanding from that date. See pro forma data set forth
at "Selected Financial Information--ThermoSpectra Corporation."
SUMMARY OF THE SHARE PURCHASE AGREEMENT
GENERAL
On July 30, 1997, the Company agreed with Thermo Instrument that it would
purchase NESLAB from LSI or LSI's wholly owned subsidiaries.
ISSUANCE OF THE THS SHARES
Both (i) Thermo Instrument's right to receive the THS Shares and (ii) the
closing of the transactions contemplated by the Share Purchase Agreement (the
"Closing") are conditioned on the prior listing of the THS Shares for trading
upon the AMEX. In the Share Purchase Agreement, the Company agreed to take all
action necessary in accordance with applicable law to convene a meeting of its
Stockholders for the purpose of approving the listing of the THS Shares for
trading upon AMEX, and to recommend to the
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<PAGE>
Stockholders the approval of such listing. In the Share Purchase Agreement,
Thermo Instrument agreed to vote all of the shares of the Company's Common Stock
held by it as of the record date of such meeting in favor of such listing.
Accordingly, the listing of the THS Shares is assured, because of Thermo
Instrument's greater than fifty percent ownership of the Company. Consequently,
despite the fact that the Closing has not yet taken place, the Company and
Thermo Instrument have treated the Acquisition as effectively complete.
As of June 30, 1998, Thermo Instrument beneficially owned 8,997,475 shares
of the Company, or approximately 71.6% of the outstanding shares. Giving effect
to the issuance of the THS Shares to Thermo Instrument would increase Thermo
Instrument's ownership percentage to 76.7%.
REPRESENTATIONS AND WARRANTIES
In the Share Purchase Agreement, the Company and Thermo Instrument made
certain representations and warranties to one another with respect to certain
customary matters, such as their respective organization, their respective
authority to enter into the Share Purchase Agreement and the enforceability of
the Share Purchase Agreement. In addition, Thermo Instrument made certain
representations and warranties to the Company with respect to (i) the
capitalization of NESLAB, (ii) environmental conditions with respect to NESLAB's
properties, and (iii) NESLAB's consolidated balance sheet as at June 28, 1997,
and NESLAB's consolidated statements of earnings for the three years ended
December 31, 1996, and for the six-month period ended June 28, 1997. The
representations and warranties made by Thermo Instrument with respect to
environmental conditions at NESLAB's properties include statements regarding the
absence of activity on premises occupied by NESLAB involving use, handling,
storage, or disposal of hazardous or toxic wastes in violation of common law or
any applicable environmental law. In addition, the representations and
warranties of Thermo Instrument with respect to NESLAB's consolidated financial
statements state that such financial statements fairly present the financial
condition, results of operations, and cash flows of NESLAB as of the dates and
for the periods indicated, in each case in accordance with generally accepted
accounting principles consistently applied. Each of these representations and
warranties survives the Closing for a period of two years from the date of the
Closing.
CERTAIN ADJUSTMENTS
The Purchase Price for NESLAB was subject to adjustment depending on changes
in the amount of net operating assets of NESLAB and the amount of total goodwill
associated with Thermo Instrument's acquisition of LSI. The Company received a
refund from Thermo Instrument of $1,256,000 of the Purchase Price in connection
with this adjustment. For purposes of this section, "goodwill" means cost in
excess of net tangible assets acquired, and does not include any restructuring
or similar costs or reserves accrued by Thermo Instrument in connection with
actions taken by the businesses of LSI after March 12, 1997, to reduce costs
through severance or abandonment of excess facilities, and "net operating
assets" means tangible assets, minus total liabilities, determined in accordance
with Thermo Instrument's accounting policies.
AMENDMENTS; WAIVERS
Any provision of the Share Purchase Agreement may be amended or waived by
the mutual consent of the parties at any time. The Company does not expect that
any material provisions of the Share Purchase Agreement will be amended or
waived. However, as any amendment or waiver of any provision of the Share
Purchase Agreement requires the consent of both the Company and Thermo
Instrument, any changes made will be the result of negotiation between and
agreement by both parties.
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<PAGE>
PREVIOUS TRANSACTIONS BETWEEN NESLAB AND THE COMPANY
Prior to the transactions represented by the Share Purchase Agreement, there
were no material contracts, arrangements, understandings, relationships,
negotiations, or transactions between NESLAB or its affiliates and the Company
and its affiliates, except for the purchase of all of the issued and outstanding
shares of LSI, the parent company of NESLAB, by Thermo Instrument, the Company's
parent company, in March, 1997. See "Background of the Share Purchase
Agreement."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
No gain or loss for federal income tax purposes will be recognized by the
Company in connection with the Acquisition or the issuance of the THS Shares.
REGULATORY APPROVALS
No federal or state regulatory approvals are required in order to issue the
THS Shares pursuant to the Share Purchase Agreement.
NO DISSENTERS' APPRAISAL RIGHTS
Under applicable provisions of the Delaware General Corporation Law, holders
of the Company's Common Stock will not have any dissenters' appraisal rights in
connection with the listing of the THS Shares, or any other transaction
described in this proxy statement, to be acted upon at the Meeting.
INFORMATION CONCERNING NESLAB
BUSINESS
Under the terms of the Share Purchase Agreement, the Company will acquire
all of the issued and outstanding shares of NESLAB in exchange for the right to
receive 2,759,042 THS Shares and the assumption of $44,907,000 of debt to Thermo
Instrument. The principal executive office of NESLAB is 25 Nimble Hill Road,
Newington, New Hampshire 03801, and its telephone number is 603-436-9444.
NESLAB manufactures and markets precision temperature-control systems for
analytical, laboratory, industrial, research and development, laser, and
semiconductor applications. The laboratory product line includes
constant-temperature bath/circulators and immersion coolers typically used for
cell culture, incubations, refractometer cooling, and general research and
development. The industrial product line features self-contained cooling systems
that pump chilled water through water-cooled equipment such as lasers;
analytical instrumentation such as X-ray diffraction; and, in the semiconductor
industry, etchers and ion implanters.
NESLAB sells its temperature-control systems through a direct sales force in
the U.S. and Europe, and through a network of distributors and sales
representatives in the rest of the world.
PRINCIPAL CUSTOMERS
The principal customers for NESLAB's products and services are semiconductor
manufacturers, research and development laboratories, and medical equipment,
analytical equipment, and laser manufacturers.
COMPETITION
NESLAB competes primarily on the basis of performance, price, and customer
service. The Company's main competitors are Lauder and Julabo. NESLAB has
established a strong competitive position in the laboratory/research and
development market and in the semiconductor market. The Company believes
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NESLAB has distinguished itself from its competitors in the areas of software
control systems and customizing design capabilities.
MANAGEMENT
The following sets forth information concerning the officers of the Acquired
Company.
Richard Melanson has been President of NESLAB since November 1997. Prior to
joining NESLAB, Mr. Melanson had been President and Chief Executive Officer of
ElectroScan Corporation from 1988 until 1996, and had served as Vice President
and General Manager of Philips ElectroScan Corporation from 1996 until 1997.
James R. Allen has been Vice President, Finance, Systems, Administration of
NESLAB since 1996. Prior to 1996, Mr. Allen had been Senior Vice
President-Finance and Administration of The Kingston-Warren Corporation, a
supplier to automotive original equipment manufacturers, since 1989.
Tim LeFebvre has been Vice President, Sales and Marketing of NESLAB since
1991.
EMPLOYEES
As of July 4, 1998, the Acquired Company had 533 employees. The Company
believes that the Acquired Company's relations with its employees are good.
PROPERTIES
NESLAB is headquartered in 140,000 square feet of office and manufacturing
space in Portsmouth, New Hampshire pursuant to a lease expiring in September
2000. NESLAB also maintains sales and customer support offices in Schaumburg,
Illinois; Hillsboro, Oregon; Union City, California; Phoenix, Arizona; and
Austin, Texas. NESLAB also has offices in The Netherlands; Cheshire, England;
Vitry sur Seine, France; and Frankfurt, Germany. The Company believes that
NESLAB's facilities are adequate for its present operations and that other
suitable space is readily available if any of the leases for such facilities are
not extended.
SELECTED QUARTERLY FINANCIAL DATA--NESLAB
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.............................................................. $ 14,794 $ 17,659 $ 13,597 $ 14,982
Gross Profit.......................................................... 4,993 5,922 3,695 4,765
Net Income (Loss)..................................................... 84 137 (68) (87)
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
Revenues.............................................................. $ 10,602 $ 13,389 $ 14,514 $ 16,946
Gross Profit.......................................................... 3,777 5,051 5,133 6,241
Net Income............................................................ 178 772 632 51
</TABLE>
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SELECTED FINANCIAL INFORMATION--NESLAB
The selected financial information below for the fiscal year ended December
31, 1994, and as of and for the fiscal years ended December 31, 1995 and 1996,
has been derived from NESLAB's Combined Financial Statements, which have been
audited by KPMG Peat Marwick LLP, independent public accountants, as indicated
in their report included elsewhere in this Proxy Statement. The selected
financial information as of and for the fiscal years ended December 31, 1992 and
1993, and as of December 31, 1994, has not been audited but, in the opinion of
NESLAB, includes all adjustments (consisting only of normal, recurring
adjustments) necessary to present fairly such information in accordance with
generally accepted accounting principles applied on a consistent basis.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 30,296 $ 32,145 $ 37,238 $ 55,451 $ 61,032
--------- --------- --------- --------- ---------
Cost and Operating Expenses:
Cost of revenues......................................... 14,574 17,777 21,682 35,249 41,657
Selling, general, and administrative expenses............ 10,390 11,571 10,128 11,252 12,018
Research and development expenses........................ 596 985 2,118 3,003 4,151
--------- --------- --------- --------- ---------
25,560 30,333 33,928 49,504 57,826
--------- --------- --------- --------- ---------
Operating Income........................................... 4,736 1,812 3,310 5,947 3,206
Interest Expense, Net...................................... (3,205) (2,691) (2,503) (2,651) (2,560)
--------- --------- --------- --------- ---------
Income (Loss) Before Provision for Income Taxes............ 1,531 (879) 807 3,296 646
Provision for Income Taxes................................. 588 58 637 1,663 580
--------- --------- --------- --------- ---------
Net Income (Loss).......................................... $ 943 $ (937) $ 170 $ 1,633 $ 66
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BALANCE SHEET DATA (AT END OF PERIOD):
Working Capital............................................ $ 5,971 $ 4,219 $ 6,720 $ 10,569 $ 12,981
Total Assets............................................... 51,330 51,792 54,098 62,899 65,874
Long-term Notes Payable, Due to Affiliates................. 41,580 41,580 41,580 44,580 44,580
Shareholder's Investment................................... 1,945 970 1,164 2,807 2,877
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--NESLAB
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 NESLAB to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements."
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995
Revenues increased 10% in 1996 to $61.0 million, compared with $55.5 million
in 1995. The increase was primarily due to continued increase in demand for
semiconductor industry-related orders.
The gross profit margin decreased to 32% in 1996 from 36% in 1995, primarily
due to a continued shift of product sales mix toward original equipment
manufacturers ("OEMs"), particularly in the semiconductor market, which carry
lower profit margins, and increased warranty expenses.
Selling, general, and administrative expenses as a percentage of revenues
was unchanged at 20% in 1996 and 1995. Expenses for research and development
increased to $4.2 million in 1996 from $3.0 million in 1995 as NESLAB continued
to develop more customized features in its products and as a result of the
full-year impact of hiring during 1995.
Interest expense, related party, primarily represents interest incurred on a
$39.0 million note payable to Life Sciences International PLC, issued in
connection with its acquisition of NESLAB.
The effective tax rate in both years exceeded the statutory federal income
tax rate primarily due to the amortization of cost in excess of net assets of
acquired company. The effective tax rate increased in 1996 due to the larger
relative effect of nondeductible expenses.
1995 COMPARED WITH 1994
Revenues increased 49% in 1995 to $55.5 million from $37.2 million in 1994.
The increase was primarily due to increased emphasis on OEM business,
particularly semiconductor industry-related, coupled with a strong semiconductor
equipment market, which increased demand for NESLAB's products.
The gross profit margin decreased to 36% in 1995 from 42% in 1994, primarily
due to growth in OEM and semiconductor industry-related products and increased
infrastructure and overhead costs to support this growth.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 20% in 1995 from 27% in 1994, primarily due to increased revenues.
Expenses for research and development increased to $3.0 million in 1995 from
$2.1 million in 1994, primarily to support the shift to OEM business as NESLAB
developed more customized features in its products.
Interest expense, related party, primarily represents interest incurred on a
$39.0 million note payable to Life Sciences International PLC, issued in
connection with its acquisition of NESLAB.
The effective tax rate in both years exceeded the statutory federal income
tax rate primarily due to the amortization of cost in excess of net assets of
acquired company. The effective tax rate decreased in 1995 due to the smaller
relative effect of nondeductible expenses.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $13.0 million at December 31, 1996, compared with $10.6
million at December 31, 1995. During 1996, $1.1 million of cash was provided by
operating activities. The impact of an increase in amounts due from affiliates
of $4.4 million was substantially offset by the impact of an increase in amounts
due to affiliates of $4.2 million.
NESLAB expended $2.1 million on capital expenditures during 1996.
Collections on notes receivable from affiliates provided $2.3 million of cash in
1996. NESLAB believes its existing resources are sufficient to meet the capital
requirements of its existing operations for the foreseeable future.
INFORMATION CONCERNING THE COMPANY
On August 12, 1998, Thermo Electron issued a press release regarding a
proposed reorganization at Thermo Electron involving certain of Thermo
Electron's subsidiaries, including the Company.
In the press release, Thermo Electron announced that the Company may be
taken private and become a wholly-owned subsidiary of Thermo Instrument.
Shareholders of the Company would receive cash or shares of the common stock,
$.10 par value per share, of Thermo Instrument in exchange for their shares of
the Company's Common Stock.
The completion of the transaction described in the preceding paragraph is
subject to numerous conditions, including the establishment of prices or
exchange ratios; confirmation of anticipated tax consequences; the approval of
the Board of Directors of Thermo Instrument; the negotiation and execution of a
definitive merger agreement; the receipt of a fairness opinion from an
investment banking firm that the transaction is fair to the Company's
shareholders (other than Thermo Instrument and Thermo Electron) from a financial
point of view; the approval of the Company's Board of Directors, including its
independent directors; and clearance by the Securities and Exchange Commission
of any necessary documents regarding the proposed transaction.
BUSINESS
GENERAL
ThermoSpectra Corporation develops, manufactures, and markets imaging and
inspection, temperature-control, and test and measurement instruments. These
instruments are generally combined with proprietary operations and analysis
software to provide industrial and research customers with integrated systems
that address their specific needs. The Company was incorporated in Delaware in
August 1994 as an indirect, wholly owned subsidiary of Thermo Instrument.
The Company has achieved and maintains its competitive position primarily by
providing customers with a broad array of technologically advanced
instrumentation. The Company's strategy for growth includes the continued
development of new applications for its technology to address related market
segments, identifying and acquiring complementary businesses, and strengthening
its presence in selected geographic markets.
In March 1997, Thermo Instrument acquired approximately 95% of the
outstanding shares of Life Sciences International PLC ("LSI"), a London Stock
Exchange-listed company. Subsequently, Thermo Instrument acquired the remaining
shares of LSI capital stock. In July 1997, the Company agreed to acquire NESLAB,
a global supplier of temperature-control products and former LSI subsidiary,
from Thermo Instrument for $76,222,000. The purchase price represents the sum of
the net operating assets of the business as of June 28, 1997 plus a percentage
of Thermo Instrument's total cost in excess of net tangible assets acquired
associated with its acquisition of LSI, based on the aggregate 1996 revenues of
NESLAB relative to LSI's 1996 consolidated revenues. The purchase price
consisted of 2,759,042 THS Shares valued at $31,315,000 issuable to Thermo
Instrument and the assumption of $44,907,000 of debt, which was paid to Thermo
Instrument.
10
<PAGE>
In March 1997, the Company acquired Park Scientific Instruments Corporation
("PSI"), for $16.7 million in cash, including the repayment of $1.3 million in
debt. In addition, the Company assumed outstanding PSI stock options, which were
converted into stock options that are exercisable into 144,941 shares of common
stock of the Company at a weighted average exercise price of $3.07 per share,
with an aggregate value of approximately $1.7 million as of the date of the
merger agreement. PSI is a manufacturer of scanning-probe microscopes used in
industry and academia to test and measure the topography and other surface
properties of materials.
In July 1997, the Company acquired Sierra Research and Technology Inc.
("SRT"), a manufacturer of systems used for the rework and repair of printed
circuit boards, for $7.6 million in cash.
As of June 30, 1998, Thermo Instrument owned 8,997,475 shares of the Common
Stock of the Company, representing approximately 71.6% of such stock
outstanding. Thermo Instrument develops, manufactures, markets, and services
instruments and software used for the identification and quantification of
complex molecular compounds and elements in gases, liquids, and solids. Uses
include pharmaceutical drug research and clinical diagnostics, monitoring and
measuring environmental pollutants, industrial inspection, and test and control
for quality assurance and productivity improvement. In addition, Thermo
Instrument develops, manufactures, markets, and services equipment for the
measurement, preparation, storage, and automation of sample materials, and
photonics and vacuum components for original equipment manufacturers. During
1997(1), Thermo Electron purchased 845,000 shares of the Company's Common Stock
in the open market for a total purchase price of $10.8 million. Thermo Electron
provides analytical and monitoring instruments; biomedical products including
heart-assist devices, respiratory-care equipment, and mammography systems; paper
recycling and papermaking equipment; alternative-energy systems;
industrial-process equipment; and other specialized products. Thermo Electron
also provides industrial outsourcing, particularly in environmental-liability
management, laboratory analysis, and metallurgical services, and conducts
advanced-technology research and development.
The Company's backlog of firm orders was $40.4 million as of January 3,
1998, and $24.5 million as of December 28, 1996. The Company believes that
substantially all of the backlog as of January 3, 1998, will be shipped during
1998. Certain of such firm orders are cancelable by the customer upon payment of
a cancellation charge. The Company does not believe that the size of its backlog
is necessarily indicative of intermediate or long-term trends in its business.
PRINCIPAL PRODUCTS AND SERVICES
The Company manufactures and markets a variety of advanced instrumentation
that employs a broad range of technologies.
IMAGING AND INSPECTION SYSTEMS
The Company's Kevex Instruments and NORAN Instruments subsidiaries
manufacture X-ray analytical instruments enhanced by real-time digital imaging
technology for the electronics, aerospace, and automotive industries, among
others. The product lines include several X-ray microanalysis instruments that
analyze the chemical composition of microscopic samples by detecting,
collecting, sorting, and measuring X-rays emitted by a sample that has been
excited by an energy source. The Company also manufactures a range of X-ray
fluorescence instruments that incorporate an X-ray source into the instrument to
excite the sample.
Industrial customers, universities, and government laboratories represent
the majority of the end users of X-ray microanalysis systems. Over 50% of the
Company's sales of X-ray microanalyzers are to electron microscope
manufacturers, including Japan Electro Optical Laboratories, Hitachi, Ltd., and
Amray, for resale to end users. The Company sells its X-ray microanalyzers and
X-ray fluorescence
- ------------------------
(1) References to 1997, 1996, and 1995 herein are for the fiscal years ended
January 3, 1998, December 28, 1996, and December 30, 1995, respectively.
11
<PAGE>
instruments in the U.S. through a direct sales force; through a combination of
direct salespeople, distributors, and sales representatives in Europe, Japan,
and the rest of the Pacific Rim; and through original equipment manufacturer
("OEM") relationships with electron microscope manufacturers.
The Company's Kevex X-Ray subsidiary is a manufacturer of specialized X-ray
sources used by industrial users for imaging, inspection, analytical, and
thickness-gauging applications. Kevex X-Ray also supplies X-ray sources for
advanced medical diagnostic imaging equipment. The Company sells its X-ray
sources primarily to OEMs through a direct sales force in the United States, a
distributor in Japan, and through both a direct sales force and distributors in
the remainder of the world.
The Company's Nicolet Imaging Systems ("NIS") division manufactures
real-time, nondestructive X-ray imaging systems for quality-control inspection.
NIS' products are used to inspect high-reliability, high-liability products, two
examples of which are components for the telecommunications industry and those
used in airbag assembly in the automobile industry. The Company's line of X-ray
inspection products is among the most complete on the market, ranging from
manual, industrial inspection systems to fully automated, conveyorized circuit
board analysis systems for high-volume electronics manufacturing. The Company
markets its X-ray inspection systems worldwide through a network of domestic and
international sales representatives.
Through the Company's SRT subsidiary, the Company manufactures systems for
the rework and repair of printed circuit boards that have failed quality-control
inspection. The product line includes systems that remove defective components
from the board, clean away excess solder, redispense solder to the board, and
replace components. This is facilitated by proprietary software that allows for
increased automation and ease of use when incorporated into the system. The
Company sells its circuit board-repair systems through a combination of
distributors and sales representatives.
Through its PSI subsidiary, the Company designs, manufactures, and sells a
family of scanning probe microscopes, including vacuum, ambient air, and liquid
cell systems. Scanning probe microscopy is a new imaging tool that offers
three-dimensional resolution used for studying the surface properties of
materials down to the atomic level. Scanning probe microscopes can measure such
physical surface properties as magnetic fields, surface conductivity, and
static-charge distribution. PSI's instruments are used for academic,
semiconductor, computer storage, materials science, optics, and life science
applications. The Company sells its scanning probe microscopes through a direct
sales force, representatives, and distributors throughout the world.
The Company's NORAN subsidiary manufactures confocal laser scanning
microscopes that create an image of a sample by rapidly scanning it with a laser
light source. Confocal microscopes provide greatly enhanced depth resolution
over conventional optical microscopes. The Company sells its confocal laser
scanning microscope through a direct sales force and through distributors and
sales representatives.
Revenues from imaging and inspection systems represented 46%, 55%, and 49%
of the Company's total revenues in 1997, 1996, and 1995, respectively.
TEST AND MEASUREMENT INSTRUMENTS
The Company's Nicolet Instrument Technologies and Gould Instrument Systems
("GIS") subsidiaries manufacture data-acquisition systems, digital
oscilloscopes, and recording systems addressing a broad range of applications,
primarily research-oriented. Markets served include automotive, power, medical
research, telecommunications, and TV and video. The product family enables the
analysis and display of most common signal types such as voltage, pressure,
current, strain, acceleration, and temperature.
The Company markets its test and measurement instruments in the United
States and Europe through a combination of direct salespeople, distributors, and
sales representatives, and in the rest of the world through over 90 distributors
and sales representatives. Revenues from test and measurement instruments
represented 26%, 45%, and 51% of the Company's total revenues in 1997, 1996, and
1995, respectively.
12
<PAGE>
PATENTS, LICENSES, AND TRADEMARKS
The Company's policy is to protect its intellectual property rights and to
apply for patent protection when appropriate. The Company is the owner of a
number of patents. Patent protection provides the Company with competitive
advantages with respect to certain instruments. The Company believes, however,
that technical know-how and trade secrets are more important to its business
than patent protection.
COMPETITION
The Company competes primarily on the basis of technical advances that
result in new products and improved price/performance ratios and reputation
among customers as a quality leader for products and services. To a lesser
extent, the Company competes on the basis of price. The Company is not aware of
any other company that competes with it in all of its product lines. Some of the
Company's competitors have resources substantially greater than those of the
Company.
IMAGING AND INSPECTION SYSTEMS
The Company competes in both the high- and mid-end of the X-ray
microanalysis market. In the high end of this market, the Company offers
superior imaging and user-interface software. By incorporating computer
workstations in some of its systems, the Company believes it offers its
customers superior ability to collect, analyze, and display images, and to
network into a broader laboratory environment. The Company also offers mid-level
products in this market, with instruments that operate on a personal-computer
platform. The Company competes in the mid-end of this market on the basis of
quality, performance, and price. The primary competitors in this segment are
Link Analytical Limited, a wholly owned subsidiary of Oxford Instruments plc and
EDAX.
The Company's X-ray fluorescence product offerings compete in the high end
of this market. The Company believes that its strong X-ray source and detector
technology gives its products unique capabilities for industrial process
analysis. The Company competes on the basis of quality, performance, technology,
and price. The primary competitors in this segment are Horiba Ltd., Seiko
Instruments Inc., and Jordan Valley Applied Radiation, Ltd.
The Company competes in the specialty X-ray source market on the basis of
quality and price. Competitors in such markets include Hamamatsu Photonics KK,
True Focus Inc., and Oxford.
In the X-ray inspection market, the Company competes on the basis of
superior imaging performance, imaging analysis algorithms, customer-applications
expertise, overall machine flexibility and quality, and price. In the manual
segment of the X-ray inspection market, the Company competes primarily with a
few small companies. In the automated segment, its main competitor is Four Pi, a
subsidiary of Hewlett-Packard. No company occupies an across-the-board dominant
position. Competitors also include manufacturers of visible and laser-based
inspection systems.
SRT competes primarily on the basis of technological innovation,
performance, and price. SRT's main competitors are Fine Tech, AirVac,
Conceptronics, OK Industries, APE, Manncorp, Pace, Mannix, and SEC.
The Company competes primarily in the high-speed imaging segment of the
confocal microscopy market. The Company competes by offering a higher-speed
imaging capability than its competitors. The Company also competes by offering a
highly integrated software package to its customers. The Company competes only
to a lesser extent on the basis of price. The Company believes it holds the
largest share of the high-speed imaging market; however, it is a minor
competitor in the overall confocal life sciences market. Major competitors
include Bio-Rad Laboratories, Inc., Carl Zeiss, Inc., Leica PLC, and Nikon, Inc.
13
<PAGE>
The Company competes in the scanning probe microscope market on the basis of
quality, performance, and price. The dominant competitor in this market is
Digital Instruments Inc., a subsidiary of Veeco Instruments, Inc. Other
competitors include Seiko and Topometrix Corporation.
TEST AND MEASUREMENT INSTRUMENTS
In the broad-based test and measurement market, the Company competes with
products offering a wide range of measurement capabilities and price points. The
Company competes on the basis of quality of the measurement and analysis
capability of its products. The Company's combined product lines are among the
most complete in the industry, mostly differentiating themselves on the quality
of measurement and analysis capabilities. To a much lesser degree, the Company
competes on price. The Company believes it is well-positioned to capitalize on
the market transition from monolithic, single-purpose tools based on proprietary
architectures to multi-purpose Windows-Registered Trademark--based acquisition
and analysis systems.
A common competitor for the Company across all test and measurement product
lines is Yokogawa Corporation. The Company also competes with Hewlett-Packard
and Tektronix in the general-purpose digital storage oscilloscope marketplace.
In the oscillographic recorder marketplace, the primary competition comes from
Astro-Med and Graphtec Corporation of Japan. In the data acquisition
marketplace, the Company competes in a variety of applications and markets
against a range of competitors. Primary competition at the low end of the
marketplace comes from companies such as National Instruments and IOTech and in
the high-performance segments competition comes from companies such as Hewlett-
Packard, as well as many smaller regional suppliers.
EMPLOYEES
As of July 4, 1998, the Company employed approximately 1,300 people.
PROPERTIES
The Company owns approximately 200,000 square feet of office, engineering,
laboratory, and manufacturing space in Valencia, California; Middleton,
Wisconsin; and Hainault, England. The Company leases approximately 440,000
square feet of additional office, engineering, laboratory, and manufacturing
space under leases expiring from 1998 through 2005, principally in Newington,
New Hampshire; Valley View, Ohio; San Diego, California; and Sunnyvale,
California. The Company believes that its facilities are in good condition and
are suitable and adequate for its present operations. With respect to leases
expiring in the near future, in the event the Company does not renew such
leases, the Company believes suitable alternate space is available for lease on
acceptable terms.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been publicly traded on the AMEX since its
initial public offering on August 3, 1995. The following table sets forth the
high and low sales prices for the periods indicated of the Company's Common
Stock, as reported in the consolidated transaction reporting system.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C> <C>
1996
First Quarter........................................................ $ 18.875 $ 14.625
Second Quarter....................................................... $ 18.875 $ 15.250
Third Quarter........................................................ $ 16.125 $ 12.500
Fourth Quarter....................................................... $ 15.875 $ 11.375
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C> <C>
1997
First Quarter........................................................ $ 15.125 $ 11.750
Second Quarter....................................................... $ 14.500 $ 11.375
Third Quarter........................................................ $ 13.625 $ 9.750
Fourth Quarter....................................................... $ 13.625 $ 9.000
1998
First Quarter........................................................ $ 10.750 $ 8.625
Second Quarter....................................................... $ 12.750 $ 8.625
Third Quarter (through August 19, 1998).............................. $ 12.000 $ 9.250
</TABLE>
The high, low and closing prices of the Company's Common Stock on the AMEX
on July 14, 1997, the date preceding the public announcement of the Share
Purchase Agreement, were $11.125, $11.00 and $11.125, respectively. On August
19, 1998, the closing price of the Common Stock on the AMEX was $10.00 per
share. There were 236 holders of Common Stock of record as of August 19, 1998.
Holders of Common Stock do not have any preemptive rights to subscribe for
additional issuances of Common Stock or securities convertible into Common
Stock.
The Company has never paid cash dividends to its stockholders and does not
expect to pay cash dividends in the future because its policy has been to use
earnings to finance expansion and growth. Payment of dividends rests within the
discretion of the Company's Board of Directors and will depend upon, among other
factors, the Company's earnings, capital requirements, and financial condition.
SELECTED QUARTERLY FINANCIAL DATA--THERMOSPECTRA CORPORATION
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998
------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND
--------- ---------
Revenues.............................................................. $ 53,067 $ 49,058
Gross Profit.......................................................... 22,670 20,624
Net Income............................................................ 2,072 1,488
Basic and Diluted Earnings per Share.................................. .14 .10
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------
<S> <C> <C> <C> <C>
FIRST(1) SECOND THIRD FOURTH(2)
--------- ----------- --------- -----------
Revenues............................................................. $ 37,177 $ 49,692 $ 52,271 $ 59,760
Gross Profit......................................................... 16,275 21,702 20,249 24,927
Net Income........................................................... 1,188 1,337 705 2,618
Basic and Diluted Earnings per Share................................. .09 .09 .05 .17
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND(3) THIRD FOURTH
--------- ----------- --------- ---------
Revenues............................................................. $ 26,927 $ 31,281 $ 30,329 $ 34,662
Gross Profit......................................................... 12,788 15,080 15,092 17,339
Net Income........................................................... 1,436 1,562 1,690 1,929
Earnings per Share:
Basic.............................................................. .12 .13 .14 .16
Diluted............................................................ .11 .12 .13 .15
</TABLE>
- ------------------------
(1) Financial data has been restated to reflect the March 1997 acquisition of
NESLAB, accounted for in a manner similar to a pooling of interests.
(2) Reflects a $2,210,000 gain from the sale of the Company's Linac business.
(3) Reflects the March 1996 acquisition of Kevex Instruments and Kevex X-Ray.
15
<PAGE>
SELECTED FINANCIAL INFORMATION--THERMOSPECTRA CORPORATION
The selected financial information included below for the Company for the fiscal
year ended December 30, 1995, and as of and for the fiscal years ended December
28, 1996, and January 3, 1998, has been derived from the Company's Consolidated
Financial Statements, which have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report included elsewhere
in this Proxy Statement. The selected financial information as of and for the
fiscal year ended December 31, 1994, and as of December 30, 1995, has been
derived from the Company's Consolidated Financial Statements, which have been
audited by Arthur Andersen LLP, but have not been included in this Proxy
Statement. The selected financial information as of and for the fiscal year
ended January 1, 1994, and as of and for the six months ended June 28, 1997, and
July 4, 1998, has not been audited but, in the opinion of the Company, includes
all adjustments (consisting only of normal, recurring adjustments) necessary to
present fairly such information in accordance with generally accepted accounting
principles applied on a consistent basis. The results of operations for the six
months ended July 4, 1998, are not necessarily indicative of results for the
entire year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR -------------------- PRO FORMA
----------------------------------------------------- JUNE 28, JULY 4, COMBINED
1993 1994(1) 1995(2) 1996(3) 1997(4) 1997 1998 1997(5)
--------- --------- --------- --------- --------- --------- --------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues................ $ 17,702 $ 42,142 $ 91,714 $ 123,199 $ 198,900 $ 86,869 $ 102,125 $ 208,725
--------- --------- --------- --------- --------- --------- --------- -----------
Costs and Operating
Expenses:
Cost of revenues...... 10,208 21,759 46,384 62,900 115,747 48,892 58,831 123,619
Selling, general, and
administrative
expenses............ 5,431 12,136 28,501 36,493 53,182 23,725 27,278 56,476
Research and
development
expense............. 1,523 4,149 9,036 12,910 17,303 7,784 8,712 18,153
Other nonrecurring
expense (income),
net................. -- -- -- 171 (1,257) 800 (339) (1,257)
--------- --------- --------- --------- --------- --------- --------- -----------
17,162 38,044 83,921 112,474 184,975 81,201 94,482 196,991
--------- --------- --------- --------- --------- --------- --------- -----------
Operating Income........ 540 4,098 7,793 10,725 13,925 5,668 7,643 11,734
Interest Income......... -- 226 820 935 692 408 773 748
Interest Expense........ -- (114) (707) (773) (4,217) (1,711) (2,376) (4,838)
--------- --------- --------- --------- --------- --------- --------- -----------
Income Before Provision
for Income Taxes...... 540 4,210 7,906 10,887 10,400 4,365 6,040 7,644
Provision for Income
Taxes................. 287 1,842 3,312 4,270 4,552 1,840 2,480 3,601
--------- --------- --------- --------- --------- --------- --------- -----------
Net Income.............. $ 253 $ 2,368 $ 4,594 $ 6,617 $ 5,848 $ 2,525 $ 3,560 $ 4,043
--------- --------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- --------- -----------
Earnings per Share:
Basic................. $ .03 $ .25 $ .41 $ .53 $ .40 $ .18 $ .23 $ .27
--------- --------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- --------- -----------
Diluted............... $ .03 $ .25 $ .40 $ .53 $ .39 $ .18 $ .23 $ .26
--------- --------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- --------- -----------
Weighted Average Shares:
Basic................. 9,000 9,383 11,229 12,437 14,694 14,106 15,322 15,247
--------- --------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- --------- -----------
Diluted............... 9,000 9,383 11,356 12,570 14,806 14,263 15,344 15,359
--------- --------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- --------- -----------
</TABLE>
16
<PAGE>
SELECTED FINANCIAL INFORMATION--THERMOSPECTRA CORPORATION (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR --------------------
----------------------------------------------------- JUNE 28, JULY 4,
1993 1994(1) 1995(2) 1996(3) 1997(4) 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
END OF PERIOD):
Working Capital....... $ 6,037 $ 27,377 $ 35,961 $ 44,683 $ 53,540 $ 56,826 $ 52,741
Total Assets.......... 18,795 78,701 122,917 152,485 253,397 248,593 257,869
Long-term
Obligations......... -- 7,300 7,300 22,300 67,300 77,115 57,300
Shareholders'
Investment.......... 14,494 53,313 82,525 89,621 128,338 126,063 132,645
PER SHARE DATA:
HISTORICAL:
Book Value per
Share............... $ 8.38 $ 8.66
Cash Dividends
Declared per
Share............... -- --
Earnings per Share:
Basic............... .40 .23
Diluted............. .39 .23
PRO FORMA COMBINED:
Book Value per
Share............... $ 8.38 $ 8.66
Cash Dividends
Declared per
Share............... -- --
Earnings per Share:
Basic............... .27 .23
Diluted............. .26 .23
</TABLE>
- ------------------------
(1) Reflects the March 1994 acquisition by Thermo Instrument of NORAN, the
September 1994 acquisition by the Company of IRT Corporation, and the net
proceeds of the Company's private placements of common stock.
(2) Reflects the May 1995 acquisition of GIS and the net proceeds of the
Company's initial public offering and private placement of common stock.
(3) Reflects the March 1996 acquisition by Thermo Instrument of the Kevex
businesses.
(4) Reflects the March 1997 acquisition by Thermo Instrument of NESLAB, the
March 1997 acquisition by the Company of PSI, and the July 1997 acquisition
by the Company of SRT.
(5) The pro forma combined statement of income was derived from the pro forma
combined condensed statement of income included elsewhere in this Proxy
Statement. The pro forma combined statement of income sets forth the results
of operations for 1997 as if the acquisition of NESLAB had occurred at the
beginning of 1997.
17
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--THERMOSPECTRA CORPORATION
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 Operations under
the heading "Forward-looking Statements."
OVERVIEW
The Company develops, manufactures, and markets imaging and inspection,
temperature-control, and test and measurement instruments. These instruments are
generally combined with proprietary operations and analysis software to provide
industrial and research customers with integrated systems that address their
specific needs. The Company's products include test and measurement systems
consisting of digital oscillographic recorders, digital storage oscilloscopes
("DSOs"), and data-acquisition systems; X-ray microanalyzers; X-ray fluorescence
instruments; nondestructive X-ray inspection systems; specialty X-ray tubes; and
confocal laser scanning microscopes. In 1997, the Company broadened its product
offerings through the acquisition of Park Scientific Instruments Corporation
("PSI"), a manufacturer of scanning-probe microscopes; NESLAB; and Sierra
Research and Technology Inc. ("SRT"), a manufacturer of systems used for the
rework and repair of printed circuit boards.
The Company's growth strategy includes acquiring complementary businesses,
developing new applications for its technology to address related market
segments, and strengthening its presence in selected geographic markets. Because
the Company competes primarily on the basis of its technology, it will also need
to continually improve the technology underlying the products of any company it
acquires. One of the Company's principal goals during recent quarters has been
to improve operating margins. A part of this plan included the December 1997 and
January 1998 divestitures of two low-margin product lines.
A significant portion of the Company's total revenues is attributable to the
sale of products and related services to customers in the semiconductor
industry. The semiconductor industry has historically been cyclical and is
characterized by sudden and sharp changes in supply and demand. Demand for the
Company's products and services within the semiconductor industry is dependent
upon, among other factors, the level of capital spending by semiconductor
companies. The semiconductor industry is currently experiencing a downturn in
demand for its products as a result of the current economic crisis in Asia,
excess manufacturing capacity, and a slowdown in sales of high-end personal
computers. Many semiconductor manufacturers have delayed construction or
expansion of their production facilities in response to the foregoing
conditions. Further decreases in semiconductor activities could have a
significant adverse effect upon the demand for the Company's products and
related services, which would materially adversely affect the Company's business
and future results of operations.
The Company conducts all of its manufacturing operations in the United
States, except for the production of certain DSOs that are manufactured in
England. The Company sells its products worldwide. During 1997, exports from the
Company's U.S. and foreign subsidiaries to the Far East represented 15% of total
revenues. Exports to Japan represented 8% of total revenues and exports to
Taiwan, South Korea, and Singapore, collectively, represented 5% of total
revenues. Asia is experiencing a severe economic crisis, which has been
characterized by sharply reduced economic activity and liquidity, highly
volatile foreign-currency-exchange and interest rates, and unstable stock
markets. The Company's sales in Asia could be adversely affected by the unstable
economic conditions there. Additionally, certain of the Company's customers
located outside of the Asian region could be adversely affected by the unstable
economic conditions in Asia.
18
<PAGE>
The Company anticipates that a significant portion of its revenues will
continue to be from sales to customers outside the United States. The Company's
business activities outside the United States are conducted through sales and
service subsidiaries and through third-party representatives and distributors.
The results of the Company's international operations are subject to foreign
currency fluctuations, and the exchange rate value of the dollar may have a
significant impact on both revenues and earnings. The Company may use forward
contracts to reduce its exposure to currency fluctuations.
RESULTS OF OPERATIONS
FIRST SIX MONTHS 1998 COMPARED WITH FIRST SIX MONTHS 1997
Revenues were $102.1 million in the first six months of 1998, compared with
$86.9 million in the first six months of 1997, an increase of 18%. Revenues
increased $18.6 million, net due to the inclusion of revenues from NESLAB,
acquired for accounting purposes effective March 1997; PSI, acquired in March
1997; and SRT, acquired in July 1997; and the exclusion of revenues from the
Nicolet Imaging Systems ("NIS") product lines that were sold. Combined revenues
at Kevex Instruments, Nicolet Instrument Technology, and Gould Instrument
Systems, which represented 28% of revenues for the first six months of 1998,
decreased 15% from the first six months of 1997 due to decreased demand for
their products and a large shipment at Kevex Instruments that occurred in the
first quarter of 1997. Revenues were adversely affected by approximately $0.9
million due to the strengthening in the value of the U.S. dollar relative to
currencies in foreign countries in which the Company operates.
The gross profit margin declined to 42% in the first six months of 1998 from
44% in the first six months of 1997. The decline was primarily due to the
inclusion of lower-margin revenues from NESLAB for the full period, which had a
gross profit margin of 37% in the first six months of 1998, and, to a lesser
extent, lower gross profit margins at Gould due to decreased sales of
higher-margin products.
Selling, general, and administrative expenses as a percentage of revenues
were unchanged at 27% in the first six months of 1998 and 1997. The impact of
the inclusion of lower selling expenses as a percentage of revenues at NESLAB
was substantially offset by the inclusion of higher selling, general, and
administrative expenses as a percentage of revenues at PSI.
Research and development expenses increased to $8.7 million in the first six
months of 1998 from $7.8 million in the first six months of 1997, primarily due
to the inclusion of NESLAB and PSI for the full period in 1998.
Interest income increased slightly to $0.8 million in the first six months
of 1998 from $0.4 million in the first six months of 1997, due to higher average
invested cash balances. Interest expense, related party, represents interest
incurred on the $60.0 million aggregate amount of promissory notes issued to
Thermo Electron Corporation in 1997 in connection with acquisitions.
The effective tax rate was 41% in the first six months of 1998, compared
with 42% in the first six months of 1997. The effective tax rates exceeded the
statutory federal income tax rate primarily due to the impact of state income
taxes and nondeductible amortization of cost in excess of net assets of acquired
companies for certain of the Company's acquisitions.
The Company is currently assessing the potential impact of the year 2000 on
the processing of date-sensitive information by the Company's computerized
information systems and on products sold as well as products purchased by the
Company. The Company believes that its internal information systems and current
products are either year 2000 compliant or will be so prior to the year 2000
without incurring material costs. There can be no assurance, however, that the
Company will not experience unexpected costs and delays in achieving year 2000
compliance for its internal information systems and current products, which
could result in a material adverse effect on the Company's future results of
operations.
The Company is presently assessing the effect that the year 2000 problem may
have on its previously sold products. The Company is also assessing whether its
key suppliers are adequately addressing this issue and the effect this might
have on the Company. The Company has not completed its analysis and is unable to
conclude at this time that the year 2000 problem as it relates to its previously
sold products and products
19
<PAGE>
purchased from key suppliers is not reasonably likely to have a material adverse
effect on the Company's future results of operations.
1997 COMPARED WITH 1996
Revenues were $198.9 million in 1997, compared with $123.2 million in 1996,
an increase of 61%. Revenues increased $76.6 million due to the inclusion of
revenues from NESLAB, acquired for accounting purposes effective March 1997;
PSI, acquired in March 1997; and SRT, acquired in July 1997; and the inclusion
of revenues for the full year from Kevex Instruments, a manufacturer of X-ray
microanalyzers and X-ray fluorescence instruments, and Kevex X-Ray, a
manufacturer of specialty X-ray sources (the "Kevex businesses"), which were
acquired effective March 1996 (see Note 3 to the Company's Consolidated
Financial Statements included elsewhere in this proxy statement). Excluding the
impact of acquisitions and foreign currency translation, revenues from existing
operations increased 2% in 1997 compared with 1996. Revenues increased an
aggregate of $8.5 million due to higher demand for inspection systems
manufactured by the Company's NIS division and X-ray tubes manufactured by the
Company's Kevex X-Ray subsidiary. These increases were partially offset by a
$2.5 million decline in demand for test and measurement systems and a $2.4
million decrease in revenues at NORAN due to a decline in demand for confocal
laser scanning microscopes. Revenues were adversely affected by approximately
$3.5 million due to the strengthening in the value of the U.S. dollar relative
to currencies in foreign countries in which the Company operates.
The gross profit margin declined to 42% in 1997 from 49% in 1996. The
decline in the gross profit margin is primarily attributable to the inclusion of
lower-margin revenues from NESLAB, which had a gross profit margin of 36% in
1997, and to an eight percentage-point deterioration in margin levels at NIS due
to an inventory write-off in the third quarter of 1997 and a change in mix from
higher-margin manual systems to lower-margin automated systems. To a lesser
extent, the gross margin was adversely impacted in 1997 by a deterioration in
the gross profit margin for the Company's test and measurement systems and at
NORAN due in part to the strengthening of the U.S. dollar.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 27% in 1997 from 30% in 1996, primarily due to the inclusion of
lower selling expenses as a percentage of revenues at NESLAB and, to a lesser
extent, lower selling, general, and administrative expenses at Gould as a result
of ongoing expense reductions, including restructuring charges taken in 1997
that reduced employee cost levels at that subsidiary (see Note 4 to the
Company's Consolidated Financial Statements included elsewhere in this proxy
statement). These improvements were offset in part by the inclusion of higher
selling, general, and administrative expenses as a percentage of revenues at PSI
and a higher relative expense level at NORAN primarily due to lower revenues.
Research and development expenses as a percentage of revenues decreased to
8.7% in 1997 from 10.5% in 1996, due to the inclusion of NESLAB and overall
reduced research and development spending levels at the Company's existing
operations.
Other nonrecurring expense, net, in 1997 primarily represents charges
incurred by Gould relating to severance costs for employees terminated during
the year (see Note 4 to the Company's Consolidated Financial Statements included
elsewhere in this proxy statement). Other nonrecurring expense, net, in 1996
represents a $1.0 million restructuring reserve recorded at Gould offset in part
by $0.9 million, of an aggregate settlement with the prior owner of Gould of
$2.0 million, for costs incurred by Gould in connection with its Acqulab product
line (see Note 4 to the Company's Consolidated Financial Statements included
elsewhere in this proxy statement).
Gain on sale of business in 1997 represents the sale of NIS' Linac business
in December 1997 to SteriGenics International Inc. for $5.0 million in cash and
109,607 shares of SteriGenics common stock valued at $2.1 million. The Linac
business, which had revenues and operating income in 1997 of $3.7 million and
$1.2 million, respectively, is an electron beam radiation business that offers
contract sterilization services.
20
<PAGE>
Interest income decreased to $0.7 million in 1997 from $0.9 million in 1996
due to lower invested cash balances as a result of cash used to partially fund
the acquisitions of the Kevex businesses, which was paid to Thermo Instrument
Systems Inc. in August 1996, and the acquisition of PSI in March 1997. Interest
expense, related party, increased to $4.2 million in 1997 from $0.8 million in
1996 due to borrowings from Thermo Electron to fund acquisitions (see Note 8 to
the Company's Consolidated Financial Statements included elsewhere in this proxy
statement).
The effective tax rate was 44% in 1997, compared with 39% in 1996. The
effective tax rates exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes, nondeductible amortization of cost in
excess of net assets of acquired companies for certain of the Company's
acquisitions and, in 1997, the inability to benefit losses at certain of the
Company's foreign subsidiaries. The increase in the effective tax rate in 1997
was due to the impact of nondeductible amortization of cost in excess of net
assets of acquired companies from the acquisitions of NESLAB and PSI and
increased losses at certain of the Company's foreign subsidiaries that were not
benefited.
See Note 7 to the Company's Consolidated Financial Statements included
elsewhere in this proxy statement for a description of certain patent
infringement matters involving the Company.
1996 COMPARED WITH 1995
Revenues were $123.2 million in 1996, compared with $91.7 million in 1995,
an increase of 34%. Revenues increased due to the inclusion of $18.0 million of
revenues from the acquisition of the Kevex businesses and $9.6 million of
incremental revenues from Gould, acquired in May 1995 (see Note 3 to the
Company's Consolidated Financial Statements included elsewhere in this proxy
statement). Revenues at Gould for the last six months of 1996 declined by
approximately 14% from the comparable period in 1995, due to a decrease in
demand for Gould products. Revenues from the Company's other operations
increased approximately 9% in 1996, compared with 1995, due to the inclusion of
$2.3 million of revenues related to shipments of airbag inspection systems,
overall higher demand for X-ray inspection systems at NIS, and increased demand
for products sold by NORAN. Revenues were negatively affected by approximately
$1.6 million in 1996 due to the strengthening in the value of the U.S. dollar
relative to the Japanese yen and other foreign currencies in countries where the
Company operates.
The gross profit margin was 49% in both 1996 and 1995. Higher gross profit
margins at the Company's test and measurement businesses, due to changes in
product mix and manufacturing efficiencies, were offset by a lower gross profit
margin at NIS due to higher material costs and the inclusion of lower-margin
revenues from airbag inspection systems, the inclusion of revenues from the
Kevex businesses which had a combined gross profit margin of 42%, and the
strengthening in the value of the U.S. dollar.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 30% in 1996 from 31% in 1995 due to the inclusion of lower selling
expenses as a percentage of revenues at Kevex X-Ray. Research and development
expenses as a percentage of revenues were unchanged at 10% in both 1996 and
1995.
Interest income increased to $0.9 million in 1996 from $0.8 million in 1995,
principally due to overall higher cash balances in 1996. Interest expense,
related party in 1996 represents interest expense associated with a $7.3 million
promissory note issued to Thermo Instrument in September 1994 and a $15.0
million promissory note issued to Thermo Electron in August 1996 (see Note 8 to
the Company's Consolidated Financial Statements included elsewhere in this proxy
statement). Interest expense, related party in 1995 represents interest expense
associated with the $7.3 million promissory note issued to Thermo Instrument and
a $15.0 million promissory note issued to Thermo Electron in May 1995. The $15.0
million promissory note issued in May 1995 was repaid in August 1995.
The effective tax rate decreased to 39% in 1996 from 42% in 1995. These
rates exceeded the statutory federal income tax rate primarily due to the impact
of state and foreign income taxes and the nondeductible amortization of cost in
excess of net assets of acquired companies for certain of the Company's
21
<PAGE>
acquisitions. The effective tax rate decreased in 1996 principally as a result
of a lower percentage of the Company's income generated in countries with higher
tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $52.7 million at July 4, 1998, compared
with $53.5 million at January 3, 1998. Included in working capital are cash,
cash equivalents, and short-term investments of $36.0 million at July 4, 1998,
compared with $22.8 million at January 3, 1998. Cash provided by operating
activities was $10.7 million in the first six months of 1998. A decrease in
accounts receivable as a result of improved collections and increased domestic
sales, which carry shorter collection cycles, provided $3.1 million of cash.
Cash of $1.8 million was provided by investing activities during the first
six months of 1998. During this period, the Company received $0.8 million of
cash from the sale of a product line and $2.1 million from the sale of property,
plant, and equipment, primarily for the sale of a building by Gould. The Company
expended $0.9 million during the period for purchases of property, plant, and
equipment and plans to spend an additional $2.1 million for capital expenditures
during the remainder of 1998.
On July 15, 1998, the Company signed a nonbinding letter of intent to
acquire the assets of a scanning probe microscope manufacturing business (the
"Business") for approximately $8.0 million in cash. The proposed acquisition is
subject to certain conditions including completion of due diligence, negotiation
of a definitive purchase agreement, and approval by the boards of directors of
the Company and the Business and by the stockholders of the Business. The final
terms of this acquisition have not been determined and there can be no assurance
that it will be completed.
Net cash provided by operating activities was $8.4 million in 1997. The
Company used $8.8 million during the year to reduce its current liabilities. A
reduction in inventories provided $4.9 million.
The Company's investing activities used $19.6 million of cash in 1997. The
Company used $21.1 million, net of cash acquired, for acquisitions and received
$5.0 million in cash and $2.1 million of SteriGenics common stock for the sale
of the Company's Linac business (See Note 3 to the Company's Consolidated
Financial Statements included elsewhere in this proxy statement.) During 1997,
the Company expended $2.6 million for the purchase of property, plant, and
equipment.
During 1997, the Company's financing activities provided $15.0 million of
cash. In September 1997, the Company borrowed $45.0 million from Thermo Electron
pursuant to a promissory note due July 1999. The Company used the proceeds from
this note to repay the $44.9 million of debt assumed in connection with the
NESLAB acquisition. In connection with the March 1997 acquisition of PSI, the
Company borrowed $10.0 million from Thermo Electron pursuant to a promissory
note due March 1999. In connection with the July 1997 acquisition of SRT, the
Company borrowed $5.0 million from Thermo Electron pursuant to a promissory note
due July 1999. These notes bear interest at the 90-day Commercial Paper
Composite Rate plus 25 basis points, set at the beginning of each quarter.
Although the Company expects to generate positive cash flow from its
existing operations, the Company may require significant amounts of cash to
pursue the acquisition of complementary businesses. The Company expects that it
will finance any such acquisitions through a combination of internal funds
and/or borrowings from Thermo Instrument or Thermo Electron, although it has no
agreement with these companies to ensure that funds will be available on
acceptable terms or at all. The Company believes that its existing resources and
cash provided by operations are sufficient to meet the capital requirements of
its existing businesses for the forseeable future. Thermo Electron has indicated
that it will seek repayment of the notes due to it in 1998 and 1999 only to the
extent the Company's cash flow permits such repayment.
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
22
<PAGE>
results in 1998 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
UNCERTAINTY OF GROWTH. Certain of the markets in which the Company competes
have been flat or declining over the past several years. The Company has
identified a number of strategies it believes will allow it to grow its
business, including acquiring complementary businesses, developing new
applications for its technologies, and strengthening its presence in selected
geographic markets. No assurance can be given that the Company will be able to
successfully implement these strategies, or that these strategies will result in
growth of the Company's business.
POTENTIAL INCREASED COMPETITION. The Company predominantly sells its
products in the high-performance segment of the markets in which it competes.
The products in this segment are generally characterized by superior engineering
and performance and compete more on product specifications than on price. The
other segments of these markets are dominated by companies with substantially
greater financial resources than those of the Company. If these larger companies
enter the high-performance segment of the market, no assurance can be given that
the Company will be able to successfully compete against them.
NEED TO RESPOND TO TECHNOLOGICAL CHANGE. Many of the Company's products are
marketed primarily based on their technologies. In order to be successful, the
Company believes that it will be important to continually improve the technology
underlying its products. No assurance can be given that the Company will be able
to do so or that a competitor of the Company will not develop technology or
products that will render the Company's competing products noncompetitive or
obsolete.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY. The Company's strategy includes
the acquisition of underperforming businesses and technologies that complement
or augment the Company's existing product lines. Promising acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory approvals,
including antitrust approvals. Acquisitions completed by the Company may be made
at substantial premiums over the fair value of the net assets of the acquired
companies. There can be no assurance that the Company will be able to complete
future acquisitions or that the Company will be able to successfully integrate
any acquired businesses into its existing businesses or make such businesses
profitable.
DEPENDENCE ON SEMICONDUCTOR INDUSTRY; INDUSTRY VOLATILITY. A significant
portion of the Company's total revenues is attributable to the sale of products
and related services to customers in the semiconductor industry. The
semiconductor industry has historically been cyclical and is characterized by
sudden and sharp changes in supply and demand. Demand for the Company's products
and services within the semiconductor industry is dependent upon, among other
factors, the level of capital spending by semiconductor companies. The
semiconductor industry is currently experiencing a downturn in demand for its
products as a result of the current economic crisis in Asia, excess
manufacturing capacity and slowdowns in sales of high-end personal computers.
Many semiconductor manufacturers have delayed construction or expansion of their
production facilities in response to the foregoing conditions. Further decreases
in semiconductor activities could have a significant adverse effect upon the
demand for the Company's products and related services, which would materially
adversely affect the Company's business and future results of operations.
POSSIBLE ADVERSE IMPACT OF SIGNIFICANT INTERNATIONAL OPERATIONS. The
Company expects that international sales will continue to represent a
significant portion of its revenues. In fiscal 1997, international sales
accounted for approximately half of the Company's total revenues. These sales
carry a number of inherent risks, including risks associated with currency
exchange, tariffs and other potential trade barriers, potentially reduced
protection for intellectual property, the impact of recessionary environments in
economies outside the United States, and generally longer receivable collection
patterns. In addition, exports from the Company's U.S. and foreign subsidiaries
to the Far East represented 15% of total revenues in 1997. Exports to Japan
represented 8% of total revenues and exports to Taiwan, South Korea, and
Singapore, collectively, represented 5% of total revenues. Asia is experiencing
a severe economic crisis, which has
23
<PAGE>
been characterized by sharply reduced economic activity and liquidity, highly
volatile foreign-currency-exchange and interest rates, and unstable stock
markets. There can be no assurance that the Company's export sales to Asia will
not be adversely affected by the unstable economic conditions there.
Additionally, certain of the Company's customers located outside of the Asian
region could be adversely affected by the unstable economic conditions there.
RISKS ASSOCIATED WITH PROTECTION, DEFENSE, AND USE OF INTELLECTUAL
PROPERTY. The Company holds many patents relating to various aspects of its
products, and believes that proprietary technical know-how is critical to many
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 issue from any
pending or future patent applications owned by or licensed to the Company or
that the claims allowed under any issued patents will be sufficiently broad to
protect the Company's technology and, in the absence of patent protection, the
Company may be vulnerable to competitors who attempt to copy the Company's
products or gain access to its trade secrets and know-how. Proceedings initiated
by the Company to protect its proprietary rights could result in substantial
costs to the Company. There can be no assurance that competitors of the Company
will not initiate 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's PSI subsidiary has received an
allegation of patent infringement from a competitor relating to its scanning
probe microscopy technology and the Company's NORAN subsidiary has received
allegations of patent infringement from two competitors relating to its confocal
microscopy technology. The Company may need to acquire licenses to, or contest
the validity of, these or any other 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. In addition, if any
such competitor were successful in enforcing such patents, the Company could be
subject to damages and enjoined from manufacturing and selling any related
products. 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. Further, the laws of some jurisdictions do not protect the
Company's proprietary rights to the same extent as the laws of the U.S. and
there can be no assurance that the available protections will be adequate. 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.
INABILITY TO RAISE FUTURE CAPITAL; POSSIBLE DILUTION. In order to finance
the acquisitions that are part of the Company's growth strategy, it may be
necessary for the Company to raise additional funds either through public or
private financings. Any equity or debt financing, if available at all, may be on
terms that are not favorable to the Company and, in the case of an equity
financing, could result in dilution to the Company's stockholders.
POTENTIAL IMPACT OF YEAR 2000 ON PROCESSING OF DATE-SENSITIVE
INFORMATION. The Company is currently assessing the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems and on products sold as well as products
purchased by the Company. The Company believes that its internal information
systems and current products are either year 2000 compliant or will be so prior
to the year 2000 without incurring material costs. There can be no assurance,
however, that the Company will not experience unexpected costs and delays in
achieving year 2000 compliance for its internal information systems and current
products, which could result in a material adverse effect on the Company's
future results of operations.
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The Company is presently assessing the potential impact of the year 2000 on
its previously sold products. The Company is also assessing whether its key
suppliers are adequately addressing this issue and the effect this might have on
the Company. The Company has not completed its analysis and is unable to
conclude at this time that the year 2000 problem as it relates to its previously
sold products and products purchased from key suppliers is not reasonably likely
to have a material adverse effect on the Company's future results of operations.
STOCK OWNERSHIP
The following table sets forth the beneficial ownership of the Company's
Common Stock, as well as the common stock of Thermo Instrument, the Company's
parent company, and of Thermo Electron, Thermo Instrument's parent company, as
of June 30, 1998, with respect to (i) each person who was known by the Company
to own beneficially more than 5% of the outstanding shares of Common Stock, (ii)
each director of the Company, (iii) the Chief Executive Officer of the Company
and other executive officers of the Company who, during the last completed
fiscal year of the Company, met the definition of "highly compensated" within
the meaning of the Securities and Exchange Commission's executive compensation
disclosure rules, and (iv) all directors and current executive officers as a
group.
While certain directors and executive officers of the Company are also
directors and executive officers of Thermo Electron or its subsidiaries other
than the Company, all such persons disclaim beneficial ownership of the shares
of Common Stock owned by Thermo Electron.
<TABLE>
<CAPTION>
THERMOSPECTRA THERMO INSTRUMENT THERMO ELECTRON
NAME(1) CORPORATION(2) SYSTEMS INC.(3) CORPORATION(4)
- ---------------------------------------- -------------- ------------------ ---------------
<S> <C> <C> <C>
Thermo Electron Corporation(5).......... 10,315,628 N/A N/A
Christopher J. Barron................... 32,000 10,296 148
Robert E. Finnigan...................... 11,000 0 0
Elias P. Gyftopoulos.................... 21,000 55,798 70,707
Barry S. Howe........................... 119,010 125,422 78,770
Earl R. Lewis........................... 55,000 179,250 83,678
Ronald W. Lindell....................... 36,100 0 0
Richard S. Melanson..................... 40,000 5,000 2,500
Theo Melas-Kyriazi...................... 77,800 38,347 200,320
Arvin H. Smith.......................... 20,000 539,583 515,578
All directors and current executive
officers as a group (11 persons)...... 441,310 1,061,286 1,803,306
</TABLE>
- ------------------------
(1) Except as reflected in the footnotes to this table, shares beneficially
owned consist of shares owned by the indicated person or by that person for
the benefit of minor children, and all share ownership includes sole voting
and investment power.
(2) Shares of the Common Stock beneficially owned by Mr. Barron, Dr. Finnigan,
Dr. Gyftopoulos, Mr. Howe, Mr. Lewis, Mr. Lindell, Mr. Melanson, Mr.
Melas-Kyriazi, Mr. Smith and all directors and current executive officers as
a group include 32,000, 10,000, 20,000, 104,000, 50,000, 36,000, 35,000,
64,200, 20,000 and 400,600 shares, respectively, that such person or group
has the right to acquire within 60 days of June 30, 1998, through the
exercise of stock options. No director or current executive officer
beneficially owned more than 1% of the Common Stock outstanding as of June
30, 1998; all directors and current executive officers as a group
beneficially owned approximately 3.4% of the Common Stock outstanding as of
such date.
(3) The shares of the common stock of Thermo Instrument shown in the table
reflect a five-for-four split of such stock distributed in October 1997 in
the form of a 25% stock dividend. Shares of the common stock of Thermo
Instrument beneficially owned by Mr. Barron, Dr. Gyftopoulos, Mr. Howe, Mr.
Lewis, Mr. Melanson, Mr. Melas-Kyriazi, Mr. Smith and all directors and
current executive officers as a group include 9,838, 15,107, 111,327,
172,085, 5,000, 36,326, 292,968 and 731,713 shares, respectively, that such
person or group had the right to acquire within 60 days of June 30, 1998,
25
<PAGE>
through the exercise of stock options. Shares of the common stock of Thermo
Instrument beneficially owned by Mr. Melas-Kyriazi, Mr. Smith and all
directors and current executive officers as a group include 468, 663, and
2,287 shares, respectively, allocated through June 30, 1998, to their
respective accounts maintained pursuant to Thermo Electron's employee stock
ownership plan (the "ESOP"), of which the trustees, who have investment
power over its assets, are executive officers of Thermo Electron. Shares
beneficially owned by Mr. Lewis include 2,987 shares held by Mr. Lewis'
spouse. Shares beneficially owned by Mr. Howe include 2,460 shares held in a
trust of which he is the trustee and 374 shares held by him as custodian for
two minor children. The directors and current executive officers of the
Company did not individually or as a group beneficially own more than 1% of
the common stock of Thermo Instrument outstanding as of June 30, 1998.
(4) Shares of the common stock of Thermo Electron beneficially owned by Dr.
Gyftopoulos, Mr. Howe, Mr. Lewis, Mr. Melanson, Mr. Melas-Kyriazi, Mr. Smith
and all directors and current executive officers as a group include 8,125,
69,787, 82,350, 2,500, 164,835, 212,249 and 1,295,518 shares, respectively,
that such person or group has the right to acquire within 60 days of June
30, 1998, through the exercise of stock options. Shares of the common stock
of Thermo Electron beneficially owned by Mr. Melas-Kyriazi, Mr. Smith and
all directors and current executive officers as a group include 1,071, 1,717
and 6,250 full shares, respectively, allocated to accounts maintained
pursuant to the ESOP. No director or current executive officer beneficially
owned more than 1% of the common stock of Thermo Electron outstanding as of
June 30, 1998; all directors and current executive officers as a group
beneficially owned approximately 1.1% of the Thermo Electron common stock
outstanding as of such date.
(5) As of June 30, 1998, Thermo Electron, primarily through its majority-owned
subsidiary Thermo Instrument, beneficially owned approximately 82.1% of the
outstanding Common Stock (without giving effect to the issuance of the THS
Shares). Thermo Electron's address is 81 Wyman Street, Waltham,
Massachusetts 02454-9046. As of June 30, 1998, Thermo Electron had the power
to elect all of the members of the Company's board of directors.
RELATIONSHIP WITH AFFILIATES
Thermo Electron has adopted a strategy of selling a minority interest in
subsidiary companies to outside investors as an important tool in its future
development. As part of this strategy, Thermo Electron and certain of its
subsidiaries have created several privately and publicly held subsidiaries, and
Thermo Instrument has created the Company and other subsidiaries as publicly
held majority-owned subsidiaries and privately held majority-owned subsidiaries.
From time to time, Thermo Electron and its subsidiaries will create other
majority-owned subsidiaries as part of its spinout strategy. (The Company and
such other majority-owned Thermo Electron subsidiaries are hereinafter referred
to as the "Thermo Subsidiaries.")
Thermo Electron and each of the Thermo Subsidiaries recognize that the
benefits and support that derive from their affiliation are essential elements
of their individual performance. Accordingly, Thermo Electron and each of the
Thermo Subsidiaries, including the Company, have adopted the Thermo Electron
Corporate Charter (the "Charter") to define the relationships and delineate the
nature of such cooperation among themselves. The purpose of the Charter is to
ensure that (1) all of the companies and their stockholders are treated
consistently and fairly, (2) the scope and nature of the cooperation among the
companies, and each company's responsibilities, are adequately defined, (3) each
company has access to the combined resources and financial, managerial and
technological strengths of the others, and (4) Thermo Electron and the Thermo
Subsidiaries, in the aggregate, are able to obtain the most favorable terms from
outside parties.
To achieve these ends, the Charter identifies the general principles to be
followed by the companies, addresses the role and responsibilities of the
management of each company, provides for the sharing of group resources by the
companies and provides for centralized administrative, banking and credit
services to be performed by Thermo Electron. The services provided by Thermo
Electron include collecting and managing cash generated by members, coordinating
the access of Thermo Electron and the Thermo Subsidiaries (the "Thermo Group")
to external financing sources, ensuring compliance with external financial
covenants and internal financial policies, assisting in the formulation of
long-range planning and providing other banking and credit services. Pursuant to
the Charter, Thermo Electron may also provide guarantees of debt or other
obligations of the Thermo Subsidiaries or may obtain external financing at the
26
<PAGE>
parent level for the benefit of the Thermo Subsidiaries. In certain instances,
the Thermo Subsidiaries may provide credit support to, or on behalf of, the
consolidated entity or may obtain financing directly from external financing
sources. Under the Charter, Thermo Electron is responsible for determining that
the Thermo Group remains in compliance with all covenants imposed by external
financing sources, including covenants related to borrowings of Thermo Electron
or other members of the Thermo Group, and for apportioning such constraints
within the Thermo Group. In addition, Thermo Electron establishes certain
internal policies and procedures applicable to members of the Thermo Group. The
cost of the services provided by Thermo Electron to the Thermo Subsidiaries is
covered under existing corporate services agreements between Thermo Electron and
each of the Thermo Subsidiaries.
The Charter presently provides that it shall continue in effect so long as
Thermo Electron and at least one Thermo Subsidiary participate. The Charter may
be amended at any time by agreement of the participants. Any Thermo Subsidiary,
including the Company, can withdraw from participation in the Charter upon 30
days' prior notice. In addition, Thermo Electron may terminate a subsidiary's
participation in the Charter in the event the subsidiary ceases to be controlled
by Thermo Electron or ceases to comply with the Charter or the policies and
procedures applicable to the Thermo Group. A withdrawal from the Charter
automatically terminates the corporate services agreement and tax allocation
agreement (if any) in effect between the withdrawing company and Thermo
Electron. The withdrawal from participation does not terminate outstanding
commitments to third parties made by the withdrawing company, or by Thermo
Electron or other members of the Thermo Group, prior to the withdrawal. In
addition, a withdrawing company is required to continue to comply with all
policies and procedures applicable to the Thermo Group and to provide certain
administrative functions mandated by Thermo Electron so long as the withdrawing
company is controlled by or affiliated with Thermo Electron.
As provided in the Charter, the Company and Thermo Electron have entered
into a Corporate Services Agreement (the "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 to the Company. The
Company was assessed an annual fee equal to 1.0% of the Company's revenues for
these services in fiscal 1996 and 1997. The annual fee has been reduced to 0.8%
of the Company's total revenues for fiscal 1998. The fee is reviewed annually
and may be changed by mutual agreement of the Company and Thermo Electron.
During fiscal 1997, Thermo Electron assessed the Company $1,989,000 in fees
under the Services Agreement. Management believes that the charges under the
Services Agreement are reasonable and that the terms of the Services Agreement
are fair to the Company. For additional items such as employee benefit plans,
insurance coverage, and other identifiable costs, Thermo Electron charges the
Company based on charges attributable to the Company. The Services Agreement
automatically renews for successive one-year terms, unless canceled by the
Company upon 30 days' prior notice. In addition, the Services Agreement
terminates automatically in the event the Company ceases to be a member of the
Thermo Group or ceases to be a participant in the Charter. In the event of a
termination of the Services Agreement, the Company will be required to pay a
termination fee equal to the fee that was paid by the Company for services under
the Services Agreement for the nine-month period prior to termination. Following
termination, Thermo Electron may provide certain administrative services on an
as-requested basis by the Company or as required in order to meet the Company's
obligations under Thermo Electron's policies and procedures. Thermo Electron
will charge the Company a fee equal to the market rate for comparable services
if such services are provided to the Company following termination.
From time to time, the Company may transact business with other companies in
the Thermo Group.
The Company leases certain office and manufacturing space from Nicolet
Instrument Corporation ("Nicolet"), a wholly owned subsidiary of Thermo Optek
Corporation. In 1997, the Company paid Nicolet $209,000 in rent under this
lease. Effective January 1, 1998, the annual rent expense is $209,000. This
lease is effective until December 31, 1998, but may be terminated by the Company
upon 90 days' prior written notice to Nicolet.
The Company also leases certain office and manufacturing space from Shandon
Inc. ("Shandon"), a wholly owned subsidiary of Thermo BioAnalysis Corporation, a
publicly traded, majority-owned subsidiary of Thermo Instrument. In 1997, the
Company paid Shandon $393,000 in rent under this lease. This lease expires in
September 2000.
27
<PAGE>
The Company's Nicolet Imaging Systems division has an arrangement with
ThermoTrex Corporation ("ThermoTrex"), a publicly traded, majority-owned
subsidiary of Thermo Electron, whereby ThermoTrex provides certain research and
development services to the Company, and the Company purchases flat screen x-ray
sensitive detectors pursuant to purchase orders. In 1997, the Company paid
ThermoTrex $136,000 for such products and services.
Thermo Electron's Tecomet division manufactures the Company's precision X-Y
translation table pursuant to purchase orders. In 1997, the Company paid Tecomet
$60,000 for such services. In addition, the Company purchases and sells products
and services in the ordinary course of business with other companies affiliated
with Thermo Instrument. In 1997, purchases from these companies totaled
$2,030,000 and sales to these companies totaled $825,000.
To finance the acquisition of IRT Corporation in September 1994, the Company
borrowed $7,300,000 from Thermo Instrument pursuant to a promissory note due
September 2001. In connection with the 1996 acquisition of Kevex Instruments and
Kevex X-Ray, the Company borrowed $15,000,000 from Thermo Electron pursuant to a
promissory note due August 1998. In connection with the acquisition of Park
Scientific Instruments Corporation in March 1997, the Company borrowed
$10,000,000 from Thermo Electron pursuant to a promissory note due March 1999.
In connection with the Acquisition of NESLAB from Thermo Instrument, the Company
borrowed $45,000,000 from Thermo Electron pursuant to a promissory note due July
1999. See "Proposal to Approve the Listing of Shares Issuable in Connection with
an Acquisition--Calculation of the Purchase Price for the Acquired Company." To
partially finance the acquisition of Sierra Research and Technology Inc. in July
1997, the Company borrowed $5,000,000 from Thermo Electron pursuant to a
promissory note due July 1999. These notes bear interest at the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the beginning of
each quarter. Such rate was 5.72% on the first business day of the fiscal
quarter ended April 4, 1998.
The Company, along with certain other Thermo Subsidiaries, participates in a
notional pool arrangement with Barclays Bank, which includes a $150 million
credit facility. Only European-based Thermo Subsidiaries participate in this
arrangement. Under this arrangement the Bank notionally combines the positive
and negative cash balances held by the participants to calculate the net
interest yield/expense for the group. The benefit derived from this arrangement
is then allocated based on balances attributable to the respective participants.
Thermo Electron guarantees all of the obligations of each participant in this
arrangement. In addition, funds on deposit under this arrangement provide credit
support for overdraft obligations of other participants. As of January 3, 1998,
the Company had a positive cash balance of approximately $43,857, based on an
exchange rate of $1.65/L1.00 as of January 3, 1998. For 1997, the average annual
interest rate earned on GBP deposits by participants in this credit arrangement
was approximately 6.5% and the average annual interest rate paid on overdrafts
was approximately 7.2%
The Company, along with certain other Thermo Subsidiaries, also participates
in a notional pool arrangement with ABN AMRO, which includes a $50 million
credit facility. Only European-based Thermo Subsidiaries participate in this
arrangement. Under this arrangement the Bank notionally combines the positive
and negative cash balances held by the participants to calculate the net
interest yield/expense for the group. The benefit derived from this arrangement
is then allocated based on balances attributable to the respective participants.
Thermo Electron guarantees all of the obligations of each participant in this
arrangement. In addition, funds on deposit under this arrangement provide credit
support for overdraft obligations of other participants. As of January 3, 1998,
the Company had a negative cash balance of approximately $9,551, based on an
exchange rate of $0.495/NLG 1.00 as of January 3, 1998. For 1997, the average
annual interest rate earned on NLG deposits by participants in this credit
arrangement was approximately 4.8% and the average annual interest rate paid on
NLG overdrafts was approximately 4.8%.
As of January 3, 1998, $14,311,000 of the Company's cash equivalents were
invested pursuant to 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, commercial paper, U.S. government-agency securities, 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 and have a maturity of three months
or less. 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.
28
<PAGE>
STOCK HOLDING ASSISTANCE PLAN
In 1996, the Company adopted a stock holding policy which requires its
executive officers to acquire and hold a minimum number of shares of Common
Stock. In order to assist the executive officers in complying with the policy,
the Company also adopted a stock holding assistance plan under which it may make
interest-free loans to certain key employees, including its executive officers,
to enable such employees to purchase the Common Stock in the open market. During
1996, Mr. Theo Melas-Kyriazi, the then President and Chief Executive Officer of
the Company, received loans in the aggregate principal amount of $164,830.47
under this plan to purchase 12,525 shares. During 1998, Mr. Barry S. Howe, the
current President and Chief Executive Officer of the Company, received loans in
the aggregate principal amount of $141,991.78 under this plan to purchase 15,000
shares. The loans to Mr. Melas-Kyriazi and Mr. Howe are repayable upon the
earlier of demand or the fifth anniversary of the date of the loan, unless
otherwise authorized by the human resources committee of the Company's Board of
Directors. This policy and plan were amended in 1998 to apply only to the chief
executive officer of the Company in the future.
RECOMMENDATION
The Board of Directors believes that the proposal is in the best interest of
the Company and its Stockholders and recommends that the Stockholders vote FOR
the approval of the listing of the THS Shares on the American Stock Exchange,
Inc. in connection with the acquisition of the Acquired Company. If not
otherwise specified, proxies will be voted FOR approval of this proposal. Thermo
Instrument, which owned approximately 71.6% of the outstanding Common Stock as
of August 24, 1998, has sufficient votes to approve the proposal and has
indicated its intention to vote for the proposal.
OTHER ACTION
Management is not aware at this time of any other matters that will be
presented for action at the Meeting. Should any such matters be presented, the
proxies grant power to the proxy holders to vote shares represented by the
proxies in the discretion of such proxy holders.
STOCKHOLDER PROPOSALS
Proposals of Stockholders intended to be included in the proxy statement and
form of proxy relating to the 1999 Annual Meeting of the Stockholders of the
Company must be received by the Company for inclusion in the proxy statement and
form of proxy no later than December 29, 1998. Management proxies will be
authorized to exercise discretionary voting authority with respect to any
shareholder proposal not included in the Company's proxy materials for the 1999
Annual Meeting unless (a) the Company receives notice of such proposal by March
13, 1999 and (b) the conditions set forth in Rule 14a-4(c)(2)(i)-(iii) under the
Securities Exchange Act of 1934 are met.
SOLICITATION STATEMENT
The cost of this solicitation of proxies will be borne by the Company.
Solicitation will be made primarily by mail, but regular employees of the
Company may solicit proxies personally or by telephone or telegram. Brokers,
nominees, custodians and fiduciaries are requested to forward solicitation
materials to obtain voting instructions from beneficial owners of stock
registered in their names, and the Company will reimburse such parties for their
reasonable charges and expenses in connection therewith.
Waltham, Massachusetts
August 24, 1998
29
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
THERMOSPECTRA CORPORATION
Report of Independent Public Accountants......................................... F-2
Consolidated Statement of Income for the years ended December 30, 1995,
December 28, 1996, and January 3, 1998, and the six months ended June 28, 1997,
and July 4, 1998............................................................... F-3
Consolidated Balance Sheet as of December 28, 1996, January 3, 1998, and July 4,
1998........................................................................... F-4
Consolidated Statement of Cash Flows for the years ended December 30, 1995,
December 28, 1996, and January 3, 1998, and the six months ended June 28, 1997,
and July 4, 1998............................................................... F-5
Consolidated Statement of Shareholders' Investment for the years ended
December 30, 1995, December 28, 1996, and January 3, 1998, and the six months
ended July 4, 1998............................................................. F-7
Notes to Consolidated Financial Statements....................................... F-8
NESLAB INSTRUMENTS, INC. AND NESLAB INSTRUMENTS EUROPA B.V.
Independent Auditor's Report..................................................... F-25
Combined Balance Sheet as of December 31, 1995 and 1996.......................... F-26
Combined Statement of Income for the years ended December 31, 1994, 1995, and
1996........................................................................... F-27
Combined Statement of Cash Flows for the years ended December 31, 1994, 1995,
and 1996....................................................................... F-28
Combined Statement of Shareholder's Investment for the years ended December 31,
1994, 1995, and 1996........................................................... F-29
Notes to Combined Financial Statements........................................... F-30
GOULD INSTRUMENT SYSTEMS, INC.
Report of Independent Public Accountants......................................... F-36
Consolidated Statements of Operations for the years ended December 31, 1992,
1993, and 1994, and the three months ended March 31, 1994, and 1995............ F-37
Consolidated Balance Sheets as of December 31, 1993 and 1994 and March 31,
1995........................................................................... F-38
Consolidated Statements of Cash Flows for the years ended December 31, 1992,
1993, and 1994, and the three months ended March 31, 1994, and 1995............ F-39
Consolidated Statements of Group and Stockholder's Equity for the years ended
December 31, 1992, 1993, and 1994 and for the three months ended March 31,
1995........................................................................... F-40
Notes to Consolidated Financial Statements....................................... F-41
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION OF THERMOSPECTRA CORPORATION,
NESLAB INSTRUMENTS, INC., AND NESLAB INSTRUMENTS EUROPA B.V. (UNAUDITED)
Pro Forma Combined Condensed Statement of Income for the year ended
January 3, 1998................................................................ F-51
Notes to Pro Forma Combined Condensed Statement of Income........................ F-53
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of ThermoSpectra Corporation:
We have audited the accompanying consolidated balance sheet of ThermoSpectra
Corporation (a Delaware corporation and 77%-owned subsidiary of Thermo
Instrument Systems Inc.) and subsidiaries as of January 3, 1998, and December
28, 1996, and the related consolidated statements of income, shareholders'
investment, and cash flows for each of the three years in the period ended
Janaury 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
ThermoSpectra Corporation and subsidiaries as of January 3, 1998, and December
28, 1996, and the results of their operations and their cash flows for each of
the three years in the period ended January 3, 1998, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 17, 1998
(except with respect to certain
matters discussed in Note 15, as
to which the date is August 12, 1998)
F-2
<PAGE>
THERMOSPECTRA CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX
MONTHS ENDED
---------------------
<S> <C> <C> <C> <C> <C>
JUNE 28, JULY 4,
1995 1996 1997 1997 1998
--------- ---------- ---------- --------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Notes 8 and 12).............................. $ 91,714 $ 123,199 $ 198,900 $ 86,869 $ 102,125
--------- ---------- ---------- --------- ----------
Costs and Operating Expenses:
Cost of revenues (Note 8)............................ 46,384 62,900 115,747 48,892 58,831
Selling, general, and administrative expenses (Note
8)................................................. 28,501 36,493 53,182 23,725 27,278
Research and development expenses.................... 9,036 12,910 17,303 7,784 8,712
Gain on sale of business (Note 3).................... -- -- (2,210) -- --
Gain on sale of building............................. -- -- -- -- (339)
Other nonrecurring expense, net (Note 4)............. -- 171 953 800 --
--------- ---------- ---------- --------- ----------
83,921 112,474 184,975 81,201 94,482
--------- ---------- ---------- --------- ----------
Operating Income....................................... 7,793 10,725 13,925 5,668 7,643
Interest Income........................................ 820 935 692 408 773
Interest Expense....................................... -- -- (66) (48) --
Interest Expense, Related Party (Note 8)............... (707) (773) (4,151) (1,663) (2,376)
--------- ---------- ---------- --------- ----------
Income Before Provision for Income Taxes............... 7,906 10,887 10,400 4,365 6,040
Provision for Income Taxes (Note 6).................... 3,312 4,270 4,552 1,840 2,480
--------- ---------- ---------- --------- ----------
Net Income............................................. $ 4,594 $ 6,617 $ 5,848 $ 2,525 $ 3,560
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
Earnings per Share (Note 13):
Basic................................................ $ .41 $ .53 $ .40 $ .18 $ .23
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
Diluted.............................................. $ .40 $ .53 $ .39 $ .18 $ .23
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
Weighted Average Shares (Note 13):
Basic................................................ 11,229 12,437 14,694 14,106 15,322
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
Diluted.............................................. 11,356 12,570 14,806 14,263 15,344
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
THERMOSPECTRA CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 4,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................................. $ 16,580 $ 20,672 $ 33,152
Available-for-sale investments, at quoted market value
(cost of $2,056; Note 2)................................................ -- 2,083 2,836
Accounts receivable, less allowances of $1,516, $1,934, and $1,684........ 32,327 43,015 39,781
Inventories............................................................... 27,042 34,785 33,297
Prepaid income taxes (Note 6)............................................. 5,931 7,337 7,220
Other current assets...................................................... 1,722 1,774 2,319
---------- ---------- -----------
83,602 109,666 118,605
---------- ---------- -----------
Property, Plant, and Equipment, at Cost, Net................................ 20,169 20,391 17,896
---------- ---------- -----------
Patents, Trademarks, and Other Assets....................................... 7,938 8,108 7,641
---------- ---------- -----------
Cost in Excess of Net Assets of Acquired Companies (Notes 3, 4, and 6)...... 40,776 115,232 113,727
---------- ---------- -----------
$ 152,485 $ 253,397 $ 257,869
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Note payable to Thermo Electron (Notes 3 and 8)........................... $ -- $ 15,000 $ 25,000
Note payable (Note 9)..................................................... 591 -- --
Accounts payable.......................................................... 11,508 12,842 11,837
Accrued payroll and employee benefits..................................... 5,334 6,987 5,213
Accrued installation and warranty expenses................................ 3,396 4,495 4,105
Deferred revenue.......................................................... 3,453 4,695 4,559
Accrued income taxes...................................................... 1,792 2,050 3,097
Other accrued expenses (Note 4)........................................... 9,586 8,496 8,479
Due to affiliated companies............................................... 3,259 1,561 3,574
---------- ---------- -----------
38,919 56,126 65,864
---------- ---------- -----------
Deferred Income Taxes (Note 6).............................................. 268 356 356
---------- ---------- -----------
Other Deferred Items........................................................ 1,377 1,277 1,704
---------- ---------- -----------
Long-term Obligations, Due to Thermo Electron and Thermo Instrument (Notes 3
and 8).................................................................... 22,300 67,300 57,300
---------- ---------- -----------
Commitments and Contingencies (Notes 7 and 8)
Shareholders' Investment (Notes 3, 5, and 10):
Common stock, $.01 par value, 25,000,000 shares authorized; 12,439,950,
15,313,506, and 15,325,516 shares issued................................ 124 153 153
Capital in excess of par value............................................ 77,416 111,262 111,304
Retained earnings......................................................... 12,345 17,938 21,498
Treasury stock at cost, 305, 423, and 423 shares.......................... (5) (7) (7)
Cumulative translation adjustment......................................... (259) (1,035) (1,083)
Unrealized gain on available-for-sale investments......................... -- 27 780
---------- ---------- -----------
89,621 128,338 132,645
---------- ---------- -----------
$ 152,485 $ 253,397 $ 257,869
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
THERMOSPECTRA CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX
MONTHS ENDED
-----------------------
<S> <C> <C> <C> <C> <C>
JUNE 28, JULY 4,
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 4,594 $ 6,617 $ 5,848 $ 2,525 $ 3,560
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 3,720 4,493 6,615 3,106 3,581
Gain on sale of business (Note 3) and building............ -- -- (2,210) -- (339)
Restructuring expense (Note 4)............................ -- 1,038 953 800 --
Provision for losses on accounts receivable............... 192 199 521 172 96
Other noncash expenses, net............................... 430 839 1,417 499 495
Deferred income tax (benefit) expense..................... 75 (796) (40) -- --
Changes in current accounts, excluding the effects of
acquisitions:
Accounts receivable..................................... 739 (3,444) (733) 3,347 3,146
Inventories............................................. (1,106) (3,105) 4,873 (919) 486
Other current assets.................................... (173) 335 (81) 643 (427)
Accounts payable........................................ (3,116) 2,123 (2,330) (1,555) (849)
Due to affiliates....................................... 1,398 426 (2,699) (1,941) 2,013
Other current liabilities............................... (1,432) (3,276) (3,782) (4,377) (1,171)
Other..................................................... -- (21) 34 27 106
----------- ----------- ----------- ----------- ----------
Net cash provided by operating activities..................... 5,321 5,428 8,386 2,327 10,697
----------- ----------- ----------- ----------- ----------
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (Note 3)................. (26,142) (22,521) (21,142) (13,885) --
Proceeds from sale of business (Note 3)..................... -- -- 4,980 -- 750
Refund of acquisition purchase price (Note 4)............... -- 1,103 -- -- --
Purchases of property, plant, and equipment................. (1,254) (2,762) (2,595) (1,133) (942)
Proceeds from sale of property, plant, and equipment........ 452 168 91 22 2,052
Purchases of available-for-sale investments................. -- (3,000) -- -- --
Proceeds from sale and maturities of available-for-sale
investments............................................... 4,855 3,000 -- -- --
Investment in joint venture................................. (2,017) -- -- -- --
Other, net.................................................. 34 (733) (926) (651) (30)
----------- ----------- ----------- ----------- ----------
Net cash provided by (used in) investing activities........... $ (24,072) $ (24,745) $ (19,592) $ (15,647) $ 1,830
----------- ----------- ----------- ----------- ----------
</TABLE>
F-5
<PAGE>
THERMOSPECTRA CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX
MONTHS ENDED
-----------------------
JUNE 28, JULY 4,
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations to Thermo
Electron (Note 8)......................................... $ 15,000 $ 15,000 $ 60,000 $ 10,000 $ --
Repayment of long-term obligation to Thermo Electron........ (15,000) -- -- -- --
Payment to Thermo Instrument for debt assumed in connection
with acquisition of NESLAB (Note 3)....................... -- -- (44,907) -- --
Net proceeds from issuance of Company common stock (Note
10)....................................................... 24,880 74 561 188 42
Other....................................................... -- 552 (674) 405 --
----------- ----------- ----------- ----------- ----------
Net cash provided by financing activities..................... 24,880 15,626 14,980 10,593 42
----------- ----------- ----------- ----------- ----------
Exchange Rate Effect on Cash.................................. (262) (35) 318 (299) (89)
----------- ----------- ----------- ----------- ----------
Increase (Decrease) in Cash and Cash Equivalents.............. 5,867 (3,726) 4,092 (3,026) 12,480
Cash and Cash Equivalents at Beginning of Period.............. 14,439 20,306 16,580 16,580 20,672
----------- ----------- ----------- ----------- ----------
Cash and Cash Equivalents at End of Period.................... $ 20,306 $ 16,580 $ 20,672 $ 13,554 $ 33,152
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
CASH PAID FOR:
Interest.................................................... $ 806 $ 773 $ 4,217 $ 1,711 $ 2,376
Income taxes................................................ $ 1,796 $ 3,419 $ 4,490 $ 2,256 $ 498
NONCASH ACTIVITIES:
Inventory contributed to joint venture...................... $ 412 $ -- $ -- $ -- $ --
Common stock received from sale of business (Note 3)........ $ -- $ -- $ 2,056 $ -- $ --
Fair value of assets of acquired companies.................. $ 47,597 $ 29,757 $ 114,495 $ 108,820 $ --
Cash paid for acquired companies............................ (28,098) (22,525) (24,379) (17,044) --
Stock options issued in connection with acquisition of
PSI....................................................... -- -- (1,693) (2,080) --
Stock issuable to Thermo Instrument for acquisition of
NESLAB.................................................... -- -- (31,315) (32,571) --
Debt assumed in connection with acquisition of NESLAB....... -- -- (44,907) (44,815) --
----------- ----------- ----------- ----------- ----------
Liabilities assumed of acquired companies................. $ 19,499 $ 7,232 $ 12,201 $ 12,310 $ --
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
THERMOSPECTRA CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX
MONTHS ENDED
JULY 4,
1995 1996 1997 1998
--------- --------- ---------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
COMMON STOCK, $.01 PAR VALUE
Balance at beginning of period................................ $ 105 $ 124 $ 124 $ 153
Stock issuable to Thermo Instrument for acquisition of NESLAB
(Note 3).................................................... -- -- 28 --
Issuance of Company common stock (Note 10).................... 19 -- 1 --
--------- --------- ---------- -------------
Balance at end of period...................................... 124 124 153 153
--------- --------- ---------- -------------
CAPITAL IN EXCESS OF PAR VALUE
Balance at beginning of period................................ 52,005 76,955 77,416 111,262
Stock issuable to Thermo Insturment for acquisition of NESLAB
(Note 3).................................................... -- -- 31,287 --
Stock options issued in connection with acquisition of PSI
(Note 3).................................................... -- -- 1,693 --
Issuance of Company common stock (Note 10).................... 24,861 79 562 42
Tax benefit related to employees' and directors' stock
plans....................................................... 89 382 304 --
--------- --------- ---------- -------------
Balance at end of period...................................... 76,955 77,416 111,262 111,304
--------- --------- ---------- -------------
RETAINED EARNINGS
Balance at beginning of period................................ 1,134 5,728 12,345 17,938
Net income.................................................... 4,594 6,617 5,848 3,560
Deemed distribution to Thermo Instrument for acquisition of
NESLAB (Note 3)............................................. -- -- (255) --
--------- --------- ---------- -------------
Balance at end of period...................................... 5,728 12,345 17,938 21,498
--------- --------- ---------- -------------
TREASURY STOCK
Balance at beginning of period................................ -- -- (5) (7)
Purchases of Company common stock............................. -- (5) (2) --
--------- --------- ---------- -------------
Balance at end of period...................................... -- (5) (7) (7)
--------- --------- ---------- -------------
CUMULATIVE TRANSLATION ADJUSTMENT
Balance at beginning of period................................ 69 (282) (259) (1,035)
Translation adjustment........................................ (351) 23 (776) (48)
--------- --------- ---------- -------------
Balance at end of period...................................... (282) (259) (1,035) (1,083)
--------- --------- ---------- -------------
UNREALIZED GAIN ON AVAILABLE-FOR-SALE INVESTMENTS
Balance at beginning of period................................ -- -- -- 27
Unrealized gain on available-for-sale investments
(Note 2).................................................... -- -- 27 753
--------- --------- ---------- -------------
Balance at end of period...................................... -- -- 27 780
--------- --------- ---------- -------------
TOTAL SHAREHOLDERS' INVESTMENT.................................. $ 82,525 $ 89,621 $ 128,338 $ 132,645
--------- --------- ---------- -------------
--------- --------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
ThermoSpectra Corporation (the Company) develops, manufactures, and markets
imaging and inspection, temperature-control, and test and measurement
instruments, which represent 46%, 28%, and 26% of the Company's 1997 revenues,
respectively. The Company sells its products on a worldwide basis (Note 12).
RELATIONSHIP WITH THERMO INSTRUMENT SYSTEMS INC. AND THERMO ELECTRON
CORPORATION
The Company was incorporated in August 1994 as an indirect, wholly owned
subsidiary of Thermo Instrument Systems Inc., which is an 82%-owned subsidiary
of Thermo Electron Corporation. As of January 3, 1998, Thermo Instrument and
Thermo Electron owned a total of 12,710,770 shares of the Company's common
stock, representing 83% of such stock outstanding, including 2,759,042 shares
issuable to Thermo Instrument upon shareholder approval (Note 3).
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
FISCAL YEAR
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1995, 1996, and 1997 are for the fiscal years ended December
30, 1995, December 28, 1996, and January 3, 1998, respectively. Fiscal year 1995
and 1996 each included 52 weeks; 1997 included 53 weeks.
REVENUE RECOGNITION
The Company recognizes product revenue upon shipment. The Company provides a
reserve for its estimate of warranty and installation costs at the time of
shipment. Deferred revenue in the accompanying balance sheet consists of
unearned revenue on service contracts, which is recognized as revenue over the
life of the service contract. Substantially all of the deferred revenue included
in the accompanying 1997 balance sheet will be recognized within one year.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," software development costs are expensed as incurred until
technological feasibility has been established. The Company believes that, under
its current process for developing software, the software is essentially
completed concurrently with the establishment of technological feasibility.
Accordingly, no software development costs have been capitalized.
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.
F-8
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The Company and Thermo Instrument entered into a tax allocation agreement
under which both the Company and Thermo Instrument were included in Thermo
Electron's consolidated federal and certain state income tax returns. The
agreement provided that, in years that the Company had taxable income, the
Company would pay to Thermo Instrument amounts comparable to the taxes the
Company would have paid if it had filed separate tax returns. Subsequent to the
Company's initial public offering in August 1995, Thermo Instrument's equity
ownership of the Company was reduced below 80% and, as a result, the Company is
required to file its own federal income tax returns. Subsequent to the issuance
of 2,759,042 shares to Thermo Instrument (Note 3), the Company may be included
in Thermo Electron's consolidated tax returns, provided that certain tax
requirements are met.
In accordance with 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 fourth quarter of 1997, the Company adopted SFAS No. 128,
"Earnings per Share" (Note 13). As a result, all previously reported earnings
per share have been restated, and the Company is required to report diluted
earnings per share. However, basic earnings per share equals the Company's
previously reported earnings per share for the 1995 and 1996 periods. Basic
earnings per share have been computed by dividing net income by the weighted
average number of shares outstanding during the year. Diluted earnings per share
have been computed assuming the exercise of stock options, as well as their
related income tax effects.
CASH AND CASH EQUIVALENTS
At year-end 1996 and 1997, $11,858,000 and $14,311,000, 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, commercial paper, U.S.
government-agency securities, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The Company's
funds subject to the repurchase agreement are readily convertible into cash by
the Company. The repurchase agreement earns a rate based on the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the beginning of
each quarter. At year-end 1996 and 1997, the Company's cash equivalents also
included investments in short-term certificates of deposit at the Company's
foreign operations, which have an original maturity of three months or less.
Cash equivalents are carried at cost, which equals market value.
F-9
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market value and include materials, labor, and manufacturing overhead. The
components of inventories are as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Raw materials and supplies.............................................. $ 12,047 $ 16,850
Work in process......................................................... 6,941 7,096
Finished goods.......................................................... 8,054 10,839
--------- ---------
$ 27,042 $ 34,785
--------- ---------
--------- ---------
</TABLE>
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 and improvements, 5 to 30
years; machinery and equipment, 2 to 10 years; and leasehold improvements, the
shorter of the term of the lease or the life of the asset. Property, plant, and
equipment consists of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Land.................................................................... $ 3,372 $ 3,067
Buildings............................................................... 7,896 6,910
Machinery, equipment, and leasehold improvements........................ 16,111 21,131
--------- ---------
27,379 31,108
Less: Accumulated depreciation and amortization......................... 7,210 10,717
--------- ---------
$ 20,169 $ 20,391
--------- ---------
--------- ---------
</TABLE>
PATENTS, TRADEMARKS, AND OTHER ASSETS
Patents, trademarks, and other assets in the accompanying balance sheet
includes the costs of acquired patents and trademarks that are amortized using
the straight-line method over an estimated useful life of 3 to 20 years. These
assets were $4,695,000 and $4,826,000, net of accumulated amortization of
$1,473,000 and $2,135,000, at year-end 1996 and 1997, respectively.
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method over 40 years. Accumulated
amortization was $2,360,000 and $4,927,000 at year-end 1996 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 businesses in assessing the recoverability of this asset. If impairment
occurs, any excess of carrying value over fair value is recorded as a loss.
F-10
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 are included in the
accompanying statement of income and are not material for the three years
presented.
FORWARD CONTRACTS
The Company uses short-term forward foreign exchange contracts to manage
exposures related to firm purchase and sale commitments that are denominated in
currencies other than its subsidiaries' local currencies. These contracts
principally hedge U.S. dollars, British pound sterling, Japanese yen, French
francs, and German deutsche marks. Gains and losses arising from forward foreign
exchange contracts are recorded as an offset to the 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.
INTERIM FINANCIAL STATEMENTS
The financial statements as of July 4, 1998, and for the six-month periods
ended June 28, 1997, and July 4, 1998, are unaudited but, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair presentation of results for these interim periods. The results of
operations for the six-month period ended July 4, 1998, are not necessarily
indicative of the results to be expected for the entire year.
2. AVAILABLE-FOR-SALE INVESTMENTS
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," the Company's marketable equity securities are
considered available-for-sale investments and are carried at market value, with
the difference between cost and market value recorded currently as a component
of shareholders' investment titled "Unrealized gain on available-for-sale
investments." As of January 3, 1998, available-for-sale investments represented
common stock received in connection with the sale of its Linac business (Note
3).
3. ACQUISITIONS AND DISPOSITION
In July 1997, the Company acquired Sierra Research and Technology Inc.
(SRT), a manufacturer of systems used for the rework and repair of printed
circuit boards, for $7,638,000 in cash. The cost of this acquisition exceeded
the estimated fair value of the net assets by $6,368,000. To partially finance
the acquisition, the Company borrowed $5,000,000 from Thermo Electron (Note 8).
F-11
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 1997, Thermo Instrument acquired approximately 95% of the
outstanding shares of Life Sciences International PLC (LSI), a London Stock
Exchange-listed company. Subsequently, Thermo Instrument acquired the remaining
shares of LSI capital stock. In July 1997, the Company agreed to acquire NESLAB
Instruments, Inc. and its related sales and service entity, NESLAB Instruments
Europa BV in the Netherlands, (collectively, NESLAB), a global supplier of
temperature-control products and former LSI subsidiary, from Thermo Instrument
for $76,222,000. The purchase price represents the sum of the net tangible book
value of the business as of June 28, 1997, plus a percentage of Thermo
Instrument's total cost in excess of net assets acquired associated with its
acquisition of LSI, based on NESLAB's 1996 revenues relative to LSI's 1996
consolidated revenues.
The purchase price consisted of 2,759,042 shares of Company common stock
valued at $31,315,000 issuable to Thermo Instrument and the assumption of
$44,907,000 of debt to Thermo Instrument, which was subsequently paid. Issuance
of the common stock component of the purchase price will occur immediately after
its listing upon the American Stock Exchange, which will require approval by the
Company's shareholders. Because Thermo Instrument is the Company's majority
shareholder and intends to vote its shares in favor of such listing, the
approval is assured. To repay the debt assumed from Thermo Instrument, the
Company borrowed $45,000,000 from Thermo Electron (Note 8).
Because the Company and NESLAB were deemed for accounting purposes to be
under control of their common majority owner, Thermo Instrument, the transaction
has been accounted for in a manner similar to a pooling of interests.
Accordingly, the accompanying financial statements include the results of NESLAB
from March 12, 1997, the date the business was acquired by Thermo Instrument,
and the shares issuable to Thermo Instrument subject to shareholder vote have
been deemed outstanding from that date for purposes of computing weighted
average shares. The purchase price included $255,000 for the increase in net
book value from the date the business was acquired by Thermo Instrument to June
28, 1997. This amount was recorded as a reduction in retained earnings. The cost
of this acquisition exceeded the estimated fair value of the net assets by
$57,774,000.
In March 1997, the Company acquired Park Scientific Instruments Corporation
(PSI), a manufacturer of scanning-probe microscopes used in industry and
academia to test and measure the topography and other surface properties of
materials, for $16,702,000 in cash, including the repayment of $1,300,000 of
bank debt. In addition, the Company assumed outstanding PSI stock options, which
were converted into stock options that are exercisable into 144,941 shares of
Company common stock at a weighted average exercise price of $3.07 per share,
with an aggregate value of $1,693,000 as of the date of the merger agreement.
The cost of this acquisition exceeded the estimated fair value of the net assets
by $14,132,000. To partially finance the acquisition, the Company borrowed
$10,000,000 from Thermo Electron (Note 8).
In March 1996, Thermo Instrument acquired a substantial portion of the
businesses comprising the Scientific Instruments Division of Fisons plc
(Fisons), a wholly owned subsidiary of Rhone-Poulenc Rorer, Inc. Pursuant to an
agreement executed in August 1996, the Company acquired Kevex Instruments and
Kevex X-Ray (the Kevex businesses), which were formerly part of Fisons, from
Thermo Instrument for $21,567,000 in cash. To partially finance the acquisition,
the Company borrowed $15,000,000 from Thermo Electron (Note 8). The purchase
price was determined based on the net book value of the Kevex businesses at
March 29, 1996, and a pro rata allocation of Thermo Instrument's total cost in
excess of the net assets of acquired companies recorded in connection with the
acquisition of the Fisons businesses. Kevex Instruments is a manufacturer of
X-ray microanalyzers and X-ray fluorescence instruments and Kevex X-Ray is a
manufacturer of specialty X-ray sources.
Because the Company and the Kevex businesses were deemed for accounting
purposes to be under control of their common majority owner, Thermo Instrument,
the transaction has been accounted for in a
F-12
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
manner similar to a pooling of interests. Accordingly, the Company's 1996
financial statements include the results of the Kevex businesses from March 29,
1996, the date these businesses were acquired by Thermo Instrument. The cost of
this acquisition exceeded the estimated fair value of the net assets by
$10,046,000. During 1996, the Company acquired two additional companies for an
aggregate $900,000 in cash.
In May 1995, the Company acquired Gould Instrument Systems, Inc. (GIS) for
$25,758,000 in cash, which included the repayment of $6,000,000 of bank debt. In
1996, the Company recorded a $1,103,000 reduction in the purchase price of GIS
(Note 4). To partially finance the acquisition of GIS, the Company borrowed
$15,000,000 from Thermo Electron pursuant to a promissory note that was repaid
in August 1995 with proceeds from the Company's initial public offering (Note
8). The cost of this acquisition exceeded the estimated fair value of the net
assets by $9,438,000. GIS develops, manufactures, and sells data acquisition
systems, oscillographic recorders, and digital storage oscilloscopes (DSOs) for
industrial, medical, scientific, and government applications. During 1995, the
Company acquired one additional company for $2,340,000 in cash.
Except for the acquisitions of NESLAB and the Kevex businesses, the
acquisitions described above have been accounted for using the purchase method
of accounting and their results of operations have been included in the
accompanying financial statements from their respective dates of acquisition.
Allocation of the purchase price for these acquisitions was based on estimates
of the fair value of the net assets acquired and, for businesses acquired in
1997, is subject to adjustment. The Company has gathered no information that
indicates the final allocation will differ materially from the preliminary
estimates.
Based on unaudited data, the following table presents selected financial
information for the Company and the businesses acquired, on a pro forma basis,
assuming that the Company, NESLAB, and PSI had been combined since the beginning
of 1996 and the Company, the Kevex businesses, and GIS had been combined since
the beginning of 1995. The effect of the acquisitions not included in the pro
forma data was not material to the Company's results of operations or financial
position.
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
Revenues................................................. $ 138,876 $ 202,813 $ 210,412
Net income............................................... 1,633 3,280 3,736
Earnings per share:
Basic.................................................. .15 .22 .25
Diluted................................................ .14 .21 .24
</TABLE>
The pro forma results are not necessarily indicative of future operations or
the actual results that would have occurred had the acquisitions of NESLAB and
PSI been made at the beginning of 1996 or the acquisitions of the Kevex
businesses and GIS been made at the beginning of 1995.
In December 1997, the Company sold its Linac business to SteriGenics
International, Inc. for $4,980,000 in cash and 109,607 shares of SteriGenics
common stock valued at $2,056,000, resulting in a gain of $2,210,000. The Linac
business is an electron beam radiation business that offers contract
sterilization services.
F-13
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. OTHER NONRECURRING EXPENSE, NET
In 1997, the Company's GIS subsidiary incurred a $953,000 restructuring
charge, related primarily to severance costs for 40 employees terminated during
the year. Other accrued expenses in the accompanying balance sheet includes a
remaining reserve of $244,000 associated with these actions.
In 1996, the Company's GIS subsidiary commenced a $1,038,000 restructuring
plan, which included the termination of approximately 40 employees.
In 1996, the Company finalized negotiations in connection with amounts
claimed for the discontinuance of the Acqulab product line, which was sold to
the Company as part of the purchase of GIS. Of the $1,970,000 settlement
received, $1,103,000 related to a reduction of the purchase price principally
for the unrealized earning potential of the Acqulab product line, resulting in a
reduction of "Cost in excess of net assets of acquired companies" in the
accompanying 1996 balance sheet. The remaining $867,000 related to a
reimbursement of expenses incurred subsequent to the acquisition of GIS for the
ongoing development of Acqulab.
The $867,000 reimbursement and the $1,038,000 restructuring charge were
recorded as "Other nonrecurring expense, net" in the accompanying 1996 statement
of income.
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, which permit 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 a five- to ten-year period, depending on the term
of the option, which generally ranges from seven 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 common 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 to
outside directors pursuant to a formula approved by the Company's shareholders.
Options granted under this plan have the same general terms as options granted
under the stock-based compensation plans described above, except that the
restrictions and repurchase rights generally lapse ratably over a four-year
period and the option term is five years. In addition to the Company's
stock-based compensation plans, certain officers and key employees may also
participate in the stock-based compensation plans of Thermo Electron and Thermo
Instrument.
F-14
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----- -------- ----- -------- ------- --------
<CAPTION>
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year............ 578 $10.00 862 $11.32 971 $12.10
Issued upon acquisition of PSI................ -- -- -- -- 145 3.07
Granted....................................... 315 13.68 183 15.26 374 10.46
Exercised..................................... -- -- (8) 10.00 (105) 4.20
Forfeited..................................... (31) 10.75 (66) 10.89 (129) 12.02
----- ----- -------
Options outstanding, end of year.................. 862 $11.32 971 $12.10 1,256 $11.23
----- -------- ----- -------- ------- --------
----- -------- ----- -------- ------- --------
Options exercisable............................... 862 $11.32 971 $12.10 1,238 $11.35
----- -------- ----- -------- ------- --------
----- -------- ----- -------- ------- --------
Options available for grant....................... 238 121 172
----- ----- -------
----- ----- -------
</TABLE>
A summary of the status of the Company's stock options at January 3, 1998,
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------
<S> <C> <C> <C>
WEIGHTED
WEIGHTED AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE
EXERCISE PRICES OF SHARES CONTRACTUAL LIFE PRICE
- -------------------------------------------------------------------------- ----------- ---------------- -----------
<CAPTION>
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
$2.55-$6.20............................................................... 56 6.9 years $ 3.31
6.21-9.85................................................................. 188 7.8 years 9.53
9.86-13.50................................................................ 604 7.4 years 10.24
13.51-17.15............................................................... 408 7.3 years 14.58
-----
$2.55-$17.15.............................................................. 1,256 7.4 years $ 11.23
-----
-----
</TABLE>
The information disclosed above for options outstanding at January 3, 1998,
does not differ materially for options exercisable.
Employee Stock Purchase Program
Effective November 1, 1996, substantially all of the Company's full-time
U.S. employees are eligible to participate in an employee stock purchase program
sponsored by the Company and Thermo Electron, under which employees can purchase
shares of the Company's and Thermo Electron's common stock. Prior to November 1,
1996, the program was sponsored by Thermo Instrument and Thermo Electron. Under
this program, the applicable shares of 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.
Prior to November 1, 1995, the applicable shares of common stock could be
purchased at 85% of the fair market value at the beginning of the period, and
the shares purchased were 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 1997, the Company issued 9,852 shares of its
common stock under this program.
F-15
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA STOCK-BASED COMPENSATION EXPENSE
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
in 1995, 1996, and 1997 under the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on the Company's net income and
earnings per share would have been as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
Net income:
As reported............................................ $4,594 $6,617 $5,848
Pro forma.............................................. 4,475 6,277 5,343
Basic earnings per share:
As reported............................................ .41 .53 .40
Pro forma.............................................. .40 .50 .36
Diluted earnings per share:
As reported............................................ .40 .53 .39
Pro forma.............................................. .39 .50 .36
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $5.93,
$5.80, and $3.74 in 1995, 1996, and 1997, 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:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Volatility............................................... 26% 26% 28%
Risk-free interest rate.................................. 6.4% 6.6% 5.9%
Expected life of options................................. 6.7 years 5.4 years 5.0 years
</TABLE>
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.
F-16
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
401(K) SAVINGS PLANS
Substantially all of the Company's full-time U.S. employees are eligible to
participate in a 401(k) savings plan. Contributions to the 401(k) savings plans
are made by both the employee and the Company. Company contributions are based
upon the level of employee contributions. For these plans, the Company
contributed and charged to expense $493,000, $689,000, and $1,427,000 in 1995,
1996, and 1997, respectively.
6. INCOME TAXES
The components of income before provision for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Domestic...................................................... $ 5,835 $ 8,969 $ 10,719
Foreign....................................................... 2,071 1,918 (319)
--------- --------- ---------
$ 7,906 $ 10,887 $ 10,400
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Currently payable:
Federal..................................................... $ 1,651 $ 3,427 $ 3,834
State....................................................... 349 774 600
Foreign..................................................... 1,237 865 158
--------- --------- ---------
3,237 5,066 4,592
--------- --------- ---------
Net deferred (prepaid):
Federal..................................................... 125 (608) (112)
State....................................................... 27 (129) (24)
Foreign..................................................... (77) (59) 96
--------- --------- ---------
75 (796) (40)
--------- --------- ---------
$ 3,312 $ 4,270 $ 4,552
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes that is currently payable does not reflect
$1,024,000 of tax benefits used to reduce cost in excess of net assets of
acquired companies in 1996. In addition, the Company receives a tax deduction
upon exercise of nonqualified stock options by employees for the difference
between the exercise price and the market price of the underlying common stock
on the date of exercise. The provision for income taxes that is currently
payable does not reflect $89,000, $382,000, and $304,000 of such benefits that
have been allocated to capital in excess of par value in 1995, 1996, and 1997,
respectively.
F-17
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 34% to income before provision for income taxes due to the
following:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Provision for income taxes at statutory rate..................... $ 2,688 $ 3,702 $ 3,536
Increases (decreases) resulting from:
State income taxes, net of federal tax......................... 248 426 380
Net foreign losses not benefited and tax rate differential..... 456 154 362
Tax benefit of foreign sales corporation....................... (201) (268) (295)
Amortization of cost in excess of net assets of acquired
companies.................................................... 155 146 685
Other, net..................................................... (34) 110 (116)
--------- --------- ---------
$ 3,312 $ 4,270 $ 4,552
--------- --------- ---------
--------- --------- ---------
</TABLE>
Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Prepaid income taxes:
Tax loss carryforwards................................................ $ 9,334 $ 9,052
Reserves and accruals................................................. 3,726 3,800
Inventory basis difference............................................ 1,983 3,185
Allowance for doubtful accounts....................................... 222 352
--------- ---------
15,265 16,389
Less:Valuation allowance.............................................. 9,334 9,052
--------- ---------
$ 5,931 $ 7,337
--------- ---------
--------- ---------
Deferred income taxes:
Intangible assets..................................................... $ 176 $ 333
Other................................................................. 92 23
--------- ---------
$ 268 $ 356
--------- ---------
--------- ---------
</TABLE>
At year-end 1997, the Company had foreign and federal tax loss carryforwards
of $21,905,000 and $6,088,000, respectively. The valuation allowance relates to
uncertainty surrounding the realization of the tax loss carryforwards, for which
realization is limited to the future income of certain subsidiaries. The federal
tax loss carryforwards expire in the years 2008 through 2010. The foreign tax
loss carryforwards do not expire. Any resulting benefit from the loss
carryforwards will first be used to reduce "Cost in excess of net assets of
acquired companies," with any remaining benefit used to reduce other acquired
intangible assets.
A provision has not been made for U.S. or additional foreign taxes on
$4,239,000 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.
F-18
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases portions of its office and operating facilities under
various operating lease arrangements. The accompanying statement of income
includes expenses from operating leases of $2,066,000, $2,818,000, and
$2,171,000 in 1995, 1996, and 1997, respectively, net of sublease income of
$185,000 and $893,000 in 1996 and 1997, respectively. Future minimum payments
due under noncancelable operating leases at January 3, 1998, were $2,611,000 in
1998; $2,172,000 in 1999; $1,851,000 in 2000; $1,382,000 in 2001; $1,067,000 in
2002; and $2,473,000 in 2003 and thereafter. Total future minimum lease payments
are $11,556,000 and have not been reduced by minimum sublease rental income of
$2,248,000 due through 2001 under noncancelable operating subleases. See Note 8
for office and manufacturing space leased from related parties.
CONTINGENCIES
The Company has received correspondence alleging that certain of its
products infringe patents owned by third parties, though no lawsuits have been
filed. The Company does not believe that its products infringe the intellectual
property rights of these parties; however, given the inherent uncertainty of
dispute resolution, there can be no assurance that the outcome of any such
lawsuit, if filed, would not result in a material adverse effect on the
Company's results of operations or financial position.
8. 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 paid Thermo Electron annually an amount equal to 1.2% of the
Company's revenues in 1995 and 1.0% of the Company's revenues in 1996 and 1997.
For these services, the Company was charged $1,101,000, $1,232,000, and
$1,989,000 in 1995, 1996, and 1997, respectively. Beginning in 1998, the Company
will pay an annual fee equal to 0.8% of the Company's revenues. The annual fee
is reviewed and adjusted annually by mutual agreement of the parties. Management
believes that the service fee charged by Thermo Electron is reasonable and that
such fees are representative of the expenses the Company would have incurred on
a stand-alone basis. The corporate services agreement is renewed annually but
can be terminated upon 30 days' prior notice by the Company or upon the
Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo
Electron Corporate Charter defines the relationship among Thermo Electron and
its majority-owned subsidiaries). For additional items such as employee benefit
plans, insurance coverage, and other identifiable costs, Thermo Electron charges
the Company based upon costs attributable to the Company.
OPERATING LEASES
In addition to the operating leases discussed in Note 7, the Company leases
certain office and manufacturing space from Nicolet Instrument Corporation
(Nicolet), a wholly owned subsidiary of Thermo Optek Corporation, and Shandon
Inc., a wholly owned subsidiary of Thermo Instrument. The accompanying statement
of income includes expenses from these operating leases of $218,000, $208,000,
and $602,000 in 1995, 1996, and 1997, respectively. The lease with Nicolet is
effective until December 31,
F-19
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1998, but may be terminated by the Company upon 90 days' prior notice to
Nicolet, and the lease with Shandon expires in September 2000. At January 3,
1998, future minimum payments due under these leases are $884,000 in 1998,
$675,000 in 1999, and $506,000 in 2000. Total future minimum lease payments
under these leases are $2,065,000.
OTHER RELATED-PARTY TRANSACTIONS
The Company purchases and sells products and services in the ordinary course
of business with other companies affiliated with Thermo Electron. Sales of
products to such affiliated companies totaled $118,000, $240,000, and $825,000
in 1995, 1996, and 1997, respectively. Purchases of products and services from
such affiliated companies totaled $1,090,000, $1,310,000, and $2,226,000 in
1995, 1996, and 1997, respectively.
REPURCHASE AGREEMENT
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
SHORT- AND LONG-TERM OBLIGATIONS
The accompanying balance sheet includes the following amounts borrowed from
Thermo Instrument and Thermo Electron to finance the acquisitions of certain
companies (Note 3):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Promissory notes to Thermo Electron, due:
August 1998........................................................... $ 15,000 $ 15,000
March 1999............................................................ -- 10,000
July 1999............................................................. -- 45,000
July 1999............................................................. -- 5,000
Promissory note to Thermo Instrument, due September 2001................ 7,300 7,300
--------- ---------
$ 22,300 $ 82,300
--------- ---------
--------- ---------
</TABLE>
These notes bear interest at the 90-day Commercial Paper Composite Rate plus
25 basis points, set at the beginning of each quarter. The interest rate for the
notes outstanding at year-end 1997 and 1996 was 5.76% and 5.77%, respectively.
In addition, in connection with the May 1995 acquisition of GIS, the Company
borrowed $15,000,000 from Thermo Electron pursuant to a promissory note that was
repaid in August 1995 with proceeds from the Company's initial public offering
(Note 10).
9. NOTE PAYABLE
Note payable in the accompanying 1996 balance sheet represents borrowings
under a 1.2 million British pounds sterling line of credit facility. The
interest rate for this line of credit was 7.0% and 8.0% at December 28, 1996,
and January 3, 1998, respectively. Unused amounts available under this and other
lines of credit available to the Company's foreign subsidiaries were $3,249,000
as of January 3, 1998.
F-20
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMON STOCK
In 1995, the Company sold 1,725,000 shares of its common stock in its
initial public offering at $14.00 per share for net proceeds of $21,858,000, and
the Company sold an additional 202,000 shares of its common stock in a private
placement at $15.72 per share for net proceeds of $3,022,000.
At January 3, 1998, the Company had reserved 1,594,000 unissued shares of
its common stock for possible issuance under stock-based compensation plans.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, available-for-sale investments, accounts receivable, note payable
to Thermo Electron, note payable, accounts payable, due to affiliated companies,
long-term obligations due to Thermo Electron and Thermo Instrument, and forward
foreign exchange contracts. The Company's long-term obligations (Note 8) bear
interest at a variable market rate and therefore the carrying amounts
approximate fair value. The carrying amounts of the Company's remaining
financial instruments, with the exception of available-for-sale investments 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
(Note 2).
The Company has forward foreign exchange contracts of $2,185,000 and
$2,041,000 outstanding at year-end 1996 and 1997, respectively. The fair value
of the Company's forward foreign exchange contracts receivable was $138,000 and
$3,000 at year-end 1996 and 1997, respectively. The fair value of such contracts
is the estimated amount that the Company would receive upon termination of the
contracts, taking into account the change in foreign exchange rates.
F-21
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. GEOGRAPHICAL INFORMATION
The Company is engaged in one business segment: developing, manufacturing,
and marketing imaging and inspection, temperature-control, and test and
measurement instruments. The following table shows data for the Company by
geographical area:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues:
United States.............................................................. $ 63,675 $ 94,493 $ 176,717
Germany.................................................................... 12,952 14,673 12,217
England.................................................................... 12,759 14,260 12,546
Other Europe............................................................... 14,545 13,698 17,930
Other...................................................................... 3,609 5,593 7,463
Transfers among geographical areas (a)..................................... (15,826) (19,518) (27,973)
---------- ---------- ----------
$ 91,714 $ 123,199 $ 198,900
---------- ---------- ----------
---------- ---------- ----------
Income before provision for income taxes:
United States (b).......................................................... $ 5,586 $ 9,072 $ 15,106
Germany.................................................................... 975 867 (13)
England.................................................................... (70) 253 (406)
Other Europe............................................................... 1,297 697 128
Other...................................................................... 5 (164) (890)
---------- ---------- ----------
Total operating income..................................................... 7,793 10,725 13,925
Interest income (expense), net............................................. 113 162 (3,525)
---------- ---------- ----------
$ 7,906 $ 10,887 $ 10,400
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets:
United States.............................................................. $ 89,951 $ 121,891 $ 220,590
Germany.................................................................... 8,881 8,968 7,118
England.................................................................... 9,707 9,142 7,207
Other Europe............................................................... 13,060 10,210 13,902
Other...................................................................... 1,318 2,274 4,580
---------- ---------- ----------
$ 122,917 $ 152,485 $ 253,397
---------- ---------- ----------
---------- ---------- ----------
Export revenues included in United States revenues above (c):
Asia....................................................................... $ 8,195 $ 19,102 $ 28,304
Europe..................................................................... 13,003 13,300 25,093
Other...................................................................... 5,400 4,070 6,036
---------- ---------- ----------
$ 26,598 $ 36,472 $ 59,433
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(a) Transfers among geographical areas are accounted for at prices that are
representative of transactions with unaffiliated parties.
(b) Includes corporate general and administrative expenses.
(c) In general, export sales are denominated in U.S. dollars.
F-22
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
13. EARNINGS PER SHARE
Basic and diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 28, JULY 4,
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BASIC
Net income....................................... $ 4,594 $ 6,617 $ 5,848 $ 2,525 $ 3,560
--------- --------- --------- --------- ---------
Weighted average shares.......................... 11,229 12,437 12,488 12,454 12,563
Shares issuable for acquisition of NESLAB........ -- -- 2,206 1,652 2,759
--------- --------- --------- --------- ---------
Weighted average shares, as adjusted............. 11,229 12,437 14,694 14,106 15,322
--------- --------- --------- --------- ---------
Basic earnings per share......................... $ .41 $ .53 $ .40 $ .18 $ .23
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
DILUTED
Net income....................................... $ 4,594 $ 6,617 $ 5,848 $ 2,525 $ 3,560
--------- --------- --------- --------- ---------
Basic weighted average shares.................... 11,229 12,437 14,694 14,106 15,322
Effect of stock options.......................... 127 133 112 157 22
--------- --------- --------- --------- ---------
Weighted average shares, as adjusted............. 11,356 12,570 14,806 14,263 15,344
--------- --------- --------- --------- ---------
Diluted earnings per share....................... $ .40 $ .53 $ .39 $ .18 $ .23
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The computation of diluted earnings per share for 1996 and 1997 excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of January 3, 1998, there were 410,400 of such
options outstanding, with exercise prices ranging from $13.78 to $17.15 per
share.
14. UNAUDITED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
1996 FIRST SECOND(A) THIRD FOURTH
- --------------------------------------------------------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues............................................................. $ 26,927 $ 31,281 $ 30,329 $ 34,662
Gross profit......................................................... 12,788 15,080 15,092 17,339
Net income........................................................... 1,436 1,562 1,690 1,929
Earnings per share:
Basic.............................................................. .12 .13 .14 .16
Diluted............................................................ .11 .12 .13 .15
</TABLE>
<TABLE>
<CAPTION>
1997 FIRST(B) SECOND THIRD FOURTH(C)
- --------------------------------------------------------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Revenues............................................................. $ 37,177 $ 49,692 $ 52,271 $ 59,760
Gross profit......................................................... 16,275 21,702 20,249 24,927
Net income........................................................... 1,188 1,337 705 2,618
Basic and diluted earnings per share................................. .09 .09 .05 .17
</TABLE>
- ------------------------
(a) Reflects the March 1996 acquisition of Kevex Instruments and Kevex X-Ray.
F-23
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
(b) Reflects the March 1997 acquisitions of NESLAB and PSI.
(c) Reflects a $2,210,000 gain from the sale of the Company's Linac business.
15. SUBSEQUENT EVENT
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 Instrument.
Shareholders of the Company would receive cash or shares of the common stock,
$.10 par value per share, of Thermo Instrument in exchange for their shares of
the Company's common stock. The completion of this transaction is subject to
numerous conditions, including the establishment of prices or exchange ratios;
confirmation of anticipated tax consequences; the approval of the Board of
Directors of Thermo Instrument; the negotiation and execution of a definitive
merger agreement; the receipt of a fairness opinion from an investment banking
firm that the transaction is fair to the Company's shareholders (other than
Thermo Instrument and Thermo Electron) from a financial point of view; the
approval of the Company's Board of Directors, including its independent
directors; and clearance by the Securities and Exchange Commission of any
necessary documents regarding the proposed transaction.
F-24
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To NESLAB Instruments, Inc. and NESLAB Instruments Europa B.V.
(the NESLAB businesses):
We have audited the accompanying combined balance sheet of the NESLAB
businesses as of December 31, 1995 and 1996, and the related combined statements
of income, shareholder's investment, and cash flows for each of the years in the
three-year period ended December 31, 1996. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined 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 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the NESLAB
businesses at December 31, 1995 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 4, 1997, except as to Note 7,
which is as of July 30, 1997
F-25
<PAGE>
NESLAB INSTRUMENTS, INC. AND NESLAB INSTRUMENTS EUROPA B.V.
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................................................... $ 798 $ 2,103
Accounts receivable, less allowances of $146 and $178..................................... 10,556 8,839
Accounts receivable, affiliates........................................................... 5,379 9,775
Inventories............................................................................... 8,027 8,957
Other current assets (Note 4)............................................................. 1,218 1,491
--------- ---------
25,978 31,165
--------- ---------
Property and Equipment, Net................................................................. 3,560 4,755
--------- ---------
Notes Receivable, Due From Affiliates (Note 5).............................................. 5,602 3,350
--------- ---------
Intangible Assets........................................................................... 27,759 26,604
--------- ---------
$ 62,899 $ 65,874
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S INVESTMENT
Current Liabilities:
Accounts payable.......................................................................... $ 2,197 $ 2,001
Accounts payable, affiliates.............................................................. 9,066 13,314
Accrued payroll and employee benefits..................................................... 2,237 1,546
Accrued warranty expenses................................................................. 201 509
Income taxes payable...................................................................... 864 56
Accrued interest expense.................................................................. 502 11
Other accrued expenses.................................................................... 342 747
--------- ---------
15,409 18,184
--------- ---------
Deferred Income Taxes (Note 4).............................................................. 103 233
--------- ---------
Long-term Notes Payable, Due to Affiliates (Note 5)......................................... 44,580 44,580
--------- ---------
Commitments (Notes 3 and 5)
Shareholder's Investment:
Common stock NESLAB Instruments, Inc., no par value, 300 shares authorized, 100 shares
issued and outstanding.................................................................. 1,000 1,000
Common stock NESLAB Instruments Europa B.V., 400 shares issued and outstanding............ 20 20
Retained earnings......................................................................... 1,703 1,769
Cumulative translation adjustment......................................................... 84 88
--------- ---------
2,807 2,877
--------- ---------
$ 62,899 $ 65,874
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-26
<PAGE>
NESLAB INSTRUMENTS, INC. AND NESLAB INSTRUMENTS EUROPA B.V.
COMBINED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
Revenues (Notes 5 and 6)......................................................... $ 37,238 $ 55,451 $ 61,032
--------- --------- ---------
Costs and Operating Expenses:
Cost of revenues (Note 5)...................................................... 21,682 35,249 41,657
Selling, general, and administrative expenses (Note 5)......................... 10,128 11,252 12,018
Research and development expenses.............................................. 2,118 3,003 4,151
--------- --------- ---------
33,928 49,504 57,826
--------- --------- ---------
Operating Income................................................................. 3,310 5,947 3,206
Interest Income.................................................................. 298 317 311
Interest Expense, Related Party.................................................. (2,801) (2,968) (2,871)
--------- --------- ---------
Income Before Provision for Income Taxes......................................... 807 3,296 646
Provision for Income Taxes (Note 4).............................................. 637 1,663 580
--------- --------- ---------
Net Income....................................................................... $ 170 $ 1,633 $ 66
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-27
<PAGE>
NESLAB INSTRUMENTS, INC. AND NESLAB INSTRUMENTS EUROPA B.V.
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income........................................................................ $ 170 $ 1,633 $ 66
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation.................................................................... 690 809 887
Amortization.................................................................... 2,822 1,989 1,155
Provision for losses on accounts receivable..................................... 1 36 62
Deferred income tax expense..................................................... 75 28 130
Provision for warranty costs.................................................... -- -- 325
Provision for inventory obsolescence............................................ 50 -- 200
Loss on sale of property and equipment.......................................... -- -- 5
Changes in current accounts:
Accounts receivable........................................................... (1,143) (4,387) 1,655
Accounts receivable, affiliates............................................... (2,241) (617) (4,396)
Inventories................................................................... (1,382) (2,351) (1,130)
Other assets.................................................................. (149) (816) (274)
Accounts payable.............................................................. 159 516 (196)
Accounts payable, affiliates.................................................. 1,160 2,146 4,248
Other current liabilities..................................................... 719 1,467 (1,601)
--------- --------- ---------
Net cash provided by operating activities......................................... 931 453 1,136
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment............................................. (1,022) (1,973) (2,113)
Disposals of property and equipment............................................. -- -- 26
--------- --------- ---------
Net cash used in investing activities............................................. (1,022) (1,973) (2,087)
--------- --------- ---------
FINANCING ACTIVITIES:
Notes payable, affiliates....................................................... -- 3,000 --
Notes receivable, affiliates.................................................... (258) (1,654) 2,252
--------- --------- ---------
Net cash provided by (used in) financing activities............................... (258) 1,346 2,252
--------- --------- ---------
Effect of exchange rate changes on cash........................................... 23 11 4
--------- --------- ---------
Increase (Decrease) in Cash....................................................... (326) (163) 1,305
Cash at Beginning of Year......................................................... 1,287 961 798
--------- --------- ---------
Cash at End of Year............................................................... $ 961 $ 798 $ 2,103
--------- --------- ---------
--------- --------- ---------
CASH PAID FOR:
Interest........................................................................ $ 2,655 $ 2,632 $ 3,414
Income taxes.................................................................... $ 174 $ 1,230 $ 1,442
NONCASH INVESTING ACTIVITY:
Transfer of property and equipment to affiliate................................. $ 240 $ -- $ --
Issuance of note receivable from affiliate for transferred property and
equipment..................................................................... $ (240) $ -- $ --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-28
<PAGE>
NESLAB INSTRUMENTS, INC. AND NESLAB INSTRUMENTS EUROPA B.V.
COMBINED STATEMENT OF SHAREHOLDER'S INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
COMMON STOCK NESLAB INSTRUMENTS, INC................................................. $ 1,000 $ 1,000 $ 1,000
--------- --------- ---------
COMMON STOCK NESLAB INSTRUMENTS EUROPA B.V........................................... 20 20 20
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of year....................................................... (100) 70 1,703
Net income......................................................................... 170 1,633 66
--------- --------- ---------
Balance at end of year............................................................. 70 1,703 1,769
--------- --------- ---------
CUMULATIVE TRANSLATION ADJUSTMENT
Balance at beginning of year....................................................... 50 73 84
Translation adjustment............................................................. 23 11 4
--------- --------- ---------
Balance at end of year............................................................. 73 84 88
--------- --------- ---------
TOTAL SHAREHOLDER'S INVESTMENT....................................................... $ 1,163 $ 2,807 $ 2,877
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-29
<PAGE>
NESLAB INSTRUMENTS, INC. AND NESLAB INSTRUMENTS EUROPA B.V.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The accompanying combined financial statements include the accounts of
NESLAB Instruments, Inc. and NESLAB Instruments Europa B.V. (the NESLAB
businesses). NESLAB Instruments, Inc. manufactures and markets precision
temperature control liquid systems for analytical, laboratory, industrial
research and development, laser, and semiconductor applications. NESLAB
Instruments Europa B.V. markets and distributes the Company's products in
Europe.
The NESLAB businesses were wholly owned subsidiaries of Life Sciences
International, PLC (Life Sciences) through March 12, 1997 (Note 7).
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of the
NESLAB businesses. All material intercompany accounts and transactions have been
eliminated.
REVENUE RECOGNITION
The NESLAB businesses recognize product revenue upon shipment. The NESLAB
businesses maintain a reserve for the estimate of warranty costs.
INCOME TAXES
The NESLAB businesses' operations are included in groups that file
consolidated or combined income tax returns with other Life Sciences operations.
Life Sciences' intercompany tax allocation policy has been based on the income
taxes calculated on a separate return basis for each subsidiary.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the NESLAB businesses recognize deferred
income taxes based upon 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 on the tax returns.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market value and includes materials, labor, and manufacturing overhead. The
components of inventories are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Raw materials and supplies................................................. $ 4,958 $ 4,440
Work in process............................................................ 1,367 1,710
Finished goods............................................................. 1,702 2,807
--------- ---------
$ 8,027 $ 8,957
--------- ---------
--------- ---------
</TABLE>
F-30
<PAGE>
NESLAB INSTRUMENTS, INC. AND NESLAB INSTRUMENTS EUROPA B.V.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. Effective January 1, 1995, the
NESLAB businesses changed the estimated useful lives of property and equipment
as follows: machinery and equipment increased from 5 to 10 years, computer
equipment decreased from 5 to 3 years, and leasehold improvements increased from
10 to 40 years, or the life of the asset, if shorter. The effect of the change
was a reduction in depreciation expense of $176,000 in 1995. The NESLAB
businesses provide for depreciation using the straight-line method over the
estimated useful lives of the property as follows: machinery and equipment, 5 to
10 years; leasehold improvements, 40 years; and furniture and fixtures, 3 to 5
years. Property and equipment consist of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Machinery and equipment.................................................... $ 4,033 $ 5,408
Furniture and fixtures..................................................... 2,605 3,070
Leasehold improvements..................................................... 661 884
--------- ---------
7,299 9,362
Less: Accumulated depreciation............................................. 3,739 4,607
--------- ---------
$ 3,560 $ 4,755
--------- ---------
--------- ---------
</TABLE>
INTANGIBLE ASSETS
The excess of cost over the fair value of net assets of acquired company
represents the effect of push-down accounting whereby NESLAB Instruments, Inc.
recorded in its financial statements certain assets associated with the purchase
in 1991 of NESLAB Instruments, Inc. by Life Sciences. These certain assets
comprise the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Customer list........................................................... $ 25,000 $ 25,000
Goodwill................................................................ 7,959 7,959
--------- ---------
32,959 32,959
Less: Accumulated amortization.......................................... 5,200 6,355
--------- ---------
$ 27,759 $ 26,604
--------- ---------
--------- ---------
</TABLE>
The customer list and goodwill are being amortized using the straight-line
method over 40 years and 15 years, respectively. The customer list was valued
based upon an independent appraisal at the time of the acquisition in 1991. The
NESLAB businesses assess the future useful life of these assets whenever events
or changes in circumstances indicate that the current useful life has
diminished. The NESLAB businesses consider the future undiscounted cash flows
for the acquired businesses in assessing the recoverability of these assets. If
impairment occurs, any excess of carrying value over fair value is recorded as a
loss.
FOREIGN CURRENCY
All assets and liabilities of NESLAB Instruments Europa B.V. 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
F-31
<PAGE>
NESLAB INSTRUMENTS, INC. AND NESLAB INSTRUMENTS EUROPA B.V.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
separate component of shareholder's investment titled "Cumulative translation
adjustment." Foreign currency translation gains and losses are included in the
accompanying combined statement of income and are not material for the three
years presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The NESLAB businesses' financial instruments consist mainly of cash,
receivables, accounts payable, and accrued expenses. The carrying amounts of the
NESLAB businesses' cash, receivables, accounts payable, and accrued expenses
approximate their fair value due to the short-term nature of these instruments.
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 and
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.
2. EMPLOYEE BENEFIT PLANS
Substantially all of NESLAB Instruments, Inc.'s full-time employees are
eligible to participate in a 401(k) savings plan sponsored by NESLAB
Instruments, Inc. Contributions to the 401(k) savings plan are made by both the
employee and NESLAB Instruments, Inc. NESLAB Instruments, Inc.'s. contributions
are based upon the level of employee contributions. In connection with this
plan, NESLAB Instruments, Inc. contributed and charged to expense $307,000,
$382,000, and $540,000 in 1994, 1995, and 1996, respectively.
3. COMMITMENTS
The NESLAB businesses lease office and operating facilities under various
operating lease arrangements. The accompanying combined statement of income
includes expenses from operating leases of $307,000, $335,000, and $343,000 in
1994, 1995, and 1996, respectively. Future minimum lease payments under
noncancellable operating leases at December 31, 1996, are $304,000 in 1997;
$293,000 in 1998; $243,000 in 1999; $236,000 in 2000; $182,000 in 2001; and
$424,000 in 2002 and thereafter. The NESLAB businesses also have an operating
lease arrangement with a related party as discussed in Note 5.
4. INCOME TAXES
The components of income before provision for income taxes are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Domestic.......................................................... $ 974 $ 3,265 $ 572
Foreign........................................................... (167) 31 74
--------- --------- ---------
$ 807 $ 3,296 $ 646
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-32
<PAGE>
NESLAB INSTRUMENTS, INC. AND NESLAB INSTRUMENTS EUROPA B.V.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current tax expense:
Federal......................................................... $ 544 $ 1,559 $ 346
Foreign......................................................... (58) 11 26
State........................................................... 132 369 83
--------- --------- ---------
618 1,939 455
--------- --------- ---------
Deferred (prepaid) tax expense:
Federal......................................................... 16 (223) 101
State........................................................... 3 (53) 24
--------- --------- ---------
19 (276) 125
--------- --------- ---------
$ 637 $ 1,663 $ 580
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes differs from the provision calculated by
applying the statutory federal income tax rate of 35% to income before provision
for income taxes due to the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Income tax provision at statutory rate............................ $ 282 $ 1,154 $ 226
Increases resulting from:
State income taxes, net of federal tax.......................... 87 205 70
Amortization of cost in excess of net assets of acquired
company....................................................... 259 259 259
Nondeductible expenses.......................................... 9 45 25
--------- --------- ---------
$ 637 $ 1,663 $ 580
--------- --------- ---------
--------- --------- ---------
</TABLE>
Prepaid income taxes and deferred income taxes in the accompanying combined
balance sheet consist of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Depreciation................................................................ $ 178 $ 371
Deferred compensation....................................................... (75) (138)
--------- ---------
Total long-term deferred tax liability................................ $ 103 $ 233
--------- ---------
--------- ---------
Other reserves and accruals................................................. $ 254 $ 173
Inventory basis difference.................................................. 38 130
Accrued compensation........................................................ 96 116
Other, net.................................................................. (1) (26)
--------- ---------
Total current deferred tax asset...................................... $ 387 $ 393
--------- ---------
--------- ---------
</TABLE>
F-33
<PAGE>
NESLAB INSTRUMENTS, INC. AND NESLAB INSTRUMENTS EUROPA B.V.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. RELATED-PARTY TRANSACTIONS
OPERATING LEASES
NESLAB Instruments, Inc. leases certain office and manufacturing space from
Shandon, Inc., a Life Sciences affiliated company, on an as-needed basis. The
accompanying combined statement of income includes expenses from this operating
lease of $445,000, $614,000, and $723,000 in 1994, 1995, and 1996, respectively.
OTHER RELATED-PARTY TRANSACTIONS
The NESLAB businesses purchase and sell products and services in the
ordinary course of business with other Life Sciences businesses. Sales of
products to such affiliated companies totaled $2,300,000, $4,092,000, and
$4,489,000 in 1994, 1995, and 1996, respectively. Purchases of products and
services from such affiliated companies totaled $509,000, $1,177,000, and
$4,304,000 in 1994, 1995, and 1996, respectively.
NESLAB Instruments, Inc. pays Life Sciences annual management fees in return
for certain administrative services, including risk management, certain employee
benefit administration, tax advice and preparation of tax returns, and certain
financial and other services. The accompanying combined statement of income
includes such management fees of $269,000, $264,000, and $380,000 in 1994, 1995,
and 1996, respectively.
NOTES RECEIVABLE AND PAYABLE
The accompanying combined balance sheet includes notes receivable from and
notes payable to Life Sciences affiliated companies as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Notes Receivable:
Shandon Inc........................................................... $ 4,200 $ 2,000
LSI North America Services, Inc. ..................................... 1,402 1,350
--------- ---------
$ 5,602 $ 3,350
--------- ---------
--------- ---------
Notes Payable:
Life Sciences International, PLC...................................... $ 39,000 $ 39,000
International Equipment Corp. (IEC)................................... 3,952 3,952
Forma Scientific, Inc. (Forma)........................................ 1,628 1,628
--------- ---------
$ 44,580 $ 44,580
--------- ---------
--------- ---------
</TABLE>
The Life Sciences International, PLC note payable resulted from the 1991
acquisition of NESLAB Instruments, Inc. by Life Sciences. Interest on this note
accrues at rates which vary with LIBOR, and averaged 6.5% and 6.7% in 1995 and
1996, respectively. The note receivable from Shandon Inc. and notes payable to
IEC and Forma bear interest at a rate set annually, and were 6.5% and 7.0% for
1995 and 1996, respectively. The note receivable for LSI North America Service,
Inc. is noninterest bearing.
F-34
<PAGE>
NESLAB INSTRUMENTS, INC. AND NESLAB INSTRUMENTS EUROPA B.V.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONCLUDED)
6. SIGNIFICANT CUSTOMER, GEOGRAPHICAL INFORMATION, AND EXPORT SALES
The Company is involved in one business segment: manufacturing and marketing
precision temperature control liquid systems for analytical, laboratory,
industrial research and development, laser, and semiconductor applications.
Sales to one customer accounted for 11%, 15%, and 14% of revenues in 1994, 1995,
and 1996, respectively. The Company's revenues are principally United States
sourced. Export revenues included in United States-sourced revenues are:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Europe....................................................... $ 3,681 $ 5,860 $ 8,190
Far East and Australia....................................... 2,883 5,360 7,378
Other........................................................ 1,454 1,890 1,166
--------- --------- ---------
$ 8,018 $ 13,110 $ 16,734
--------- --------- ---------
--------- --------- ---------
</TABLE>
7. SUBSEQUENT EVENT
On March 12, 1997, Life Sciences was acquired by Thermo Instrument Systems
Inc. (Thermo Instrument). Pursuant to an agreement executed on July 30, 1997,
ThermoSpectra Corporation, a majority-owned subsidiary of Thermo Instrument,
agreed to acquire the NESLAB businesses from Thermo Instrument for shares of
ThermoSpectra common stock valued at $32.6 million and the assumption of
approximately $44.2 million of amounts owed to affiliates.
F-35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Gould Instrument Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Gould
Instrument Systems, Inc. (previously a wholly owned subsidiary of Japan Energy
Corporation) and subsidiaries (the Test and Measurement Group of Gould Inc.
prior to December 1, 1993) as of December 31, 1993 and 1994, and the related
consolidated statements of operations, group and stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 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.
As discussed in Note 2, as of May 10, 1995 the shares outstanding of the
Company were acquired by ThermoSpectra Corporation. The Company has historically
experienced operating losses and, accordingly, is dependent upon ThermoSpectra
Corporation to fund the Company's operating losses and to realize the carrying
value of its assets. Management of ThermoSpectra Corporation has declared their
intent to provide such continued financial support.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Gould Instrument Systems, Inc. and subsidiaries (the Test and Measurement Group
of Gould Inc. prior to December 1, 1993) at December 31, 1993 and 1994 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in January
1993 the Company changed its methods of accounting for postretirement benefits
other than pensions and income taxes.
Ernst & Young LLP
Cleveland, Ohio
May 25, 1995
F-36
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------
---------------------------------- MARCH 31, MARCH 31,
1992 1993 1994 1994 1995
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues.............................................. $ 75,410 $ 53,025 $ 51,467 $ 14,763 $ 14,546
---------- ---------- ---------- ----------- -----------
Costs and Operating Expenses:
Cost of revenues.................................... 46,059 31,214 31,176 8,637 8,291
Selling, general, and administrative expenses....... 30,275 22,953 21,306 5,370 4,636
Research and development expenses................... 11,326 10,146 7,614 1,780 1,456
Restructuring expenses.............................. 3,814 696 1,796 -- --
---------- ---------- ---------- ----------- -----------
91,474 65,009 61,892 15,787 14,383
---------- ---------- ---------- ----------- -----------
Operating Income (Loss)............................... (16,064) (11,984) (10,425) (1,024) 163
Other Income, Net..................................... 103 1,192 408 100 295
Interest Expense...................................... (101) (96) (247) (39) (103)
---------- ---------- ---------- ----------- -----------
Income (Loss) Before Income Taxes and Cumulative
Effect of Accounting Changes........................ (16,062) (10,888) (10,264) (963) 355
Income Taxes.......................................... -- (310) (13) (76) (115)
---------- ---------- ---------- ----------- -----------
Income (Loss) Before Cumulative Effect of Accounting
Changes............................................. (16,062) (11,198) (10,277) (1,039) 240
Cumulative Effect of Accounting Changes............... -- (1,165) -- -- --
---------- ---------- ---------- ----------- -----------
Net Income (Loss)..................................... $ (16,062) $ (12,363) $ (10,277) $ (1,039) $ 240
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 2,465 $ 1,701 $ 1,835
Accounts receivable, less allowances of $523, $409 and $435...................... 9,802 8,865 10,782
Receivable from affiliates....................................................... 3,015 742 822
Inventories, less allowances of $11,768, $11,831 and $11,611..................... 10,992 9,594 8,513
Other current assets............................................................. 1,212 818 1,042
--------- --------- -----------
27,486 21,720 22,994
--------- --------- -----------
Property, Plant, and Equipment:
Land............................................................................. 2,177 2,181 2,218
Buildings........................................................................ 1,650 1,650 1,703
Machinery and equipment.......................................................... 29,442 28,106 28,334
Demonstration equipment.......................................................... 4,939 5,918 6,300
Construction in progress......................................................... 479 172 265
--------- --------- -----------
38,687 38,027 38,820
Less: Accumulated depreciation................................................... 25,985 27,699 28,637
--------- --------- -----------
12,702 10,328 10,183
--------- --------- -----------
Intangible Assets:
Goodwill......................................................................... 4,192 4,192 4,192
Patents and trademarks........................................................... 5,600 5,600 5,600
--------- --------- -----------
9,792 9,792 9,792
Less: Accumulated amortization................................................... 3,832 4,497 4,663
--------- --------- -----------
5,960 5,295 5,129
Other Assets....................................................................... 462 415 464
--------- --------- -----------
$ 46,610 $ 37,758 $ 38,770
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Short-term debt.................................................................. $ 105 $ 6,009 $ 6,009
Accounts payable................................................................. 4,935 4,285 5,028
Amounts due to affiliates........................................................ 6,223 1,463 388
Accrued payroll and employee benefits............................................ 1,887 1,456 1,953
Restructuring reserves........................................................... 543 1,768 1,161
Warranty reserves................................................................ 870 860 809
Other liabilities and accrued expenses........................................... 3,365 2,769 3,184
--------- --------- -----------
17,928 18,610 18,532
Retirement Benefits................................................................ 1,948 2,315 2,474
Other Long-term Liabilities........................................................ 1,294 1,333 1,471
Stockholder's Equity:
Common stock, par value $1; 3,000 shares authorized, issued and outstanding...... 3 3 3
Capital in excess of par value................................................... 25,897 25,897 25,897
Accumulated deficit.............................................................. (643) (10,920) (10,680)
Cumulative translation adjustment................................................ 183 520 1,073
--------- --------- -----------
25,440 15,500 16,293
--------- --------- -----------
$ 46,610 $ 37,758 $ 38,770
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, --------------------
------------------------------- MARCH 31, MARCH 31,
1992 1993 1994 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES:
Net income (loss) $ (16,062) $ (12,363) $ (10,277) $(1,039) $ 240
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Cumulative effect of change in accounting
principle................................. -- 1,165 -- -- --
Depreciation and amortization............... 6,900 5,107 4,938 1,265 1,014
Provision for doubtful accounts............. 186 50 128 12 12
Provision for obsolescence.................. 5,475 1,930 1,574 324 186
Loss (gain) on sale of equipment............ 368 (676) 141 3 18
Changes in operating assets and liabilities
net of effect of noncash activities:
Accounts receivable..................... 7,207 924 809 (879) (1,929)
Receivables from affiliates............. 564 5,998 1,315 (339) (80)
Inventories............................. (555) (3,301) 231 692 920
Other current assets.................... 368 302 394 (290) (225)
Demonstration equipment................. 266 (925) (1,808) (688) (470)
Accounts payable........................ (3,556) (177) (651) 142 743
Amounts due to affiliates............... (374) (2,476) 490 (4,950) (1,075)
Accrued payroll and employee benefits... (1,101) 13 (431) 132 497
Restructuring reserves.................. 1,607 (1,695) 1,225 (77) (607)
Retirement benefits..................... (199) (407) 367 118 159
Other--net.............................. 250 59 (513) 283 451
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities............................ 1,344 (6,472) (2,068) (5,291) (146)
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment..... (2,608) (1,253) (568) (259) (180)
Proceeds from sale of property, plant, and
equipment..................................... 87 2,232 11 1 --
Loans to affiliates............................. -- (958) -- -- --
Proceeds from loans to affiliates............... -- -- 958 -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities............................ (2,521) 21 401 (258) (180)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Principal payments on borrowings................ (196) (208) (104) (83) --
Net contributed capital......................... 9,483 9,276 -- -- --
Proceeds from short-term borrowings............. -- -- 6,000 5,000 --
Proceeds from affiliate borrowings.............. -- 5,250 -- -- --
Principal payments on affiliate borrowings...... -- -- (5,250) -- --
Dividends paid.................................. -- (3,443) -- -- --
Assets and liabilities retained by Gould Inc.... -- (12,336) -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities............................ 9,287 (1,461) 646 4,917 --
--------- --------- --------- --------- ---------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents..................................... (4,521) (591) 257 167 460
--------- --------- --------- --------- ---------
Increase (Decrease) in Cash and Cash
Equivalents..................................... 3,589 (8,503) (764) (465) 134
Cash and Cash Equivalents at Beginning of
Period.......................................... 7,379 10,968 2,465 2,465 1,701
--------- --------- --------- --------- ---------
Cash and Cash Equivalents at End of Period........ $ 10,968 $ 2,465 $ 1,701 $ 2,000 $ 1,835
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
CASH PAID FOR:
Interest........................................ $ 52 $ 27 $ 225 $ 36 $ 103
Income taxes.................................... $ 4 $ -- $ 33 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF GROUP AND STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL IN CUMULATIVE TOTAL
COMMON EXCESS OF ACCUMULATED TRANSLATION STOCKHOLDER'S GROUP
STOCK PAR VALUE DEFICIT ADJUSTMENT EQUITY EQUITY
----------- ----------- ------------ ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1992.................... $ -- $ -- $ -- $ -- $ -- $ 56,814
Net loss...................................... -- -- -- -- -- (16,062)
Net contributed capital....................... -- -- -- -- -- 9,483
Foreign currency translation adjustment....... -- -- -- -- -- (5,284)
----- ----------- ------------ ------ ------------- ---------
BALANCE AT DECEMBER 31, 1992.................. -- -- -- -- -- 44,951
Net loss...................................... -- -- -- -- -- (11,720)
Net contributed capital....................... -- -- -- -- -- 9,276
Foreign currency translation adjustment....... -- -- -- -- -- (828)
Dividends paid................................ -- -- -- -- -- (3,443)
----- ----------- ------------ ------ ------------- ---------
BALANCE AT NOVEMBER 30, 1993.................. -- -- -- -- -- 38,236
Assets and liabilities retained by
Gould Inc................................... -- -- -- -- -- (12,336)
Capitalization of Gould Instrument
Systems, Inc................................ 3 25,897 -- -- 25,900 (25,900)
----- ----------- ------------ ------ ------------- ---------
BALANCE AT DECEMBER 1, 1993................... 3 25,897 -- -- 25,900 --
Net loss...................................... -- -- (643) -- (643) --
Foreign currency translation adjustment....... -- -- -- 183 183 --
----- ----------- ------------ ------ ------------- ---------
BALANCE AT DECEMBER 31, 1993.................. 3 25,897 (643) 183 25,440 --
Net loss...................................... -- -- (10,277) -- (10,277) --
Foreign currency translation adjustment....... -- -- -- 337 337 --
----- ----------- ------------ ------ ------------- ---------
BALANCE AT DECEMBER 31, 1994.................. 3 25,897 (10,920) 520 15,500 --
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net income.................................... -- -- 240 -- 240 --
Foreign currency translation translation...... -- -- -- 553 553 --
----- ----------- ------------ ------ ------------- ---------
BALANCE AT MARCH 31, 1995..................... $ 3 $ 25,897 $ (10,680) $ 1,073 $ 16,293 $ --
----- ----------- ------------ ------ ------------- ---------
----- ----------- ------------ ------ ------------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On November 30, 1993 (date of inception) Gould Instrument Systems, Inc.
("the Company") purchased substantially all of the assets and liabilities of the
Test and Measurement Group ("T&M") of Gould Inc. for $29,950,000 in cash and
$5,250,000 in notes. During 1994, a reduction in the purchase price of $496,000
was agreed to between the Company and Gould Inc. and the notes were paid in
full. Both the Company and Gould Inc. (predecessor to Gould Electronics Inc.
collectively "Gould") are wholly owned subsidiaries of Japan Energy Corporation
("JEC"). Accordingly, the acquisition was accounted for on a historical cost
carryover basis. The Company's operations consist entirely of the former T&M
group.
Pursuant to the acquisition of T&M, the Company negotiated a Service
Agreement with Gould for the purchase of certain tax, accounting, legal, human
resource and cash management services for an annual fee of $300,000. Although
such services were also performed for T&M prior to the acquisition by the
Company, a charge for such services was not allocated to T&M. Management of the
Company believes the Service Agreement represents a reasonable approximation of
the cost of such services and, accordingly, has included a charge of $300,000 in
the 1992 and 1993 statement of operations as an estimate of expenses incurred by
Gould on behalf of the Company during 1992 and 1993. However, these estimated
costs are not necessarily indicative of the expenses that would have been
incurred had the Company operated on a stand-alone basis during 1992 and 1993.
As discussed further in Note 6, the Company also participates in certain
pension plans sponsored by Gould. Benefits provided under such plans are charged
by Gould to the Company based on amounts determined by consulting actuaries.
Pension expense recorded for such plans was $266,000, $221,000, and $362,000 in
1992, 1993, and 1994, respectively.
2. STOCK PURCHASE AGREEMENT
On May 10, 1995, JEC entered into an agreement with ThermoSpectra
Corporation ("ThermoSpectra") whereby ThermoSpectra agreed to purchase all of
the shares outstanding of the Company for $19,500,000.
The Company has historically experienced operating losses and, accordingly,
is dependent upon the continued financial support of ThermoSpectra to fund the
Company's operating losses and to realize the carrying value of its assets.
Management of ThermoSpectra has declared their intent to provide such continued
financial support to the Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated.
CASH EQUIVALENTS
The Company considers liquid investments with a maturity of three months or
less when purchased to be cash equivalents.
F-41
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market value, using the
first-in, first-out method. The components of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and supplies................................. $ 10,138 $ 10,154 $ 9,390
Work in process............................................ 5,452 4,636 4,359
Finished goods............................................. 7,170 6,635 6,375
--------- --------- -----------
22,760 21,425 20,124
Less: Allowances........................................... 11,768 11,831 11,611
--------- --------- -----------
$ 10,992 $ 9,594 $ 8,513
--------- --------- -----------
--------- --------- -----------
</TABLE>
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost. Depreciation is computed
using the straight-line method for substantially all depreciable assets over the
estimated useful lives of the assets as follows: buildings and improvements -- 3
to 30 years; and machinery and equipment -- 2 to 10 years. Demonstration
equipment is amortized using the straight-line method over three years.
Amortization of demonstration equipment is included in "Selling, general, and
administrative expenses" in the statements of operations.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and other intangibles which are being
amortized using the straight-line method over periods ranging from 10 to 40
years. Goodwill is assessed quarterly to determine its continuing value using an
estimated undiscounted future cash flows method.
FOREIGN CURRENCY TRANSLATION
Adjustments resulting from translating foreign functional currency financial
statements into U.S. dollars are recorded as a separate component of
stockholder's equity in the balance sheets. Foreign currency transaction gains
and losses are included in the statements of operations and are not material for
the periods presented.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." This accounting standard requires companies to
accrue the actuarially determined costs of postretirement benefits other than
pensions during the years that the employee renders service. Under the Company's
previous policy, the annual expense of health care and life insurance benefits
provided to certain retired employees was determined based on the amount of
actual claims incurred and premiums paid. As a result of the Company electing to
immediately recognize the cumulative effect of adopting SFAS No. 106 as of
January 1, 1993, an after tax charge of $1,165,000 is included in the
accompanying 1993 statement of operations. Because Gould has agreed to retain
the liability for postretirement benefits for all retirees of
F-42
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company as of November 30, 1993, such cumulative effect adjustment has been
calculated as of January 1, 1993, for only active employees of the Company as of
November 30, 1993. Since the Company has provided a valuation allowance equal to
its total net deferred tax assets there is no tax benefit associated with this
charge. Excluding the cumulative effect, the adoption of SFAS No. 106 resulted
in an increase in the 1993 net loss of approximately $150,000.
INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." This accounting standard requires that the liability method be
used in accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
basis and the tax basis of assets and liabilities and are measured using the
enacted tax rate and laws that apply in the periods in which the deferred tax
asset or liability is expected to be realized or settled. Under the Company's
previous policy, deferred tax assets and liabilities were measured using tax
rates in effect when timing differences originated and were not adjusted for
subsequent changes in tax rates. Adopting SFAS No. 109 as of January 1, 1993,
did not have a significant effect on the Company's 1993 results of operations.
INTERIM FINANCIAL STATEMENTS
The financial statements as of March 31, 1995, and for the three-month
periods ended March 31, 1994 and 1995 have not been audited. However, in the
opinion of management, such financial statements reflect all adjustments of a
normal recurring nature necessary for a fair presentation of results for these
interim periods. The results of operations for the three-month period ended
March 31, 1995, are not necessarily indicative of the results to be expected for
the entire year.
4. SHORT-TERM DEBT
Short-term debt at December 31, 1993 and 1994 consists of the following:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Line of credit with bank expiring March 31, 1995, $7,000,000 maximum,
interest at rate mutually agreeable to borrower and lender at time of
borrowing (6.69% at December 31, 1994), guaranteed by JEC................ $ -- $ 4,200
Line of credit with bank expiring September 7, 1995, $3,000,000 maximum,
interest at Federal Funds Rate plus .375% per annum (6.66% at December
31, 1994), guaranteed by JEC............................................. -- 1,800
Other...................................................................... 105 9
--------- ---------
$ 105 $ 6,009
--------- ---------
--------- ---------
</TABLE>
In conjunction with the sale of the Company by JEC to ThermoSpectra on May
10, 1995, the above lines of credit were paid by ThermoSpectra and cancelled by
the Company.
5. RESTRUCTURING
During 1992, 1993, and 1994, the Company implemented a series of business
restructuring actions intended to eliminate redundant cost structures including,
in 1992, decisions to exit the Company's medical
F-43
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
clinical equipment market and to close the Company's Mexican operations.
Approximately 500 positions have been terminated as a result of these actions.
Accordingly, during 1992, 1993, and 1994, the Company provided approximately
$3,814,000, $696,000, and $1,796,000, respectively, of which $3,289,000,
$696,000, and $1,796,000, respectively, represents provisions for severance and
$525,000 in 1992 represents a provision for other restructuring expenses
associated with exiting the medical equipment market and the closing of the
Company's Mexican operations. The Company made payments in 1992, 1993, and 1994
thereon of $2,211,000, $2,004,000, and $591,000, respectively, related to these
actions.
6. PENSION AND RETIREMENT PLANS
DEFINED BENEFIT PENSION PLANS
Employees of the Company's U.S. operations who meet specified service
requirements are entitled to retirement benefits under defined benefit pension
plans sponsored by Gould. Benefit formulas under these plans are dependent upon
employee earnings and years of service prior to retirement. Gould's policy is to
fund at least the minimum required contribution, but not more than the maximum
tax deductible limit. These contributions provide for both benefits attributable
to service to date and those expected to be earned in the future. Gould charges
the Company, based on amounts determined by consulting actuaries, for benefits
provided under these plans. The Company recorded pension expense of $266,000,
$221,000, and $362,000 in 1992, 1993, and 1994, respectively, related to these
plans. As a result of these arrangements, a pension liability is not recorded by
the Company related to its U.S. employees.
Pursuant to the sale of the Company to ThermoSpectra on May 10, 1995, the
accrued benefits of U.S. employees of the Company, participating in the defined
benefit plans sponsored by Gould, became fully vested and the Company withdrew
as an employer under such plans.
The Company's German operation has a defined benefit pension plan covering
substantially all employees in Germany. Retirement benefits are based on years
of service (as defined) and employee earnings.
Net pension cost for the German plan is as follows:
<TABLE>
<CAPTION>
1994
-----------------
<S> <C>
(IN THOUSANDS)
Service cost--benefits earned during the year................................. $ 82
Interest cost on projected benefit obligation................................. 74
Net amortization and deferral................................................. 14
-----
$ 170
-----
-----
</TABLE>
F-44
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net pension cost for the German plan for 1992 and 1993 was not significant.
In certain countries, the funding of pension plans is not a common practice as
funding does not provide an economic benefit. Consequently, the Company's German
pension plan is not funded. The following table sets forth the status of the
German plan at December 31, 1993 and 1994:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefits............................................................ $ 399 $ 538
Nonvested benefits......................................................... 115 126
--------- ---------
Accumulated benefit obligation............................................. 514 664
Excess of projected benefit obligation over accumulated benefit
obligation............................................................... 414 500
--------- ---------
Projected benefit obligation............................................... 928 1,164
Unrecognized transition obligation........................................... (270) (277)
Unrecognized net actuarial loss.............................................. -- (1)
--------- ---------
Accrued pension liability.................................................... $ 658 $ 886
--------- ---------
--------- ---------
</TABLE>
The range of assumptions for the German plan reflects the different economic
environment and includes a discount rate of 7.5% at December 31, 1993 and 1994
and an average increase in compensation of 4.5% at December 31, 1993 and 1994.
DEFINED CONTRIBUTION BENEFIT PLANS
The Company's U.K. operation has a defined contribution pension plan
covering substantially all U.K. employees. The plan is administered through
Gould Electronics (U.K.) Pension Trustees Limited. Company contributions are
determined as a percentage of the employee's salary and totaled $134,000,
$104,000, and $96,000 in 1992, 1993, and 1994, respectively.
The Company maintains a voluntary contributory retirement savings plan for
substantially all employees in the U.S. Company contributions are determined as
a percentage of employee contributions as defined, and totaled $247,000,
$248,000, and $223,000 in 1992, 1993, and 1994, respectively.
POSTRETIREMENT BENEFIT PLANS
The Company sponsors several defined benefit health care plans that provide
certain health care and life insurance benefits for retired employees. Most of
the Company's U.S. salaried employees, and certain hourly employees, may become
eligible for such benefits if they reach either age 55 with ten years of vested
service or normal retirement age while working for the Company. Most plans are
contributory and contain other cost sharing features such as deductibles and
coinsurance. Currently, the Company does not fund its postretirement health care
plans.
F-45
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The status of the U.S. postretirement health care plans at December 31, 1993
and 1994 is as follows:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Actuarial present value of accumulated postretirement benefit obligations
("APBO"):
Retirees............................................................... $ -- $ 103
Other fully-eligible plan participants................................. 769 388
Other active plan participants......................................... 749 805
--------- ---------
Total APBO........................................................... 1,518 1,296
Unrecognized prior service cost............................................ -- (67)
Unrecognized net gain (loss)............................................... (201) 236
--------- ---------
Accrued postretirement benefit cost........................................ $ 1,317 $ 1,465
--------- ---------
--------- ---------
</TABLE>
Net periodic postretirement benefit cost is as follows:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Service cost............................................................... $ 53 $ 49
Interest cost.............................................................. 99 99
--------- ---------
$ 152 $ 148
--------- ---------
--------- ---------
</TABLE>
Pursuant to the purchase of T&M by the Company, Gould agreed to retain the
liability for health care benefits related to T&M retirees as of November 30,
1993. The above net periodic postretirement benefit cost excludes retiree health
care benefits paid by Gould and charged to T&M during 1993. Retiree health care
expenses paid by Gould and charged to T&M were $524,000 in 1992 and $513,000 in
1993.
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., medical trend rate) is 15% for 1993 and 11% for 1994
and 1995 and is assumed to decrease gradually, to an ultimate trend rate of 6%
in 2004. Increasing the assumed medical trend rates by one percentage point in
each year would increase the APBO as of December 31, 1994, by $82,000 and net
periodic postretirement benefit cost for 1994 by $6,000. The weighted average
discount rate used in determining the APBO was 7.0% and 8.5% at December 31,
1993 and 1994, respectively.
Pursuant to the sale of the Company to ThermoSpectra on May 10, 1995, Gould
assumed the liability for medical coverage under the Company's health care plans
for employees who retired prior to May 10, 1995 and for employees who are
eligible for continuing coverage as retirees as of May 10, 1995 or become
eligible before August 31, 1995 and who elect to retire under such coverage on
or before August 31, 1995.
F-46
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Losses before income taxes and cumulative effect of accounting changes is as
follows:
<TABLE>
<CAPTION>
1992 1993 1994
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Domestic.................................................. $ (13,189) $ (8,819) $ (6,869)
Foreign................................................... (2,873) (2,069) (3,395)
---------- ---------- ----------
$ (16,062) $ (10,888) $ (10,264)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Income taxes are as follows:
<TABLE>
<CAPTION>
1992 1993 1994
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Currently payable:
Foreign................................................. $-- $(310) $(13)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Income taxes related to T&M prior to December 1, 1993 were computed as if
T&M became a stand-alone entity on January 1, 1992. The income tax provisions
differ from the amounts calculated by applying the statutory federal income tax
rate of 34% in 1992 and 35% in 1993 and 1994 to loss before income taxes and
cumulative effect of accounting changes due to the following:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Income tax benefit at statutory rate.......................... $ 5,461 $ 3,811 $ 3,592
Losses without a tax benefit.................................. (5,461) (3,811) (3,592)
Other......................................................... -- (310) (13)
--------- --------- ---------
Income tax expenese......................................... $ -- $ (310) $ (13)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-47
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of net deferred income taxes at December 31, 1993 and 1994
consist of the following:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Fixed assets........................................................... $ 401 $ 964
Intangible assets...................................................... 1,085 1,129
Reserves and accruals.................................................. 1,470 1,307
Inventory basis........................................................ -- 326
Tax loss carryforwards................................................. 127 2,538
Other.................................................................. 4 30
--------- ---------
Total deferred tax assets............................................ 3,087 6,294
Deferred tax liabilities:
Inventory basis........................................................ 267 --
Accounts receivable.................................................... 332 --
Other.................................................................. 13 13
--------- ---------
Total deferred tax liabilities....................................... 612 13
Valuation allowance:
Current................................................................ (909) (748)
Non-current............................................................ (1,566) (5,533)
--------- ---------
Total valuation allowance............................................ (2,475) (6,281)
--------- ---------
Net deferred income taxes................................................ $ -- $ --
--------- ---------
--------- ---------
</TABLE>
Due to the cumulative losses since November 30, 1993 (date of inception of
the Company), a valuation allowance equal to total net deferred tax assets has
been recognized as of December 31, 1994. The net operating loss carryforwards at
December 31, 1994 represent the cumulative losses of the Company since the date
of inception. The net operating loss carryforwards attributable to the
historical losses of T&M prior to December 1, 1993 have not been recorded as
such benefits are not realizable by the Company or remain subject to
determination by foreign tax authorities. At December 31, 1994, the Company had
net operating loss carryforwards of $6,400,000 that expire principally in 2009.
The utilization of such loss carryforwards may be limited under United
States tax law due to the purchase of the Company's outstanding shares on May
10, 1995 by ThermoSpectra.
8. LEASES
The Company leases various buildings, vehicles and equipment under long-term
leases. These leases require payment of fixed rentals and, in certain instances,
insurance, taxes, and maintenance. Rental expense for operating leases was
$3,097,000, $2,452,000, and $1,969,000 in 1992, 1993, and 1994, respectively.
Future minimum lease commitments due under noncancelable operating leases at
December 31, 1994 are $1,603,000 in 1995; $1,503,000 in 1996; $1,325,000 in
1997; $1,225,000 in 1998; $1,059,000 in 1999; and $5,340,000 thereafter. Total
future minimum lease payments at December 31, 1994, are $12,055,000.
F-48
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CONTINGENCIES
The Company is subject to various claims and legal proceedings that arose in
the ordinary course of its business activities. Each of these matters is subject
to various uncertainties, and it is possible that some of these matters may be
decided unfavorably to the Company. Pursuant to the sale of the Company to
ThermoSpectra on May 10, 1995 ("closing date"), JEC will indemnify ThermoSpectra
for any damage (as defined) in excess of the respective reserve recorded as of
the closing date, if any, after the total of all such excess damages incurred
exceed $100,000. JEC will have no liability for indemnification unless on or
before the tenth anniversary of the closing date, ThermoSpectra asserts a claim
for damages against JEC specifying the factual basis of that claim in reasonable
detail to the extent then known. While management believes that any liability
that may ultimately result from the resolution of these matters will not have a
material adverse effect on the financial position of the Company, the resolution
of these matters may have a material adverse effect on the Company's results of
operations in the period in which they are recognized.
10. TRANSACTIONS WITH AFFILIATES
The Company enters into transactions with affiliates in the ordinary course
of business. Transactions include participation in certain insurance and
employee benefit programs sponsored by Gould. In addition, Gould provided, among
other things, certain tax, accounting, legal, human resource, and cash
management services to the Company for a fee of $300,000 in 1992, 1993, and
1994, respectively. Amounts due to Gould as of December 31, 1993 and 1994
relating to these programs and services was $826,000 and $1,310,000,
respectively. In addition, under a cash management service arrangement, the
Company's German operation has a receivable of $476,000 and $578,000 from Gould
at December 31, 1993 and 1994, respectively, and under the terms of a 10%
promissory note, the Company's France operation has a receivable of $958,000
from Gould at December 31, 1993. Receivables from affiliates also include
$55,000 and $133,000 due from JEC for purchases of the Company's products as of
December 31, 1993 and 1994, respectively. Revenues from affiliates were
$435,000, $446,000, and $706,000 in 1992, 1993, and 1994, respectively.
F-49
<PAGE>
GOULD INSTRUMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
11. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
The Company's primary business is the design, manufacture and sale, in the
domestic and international markets, of analytical monitoring instruments.
Financial information by geographic areas is as follows:
<TABLE>
<CAPTION>
UNITED OTHER
STATES EUROPE COUNTRIES ELIMINATIONS TOTAL
---------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
1992
Net sales to unaffiliated customers................... $ 32,853 $ 41,672 $ 885 $ -- $ 75,410
Inter-geographic sales................................ 5,194 14,322 507 (20,023) --
---------- --------- ----------- ------------ ----------
Total............................................... $ 38,047 $ 55,994 $ 1,392 $ (20,023) $ 75,410
---------- --------- ----------- ------------ ----------
---------- --------- ----------- ------------ ----------
Loss before income taxes.............................. $ (13,189) $ (2,053) $ (820) $ -- $ (16,062)
---------- --------- ----------- ------------ ----------
---------- --------- ----------- ------------ ----------
Identifiable assets................................... $ 29,448 $ 41,376 $ 1,127 $ (7,101) $ 64,850
---------- --------- ----------- ------------ ----------
---------- --------- ----------- ------------ ----------
1993
Net sales to unaffiliated customers................... $ 24,788 $ 28,237 $ -- $ -- $ 53,025
Inter-geographic sales................................ 4,931 7,915 -- (12,846) --
---------- --------- ----------- ------------ ----------
Total............................................... $ 29,719 $ 36,152 $ -- $ (12,846) $ 53,025
---------- --------- ----------- ------------ ----------
---------- --------- ----------- ------------ ----------
Loss before income taxes and cumulative effect of
accounting changes.................................. $ (8,819) $ (1,159) $ (910) $ -- $ (10,888)
---------- --------- ----------- ------------ ----------
---------- --------- ----------- ------------ ----------
Identifiable assets................................... $ 31,879 $ 22,324 $ -- $ (7,593) $ 46,610
---------- --------- ----------- ------------ ----------
---------- --------- ----------- ------------ ----------
1994
Net sales to unaffiliated customers................... $ 25,012 $ 26,455 $ -- $ -- $ 51,467
Inter-geographic sales................................ 5,625 6,995 -- (12,620) --
---------- --------- ----------- ------------ ----------
Total............................................... $ 30,637 $ 33,450 $ -- $ (12,620) $ 51,467
---------- --------- ----------- ------------ ----------
---------- --------- ----------- ------------ ----------
Loss before income taxes.............................. $ (6,869) $ (3,395) $ -- $ -- $ (10,264)
---------- --------- ----------- ------------ ----------
---------- --------- ----------- ------------ ----------
Identifiable assets................................... $ 24,450 $ 18,510 $ -- $ (5,202) $ 37,758
---------- --------- ----------- ------------ ----------
---------- --------- ----------- ------------ ----------
</TABLE>
Intercompany sales between geographic regions are accounted for at prices
comparable to normal customer sales and are eliminated in consolidation.
Export sales (excluding intercompany sales) from the United States were
$5,231,000, $4,363,000 and $5,530,000 in 1992, 1993, and 1994, respectively.
F-50
<PAGE>
THERMOSPECTRA CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED JANUARY 3, 1998
(UNAUDITED)
In March 1997, Thermo Instrument acquired approximately 95% of the
outstanding shares of Life Sciences International PLC ("LSI"), a London Stock
Exchange-listed company. Subsequently, Thermo Instrument acquired the remaining
shares of LSI capital stock. In July, 1997, the Company agreed to acquire NESLAB
Instruments, Inc. and its related sales and service entity, NESLAB Instruments
Europa BV in the Netherlands (collectively, NESLAB), a global supplier of
temperature-control products and former LSI subsidiary, from Thermo Instrument
for $76.2 million. The purchase price represents the sum of the net tangible
book value of the business as of June 28, 1997, plus a percentage of Thermo
Instrument's total cost in excess of net assets acquired associated with its
acquisition of LSI, based on NESLAB's 1996 revenues relative to LSI's 1996
consolidated revenues. Management believes such method of allocation is
reasonable. Of the $76.2 million purchase price, the Company assumed $44.9
million of debt to Thermo Instrument, which was subsequently paid, and will
issue to Thermo Instrument 2,759,042 shares of Company common stock valued at
approximately $31.3 million.
F-51
<PAGE>
THERMOSPECTRA CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED JANUARY 3, 1998
(UNAUDITED)
The following unaudited pro forma combined condensed statement of income
sets forth the results of operations for the year ended January 3, 1998, as if
the acquisition of NESLAB had occurred on December 29, 1996. NESLAB's historical
statement of income represents its results for the period from January 1, 1997,
through March 12, 1997, the effective date of acquisition by the Company. The
pro forma results of operations are not necessarily indicative of future
operations or the actual results that would have occurred had the acquisition of
NESLAB been made on December 29, 1996. This statement should be read in
conjunction with the accompanying notes and the respective historical financial
statements and related notes of the Company and NESLAB appearing elsewhere in
this Proxy Statement.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- -----------------------
THERMOSPECTRA NESLAB ADJUSTMENTS COMBINED
-------------- --------- ----------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues..................................................... $ 198,900 $ 9,825 $ -- $ 208,725
-------------- --------- ----------- ----------
Costs and Operating Expenses:
Cost of revenues........................................... 115,747 7,872 -- 123,619
Selling, general, and administrative expenses.............. 53,182 3,014 280 56,476
Research and development expenses.......................... 17,303 850 -- 18,153
Gain on sale of business................................... (2,210) -- -- (2,210)
Other nonrecurring expense, net............................ 953 -- -- 953
-------------- --------- ----------- ----------
184,975 11,736 280 196,991
-------------- --------- ----------- ----------
Operating Income (Loss)...................................... 13,925 (1,911) (280) 11,734
Interest and Other Income.................................... 692 56 -- 748
Interest Expense............................................. (4,217) (621) -- (4,838)
-------------- --------- ----------- ----------
Income (Loss) Before Provision for Income Taxes.............. 10,400 (2,476) (280) 7,644
Provision for Income Taxes................................... 4,552 16 (967) 3,601
-------------- --------- ----------- ----------
Net Income (Loss)............................................ $ 5,848 $ (2,492) $ 687 $ 4,043
-------------- --------- ----------- ----------
-------------- --------- ----------- ----------
Earnings per Share:
Basic...................................................... $ .40 $ .27
-------------- ----------
-------------- ----------
Diluted.................................................... $ .39 $ .26
-------------- ----------
-------------- ----------
Weighted Average Shares:
Basic...................................................... 14,694 553 15,247
-------------- ----------- ----------
-------------- ----------- ----------
Diluted.................................................... 14,806 553 15,359
-------------- ----------- ----------
-------------- ----------- ----------
</TABLE>
See notes to pro forma combined condensed statement of income.
F-52
<PAGE>
THERMOSPECTRA CORPORATION
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(UNAUDITED)
NOTE 1--PRO FORMA ADJUSTMENTS TO PRO FORMA COMBINED CONDENSED STATEMENT OF
INCOME
(IN THOUSANDS, EXCEPT IN TEXT)
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 3, 1998
---------------
<S> <C>
DEBIT (CREDIT)
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Reversal of service fee charged to NESLAB by LSI in 1997.......................................... $ (96)
Service fee of 1.0% of the revenues of NESLAB for the year ended January 3, 1998,
for services provided under a services agreement between the Company and
Thermo Electron Corporation..................................................................... 98
Amortization over 40 years of $57,774,000 of cost in excess of net assets of acquired companies
created by the acquisition of NESLAB............................................................ 278
-----
280
-----
-----
PROVISION FOR INCOME TAXES
Income tax benefit associated with the adjustments above (excluding the amortization of cost in
excess of net assets of acquired companies), calculated at the Company's statutory rate of
39%............................................................................................. (1)
Income tax benefit associated with NESLAB net loss, calculated at the Company's statutory rate of
39%............................................................................................. (966)
-----
(967)
-----
-----
WEIGHTED AVERAGE SHARES
Increase in weighted average shares outstanding due to the assumed issuance at the beginning of
1997 of 2,759,042 shares of the Company's common stock related to the acquisition of NESLAB.
</TABLE>
F-53
<PAGE>
APPENDIX A
SHARE PURCHASE AGREEMENT
BETWEEN
THERMOSPECTRA CORPORATION
AND
THERMO INSTRUMENT SYSTEMS INC.
------------------------
Dated as of July 30, 1997
------------------------
<PAGE>
SHARE PURCHASE AGREEMENT
THIS SHARE PURCHASE AGREEMENT (this "AGREEMENT") dated as of July 30, 1997
is between ThermoSpectra Corporation ("THS"), a Delaware corporation, and Thermo
Instrument Systems Inc. ("THI"), a Delaware corporation.
PRELIMINARY STATEMENT
1. Life Sciences International Limited ("LSI"), which is a majority-owned
subsidiary of THI, owns, directly or through wholly-owned subsidiaries, all of
the issued and outstanding shares (the "SHARES") of NESLAB Instruments, Inc.
("NESLAB"), a New Hampshire corporation, NESLAB Instruments Europa BV, a
Netherlands corporation ("NESLAB BV"), and NESLAB Instruments Ltd., a United
Kingdom private Company ("NESLAB Ltd."). THI, LSI and those of LSI's
wholly-owned subsidiaries that own Shares are referred to individually as a
"SELLER" and collectively as the "SELLERS". NESLAB, NESLAB BV and NESLAB Ltd.
are referred to herein as the "COMPANY".
2. THS desires to purchase, or cause its wholly-owned subsidiaries to
purchase, and THI desires to sell, or to cause its subsidiaries to sell, the
Shares for the consideration set forth below, subject to the terms and
conditions of this Agreement.
NOW THEREFORE, in consideration of the mutual promises hereinafter set forth
and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereby agree as follows:
SECTION 1--PURCHASE AND SALE OF THE SHARES
1.1 PURCHASE OF THE SHARES FROM THE SELLERS. Subject to and upon the terms
and conditions of this Agreement, at the closing of the transactions
contemplated by this Agreement (the "Closing"), THI shall cause its subsidiaries
to sell, transfer, convey, assign and deliver to THS, or its wholly-owned
subsidiaries, and THS or its wholly-owned subsidiaries shall purchase, acquire
and accept the Shares. At the option of THS, THS may acquire the Shares through
the merger of a subsidiary of THS with and into NESLAB, pursuant to which merger
the Sellers' shares of NESLAB would be canceled in exchange for the
consideration set forth in Section 3.1 below.
1.2 FURTHER ASSURANCES. At any time and from time to time after the
Closing, at THS's request and without further consideration, each Seller shall
promptly execute and deliver such instruments of sale, transfer, conveyance,
assignment and confirmation, and take all such other action as THS may
reasonably request, more effectively to transfer, convey and assign to THS, and
to confirm THS's title to, all of the Shares owned by such Seller, to put THS in
actual possession and operating control of the assets, properties and business
of the Company, to assist in exercising all rights with respect thereto and to
carry out the purpose and intent of this Agreement.
1.3 PURCHASE PRICE FOR THE SHARES.
(a) The purchase price to be paid by THS for the Shares (the "Purchase
Price") shall consist of 2,869,717 shares of common stock, $.01 par value, of
THS (the "THS SHARES").
(b) THS and THI acknowledge and agree that the Purchase Price represents an
estimate of the sum of (i) the net operating assets of the Company as of June
28, 1997, plus (ii) a percentage of the total goodwill associated with THI's
acquisition of LSI equal to the sales of the Company for the 1996 fiscal year
relative to the total sales of LSI during such period (the "GOODWILL
PERCENTAGE"). Promptly following the Closing Date, but in any event no later
than September 30, 1997, THI will prepare a draft statement of the net operating
assets of the Company (the "COMPANY NET ASSET STATEMENT") as of June 28, 1997,
and a draft calculation of THI's total goodwill associated with the acquisition
of LSI (the "THI GOODWILL STATEMENT") as of March 12, 1997, the date of THI's
acquisition of LSI. THS will review such statements and provide
A-2
<PAGE>
THI with any objections thereto within 30 days after THS's receipt thereof. If
THS does not object within such 30-day period, then the THI Goodwill Statement
and the Company Net Asset Statement shall be deemed to be accepted by THS and
shall become final. If THS does object to either statement, then the parties
will use best efforts to resolve any such objections within 30 days. If the
parties are unable to resolve such objections within such 30-day period, then
any disputed items will be resolved by an accounting firm designated jointly by
THS and THI and the statements shall be finalized in accordance with the
determination of such firm. Upon finalization of the Companies Net Asset
Statement and the THI Goodwill Statement as provided above, the Purchase Price
shall be increased or decreased, as the case may be, by (A) the amount by which
the net operating assets of the Companies as shown on the Companies Net Asset
Statement are greater than or less than $18,645,671 and (B) the amount by which
the Goodwill Percentage of THI's total goodwill as shown on the THI Goodwill
Statement is greater than or less than $58,740,441. Any payment due by THS or
THI to the other under this section 1.3(b) shall be accompanied by interest from
the date hereof at a rate equal to the Commercial Paper Composite Rate plus 25
basis points. For purposes of this section 1.3(b), "GOODWILL" means cost in
excess of net tangible assets acquired, and does not include any restructuring
or similar costs or reserves accrued in connection with actions taken by the
businesses of LSI after March 12, 1997 to reduce costs or enhance profitability,
and "NET OPERATING ASSETS" means tangible assets, minus total liabilities,
determined in accordance with THI's accounting policies.
1.4 CLOSING. The Closing shall take place at the offices of THI at 81
Wyman Street, Waltham, Massachusetts. At the Closing THI shall deliver, or cause
its subsidiaries to deliver, certificates evidencing the Shares duly endorsed in
blank or with stock powers duly executed. At the Closing THS shall deliver one
or more certificates representing the THS Shares registered in the name of THI
and/or such of its subsidiaries as THI shall designate.
SECTION 2--REPRESENTATIONS AND WARRANTIES OF THI
Except as set forth on the disclosure schedule delivered to THS on the date
hereof (the "DISCLOSURE SCHEDULE"), THI represents and warrants to THS as
follows. The term "knowledge," when used in this Agreement, shall mean actual
knowledge after reasonable investigation.
2.1 ORGANIZATION AND QUALIFICATION. Each of the Sellers and the Company is
a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation and has full corporate power and
authority to own, lease and operate its assets and to carry on its business as
now being and as heretofore conducted. Each of the Sellers and the Company is
qualified or otherwise authorized to transact business as a foreign corporation
in all jurisdictions in which such qualification or authorization is required by
law, except for jurisdictions in which the failure to be so qualified or
authorized would not have a material adverse effect on the assets, properties,
business, results of operations, condition (financial or otherwise) or prospects
of the Company taken as a whole.
2.2 AUTHORITY. THI has full right, power, capacity and authority to
execute, deliver and perform this Agreement and to consummate the transactions
contemplated hereby and each of the Sellers has full right, power, capacity and
authority to consummate the transactions contemplated hereby to be performed by
such Seller. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of THI. This Agreement
has been duly and validly executed and delivered by THI and constitutes the
valid and binding obligation of THI, enforceable against it in accordance with
the terms hereof. Neither the execution, delivery and performance of this
Agreement, nor the consummation of the transactions contemplated hereby will (i)
conflict with or result in a violation, breach, termination or acceleration of,
or default under (or would result in a violation, breach, termination,
acceleration or default with the giving of notice or passage of time, or both)
any of the terms, conditions or provisions of the organizational documents of
any Seller or Company, or of any note, bond, mortgage, indenture, license,
agreement or other instrument or obligation to which any of Seller or Company is
a party or by
A-3
<PAGE>
which any Seller or Company or any of their respective properties or assets may
be bound or affected; (ii) result in the violation of any order, writ,
injunction, decree, statute, rule or regulation applicable to any Seller or the
Company or any of their respective properties or assets; (iii) result in the
imposition of any lien, encumbrance, charge or claim upon any assets of any of
the Company; or (iv) entitle any employee of the Company to severance or other
payments or create any other obligation to an employee. No consent or approval
by, or notification to or filing with, any court, governmental authority or
third party is required in connection with the execution, delivery and
performance of this Agreement by any Seller or the consummation of the
transactions contemplated hereby.
2.3 CAPITALIZATION AND TITLE TO SHARES.
(a) The authorized share capital of the Company is set forth on EXHIBIT A
hereto. The Seller set forth opposite the name of the Company on EXHIBIT A is
the record and beneficial owner of all of the issued and outstanding shares of
the Company. All of the Shares are duly authorized and are validly issued, fully
paid, nonassessable and free of preemptive rights.
(b) There are no other shares of capital stock of any Company authorized or
outstanding or any subscriptions, options, conversion or exchange rights,
warrants, repurchase or redemption agreements, or other agreements or
commitments obligating any Company to issue, transfer, sell, repurchase or
redeem any shares of its capital stock or other securities of any Company. There
are no written shareholder agreements, voting trusts, proxies or other
agreements, instruments or understandings with respect to the voting of the
capital stock of any Company. The books and records of each Company, including
without limitation the books of account, minute books, stock certificate books
and stock ledgers, are complete and correct and accurately reflect the conduct
of the business and affairs of such Company.
2.4 SUBSIDIARIES AND OTHER AFFILIATES.
(a) The Disclosure Schedule sets forth all Subsidiaries of the Company and
the jurisdiction in which each is incorporated. All shares of the capital stock
of each Subsidiary owned by the Company are owned free and clear of any charges,
liens, encumbrances, security interests or adverse claims. As used in this
Agreement, "SUBSIDIARY" means any corporation or other legal entity of which a
party to this Agreement owns, directly or indirectly, fifty percent (50%) or
more of the stock or other equity interest entitled to vote for the election of
directors and representations, warranties and covenants referring to the Company
contained herein shall be deemed to mean the Company and each of its
Subsidiaries, both separately and together as a consolidated whole, unless and
except to the extent expressly indicated otherwise.
(b) There are no other shares of capital stock of any Subsidiary of the
Company authorized or outstanding or any subscriptions, options, conversion or
exchange rights, warrants, repurchase or redemption agreements, or other
agreements or commitments obligating any Subsidiary of the Company to issue,
transfer, sell, repurchase or redeem any shares of its capital stock or other
securities. There are no shareholder agreements, voting trusts, proxies or other
agreements, instruments or understandings with respect to the voting of the
capital stock of any Subsidiary of the Company.
(c) Except for its Subsidiaries, the Company does not, directly or
indirectly, own any material equity interest in any corporation, partnership,
joint venture or other entity.
2.5 FINANCIAL STATEMENTS. THI has delivered to THS prior to the execution
of this Agreement true and complete copies of: the unaudited consolidated
balance sheet of the Company as at June 28, 1997 (the "BALANCE SHEET"), and the
unaudited consolidated statements of earnings of the Company for the three years
ended December 31, 1996 and for the six-month period ended June 28, 1997
(collectively, the "FINANCIAL STATEMENTS"). The Financial Statements have been
prepared from, and are in accordance with, the books and records of LSI and
fairly present the financial condition, results of operations, and cash flows of
the Company as at the dates and for the periods indicated, in each case in
accordance with generally accepted accounting principles applied on a basis
consistent with previous years subject to normal year-end adjustments and
footnote disclosures, which in the aggregate are not material.
A-4
<PAGE>
2.6 ABSENCE OF UNDISCLOSED LIABILITIES; NO DEALINGS WITH AFFILIATES. As of
the date of the Balance Sheet, the Company had no material liabilities or
obligations of any nature, whether accrued, absolute, contingent or otherwise
and whether due or to become due (including without limitation, liabilities as
guarantor or otherwise with respect to obligations of others or liabilities for
taxes due or then accrued or to become due), required to be reflected or
disclosed on the Balance Sheet that were not adequately reflected or reserved
against on the Balance Sheet. The Company has no liabilities of the type
required to be reflected or disclosed on a balance sheet in accordance with
generally accepted accounting principles, other than liabilities (i) adequately
reflected or reserved against on the Balance Sheet, (ii) incurred since the date
of the Balance Sheet in the ordinary course of business and consistent with past
practice, (iii) that would not, in the aggregate, have a material adverse effect
on the Company taken as a whole, or (iv) disclosed in this Agreement. The
Company has no contractual arrangement with or commitment to or from any of its
stockholders, officers, management, directors or employees (or their family
members) other than such as may have been entered into in the normal course of
employment, including, without limiting the generality of the foregoing, being
directly or indirectly a joint investor or coventurer with respect to, or owner,
lessor, lessee, licenser or licensee of, any real or personal property, tangible
or intangible, owned or used by, or a lender to or debtor of, the Company.
2.7 TAXES. The Company has accurately prepared and duly and timely filed
all federal, state, local, provincial or foreign tax and other returns and
reports which were required to be filed, in respect of all income, franchise,
excise, sales, use, property (real and personal), VAT, payroll and other taxes,
levies, imports, duties, license and registration fees, charges or withholdings
of any nature whatsoever (collectively "TAXES"), and to the extent the
liabilities of the Company for Taxes have not been fully discharged, adequate
reserves have been established on the Balance Sheet. None of the federal, state,
local, provincial or foreign Tax returns of the Company has been audited or
examined by the governmental authority having jurisdiction. No waivers of any
statutes of limitation are in effect in respect of any Taxes. The Company is not
in default in the payment of any Taxes due and payable or on any assessments
received in respect thereof, and there are no claims pending or, to the best
knowledge of the Company and the Sellers, threatened, against the Company for
past due Taxes. All Taxes incurred but not yet due have been fully accrued on
the books of the Company or full reserves have been established therefor; the
reserves indicated on the Balance Sheet are also adequate to cover all Taxes
that may become payable by the Company in future periods in respect of any
transactions or sales occurring on or prior to the date of the Balance Sheet.
Without limiting the generality of the foregoing, the Company has withheld or
collected from each payment made to each of their employees, consultants or
non-U.S. payees, the amount of all Taxes required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositories.
2.8 PROPERTIES. The Company owns and has good title to all of the assets
and properties reflected as owned by it on the Balance Sheet or acquired by the
Company since the date of the Balance Sheet (except personal property sold or
otherwise disposed of in the ordinary course of business since the date of the
Balance Sheet), free and clear of any lien, claim or other encumbrance, except
for (i) the liens, claims or other encumbrances reflected on the Balance Sheet,
(ii) assets and properties disposed of, or subject to purchase or sales orders,
in the ordinary course of business since the date of the Balance Sheet, (iii)
liens, claims or other encumbrances securing the liens of materialmen, carriers,
landlords and like persons, all of which are not yet due and payable, (iv) liens
for taxes not yet delinquent and (v) liens, claims, other encumbrances or
defects in title that, in the aggregate, are not material to the Company taken
as a whole. The Company owns or has a valid leasehold interest in all of the
buildings, structures, leasehold improvements, equipment and other tangible
property material to the Company taken as a whole, all of which are in good and
sufficient operating condition and repair, ordinary wear and tear excepted and
the Company has not received any notice that any such property is in violation
in any material respect of any existing law or any building, zoning, health,
safety or other ordinance, code or regulation.
A-5
<PAGE>
2.9 HAZARDOUS MATERIALS.
(a) There has been no generation, use, handling, storage or disposal of any
Hazardous Materials in violation of common law or any applicable environmental
law at any site owned or premises leased by the Company during the period of the
Company's ownership or lease that could have a material adverse effect on the
Company taken as a whole. Nor has there been or is there threatened any release
of any Hazardous Materials on or at any such site or premises during such period
in violation of common law or any applicable environmental law or which created
or will create an obligation to report or remediate such release, which release
or failure to report or remediate could have a material adverse effect on the
Company taken as a whole. For purposes of this Agreement, "HAZARDOUS MATERIAL"
means any medical waste, flammable, explosive or radioactive material, or any
hazardous or toxic waste, substance or material, including substances defined as
"hazardous substances," "hazardous materials," "solid waste" or "toxic
substances" under any applicable laws or ordinances relating to hazardous or
toxic materials and substances, air pollution (including noise and odors), water
pollution, liquid and solid waste, pesticides, drinking water, community and
employee health, environmental land use management, stormwater, sediment
control, nuisances, radiation, wetlands, endangered species, environmental
permitting, petroleum products, and all rules and regulations promulgated
pursuant to any such laws and ordinances.
(b) THI has previously made available to THS copies of all documents
concerning any environmental or health and safety matter that could have a
material adverse effect on the Company taken as a whole, if any, and copies of
any environmental audits or risk assessments, site assessments, documentation
regarding off-site disposal of Hazardous Materials, spill control plans and
material correspondence with any governmental authority regarding the foregoing.
2.10 ACCOUNTS RECEIVABLE. All accounts and notes receivable of the Company
shown on the Balance Sheet and all accounts and notes receivable acquired by the
Company subsequent to the date of the Balance Sheet have arisen in the ordinary
course of business and have been collected, or are in the process of collection
and are collectible in the ordinary course of business and in any event within
nine months from the Closing Date, in the aggregate recorded amounts thereof,
less the applicable allowances reflected on the Balance Sheet with respect to
the accounts and notes receivable shown thereon, or set up consistent with past
practice on the books of the Company with respect to the accounts and notes
receivable acquired subsequent to the date of the Balance Sheet.
2.11 INVENTORIES. All Inventories (as defined below) of the Company are of
a quality and quantity usable and saleable in the ordinary course of business,
except for obsolete items and items of below-standard quality, all of which are
in the aggregate immaterial to the Company taken as a whole. Items included in
such Inventories are carried on the books of the Company, and are valued on the
Balance Sheet, at the lower of cost or market. The value of obsolete materials
and materials of below-standard quality or quantity has been written down on the
books of account of the Company to realizable market value. The term
"Inventories" includes all stock of raw materials, work-in-process and finished
goods, including but not limited to finished goods purchased for resale, held by
the Company for manufacturing, assembly, processing, finishing, sale or resale
to others, from time to time in the ordinary course of business of the Company
in the form in which such inventories then are held or after manufacturing,
assembling, finishing, processing, incorporating with other goods or items,
refining or the like.
2.12 PURCHASE AND SALE COMMITMENTS. No outstanding purchase commitments by
the Company are in excess of the normal, ordinary and usual requirements of the
Company, and the aggregate of the contract prices to which the Company has
agreed in any outstanding purchase commitments is not so excessive when compared
with current market prices for the relevant commodities or services that a
material loss is likely to result. No outstanding sales commitment by the
Company obligates the Company to sell any product or service at a price which,
because of currently prevailing and projected costs of materials or labor, is
likely to result, when all such sales commitments are taken in the aggregate, in
a material loss to the Company taken as a whole. There are no material suppliers
to the Company of
A-6
<PAGE>
significant goods or services with respect to which practical alternative
sources of supply, or comparable products, are not available on comparable terms
and conditions.
2.13 GOVERNMENTAL AUTHORIZATIONS. The Company has all governmental
permits, licenses, franchises, concessions, zoning variances and other
approvals, authorizations and orders (collectively "PERMITS") material to the
Company taken as a whole. All such Permits are presently in full force and
effect, the Company is in compliance with the requirements thereof, no
suspension or cancellation of any of them is threatened so far as is known to
the Sellers or the Company, and the sale of the Shares as contemplated hereby
will not adversely affect the validity or effectiveness of, and will not
require, for retention thereof after such sale, the consent or approval of any
party to, or any other person or governmental authority having jurisdiction of,
any such Permit. None of the Company or the Sellers has any knowledge of any
fact or circumstance which would prevent, limit or restrict it from continuing
to operate its business in the present manner, and no new requirements
pertaining to the manner of operating its business have been issued or announced
by any governmental authority during the past year nor are there any disputes
pending between the Company and any governmental authority relating to the
Company's operations as presently being conducted or actively considered.
2.14 INTELLECTUAL PROPERTY. The Company owns, or is licensed to use, or
otherwise has the right to use all patents, trademarks, service marks, trade
names, trade secrets, franchises, and copyrights, and all applications for any
of the foregoing, and all technology, know-how and processes necessary for the
conduct of its businesses as now conducted (collectively, the "PROPRIETARY
RIGHTS"). A list of all such copyrights, trademarks, tradenames and patents, and
all applications therefor, has been furnished or made available to THS. None of
the Company or the Sellers is aware of any claim by any third party that the
business of the Company as currently conducted or proposed to be conducted
infringes upon the unlicensed Proprietary Rights of others, nor has the Company
or any of the Sellers received any notice or claim from any third party of such
infringement by the Company. None of the Company or the Sellers is aware of any
infringement by any third party on, or any competing claim of right to use or
own any of, the Proprietary Rights of the Company. The Company has the right to
use, free and clear of claims or rights of others, all customer lists and
computer software material to its business as presently conducted. To the best
knowledge of the Company and the Sellers, none of the activities of the
employees of the Company on behalf of the Company violates any agreements or
arrangements which any such employees have with former employers in a way which
is materially adverse to the business of the Company taken as a whole.
2.15 INSURANCE. The Company is not in default with respect to any
provisions of any policy of general liability, fire, title or other form of
insurance held by it, the Company is current in the payment of all premiums due
on such insurance and the Company has not failed to give any notice or present
any claim thereunder in due and timely fashion, except for claims that are
immaterial in both the nature of the claim and in the amount of such claim. The
Company maintains insurance on all of their assets and business (including
products liability insurance) from insurers which are financially sound and
reputable, in amounts and coverages and against the kinds of risks and losses
reasonably prudent to be insured against by corporations engaged in the same or
similar businesses. No basis exists which would jeopardize the coverage under
any such insurance. No such insurance will be terminated or canceled by reason
of the execution, delivery and performance of this Agreement or the consummation
of the transactions contemplated hereby. THI has previously furnished or made
available to THS all policies of general liability, fire, title or other forms
of insurance applicable to the Company and a description of all claims pending
thereunder other than health or dental insurance claims.
2.16 EMPLOYEE BENEFIT PLANS.
(a) THI has made available or furnished to THS true and complete copies of
each pension, profit-sharing, deferred compensation, incentive compensation,
severance pay, retirement, welfare benefit or other plan or arrangement
providing benefits to employees or retirees, including both those that do and do
not constitute employee benefit plans within the meaning of Section 3(3) of the
Employee Retirement
A-7
<PAGE>
Income Security Act of 1974, as amended (the "ERISA"), currently maintained or
contributed to by THI or any of its affiliates for the benefit of the employees
or retirees of the Company (each, a "PLAN").
(b) Except as set forth on the Disclosure Schedule, (i) each such Plan that
is an "employee pension benefit plan" within the meaning of Section 3(2) of
ERISA is being operated and administered in compliance with Section 401(a) of
the Code, a favorable determination letter has been obtained from the Internal
Revenue Service (the "IRS") for such Plan, and there is no accumulated funding
deficiency, as defined in Section 302(a)(2) of ERISA or Section 412 of the Code,
with respect to such Plan; (ii) there has been no non-exempt "prohibited
transaction" within the meaning of Section 406 of ERISA or Section 4975 of the
Code involving the assets of any Plan nor any "reportable event" within the
meaning of Section 4043 of ERISA with respect to any Plan; (iii) all required
employer contributions to such Plan have been made (or, in the case of
contributions not yet due, have been accrued on the Balance Sheet); (iv) THI has
made available to THS as to each such Plan a true and correct copy of (w) the
annual report (Form 5500) filed with the IRS for each of the three most recent
plan years, (x) each plan, trust agreement, group annuity contract and insurance
contract, if any, relating to such Plan, (y) each actuarial report prepared for
each of the last three years for each Plan and (z) each summary plan description
distributed to participants in each Plan and each summary of material
modifications to each Plan (as defined in ERISA); and (v) each such Plan is, and
at all relevant times has been, in compliance with ERISA, the Code and the terms
of such Plan. None of the Sellers or the Company or their respective affiliates
has ever participated in a "multiemployer pension plan" as defined in Section
3(37) of ERISA.
(c) Except as set forth on the Disclosure Schedule, the Company has no
obligation to provide any welfare benefits to retired or former employees other
than continuation of welfare benefits as required by applicable law.
(d) The Company has no liability under or with respect to any employee
benefit plans or arrangements that it no longer maintains or in which it no
longer participates.
2.17 AGREEMENTS AND DOCUMENTS. THI has previously furnished or made
available to THS true, correct and complete copies of each document that is
referred to or otherwise related to any of the following items referred to in
this Section 2.17:
(a) each document related to interests in real property owned, leased or
otherwise used or claimed by the Company;
(b) (i) each agreement of the Company made in the ordinary course of
business which involves aggregate future payments by or to the Company of more
than one hundred fifty thousand dollars ($150,000) or any agreement made in the
ordinary course of business whose term extends beyond one year after the date
hereof; (ii) each agreement containing any covenant restricting the freedom of
the Company to compete in any line of business or with any person; and (iii)
each agreement of the Company not made in the ordinary course of business which
is or was to be performed after July 30, 1997;
(c) all employment or similar compensation agreements of the Company which
may not be terminated by the Company without penalty within thirty days after
the Closing;
(d) all bonus, incentive compensation, deferred compensation,
profit-sharing, stock option, retirement, pension, severance, indemnification,
insurance, death benefit or other fringe benefit plans, agreements or
arrangements of any of the Company (or applying to the Company) in effect, or
under which any amounts remain unpaid, on the date hereof or to become effective
after the date hereof;
(e) all labor unions or other organizations representing, purporting to
represent or attempting to represent any employees of the Company, and all
collective bargaining agreements of the Company with any labor unions or other
representatives or employees;
(f) each agreement or other instrument or arrangement defining the terms on
which any indebtedness of the Company (or a guarantee by the Company of
indebtedness) is or may be issued; and
(g) the names and addresses of all banks in which the Company has accounts
or lines of credit, and with respect to each such account or line of credit, the
names of all persons authorized to draw thereon.
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The Company is not a party to any oral contract or agreement which would be
required to have been furnished or made available to THS under this Section 2.17
had such contract or agreement been committed to writing.
2.18 VALIDITY. There is no default or claimed or purported or alleged
default, or basis on which with notice or lapse of time or both (including
notice of this Agreement), a default would exist, in any obligation on the part
of any party (including the Company) to be performed under any lease, contract,
plan, policy or other instrument or arrangement referred to in Section 2.17 or
otherwise in this Agreement.
2.19 NO CHANGES. Since the date of the Balance Sheet there has not been:
(a) any material adverse change in the business of the Company taken as a
whole;
(b) any material damage, destruction or loss (whether or not covered by
insurance) adversely affecting the business of the Company taken as a whole;
(c) any declaration, setting aside or payment of any dividend, or other
distribution, in respect of any capital stock of the Company or any direct or
indirect redemption, purchase or other acquisition of such stock;
(d) any option to purchase any capital stock of the Company granted to any
person, or any employment or deferred compensation agreement entered into
between the Company and any of its stockholders, officers, directors, employees
or consultants;
(e) any issuance or sale by the Company of any stock, bonds or other
corporate securities, or any partial or complete formation, acquisition,
disposition or liquidation of the Company;
(f) any labor union activity (including without limitation any negotiation,
or request for negotiation, with respect to any union representation or any
labor contract) respecting the Company;
(g) any statute, rule or regulation, or, to the best knowledge of the
Company and the Sellers, any government policy, adopted which may materially and
adversely affect the business of the Company;
(h) any mortgage, lien, attachment, pledge, encumbrance or security interest
created on any asset, tangible or intangible, of the Company, or assumed, either
by the Company or by others, with respect to any such assets, except for liens
permitted under Section 2.8;
(i) any indebtedness or other liability or obligation (whether absolute,
accrued, contingent or otherwise) incurred, or other transaction (except that is
reflected in this Agreement) engaged in, by the Company, except those in the
ordinary course of business that are individually, or in the aggregate to one
group of related parties, less than fifty thousand dollars ($50,000);
(j) any obligation or liability discharged or satisfied by the Company,
except items included in current liabilities shown on the Balance Sheet and
current liabilities incurred since the date of the Balance Sheet in the ordinary
course of business which are individually, or in the aggregate to one group of
related parties, less than twenty five thousand dollars ($25,000) in amount;
(k) any sale, assignment, lease, transfer or other disposition of any
tangible asset of the Company, except in the ordinary course of business, or any
sale, assignment, lease, transfer or other disposition of its patents,
trademarks, trade names, brand names, copyrights, licenses or other intangible
assets;
(l) any amendment, termination or waiver of any material right belonging to
the Company;
(m) any increase in the compensation or benefits payable or to become
payable by the Company to any of its officers or employees;
(n) any other action or omission by the Company, or the passage of any
resolution, other than in the ordinary course of business.
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2.20 LITIGATION OR PROCEEDINGS. The Company is not engaged in, or a party
to, or, to the best of the Sellers' and the Company's knowledge, threatened
with, any claim or legal action or other proceeding before any court, any
arbitrator of any kind or any governmental authority, nor does any basis for any
claim or legal action or other proceeding or governmental investigation exist.
There are no orders, rulings, decrees, judgments or stipulations to which the
Company is a party by or with any court, arbitrator or governmental authority
affecting the Company.
2.21 COMPLIANCE WITH LAWS. The Company (i) has not been and is not in
violation of any applicable building, zoning, occupational safety and health,
pension, export control, environmental or other federal, state, local or foreign
law, ordinance, regulation, rule, order or governmental policy applicable to it;
(ii) has not received any complaint from any governmental authority, and to the
best knowledge of the Sellers and the Company, none is threatened, alleging that
the Company has violated any such law, ordinance, regulation, rule, order or
governmental policy; (iii) has not received any notice from any governmental
authority of any pending proceedings to take all or any part of the properties
of the Company (whether leased or owned) by condemnation or right of eminent
domain and, to the best knowledge of the Sellers and the Company, no such
proceeding is threatened; and (iv) is not a party to any agreement or
instrument, or subject to any charter or other corporate restriction or
judgment, order, writ, injunction, rule, regulation, code or ordinance, which
materially and adversely affects, or might reasonably be expected materially and
adversely to affect the business of the Company.
2.22 LABOR MATTERS. There are no labor organizing activities, election
petitions or proceedings, labor strikes, disputes, slowdowns, work stoppages or
unfair labor practice complaints pending or, to the best knowledge of the
Sellers and the Company, threatened against the Company or between the Company
and any of its employees.
2.23 RECALLS. There is no basis for the recall, withdrawal or suspension
of any approval by any governmental authority with respect to any product sold
or proposed to be sold by the Company. None of the products of any of the
Company is subject to any recall proceedings and to the best of its knowledge no
such proceedings have been threatened.
2.24 BROKERS AND FINDERS. None of the Sellers or the Company has employed
any broker, agent or finder or incurred any liability on behalf of any of the
Sellers or the Company or for any brokerage fees, agents' commissions or
finders' fees in connection with the transactions contemplated hereby.
2.25 POWERS OF ATTORNEY. The Company has no powers of attorney or similar
authorizations outstanding.
2.26 NO TERMINATION OF RELATIONSHIP. As of the date hereof, none of the
Sellers or the Company has any reason to expect that any relationship between
the Company and a material distributor, customer, supplier, lender, employee or
other person will be terminated or adversely affected as a result of the
transactions contemplated by this Agreement.
2.27 ALL INFORMATION. THS has been furnished in writing prior to the
execution of this Agreement all information as to the business of the Company
material to a reasonable buyer's determination to enter into this Agreement and
to consummate the transactions contemplated hereby.
2.28 STATEMENTS TRUE AND CORRECT. The statements contained herein or in
any written documents prepared and delivered by or on behalf of THI pursuant to
the terms hereof are true, complete and correct in all material respects, and
such documents do not omit any material fact required to be stated herein or
therein or necessary to make the statements contained herein or therein not
misleading.
SECTION 3--REPRESENTATIONS AND WARRANTIES OF THS
THS represents and warrants to THI as follows.
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3.1 ORGANIZATION. THS is a corporation duly organized, validly existing
and in good standing under the laws of the state of Delaware and has full
corporate power and authority to own, lease and operate its assets and to carry
on its business as now being and as heretofore conducted.
3.2 AUTHORITY. THS has full right, power, capacity and authority to
execute, deliver and perform this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action on the part of THS, except
that approval of the THS shareholders is required to list the THS Shares on the
AMEX. This Agreement has been duly and validly executed and delivered by THS and
constitutes the valid and binding obligation of THS, enforceable against it in
accordance with the terms hereof. Neither the execution, delivery and
performance of this Agreement nor the consummation of the transactions
contemplated hereby will (i) conflict with or result in a violation, breach,
termination or acceleration of, or default under (or would result in a
violation, breach, termination, acceleration or default with the giving of
notice or passage of time, or both) any of the terms, conditions or provisions
of the Certificate of Incorporation or By-laws of THS, as amended, or of any
note, bond, mortgage, indenture, license, agreement or other instrument or
obligation to which THS is a party or by which THS or any of its properties or
assets may be bound or affected; (ii) result in the violation of any order,
writ, injunction, decree, statute, rule or regulation applicable to THS or any
of its properties or assets; or (iii) result in the imposition of any lien,
encumbrance, charge or claim upon any of its assets. Except for the listing of
the THS Shares for trading on the AMEX, no consent or approval by, or
notification to or filing with, any court, governmental authority or third party
is required in connection with the execution, delivery and performance of this
Agreement by THS or the consummation of the transactions contemplated hereby.
The THS Shares will be, when issued in accordance with this Agreement, duly
authorized, validly issued, fully paid, nonassessable and free of pre-emptive
rights.
3.3 STATEMENTS TRUE AND CORRECT. The statements contained herein or in any
written documents prepared and delivered by or on behalf of THS pursuant to the
terms hereof are true, complete and correct in all material respects, and such
documents do not omit any material fact required to be stated herein or therein
or necessary to make the statements contained herein or therein not misleading.
SECTION 4--COVENANTS AND AGREEMENTS
4.1 CONDUCT OF BUSINESS. Except with the prior written consent of THS,
which will not be unreasonably withheld or delayed, and except as otherwise
contemplated herein, during the period from the date hereof to the Closing Date,
THI shall cause the Sellers and the Company to observe the following covenants:
(a) AFFIRMATIVE COVENANTS PENDING CLOSING. The Sellers and the Company
shall:
(i) PRESERVATION OF PERSONNEL. Use all reasonable efforts to preserve
intact the business organization of the Company and keep available the
services of the present employees of the Company, in each case in
accordance with past practice, it being understood that the termination
of employees with poor performance ratings shall not constitute a
violation of this covenant;
(ii) INSURANCE. Use all reasonable efforts to keep in effect
casualty, public liability, worker's compensation and other insurance
policies applicable to the Company in coverage amounts not less than
those in effect at the date of this Agreement;
(iii) PRESERVATION OF THE BUSINESS; MAINTENANCE OF PROPERTIES. Use
all reasonable efforts to preserve the business of the Company,
advertise, promote and market its products and services in accordance
with past practices over the last twelve months, keep their properties
intact, preserve their goodwill, maintain all physical properties in such
operating condition as will permit the conduct of such business on a
basis consistent with past practice;
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(iv) INTELLECTUAL PROPERTY RIGHTS. Use all reasonable efforts to
preserve and protect the Proprietary Rights of the Company; and
(v) ORDINARY COURSE OF BUSINESS. Operate the business of the Company
solely in the ordinary course.
(b) NEGATIVE COVENANTS PENDING CLOSING. THI shall cause each of the
Sellers and the Company not to:
(i) DISPOSITION OF ASSETS. Sell or transfer, or mortgage, pledge or
create or permit to be created any lien on, any of the assets of the
Company other than sales or transfers in the ordinary course of business
or the creation of liens under existing arrangements disclosed hereunder
and liens permitted under Section 2.8;
(ii) LIABILITIES. Permit the Company to (A) incur any obligation or
liability other than in the ordinary course of business, (B) incur any
indebtedness for borrowed money in excess of $100,000 or (C) enter into
any contracts or commitments involving payments by the Company of
$100,000 or more other than purchase orders and commitments for
inventory, materials and supplies in the ordinary course of business;
(iii) COMPENSATION. Except as required by applicable law or any
existing employment or severance agreement, (A) change the compensation
or fringe benefits of any officer, director, employee or agent of the
Company, except for ordinary merit increases for employees other than
officers based on periodic reviews in accordance with past practices, or
(B) enter into or modify any employment, severance or other agreement
with any officer, director or employee of the Company or any benefit plan
(it being understood that hiring of at will employees in the ordinary
course of business shall not constitute a violation of this covenant) or
(C) enter into or modify any agreement with any consultant, except for
agreements terminable upon not more than one year's notice that are
consistent with past practices with respect to consulting agreements.
(iv) CAPITAL STOCK. Make any change in the number of shares of
capital stock of the Company authorized, issued or outstanding or grant
any option, warrant or other right to purchase, or to convert any
obligation into, shares of capital stock of the Company, or declare or
pay any dividend or other distribution with respect to any shares of
capital stock of the Company, or sell or transfer any shares of its
capital stock;
(v) ORGANIZATIONAL DOCUMENTS. Amend the organizational documents of
the Company;
(vi) ACQUISITIONS. Make any material acquisition of property other
than in the ordinary course of the business of the Company;
(vi) LICENSE AGREEMENTS. Enter into or modify any license, technology
development or technology transfer agreement between any of the Company
and any other person or entity.
4.2 CORPORATE EXAMINATIONS AND INVESTIGATIONS. Prior to the Closing Date,
THS shall be entitled, through its employees and representatives, to have such
access to the assets, properties, business and operations of the Company, as is
reasonably necessary or appropriate in connection with its investigation of the
Company with respect to the transaction contemplated hereby. Any such
investigation and examination shall be conducted at reasonable times and under
reasonable circumstances so as to minimize any disruption to or impairment of
the business and each party shall cooperate fully therein. No investigation by
THS shall diminish or obviate any of the representations, warranties, covenants
or agreements of THI contained in this Agreement. In order that THS may have
full opportunity to make such investigation, THI shall furnish the
representatives of THS with all such information and copies of such documents
concerning the affairs of the Company as THS may reasonably request and cause
its officers, employees, consultants, agents, accountants and attorneys to
cooperate fully with THS's representatives in connection with such
investigation.
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4.3 EXPENSES. THS and THI shall bear their respective expenses incurred in
connection with the preparation, execution and performance of this Agreement and
the transactions contemplated hereby, including without limitation, all fees and
expenses of agents, representatives, counsel and accountants.
4.4 AUTHORIZATION FROM OTHERS. Prior to the Closing Date, the parties
shall use all reasonable efforts to obtain all authorizations, consents and
permits of others required to permit the consummation of the transactions
contemplated by this Agreement.
4.5 CONSUMMATION OF AGREEMENT. Each party shall use all reasonable efforts
to perform and fulfill all conditions and obligations to be performed and
fulfilled by it under this Agreement and to ensure that to the extent within its
control or capable of influence by it, no breach of any of its respective
representations, warranties and agreements hereunder occurs or exists on or
prior to the Closing Date, all to the end that the transactions contemplated by
this Agreement shall be fully carried out in a timely fashion.
4.6 FURTHER ASSURANCES. Each of the parties shall execute such documents,
further instruments of transfer and assignment and other papers and take such
further actions as may be reasonably required or desirable to carry out the
provisions hereof and the transactions contemplated hereby.
4.7 LISTING OF SHARES. Promptly after the date hereof, THS shall take all
action necessary in accordance with applicable law to convene a meeting of its
shareholders to be held for the purpose of approving the listing of the THS
Shares for trading upon AMEX in accordance with Section 712 of AMEX's Listing
Standards, Policies and Requirements. In connection with such meeting, THS's
Board of Directors shall recommend to the THS shareholders the approval of the
listing of the THS Shares pursuant to this Agreement. THS shall use all
reasonable efforts to obtain all votes and approvals of the THS shareholders
necessary for the listing of the THS Shares and all related matters required
under the Delaware Business Corporation Act, and its Certificate of
Incorporation and By-laws. THI hereby agrees to vote all of the shares of THS
common stock held by it as of the record date of any such meeting in favor of
the listing of the THS Shares and all such related matters.
4.8 PUBLIC ANNOUNCEMENTS AND CONFIDENTIALITY. Any press release or other
information to the press or any third party with respect to this Agreement or
the transactions contemplated hereby shall require the prior approval of THS and
THI, which approval shall not be unreasonably withheld, provided that a party
shall not be prevented from making such disclosure as it shall be advised by
counsel is required by law.
4.9 NO SOLICITATION. None of the Sellers or the Company will (i) solicit
or initiate discussions with any person, other than THS, relating to the
possible acquisition of any of the Company or all or a material portion of the
assets or any of the capital stock of the Company or any merger or other
business combination with the Company (an "ACQUISITION TRANSACTION") or (ii)
except to the extent reasonably required by fiduciary obligations under
applicable law as advised by legal counsel, participate in any negotiations
regarding, or furnish to any other person information with respect to, any
effort or attempt by any other person to do or to seek any Acquisition
Transaction. THI agrees to inform THS within one business day of its receipt of
any offer, proposal or inquiry relating to any Acquisition Transaction.
4.10 INDEMNIFICATION.
(a) RIGHT TO INDEMNIFICATION. THS and THI (as the case may be, the
"INDEMNITEE") shall be indemnified on its respective demand made to the other
(the "INDEMNITOR") for the full amount of all damages (as defined below)
suffered by it as a direct or indirect result of:
(i) the inaccuracy of any representation or warranty made by the
Indemnitor in or pursuant to this Agreement; and
(ii) any failure by the Indemnitor to perform any obligation or comply
with any covenant or agreement specified in this Agreement.
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For the purpose of this Section 4.10, (a) the term "DAMAGES" shall be determined
and computed by reference to the effect of the compensable event on the
Indemnitee, and shall be deemed to include (i) all losses, liabilities, expenses
or costs incurred by the Indemnitee, including reasonable attorneys' fees, and
(ii) interest at a rate per annum equal to that announced from time to time by
First National Bank of Boston as its "BASE RATE" (or the legal rate of interest,
if lower) from the date 30 days after notice of any such claim for
indemnification is given to the Indemnitor, or if an unliquidated claim, from
such later date as the claim is liquidated, to the date full indemnification is
made therefor; and (b) damages shall not include any amounts for which the
Indemnitee actually receives payment under an insurance policy, excluding
self-insured amounts and deductible amounts.
(b) INDEMNIFICATION PROCEDURES. The Indemnitee shall give the Indemnitor
notice of any claim, action or proceeding by a third party which is reasonably
likely to result in a claim for indemnification under this Section 4.10. The
Indemnitor shall have the right, at its expense, to defend, contest, protest,
settle and otherwise control the resolution of any such claim, action or
proceeding. The Indemnitee shall have the right to participate in any such legal
proceeding, subject to the Indemnitor's right of control thereof, at the expense
of the Indemnitee and with counsel selected by the Indemnitee.
(c) LIMITATIONS ON INDEMNIFICATION. The rights of THS and THI to be
indemnified pursuant to Section 4.10 shall survive the Closing Date for a period
of two years.
4.11 TAX-FREE QUALIFICATION. The Sellers and THS agree that they will take
no actions not contemplated by this Agreement that would cause the transaction
not to qualify as a tax-free reorganization under Section 368 of the Internal
Revenue Code.
SECTION 5--CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THS
The obligation of THS to acquire the Shares is subject to the satisfaction
or waiver, at or before the Closing Date, of the following conditions:
5.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of THI contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date with the same force and effect
as though made on and as of the Closing Date (with such exceptions as may be
permitted under or contemplated by this Agreement) and there shall not have been
any material adverse change in the business of the Company taken as a whole
since the date hereof. THI shall have performed and complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by it on or prior to the Closing Date and shall have
obtained all required consents and approvals. THI shall have delivered to THS a
certificate, dated the Closing Date, to the foregoing effect.
5.2 CERTIFICATES. THI shall have furnished THS with such certificates of
public officials and of the Sellers' or the Company' officers as may be
reasonably requested by THS.
SECTION 6--CONDITIONS PRECEDENT TO THE OBLIGATION OF THI
The obligation of THI to sell the Shares is subject to the satisfaction or
waiver, at or before the Closing Date, of the following conditions:
6.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of THS contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date with the same force and effect
as though made on and as of the Closing Date (with such exceptions as may be
permitted under or contemplated by this Agreement). THS shall have performed and
complied in all material respects with all covenants and agreements required by
this Agreement to be performed or complied with by it on or prior to the Closing
Date and shall have obtained all required consents and approvals, including
approval of the THS shareholders of the listing of the THS Shares on the AMEX.
THS shall have delivered to LSI a certificate, dated the Closing Date, to the
foregoing effect.
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6.2 CERTIFICATES. THS shall have furnished THI with such certificates of
public officials and of THS's officers as may be reasonably requested by THI.
SECTION 7--TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION. This Agreement may be terminated at any time prior to the
Closing Date as follows:
(a) by THI upon written notice to THS if THS has materially breached any
representation, warranty, covenant or agreement contained herein and has not
cured such breach within ten (10) business days of receipt of written notice
from THI;
(b) by THS upon written notice to THI if THI has materially breached any
representation, warranty, covenant or agreement contained herein and has not
cured such breach within ten (10) business days of receipt of written notice
from THS;
(c) by either party if any court of competent jurisdiction or United
States or foreign governmental body shall have issued an order, decree or
ruling or taken any other action restraining, enjoining or otherwise
prohibiting the sale of any of the Shares and such order, decree or ruling
shall have become final and nonappealable; or
(d) at any time with the written consent of THS and THI.
7.2 EFFECT OF TERMINATION. If this Agreement is terminated as provided in
Section 7.1, this Agreement shall forthwith become void and have no effect,
without liability on the part of any party, its directors, officers or
stockholders, other than the provisions of this Section 7.2, Section 4.3
relating to expenses and Section 4.8 relating to publicity and confidentiality
to the extent provided therein. Nothing contained in this Section 7.2 shall
relieve any party from liability for any breach of this Agreement occurring
before such termination.
7.3 AMENDMENT. This Agreement may not be amended except by an instrument
signed by each of the parties hereto.
7.4 WAIVER. At any time, any party hereto may (a) extend the time for the
performance of any of the obligations or other acts of any other party hereto or
(b) waive compliance with any of the agreements of any other party or any
conditions to its own obligations, in each case only to the extent such
obligations, agreements and conditions are intended for its benefit; provided
that any such extension or waiver shall be binding upon a party only if such
extension or waiver is set forth in a writing executed by such party.
SECTION 8--MISCELLANEOUS
8.1 NOTICES. All notices, requests, demands, consents and other
communications which are required or permitted hereunder shall be in writing,
and shall be deemed given when actually received or if earlier, one day after
deposit with a nationally recognized air courier or express mail, charges
prepaid or three days after deposit in the U.S. mail by certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to THI:
Thermo Instrument Systems Inc.
1851 Central Drive
Suite 314
Bedford, TX 76021
Attention: President
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With a copy to:
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02254
Attention: General Counsel
If to THS:
ThermoSpectra Corporation
81 Wyman Street
Waltham, Massachusetts 02254
Attention: President
With a copy to:
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02254
Attention: General Counsel
or to such other address as any party hereto may designate in writing to the
other parties, specifying a change of address for the purpose of this Agreement.
8.2 SURVIVAL AND MATERIALITY OF REPRESENTATIONS. Each of the
representations, warranties and agreements made by the parties hereto shall be
deemed material and shall survive the Closing Date and the consummation of the
transactions contemplated hereby. All statements contained in any certificates
or other instruments delivered by or on behalf of the parties pursuant hereto or
in connection with the transactions contemplated hereby shall be deemed material
and shall constitute representations and warranties by the person making such
statement.
8.3 ENTIRE AGREEMENT. This Agreement, including the exhibits, the
Disclosure Schedule and the other documents referred to herein, supersedes any
and all oral or written agreements or understandings heretofore made relating to
the subject matter hereof and constitutes the entire agreement of the parties
relating to the subject matter hereof.
8.4 PARTIES IN INTEREST. All covenants and agreements, representations and
warranties contained in this Agreement made by or on behalf of any of the
parties hereto shall bind and inure to the benefit of the parties hereto, and
their respective successors, assigns, heirs, executors, administrators and
personal representatives, whether so expressed or not.
8.5 NO IMPLIED RIGHTS OR REMEDIES. Except as otherwise expressly provided
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or to give any person, firm or corporation, other than the parties
hereto, any rights or remedies under or by reason of this Agreement.
8.6 HEADINGS. The headings in this Agreement are inserted for convenience
of reference only and shall not be a part of or control or affect the meaning
hereof.
8.7 SEVERABILITY. If any provision of this Agreement shall be declared
void or unenforceable by any judicial or administrative authority, the validity
of any other provision shall not be affected thereby.
8.8 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
8.9 FURTHER ASSURANCES. THI will execute and furnish to THS all documents
and will do or cause to be done all other things that THS may reasonably request
from time to time in order to give full effect to this Agreement and to
effectuate the intent of the parties.
A-16
<PAGE>
8.10 GOVERNING LAW. This Agreement shall be governed by the law of the
State of Delaware applicable to agreements made and to be performed wholly
within such jurisdiction, without regard to the conflicts of laws provisions
thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-17
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first written above.
THERMOSPECTRA CORPORATION
[Seal] By: /s/ THEO MELAS-KYRIAZI
------------------------------------------
Name: Theo Melas-Kyriazi
Title: President
THERMO INSTRUMENT SYSTEMS INC.
[Seal] By: /s/ EARL R. LEWIS
------------------------------------------
Name: Earl R. Lewis
Title: President
A-18
<PAGE>
ATTACHMENT A
FORM OF PROXY
THERMOSPECTRA CORPORATION
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD SEPTEMBER 22, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints JOHN N. HATSOPOULOS, BARRY S. HOWE and
SANDRA L. LAMBERT, or any one of them in the absence of the others, as attorneys
and proxies of the undersigned, with full power of substitution, for and in the
name of the undersigned, to represent the undersigned at the Special Meeting of
the Stockholders of ThermoSpectra Corporation, a Delaware corporation (the
"Company"), to be held on September 22, 1998, at 10:00 a.m. at Thermo Electron
Corporation, 81 Wyman Street, Waltham, Massachusetts 02454, and at any
adjournment or postponement thereof, and to vote all shares of common stock of
the Company standing in the name of the undersigned on July 24, 1998, with all
of the powers the undersigned would possess if personally present at such
meeting:
(IMPORTANT--TO BE SIGNED AND DATED ON THE REVERSE SIDE.)
<PAGE>
SPECIAL MEETING OF STOCKHOLDERS
THERMOSPECTRA CORPORATION
SEPTEMBER 22, 1998
1. Approve management proposal to list 2,759,042 shares of common stock, to be
issued in connection with an acquisition, on the American Stock Exchange, Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion on such other matters as may properly come before the
Meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED "FOR" THE PROPOSALS SET
FORTH ABOVE IF NO INSTRUCTION TO THE CONTRARY IS INDICATED OR IF NO INSTRUCTION
IS GIVEN.
Copies of the Notice of Meeting and of the Proxy Statement have been
received by the undersigned.
PLEASE DATE, SIGN AND PROMPTLY
RETURN THIS PROXY IN THE ENCLOSED
ENVELOPE.
Signature(s) _____________________
Date _____________________________
Note: This proxy should be dated,
signed by the shareholder(s)
exactly as his or her name appears
hereon, and returned promptly in
the enclosed envelope. Persons
signing in a fiduciary capacity
should so indicate. If shares are
held by joint tenants or as
community property, both should
sign.
PLEASE DATE, SIGN AND MAIL YOUR PROXY CARD BACK AS SOON AS POSSIBLE!
