SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended July 3, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-13876
THERMOSPECTRA CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-3242970
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8 East Forge Parkway
Franklin, Massachusetts 02038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at July 30, 1999
Common Stock, $.01 par value 15,374,915
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMOSPECTRA CORPORATION
Consolidated Balance Sheet
(Unaudited)
<S> <C> <C>
Assets
July 3, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
Cash and cash equivalents $ 9,723 $20,717
Advance to affiliate (Note 7) 7,243 -
Accounts receivable, less allowances of $2,172 and $2,386 36,792 41,016
Inventories:
Raw materials and supplies 18,921 18,355
Work in process 4,830 5,899
Finished goods 6,785 7,491
Prepaid income taxes 13,107 10,188
Other current assets 2,343 2,271
-------- --------
99,744 105,937
-------- --------
Property, Plant, and Equipment, at Cost 32,231 30,517
Less: Accumulated depreciation and amortization 16,019 13,526
-------- --------
16,212 16,991
-------- --------
Patents, Trademarks, and Other Assets 7,059 7,280
-------- --------
Cost in Excess of Net Assets of Acquired Companies 117,210 119,674
-------- --------
$240,225 $249,882
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2
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THERMOSPECTRA CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 3, January 2,
(In thousands except share amounts) 1999 1999
- ------------------------------------------------------------------------------------ ---------- ----------
Current Liabilities:
Notes payable (includes $50,000 and $60,000 due to Thermo Electron) $52,714 $ 60,000
Accounts payable 13,135 11,822
Accrued payroll and employee benefits 5,221 6,239
Accrued installation and warranty expenses 4,533 4,362
Deferred revenue 3,624 4,360
Accrued income taxes 4,770 3,735
Other accrued expenses (Notes 5 and 6) 11,932 13,143
Due to parent company and affiliated companies 2,627 4,528
-------- --------
98,556 108,189
-------- --------
Deferred Income Taxes and Other Deferred Items 4,696 3,558
-------- --------
Long-term Obligations, Due to Related Party 7,300 7,300
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 25,000,000 shares authorized; 154 153
15,369,190 and 15,327,620 shares issued
Capital in excess of par value 111,900 111,549
Retained earnings 20,319 19,763
Treasury stock at cost, 423 shares (7) (7)
Accumulated other comprehensive items (Note 2) (2,693) (623)
-------- --------
129,673 130,835
-------- --------
$240,225 $249,882
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMOSPECTRA CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $42,735 $49,058
------- -------
Costs and Operating Expenses:
Cost of revenues 25,376 28,434
Selling, general, and administrative expenses 11,841 13,160
Research and development expenses 3,759 4,199
Restructuring costs (Note 6) 117 -
------- ------
41,093 45,793
------- ------
Operating Income 1,642 3,265
Interest Income 176 448
Interest Expense, Related Party (755) (1,185)
------- ------
Income Before Provision for Income Taxes 1,063 2,528
Provision for Income Taxes 511 1,040
------- ------
Net Income $ 552 $1,488
======= ======
Basic and Diluted Earnings per Share (Note 3) $ .04 $ .10
======= ======
Weighted Average Shares (Note 3):
Basic 15,346 15,324
======= ======
Diluted 15,473 15,351
======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMOSPECTRA CORPORATION
Consolidated Statement of Income
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ------------------------------------------------------------------------------------ ---------- ----------
Revenues $84,609 $102,125
------- --------
Costs and Operating Expenses:
Cost of revenues 50,487 58,831
Selling, general, and administrative expenses 23,478 27,278
Research and development expenses 7,530 8,712
Restructuring costs (Note 6) 875 -
Gain on sale of property, plant, and equipment (45) (339)
------- --------
82,325 94,482
------- --------
Operating Income 2,284 7,643
Interest Income 364 773
Interest Expense, Related Party (1,577) (2,376)
------- --------
Income Before Provision for Income Taxes 1,071 6,040
Provision for Income Taxes 515 2,480
------- --------
Net Income $ 556 $ 3,560
======= ========
Basic and Diluted Earnings per Share (Note 3) $ .04 $ .23
======= ========
Weighted Average Shares (Note 3):
Basic 15,338 15,322
======= ========
Diluted 15,430 15,344
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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THERMOSPECTRA CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------ ---------- ----------
Operating Activities:
Net income $ 556 $ 3,560
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,346 3,581
Provision for losses on accounts receivable 44 96
Gain on sale of property, plant, and equipment (45) (339)
Other noncash items 486 495
Changes in current accounts, excluding the effects of a disposition:
Accounts receivable 2,956 3,146
Inventories 653 486
Other current assets (126) (427)
Accounts payable 1,485 (849)
Due to parent company and affiliated companies (1,352) 2,013
Other current liabilities (3,111) (1,171)
Other - 106
------- --------
Net cash provided by operating activities 5,892 10,697
------- --------
Investing Activities:
Proceeds from sale of a product line - 750
Refund of acquisition purchase price 595 -
Advances to affiliate, net (Note 7) (7,243) -
Purchases of property, plant, and equipment (2,193) (942)
Proceeds from sale of property, plant, and equipment 160 2,052
Other (148) (30)
------- --------
Net cash provided by (used in) investing activities (8,829) 1,830
------- --------
Financing Activities:
Repayment of obligation to Thermo Electron (10,000) -
Net proceeds from issuance of Company common stock 352 42
Increase in short-term borrowings 2,812 -
------- --------
Net cash provided by (used in) financing activities (6,836) 42
------- --------
Exchange Rate Effect on Cash (1,221) (89)
------- --------
Increase (Decrease) in Cash and Cash Equivalents (10,994) 12,480
Cash and Cash Equivalents at Beginning of Period 20,717 20,672
------- --------
Cash and Cash Equivalents at End of Period $ 9,723 $ 33,152
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
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Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by ThermoSpectra Corporation (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at July 3, 1999, the results of
operations for the three- and six-month periods ended July 3, 1999, and July 4,
1998, and the cash flows for the six-month periods ended July 3, 1999, and July
4, 1998. Interim results are not necessarily indicative of results for a full
year.
The consolidated balance sheet presented as of January 2, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999,
filed with the Securities and Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and, in the 1998 period, unrealized net of tax
gains and losses from available-for-sale investments. During the second quarter
of 1999 and 1998, the Company had a comprehensive loss of $478,000 and
comprehensive income of $1,984,000, respectively. During the first six months of
1999 and 1998, the Company had a comprehensive loss of $1,514,000 and
comprehensive income of $4,265,000, respectively.
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3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Basic
Net Income $ 552 $ 1,488 $ 556 $ 3,560
------ ------- ------ -------
Weighted Average Shares 15,346 15,324 15,338 15,322
------ ------- ------ -------
Basic Earnings per Share $ .04 $ .10 $ .04 $ .23
====== ======= ====== =======
Diluted
Net Income $ 552 $ 1,488 $ 556 $ 3,560
------ ------- ------ -------
Weighted Average Shares 15,346 15,324 15,338 15,322
Effect of Stock Options 127 27 92 22
------ ------- ------ -------
Weighted Average Shares, as Adjusted 15,473 15,351 15,430 15,344
------ ------- ------ -------
Diluted Earnings per Share $ .04 $ .10 $ .04 $ .23
====== ======= ====== =======
7
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3. Earnings per Share (continued)
The computation of diluted earnings per share for each period excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of July 3, 1999, there were 133,000 of such
options outstanding, with exercise prices ranging from $14.00 to $17.15 per
share.
4. Business Segment Information
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------ ----------- ---------- ----------- ----------
Revenues:
Imaging and Inspection $ 20,466 $ 22,120 $ 41,879 $ 45,113
Temperature Control 12,479 15,953 24,512 34,545
Test and Measurement 9,790 10,985 18,218 22,467
--------- -------- --------- --------
$ 42,735 $ 49,058 $ 84,609 $102,125
========= ======== ========= ========
Income Before Provision for Income Taxes:
Imaging and Inspection $ 575 $ 1,365 $ 756 $ 3,056
Temperature Control 851 1,906 1,378 4,498
Test and Measurement 775 494 1,145 1,184
Corporate (a) (559) (500) (995) (1,095)
--------- -------- --------- --------
Total operating income 1,642 3,265 2,284 7,643
Interest expense, net (579) (737) (1,213) (1,603)
--------- -------- --------- --------
$ 1,063 $ 2,528 $ 1,071 $ 6,040
========= ======== ========= ========
(a) Primarily general and administrative expenses.
5. Accrued Acquisition Expenses
The Company has undertaken restructuring activities at certain acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily
have included reductions in staffing levels and the abandonment of excess
facilities. In connection with these restructuring activities, as part of the
cost of acquisitions, the Company established reserves, primarily for severance
and excess facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. Unresolved matters at July 3, 1999, primarily included completion
of abandonment of excess facilities for TopoMetrix Corporation, acquired in
October 1998.
8
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5. Accrued Acquisition Expenses (continued)
A summary of the changes in accrued acquisition expenses, included in
other accrued expenses in the accompanying balance sheet, follows:
<S> <C> <C> <C> <C>
Abandonment
of Excess
(In thousands) Severance Facilities Total
- --------------------------------------------------------------- -------------- ------------- -------------
Balance at January 2, 1999 $ 30 $416 $ 446
Reserves established 39 207 246
Usage (63) (447) (510)
Currency translation adjustment - (5) (5)
----- ---- -----
Balance at July 3, 1999 $ 6 $171 $ 177
===== ==== =====
6. Restructuring Costs
During 1998, the Company recorded restructuring costs, which were
accounted for in accordance with EITF 94-3, primarily for severance for 259
employees. As of January 2, 1999, the Company had terminated 182 employees and
had $2,459,000 accrued for severance costs. During the first quarter of 1999,
the Company terminated 30 additional employees and incurred restructuring costs
of $758,000, which consisted of $259,000 related to severance costs for four
employees at a foreign sales office, $155,000 for facility-closing costs, and
$344,000 related to certain business relocation and related costs. During the
second quarter of 1999, the Company terminated six additional employees and
incurred restructuring costs of $117,000, which consisted of $6,000 related to
severance costs for five employees at a foreign sales office, $46,000 for
facility-closing costs, and $65,000 for certain business relocation and related
costs. The Company expects that the remainder of the employees will be
terminated primarily in the third quarter of 1999. A summary of the changes in
accrued restructuring costs, included in other accrued expenses in the
accompanying balance sheet, follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 2, 1999 $ 2,459 $ - $ - $ 2,459
Charged to expense 265 201 409 875
Usage (1,773) (201) (409) (2,383)
Currency translation adjustment (44) - - (44)
-------- ------- ------- -------
Balance at July 3, 1999 $ 907 $ - $ - $ 907
======= ======= ======= =======
In connection with the Company's restructuring activities, the Company
expects to incur approximately $200,000 of additional costs which, pursuant to
the requirements of EITF 94-3, are not permitted as charges until incurred.
These additional costs primarily include costs for certain employee and business
relocation and related costs. The Company plans to complete implementation of
its restructuring plan in the third quarter of 1999.
9
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7. Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron Corporation
commenced use of a new domestic cash management arrangement. Under the new
arrangement, amounts advanced to Thermo Electron by the Company for domestic
cash management purposes bear interest at the 30-day Dealer Commercial Paper
Rate plus 50 basis points, set at the beginning of each month. Thermo Electron
is contractually required to maintain cash, cash equivalents, and/or immediately
available bank lines of credit equal to at least 50% of all funds invested under
this cash management arrangement by all Thermo Electron subsidiaries other than
wholly owned subsidiaries. The Company has the contractual right to withdraw its
funds invested in the cash management arrangement upon 30 days' prior notice.
Amounts invested in this arrangement are included in "advance to affiliate" in
the accompanying balance sheet.
In addition, under the new domestic cash management arrangement, amounts
borrowed from Thermo Electron by the Company for domestic cash management
purposes bear interest at the 30-day Dealer Commercial Paper Rate plus 150 basis
points, set at the beginning of each month. The Company has no borrowings under
this arrangement at July 3, 1999.
8. Proposed Merger
On May 21, 1999, the Company entered into a definitive agreement and plan
of merger with Thermo Instrument Systems Inc. pursuant to which Thermo
Instrument would acquire all of the outstanding shares of Company common stock
held by shareholders other than Thermo Instrument and Thermo Electron in
exchange for $16.00 in cash per share, without interest. Following the merger,
the Company's common stock would cease to be publicly traded. The Board of
Directors of the Company unanimously approved the merger agreement based on a
recommendation by a special committee of the Board of Directors, consisting
solely of outside directors of the Company. The special committee's
recommendation was based on extensive negotiations, related to the pricing and
terms of this proposed transaction, with representatives of Thermo Instrument.
The completion of this merger is subject to certain conditions, including
shareholder approval of the merger agreement and the completion of review by the
Securities and Exchange Commission of certain required filings. Thermo Electron
and Thermo Instrument intend to vote all of their shares of common stock of the
Company in favor of approval of the merger agreement and, therefore, approval of
the merger agreement is assured. This merger is expected to be completed in the
fourth quarter of 1999.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities and 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 under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1999, filed with the Securities and Exchange
Commission.
Overview
The Company develops, manufactures, and markets precision instruments in
three segments: Imaging and Inspection, Temperature Control, and Test and
Measurement. 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 Imaging and
Inspection segment includes X-ray microanalysis instruments; X-ray fluorescence
instruments; nondestructive X-ray inspection systems; specialty X-ray tubes; and
confocal laser scanning microscopes. In 1998, the Company acquired a
manufacturer of scanning probe microscopes, TopoMetrix Corporation. The
Temperature Control segment manufactures and markets precision temperature
control systems for analytical, laboratory, industrial, research and
development, laser, and semiconductor applications. The Test and Measurement
segment includes digital oscillographic recorders, digital storage oscilloscopes
(DSOs), and data acquisition systems.
10
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Overview (continued)
The Company's growth strategy has included acquiring complementary
businesses, developing new applications for its technologies to address related
market segments, and strengthening its presence in selected geographic markets.
Because the Company competes primarily on the basis of its technology in all of
its segments, 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. As part of this
plan, the Company completed the divestiture of a low-margin product line and
undertook certain other restructuring actions during 1998.
A significant portion of the Company's total revenues, primarily in the
Imaging and Inspection and Temperature Control segments, 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 things, the level of capital spending by semiconductor
companies. The semiconductor industry has been experiencing weakness in demand
for its products as a result of the economic crisis in Asia, excess
manufacturing capacity, and a slowdown in sales of high-end personal computers.
Many semiconductor manufacturers delayed construction or expansion of their
production facilities in response to the foregoing conditions. This slowdown in
semiconductor activity began to affect demand for the Company's products in the
second quarter of 1998. During the first six months of 1999, the semiconductor
industry has shown some increased activity, but not to the levels experienced
prior to this most recent slowdown. Continued fluctuation in the semiconductor
industry could have a significant adverse effect upon the demand for the
Company's products and related services, which could materially adversely affect
the Company's business and future results of operations.
The Company conducts all of its manufacturing operations in the United
States. The Company sells its products worldwide. During 1998, exports to the
Far East represented 15% 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 to Asia have been, and
are expected to continue to be, adversely affected by the unstable economic
conditions in that region. Additionally, certain of the Company's customers
located outside of the Asian region could be adversely affected by the unstable
economic conditions in Asia.
The Company anticipates that a significant portion of its revenues in all
three segments will 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
Second Quarter 1999 Compared With Second Quarter 1998
Total revenues decreased to $42.7 million in the second quarter of 1999
from $49.1 million in the second quarter of 1998. Revenues from the Imaging and
Inspection segment decreased $1.7 million, primarily due to a continued
reduction in demand for semiconductor-related products, a downturn in overseas
markets, and reduced demand for products at Kevex Instruments. The decrease in
revenues at the Imaging and Inspection segment was offset in part by an increase
of $2.0 million due to the inclusion of revenues from TopoMetrix, acquired in
October 1998. Revenues from the Temperature Control segment decreased $3.5
million, principally due to a continued reduction in capital-equipment
expenditures in the semiconductor industry. Revenues from the Test and
Measurement segment decreased $1.2 million, primarily due to a decline in demand
for its products. The Company's total backlog increased slightly to $26.6
million at July 3, 1999, from $26.0 million at year-end 1998.
11
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Second Quarter 1999 Compared With Second Quarter 1998 (continued)
The gross profit margin decreased to 41% in the second quarter of 1999
from 42% in the second quarter of 1998, primarily due to increased sales of
lower-margin products at certain of the Company's microanalysis businesses. The
decrease in the gross profit margin was offset in part by reduced spending as a
result of restructuring actions commenced in 1998.
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in the second quarter of 1999 from 27% in the second quarter of
1998, primarily due to decreased revenues. Selling, general, and administrative
expenses decreased 10% to $11.8 million in 1999 from $13.2 million in 1998,
primarily as a result of restructuring actions commenced in 1998.
Research and development expenses decreased to $3.8 million in the second
quarter of 1999 from $4.2 million in the second quarter of 1998. The decreased
spending primarily resulted from the discontinuation of research and development
efforts on underperforming product lines and completion of efforts relating to
new-product releases.
The Company recorded $0.1 million of restructuring costs in the second
quarter of 1999 (Note 6). In connection with the closing of certain facilities,
the Company expects to incur approximately $0.2 million of additional costs in
the third quarter of 1999.
Interest income decreased to $0.2 million in the second quarter of 1999
from $0.4 million in the second quarter of 1998, principally due to a reduction
in invested balances as a result of the repayment of an aggregate $25.0 million
of promissory notes to Thermo Electron Corporation in August 1998 and March
1999. Interest expense, related party, decreased to $0.8 million in 1999 from
$1.2 million in 1998, primarily due to the repayment of such promissory notes.
The effective tax rate was 48% in the second quarter of 1999, compared
with 41% in the second quarter of 1998. 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 effective tax rate
increased primarily due to the higher relative impact of nondeductible
amortization of cost in excess of net assets of acquired companies.
First Six Months 1999 Compared With First Six Months 1998
Total revenues decreased to $84.6 million in the first six months of 1999
from $102.1 million in the first six months of 1998. Revenues from the Imaging
and Inspection segment decreased $3.2 million, primarily due to the reasons
discussed in the results of operations for the second quarter. The decrease in
revenues at the Imaging and Inspection segment was offset in part by an increase
of $3.9 million due to the inclusion of revenues from TopoMetrix, acquired in
October 1998. Revenues from the Temperature Control segment decreased $10.0
million, principally due to a severe reduction in capital-equipment expenditures
in the semiconductor industry. Revenues from the Test and Measurement segment
decreased $4.2 million, primarily due to a decline in demand for its products.
The gross profit margin decreased to 40% in the first six months of 1999
from 42% in the first six months of 1998, primarily due to lower sales volume.
The decrease in the gross profit margin was offset in part by reduced spending
as a result of restructuring actions commenced in 1998.
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in the first six months of 1999 from 27% in the first six
months 1998, primarily due to decreased revenues. Selling, general, and
administrative expenses decreased 14% to $23.5 million in 1999 from $27.3
million in 1998, primarily as a result of restructuring actions commenced in
1998.
Research and development expenses decreased to $7.5 million in the first
six months of 1999 from $8.7 million in the first six months of 1998, primarily
due to the reasons discussed in the results of operations for the second
quarter.
12
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First Six Months 1999 Compared With First Six Months 1998 (continued)
The Company recorded $0.9 million of restructuring costs in the first six
months of 1999 (Note 6).
Interest income decreased to $0.4 million in the first six months of 1999
from $0.8 million in the first six months of 1998. Interest expense, related
party, decreased to $1.6 million in 1999 from $2.4 million in 1998. Interest
income and interest expense decreased due to the reasons discussed in the
results of operations for the second quarter.
The effective tax rate was 48% in the first six months of 1999, compared
with 41% in the first six months of 1998. 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 effective tax rate
increased primarily due to the higher relative impact of nondeductible
amortization of cost in excess of net assets of acquired companies.
Liquidity and Capital Resources
The Company had working capital of $1.2 million at July 3, 1999, compared
with negative working capital of $2.3 million at January 2, 1999. Included in
working capital are cash and cash equivalents of $9.7 million at July 3, 1999,
compared with $20.7 million at January 2, 1999. In addition, as of July 3, 1999,
the Company had $7.2 million invested in an advance to affiliate. Prior to the
use of a new domestic cash management arrangement between the Company and Thermo
Electron (Note 7), which became effective June 1, 1999, amounts invested with
Thermo Electron were included in cash and cash equivalents. Also included in
working capital are notes payable to Thermo Electron of $50.0 million at July 3,
1999, and $60.0 million at January 2, 1999. In July 1999, the Company repaid its
$5.0 million promissory note owed to Thermo Electron, and Thermo Electron
extended the maturity of the Company's $45.0 million promissory note to December
1999. The promissory note bears interest at the 30-day Dealer Commercial Paper
Rate plus 150 basis points, set at the beginning of each month.
During the first six months of 1999, the Company's operating activities
provided $5.9 million of cash. A decrease in accounts receivable, primarily due
to lower revenues, provided $3.0 million of cash. An increase in accounts
payable, due to the timing of payments, provided $1.5 million of cash. These
increases in cash were reduced in part by the use of $3.1 million of cash to
fund a decrease in other current liabilities, primarily for cash payments
relating to severance and facility-closure costs (Note 6).
During the first six months of 1999, the Company's primary investing
activities, excluding advance to affiliate activity, included the purchase of
property, plant, and equipment. The Company used $2.2 million of cash for
purchases of property, plant, and equipment and received a $0.6 million refund
of a portion of the acquisition purchase price for Park Scientific Instruments
Corporation, which resulted from the final determination of the post-closing
adjustment. During the remainder of 1999, the Company plans to expend
approximately $1.8 million for purchases of property, plant, and equipment.
During the first six months of 1999, the Company's financing activities
used $6.8 million of cash. The Company repaid $10.0 million of borrowings to
Thermo Electron in March 1999. In addition, an increase in short-term borrowings
provided $2.8 million of cash.
The Company generally expects to have positive cash flow from its existing
operations. Although the Company does not presently intend to actively seek to
acquire additional businesses in the near future, it may acquire one or more
complementary businesses if they are presented to the Company on terms the
Company believes to be attractive. Such acquisitions may require significant
amounts of cash. The Company expects that it would seek to finance any such
acquisitions through a combination of internal funds and/or short-term
borrowings from Thermo Instrument or Thermo Electron, although it has no
agreement with these companies to ensure that any additional funds will be
available on acceptable terms or at all. Thermo Electron has indicated that it
will seek repayment from the Company of its $45.0 million promissory note, the
maturity of which was extended by Thermo Electron to December 1999, only to the
extent the Company's cash flow permits such repayment. Accordingly, 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
foreseeable future.
13
<PAGE>
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 date recognition issue
on the Company's internal business systems, products, and operations. The
Company's year 2000 initiatives include (i) testing and upgrading significant
information technology systems and facilities; (ii) testing and developing
upgrades, if necessary, for the Company's current products and certain
discontinued products; (iii) assessing the year 2000 readiness of its key
suppliers and vendors; and (iv) developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems for year 2000 compliance, has largely been
completed. During phase one, the Company tested and evaluated its significant
computer systems, software applications, and related equipment for year 2000
compliance. The Company also evaluated the potential year 2000 impact on its
critical non-information technology systems, which efforts included testing the
year 2000 readiness of its manufacturing, utility, and telecommunications
systems at its critical facilities. The Company is currently in phase two of its
program, during which any material noncompliant information technology systems
or non-information technology systems that were identified during phase one are
prioritized and remediated. Based on its evaluations of its critical
non-information technology systems, the Company does not believe any material
upgrades or modifications are required. The Company is currently upgrading or
replacing its material noncompliant information technology systems, and this
process was approximately 89% complete as of July 3, 1999. In many cases, such
upgrades or replacements are being made in the ordinary course of business,
without accelerating previously scheduled upgrades or replacements. The Company
expects that all of its material information technology systems and critical
non-information technology systems will be year 2000 compliant by September
1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third-party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 2000 problems with its current products. The Company
believes that certain of its older products, which it no longer manufactures or
sells, may not be year 2000 compliant. The Company is continuing to test and
evaluate such products. The Company is focusing its efforts on products that are
still under warranty and/or are early in their expected life. The Company is
offering upgrades and/or identifying potential solutions where reasonably
practicable.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and distributed questionnaires relating to year 2000 compliance to its
significant suppliers and vendors. To date, no significant supplier or vendor
has indicated that it believes its business operations will be materially
disrupted by the year 2000 issue. The Company is now following up with its
significant suppliers and vendors that have not responded to the Company's
questionnaires. The Company has not completed the majority of its assessment of
third-party risk, but expects to be substantially completed by September 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required. The Company expects to complete
its contingency plan by September 1999.
14
<PAGE>
Year 2000 (continued)
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
were funded from working capital. All internal costs and related external costs,
other than capital additions, related to year 2000 remediation have been and
will continue to be expensed as incurred. The Company does not track the
internal costs incurred for its year 2000 compliance project. Such costs are
principally the related payroll costs for its information systems group.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's significant
suppliers or vendors experience business disruptions due to the year 2000 issue
and are unable to provide materials and services to the Company on time. The
Company's operations could be delayed or temporarily shut down, and it could be
unable to meet its obligations to customers in a timely fashion. The Company's
business, operations, and financial condition could be adversely affected in
amounts that cannot be reasonably estimated at this time. If the Company
believes that any of its key suppliers or vendors may not be year 2000 ready, it
will seek to identify and secure other suppliers or vendors as part of its
contingency plan.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. As discussed above, if any of
the Company's significant suppliers or vendors experience business disruptions
due to year 2000 issues, the Company might also be materially adversely
affected. If any countries in which the Company operates experience significant
year 2000 disruption, the Company could also be materially adversely impacted.
There is expected to be a significant amount of litigation relating to the year
2000 issue and there can be no assurance that the Company will not incur
material costs in defending or bringing lawsuits. In addition, if any year 2000
issues are identified, there can be no assurance that the Company will be able
to retain qualified personnel to remedy such issues. Any unexpected costs or
delays arising from the year 2000 issue could have a material adverse impact on
the Company's business, operations, and financial condition in amounts that
cannot be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates and interest rates has not changed materially from its exposure
at year-end 1998.
15
<PAGE>
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On May 27, 1999, at the Annual Meeting of Shareholders, the shareholders
elected seven incumbent directors to a one-year term expiring in 2000. The
directors elected at the meeting were: Mr. Joseph A. Baute, Mr. David J.
Beaubien, Dr. Robert E. Finnigan, Dr. Elias P. Gyftopoulos, Mr. Barry S. Howe,
Mr. Earl R. Lewis, and Mr. Theo Melas-Kyriazi. Messrs. Baute and Beaubien and
Drs. Finnigan and Gyftopoulos each received 15,143,014 shares voted in favor of
election and 13,277 shares voted against. Messrs. Howe and Lewis each received
15,142,914 shares voted in favor of election and 13,377 shares voted against.
Mr. Melas-Kyriazi received 15,142,606 shares voted in favor of election and
13,685 shares voted against. No abstentions or broker nonvotes were recorded on
the election of directors.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On May 25, 1999, the Company filed a Current Report on Form 8-K for events
occurring on May 21, 1999, with respect to a definitive agreement and plan of
merger entered into with its parent company, Thermo Instrument Systems Inc.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 11th day of August 1999.
THERMOSPECTRA CORPORATION
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10.1 Master Cash Management, Guarantee Reimbursement and Loan
Agreement dated as of June 1, 1999, between the Registrant and
Thermo Electron Corporation.
10.2 Amended and Restated $45,000,000 Promissory Note dated as of July 30,
1999, issued by the Registrant to Thermo Electron Corporation.
10.3 Amended and Restated Deferred Compensation Plan for Directors of the
Registrant.
27 Financial Data Schedule.
</TABLE>
Exhibit 10.1
MASTER CASH MANAGEMENT, GUARANTEE
REIMBURSEMENT AND LOAN AGREEMENT
This AGREEMENT is entered into as of the 1st day of June, 1999 by and
between Thermo Electron Corporation, a Delaware corporation ("Thermo Electron")
and ThermoSpectra Corporation, a Delaware corporation (the "Subsidiary").
WITNESSETH:
WHEREAS, Thermo Electron and the Subsidiary are party to a Master
Repurchase Agreement, as amended and restated, which contains terms governing a
cash management arrangement between them and a Master Guarantee Reimbursement
and Loan Agreement, as amended and restated, which contains terms relating to
intercompany credit support and a short term borrowing facility;
WHEREAS, Thermo Electron and the Subsidiary desire to establish a new
cash management arrangement and short term borrowing facility between them in
lieu of the arrangements set forth in the Master Repurchase Agreement and the
Master Guarantee Reimbursement and Loan Agreement and also to consolidate the
terms relating to intercompany credit support in one agreement;
WHEREAS, the Subsidiary and other majority owned subsidiaries of Thermo
Electron that join in this Agreement (collectively, the "Majority-Owned
Subsidiaries") and their wholly-owned subsidiaries wish to enter into various
financial transactions, such as convertible or nonconvertible debt, loans,
equity offerings, and other contractual arrangements with third parties (the
"Underlying Obligations") and may provide credit support to, on behalf of or for
the benefit of, other subsidiaries of Thermo Electron ("Credit Support
Obligations");
WHEREAS, the Majority Owned Subsidiaries and Thermo Electron acknowledge
that the Majority Owned Subsidiaries and their wholly-owned subsidiaries may be
unable to enter into many kinds of Underlying Obligations without a guarantee of
their performance thereunder from Thermo Electron (a "Parent Guarantee") or
without obtaining Credit Support Obligations from other Majority Owned
Subsidiaries;
WHEREAS, certain Majority Owned Subsidiaries ("Second Tier Majority
Owned Subsidiaries") may themselves be majority owned subsidiaries of other
Majority Owned Subsidiaries ("First Tier Majority Owned Subsidiaries");
WHEREAS, for various reasons, Parent Guarantees of a Second Tier
Majority Owned Subsidiary's Underlying Obligations may be demanded and given
without the respective First Tier Majority Owned Subsidiary also issuing a
guarantee of such Underlying Obligation;
WHEREAS, Thermo Electron may itself make a loan or provide other credit
to a Second Tier Majority Owned Subsidiary or its wholly-owned subsidiaries
under circumstances where the applicable First Tier Majority Owned Subsidiary
does not provide such credit; and
WHEREAS, Thermo Electron is willing to consider continuing to issue
Parent Guarantees and providing credit, and the Majority Owned Subsidiaries are
willing to consider continuing to provide Credit Support Obligations, on the
terms and conditions set forth below;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by each party hereto, the parties agree as follows:
1. Cash Management Arrangement. The Subsidiary directly, or through its
wholly-owned U.S. subsidiaries, may, from time to time, lend its excess cash to
Thermo Electron (a "Transaction"), on an unsecured basis, bearing interest at a
rate equal to the 30-day Dealer Commercial Paper Rate as reported in the Wall
Street Journal (the "DCP Rate") plus 50 basis points, which rate shall be
adjusted on the second business day of each fiscal month of the Subsidiary and
shall be in effect for the entirety of such fiscal month. The Subsidiary shall
institute a Transaction by depositing its excess cash in the Subsidiary's
concentration account at BankBoston Corporation ("BankBoston") or other bank
designated by Thermo Electron. At the end of each business day, the cash balance
deposited in the Subsidiary's concentration account shall be transferred to
Thermo Electron's intercompany account at BankBoston or other bank designated by
Thermo Electron. Thermo Electron shall indicate on its books the balance of the
Subsidiary's cash held by Thermo Electron under this arrangement. After each
fiscal month end, Thermo Electron shall provide the Subsidiary a report
indicating the Subsidiary's aggregate cash balance ("Excess Cash") held by
Thermo Electron hereunder. The Subsidiary shall have the right to withdraw all
or part of its Excess Cash upon 30 days' prior notice to Thermo Electron. Within
30 days of receipt of such withdrawal notice, Thermo Electron shall transfer the
portion of the Excess Cash requested for withdrawal to an account designated by
the Subsidiary. Thermo Electron shall maintain, at all times, cash, cash
equivalents and/or immediately available bank lines of credit equal to at least
50% of the cash balances of the Subsidiary and of all other participating
subsidiaries of Thermo Electron, other than wholly-owned subsidiaries of Thermo
Electron, held by Thermo Electron under this arrangement. Interest shall be
payable on the Excess Cash by Thermo Electron to the Subsidiary each fiscal
month in arrears. In addition, the Subsidiary's non-U.S. subsidiaries may, from
time to time, lend or advance their excess cash to Thermo Electron, on an
unsecured basis, bearing interest at rates set by Thermo Electron at the
beginning of each month, based to the extent practicable on comparable interest
rates generally available in the local jurisdiction of such participating
non-U.S. subsidiary. Further, Thermo Electron and such non-U.S. subsidiaries
participating in the cash management arrangement with Thermo Electron shall
establish mutually agreeable procedures governing such cash management
arrangement.
2. Loans and Advances. Upon request from the Subsidiary, Thermo Electron
may make loans and advances to the Subsidiary on a short-term, revolving credit
basis, from time to time, in such amounts as mutually determined by Thermo
Electron and the Subsidiary. The aggregate principal amount of such loans and
advances shall be reflected on the books and records of the Subsidiary and
Thermo Electron. All such loans and advances shall be on an unsecured basis
unless specifically provided otherwise in separate loan documents executed at
that time. The Subsidiary shall pay interest on the aggregate unpaid principal
amount of such loans from time to time outstanding at a rate equal to the DCP
Rate plus one hundred fifty (150) basis points, which rate shall be adjusted on
the second business day of each fiscal month of the Subsidiary and shall be in
effect for the entirety of such fiscal month. If, however, one or more of the
Subsidiary's majority-owned U.S. subsidiaries (i.e., not wholly-owned) is also
participating in the cash management arrangement with Thermo Electron, then the
rate payable on the Subsidiary's outstanding principal balance shall be
calculated as follows: If the aggregate amount of the Subsidiary's
majority-owned U.S. subsidiaries' cash balances under the cash management
arrangement ("Majority-Owned Excess Cash") equals or exceeds the Subsidiary's
outstanding principal balance, then the Subsidiary shall pay interest on the
aggregate unpaid principal amount of such loans at a rate per annum equal to the
DCP Rate plus fifty (50) basis points. If the aggregate amount of the
Majority-Owned Excess Cash is less than the Subsidiary's outstanding principal
balance, then (A) the Subsidiary shall pay interest at a rate per annum equal to
the DCP Rate plus fifty (50) basis points on that portion of the unpaid
principal amount equal to the Majority-Owned Excess Cash, and (B) the Subsidiary
shall pay interest at a rate per annum equal to the DCP Rate plus one hundred
fifty (150) basis points on that portion of the unpaid principal amount equal to
(i) the Subsidiary's outstanding principal balance, minus (ii) the
Majority-Owned Excess Cash. The interest rates set forth in the prior two
sentences shall be adjusted on the second business day of each fiscal month of
the Subsidiary and shall be in effect for the entirety of such fiscal month.
Interest shall be computed on a 360-day basis. Interest is payable each fiscal
month in arrears. The aggregate principal amount outstanding shall be payable
within 30 days of demand by Thermo Electron. Overdue principal and interest
shall bear interest at a rate per annum equal to the rate of interest published
from time to time in the Wall Street Journal as the "prime rate" plus one
percent (1%). The principal and accrued interest may be paid by the Subsidiary
at any time or from time to time, in whole or in part, without premium or
penalty. All payments shall be applied first to accrued interest and then to
principal. At the end of each business day, Thermo Electron shall apply the
balance of the Subsidiary's Excess Cash held by Thermo Electron under the cash
management arrangement toward the payment of any loans or advances to the
Subsidiary. Principal and interest shall be payable in lawful money of the
United States of America, in immediately available funds, at the principal
office of Thermo Electron or at such other place as Thermo Electron may
designate from time to time in writing to the Subsidiary. The unpaid principal
amount of any such borrowings, and accrued interest thereon, shall become
immediately due and payable, without demand, upon occurrence of any of the
following events:
(a) the failure of the Subsidiary to pay any amount due hereunder within
fifteen (15) days of the date when due;
(b) the failure of the Subsidiary to pay its debts as they become due,
the filing by or against the Subsidiary of any petition under the U.S.
Bankruptcy Code (or the filing of any similar petition under the
insolvency law of any jurisdiction), or the making by the Subsidiary of
an assignment or trust mortgage for the benefit of creditors or the
appointment of a receiver, custodian or similar agent with respect to,
or the taking by any such person of possession of, any material property
of the Subsidiary;
(c) the sale by the Subsidiary of all or substantially all of its
assets;
<PAGE>
(d) the merger or consolidation of the Subsidiary with or into any other
corporation in a transaction in which the Subsidiary is not the
surviving entity;
(e) the issuance of any writ of attachment, by trustee process or
otherwise, or any restraining order or injunction against or affecting
the person or property of the Subsidiary that is not removed, repealed
or dismissed within thirty (30) days of issuance and as a result has a
material adverse effect on the business, operations, assets or
condition, financial or otherwise, of the Subsidiary or its ability to
discharge any of its liabilities or obligations to Thermo Electron; and
(f) the suspension of the transaction of the usual business of the
Subsidiary.
3. Guarantee Arrangements.
(a) If Thermo Electron provides a Parent Guarantee of an Underlying
Obligation, and the beneficiary(ies) of the Parent Guarantee enforce the
Parent Guarantee, or Thermo Electron performs under the Parent Guarantee
for any other reason, then the Majority Owned Subsidiary that is
obligated, either directly or indirectly through a wholly-owned
subsidiary, under such Underlying Obligation shall indemnify and save
harmless Thermo Electron from any liability, cost, expense or damage
(including reasonable attorneys' fees) suffered by Thermo Electron as a
result of the Parent Guarantee. If the Underlying Obligation is issued
by a Second Tier Majority Owned Subsidiary or a wholly-owned subsidiary
thereof, and such Second Tier Majority Owned Subsidiary is unable to
fully indemnify Thermo Electron (because of the poor financial condition
of such Second Tier Majority Owned Subsidiary, or for any other reason),
then the First Tier Majority Owned Subsidiary that owns the majority of
the stock of such Second Tier Majority Owned Subsidiary shall indemnify
and save harmless Thermo Electron from any remaining liability, cost,
expense or damage (including reasonable attorneys' fees) suffered by
Thermo Electron as a result of the Parent Guarantee. If a Majority Owned
Subsidiary or a wholly-owned subsidiary thereof provides a Credit
Support Obligation for any subsidiary of Thermo Electron, other than a
subsidiary of such Majority Owned Subsidiary, and the beneficiary(ies)
of the Credit Support Obligation enforce the Credit Support Obligation,
or the Majority Owned Subsidiary or its wholly-owned subsidiary performs
under the Credit Support Obligation for any other reason, then Thermo
Electron shall indemnify and save harmless the Majority Owned Subsidiary
or its wholly-owned subsidiary, as applicable, from any liability, cost,
expense or damage (including reasonable attorneys' fees) suffered by the
Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable,
as a result of the Credit Support Obligation. Without limiting the
foregoing, Credit Support Obligations include the deposit of funds by a
Majority Owned Subsidiary or a wholly-owned subsidiary thereof in a
credit arrangement with a banking facility whereby such funds are
available to the banking facility as collateral for overdraft
obligations of other Majority Owned Subsidiaries or their subsidiaries
also participating in the credit arrangement with such banking facility.
Nothwithstanding the foregoing, in order to obtain the benefits of the
indemnification obligations of the First Tier Majority Owned Subsidiary
set forth above in this Section 3(a), Thermo Electron must have notified
the First Tier Majority Owned Subsidiary prior to guaranteeing the
obligations of the Second Tier Majority Owned Subsidiary. If after five
(5) business days, Thermo Electron has not received from the First Tier
Majority Owned Subsidiary a notice of objection stating that the First
Tier Majority Owned Subsidiary objects to Thermo Electron guaranteeing
the obligations of the Second Tier Majority Owned Subsidiary, then
Thermo Electron may proceed to issue its guarantee of the Underlying
Obligation and such guarantee shall be subject to the benefits of the
indemnification obligations of the First Tier Majority Owned Subsidiary
set forth above in this Section 3(a). If Thermo Electron does receive
such notice of objection, then Thermo Electron's guarantee shall not be
subject to the indemnification obligations of the First Tier Majority
Owned Subsidiary set forth above in this Section 3(a).
(b) For purposes of this Agreement, the term "guarantee" shall include
not only a formal guarantee of an obligation, but also any other
arrangement where Thermo Electron is liable for the obligations of a
Majority Owned Subsidiary or its wholly-owned subsidiaries. Such other
arrangements include (a) representations, warranties and/or covenants or
other obligations joined in by Thermo Electron, whether on a joint or
joint and several basis, for the benefit of the Majority Owned
Subsidiary or its wholly-owned subsidiaries and (b) responsibility of
Thermo Electron by operation of law for the acts and omissions of the
Majority Owned Subsidiary or its wholly-owned subsidiaries, including
controlling person liability under securities and other laws.
(c) Promptly after Thermo Electron receives notice that a beneficiary of
a Parent Guarantee is seeking to enforce such Parent Guarantee, Thermo
Electron shall notify the Majority Owned Subsidiary(s) obligated, either
directly or indirectly through a wholly-owned subsidiary, under the
relevant Underlying Obligation. Such Majority Owned Subsidiary(s) or
wholly-owned subsidiary thereof, as applicable, shall have the right, at
its own expense, to contest the claim of such beneficiary. If a Majority
Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, is
contesting the claim of such beneficiary, Thermo Electron will not
perform under the relevant Parent Guarantee unless and until, in Thermo
Electron's reasonable judgment, Thermo Electron is obligated under the
terms of such Parent Guarantee to perform. Subject to the foregoing, any
dispute between a Majority Owned Subsidiary or wholly-owned subsidiary
thereof, as applicable, and a beneficiary of a Parent Guarantee shall
not affect such Majority Owned Subsidiary's obligation to promptly
indemnify Thermo Electron hereunder. Promptly after a Majority Owned
Subsidiary or wholly-owned subsidiary thereof, as applicable, receives
notice that a beneficiary of a Credit Support Obligation is seeking to
enforce such Credit Support Obligation, the Majority Owned Subsidiary
shall notify Thermo Electron. Thermo Electron shall have the right, at
its own expense, to contest the claim of such beneficiary. If Thermo
Electron or the subsidiary of Thermo Electron on whose behalf the Credit
Support Obligation is given is contesting the claim of such beneficiary,
the Majority Owned Subsidiary or wholly-owned subsidiary thereof, as
applicable, will not perform under the relevant Credit Support
Obligation unless and until, in the Majority Owned Subsidiary's
reasonable judgment, the Majority Owned Subsidiary or wholly-owned
subsidiary thereof, as applicable, is obligated under the terms of such
Credit Support Obligation to perform. Subject to the foregoing, any
dispute between Thermo Electron or the subsidiary of Thermo Electron on
whose behalf the Credit Support Obligation was given, on the one hand,
and a beneficiary of a Credit Support Obligation, on the other, shall
not affect Thermo Electron's obligation to promptly indemnify the
Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable,
hereunder.
(d) If Thermo Electron makes a loan or provides other credit ("Credit
Extension") to a Second Tier Majority Owned Subsidiary, the First Tier
Majority Owned Subsidiary that owns the majority of the stock of such
Second Tier Majority Owned Subsidiary hereby guarantees the Second Tier
Majority Owned Subsidiary's obligations to Thermo Electron thereunder.
Such guaranty shall be enforced only after Thermo Electron, in its
reasonable judgment, determines that the Second Tier Majority Owned
Subsidiary is unable to fully perform its obligations under the Credit
Extension. If Thermo Electron provides Credit Extension to a
wholly-owned subsidiary of a Second Tier Majority Owned Subsidiary, the
Second Tier Majority Owned Subsidiary hereby guarantees it wholly-owned
subsidiary's obligations to Thermo Electron thereunder and the First
Tier Majority Owned Subsidiary that owns the majority of the stock of
such Second Tier Majority Owned Subsidiary hereby guarantees the Second
Tier Majority Owned Subsidiary's obligations to Thermo Electron
hereunder. Such guaranty by the First Tier Majority Owned Subsidiary
shall be enforced only after Thermo Electron, in its reasonable
judgment, determines that the Second Tier Majority Owned Subsidiary is
unable to fully perform its guaranty obligation hereunder.
Notwithstanding the foregoing, in order for a Credit Extension to be
deemed guaranteed by the First Tier Majority Owned Subsidiary as set
forth above in this Section 3(d), Thermo Electron must have notified the
First Tier Majority Owned Subsidiary prior to providing the Credit
Extension to the Second Tier Majority Owned Subsidiary. If after five
(5) business days, Thermo Electron has not received from the First Tier
Majority Owned Subsidiary a notice of objection stating that the First
Tier Majority Owned Subsidiary objects to Thermo Electron providing a
Credit Extension to the Second Tier Majority Owned Subsidiary, then
Thermo Electron may proceed to issue the Credit Extension to the Second
Tier Majority Owned Subsidiary and the First Tier Majority Owned
Subsidiary shall be deemed to have guaranteed such Credit Extension as
set forth above in this Section 3(d). If Thermo Electron does receive
such notice of objection, then Thermo Electron's Credit Extension shall
not be deemed guaranteed by the First Tier Majority Owned Subsidiary as
set forth in this Section 3(d).
(e) All payments required to be made under this Section 3 by a Majority
Owned Subsidiary or its wholly-owned subsidiaries, as applicable, shall
be made within two days after receipt of notice from Thermo Electron.
All payments required to be made under this Section 3 by Thermo Electron
shall be made within two days after receipt of notice from the Majority
Owned Subsidiary.
4. Waivers. No delay or omission on the part of either party in
exercising any right hereunder shall operate as a waiver of such right or of any
other right of the party, nor shall any delay, omission or waiver on any one
occasion be deemed a bar to or waiver of the same or any other right on any
future occasion. The Subsidiary hereby waives demand, notice of prepayment,
protest and all other demands and notices in connection with the delivery,
acceptance, performance, default or enforcement of the Subsidiary's obligations
hereunder. The Subsidiary hereby assents to any indulgence and any extension of
time for payment of any indebtedness hereunder granted or permitted by the
party.
5. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts applicable to
contracts made and performed therein without giving effect to any choice of law
provision or rule that would cause the application of laws of any jurisdiction
other than the Commonwealth of Massachusetts.
6. Severability. Each provision and agreement herein shall be treated as
separate and independent from any other provision or agreement herein and shall
be enforceable notwithstanding the unenforceability of any such other provision
or agreement.
7. Non-assignability. The rights and obligations of the parties under
this Agreement shall not be assigned by either party without the prior written
consent of the other party. Subject to the foregoing, this Agreement shall be
binding upon and shall inure to the benefit of the parties and their respective
successors and assigns.
8. Other Agreements. The parties agree that, effective as of the date
hereof, each of the Master Repurchase Agreement, as amended and restated,
between the Subsidiary and Thermo Electron and the Master Guarantee
Reimbursement and Loan Agreement, as amended and restated, between the
Subsidiary and Thermo Electron, is hereby terminated and is of no further force
and effect.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
THERMO ELECTRON CORPORATION
By: Kenneth J. Apicerno
Title: Treasurer
THERMOSPECTRA CORPORATION
By: Barry S. Howe
Title: President and
Chief Executive Officer
Exhibit 10.2
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"). THESE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT, AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD,
PLEDGED, MORTGAGED, HYPOTHECATED OR OTHERWISE TRANSFERRED (1) WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT COVERING THESE SECURITIES OR (2)
UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
THERMOSPECTRA CORPORATION
Amended and Restated Promissory Note Due December 31, 1999
Waltham, Massachusetts
July 30, 1999
For value received, ThermoSpectra Corporation, a Delaware corporation
(the "Company"), hereby promises to pay to Thermo Electron Corporation
(hereinafter referred to as the "Payee"), or registered assigns, on December
31,1999, as described below, the principal sum of forty-five million dollars
($45,000,000) or such part thereof as then remains unpaid, to pay interest from
the date hereof on the whole amount of said principal sum remaining from time to
time unpaid at a rate per annum equal to the rate of the Dealer Commercial Paper
Rate for 30-day maturities as reported in The Wall Street Journal on the first
business day of each fiscal month of the Company (the "DCP Rate") plus
one-hundred fifty (150) basis points, which rate shall be adjusted on the second
business day of each fiscal month of the Company and shall be in effect for the
entirety of such fiscal month. Interest is payable in arrears on the first
business day of each fiscal month of the Company, until all amounts outstanding
are paid in full. Overdue principal and interest shall bear interest at a rate
per annum equal to the rate of interest announced from time to time by
BankBoston, N.A. at its head office in Boston, Massachusetts as its "base rate"
plus one percent (1%). Principal and all accrued but unpaid interest shall be
repaid on December 31, 1999. Principal and interest shall be payable in lawful
money of the United States of America, in immediately available funds, at the
principal office of the Payee or at such other place as the legal holder may
designate from time to time in writing to the Company.
Interest shall be computed on an actual 360-day basis.
This Note may be prepaid at any time or from time to time, in whole or
in part, without any premium or penalty. All prepayments shall be applied first
to accrued interest and then to principal.
<PAGE>
The then unpaid principal amount of, and interest outstanding on, this
Note shall be and become immediately due and payable without notice or demand,
at the option of the holder hereof, upon the occurrence of any of the following
events:
(a) the failure of the Company to pay any amount due hereunder
within ten (10) days of the date when due;
(b) any representation, warranty or statement made or furnished
to the Payee by the Company in connection with this Note or the
transaction from which it arises shall prove to have been false or
misleading in any material respect as of the date when made or
furnished;
(c) the failure of the Company to pay its debts as they become
due, the insolvency of the Company, the filing by or against the Company
of any petition under the U.S. Bankruptcy Code (or the filing of any
similar petition under the insolvency law of any jurisdiction), or the
making by the Company of an assignment or trust mortgage for the benefit
of creditors or the appointment of a receiver, custodian or similar
agent with respect to, or the taking by any such person of possession
of, any property of the Company;
(d) the sale by the Company of all or substantially all of its
assets;
(e) the merger or consolidation of the Company with or into any
other corporation in a transaction in which the Company is not the
surviving entity;
(f) the issuance of any writ of attachment, by trustee process or
otherwise, or any restraining order or injunction not removed, repealed
or dismissed within thirty (30) days of issuance, against or affecting
the person or property of the Company or any liability or obligation of
the Company to the holder hereof; and
(g) the suspension of the transaction of the usual business of
the Company.
Upon surrender of this Note for transfer or exchange, a new Note or new
Notes of the same tenor dated the date to which interest has been paid on the
surrendered Note and in an aggregate principal amount equal to the unpaid
principal amount of the Note so surrendered will be issued to, and registered in
the name of, the transferee or transferees. The Company may treat the person in
whose name this Note is registered as the owner hereof for the purpose of
receiving payment and for all other purposes.
In case any payment herein provided for shall not be paid when due, the
Company further promises to pay all cost of collection, including all reasonable
attorneys' fees.
<PAGE>
No delay or omission on the part of the Payee in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Payee, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Company hereby waives presentment, demand, notice of prepayment, protest and all
other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note. The undersigned hereby assents
to any indulgence and any extension of time for payment of any indebtedness
evidenced hereby granted or permitted by the Payee.
This Note amends and restates in its entirety that certain promissory
note issued by the Company to Thermo Electron Corporation dated September 12,
1997.
This Note shall be governed by and construed in accordance with, the
laws of the Commonwealth of Massachusetts and shall have the effect of a sealed
instrument.
THERMOSPECTRA CORPORATION
By: _____________________________
Barry S. Howe
President
[Corporate Seal]
Attest:
- ----------------------------
Sandra L. Lambert
Secretary
THERMOSPECTRA CORPORATION
DEFERRED COMPENSATION PLAN FOR DIRECTORS
As amended and restated as of May 20, 1999
Section 1. Participation. Any director of ThermoSpectra Corporation (the
"Company") may elect to have such percentage as he or she may specify of the
fees otherwise payable to him or her deferred and paid to him or her as provided
in this Plan. A director who is also an employee of the Company or any
subsidiary or parent of the Company, shall not be eligible to participate in
this Plan. Each election shall be made by notice in writing delivered to the
Secretary of the Company, in such form as the Secretary shall designate, and
each election shall be applicable only with respect to fees earned subsequent to
the date of the election for the period designated in the form. The term
"participant" as used herein refers to any director who shall have made an
election. No participant may defer the receipt of any fees to be earned after
the later to occur of either (a) the date on which the participant shall retire
from or otherwise cease to engage in his or her principal occupation or
employment or (b) the date on which he or she shall cease to be a director of
the Company, or such earlier date as the Board of Directors of the Company, with
the participant's consent, may designate (the "deferral termination date"). In
the event that the participant's deferral termination date is the date on which
he or she ceases to engage in his or her principal occupation or employment, the
participant or a personal representative shall advise the Company of that date
by written notice delivered to the Secretary of the Company.
Section 2. Establishment of Deferred Compensation Accounts. There shall be
established for each participant an account to be designated as that
participant's deferred compensation account.
Section 3. Allocations to Deferred Compensation Accounts. There shall be
allocated to each participant's deferred compensation account, as of the end of
each quarter, an amount equal to his or her fees for that quarter which that
participant shall have elected to have deferred pursuant to Section 1.
Section 4. Stock Units and Stock Unit Accounts. All amounts allocated to a
participant's deferred compensation account pursuant to Section 3 and Section 5
shall be converted, at the end of each quarter, into stock units by dividing the
accumulated balance in the deferred compensation account as of the end of that
quarter by the average last sale price per share of the Company's common stock
as reported in The Wall Street Journal, for the five business days up to and
including the last business day of that quarter. The number of stock units, so
determined, rounded to the nearest one-hundredth of a share, shall be credited
to a separate stock unit account to be established for the participant, and the
aggregate value thereof as of the last business day of that quarter shall be
charged to the participant's deferred compensation account. No amounts credited
to the participant's deferred compensation account pursuant to Section 5
subsequent to the close of the fiscal year in which occurs the participant's
deferral termination date shall be converted into stock units. Any such amount
shall be distributed in cash as provided in Section 8. A maximum number of
25,000 shares of the Company's common stock may be represented by stock units
credited under this Plan, subject to proportionate adjustment in the event of
any stock dividend, stock split or other capital change affecting the Company's
common stock.
Section 5. Cash Dividend Credits. Additional credits shall be made to a
participant's deferred compensation account, until all distributions shall have
been made from the participant's stock unit account, in amounts equal to the
cash dividends (or the fair market value of dividends paid in property other
than dividends payable in common stock of the Company) which the participant
would have received from time to time had he or she been the owner on the record
dates for the payment of such dividends of the number of shares of the Company's
common stock equal to the number of units in his or her stock unit account on
those dates.
Section 6. Stock Dividend Credits. Additional credits shall be made to a
participant's stock unit account, until all distributions shall have been made
from the participant's stock unit account, of a number of units equal to the
number of shares of the Company's common stock, rounded to the nearest
one-hundredth share, which the participant would have received from time to time
as stock dividends had he or she been the owner on the record dates for the
payments of such stock dividends of the number of units of the Company's common
stock equal to the number of units credited to his or her stock unit account on
those dates.
Section 7. Adjustments in the Event of Certain Transactions. In the event of a
stock dividend, stock split or combination of shares, or other distribution with
respect to holders of Common Stock other than normal cash dividends, the number
of units then credited to a partipant's stock unit account shall be
appropriately adjusted on the same basis. In the event of any recapitalization,
merger or consolidation involving the Company, any transaction in which the
Company becomes a subsidiary of another entity, any sale or other disposition of
all or a substantial portion of the assets of the Company or any similar
transaction, as determined by the Board, the Board in its discretion may
terminate the Plan pursuant to Section 11.
Section 8. Distribution of Stock and Cash After Participant's Deferral
Termination Date. When a participant's deferral termination date shall occur,
the Company shall become obligated to make the distributions prescribed in the
following paragraphs (a) and (b).
(a) The Company shall distribute to the participant the number of shares
of the common stock of the Company which shall equal the total number of units
accumulated in his or her stock unit account as of the close of the fiscal year
in which the participant's deferral termination date occurs. Such distribution
of stock shall be made in ten annual installments, unless, at least six months
prior to his or her deferral termination date, the participant shall have
elected, by notice in writing filed with the Secretary of the Company, to have
such distribution made in five annual installments. In either such case, the
installments shall be of as nearly equal number of shares as practicable,
adjusted to reflect any changes pursuant to Sections 6 and 7 in the number of
units remaining in the participant's stock unit account. The first such
installment shall be distributed within 60 days after the close of the fiscal
year in which the participant's deferral termination date occurs. The remaining
installments shall be distributed at annual intervals thereafter. Anything
herein to the contrary notwithstanding, the Company shall have the option, if
its Board of Directors shall by resolution so determine, in lieu of making
distribution in ten or five annual installments as set forth above, with the
participant's consent, to distribute stock or any remaining installments thereof
in a single distribution at any time following the close of the fiscal year in
which the participant's deferral termination date occurs. Distribution of stock
made hereunder may be made from shares of common stock held in the treasury
and/or from shares of authorized but previously unissued shares of common stock.
(b) The Company shall distribute to the participant sums in cash equal
to the balance credited to his or her deferred compensation account as of the
close of the fiscal year in which his or her deferral termination date occurs
plus such additional amounts as shall be credited thereto from time to time
thereafter pursuant to Section 5. The cash distribution shall be made on the
same dates as the annual distributions made pursuant to paragraph (a) above, and
each cash distribution shall consist of the entire balance credited to the
participant's deferred compensation account at the time of the annual
distribution.
If a participant's deferral termination date shall occur by reason of
his or her death or if he or she shall die after his or her deferral termination
date but prior to receipt of all distributions of stock and cash provided for in
this Section 8, all stock and cash remaining distributable hereunder shall be
distributed to such beneficiary as the participant shall have designated in
writing and filed with the Secretary of the Company or, in the absence of
designation, to the participant's personal representative. Such distributions
shall be made in the same manner and at the same intervals as they would have
been made to the participant had he or she continued to live.
Section 9. Participant's Rights Unsecured. The right of any participant to
receive distributions under Section 8 shall be an unsecured claim against the
general assets of the Company. The Company may but shall not be obligated to
acquire shares of its outstanding common stock from time to time in anticipation
of its obligation to make such distributions, but no participant shall have any
rights in or against any shares of stock so acquired by the Company. All such
stock shall constitute general assets of the Company and may be disposed of by
the Company at such time and for such purposes as it may deem appropriate.
Section 10. Termination of the Plan. The Plan shall terminate and full
distribution shall be made from all participants' deferred compensation accounts
and stock unit accounts upon any change of control of the Company. Either of the
following shall be deemed to be a change of control: (a) the occurrence, without
the prior approval of the Board of Directors, of the acquisition, directly or
indirectly, by any person of 50% or more of the outstanding common stock of
either the Company or its parent corporation, Thermo Instrument Systems Inc.
("Thermo Instrument"), or the beneficial owner of 25% or more of the outstanding
common stock of Thermo Electron Corporation ("Thermo Electron"), without the
prior approval of the prior directors of the Company, Thermo Instrument, or
Thermo Electron, as the case may be; (b) the failure of the prior directors to
constitute a majority of the Board of Directors of the Company, Thermo
Instrument or Thermo Electron, at any time within two years following any
electoral event. As used in this sentence and the preceding sentence, person
shall mean a natural person, an entity (together with an affiliate thereof, as
defined in Rule 405 under the Securities Act of 1933) or a group, as defined in
Rule 13d-5 under the Securities Exchange Act of 1934; prior directors shall mean
the persons serving on the Board of Directors immediately prior to any electoral
event; and electoral event shall mean any contested election of directors or any
tender or exchange offer for common stock of the Company, Thermo Instrument or
Thermo Electron by any person other than the Company, Thermo Instrument, Thermo
Electron or a subsidiary of any of the foregoing companies. The Board of
Directors at any time, at its discretion, may terminate the Plan. If the Board
of Directors terminates the Plan after any person or group of persons shall have
acquired or proposed to acquire control of the Company through the Board of
Directors, Thermo Instrument or Thermo Electron, full and prompt distribution
shall be made from all participants' deferred compensation accounts and stock
unit accounts. Otherwise, distributions in respect of credits to participants'
deferred compensation accounts and stock unit accounts as of the date of
termination shall be made in the manner and at the time prescribed in Section 8.
Section 11. Amendment and Termination of the Plan. The Board of Directors of the
Company may amend or terminate the Plan at any time and from time to time,
provided, however, that no amendment adversely affecting credits already made to
any participant's deferred compensation account or stock unit account may be
made without the consent of that participant or, if that participant has died,
that participant's beneficiary. Upon termination of the Plan, the Company shall
be obligated to distribute to the participant either of the following as the
Board of Directors of the Company, in its sole discretion, may determine: (i)
the number of shares of the common stock of the Company which shall equal the
total number of units accumulated in the participant's stock unit account as of
the effective date of termination of the Plan or (ii) a sum in cash equal to the
balance credited to the participant's deferred compensation account as of the
effective date of termination of the Plan.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
SPECTRA CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JULY 3,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JUL-03-1999
<CASH> 9,723
<SECURITIES> 0
<RECEIVABLES> 38,964
<ALLOWANCES> 2,172
<INVENTORY> 30,536
<CURRENT-ASSETS> 99,974
<PP&E> 32,231
<DEPRECIATION> 16,019
<TOTAL-ASSETS> 240,225
<CURRENT-LIABILITIES> 98,556
<BONDS> 0
0
0
<COMMON> 154
<OTHER-SE> 129,519
<TOTAL-LIABILITY-AND-EQUITY> 240,225
<SALES> 84,609
<TOTAL-REVENUES> 84,609
<CGS> 50,487
<TOTAL-COSTS> 50,487
<OTHER-EXPENSES> 8,405
<LOSS-PROVISION> 44
<INTEREST-EXPENSE> 1,577
<INCOME-PRETAX> 1,071
<INCOME-TAX> 515
<INCOME-CONTINUING> 556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 556
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
