SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
AMENDMENT NO. 1 ON FORM 10-K/A
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended January 2, 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of January 29, 1999, was approximately $12,301,000.
As of January 29, 1999, the Registrant had 15,327,197 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
January 2, 1999, are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders held on May 27, 1999, are incorporated by reference into Part
III.
<PAGE>
FORM 10-K/A
Item 1. Business
Items 1(a), 1(b), and 1(d) are hereby amended and restated in their
entirety as follows:
(a) General Development of Business
ThermoSpectra Corporation (the Company or the Registrant) 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 businesses operate in three segments. The Imaging and Inspection
segment develops, manufactures, and markets X-ray instruments, X-ray sources,
and X-ray imaging systems as well as an assortment of scanning probe and
confocal laser scanning microscopes, all of which are used in a variety of
analytical- and inspection-oriented applications. In October 1998, the Imaging
and Inspection segment purchased the assets, subject to certain liabilities, of
TopoMetrix Corporation, a manufacturer of scanning probe microscopes, for
approximately $8 million in cash, subject to a post-closing adjustment. This
segment is also engaged in the manufacture of systems that rework and repair
printed circuit boards that have failed quality control inspection. The
Temperature Control segment manufactures and markets precision temperature
control systems for analytical, laboratory, industrial, R&D, laser, and
semiconductor applications. The Test and Measurement segment develops,
manufactures, and markets data-acquisition systems, digital oscilloscopes, and
recording systems used primarily in product development and process monitoring
settings.
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.
The Company was incorporated in Delaware in August 1994 as an indirect,
wholly owned subsidiary of Thermo Instrument Systems Inc. As of January 2, 1999,
Thermo Instrument owned 12,637,417 shares of the Company's common stock,
representing 82% of such stock outstanding. During 1998*, Thermo Instrument
purchased 880,900 shares of Company common stock in the open market for a total
purchase price of $9.0 million. 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. Thermo Instrument is an 85%-owned subsidiary of Thermo Electron
Corporation. As of January 2, 1999, Thermo Electron owned 1,491,453 shares of
the Company's common stock, representing 10% of such stock outstanding. During
1998, Thermo Electron purchased 537,200 shares of Company common stock in the
open market for a total purchase price of $5.6 million. Thermo Electron is a
world leader in monitoring, analytical, and biomedical instrumentation;
biomedical products including heart-assist devices, respiratory-care equipment,
and mammography systems; and paper recycling and papermaking equipment. Thermo
Electron also develops alternative-energy systems and clean fuels, provides a
range of services including industrial outsourcing and environmental-liability
management, and conducts research and development in advanced imaging, laser,
and electronic information-management technologies.
Thermo Electron has 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.
The proposed transaction is subject to certain conditions, as outlined in Note
16 to Consolidated Financial Statements in the Registrant's 1998 Annual Report
to Shareholders, which information is incorporated herein by reference.
- --------------------
* References to 1998, 1997, and 1996 herein are for the fiscal years ended
January 2, 1999, January 3, 1998, and December 28, 1996, respectively.
2
<PAGE>
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Annual Report on Form
10-K, as amended. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," "seeks," "estimates," and similar expressions are intended to
identify forward-looking statements. There are a number of important factors
that could cause the results of the Company to differ materially from those
indicated by such forward-looking statements, including those detailed under the
heading "Forward-looking Statements" in the Registrant's 1998 Annual Report to
Shareholders, which statements are incorporated herein by reference.
(b) Financial Information About Industry Segments
Financial information concerning the Company's industry segments is
summarized in Note 12 to Consolidated Financial Statements in the Registrant's
1998 Annual Report to Shareholders and is incorporated herein by reference.
(d) Financial Information About Geographic Areas
Financial information about geographic areas is summarized in Note 12 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders and is incorporated herein by reference.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a,d) Financial Statements and Schedules
Financial Statement Schedules filed herewith:
Schedule II: Valuation and Qualifying Accounts. See attached.
(c) Exhibits
13 Annual Report to Shareholders for the Year Ended January 2, 1999 (only
these portions incorporated herein by reference).
23 Consent of Arthur Andersen LLP.
Attached is Exhibit 13 and Schedule II of the Registrant's Form 10-K for
the year ended January 2, 1999. The Registrant's financial statements have been
amended principally to modify disclosures concerning certain restructuring
actions and other subsequent events. This amended information replaces the
corresponding information filed originally in the Form 10-K.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: October 8, 1999 THERMOSPECTRA CORPORATION
By: /s/ Barry S. Howe
Barry S. Howe
President and Chief Executive Officer
4
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of ThermoSpectra Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in ThermoSpectra Corporation's
Annual Report to Shareholders incorporated by reference in this Amendment No. 1
on Form 10-K/A, and have issued our report thereon dated February 16, 1999
(except with respect to certain matters discussed in Note 16, as to which the
date is June 1, 1999). Our audits were made for the purpose of forming an
opinion on those statements taken as a whole. The schedule listed in Item 14 on
page 3 is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the consolidated financial data required to be set forth
therein in relation to the basic consolidated financial statements taken as a
whole.
Arthur Andersen LLP
Boston, Massachusetts
February 16, 1999
5
<PAGE>
SCHEDULE II
THERMOSPECTRA CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Balance at Provision Accounts Balance
Beginning Charged to Accounts Written at End
Description of Year Expense Recovered Off Other (a) of Year
- -------------------------------- ------------ ----------- ------------ ----------- ------------ -----------
Allowance for Doubtful Accounts
Year Ended January 2, 1999 $ 1,934 $ 689 $ 9 $ (449) $ 203 $ 2,386
Year Ended January 3, 1998 $ 1,516 $ 521 $ 135 $ (704) $ 466 $ 1,934
Year Ended December 28, 1996 $ 1,095 $ 199 $ 1 $ (436) $ 657 $ 1,516
Balance at Established Activity Balance
Beginning as Cost of Charged to at End
Description of Year Acquisition Reserve Other (c) of Year
- --------------------------------------------- ----------- ------------ ----------- ------------ -----------
Accrued Acquisition Expenses (b)
Year Ended January 2, 1999 $ 586 $ 751 $ (680) $ (211) $ 446
Year Ended January 3, 1998 $ 776 $ 761 $ (517) $ (434) $ 586
Year Ended December 28, 1996 $ 1,559 $ 1,108 $(1,586) $ (305) $ 776
</TABLE>
<TABLE>
<CAPTION>
Balance at Provision Balance
Beginning Charged to at End
Description of Year Expense(e) Cash Paid of Year
- --------------------------------------------------------- ------------ ----------- ------------ -----------
Restructuring Reserves (d)
<S> <C> <C> <C> <C>
Year Ended January 2, 1999 $ 244 $ 3,830 $ (1,615) $ 2,459
Year Ended January 3, 1998 $ 1,024 $ 953 $ (1,733) $ 244
Year Ended December 28, 1996 $ 308 $ 1,038 $ (322) $ 1,024
(a) Includes allowance of businesses acquired during the year as described in
Note 3 to Consolidated Financial Statements in the Registrant's 1998 Annual
Report to Shareholders and the effect of foreign currency translation.
(b) The nature of activity in this account is described in Note 3 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders.
(c) Represents reversal of accrued acquisition expenses and corresponding
reduction in cost in excess of net assets of acquired companies resulting
from finalization of restructuring plans and the effect of foreign currency
translation.
(d) The nature of activity in this account is described in Note 4 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders.
(e) Excludes provision of $0.5 million for an asset write-down.
</TABLE>
ThermoSpectra Corporation
Consolidated Financial Statements
1998
<PAGE>
<TABLE>
<CAPTION>
ThermoSpectra Corporation 1998 Financial Statements
Consolidated Statement of Income
Year Ended
--------------------------------------
January 2, January 3, December 28,
(In thousands except per share amounts) 1999 1998 1996
- ---------------------------------------------------------------- -------------- ------------- -------------
<S> <C> <C> <C>
Revenues (Notes 8 and 12) $191,017 $198,900 $ 123,199
-------- -------- ---------
Costs and Operating Expenses:
Cost of revenues (Note 8) 110,915 115,747 62,900
Selling, general, and administrative expenses (Note 8) 53,643 53,182 36,493
Research and development expenses 16,298 17,303 12,910
Restructuring costs (Note 4) 4,320 953 1,038
Other nonrecurring income (Note 3) (102) (2,210) (867)
-------- -------- ---------
185,074 184,975 112,474
-------- -------- ---------
Operating Income 5,943 13,925 10,725
Interest Income 1,333 692 935
Interest Expense (3) (66) -
Interest Expense, Related Party (Note 8) (4,334) (4,151) (773)
Gain on Sale of Investment (Note 3) 713 - -
-------- -------- ---------
Income Before Provision for Income Taxes 3,652 10,400 10,887
Provision for Income Taxes (Note 6) 1,827 4,552 4,270
-------- -------- ---------
Net Income $ 1,825 $ 5,848 $ 6,617
======== ======== =========
Earnings per Share (Note 13)
Basic $ .12 $ .40 $ .53
======== ======== =========
Diluted $ .12 $ .39 $ .53
======== ======== =========
Weighted Average Shares (Note 13)
Basic 15,324 14,694 12,437
======== ======== =========
Diluted 15,354 14,806 12,570
======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
ThermoSpectra Corporation 1998 Financial Statements
Consolidated Balance Sheet
January 2, January 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Assets
Current Assets:
Cash and cash equivalents $ 20,717 $ 20,672
Available-for-sale investments, at quoted market value (cost - 2,083
of $2,056 in 1997; Note 2)
Accounts receivable, less allowances of $2,386 and $1,934 41,016 43,015
Inventories 31,745 34,785
Prepaid income taxes (Note 6) 10,188 7,337
Other current assets 2,271 1,774
--------- --------
105,937 109,666
--------- --------
Property, Plant, and Equipment, at Cost, Net 16,991 20,391
--------- --------
Patents, Trademarks, and Other Assets 7,280 8,108
--------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 3) 119,674 115,232
--------- --------
$ 249,882 $253,397
========= ========
3
<PAGE>
ThermoSpectra Corporation 1998 Financial Statements
Consolidated Balance Sheet (continued)
January 2, January 3,
(In thousands except share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable to Thermo Electron (Notes 3 and 8) $ 60,000 $ 15,000
Accounts payable 11,822 12,842
Accrued payroll and employee benefits 6,239 6,987
Accrued installation and warranty expenses 4,362 4,495
Deferred revenue 4,360 4,695
Accrued income taxes 3,735 2,050
Accrued restructuring costs (Note 4) 2,459 244
Other accrued expenses (Note 3) 10,684 8,252
Due to parent company and affiliated companies 4,528 1,561
--------- --------
108,189 56,126
--------- --------
Deferred Income Taxes (Note 6) 1,651 356
--------- --------
Other Deferred Items 1,907 1,277
--------- --------
Long-term Obligations, Due to Related Party (Notes 3 and 8) 7,300 67,300
--------- --------
Commitments and Contingencies (Notes 7 and 8)
Shareholders' Investment (Notes 3, 5, and 10):
Common stock, $.01 par value, 25,000,000 shares authorized; 153 153
15,327,620 and 15,313,506 shares issued
Capital in excess of par value 111,549 111,262
Retained earnings 19,763 17,938
Treasury stock at cost, 423 shares (7) (7)
Accumulated other comprehensive items (Note 14) (623) (1,008)
--------- --------
130,835 128,338
--------- --------
$ 249,882 $253,397
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ThermoSpectra Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows
Year Ended
--------------------------------------
January 2, January 3, December 28,
(In thousands) 1999 1998 1996
- ---------------------------------------------------------------- -------------- ------------- -------------
Operating Activities
Net income $ 1,825 $ 5,848 $ 6,617
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,073 6,615 4,493
Provision for losses on accounts receivable 689 521 199
Gain on sales of building, investment, and (815) (2,210) -
business, net (Note 3)
Other noncash expenses 2,554 1,417 839
Deferred income tax benefit (1,432) (40) (796)
Changes in current accounts, excluding the
effects of acquisitions and dispositions:
Accounts receivable 3,597 (733) (3,444)
Inventories 3,260 4,873 (3,105)
Other current assets (170) (81) 335
Accounts payable (1,988) (2,330) 2,123
Due to parent company and affiliated companies 2,967 (2,699) 426
Other current liabilities 3,841 (2,829) (2,238)
Other (343) 34 (21)
-------- -------- --------
Net cash provided by operating activities 21,058 8,386 5,428
-------- -------- --------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (7,943) (21,142) (22,521)
Proceeds from sale of product lines and business 750 4,980 -
(Note 3)
Refund of acquisition purchase price (Note 3) - - 1,103
Purchases of property, plant, and equipment (2,199) (2,595) (2,762)
Proceeds from sale of property, plant, and equipment 2,052 91 168
Proceeds from sale and maturities of available-for-sale 2,769 - 3,000
investments (Note 3)
Purchases of available-for-sale investments - - (3,000)
Other, net (111) (926) (733)
-------- -------- --------
Net cash used in investing activities (4,682) (19,592) (24,745)
-------- -------- --------
Financing Activities
Repayment of long-term obligation to Thermo Electron (15,000) - -
Proceeds from issuance of long-term obligations to - 60,000 15,000
Thermo Electron (Note 8)
Payment to Thermo Instrument for debt assumed in - (44,907) -
connection with acquisition of NESLAB (Note 3)
Net proceeds from issuance of Company common stock 48 561 74
Other 239 (674) 552
-------- -------- --------
Net cash provided by (used in) financing activities $(14,713) $ 14,980 $ 15,626
-------- -------- --------
5
<PAGE>
ThermoSpectra Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
Year Ended
--------------------------------------
January 2, January 3, December 28,
(In thousands) 1999 1998 1996
- ---------------------------------------------------------------- -------------- ------------- -------------
Exchange Rate Effect on Cash $ (1,618) $ 318 $ (35)
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents 45 4,092 (3,726)
Cash and Cash Equivalents at Beginning of Year 20,672 16,580 20,306
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 20,717 $ 20,672 $ 16,580
======== ======== ========
Cash Paid For
Interest $ 4,335 $ 4,217 $ 773
Income Taxes $ 1,158 $ 4,490 $ 3,419
Noncash Activities
Common stock received from sale of business (Note 3) $ - $ 2,056 $ -
Fair value of assets of acquired companies $ 10,519 $114,495 $ 29,757
Cash paid for acquired companies (7,967) (24,379) (22,525)
Stock options issued in connection with acquisition - (1,693) -
of PSI
Stock issuable to Thermo Instrument in connection - (31,315) -
with acquisition of NESLAB
Debt assumed in connection with acquisition of NESLAB - (44,907) -
-------- -------- --------
Liabilities assumed of acquired companies $ 2,552 $ 12,201 $ 7,232
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ThermoSpectra Corporation 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
Year Ended
--------------------------------------
January 2, January 3, December 28,
(In thousands) 1999 1998 1996
- ---------------------------------------------------------------- -------------- ------------- -------------
Comprehensive Income
Net Income $ 1,825 $ 5,848 $ 6,617
-------- ------- --------
Other Comprehensive Items, Net (Note 14):
Foreign currency translation adjustment 412 (776) 23
Unrealized gain (loss) on available-for-sale investments (27) 27 -
-------- ------- --------
385 (749) 23
-------- ------- --------
$ 2,210 $ 5,099 $ 6,640
======== ======= ========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning of year $ 153 $ 124 $ 124
Stock issued to Thermo Instrument in connection with - 28 -
acquisition of NESLAB (Note 3)
Issuance of Company common stock - 1 -
-------- ------- --------
Balance at end of year 153 153 124
-------- ------- --------
Capital in Excess of Par Value:
Balance at beginning of year 111,262 77,416 76,955
Stock issued to Thermo Instrument in connection with - 31,287 -
acquisition of NESLAB (Note 3)
Stock options issued in connection with acquisition - 1,693 -
of PSI (Note 3)
Issuance of Company common stock 48 562 79
Capital contribution from parent company 125 - -
Tax benefit related to employees' and directors' stock plans 114 304 382
-------- ------- --------
Balance at end of year 111,549 111,262 77,416
-------- ------- --------
Retained Earnings:
Balance at beginning of year 17,938 12,345 5,728
Net income 1,825 5,848 6,617
Deemed distribution to Thermo Instrument in - (255) -
connection with acquisition of NESLAB (Note 3)
-------- ------- --------
Balance at end of year 19,763 17,938 12,345
-------- ------- --------
Treasury Stock:
Balance at beginning of year (7) (5) -
Purchases of Company common stock - (2) (5)
-------- ------- --------
Balance at end of year $ (7) $ (7) $ (5)
-------- ------- --------
7
<PAGE>
ThermoSpectra Corporation 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued)
Year Ended
--------------------------------------
January 2, January 3, December 28,
(In thousands) 1999 1998 1996
- ---------------------------------------------------------------- -------------- ------------- -------------
Accumulated Other Comprehensive Items (Note 14):
Balance at beginning of year $ (1,008) $ (259) $ (282)
Other comprehensive items, net 385 (749) 23
-------- ------- --------
Balance at end of year (623) (1,008) (259)
-------- ------- --------
$130,835 $128,338 $ 89,621
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
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 45%, 32%, and 23% of the Company's 1998 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. As of January 2, 1999, Thermo
Instrument owned 12,637,417 shares of the Company's common stock, representing
82% of such stock outstanding. Thermo Instrument is an 85%-owned subsidiary of
Thermo Electron Corporation. As of January 2, 1999, Thermo Electron owned
1,491,453 shares of the Company's common stock, representing 10% of such stock
outstanding.
Thermo Electron has 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
(Note 16).
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1998, 1997, and 1996 are for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996, respectively. Fiscal years 1998
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 1998 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 shareholders' investment.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Income Taxes
The Company's initial public offering in August 1995 resulted in a
reduction of Thermo Instrument's equity ownership of the Company below 80% and,
as a result, the Company was required to file its own federal income tax returns
for 1996 through 1998. Thermo Instrument's equity ownership of the Company now
exceeds 80%, therefore, effective January 3, 1999, the Company will be included
in Thermo Electron's consolidated tax return as provided for under a tax
allocation agreement between the Company and Thermo Instrument. This agreement
provides that, in years that the Company has taxable income, the Company will
pay to Thermo Instrument amounts comparable to the taxes the Company would have
paid if it had filed separate tax returns.
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
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 1998 and 1997, $10,323,000 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, U.S. government-agency securities,
commercial paper, money market funds, and other marketable securities, in the
amount of at least 103% of such obligation. The Company's funds subject to the
repurchase agreement are readily convertible into cash by the Company. The
repurchase agreement earns a rate based on the 90-day Commercial Paper Composite
Rate plus 25 basis points, set at the beginning of each quarter (Note 16).
At year-end 1998, $147,000 of the Company's cash equivalents, denominated
in Dutch guilders, were invested in a repurchase agreement with a wholly owned
subsidiary of Thermo Electron under terms similar to those outlined in the above
agreement, except that the rate earned is based on Netherlands market rates, set
at the beginning of each month.
The Company, along with other subsidiaries of Thermo Electron,
participates in a notional pool arrangement with Barclays Bank, which includes a
$71 million credit facility. The Company has access to $2,423,000 under this
credit facility, which is included in the amount available for use as discussed
in Note 9. Only U.K.-based subsidiaries of Thermo Electron participate in this
arrangement. Under this arrangement, Barclays notionally combines the positive
and negative cash balances held by the participants to calculate the net
interest yield/expense for the group. The benefit derived from this arrangement
is then allocated based on balances attributable to the respective participants.
Thermo Electron guarantees all of the obligations of each participant in this
arrangement. At year-end 1998 and 1997, the Company had a positive cash balance
under this arrangement of $1,958,000 and $44,000, respectively.
At year-end 1998 and 1997, the Company's cash equivalents also included
investments in short-term certificates of deposit held by the Company's foreign
operations, which have an original maturity of three months or less. Cash
equivalents are carried at cost, which approximates market value.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
1. Nature of Operations and Summary of Significant Accounting Policies (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:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
<S> <C> <C>
Raw Materials and Supplies $18,355 $ 16,850
Work in Process 5,899 7,096
Finished Goods 7,491 10,839
------- --------
$31,745 $ 34,785
======= ========
The Company periodically reviews the quantities of inventories on hand and
compares these amounts to expected usage of each particular product or product
line. The Company records as a charge to cost of revenues any amounts required
to reduce the carrying value of inventories to net realizable value.
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:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Land $ 2,424 $ 3,067
Buildings 6,238 6,910
Machinery, Equipment, and Leasehold Improvements 21,855 21,131
------- --------
30,517 31,108
Less: Accumulated Depreciation and Amortization 13,526 10,717
------- --------
$16,991 $ 20,391
======= ========
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 $4,028,000 and $4,826,000, net of accumulated amortization of
$2,965,000 and $2,135,000, at year-end 1998 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 $8,015,000 and $4,927,000 at year-end 1998 and 1997,
respectively. The Company assesses the future useful life of this asset whenever
events or changes in circumstances indicate that the current useful life has
diminished. The Company considers the future undiscounted cash flows of the
acquired businesses in assessing the recoverability of this asset. If impairment
occurs, any excess of carrying value over fair value is recorded as a loss.
11
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment
(Note 14). 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 transactions denominated in U.S. dollars, British pound
sterling, Japanese yen, French francs, and German marks. The purpose of the
Company's foreign currency hedging activities is to protect the Company's local
currency cash flows related to these commitments from fluctuations in foreign
exchange rates. Gains and losses arising from forward foreign exchange contracts
are 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.
Presentation
Certain amounts in 1997 and 1996 have been reclassified to conform to the
presentation in the 1998 financial statements.
2. Available-for-sale Investments
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, net of related tax effects, recorded
in the "Accumulated Other Comprehensive Items" component of shareholders'
investment. Available-for-sale investments in the accompanying 1997 balance
sheet represent common stock received in connection with the sale of its Linac
business (Note 3).
3. Acquisitions and Dispositions
Acquisitions
In October 1998, the Company acquired the assets, subject to certain
liabilities, of TopoMetrix Corporation, a scanning probe microscope
manufacturing business, for approximately $7,967,000 in cash, subject to a
post-closing adjustment. The cost of this acquisition exceeded the estimated
fair value of the net assets by $7,061,000. The businesses of Park Scientific
Instruments Corporation (PSI) and TopoMetrix were combined and renamed
ThermoMicroscopes Corporation.
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).
12
<PAGE>
3. Acquisitions and Dispositions (continued)
In March 1997, Thermo Instrument acquired Life Sciences International PLC
(LSI), a London Stock Exchange-listed company. 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 systems 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 Company believes that this allocation
methodology is reasonable and in accordance with the guidance provided by
Securities and Exchange Commission Staff Accounting Bulletin (SAB) 55 (Topic
1:B).
The purchase price of NESLAB consisted of 2,759,042 shares of Company
common stock valued at $31,315,000 issued to Thermo Instrument and the
assumption of $44,907,000 of debt to Thermo Instrument, which was subsequently
paid. To repay the debt assumed from Thermo Instrument, the Company borrowed
$45,000,000 from Thermo Electron (Note 8). The cost of this acquisition exceeded
the estimated fair value of the net assets by $57,774,000.
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 issued have been treated as outstanding from that date. 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.
In March 1997, the Company acquired 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, 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, which was repaid in 1998
(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. The
Company believes that this allocation methodology is reasonable and in
accordance with the guidance provided by SAB 55 (Topic 1:B). The cost of this
acquisition exceeded the estimated fair value of the net assets by $10,046,000.
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 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. During 1996, the Company acquired two
additional companies for an aggregate $900,000 in cash.
Except for 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
13
<PAGE>
3. Acquisitions and Dispositions (continued)
on estimates of the fair value of the net assets acquired and, for TopoMetrix,
is subject to adjustment. The Company has gathered no information that indicates
the final allocation of the purchase price for TopoMetrix will differ materially
from the preliminary estimate.
In connection with these acquisitions, the Company has undertaken
restructuring activities at the acquired businesses. The Company's restructuring
activities, which were accounted for in accordance with Emerging Issues Task
Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing
levels and the abandonment of excess facilities. In connection with these
restructuring activities, as part of the cost of the acquisitions, the Company
established reserves as detailed below, primarily for severance and excess
facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions.
A summary of the changes in accrued acquisition expenses for severance
follows:
</TABLE>
<TABLE>
<CAPTION>
Imaging and Temperature
Inspection Control
Segment Segment
----------------------------- -----------------
(In thousands) Kevex TopoMetrix NESLAB Other Total
- --------------------------------- -------------- -------------- ----------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 30, 1995 $ - $ - $ - $ 570 $ 570
Reserves established 730 - - - 730
Usage (207) - - (344) (551)
Decrease due to finalization of - - - (191) (191)
restructuring plan, recorded
as a decrease to cost in
excess of net assets of
acquired companies
------ ------ ----- ------ ------
Balance at December 28, 1996 523 - - 35 558
Reserves established - - 150 23 173
Usage (265) - (67) (58) (390)
Decrease due to finalization (147) - (8) - (155)
of restructuring plan,
recorded as a decrease to
cost in excess of net
assets of acquired companies
------ ------ ----- ------ ------
Balance at January 3, 1998 111 - 75 - 186
Reserves established - 149 - - 149
Usage (111) (119) - - (230)
Decrease due to finalization - - (75) - (75)
of restructuring plan,
recorded as a decrease to
cost in excess of net
assets of acquired companies
------ ------ ----- ------ ------
Balance at January 2, 1999 - 30 - - 30
(Unaudited)
Reserves established - 39 - - 39
Usage - (63) - - (63)
------ ------ ----- ------ ------
Balance at July 3, 1999 $ - $ 6 $ - $ - $ 6
====== ====== ===== ====== ======
14
<PAGE>
3. Acquisitions and Dispositions (continued)
A summary of the changes in accrued acquisition expenses for the
abandonment of excess facilities follows:
Imaging and Temperature
Inspection Control
Segment Segment
----------------------------- -----------------
(In thousands) Kevex TopoMetrix NESLAB Other Total
- --------------------------------- -------------- -------------- ----------------- ---------- --------------
Balance at December 30, 1995 $ - $ - $ - $ 989 $ 989
Reserves established 377 - - 1 378
Usage (335) - - (700) (1,035)
Decrease due to finalization of - - - (114) (114)
restructuring plan, recorded
as a decrease to cost in
excess of net assets of
acquired companies
------- ------- ------ ------- -------
Balance at December 28, 1996 42 - - 176 218
Reserves established - - 588 - 588
Usage (42) - - (85) (127)
Decrease due to finalization - - (135) (91) (226)
of restructuring plan,
recorded as a decrease to
cost in excess of net
assets of acquired companies
Currency translation - - (53) - (53)
------- ------- ------ ------- -------
Balance at January 3, 1998 - - 400 - 400
Reserves established - 602 - - 602
Usage - (237) (213) - (450)
Decrease due to finalization - - (166) - (166)
of restructuring plan,
recorded as a decrease to
cost in excess of net
assets of acquired companies
Currency translation - - 30 - 30
------- ------- ------ ------- -------
Balance at January 2, 1999 - 365 51 - 416
(Unaudited)
Reserves established - 207 - - 207
Usage - (407) (40) - (447)
Currency translation - - (5) - (5)
------- ------- ------ ------- -------
Balance at July 3, 1999 $ - $ 165 $ 6 $ - $ 171
======= ======= ====== ======= =======
</TABLE>
15
<PAGE>
3. Acquisitions and Dispositions (continued)
The increase in accrued acquisition expenses in 1996 primarily related to
severance across all functions at the Imaging and Inspection segment's Kevex
Instruments subsidiary and relocation of its California sales and service office
to another California facility and the closure of its Japan sales and service
office. The increase in accrued acquisition expenses in 1997 principally related
to lease costs at the Temperature Control segment's NESLAB Instruments
subsidiary's Netherlands facility, which was abandoned, and severance across all
functions at this business. The increase in accrued acquisition expenses in 1998
and 1999 principally related to cancellation of operating leases at the Imaging
and Inspection segment's TopoMetrix subsidiary's sales and services office in
Germany and at its manufacturing facility in California, both of which were
closed. In addition, the increase represented severance across all functions at
this business.
Unresolved matters at January 2, 1999, primarily included completion of
abandonment of excess facilities for TopoMetrix. Accrued acquisition expenses
are included in other accrued expenses in the accompanying balance sheet.
Based on unaudited data, the following table presents selected financial
information for the Company, NESLAB, PSI, and the Kevex businesses, on a pro
forma basis, assuming that the Company and these acquired businesses had been
combined since the beginning of 1996. The effect of the acquisitions not
included in the pro forma data was not material to the Company's results of
operations.
<TABLE>
<CAPTION>
(In thousands except per share amounts) 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
<S> <C> <C>
Revenues $210,412 $ 202,813
Net Income 3,736 3,280
Earnings per Share:
Basic .25 .22
Diluted .24 .21
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisitions of NESLAB,
PSI, and the Kevex businesses been made at the beginning of 1996.
In 1996, the Company finalized negotiations with the former owner of Gould
Instrument Systems, Inc. in connection with amounts claimed by the Company for
the discontinuance of the Acqulab product line, which was sold to the Company as
part of the 1995 purchase of Gould. 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 1996. The
remaining $867,000 related to a reimbursement of expenses incurred subsequent to
the acquisition of Gould for the ongoing development of Acqulab. This amount is
classified as other nonrecurring income in the accompanying 1996 statement of
income.
Dispositions
In January 1998, the Company's Nicolet Imaging Systems (NIS) division sold
its security screening product line to OSI Systems, Inc. for $750,000 in cash
for a nominal loss. The product line represented less than 1.0% of the Company's
revenues. During 1998, the Company sold real estate for a gain of $106,000.
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. The Company sold its shares of SteriGenics common stock
in 1998 and realized a gain of $713,000.
16
<PAGE>
4. Restructuring Costs
During 1998, the Company recorded restructuring and related costs of
$5,399,000. Restructuring costs of $4,320,000, which were accounted for in
accordance with EITF 94-3, consist of $3,712,000 related to severance costs for
259 employees across all functions and $608,000 related primarily to
facility-closing costs. The charge for facility-closing costs includes $490,000
for write-downs of related fixed assets. In addition, the Company recorded an
inventory write-down totaling $1,079,000 related to the discontinuation of
certain underperforming products, which is included in cost of revenues in the
accompanying 1998 statement of income. As of January 2, 1999, the Company had
terminated 182 employees and had expended $1,371,000 of the established
reserves. During the first six months of 1999, the Company terminated 36
additional employees and recorded additional restructuring costs of $875,000.
Such costs consist of $265,000 related to severance costs for nine employees at
a foreign sales office, $201,000 for facility-closing costs, and $409,000
related to certain business relocation and related costs.
In 1997, the Company's Gould subsidiary incurred a $953,000 restructuring
charge, related primarily to severance costs for 40 employees terminated during
1997. Accrued restructuring costs of $244,000 in the accompanying 1997 balance
sheet relates to these actions and was expended during 1998. In addition, in
1997 the Company's NIS division recorded an inventory write-down of $0.8
million, related primarily to the discontinuation of an underperforming product,
which is included in cost of revenues in the accompanying 1997 statement of
income.
In 1996, Gould incurred $1,038,000 in connection with a restructuring
plan, which included the termination of approximately 40 employees.
17
<PAGE>
4. Restructuring Costs (continued)
</TABLE>
<TABLE>
<CAPTION>
The Company recorded charges for its restructuring plans as follows:
<S> <C> <C> <C> <C>
Abandonment Other Total
of Excess
(In thousands) Severance Facilities
- ------------------------------------------------- ----------- ------------- -------------- --------------
1996 Restructuring Plan
Costs incurred in 1996 (a) $ 1,038 $ - $ - $ 1,038
1996 Usage (14) - - (14)
------- ------ ------- -------
Balance at December 28, 1996 1,024 - - 1,024
1997 Usage (1,024) - - (1,024)
------- ------ ------- -------
Balance at January 3, 1998 $ - $ - $ - $ -
======= ====== ======= =======
1997 Restructuring Plan
Costs incurred in 1997 (b) $ 953 $ - $ - $ 953
1997 Usage (709) - - (709)
------- ------ ------- -------
Balance at January 3, 1998 244 - - 244
1998 Usage (244) - - (244)
------- ------ ------- -------
Balance at January 2, 1999 $ - $ - $ - $ -
======= ====== ======= =======
1998 Restructuring Plan
Costs incurred in 1998 (c) $ 3,712 $ 118 $ - $ 3,830
1998 Usage (1,253) (118) - (1,371)
------- ------ ------- -------
Balance at January 2, 1999 2,459 - - 2,459
(Unaudited)
Costs incurred in 1999 (d) 265 201 409 875
1999 Usage (1,773) (201) (409) (2,383)
Currency translation (44) - - (44)
------- ------ ------- -------
Balance at July 3, 1999 $ 907 $ - $ - $ 907
======= ====== ======= =======
(a) Reflects restructuring costs recorded by the Test and Measurement segment.
(b) Reflects restructuring costs recorded by the Test and Measurement segment.
Excludes noncash inventory write-down of $0.8 million included in cost of
revenues and recorded by the Imaging and Inspection segment.
(c) Reflects restructuring costs of $1.2 million, $2.4 million, and $0.2 million
recorded by the Imaging and Inspection, Test and Measurement, and
Temperature Control segments, respectively. Excludes noncash inventory
write-down of $1.1 million included in cost of revenues, of which $0.5
million was recorded by the Imaging and Inspection segment and $0.6 million
was recorded by the Test and Measurement segment. Excludes provision of $0.5
million for an asset write-down, of which $0.4 million was recorded by the
Imaging and Inspection segment and $0.1 million was recorded by the Test and
Measurement segment.
(d) Reflects restructuring costs recorded by the Imaging and Inspection segment.
18
<PAGE>
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. The option
recipients and the terms of options granted under these plans are determined by
the Board Committee. As of year-end 1998, only nonqualified stock options have
been awarded under these plans. 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 one- to ten-year period,
depending on the term of the option, which generally ranges from five to twelve
years. Nonqualified stock options may be granted at any price determined by the
Board Committee, although incentive stock options must be granted at not less
than the fair market value of the Company's 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.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 87,000 shares at a weighted average exercise price of $14.50 per share
elected to participate in this exchange and, as a result, received options to
purchase 43,500 shares of Company common stock at $11.41 per share, which are
included in the 1998 grants in the table below. The other terms of the new
options are the same as the exchanged options except that the holders may not
sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.
A summary of the Company's stock option activity is:
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- -------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding, Beginning of Year 1,256 $11.23 971 $12.10 862 $11.32
Issued upon acquisition of PSI - - 145 3.07 - -
Granted 370 10.73 374 10.46 183 15.26
Exercised (14) 3.44 (105) 4.20 (8) 10.00
Forfeited (306) 12.17 (129) 12.02 (66) 10.89
Canceled due to exchange (87) 14.50 - - - -
----- ----- ------
Options Outstanding, End of Year 1,219 $10.70 1,256 $11.23 971 $12.10
===== ====== ===== ====== ====== ======
Options Exercisable 1,212 $10.74 1,238 $11.35 971 $12.10
===== ====== ===== ====== ====== ======
Options Available for Grant 388 172 121
===== ===== ======
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
5. Employee Benefit Plans (continued)
A summary of the status of the Company's stock options at January 2, 1999,
is:
Options Outstanding
-----------------------------------------------------
Number Weighted Weighted
of Average Average
Shares Remaining Exercise
Range of Exercise Prices (In thousands) Contractual Life Price
- ------------------------------------------------ ----------------- ------------------- --------------------
<S> <C> <C> <C>
$ 2.55 - $ 6.20 36 6.1 years $ 3.37
6.21 - 9.85 163 6.8 years 9.50
9.86 - 13.50 847 7.1 years 10.42
13.51 - 17.15 173 6.5 years 14.73
-----
$ 2.55 - $ 17.15 1,219 6.9 years $10.70
=====
The information disclosed above for options outstanding at January 2,
1999, 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. Prior
to the 1998 program year, the applicable shares of common stock could be
purchased at the end of a 12-month period at 95% of the fair market value at the
beginning of the period, and the shares purchased were subject to a six-month
resale restriction. Effective November 1, 1998, the applicable shares of common
stock may be purchased at 85% of the lower of the fair market value at the
beginning or end of the plan year, and the shares purchased are subject to a
one-year resale restriction. Shares are purchased through payroll deductions of
up to 10% of each participating employee's gross wages. No shares were issued
under this program during 1998. During 1997, the Company issued 9,852 shares of
its common stock under this program.
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
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:
</TABLE>
<TABLE>
<CAPTION>
(In thousands except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Net Income:
<S> <C> <C> <C>
As reported $1,825 $5,848 $6,617
Pro forma 1,070 5,343 6,277
Basic Earnings per Share:
As reported .12 .40 .53
Pro forma .07 .36 .50
Diluted Earnings per Share:
As reported .12 .39 .53
Pro forma .07 .36 .50
20
<PAGE>
5. Employee Benefit Plans (continued)
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 $4.04,
$3.74, and $5.80 in 1998, 1997, and 1996, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
</TABLE>
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
- ----------------------------------------------------------------------- ----------- ---------- -----------
Volatility 28% 28% 26%
Risk-free Interest Rate 5.3% 5.9% 6.6%
Expected Life of Options 5.6 years 5.0 years 5.4 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plans
Substantially all of the Company's full-time U.S. employees are eligible
to participate in 401(k) savings plans. 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 $1,350,000, $1,427,000, and $689,000 in 1998,
1997, and 1996, respectively.
6. Income Taxes
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
The components of income before provision for income taxes are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------- -------- --------- --------
Domestic $ 2,306 $ 10,719 $ 8,969
Foreign 1,346 (319) 1,918
------- -------- -------
$ 3,652 $ 10,400 $10,887
======= ======== =======
21
<PAGE>
6. Income Taxes (continued)
The components of the provision for income taxes are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------- -------- --------- --------
Currently Payable:
Federal $ 2,207 $ 3,834 $ 3,427
State 529 600 774
Foreign 523 158 865
------- ------- -------
3,259 4,592 5,066
------- ------- -------
Net Deferred (Prepaid):
Federal (1,248) (112) (608)
State (280) (24) (129)
Foreign 96 96 (59)
------- ------- -------
(1,432) (40) (796)
------- ------- -------
$ 1,827 $ 4,552 $ 4,270
======= ======= =======
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 $114,000,
$304,000, and $382,000 of such benefits that have been allocated to capital in
excess of par value in 1998, 1997, and 1996, respectively. In addition, 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.
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:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------- --------- --------- --------
Provision for Income Taxes at Statutory Rate $ 1,242 $ 3,536 $3,702
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 164 380 426
Foreign tax rate and tax law differential 163 362 154
Amortization of cost in excess of net assets of acquired companies 841 685 146
Tax benefit of foreign sales corporation (362) (295) (268)
Other, net (221) (116) 110
------- ------- ------
$ 1,827 $ 4,552 $4,270
======= ======= ======
22
<PAGE>
6. Income Taxes (continued)
Prepaid and deferred income taxes in the accompanying balance sheet
consist of:
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------- --------- --------
Prepaid Income Taxes:
Tax loss carryforwards $10,133 $9,052
Reserves and accruals 5,439 4,152
Inventory basis difference 4,749 3,185
------- ------
20,321 16,389
Less: Valuation allowance 10,133 9,052
------- ------
$10,188 $7,337
======= ======
Deferred Income Taxes:
Fixed and intangible assets $ 1,651 $ 356
======= ======
At year-end 1998, the Company had foreign and federal tax loss
carryforwards of $23,497,000 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. Foreign tax loss carryforwards of $313,000 expire in 2006, while
the remainder 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
$5,695,000 of undistributed earnings of foreign subsidiaries that could be
subject to taxation if remitted to the U.S. because the Company plans to keep
these amounts permanently reinvested overseas.
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 $2,333,000, $2,171,000, and
$2,818,000 in 1998, 1997, and 1996, respectively, net of sublease income of
$847,000 and $893,000 in 1998 and 1997, respectively. Future minimum payments
due under noncancelable operating leases at January 2, 1999, were $2,093,000 in
1999; $1,937,000 in 2000; $1,589,000 in 2001; $1,438,000 in 2002; $1,312,000 in
2003; and $1,580,000 in 2004 and thereafter. Total future minimum lease payments
are $9,949,000 and have not been reduced by minimum sublease rental income of
$3,744,000 due through 2004 and thereafter 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.
23
<PAGE>
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 currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In 1997 and 1996, the Company paid an amount equal to
1.0% of the Company's revenues. For these services, the Company was charged
$1,528,000, $1,989,000, and $1,232,000 in 1998, 1997, and 1996, respectively.
The fee is reviewed and adjusted annually by mutual agreement of the parties.
Management believes that the service fee charged by Thermo Electron is
reasonable and that such fees are representative of the expenses the Company
would have incurred on a stand-alone basis. The corporate services agreement is
renewed annually but can be terminated upon 30 days' prior notice by the Company
or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the
Thermo Electron Corporate Charter defines the relationship among Thermo Electron
and its majority-owned subsidiaries). For additional items such as employee
benefit plans, insurance coverage, and other identifiable costs, Thermo Electron
charges the Company based upon costs attributable to the Company.
Operating Leases
In addition to the operating leases discussed in Note 7, the Company
leases certain office and manufacturing space from subsidiaries of Thermo
Instrument under two leases expiring in 2000 and 2001. The accompanying
statement of income includes expenses from these operating leases of $899,000,
$602,000, and $208,000 in 1998, 1997, and 1996, respectively. At January 2,
1999, future minimum payments due under these leases are $906,000 in 1999,
$739,000 in 2000, and $236,000 in 2001. Total future minimum lease payments
under these leases are $1,881,000.
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 $1,215,000, $825,000, and
$240,000 in 1998, 1997, and 1996, respectively. Purchases of products and
services from such affiliated companies totaled $2,013,000, $2,226,000, and
$1,310,000 in 1998, 1997, and 1996, respectively. During 1998, the Company sold
a product line to Thermo Optek for $125,000.
Repurchase Agreement
The Company invests excess cash in repurchase agreements with Thermo
Electron as discussed in Notes 1 and 16.
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):
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Promissory Notes to Thermo Electron, Due:
August 1998 $ - $ 15,000
March 1999 10,000 10,000
July 1999 50,000 50,000
Promissory Note to Thermo Instrument, Due September 2001 7,300 7,300
------- --------
$67,300 $ 82,300
======= ========
24
<PAGE>
8. Related-party Transactions (continued)
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 1998 and 1997 was 5.36% and 5.76%,
respectively.
9. Lines of Credit
Unused amounts available under outstanding lines of credit were $3,345,000
and $3,249,000 at year-end 1998 and 1997, respectively. Borrowings under lines
of credit are guaranteed by Thermo Electron or Thermo Instrument.
10. Common Stock
At January 2, 1999, the Company had reserved 1,672,000 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, accounts receivable, notes payable to Thermo Electron, accounts
payable, due to affiliated companies, long-term obligations due to related
party, and forward foreign exchange contracts. Available-for-sale investments
were carried at fair value in the accompanying 1997 balance sheet (Note 2). 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
forward foreign exchange contracts, approximate fair value due to their
short-term nature.
The notional amounts of forward foreign exchange contracts outstanding
totaled $1,519,000 and $2,041,000 at year-end 1998 and 1997, respectively. The
fair value of the Company's forward foreign exchange contracts receivable was
$19,000 and $3,000 at year-end 1998 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.
12. Business Segments and Geographical Information
The Company organizes and manages its business by functional operating
entity. The Company operates in three segments: Imaging and Inspection,
Temperature Control, and Test and Measurement. In classifying operational
entities into a particular segment, the Company aggregates businesses with
similar economic characteristics, products and services, production processes,
customers, and methods of distribution.
The Company, through its Imaging and Inspection segment, designs,
manufactures, and markets instruments and systems used in the analysis of
material samples by industrial, academic, and government laboratories. Principal
products manufactured by this segment include X-ray microanalysis systems that
analyze the chemical composition of microscopic samples; X-ray sources for
imaging, inspection, analytical, and thickness-gauging applications; X-ray
imaging systems for quality-control inspections; systems for the rework and
repair of printed circuit boards that have failed quality-control inspection;
scanning probe microscopes that measure physical surface properties; and
confocal laser scanning microscopes that create high-resolution
three-dimensional images.
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 manufactures data-acquisition systems,
digital oscilloscopes, and recording systems used primarily in product
development and process monitoring settings.
25
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
12. Business Segments and Geographical Information (continued)
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Business Segment Information
Revenues:
Imaging and Inspection $ 85,824 $ 91,771 $ 67,711
Temperature Control 61,198 56,288 -
Test and Measurement 43,995 50,841 55,488
--------- -------- ---------
$ 191,017 $198,900 $ 123,199
========= ======== =========
Income Before Provision for Income Taxes:
Imaging and Inspection $ 1,580 $ 7,422 $ 9,219
Temperature Control 7,070 6,698 -
Test and Measurement (967) 2,713 3,942
Corporate (a) (1,740) (2,908) (2,436)
--------- -------- ---------
Total operating income 5,943 13,925 10,725
Interest and other income (expense), net (2,291) (3,525) 162
---------- -------- ---------
$ 3,652 $ 10,400 $ 10,887
========= ======== =========
Total Assets:
Imaging and Inspection $ 110,695 $104,026 $ 84,547
Temperature Control 77,356 83,509 -
Test and Measurement 42,227 43,658 50,926
Corporate (b) 19,604 22,204 17,012
--------- -------- ---------
$ 249,882 $253,397 $ 152,485
========= ======== =========
26
<PAGE>
12. Business Segments and Geographical Information (continued)
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Depreciation and Amortization:
Imaging and Inspection $ 3,019 $ 2,896 $ 2,109
Temperature Control 2,469 1,911 -
Test and Measurement 1,582 1,808 2,384
Corporate 3 - -
--------- -------- ---------
$ 7,073 $ 6,615 $ 4,493
========= ======== =========
Capital Expenditures:
Imaging and Inspection $ 1,083 $ 1,857 $ 2,215
Temperature Control 477 516 -
Test and Measurement 621 222 547
Corporate 18 - -
--------- -------- ---------
$ 2,199 $ 2,595 $ 2,762
========= ======== =========
Geographical Information
Revenues (c):
United States $ 165,363 $176,717 $ 94,493
Germany 11,495 12,217 14,673
England 10,853 12,546 14,260
Other 29,324 25,393 19,291
Transfers among geographical areas (d) (26,018) (27,973) (19,518)
--------- -------- ---------
$ 191,017 $198,900 $ 123,199
========= ======== =========
Long-lived Assets (e):
United States $ 18,462 $ 20,684 $ 20,361
International 863 2,104 2,190
--------- -------- ---------
$ 19,325 $ 22,788 $ 22,551
========= ======== =========
Export Revenues Included in United States Revenues Above (f) $ 59,413 $ 59,433 $ 36,472
========= ======== =========
(a) Primarily general and administrative expenses.
(b) Primarily cash, cash equivalents, and available-for-sale investments.
(c) Revenues are attributed to countries based on selling location.
(d) Transfers among geographical areas are accounted for at prices that
are representative of transactions with unaffiliated parties.
(e) Includes property, plant, and equipment, net, and other long-term
tangible assets.
(f) In general, export revenues are denominated in U.S. dollars.
27
<PAGE>
13. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------- -------- --------- --------
Basic
Net income $ 1,825 $ 5,848 $ 6,617
------- -------- -------
Weighted Average Shares, as Adjusted 15,324 14,694 12,437
------- -------- -------
Basic Earnings per Share $ .12 $ .40 $ .53
======= ======== =======
Diluted
Net Income $ 1,825 $ 5,848 $ 6,617
------- -------- -------
Weighted Average Shares 15,324 14,694 12,437
Effect of Stock Options 30 112 133
------- -------- -------
Weighted Average Shares, as Adjusted 15,354 14,806 12,570
------- -------- -------
Diluted Earnings per Share $ .12 $ .39 $ .53
======= ======== =======
The computation of diluted earnings per share for each period excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of January 2, 1999, there were 311,075 of such
options outstanding, with exercise prices ranging from $11.03 to $17.15 per
share.
14. Comprehensive Income
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"Other comprehensive items, net," which represents certain amounts that are
reported as components of shareholders' investment in the accompanying balance
sheet, including foreign currency translation adjustments and unrealized net of
tax gains and losses from available-for-sale investments.
Accumulated other comprehensive items in the accompanying balance sheet
consists of:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Cumulative Translation Adjustment $ (623) $ (1,035)
Net Unrealized Gain on Available-for-sale Investments - 27
------- --------
$ (623) $ (1,008)
======= ========
28
<PAGE>
15. Unaudited Quarterly Information
(In thousands except per share amounts)
1998 First Second Third(a) Fourth
- ---------------------------------------------------------------- --------- ---------- ---------- ----------
Revenues $53,067 $49,058 $44,052 $44,840
Gross Profit 22,670 20,624 16,485 20,323
Net Income (Loss) 2,072 1,488 (2,503) 768
Basic and Diluted Earnings (Loss) per Share .14 .10 (.16) .05
1997 First(b) Second Third Fourth(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
(a) Reflects a $5.4 million pretax charge for restructuring and related costs.
(b) Reflects the March 1997 acquisitions of NESLAB and PSI.
(c) Reflects a $2.2 million gain from the sale of the Company's Linac business.
16. Subsequent Events
Proposed Merger
On May 21, 1999, the Company entered into a definitive agreement and plan
of merger with Thermo Instrument 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.
Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron 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. The
Company will report amounts invested in this arrangement as "advance to
affiliate" in its balance sheet beginning in the second quarter of 1999.
In addition, under the new domestic cash management arrangement, amounts
borrowed from Thermo Electron by the Company for domestic cash management
purposes bear interest at the 30-day Dealer Commercial Paper Rate plus 150 basis
points, set at the beginning of each month. The Company had no borrowings under
this arrangement as of July 3, 1999.
29
<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 82%-owned subsidiary of
Thermo Instrument Systems Inc.) and subsidiaries as of January 2, 1999, and
January 3, 1998, and the related consolidated statements of income, cash flows,
and comprehensive income and shareholders' investment for each of the three
years in the period ended January 2, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
ThermoSpectra Corporation and subsidiaries as of January 2, 1999, and January 3,
1998, and the results of their operations and their cash flows for each of the
three years in the period ended January 2, 1999, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 16, 1999 (except with respect to certain matters
discussed in Note 16, as to which the date is June 1, 1999)
30
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
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. The Company broadened its product offerings
to include scanning probe microscopes through the acquisitions of Park
Scientific Instruments Corporation (PSI) in March 1997 and TopoMetrix
Corporation in October 1998 (Note 3). In addition, the Company acquired Sierra
Research and Technology Inc. (SRT) in July 1997, a manufacturer of systems used
for the rework and repair of printed circuit boards (Note 3). The Test and
Measurement segment includes digital oscillographic recorders, digital storage
oscilloscopes (DSOs), and data acquisition systems. The Company expanded into
the Temperature Control segment through its March 1997 acquisition of NESLAB
Instruments, Inc., which manufactures and markets precision temperature control
systems for analytical, laboratory, industrial, research and development, laser,
and semiconductor applications (Note 3).
The Company's growth strategy includes 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 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 two low-margin product lines in December
1997 and January 1998 (Note 3) and undertook certain other restructuring actions
during 1998 (Note 4).
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. The 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
31
<PAGE>
Overview (continued)
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
1998 Compared With 1997
Total revenues decreased $7.9 million to $191.0 million in 1998 from
$198.9 million in 1997. Revenues increased $17.6 million due to the inclusion of
$22.4 million of revenues for the full year from NESLAB, PSI, and SRT, which
were acquired during 1997, in addition to the inclusion of TopoMetrix, acquired
October 1998, offset by the exclusion of $4.8 million of revenues resulting from
the sale of the Nicolet Imaging Systems (NIS) product lines in late 1997 and
early 1998. Revenues were adversely affected by approximately $4.1 million due
to the strengthening in the value of the U.S. dollar relative to currencies in
foreign countries in which the Company operates. Revenues from the Imaging and
Inspection segment decreased $6.0 million to $85.8 million in 1998 from $91.8
million in 1997. Excluding the impact of acquisitions of $7.3 million,
dispositions of $4.8 million, and the negative effects of foreign currency
translation of $3.9 million, revenues from the Imaging and Inspection segment
decreased $4.5 million, primarily due to reduced demand for semiconductor
related products of $2.5 million, a shipment at Kevex Instruments of $1.0
million that occurred in the first quarter of 1997, and a downturn in overseas
markets of $0.9 million. Revenues from the Temperature Control segment increased
$4.9 million to $61.2 million in 1998 from $56.3 million in 1997, primarily due
to the inclusion of $15.1 million of revenues for the full year from NESLAB.
This increase was offset in part by a decrease of $10.2 million, due to a severe
reduction in capital-equipment expenditures in the semiconductor industry.
Revenues from the Test and Measurement segment decreased $6.8 million to $44.0
million in 1998 from $50.8 million in 1997, including $0.2 million resulting
from currency translation, primarily due to decreased demand. The Company's
backlog decreased $14.4 million during 1998 to $26.0 million, primarily due to
the downturn in the semiconductor industry.
The gross profit margin was unchanged at 42% in 1998 and 1997. The Company
recorded inventory write-downs of $1.1 million and $0.8 million in 1998 and
1997, respectively, primarily for discontinuing certain underperforming
products. The write-downs in 1998 included certain recorders and plotters in the
Test and Measurement segment and excess inventories in the Imaging and
Inspection segment due to consolidation of facilities. The write-down in 1997
included X-ray inspection systems that the Imaging and Inspection segment
discontinued (Note 4). The inventory write-downs were recorded in cost of
revenues. The gross profit margin remained constant as savings resulting from
restructuring actions were offset by lower selling prices at Kevex Instruments
and Gould due to decreased demand.
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in 1998 from 27% in 1997, primarily due to decreased revenues.
The impact of decreased revenues was offset in part by lower employment and
spending levels at most of the Company's subsidiaries in response to the revenue
decline.
Research and development expenses decreased to $16.3 million in 1998 from
$17.3 million in 1997. Research and development expenses decreased $1.7 million
due to the completion of efforts as a result of new product releases, $0.6
million due to the discontinuation of underperforming products, and $0.2 million
due to a decrease in professional services. These decreases were offset in part
by an increase of $1.5 million due to the inclusion of expenses from NESLAB,
PSI, and SRT for the full period in 1998.
32
<PAGE>
1998 Compared With 1997 (continued)
In addition to the inventory write-downs, the Company recorded
restructuring charges of $4.3 million in 1998 and $1.0 million in 1997 (Note 4).
The 1998 charges consisted of severance costs of $3.7 million and
facility-closing costs of $0.6 million. The 1998 actions arose as a result of
lower sales volume due to a downturn in the semiconductor industry, an economic
crisis in Asia, and lower demand and will be completed in 1999. Of the total
1998 charge for severance of $3.7 million, $1.2 million was recorded by the
Imaging and Inspection segment's Kevex subsidiary, $2.3 million by the Test and
Measurement segment's Gould subsidiary, and $0.2 million by the Temperature
Control segment's NESLAB subsidiary. The severance charge was for terminations
across all functions. Of the total 1998 charge for facility-closing costs of
$0.6 million, $0.4 million was for the write-off of building improvements at
Kevex's southern California facility, which closed in the fourth quarter of 1998
and was consolidated with other facilities in northern California and Wisconsin.
The balance was principally for fixed assets at Gould's U.K. facility, which was
consolidated with another U.K. facility. The Company's 1998 and 1997 actions
generally occurred over a short period of time and, consequently, the Company
does not believe that the restructuring actions materially affected its ongoing
business. The relocation of Kevex's facility was announced in the third quarter
of 1998 and occurred in the following quarter and, as a result, the Company
believes that some disruption to operations occurred, although the effect is not
deemed material. Of the total 1998 charges of $4.3 million, $3.8 million
represents cash costs, of which $1.4 million was paid in 1998 and $1.5 million
was paid in the first six months of 1999. The Company expects that the balance
will be paid over the remainder of 1999. The 1998 restructuring actions are
expected to result in lower annual payroll costs of approximately $10 million.
Interest income increased to $1.3 million in 1998 from $0.7 million in
1997, due to higher average invested balances. Interest expense, related party,
primarily represents interest incurred on the $60 million aggregate amount of
promissory notes issued to Thermo Electron in 1997 in connection with
acquisitions.
During 1998, the Company sold its shares of SteriGenics International Inc.
(SteriGenics) common stock that were received in connection with the 1997 sale
of its Linac business, resulting in a gain of $0.7 million.
The effective tax rate was 50% in 1998, compared with 44% in 1997. The
effective tax rates exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes and nondeductible amortization of cost in
excess of net assets of acquired companies for certain of the Company's
acquisitions. The effective tax rate increased principally due to the larger
relative impact of nondeductible amortization of cost in excess of net assets of
acquired companies.
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, PSI, and SRT, which were acquired during 1997 and the
inclusion of revenues for the full year in 1997 from Kevex Instruments and Kevex
X-Ray. Excluding the impact of acquisitions and the negative effects of foreign
currency translation of $3.5 million, revenues increased 2% in 1997. Revenues
from the Imaging and Inspection segment increased $24.1 million to $91.8 million
in 1997 from $67.7 million in 1996, primarily due to the inclusion of $20.3
million in revenues from acquisitions and higher demand for inspection systems
manufactured by NIS of $6.6 million and X-ray tubes manufactured by Kevex X-Ray
of $1.6 million. These increases were offset in part by a decrease in revenues
due to a decline in demand for confocal laser scanning microscopes at NORAN of
$2.5 million and the negative effects of foreign currency translation of $1.4
million. Test and Measurement segment revenues decreased $4.7 million, or 8%, to
$50.8 million in 1997 from $55.5 million in 1996, primarily due to a decline in
demand and the negative effects of currency translation of $2.1 million. The
Company's Temperature Control segment was created with the 1997 acquisition of
NESLAB.
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-down of $0.8 million in the third quarter of 1997 and a
change in mix from higher-margin manual systems to lower-margin
33
<PAGE>
1997 Compared With 1996 (continued)
automated systems. The inventory write-down included X-ray inspection systems
that the Imaging and Inspection segment discontinued and was recorded in cost of
revenues. 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, which totaled 18%
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 (Note 4).
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 increased to $17.3 million in 1997 from
$12.9 million in 1996, primarily due to the inclusion of $5.8 million of
expenses at acquired businesses, offset in part by overall reduced research and
development spending levels at the Company's existing operations.
The Company recorded restructuring charges of $1.0 million in both 1997
and 1996, primarily related to severance costs incurred by the Test and
Measurement segment's Gould subsidiary (Note 4). These actions consisted of
staff reductions across all functions in response to lower sales volume at this
business. The 1997 actions commenced in June 1997 and were completed in February
1998. The 1996 actions commenced in September 1996 and were completed by April
1997. The restructuring charges in both periods represent cash costs. Of the
1997 charges, $0.7 million was paid in 1997 and the remainder was paid in 1998.
Of the 1996 charges, $14,000 was paid in 1996 and the remainder was paid in
1997. The 1997 and 1996 restructuring actions resulted in lower annual payroll
costs of approximately $2.0 million and $1.5 million, respectively.
Other nonrecurring income in 1997 represents the sale of the Company's
Linac business to SteriGenics 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. Other nonrecurring income in 1996 represents a
settlement with the prior owner of Gould, for costs incurred by Gould in
connection with its Acqulab product line (Note 3).
Interest income decreased to $0.7 million in 1997 from $0.9 million in
1996 due to lower average invested cash balances as a result of cash used to
partially fund the acquisitions of the Kevex businesses, which was paid to
Thermo Instrument 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
(Note 8).
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.
Liquidity and Capital Resources
The Company had negative working capital of $2.3 million at January 2,
1999, compared with working capital of $53.5 million at January 3, 1998.
Included in working capital are cash and cash equivalents of $20.1 million at
January 2, 1999, compared with $22.8 million at January 3, 1998. Also reflected
in working capital are notes payable to Thermo Electron of $60.0 million at
January 2, 1999, compared with $15.0 million at January 3, 1998. 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.
34
<PAGE>
Liquidity and Capital Resources (continued)
Net cash provided by operating activities was $21.1 million in 1998. A
decrease in accounts receivable provided $3.6 million of cash and a decrease in
accounts payable used $2.0 million of cash, primarily due to the decline in
revenues and corresponding decline in purchases as result of the downturn in the
semiconductor industry. A decrease in inventories, primarily at the Test and
Measurement segment, provided $3.3 million due to lower sales volume. Other
current liabilities provided $3.8 million, primarily due to restructuring costs
that were not paid by the end of 1998. Increases in amounts due to affiliates
provided $3.0 million as a result of the timing of payments at year-end. As of
January 2, 1999, the Company had $2.5 million of accrued restructuring costs, of
which $1.5 million was paid in the first six months of 1999. The Company expects
that the balance will be paid over the remainder of 1999.
The Company's investing activities used $4.7 million of cash in 1998. The
Company used $7.9 million, net of cash acquired, for the acquisition of
TopoMetrix and received $0.8 million of cash from the sale of a product line
(Note 3) and $2.1 million from the sale of property, plant, and equipment,
primarily from the sale of a building by Gould. During 1998, the Company
expended $2.2 million for the purchase of property, plant, and equipment. The
Company sold its shares of SteriGenics common stock for $2.8 million during 1998
(Note 3). The Company plans to expend approximately $4 million for the purchase
of property, plant, and equipment in 1999.
During 1998, the Company's financing activities consisted primarily of the
repayment of $15.0 million of long-term obligations to Thermo Electron. In March
1999, the Company paid $10.0 million of obligations to Thermo Electron.
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 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.
Market Risk
The Company is exposed to market risk from changes in foreign currency
exchange rates and interest rates, which could affect its future results of
operations and financial condition. The Company manages its exposure to these
risks through its regular operating and financing activities.
Foreign Currency Exchange Rates
The Company generally views its investment in foreign subsidiaries with a
functional currency other than the Company's reporting currency as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in British pounds sterling,
Japanese yen, French francs, Dutch guilders, and German marks. The effect of a
change in foreign exchange rates on the Company's net investment in foreign
subsidiaries is recorded in the "Accumulated Other Comprehensive Items"
component of shareholders' investment. A 10% decrease in year-end 1998
functional currencies, relative to the U.S. dollar, would result in a $875,000
reduction of shareholders' investment.
35
<PAGE>
Market Risk (continued)
Interest Rates
The Company's cash and cash equivalents and certain long-term obligations
are sensitive to changes in interest rates. Interest rate changes would result
in a change in interest income and expense due to the difference between the
current interest rates on these financial instruments and the variable rate that
these financial instruments may adjust to in the future.
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 to determine their year 2000 compliance status; and (iv)
developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and non-information technology systems
will be ready for the year 2000. In the first phase of the program, the Company
tested and evaluated critical information technology systems and non-information
technology systems for year 2000 compliance, which efforts included testing and
evaluating its significant computer systems, software applications, and related
equipment for year 2000 compliance, and testing the year 2000 readiness of its
manufacturing, utility, and telecommunications systems at its critical
facilities. In phase two of its program, any material noncompliant information
technology systems or non-information technology systems that were identified
during phase one were prioritized and remediated. In many cases, upgrades or
replacements were made in the ordinary course of business, without accelerating
previously scheduled upgrades or replacements. The Company believes that all of
its material information technology systems and critical non-information
technology systems are currently year 2000 compliant.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third-party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 2000 problems with its current products. The Company
believes that certain of its older products, which it no longer manufactures or
sells, may not be year 2000 compliant. The Company is continuing to test and
evaluate such products. The Company is focusing its efforts on products that are
still under warranty and/or are early in their expected life. The Company is
offering upgrades and/or identifying potential solutions where reasonably
practicable.
The Company has also identified and assessed the year 2000 readiness of
key suppliers and vendors that are believed to be significant to the Company's
business operations. As part of this effort, the Company developed and
distributed questionnaires relating to year 2000 compliance to its significant
suppliers and vendors. The Company followed up with its significant suppliers
and vendors that did not respond to the Company's questionnaires. The Company
has completed the majority of its assessment of third party risk.
36
<PAGE>
Year 2000 (continued)
Contingency Plan
The Company has developed a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan includes identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
are, and will continue to be, funded from working capital. All internal costs
and related external costs, other than capital additions, related to year 2000
remediation have been and will continue to be expensed as incurred. The Company
does not track the internal costs incurred for its year 2000 compliance project.
Such costs are principally the related payroll costs for its information systems
group.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's material
suppliers or vendors experience business disruptions due to the year 2000 issue
and 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
compliant, it will seek to identify and secure other suppliers or vendors as
part of its contingency plan.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. Despite its efforts to ensure that its
material current products are year 2000 compliant, the Company may see an
increase in warranty and other claims, especially those related to Company
products that incorporate, or operate using, third-party software or hardware.
In addition, certain of the Company's older products, which it no longer
manufactures or sells, may not be year 2000 compliant, which may expose the
Company to claims. If any of the Company's material suppliers or vendors
experience business disruptions due to year 2000 issues, the Company might also
be materially adversely affected. There is expected to be a significant amount
of litigation relating to the year 2000 issue and there can be no assurance that
the Company will not incur material costs in defending or bringing lawsuits. In
addition, if any year 2000 issues are identified, there can be no assurance that
the Company will be able to retain qualified personnel to remedy such issues.
Any unexpected costs or delays arising from the year 2000 issue could have a
significant adverse impact on the Company's business, operations, and financial
condition in amounts that cannot be reasonably estimated at this time.
37
<PAGE>
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in the remainder of 1999 and beyond to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company.
Dependence on Semiconductor Industry; Industry Volatility. A significant
portion of the Company's total revenues, primarily in its Imaging and Inspection
and Temperature Control businesses, 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 slowdowns in sales
of high-end personal computers. Many semiconductor manufacturers delayed
construction or expansion of their production facilities in response to the
foregoing conditions. The 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 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 1998, 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 to the Far East represented 15% of total revenues in 1998.
Exports to Japan represented 7% of total revenues and exports to Taiwan, South
Korea, and Singapore, collectively, represented 3% 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.
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.
38
<PAGE>
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.
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 has received correspondence alleging that
certain of its products infringe patents owned by third parties, though no
lawsuits have been filed. 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 United States 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 that 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.
Risks Associated with Cash Management Arrangement with Thermo Electron.
The Company participates in a cash management arrangement with Thermo Electron.
Under this cash management arrangement, the Company lends its excess cash to
Thermo Electron on an unsecured basis. The Company has the contractual right to
withdraw its funds invested in the cash management arrangement upon 30 days'
prior notice. Thermo Electron is contractually required to maintain cash, cash
equivalents, and/or immediately available bank lines of credit equal to at least
50% of all funds invested under the cash management arrangement by all Thermo
Electron subsidiaries other than wholly owned subsidiaries. The funds are held
on an unsecured basis and therefore are subject to the credit risk of Thermo
39
<PAGE>
Electron. The Company's ability to receive its cash upon notice of withdrawal
could be adversely affected if participants in the cash management arrangement
demand withdrawal of their funds in an aggregate amount in excess of the 50%
reserve required to be maintained by Thermo Electron. In the event of a
bankruptcy of Thermo Electron, the Company would be treated as an unsecured
creditor and its right to receive funds from the bankruptcy estate would be
subordinated to secured creditors and would be treated on a pari passu basis
with all other unsecured creditors. Further, all cash withdrawn by the Company
from the cash management arrangement within one year before the bankruptcy would
be subject to rescission. The inability of Thermo Electron to return the
Company's cash on a timely basis or at all could have a material adverse effect
on the Company's results of operations and financial position.
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 problems will
not have a material adverse impact on the Company's business, operations, or
financial condition. Despite its efforts to ensure that its material current
products are year 2000 compliant, the Company may see an increase in warranty
and other claims, especially those related to Company products that incorporate,
or operate using, third-party software or hardware. In addition, certain of the
Company's older products, which it no longer manufactures or sells, may not be
year 2000 compliant, which may expose the Company to claims. If any of the
Company's material suppliers or vendors experience business disruptions due to
year 2000 issues, the Company might also be materially adversely affected. There
is expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
40
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Selected Financial Information
(In thousands except per share amounts) 1998 (a) 1997 (b) 1996 (c) 1995 (d) 1994
- -------------------------------------------------- ---------- ----------- ---------- ---------- ----------
Statement of Income Data
Revenues $191,017 $ 198,900 $123,199 $ 91,714 $ 42,142
Net Income 1,825 5,848 6,617 4,594 2,368
Earnings per Share:
Basic .12 .40 .53 .41 .25
Diluted .12 .39 .53 .40 .25
Balance Sheet Data
Working Capital $ (2,252) $ 53,540 $ 44,683 $ 35,961 $ 27,377
Total Assets 249,882 253,397 152,485 122,917 78,701
Long-term Obligations 7,300 67,300 22,300 7,300 7,300
Shareholders' Investment 130,835 128,338 89,621 82,525 53,313
(a) Reflects the October 1998 acquisition of TopoMetrix and a $5.4 million
pretax charge for restructuring and related costs.
(b) Reflects the March 1997 acquisitions of NESLAB and PSI.
(c) Reflects the March 1996 acquisition of the Kevex businesses.
(d) Reflects the May 1995 acquisition of GIS and the net proceeds of the
Company's initial public offering and private placement of common stock.
41
<PAGE>
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol THS. The following table sets forth the high and low sale prices for
1998 and 1997, as reported in the consolidated transaction reporting system.
</TABLE>
<TABLE>
<CAPTION>
1998 1997
----------------- --------------
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
First $10 3/4 $ 8 5/8 $15 1/8 $11 3/4
Second 12 3/4 8 5/8 14 1/2 11 3/8
Third 12 3/8 9 1/4 13 5/8 9 3/4
Fourth 11 3/4 8 1/4 13 5/8 9
As of January 29, 1999, the Company had 204 holders of record of its
common stock. This does not include holdings in street or nominee names. The
closing market price on the American Stock Exchange for the Company's common
stock on January 29, 1999, was $10 5/8 per share.
Shareholder Services
Shareholders of ThermoSpectra Corporation who desire information about the
Company are invited to contact the Investor Relations Department, ThermoSpectra
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046,
(781) 622-1111. A mailing list is maintained to enable shareholders whose stock
is held in street name, and other interested individuals, to receive quarterly
reports, annual reports, and press releases as quickly as possible. Distribution
of printed quarterly reports is limited to the second quarter only. All material
is available from Thermo Electron's Internet site
(http://www.thermo.com/subsid/ths1.html).
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent and
maintains shareholder activity records. The agent will respond to questions on
issuance of stock certificates, change of ownership, lost stock certificates,
and change of address. For these and similar matters, please direct inquiries
to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Board of Directors and will depend upon, among other factors,
the Company's earnings, capital requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended January
2, 1999, as amended, as filed with the Securities and Exchange Commission, may
be obtained at no charge by writing to the Investor Relations Department,
ThermoSpectra Corporation, 81 Wyman Street, P.O. Box 9046, Waltham,
Massachusetts 02454-9046.
Annual Meeting
The annual meeting of shareholders was held on Thursday, May 27, 1999, at
11 a.m. at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.
42
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
by reference of our reports dated February 16, 1999 (except with respect to
certain matters discussed in Note 16, as to which the date is June 1, 1999),
included in or incorporated by reference into ThermoSpectra Corporation's Annual
Report on Form 10-K for the year ended January 2, 1999, into the Company's
previously filed Registration Statement No. 33-80759 on Form S-8, Registration
Statement No. 333-24649 on Form S-8, and Registration Statement No. 333-66391 on
Form S-8.
Arthur Andersen LLP
Boston, Massachusetts
October 6, 1999
