SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended October 3, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-8002
THERMO ELECTRON CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2209186
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Class Outstanding at October 30, 1998
----------------------------- -------------------------------
Common Stock, $1.00 par value 158,834,186
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
October 3, January 3,
(In thousands) 1998 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 416,084 $ 593,580
Short-term available-for-sale investments
at quoted market value (amortized cost
of $1,132,076 and $925,855) 1,135,876 929,118
Accounts receivable, less allowances of
$55,315 and $55,698 833,948 797,399
Unbilled contract costs and fees 81,529 69,375
Inventories:
Raw materials and supplies 273,790 260,458
Work in process 133,720 108,327
Finished goods 211,805 174,804
Prepaid income taxes 134,259 118,182
Prepaid expenses 48,264 42,955
---------- ----------
3,269,275 3,094,198
---------- ----------
Property, Plant, and Equipment, at Cost 1,268,395 1,159,913
Less: Accumulated depreciation and
amortization 443,375 370,867
---------- ----------
825,020 789,046
---------- ----------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $89,498 and $49,581) 96,248 63,306
---------- ----------
Other Assets 173,515 157,108
---------- ----------
Cost in Excess of Net Assets of Acquired
Companies (Note 6) 1,880,069 1,692,211
---------- ----------
$6,244,127 $5,795,869
========== ==========
2
<PAGE>
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 3, January 3,
(In thousands except share amounts) 1998 1998
- --------------------------------------------------------------------------
Current Liabilities:
Notes payable and current maturities of
long-term obligations $ 122,252 $ 176,912
Accounts payable 250,612 251,677
Accrued payroll and employee benefits 144,045 140,698
Accrued income taxes 99,961 57,923
Accrued installation and warranty costs 74,423 72,710
Deferred revenue 60,495 54,999
Other accrued expenses (Notes 6 and 8) 370,689 337,316
---------- ----------
1,122,477 1,092,235
---------- ----------
Deferred Income Taxes and Other Deferred Items 165,129 149,884
---------- ----------
Long-term Obligations:
Senior convertible obligations 187,042 187,824
Subordinated convertible obligations (Note 3) 1,642,114 1,473,015
Nonrecourse tax-exempt obligations 33,700 37,600
Other 31,687 44,468
---------- ----------
1,894,543 1,742,907
---------- ----------
Minority Interest 746,650 719,622
---------- ----------
Common Stock of Subsidiaries Subject to
Redemption ($95,262 redemption value) 94,054 93,312
---------- ----------
Shareholders' Investment (Note 7):
Preferred stock, $100 par value, 50,000
shares authorized; none issued
Common stock, $1 par value, 350,000,000
shares authorized; 166,970,711 and
159,206,337 shares issued 166,971 159,206
Capital in excess of par value 1,027,857 843,709
Retained earnings 1,179,500 1,034,640
Treasury stock at cost, 8,139,845 and
95,684 shares (146,032) (3,839)
Accumulated other comprehensive items (Note 4) (7,022) (35,807)
---------- ----------
2,221,274 1,997,909
---------- ----------
$6,244,127 $5,795,869
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues:
Product and service revenues $933,028 $869,424
Research and development contract revenues 44,141 40,426
-------- --------
977,169 909,850
-------- --------
Costs and Operating Expenses:
Cost of product and service revenues 554,474 500,739
Expenses for research and development (a) 93,177 83,974
Selling, general, and administrative expenses 234,246 205,884
Restructuring and other nonrecurring costs,
net (Note 8) 41,620 2,517
-------- --------
923,517 793,114
-------- --------
Operating Income 53,652 116,736
Gain on Issuance of Stock by Subsidiaries
(Note 2) (2,431) 18,587
Other Expense, Net (Note 3) (119) (4,763)
-------- --------
Income Before Income Taxes, Minority Interest,
and Extraordinary Items 51,102 130,560
Provision for Income Taxes 38,182 47,950
Minority Interest (Income) Expense (2,731) 20,751
-------- --------
Income Before Extraordinary Items 15,651 61,859
Extraordinary Items, Net of Provision for Income
Taxes and Minority Interest of $3,108 (Note 3) 1,931 -
-------- --------
Net Income $ 17,582 $ 61,859
======== ========
Earnings per Share (Notes 3 and 5):
Basic $ .11 $ .41
======== ========
Diluted $ .10 $ .36
======== ========
Weighted Average Shares (Notes 3 and 5):
Basic 163,362 150,345
======== ========
Diluted 163,936 176,191
======== ========
(a) Includes costs of:
Research and development contracts $ 39,280 $ 35,070
Internally funded research and development 53,897 48,904
-------- --------
$ 93,177 $ 83,974
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- ---------------------------------------------------------------------------
Revenues:
Product and service revenues $2,733,993 $2,426,797
Research and development contract revenues 135,238 121,574
---------- ----------
2,869,231 2,548,371
---------- ----------
Costs and Operating Expenses:
Cost of product and service revenues 1,608,519 1,413,400
Expenses for research and development (a) 278,147 242,765
Selling, general, and administrative expenses 685,300 605,611
Restructuring and other nonrecurring costs,
net (Note 8) 45,732 7,468
---------- ----------
2,617,698 2,269,244
Operating Income 251,533 279,127
Gain on Issuance of Stock by Subsidiaries
(Note 2) 51,775 67,467
Other Income (Expense), Net (Note 3) 4,839 (5,489)
---------- ----------
Income Before Income Taxes, Minority Interest,
and Extraordinary Items 308,147 341,105
Provision for Income Taxes 130,069 118,373
Minority Interest Expense 38,035 52,657
---------- ----------
Income Before Extraordinary Items 140,043 170,075
Extraordinary Items, Net of Provision for Income
Taxes and Minority Interest of $7,952 (Note 3) 4,817 -
---------- ----------
Net Income $ 144,860 $ 170,075
========== ==========
Earnings per Share (Notes 3 and 5):
Basic $ .89 $ 1.13
========== ==========
Diluted $ .84 $ 1.01
========== ==========
Weighted Average Shares (Notes 3 and 5):
Basic 162,887 150,196
========== ==========
Diluted 179,774 175,976
========== ==========
(a) Includes costs of:
Research and development contracts $ 118,641 $ 106,027
Internally funded research and development 159,506 136,738
---------- ----------
$ 278,147 $ 242,765
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- -------------------------------------------------------------------------
Operating Activities:
Net income $ 144,860 $ 170,075
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 119,755 99,223
Noncash restructuring and other
nonrecurring costs, net (Note 8) 14,780 7,468
Provision for losses on accounts
receivable 5,473 6,974
Change in deferred income taxes (3,746) 2,296
Minority interest expense 38,035 52,657
Gain on issuance of stock by
subsidiaries (Note 2) (51,775) (67,467)
Gain on sale of investments, net (5,125) (1,310)
Extraordinary items, net of minority
interest expense (Note 3) (9,733) -
Other noncash items 27,407 7,036
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable 15,274 (76,165)
Inventories (36,465) (20,543)
Other current assets (19,603) (9,838)
Accounts payable (28,968) (13,896)
Other current liabilities 8,691 (14,043)
----------- -----------
Net cash provided by operating activities 218,860 142,467
----------- -----------
Investing Activities:
Acquisitions, net of cash acquired
(Note 6) (177,678) (636,858)
Purchases of available-for-sale
investments (1,793,500) (717,850)
Proceeds from sale and maturities of
available-for-sale investments 1,549,940 1,147,287
Purchases of property, plant, and
equipment (108,785) (78,319)
Proceeds from sale of property, plant,
and equipment 12,283 11,276
Increase in other assets (23,153) (6,329)
Other 14,559 13,455
----------- -----------
Net cash used in investing activities $ (526,334) $ (267,338)
----------- -----------
6
<PAGE>
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- -------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of long-term
obligations $ 244,649 $ 378,331
Repayment of long-term obligations (55,031) (45,858)
Net proceeds from issuance of Company and
subsidiary common stock (Note 7) 475,449 134,614
Purchases of Company and subsidiary common
stock and subordinated convertible
debentures (508,698) (246,185)
Decrease in short-term notes payable (28,404) (4,385)
Other (3,412) (3,876)
----------- -----------
Net cash provided by financing activities 124,553 212,641
----------- -----------
Exchange Rate Effect on Cash 5,425 (8,887)
----------- -----------
Increase (Decrease) in Cash and Cash
Equivalents (177,496) 78,883
Cash and Cash Equivalents at Beginning of
Period 593,580 414,404
----------- -----------
Cash and Cash Equivalents at End of Period $ 416,084 $ 493,287
=========== ===========
Noncash activities:
Conversions of subsidiary convertible
obligations $ 18,280 $ 65,239
=========== ===========
Fair value of assets of acquired companies $ 290,302 $ 828,425
Cash paid for acquired companies (190,759) (691,288)
Issuance of subsidiary common stock and
stock options for acquired companies (11,450) (4,093)
----------- -----------
Liabilities assumed of acquired
companies $ 88,093 $ 133,044
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
THERMO ELECTRON CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Electron Corporation (the Company) without audit and, in the opinion
of management, reflect all adjustments of a normal recurring nature necessary
for a fair statement of the financial position at October 3, 1998, the results
of operations for the three- and nine-month periods ended October 3, 1998, and
September 27, 1997, and the cash flows for the nine-month periods ended October
3, 1998, and September 27, 1997. Certain prior period amounts have been
reclassified to conform to the presentation in the current financial statements.
Interim results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of January 3, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K, as amended, for the fiscal year ended
January 3, 1998, filed with the Securities and Exchange Commission.
2. Transactions in Stock of Subsidiaries
Gain on issuance of stock by subsidiaries in the accompanying statement of
income for the nine-month period ended October 3, 1998, resulted primarily from
the following:
Public offering of 5,175,000 shares of Trex Medical Corporation common stock
at $13.75 per share for net proceeds of $66.9 million resulted in a gain of
$23.8 million that was recorded by ThermoTrex Corporation.
Private placement of 781,921 shares of Thermo Trilogy Corporation common
stock at $8.25 per share for net proceeds of $6.0 million resulted in a gain
of $2.2 million that was recorded by Thermo Ecotek Corporation.
Initial public offering of 3,300,000 shares of ONIX Systems Inc. common
stock at $14.50 per share for net proceeds of $43.2 million resulted in a
gain of $10.0 million that was recorded by Thermo Instrument Systems Inc.
Private placement of 1,543,000 shares of Thermo Coleman Corporation common
stock at $10.00 per share for net proceeds of $14.3 million resulted in a
gain of $7.2 million.
8
<PAGE>
2. Transactions in Stock of Subsidiaries (continued)
Public offering of 3,000,000 shares of Thermo BioAnalysis Corporation common
stock at $18.125 per share for net proceeds of $51.5 million resulted in a
gain of $8.3 million that was recorded by Thermo Instrument in the second
quarter of 1998. In the third quarter of 1998, Thermo BioAnalysis
repurchased 550,000 shares of its common stock, which resulted in a gain
reversal of $2.4 million that was recorded by Thermo Instrument.
Conversion of $1.8 million of Thermo Optek Corporation 5% subordinated
convertible debentures, convertible at $13.94 per share, into 127,646 shares
of Thermo Optek common stock resulted in a gain of $0.9 million that was
recorded by Thermo Instrument.
Conversion of $4.0 million of ThermoQuest Corporation 5% subordinated
convertible debentures, convertible at $16.50 per share, into 239,393 shares
of ThermoQuest common stock resulted in a gain of $1.8 million that was
recorded by Thermo Instrument.
3. Other Income (Expense), Net and Extraordinary Items
Other Income (Expense), Net
The components of other income (expense), net in the accompanying statement
of income are as follows:
Three Months Ended Nine Months Ended
-------------------- --------------------
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
(In thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Interest Income $ 25,253 $ 20,332 $ 77,482 $ 63,451
Interest Expense (25,110) (24,896) (77,077) (67,794)
Equity in Loss of
Unconsolidated
Subsidiaries (162) (475) (636) (722)
Gain (Loss) on Sale of
Investments, Net (127) 714 5,125 1,310
Other 27 (438) (55) (1,734)
-------- -------- -------- --------
$ (119) $ (4,763) $ 4,839 $ (5,489)
======== ======== ======== ========
Extraordinary Items
During the third quarter of 1998, ThermoTrex repurchased $35.6 million
principal amount of its 3 1/4% subordinated convertible debentures for $30.5
million in cash, which resulted in an extraordinary gain recorded by ThermoTrex.
In addition, in the third quarter of 1998, a majority-owned subsidiary of Thermo
Instrument repurchased $5.0 million principal amount of its 5% subordinated
convertible debentures for
9
<PAGE>
3. Other Income (Expense), Net and Extraordinary Items (continued)
$4.6 million in cash, which resulted in an extraordinary gain recorded by Thermo
Instrument. The combined extraordinary gain resulting from these transactions
was $1.9 million, net of taxes and minority interest of $3.1 million.
In June 1998, Thermedics Inc. offered holders of its noninterest-bearing
subordinated convertible debentures due 2003, convertible at $31.125 per share,
the opportunity to exchange such debentures for newly issued 2 7/8% subordinated
convertible debentures due 2003, convertible at $14.928 per share. Holders of
$21.7 million principal amount of outstanding debentures exchanged such
debentures for $15.9 million principal amount of newly issued debentures.
Thermedics recognized an extraordinary gain on this transaction in accordance
with the provisions of Emerging Issues Task Force Pronouncement (EITF) No.
96-19. In addition, earlier in the second quarter of 1998, Thermedics
repurchased $2.7 million principal amount of its noninterest-bearing
subordinated convertible debentures for $2.1 million in cash, which also
resulted in an extraordinary gain recorded by Thermedics. The combined
extraordinary gain resulting from these transactions was $2.2 million, net of
taxes and minority interest of $3.6 million.
During the first quarter of 1998, Thermedics and one of its majority-owned
subsidiaries repurchased $11.5 million principal amount of their subordinated
convertible debentures for $9.3 million in cash, which resulted in an
extraordinary gain of $0.7 million, net of taxes and minority interest of $1.3
million.
The extraordinary gains recorded by the Company increased basic and diluted
earnings per share by $.01 in the third quarter of 1998 and $.03 in the first
nine months of 1998.
4. Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards 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," 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 on
available-for-sale investments. During the third quarter of 1998 and 1997, the
Company's comprehensive income totaled $44.9 million and $52.4 million,
respectively. During the first nine months of 1998 and 1997, the Company's
comprehensive income totaled $165.0 million and $141.5 million, respectively.
10
<PAGE>
5. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Nine Months Ended
------------------ ------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Basic
Net Income $ 17,582 $ 61,859 $144,860 $170,075
-------- -------- -------- --------
Weighted Average Shares 163,362 150,345 162,887 150,196
-------- -------- -------- --------
Basic Earnings per Share $ .11 $ .41 $ .89 $ 1.13
======== ======== ======== ========
Diluted
Net Income $ 17,582 $ 61,859 $144,860 $170,075
Effect of:
Convertible debentures - 4,946 11,002 14,864
Majority-owned subsidiaries'
dilutive securities (999) (3,407) (5,280) (6,820)
-------- -------- -------- --------
Income Available to Common
Shareholders, as Adjusted $ 16,583 $ 63,398 $150,582 $178,119
-------- -------- -------- --------
Weighted Average Shares 163,362 150,345 162,887 150,196
Effect of:
Convertible debentures - 23,736 15,476 23,792
Stock options 574 2,110 1,411 1,988
-------- -------- -------- --------
Weighted Average Shares,
as Adjusted 163,936 176,191 179,774 175,976
-------- -------- -------- --------
Diluted Earnings per Share $ .10 $ .36 $ .84 $ 1.01
======== ======== ======== ========
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 October 3, 1998, there were 4,515,000 such
options outstanding, with exercise prices ranging from $21.45 to $43.46 per
share.
In addition, the computation of diluted earnings per share for the
three-month period ended October 3, 1998, excludes the effect of assuming the
conversion of the Company's $585.0 million principal amount 4 1/4% subordinated
convertible debentures, convertible at $37.80 per share, because the effect
would be antidilutive.
6. Acquisitions
The Company and its majority-owned subsidiaries made several acquisitions
during the first nine months of 1998 for $177.7 million in cash, net of cash
acquired, and the issuance of subsidiary common stock
11
<PAGE>
6. Acquisitions (continued)
valued at $11.5 million, subject to post-closing adjustments. These acquisitions
have been accounted for using the purchase method of accounting, and their
results have been included in the accompanying financial statements from their
respective dates of acquisition. The aggregate cost of these acquisitions
exceeded the estimated fair value of the acquired net assets by $140.4 million,
which is being amortized over periods not exceeding 40 years. Allocation of the
purchase price for these acquisitions was based on estimates of the fair value
of the net assets acquired and is subject to adjustment upon finalization of the
purchase price allocations. The Company has gathered no information that
indicates the final allocations will differ materially from the preliminary
estimates. Pro forma results have not been presented as the results of the
acquired businesses were not material to the Company's results of operations.
During 1996, Thermo Instrument undertook a restructuring of a substantial
portion of the businesses constituting the Scientific Instruments Division of
Fisons plc, acquired in March 1996. In March 1997, Thermo Instrument finalized
its plan for restructuring the acquired businesses. At January 3, 1998, the
remaining reserve for these restructuring activities totaled $11.1 million.
During the first nine months of 1998, Thermo Instrument expended $1.5 million
for restructuring costs, primarily for abandoned-facility and severance
payments. At October 3, 1998, the remaining reserve for restructuring these
businesses was $10.0 million, as adjusted for the impact of currency
translation, which is included in other accrued expenses in the accompanying
balance sheet and is primarily for ongoing payments for abandoned-facilities
and, to a lesser extent, severance.
7. Sale of Common Stock
In April 1998, the Company sold 7,475,000 shares of its common stock at
$40.625 per share for net proceeds of $290.2 million.
8. Restructuring and Other Nonrecurring Costs
During the third quarter of 1998, the Company recorded restructuring and
related costs of $57.1 million as described below, including restructuring costs
of $41.6 million, inventory write-downs of $8.6 million, and a tax asset
write-off of $6.9 million. The inventory write-downs are included in cost of
revenues and the tax asset write-off is included in the provision for income
taxes in the accompanying statement of income. In addition, during the second
quarter of 1998, the Company recorded $4.1 million of restructuring and other
nonrecurring costs.
Thermo Instrument Systems Inc.
Thermo Instrument recorded restructuring and related costs of $30.5 million
during the third quarter of 1998. Restructuring costs of $21.9 million consist
of $17.2 million related to severance costs for approximately 760 employees
across all functions, $4.3 million related primarily to facility-closing costs,
and $0.4 million related to the loss
12
<PAGE>
8. Restructuring and Other Nonrecurring Costs (continued)
on the sale of a division. The charge for facility-closing costs includes $2.2
million for write-downs of related fixed assets. In addition, Thermo Instrument
recorded $8.6 million of inventory write-downs, included in cost of revenues in
the accompanying financial statements, related to discontinuing certain product
lines and increased excess and obsolescence reserves associated with lower
product demand.
In connection with these actions, Thermo Instrument expects to incur
additional costs in the fourth quarter of 1998 and the first quarter of 1999
totaling $2.2 million for costs not permitted as charges in the third quarter of
1998, pursuant to EITF No. 94-3. These costs primarily include costs to move
inventories, and certain employee relocation and related costs. Thermo
Instrument expects to complete the implementation of its restructuring plans in
the first half of 1999. As of October 3, 1998, Thermo Instrument had terminated
274 employees and had expended $1.7 million of the established reserves.
In addition, five former employees of Thermo Instrument's Epsilon
Industrial, Inc. subsidiary had sought damages in an arbitration proceeding for
alleged breaches of agreements entered into with such employees prior to
Epsilon's acquisition by Thermo Instrument. The arbitrators rendered a decision
with respect to such claims during the second quarter of 1998, and Thermo
Instrument recorded $1.4 million of nonrecurring costs related to the resolution
of this matter at that time.
ThermoTrex Corporation
ThermoLase Corporation, a subsidiary of ThermoTrex, recorded restructuring
and related costs of $15.1 million during the third quarter of 1998.
Restructuring costs of $8.2 million recorded during the third quarter of 1998
consist of $4.6 million related to the closure of three Spa Thira locations,
including $2.4 million for the write-off of leasehold improvements and related
spa assets, and $2.2 million primarily for abandoned-facility payments. In
addition, in connection with the closure of another spa which was operated under
a joint venture agreement, ThermoLase recorded costs of $3.6 million, primarily
to liquidate the joint venture and to write-off its remaining investment.
ThermoLase also recorded a charge of $6.9 million to write off certain tax
assets, primarily loss carryforwards due to uncertainty concerning their
realization as a result of ThermoLase's recent operating results. This amount is
included in provision for income taxes in the accompanying financial statements.
During the second quarter of 1998, ThermoLase recorded restructuring costs of
$1.9 million related to certain actions, including the relocation of its
headquarters from California to Texas. This amount included $1.2 million for
severance for 40 terminated employees and $0.8 million for the write-off of
fixed assets no longer of use.
13
<PAGE>
8. Restructuring and Other Nonrecurring Costs (continued)
Thermo TerraTech Inc.
Thermo TerraTech recorded restructuring costs of $10.2 million during the
third quarter of 1998. Of these restructuring costs, $9.2 million was recorded
by ThermoRetec Corporation (formerly Thermo Remediation Inc.), a majority-owned
subsidiary of Thermo TerraTech, in connection with the closure of two
soil-recycling facilities. The costs included a write-down of fixed assets to
their estimated disposal value and a write-off of intangible assets, including
cost in excess of net assets of acquired companies, as well as other closure
costs. In addition, Thermo TerraTech recorded $1.0 million of restructuring
costs for abandoned-facility payments relating to the consolidation of the
facilities of another business.
Other
Thermo Power Corporation recorded restructuring and other nonrecurring costs
of $1.0 million during the third quarter of 1998 relating to a loss on
discontinuance of its engines business. The Company's wholly owned SensorMedics
Corporation subsidiary recorded restructuring costs of $0.7 million during the
second quarter of 1998, primarily for severance, in connection with a
reorganization of a subsidiary in the Netherlands. In addition, the Company
recorded additional Biomedical Products segment restructuring costs of $0.3
million during the third quarter of 1998.
The remaining liability for severance and facility-closing costs of $26.4
million is included in other accrued expenses in the accompanying balance sheet
at October 3, 1998.
9. Proposed Reorganization
On August 12, 1998, the Company announced a proposed reorganization
involving the Company and certain of its subsidiaries. The goals of the proposed
reorganization include (1) consolidating and strategically realigning certain
businesses to enhance their competitive market positions and improve management
coordination and (2) increasing liquidity in the public markets by providing
larger market floats for the Company's publicly traded subsidiaries. If
completed as proposed, the reorganization would reduce the number of the
Company's majority-owned public subsidiaries from 23 to 15. It may take up to
two years to complete all aspects of the plan. Each component of the
reorganization is subject to numerous conditions, including the following (not
all of which are applicable to each component): establishment of prices and/or
exchange ratios; confirmation of anticipated tax consequences; approval by the
boards of directors (including the independent directors) of each of the
affected majority-owned subsidiaries; negotiation and execution of definitive
purchase and sale or merger agreements; clearance, where necessary, by the
Securities and Exchange Commission of any necessary documents regarding the
proposed transactions; and, where appropriate, fairness opinions from one or
more investment banking firms on certain financial aspects of the transactions.
14
<PAGE>
9. Proposed Reorganization (continued)
The proposed reorganization can be summarized as follows. One or more of
these transactions may not occur if the applicable conditions described above
are not satisfied.
Reorganization of Biomedical Businesses
The Company may transfer its wholly owned Thermo Biomedical group of
subsidiaries to Thermedics. Thermedics is a majority-owned, publicly traded
subsidiary of the Company. The Company would transfer the Thermo Biomedical
subsidiaries to Thermedics in exchange for newly issued shares of common stock
of Thermedics.
Realignment of Instrument Companies
Thermedics may transfer to the Company its equity interests in Thermo
Sentron Inc., Thermedics Detection Inc., and Thermo Voltek Corp., each presently
majority-owned, publicly traded subsidiaries of Thermedics, in exchange for a
portion of the shares of Thermedics held by the Company. The Company would then
transfer its equity interests in Thermo Sentron and Thermedics Detection to
Thermo Instrument in exchange for cash. Thermo Instrument is a majority-owned,
publicly traded subsidiary of the Company.
In addition, Metrika Systems Corporation and ONIX Systems, majority-owned,
publicly traded subsidiaries of Thermo Instrument, and Thermo Sentron may merge
to form one majority-owned, publicly traded subsidiary of Thermo Instrument.
Shareholders of Metrika Systems, ONIX Systems, and Thermo Sentron would receive
shares of common stock of the combined entity in exchange for their shares of
common stock of Metrika Systems, ONIX Systems, and Thermo Sentron, respectively.
ThermoSpectra Corporation, a majority-owned, publicly traded subsidiary of
Thermo Instrument, and Thermedics Detection, may be taken private and become
wholly owned subsidiaries of Thermo Instrument. The public shareholders of
ThermoSpectra and Thermedics Detection would receive cash or newly issued shares
of common stock of Thermo Instrument in exchange for their shares of common
stock of ThermoSpectra and Thermedics Detection, respectively.
Consolidation of Industrial Outsourcing Companies
The Randers Group Incorporated and ThermoRetec, both majority-owned,
publicly traded subsidiaries of Thermo TerraTech, a majority-owned, publicly
traded subsidiary of the Company, along with Thermo EuroTech N.V., a
majority-owned, private subsidiary of Thermo TerraTech, may merge into Thermo
TerraTech. Shareholders of each of Randers, ThermoRetec, and Thermo EuroTech
would receive shares of common stock of Thermo TerraTech in exchange for their
shares of common stock of Randers, ThermoRetec, and Thermo EuroTech,
respectively.
15
<PAGE>
9. Proposed Reorganization (continued)
Other Reorganizations
Thermo Coleman, a majority-owned, private subsidiary of the Company, may
merge into ThermoTrex, a majority-owned, publicly traded subsidiary of the
Company. Shareholders of Thermo Coleman, including the Company, would receive
newly issued shares of common stock of ThermoTrex in exchange for their shares
of common stock of Thermo Coleman.
Thermo Power, a majority-owned, publicly traded subsidiary of the Company,
may be taken private and become a wholly owned subsidiary of the Company. The
public shareholders of Thermo Power would receive cash or newly issued shares of
common stock of the Company in exchange for their shares of common stock of
Thermo Power.
10. Subsequent Events
Sale of Notes
In October 1998, the Company issued and sold $150.0 million principal amount
of 7 5/8% notes due 2008. Proceeds of $138.0 million were net of $10.4 million
incurred on treasury rate lock agreements entered into by the Company to hedge
the interest rate on the notes and other associated costs. As a result of the
rate lock agreements and associated costs, the effective interest rate on the
notes is 8.86%.
Equity Transactions
In October 1998, in a series of transactions with an institutional
counterparty, the Company sold put options for 3,334,000 shares of its common
stock at an average exercise price per share of $14.14 and purchased call
options for 1,667,000 shares of its common stock at an average exercise price
per share of $14.90. The Company sold two put options for each call option
purchased. No cash was exchanged as a result of these transactions. After
completion of these transactions, the Company has a maximum potential obligation
under the put options to buy back 3,334,000 shares for an aggregate of $47.1
million. These put and call options are exercisable only at maturity and expire
between January and April 2000. The Company has the right to settle the put
options by physical settlement of the options or by net share settlement using
shares of the Company's common stock. The Company may, from time to time, enter
into additional put and call option arrangements.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities 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
16
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
intended to identify forward-looking statements. There are a number of important
factors that could cause the results of the Company to differ materially from
those indicated by such forward-looking statements, including those detailed
under the heading "Forward-looking Statements" in Exhibit 13 to the Company's
Annual Report on Form 10-K, as amended, for the fiscal year ended January 3,
1998, filed with the Securities and Exchange Commission.
Results of Operations
Third Quarter 1998 Compared With Third Quarter 1997
Sales in the third quarter of 1998 were $977.2 million, an increase of $67.3
million, or 7%, over the third quarter of 1997. Segment income, excluding
inventory write-downs of $8.6 million in 1998 and restructuring and other
nonrecurring costs of $41.6 million and $2.5 million in 1998 and 1997,
respectively, described below, decreased to $111.6 million in 1998 from $127.3
million in 1997. (Segment income is income before corporate general and
administrative expenses, other income and expense, minority interest, and income
taxes.) Operating income, which includes restructuring and other nonrecurring
costs, decreased to $53.7 million in 1998 from $116.7 million in 1997.
Instruments
Sales from the Instruments segment were $407.0 million in 1998, compared
with $403.9 million in 1997. Sales increased due to acquisitions made by Thermo
Instrument Systems Inc., which added $29.8 million in sales. This increase was
substantially offset by a decrease in sales at existing businesses, including a
decrease of $11.2 million at Thermo Optek Corporation, primarily due to lower
sales to customers in Asia and to the semiconductor industry and a decrease of
$8.2 million at ThermoSpectra Corporation, primarily due to the downturn in the
semiconductor industry. In addition, certain other business units experienced
lower demand, partially as a result of global economic conditions. In total, the
unfavorable effects of currency translation due to the strengthening of the U.S.
dollar relative to foreign currencies in countries in which Thermo Instrument
operates decreased revenues by $1.0 million in 1998. Backlog for the Instruments
segment decreased $7.3 million during the first nine months of 1998 to $291.6
million. Backlog decreased primarily at Thermo Optek and ThermoSpectra,
principally as a result of a decrease in demand in Asia and a slowdown in the
semiconductor and related industries.
Segment income margin (segment income margin is segment income as a
percentage of sales), excluding restructuring and other nonrecurring costs of
$21.9 million in 1998, decreased to 10.1% in 1998 from 15.0% in 1997, primarily
due to $8.6 million of inventory write-downs for discontinued product lines and
excess inventories caused by lower customer demand. In addition, segment income
margin decreased due to higher costs relating to the opening and expansion of
sales and service
17
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
offices at certain business units of Thermo BioAnalysis Corporation and the
effect of lower sales at certain business units without a proportional reduction
in costs. The recent restructuring actions described below and in Note 8 of
Notes to Consolidated Financial Statements will reduce costs in the future.
Segment margin in 1997 included the unfavorable effect of an inventory write-off
at ThermoSpectra. Restructuring and other nonrecurring costs of $21.9 million in
1998 were recorded by wholly and majority-owned businesses of Thermo Instrument,
primarily for severance costs. Thermo Instrument expects to complete the
implementation of its restructuring plan in the first half of 1999. In
connection with the closing of certain facilities, Thermo Instrument expects to
incur additional costs during the fourth quarter of 1998 and the first quarter
of 1999 totaling $2.2 million.
Biomedical Products
Sales from the Biomedical Products segment were $158.4 million in 1998, an
increase of $15.5 million, or 11%, over the 1997 period. Sales increased $24.2
million due to the inclusion of revenues from acquired businesses. This increase
was offset in part by a reduction in revenues at several existing businesses of
Trex Medical Corporation due in part to shipment delays at two business units as
customers renovate sites for delivery of certain large equipment. Such shipments
are expected to occur primarily in the next two quarters. To a lesser extent,
revenues decreased at ThermoLase Corporation primarily due to lower demand at
its spa services business and the inclusion in 1997 of $1.5 million of fees from
international licensing arrangements. Rather than continuing to open additional
spas, ThermoLase intends to concentrate its resources on both increasing the
capacity utilization of its existing spas and expanding its physicians'
licensing program and international licensing arrangements. In response to the
decrease in revenues, ThermoLase significantly reduced its prices in April 1998
in an attempt to establish an optimum price point that will result in increased
demand and higher revenues. In addition, in June 1998, ThermoLase acquired The
Greenhouse Spa, Inc., a full-service, luxury destination spa. Following this
acquisition, ThermoLase closed four spas and announced its intention to convert
its remaining eleven Spa Thira locations into full-service luxury day spas
offering an expanded line of products and services. There can be no assurance
that these strategies will be successful.
Segment income, excluding restructuring and other nonrecurring costs of $8.2
million in 1998, decreased to $10.0 million in 1998 from $13.9 million in 1997.
This decrease resulted from lower income at certain units of Trex Medical as a
result of lower sales and a segment loss of $1.0 million at its newly acquired
Trophy Radiologie subsidiary. Trex Medical is restructuring certain parts of
Trophy Radiologie, including its sales and marketing function. Trophy
Radiologie's sales during the third quarter of 1998 were adversely affected by
these activities. In addition, higher marketing expenses to promote Trophy
Radiologie as a Trex Medical company and a nonrecurring charge of $0.3 million
related to the sale of inventories revalued at the date of acquisition
contributed to Trophy Radiologie's segment loss. Also contributing to lower
18
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
profitability was the effect of an increase in segment loss at ThermoLase to
$6.4 million in 1998 from $5.2 million in 1997 resulting from a loss at its
beauty products subsidiary due in part to an increase in promotional spending
and other costs related to product introductions. These decreases in segment
income were offset in part by the inclusion of segment income from acquired
businesses. The effect of operating its spas below maximum capacity, as
ThermoLase works to convert the spas into full-service, luxury day spas, will
continue to have a negative effect on ThermoLase's segment income. Restructuring
and other nonrecurring costs of $8.2 million in 1998 were recorded by ThermoLase
in connection with the closure of four spas. The costs primarily represent a
write-off of leasehold improvements and related spa assets and
abandoned-facility payments (Note 8). The degree to which ThermoLase is
successful in improving its profitability will affect the future of its
remaining spas and the realizability of its related assets.
Advanced Technology
Sales from the Advanced Technology segment increased 12% to $118.8 million
in 1998 from $106.5 million in 1997. Revenues from Thermo Sentron Inc. increased
to $29.1 million in 1998 from $19.5 million in 1997, primarily due to the
inclusion of $11.0 million of sales from acquired businesses, offset in part by
lower demand and the unfavorable effects of currency translation. Sales from
ThermoTrex Corporation's contract research business units increased $5.0 million
in 1998, primarily as a result of the inclusion of $3.3 million in sales from
acquired businesses at its Trex Communications Corporation subsidiary. Sales at
Thermo Coleman Corporation were $42.1 million in 1998, compared with $40.3
million in 1997. This increase resulted from higher revenues from government
contracts, offset in part by a decline in sales at its Thermo Information
Solutions Inc. subsidiary. The decrease in sales at Thermo Information Solutions
was due to lower sales of kiosk units as a result of substantially exiting this
business, offset in part by higher revenues from Internet-related services.
Sales at Thermedics Detection Inc. decreased 10% to $23.6 million in 1998,
primarily due to lower demand for laboratory products and near-infrared
analyzers. Sales at Thermo Voltek Corp. decreased to $8.7 million in 1998 from
$11.1 million in 1997, primarily as a result of lower demand for
electromagnetic-compatibility test instruments, due in part to lower sales in
Europe as well as unstable economic conditions in Asia.
Segment income decreased to $8.0 million in 1998 from $10.9 million in 1997,
excluding $1.4 million of nonrecurring charges in 1997. This decrease resulted
from lower segment income at Thermedics Detection and Thermo Voltek, primarily
due to lower sales, offset in part by an increase in profitability at Thermo
Coleman as a result of higher sales. In 1997, Trex Communications incurred a
charge of $1.4 million for the write-off of in-process technology associated
with an acquisition.
19
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
Alternative Energy
Sales from the Alternative Energy segment increased to $146.0 million in
1998 from $97.7 million in 1997. Revenues from Thermo Ecotek Corporation
increased to $63.2 million in 1998 from $59.5 million in 1997. Thermo Ecotek's
energy revenues decreased to $52.4 million in 1998 from $53.9 million in 1997.
This decrease was due to $8.2 million of nonrecurring revenue in the 1997 period
related to a contractual settlement with a utility under which Thermo Ecotek
surrendered its rights to a power sales agreement. In the 1998 period, Thermo
Ecotek had $1.9 million of nonrecurring revenue from fees received for the
release of its rights to certain power-generating equipment. Excluding the
nonrecurring revenues, Thermo Ecotek's energy revenues increased due to an
increase in contractual energy rates at certain facilities and the inclusion of
$1.6 million of revenues from newly acquired power operations in the Czech
Republic. From various dates in 1998 onward, no further rate increases will
occur at Thermo Ecotek's four energy facilities in California. Revenues from
Thermo Ecotek's Thermo Trilogy Corporation biopesticide subsidiary increased
$5.2 million to $10.8 million, primarily due to the inclusion of revenues from
an acquired business. Sales at Thermo Power Corporation increased to $71.7
million in 1998 from $29.6 million in 1997, primarily due to the inclusion of
$42.6 million of sales from acquired businesses, primarily Peek plc, acquired in
November 1997.
Segment income, excluding restructuring and other nonrecurring costs of $1.0
million in 1998, was $29.2 million in 1998, compared with $27.6 million in 1997.
Thermo Ecotek's segment income was $22.6 million in 1998, compared with $25.5
million in 1997. This decrease resulted from $8.2 million of nonrecurring income
in the 1997 period related to a contractual settlement with a utility, offset in
part by nonrecurring income of $1.9 million in the 1998 period from fees
received for the release of its rights to certain power-generating equipment. In
addition, Thermo Ecotek's segment income was favorably impacted in 1998 by rate
increases at certain facilities and higher profitability at Thermo Trilogy,
primarily as a result of contributions from an acquired business. Segment income
at Thermo Power, excluding restructuring and other nonrecurring costs, improved
to $6.1 million in 1998 from $1.8 million in 1997, primarily due to
contributions from Peek. Due to funding patterns of government entities, as well
as seasonality, Peek has historically experienced higher sales and segment
income in the second and fourth calendar quarters and lower amounts in the first
and third calendar quarters. Restructuring and other nonrecurring costs of $1.0
million in 1998 were recorded by Thermo Power relating to a loss on
discontinuance of its engines business (Note 8).
Industrial Outsourcing
Sales in the Industrial Outsourcing segment were $87.3 million in 1998, an
increase of $7.5 million, or 9%, over 1997. Revenues from Thermo TerraTech
Inc.'s environmental-liability management services increased to $39.1 million in
1998 from $37.0 million in 1997, primarily due to the
20
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
inclusion of $4.3 million of sales from acquired businesses and, to a lesser
extent, greater demand at certain businesses. These increases were offset in
part by a $5.5 million decrease in revenues at one of ThermoRetec Corporation's
business units resulting from a decline in the number of contracts in process.
Revenues from Thermo TerraTech's engineering and design services increased $2.4
million in 1998, primarily due to an increase in construction and labor
management services. Sales of metallurgical services increased $1.8 million in
1998, principally due to increased demand.
Segment income, excluding restructuring and other nonrecurring costs of
$10.2 million in 1998, was $7.3 million in 1998, compared with $6.5 million in
1997. Segment income increased in 1998 principally as a result of the increase
in sales of metallurgical services and improved profitability in that business.
Restructuring and other nonrecurring costs of $10.2 million include $9.2 million
of costs at ThermoRetec related to the closure of two soil-recycling facilities
and $1.0 million for abandoned-facility payments at Thermo TerraTech relating to
the consolidation of facilities (Note 8).
Paper Recycling
Sales in the Paper Recycling segment decreased to $61.8 million in 1998 from
$81.4 million in 1997. Sales from Thermo Fibertek Inc. decreased 12% to $59.7
million in 1998 from $67.6 million in 1997, primarily due to a decrease in
revenues from its recycling and water-management businesses as a result of a
decrease in demand in Asia and North America. These decreases were offset in
part by the inclusion of $2.7 million of revenues from acquired businesses. The
unfavorable effects of currency translation reduced Thermo Fibertek's revenues
by $0.5 million in 1998. Sales from Thermo TerraTech's thermal-processing
equipment business, sold in October 1997, were $9.9 million in 1997.
Segment income margin, excluding restructuring and other nonrecurring costs
of $1.1 million in 1997, was 12.0% in 1998, compared with 9.5% in 1997. This
increase primarily resulted from improvements at Thermo Fibertek and the
inclusion in 1997 of lower segment income margins from Thermo TerraTech's
thermal-processing equipment business. Thermo Fibertek recorded restructuring
and other nonrecurring costs of $1.1 million in 1997, primarily for severance
costs.
Gain on Issuance of Stock by Subsidiaries
The Company has adopted a strategy of spinning out certain of its businesses
into separate subsidiaries and having these subsidiaries sell a minority
interest to outside investors. The Company believes that this strategy provides
additional motivation and incentives for the management of the subsidiary
through the establishment of subsidiary-level stock option programs, as well as
capital to support the subsidiary's growth. As a result of the sale of stock by
subsidiaries and the issuance of stock by subsidiaries upon conversion of
convertible debentures, the Company records gains that represent the increase in
the Company's net
21
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
investment in the subsidiaries and are classified as "Gain on issuance of stock
by subsidiaries" in the accompanying statement of income. These gains have
represented a substantial portion of the net income reported by the Company in
certain periods. The size and timing of these transactions are dependent on
market and other conditions that are beyond the Company's control. Accordingly,
there can be no assurance that the Company will be able to generate gains from
such transactions in the future. In the third quarter of 1998, Thermo
BioAnalysis repurchased shares of its common stock, which resulted in a reversal
of $2.4 million of previously recorded gains (Note 2). The Company recorded
gains of $18.6 million in 1997 as a result of subsidiary stock transactions. The
Company recorded minority interest income of $2.7 million in 1998 and minority
interest expense of $20.8 million in 1997. Minority interest includes $0.4
million of income in 1998 and $5.1 million of expense in 1997 related to a gain
reversal and gains, respectively, recorded by the Company's majority-owned
subsidiaries as a result of stock transactions by their subsidiaries.
Income Taxes
Excluding nontaxable gains from issuance of subsidiary stock and, in 1998,
the effect of a write-off of $6.9 million of tax assets, the Company's effective
tax rates were 58% and 43% in the 1998 and 1997 periods, respectively. The tax
assets were at ThermoLase and consisted primarily of tax loss carryforwards
(Note 8). The effective tax rate increased in 1998 primarily as a result of the
larger relative effect of nondeductible expenses, including amortization of cost
in excess of net assets of acquired companies, due to lower income as a result
of restructuring and related costs recorded in the 1998 period. In both periods,
the effective tax rates exceed the statutory federal income tax rate primarily
due to nondeductible expenses and state income taxes.
First Nine Months 1998 Compared With First Nine Months 1997
Sales in the first nine months of 1998 were $2,869.2 million, an increase of
$320.9 million, or 13%, over the first nine months of 1997. Segment income,
excluding inventory write-downs of $8.6 million and restructuring and other
nonrecurring costs of $45.7 million in 1998 and $7.5 million in 1997, described
below, increased to $329.4 million in 1998 from $310.6 million in 1997.
Operating income, which includes restructuring and other nonrecurring costs, was
$251.5 million in 1998, compared with $279.1 million in 1997.
Instruments
Sales from the Instruments segment increased $72.1 million, or 6%, to
$1,210.3 million in 1998. Sales increased due to acquisitions made by Thermo
Instrument, which added $122.3 million of sales in 1998. The unfavorable effects
of currency translation due to the strengthening of the U.S. dollar relative to
foreign currencies in countries in which Thermo Instrument operates decreased
revenues by $16.3 million in 1998. Revenues decreased $18.9 million at Thermo
Optek as a result of the reasons discussed in the results of operations for the
third quarter. At
22
<PAGE>
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
ThermoQuest, revenues from Asia decreased $12.0 million due to economic
uncertainty in that region. In addition, revenues from ThermoSpectra's existing
businesses decreased due to lower sales to the semiconductor industry.
Segment income margin, excluding restructuring and other nonrecurring costs
of $23.3 million in 1998 and $0.8 million in 1997, decreased to 13.4% in 1998
from 14.6% in 1997, primarily due to the reasons discussed in the results of
operations for the third quarter. Segment income margin in the 1997 period
included the unfavorable effect of an adjustment to expense of $3.2 million
relating to the sale of inventories revalued at the time of the acquisition of
Life Sciences International PLC and an inventory write-off at ThermoSpectra.
Restructuring and other nonrecurring costs of $21.9 million in 1998 are
discussed in the results of operations for the third quarter. In addition,
Thermo Instrument recorded $1.4 million of costs relating to the resolution of
an arbitration proceeding concluded during the second quarter of 1998 (Note 8).
Restructuring and other nonrecurring costs of $0.8 million in 1997 represent
severance for employees terminated at one of ThermoSpectra's business units.
Biomedical Products
Sales from the Biomedical Products segment were $489.9 million in 1998, an
increase of $65.5 million, or 15%, over the 1997 period. Sales increased due to
the inclusion of $55.9 million of sales from acquired businesses as well as
increased demand at Trex Medical, Bird Medical Technologies, Inc. and, to a
lesser extent, Thermo Cardiosystems Inc. These increases were offset in part by
a decrease in revenues of $10.0 million at ThermoLase. This decrease was
primarily due to lower demand at ThermoLase's spa services business, the
inclusion in 1997 of $3.9 million of fees from international licensing
arrangements and, to a lesser extent, lower revenues from the sale of beauty
products.
Segment income, excluding restructuring costs of $10.9 million in 1998,
increased to $43.4 million in 1998 from $34.0 million in 1997. This increase
resulted substantially from improvements at existing businesses, primarily at
Bird Medical and Trex Medical, as a result of higher revenues and, to a lesser
extent, the inclusion of segment income from acquired businesses. These
increases were offset in part by an increase in segment loss at ThermoLase to
$20.3 million in 1998 from $15.9 million in 1997, primarily due to a decrease in
revenues, as well as increased fixed costs associated with operating more spas
and operating losses from its beauty products subsidiary compared with
profitable operations in the prior year. Restructuring costs of $10.9 million in
1998 include $10.2 million recorded by ThermoLase in connection with the closure
of four spas and certain actions including the relocation of ThermoLase's
headquarters to Texas where it maintains another facility. In addition, $0.7
million of restructuring costs, primarily for severance, were recorded by
SensorMedics Corporation in connection with the reorganization of a subsidiary
in the Netherlands.
23
<PAGE>
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
Advanced Technology
Sales from the Advanced Technology segment increased to $328.1 million in
1998 from $302.9 million in 1997. Revenues from Thermo Sentron increased to
$69.7 million in 1998 from $56.0 million in 1997, primarily due to the inclusion
of $14.5 million of sales from acquired businesses and, to a lesser extent,
increased demand, offset in part by the unfavorable effects of currency
translation. Sales from ThermoTrex's business units increased $14.7 million in
1998, primarily as a result of the inclusion of $10.2 million in sales from
acquired businesses at its Trex Communications subsidiary and, to a lesser
extent, higher revenues from government contracts. Sales at Thermo Coleman were
$120.5 million in 1998, compared with $115.9 million in 1997. This increase was
due to higher revenues from government contracts, offset in part by a decline in
sales at Thermo Information Solutions. The decrease in sales at Thermo
Information Solutions was due to lower sales of kiosk units as a result of
substantially exiting this business, offset in part by higher revenues from
Internet-related services. Sales at Thermedics Detection decreased 8% to $71.2
million in 1998, primarily due to lower sales of its Alexus systems in
connection with the fulfillment in 1997 of a mandated product-line upgrade from
The Coca-Cola Company to its existing installed base. Sales at Thermo Voltek
decreased to $30.8 million in 1998 from $32.7 million in 1997, due to lower
demand for electromagnetic-compatibility test instruments in Europe and Asia.
Segment income, excluding nonrecurring costs of $1.4 million in 1997,
decreased to $22.0 million in 1998 from $26.8 million in 1997. This decrease
resulted primarily from lower segment income at Thermedics Detection due to
lower sales and at Trex Communications due to higher administrative costs as a
result of expanding its management team. Nonrecurring costs of $1.4 million in
the 1997 period are discussed in the results of operations for the third
quarter.
Alternative Energy
Sales from the Alternative Energy segment increased to $396.1 million in
1998 from $265.5 million in 1997. Revenues from Thermo Ecotek increased to
$161.2 million in 1998 from $141.7 million in 1997, primarily due to higher
contractual energy rates at certain facilities and the inclusion of $6.0 million
of revenues from newly acquired power operations in the Czech Republic. In
addition, the 1998 period includes $1.9 million of nonrecurring revenue from
fees received for the release of its rights to certain power-generating
equipment, while the 1997 period includes $8.2 million of nonrecurring revenue
from a contractual settlement with a utility. Revenues from Thermo Ecotek's
Thermo Trilogy biopesticide subsidiary increased to $26.6 million in 1998 from
$15.0 million in 1997, primarily due to the inclusion of revenues from an
acquired business. Sales at Thermo Power increased to $205.2 million in 1998
from $92.3 million in 1997, due to the inclusion of $115.9 million of sales from
acquired businesses, primarily Peek, acquired in November 1997. Sales at Peter
Brotherhood Ltd. declined to $29.7 million in 1998 from $31.6 million in 1997,
due to the disposal of several business units in 1997.
24
<PAGE>
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
Segment income, excluding restructuring and other nonrecurring costs of $1.0
million in 1998 and income of $3.7 million in 1997, was $53.0 million in 1998,
compared with $44.9 million in 1997. Thermo Ecotek's segment income was $39.6
million in 1998, compared with $39.1 million in 1997. The increase resulted
primarily from higher contractual energy rates at certain facilities,
nonrecurring income of $1.9 million described above, the inclusion of results of
the newly acquired Czech Republic power operations, and improved profitability
at Thermo Trilogy. These increases were substantially offset by $8.2 million of
nonrecurring income in the 1997 period related to a contractual settlement with
a utility. Segment income at Thermo Power, excluding restructuring and other
nonrecurring costs, improved to $12.8 million in 1998 from $3.8 million in 1997,
primarily due to contributions from Peek. Restructuring and other nonrecurring
costs of $1.0 million were recorded by Thermo Power relating to a loss on
discontinuance of its engines business (Note 8). Restructuring and other
nonrecurring income, net, of $3.7 million in 1997, consisted of $5.0 million of
previously established litigation reserves that were reversed upon settlement of
a related matter and $1.3 million of costs, primarily for severance, related to
restructuring activities at Peter Brotherhood.
Industrial Outsourcing
Sales in the Industrial Outsourcing segment were $256.4 million in 1998, an
increase of $34.8 million, or 16%, over 1997. Revenues from Thermo TerraTech's
environmental-liability management services increased to $115.4 million in 1998
from $98.2 million in 1997, primarily due to higher demand at certain business
units and, to a lesser extent, the inclusion of $13.5 million of sales from
acquired businesses. These increases were offset in part by a $14.4 million
decrease in revenues at one of ThermoRetec's business units resulting from a
decline in the number of contracts in process. Revenues from Thermo TerraTech's
engineering and design services increased $9.3 million in 1998 due to the
inclusion of $7.4 million of revenues from an acquired business and, to a lesser
extent, an increase in construction and labor management services. Sales of
metallurgical services increased $6.7 million in 1998, principally due to
increased demand for existing services.
Segment income, excluding restructuring and other nonrecurring costs of
$10.2 million in 1998 and $7.8 million in 1997, was $16.1 million in 1998,
compared with $16.7 million in 1997. Segment income declined in 1998 due to a
loss incurred at one of ThermoRetec's business units due to losses on certain
remedial-construction contracts and a decline in the number of contracts in
process. This decrease in segment income was offset in part by higher segment
income from other business units within the segment, principally due to higher
revenues. Restructuring and other nonrecurring costs of $10.2 million in 1998
(Note 8) and $7.8 million in 1997 were recorded to write down certain capital
equipment and intangible assets, including cost in excess of net assets of
acquired companies, in response to a severe downturn in ThermoRetec's
soil-recycling business. This resulted in the closure of two soil-recycling
sites during 1997 and two additional sites in 1998. In addition, the 1998 charge
included
25
<PAGE>
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
$1.0 million for abandoned-facility payments at Thermo TerraTech relating to the
consolidation of facilities. The 1997 charge also included a component in
response to reduced cash flows at certain other sites, such that analysis
indicated that the investment in these assets would not be recovered.
Paper Recycling
Sales in the Paper Recycling segment decreased to $193.4 million in 1998
from $202.7 million in 1997. Sales from Thermo Fibertek increased to $185.6
million in 1998 from $166.8 million in 1997, primarily due to an increase in
revenues of $21.4 million from Thermo Black Clawson, acquired in May 1997. An
increase in revenues from Thermo Black Clawson due to the inclusion of revenues
for the full nine-month period in 1998 was offset in part by a decrease in its
revenues from Asia and North America due to lower demand and a decrease in
revenues from Thermo Fibertek's water-management business. In addition, the
unfavorable effects of currency translation reduced Thermo Fibertek's revenues
by $3.0 million in 1998. Sales from Thermo TerraTech's thermal-processing
equipment business, sold in October 1997, were $25.3 million in 1997.
Segment income margin, excluding restructuring costs of $1.1 million in
1997, was 12.6% in 1998, compared with 10.7% in 1997. This increase primarily
resulted from improvements at Thermo Fibertek and the inclusion in 1997 of lower
segment income margins from Thermo TerraTech's thermal-processing equipment
business. Thermo Fibertek recorded restructuring and other recurring costs of
$1.1 million in 1997, primarily for severance costs.
Gain on Issuance of Stock by Subsidiaries
As a result of the sale of stock by subsidiaries and the issuance of stock
by subsidiaries upon conversion of convertible debentures, the Company recorded
gains of $51.8 million in 1998 (Note 2) and $67.5 million in 1997. Minority
interest expense decreased to $38.0 million in 1998 from $52.7 million in 1997.
Minority interest expense includes $13.9 million in 1998 and $17.0 million in
1997 related to gains recorded by the Company's majority-owned subsidiaries as a
result of the sale of stock by their subsidiaries.
Income Taxes
Excluding nontaxable gains from issuance of subsidiary stock and, in 1998,
the effect of a write-off of $6.9 million of tax assets, the Company's effective
tax rates were 48% and 43% in the 1998 and 1997 periods, respectively. The tax
assets were at ThermoLase and consisted primarily of tax loss carryforwards
(Note 8). The effective tax rate increased in 1998 primarily as a result of the
larger relative effect of nondeductible expenses, including amortization of cost
in excess of net assets of acquired companies, due to lower income as a result
of restructuring and related costs recorded in the third quarter of 1998. In
both periods, the effective tax rates exceed the statutory federal income tax
rate primarily due to nondeductible expenses and state income taxes.
26
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Liquidity and Capital Resources
Consolidated working capital was $2,146.8 million at October 3, 1998,
compared with $2,002.0 million at January 3, 1998. Included in working capital
were cash, cash equivalents, and short-term available-for-sale investments of
$1,552.0 million at October 3, 1998, compared with $1,522.7 million at January
3, 1998. In addition, the Company had $96.2 million of long-term
available-for-sale investments at October 3, 1998, compared with $63.3 million
at January 3, 1998. Of the total $1,648.2 million of cash, cash equivalents, and
short- and long-term available-for-sale investments at October 3, 1998, $1,305.4
million was held by the Company's majority-owned subsidiaries and the balance
was held by the Company and its wholly owned subsidiaries (Note 10).
Cash provided by operating activities was $218.9 million during the first
nine months of 1998. Cash of $36.5 million was used to fund increases in
inventories, principally at Thermo Instrument and Trex Medical. The increase at
Thermo Instrument was primarily due to replenishing year-end inventory levels at
ThermoQuest's European sales offices and increasing inventory levels at certain
of Thermo Instrument's subsidiaries in preparation for new product releases. To
a lesser extent, Thermo Instrument's inventories increased at one of its
subsidiaries due to longer production cycles and at another subsidiary due to a
decrease in sales in Asia. The increase in inventories at Trex Medical resulted
primarily from lower than anticipated sales and, to a lesser extent, an increase
in inventories in anticipation of a new product release. In addition, the
Company used $29.0 million of cash to fund a decrease in accounts payable,
resulting principally from the timing of payments. An increase in other current
assets used $19.6 million of cash, primarily due to an increase in unbilled
costs and fees as result of the timing of billings on percentage-of-completion
contracts and, to a lesser extent, an increase in prepaid income taxes. A
decrease in accounts receivable provided $15.3 million of cash, primarily at
Thermo Instrument. This decrease resulted principally from lower revenues at
Thermo Optek and Thermo BioAnalysis, management efforts to improve collections
at Thermo Optek, and the timing of collections at Metrika Systems. The decrease
in accounts receivable was offset in part by an increase at Trex Medical,
primarily due to slower customer payment patterns as a result of increased
export and direct sales at a majority of its operations and a shift from OEM
sales to direct and dealer sales at one of its subsidiaries.
During the first nine months of 1998, the Company's primary investing
activities, excluding available-for-sale investments activity, included
acquisitions and the purchase of property, plant, and equipment. During the
first nine months of 1998, the Company expended $177.7 million, net of cash
acquired, for acquisitions and expended $108.8 million for purchases of
property, plant, and equipment.
The Company's financing activities provided $124.6 million of cash during
the first nine months of 1998. Net proceeds from the issuance of long-term
obligations totaled $244.6 million. Net proceeds from the issuance of Company
and subsidiary stock, which includes $290.2 million of proceeds from the April
1998 sale of Company common stock (Note 7), totaled $475.4 million. In addition,
the Company used $55.0 million of
27
<PAGE>
Liquidity and Capital Resources (continued)
cash for the repayment of long-term obligations and $28.4 million of cash to
fund a decrease in short-term notes payable. In October 1998, the Company issued
$150.0 million principal amount of notes for net proceeds of $138.0 million
(Note 10).
During the first nine months of 1998, an aggregate principal amount of $18.3
million of subsidiary convertible obligations were converted into shares of
subsidiary common stock.
During the first nine months of 1998, the Company and certain of its
majority-owned subsidiaries expended $508.7 million to purchase common stock of
the Company and common stock and debentures of certain of the Company's
majority-owned subsidiaries. These purchases were made pursuant to
authorizations by the Company's and certain majority-owned subsidiaries' Boards
of Directors. As of October 3, 1998, $117.2 million remained under the Company's
authorization and $90.8 million and 573,000 shares remained under authorizations
of the Company's majority-owned subsidiaries. In addition to these
authorizations, Thermedics Inc. has presented a proposal to its Thermo Voltek
subsidiary to acquire, through a merger, all of the outstanding shares of Thermo
Voltek's common stock that Thermedics does not own, including the redemption of
Thermo Voltek's $5.3 million principal amount of 3 3/4% subordinated convertible
debentures due 2000, for a total transaction cost estimated to be approximately
$27 million. The Company may also expend additional amounts to complete its
reorganization plans (Note 9).
The Company has no material commitments for purchases of property, plant,
and equipment and expects that for the remainder of 1998, such expenditures will
approximate the current level of expenditures. Since October 3, 1998, the
Company and its majority-owned subsidiaries have expended $27.8 million on
acquisitions of businesses and as of November 11, 1998, the Company's
majority-owned subsidiaries had agreements or nonbinding letters of intent to
acquire new businesses totaling approximately $70 million. Proposed acquisitions
of new businesses are subject to various conditions to closing, and there can be
no assurance that all proposed transactions will be consummated.
Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices has not changed materially
from its exposure at year-end 1997.
Year 2000
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading material internal
business systems and facilities; (ii) testing and developing necessary upgrades
for the Company's current products and
28
<PAGE>
Year 2000 (continued)
certain discontinued products; (iii) contacting key suppliers, vendors, and
customers to determine their year 2000 compliance status; and (iv) developing
contingency plans.
The Company's State of Readiness
The Company has tested and evaluated its critical information technology
systems for year 2000 compliance, including its significant computer systems,
software applications, and related equipment. The Company is currently in the
process of upgrading or replacing its significant noncompliant systems. In most
cases, such upgrades or replacements are being made in the ordinary course of
business. The Company expects that all of its material information technology
systems will be year 2000 compliant by the end of 1999. The Company is also
evaluating the potential year 2000 impact on its facilities, including its
buildings and utility systems. Any problems that are identified will be
prioritized and remediated based on their assigned priority. The Company will
continue periodic testing of its critical internal business systems and
facilities in an effort to minimize operating disruptions due to year 2000
issues.
The Company believes that all of the material products that it currently
manufactures and sells are year 2000 compliant. However, as many of the
Company's products are complex, interact with third-party products, and operate
on computer systems that are not under the Company's control, there can be no
assurance that the Company has identified all of the year 2000 problems with its
current products. The Company believes that certain of its older products, which
it no longer manufactures or sells, may not be year 2000 compliant. The Company
is continuing to test and evaluate such products and may offer upgrades or
alternative products where reasonably practicable.
The Company is in the process of identifying and contacting suppliers,
vendors, and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company has developed and is distributing questionnaires
relating to year 2000 compliance to its significant suppliers, vendors, and
customers. The Company intends to follow-up and monitor the year 2000 compliant
progress of significant suppliers, vendors, and customers that indicate that
they are not year 2000 compliant or that do not respond to the Company's
questionnaires.
Contingency Plan
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
problems. This plan may include identifying and securing other suppliers,
increasing inventories, and modifying production facilities and schedules. As
the Company continues to evaluate the year 2000 readiness of its business
systems and facilities, products and significant suppliers, vendors, and
customers, it will modify and adjust its contingency plan as may be required.
29
<PAGE>
Year 2000 (continued)
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.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its material internal business systems will be completed in a timely fashion,
there can be no assurance that the Company will not encounter unexpected costs
or delays. Despite its efforts to ensure that its material current products are
year 2000 compliant, the Company may see an increase in warranty and other
claims, especially those related to Company products that incorporate, or
operate using, third-party software or hardware. In addition, certain of the
Company's older products, which it no longer manufactures or sells, may not be
year 2000 compliant, which may expose the Company to claims. If any of the
Company's material suppliers, vendors, or customers experience business
disruptions due to year 2000 issues, the Company might also be materially
adversely affected. The Company's research and development, production,
distribution, financial, administrative, and communications operations might be
disrupted. There is expected to be a significant amount of litigation relating
to the year 2000 issue and there can be no assurance that the Company will not
incur material costs in defending or bringing lawsuits. Any unexpected costs or
delays arising from the year 2000 issue could have a significant adverse impact
on the Company's business, operations, and financial condition.
30
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page immediately preceding exhibits.
(b) Reports on Form 8-K
On July 7, 1998, the Company filed a Current Report on Form 8-K with respect
to the Company's anticipated total gains from the issuance of stock by the
Company's subsidiaries for the quarter ended July 4, 1998.
On July 22, 1998, the Company filed a Current Report on Form 8-K with
respect to the Company's expected operating income for the quarter ended July 4,
1998.
On September 3, 1998, the Company filed a Current Report on Form 8-K with
respect to changes in the executive management of the Company.
On September 15, 1998, the Company filed a Current Report on Form 8-K with
respect to the retirement of the Company's Chief Financial Officer.
On September 30, 1998, the Company filed a Current Report on Form 8-K with
respect to restructuring and other charges at the Company.
31
<PAGE>
THERMO ELECTRON CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 12th day of November 1998.
THERMO ELECTRON CORPORATION
Paul F. Kelleher
------------------------------
Paul F. Kelleher
Senior Vice President, Finance
and Administration
John N. Hatsopoulos
------------------------------
John N. Hatsopoulos
Chief Financial Officer
32
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------------------------------------------------------------------------------
3 By-laws of the Registrant, as amended.
4.1 Indenture dated as of October 29, 1998, by and between the Registrant
and Bankers Trust Company, as Trustee, relating to the issuance of
senior debt securities by the Registrant (filed as Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated October 29, 1998, filed
with the Securities and Exchange Commission on October 30, 1998, and
incorporated herein by reference).
4.2 First Supplemental Indenture dated as of October 29, 1998, by and
between the Registrant and Bankers Trust Company, as Trustee,
relating to the issuance by the Registrant of $150,000,000 aggregate
principal amount of its 7.625% Notes due 2008 (filed as Exhibit 4.2
to the Registrant's Current Report on Form 8-K dated October 29,
1998, filed with the Securities and Exchange Commission on October
30, 1998, and incorporated herein by reference).
10.1 Thermo Electron Corporation 1998 Executive Retention Plan/Form
of Executive Retention Agreement.
10.2 Letter Agreement dated as of September 15, 1998, between the
Registrant and Mr. John N. Hatsopoulos.
27 Financial Data Schedule.
Exhibit 10.1
Executive Retention Agreement
THIS AGREEMENT by and between THERMO ELECTRON CORPORATION, a Delaware
corporation (the "Company"), and _________________ (the "Executive") is made as
of __________, 199___ (the "Effective Date").
WHEREAS, the Company recognizes that, as is the case with many
publicly-held corporations, the possibility of a change in control of the
Company exists and that such possibility, and the uncertainty and questions
which it may raise among key personnel, may result in the departure or
distraction of key personnel to the detriment of the Company and its
stockholders;
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that appropriate steps should be taken to reinforce and encourage the
continued employment and dedication of the Company's key personnel without
distraction from the possibility of a change in control of the Company and
related events and circumstances; and
NOW, THEREFORE, as an inducement for and in consideration of the Executive
remaining in its employ, the Company agrees that the Executive shall receive the
severance benefits set forth in this Agreement in the event the Executive's
employment with the Company is terminated under the circumstances described
below subsequent to a Change in Control (as defined in Section 1.1).
1. Key Definitions.
As used herein, the following terms shall have the following respective
meanings:
1.1 "Change in Control" means an event or occurrence set forth in any
one or more of subsections (a) through (d) below (including an event or
occurrence that constitutes a Change in Control under one of such subsections
but is specifically exempted from another such subsection):
(a) the acquisition by an individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership of
any capital stock of the Company if, after such acquisition, such Person
beneficially owns (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) 40% or more of either (i) the then-outstanding shares of common
stock of the Company (the "Outstanding Company Common Stock") or (ii) the
combined voting power of the then-outstanding securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection (a), the
following acquisitions shall not constitute a Change in Control: (i) any
acquisition by the Company, (ii) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any corporation
controlled by the Company, or (iii) any acquisition by any corporation pursuant
to a transaction which complies with clauses (i) and (ii) of subsection (c) of
this Section 1.1; or
(b) such time as the Continuing Directors (as defined below) do
not constitute a majority of the Board (or, if applicable, the Board of
Directors of a successor corporation to the Company), where the term "Continuing
Director" means at any date a member of the Board (i) who was a member of the
Board on the date of the execution of this Agreement or (ii) who was nominated
or elected subsequent to such date by at least a majority of the directors who
were Continuing Directors at the time of such nomination or election or whose
election to the Board was recommended or endorsed by at least a majority of the
directors who were Continuing Directors at the time of such nomination or
election; provided, however, that there shall be excluded from this clause (ii)
any individual whose initial assumption of office occurred as a result of an
actual or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents, by
or on behalf of a person other than the Board; or
(c) the consummation of a merger, consolidation, reorganization,
recapitalization or statutory share exchange involving the Company or a sale or
other disposition of all or substantially all of the assets of the Company in
one or a series of transactions (a "Business Combination"), unless, immediately
following such Business Combination, each of the following two conditions is
satisfied: (i) all or substantially all of the individuals and entities who were
the beneficial owners of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 60% of the then-outstanding
shares of common stock and the combined voting power of the then-outstanding
securities entitled to vote generally in the election of directors,
respectively, of the resulting or acquiring corporation in such Business
Combination (which shall include, without limitation, a corporation which as a
result of such transaction owns the Company or substantially all of the
Company's assets either directly or through one or more subsidiaries) (such
resulting or acquiring corporation is referred to herein as the "Acquiring
Corporation") in substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, respectively; and (ii)
no Person (excluding the Acquiring Corporation or any employee benefit plan (or
related trust) maintained or sponsored by the Company or by the Acquiring
Corporation) beneficially owns, directly or indirectly, 40% or more of the then
outstanding shares of common stock of the Acquiring Corporation, or of the
combined voting power of the then-outstanding securities of such corporation
entitled to vote generally in the election of directors; or
(d) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
1.2 "Change in Control Date" means the first date during the Term (as
defined in Section 2) on which a Change in Control occurs. Anything in this
Agreement to the contrary notwithstanding, if (a) a Change in Control occurs,
(b) the Executive's employment with the Company is terminated prior to the date
on which the Change in Control occurs, and (c) it is reasonably demonstrated by
the Executive that such termination of employment (i) was at the request of a
third party who has taken steps reasonably calculated to effect a Change in
Control or (ii) otherwise arose in connection with or in anticipation of a
Change in Control, then for all purposes of this Agreement the "Change in
Control Date" shall mean the date immediately prior to the date of such
termination of employment.
1.3 "Cause" means the Executive's willful engagement in illegal
conduct or gross misconduct after the Change in Control Date which is materially
and demonstrably injurious to the Company. For purposes of this Section 1.3, no
act or failure to act by the Executive shall be considered "willful" unless it
is done, or omitted to be done, in bad faith and without reasonable belief that
the Executive's action or omission was in the best interests of the Company.
1.4 "Good Reason" means the occurrence, without the Executive's
written consent, of any of the events or circumstances set forth in clauses (a)
through (g) below. Notwithstanding the occurrence of any such event or
circumstance, such occurrence shall not be deemed to constitute Good Reason if,
prior to the Date of Termination specified in the Notice of Termination (each as
defined in Section 3.2(a)) given by the Executive in respect thereof, such event
or circumstance has been fully corrected and the Executive has been reasonably
compensated for any losses or damages resulting therefrom (provided that such
right of correction by the Company shall only apply to the first Notice of
Termination for Good Reason given by the Executive).
(a) the assignment to the Executive of duties inconsistent in
any material respect with the Executive's position (including status, offices,
titles and reporting requirements), authority or responsibilities in effect
immediately prior to the earliest to occur of (i) the Change in Control Date,
(ii) the date of the execution by the Company of the initial written agreement
or instrument providing for the Change in Control or (iii) the date of the
adoption by the Board of Directors of a resolution providing for the Change in
Control (with the earliest to occur of such dates referred to herein as the
"Measurement Date") or a material diminution in such position, authority or
responsibilities;
(b) a reduction in the Executive's annual base salary as in
effect on the Measurement Date or as the same was or may be increased thereafter
from time to time;
(c) the failure by the Company to (i) continue in effect any
material compensation or benefit plan or program (including without limitation
any life insurance, medical, health and accident or disability plan and any
vacation or automobile program or policy) (a "Benefit Plan") in which the
Executive participates or which is applicable to the Executive immediately prior
to the Measurement Date, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan or
program, (ii) continue the Executive's participation therein (or in such
substitute or alternative plan) on a basis not materially less favorable than
the basis existing immediately prior to the Measurement Date (iii) award cash
bonuses to the Executive in amounts and in a manner substantially consistent
with past practice in light of the Company's financial performance or (iv)
continue to provide any material fringe benefit enjoyed by Executive immediately
prior to the Measurement Date;
(d) a change by the Company in the location at which the
Executive performs [his/her] principal duties for the Company to a new location
that is both (i) outside a radius of 50 miles from the Executive's principal
residence immediately prior to the Measurement Date and (ii) more than 30 miles
from the location at which the Executive performed [his/her] principal duties
for the Company immediately prior to the Measurement Date; or a requirement by
the Company that the Executive travel on Company business to a substantially
greater extent than required immediately prior to the Measurement Date;
(e) the failure of the Company to obtain the agreement from any
successor to the Company to assume and agree to perform this Agreement, as
required by Section 6.1;
(f) a purported termination of the Executive's employment which
is not effected pursuant to a Notice of Termination satisfying the requirements
of Section 3.2(a); or
(g) any failure of the Company to pay or provide to the
Executive any portion of the Executive's compensation or benefits due under any
Benefit Plan within seven days of the date such compensation or benefits are
due, or any material breach by the Company of this Agreement or any employment
agreement with the Executive.
The Executive's right to terminate [his/her] employment for Good Reason
shall not be affected by [his/her] incapacity due to physical or mental illness.
1.5 "Disability" means the Executive's absence from the full-time
performance of the Executive's duties with the Company for 180 consecutive
calendar days as a result of incapacity due to mental or physical illness which
is determined to be total and permanent by a physician selected by the Company
or its insurers and acceptable to the Executive or the Executive's legal
representative.
2. Term of Agreement. This Agreement, and all rights and obligations of
the parties hereunder, shall take effect upon the Effective Date and shall
expire upon the first to occur of (a) the expiration of the Term (as defined
below) if a Change in Control has not occurred during the Term, (b) the date 18
months after the Change in Control Date, if the Executive is still employed by
the Company as of such later date, or (c) the fulfillment by the Company of all
of its obligations under Sections 4 and 5.2 if the Executive's employment with
the Company terminates within 18 months following the Change in Control Date.
"Term" shall mean the period commencing as of the Effective Date and continuing
in effect through December 31, 2003; provided, however, that commencing on
January 1, 2003 and each January 1, thereafter, the Term shall be automatically
extended for one additional year unless, not later than 90 days prior to the
scheduled expiration of the Term (or any extension thereof), the Company shall
have given the Executive written notice that the Term will not be extended.
3. Employment Status; Termination Following Change in Control.
3.1 Not an Employment Contract. The Executive acknowledges that this
Agreement does not constitute a contract of employment or impose on the Company
any obligation to retain the Executive as an employee and that this Agreement
does not prevent the Executive from terminating employment at any time. If the
Executive's employment with the Company terminates for any reason and
subsequently a Change in Control shall occur, the Executive shall not be
entitled to any benefits hereunder except as otherwise provided pursuant to
Section 1.2.
3.2 Termination of Employment.
(a) If the Change in Control Date occurs during the Term, any
termination of the Executive's employment by the Company or by the Executive
within 18 months following the Change in Control Date (other than due to the
death of the Executive) shall be communicated by a written notice to the other
party hereto (the "Notice of Termination"), given in accordance with Section 7.
Any Notice of Termination shall: (i) indicate the specific termination provision
(if any) of this Agreement relied upon by the party giving such notice, (ii) to
the extent applicable, set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) specify the Date of
Termination (as defined below). The effective date of an employment termination
(the "Date of Termination") shall be the close of business on the date specified
in the Notice of Termination (which date may not be less than 15 days or more
than 120 days after the date of delivery of such Notice of Termination), in the
case of a termination other than one due to the Executive's death, or the date
of the Executive's death, as the case may be. In the event the Company fails to
satisfy the requirements of Section 3.2(a) regarding a Notice of Termination,
the purported termination of the Executive's employment pursuant to such Notice
of Termination shall not be effective for purposes of this Agreement.
(b) The failure by the Executive or the Company to set forth in
the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting any such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.
(c) Any Notice of Termination for Cause given by the Company
must be given within 90 days of the occurrence of the event(s) or
circumstance(s) which constitute(s) Cause. Prior to any Notice of Termination
for Cause being given (and prior to any termination for Cause being effective),
the Executive shall be entitled to a hearing before the Board of Directors of
the Company at which [he/she] may, at [his/her] election, be represented by
counsel and at which [he/she] shall have a reasonable opportunity to be heard.
Such hearing shall be held on not less than 15 days prior written notice to the
Executive stating the Board of Directors' intention to terminate the Executive
for Cause and stating in detail the particular event(s) or circumstance(s) which
the Board of Directors believes constitutes Cause for termination.
(d) Any Notice of Termination for Good Reason given by the
Executive must be given within 90 days of the occurrence of the event(s) or
circumstance(s) which constitute(s) Good Reason.
4. Benefits to Executive.
4.1 Stock Acceleration. If the Change in Control Date occurs during
the Term, then, effective upon the Change in Control Date, (a) each outstanding
option to purchase shares of Common Stock of the Company held by the Executive
shall become immediately exercisable in full and will no longer be subject to a
right of repurchase by the Company and (b) each outstanding restricted stock
award shall be deemed to be fully vested and will no longer be subject to a
right of repurchase by the Company.
4.2 Compensation. If the Change in Control Date occurs during the
Term and the Executive's employment with the Company terminates within 18 months
following the Change in Control Date, the Executive shall be entitled to the
following benefits:
(a) Termination Without Cause or for Good Reason. If the
Executive's employment with the Company is terminated by the Company (other than
for Cause, Disability or Death) or by the Executive for Good Reason within 18
months following the Change in Control Date, then the Executive shall be
entitled to the following benefits:
(i) the Company shall pay to the Executive in a lump
sum in cash within 30 days after the Date of Termination the aggregate of the
following amounts:
(1) the sum of (A) the Executive's base salary
through the Date of Termination, (B) the product of (x) the annual bonus paid or
payable (including any bonus or portion thereof which has been earned but
deferred) for the most recently completed fiscal year and (y) a fraction, the
numerator of which is the number of days in the current fiscal year through the
Date of Termination, and the denominator of which is 365 and (C) the amount of
any compensation previously deferred by the Executive (together with any accrued
interest or earnings thereon) and any accrued vacation pay, in each case to the
extent not previously paid (the sum of the amounts described in clauses (A),
(B), and (C) shall be hereinafter referred to as the "Accrued Obligations"); and
(2) the amount equal to (A) [one/two/three]
multiplied by (B) the sum of (x) the Executive's highest annual base salary in
any twelve-month period (on a rolling basis) during the five-year period prior
to the Change in Control Date and (y) the Executive's highest annual bonus in
any twelve-month period (on a rolling basis) during the five-year period prior
to the Change in Control Date.
(ii) for [one/two/three] years after the Date of
Termination, or such longer period as may be provided by the terms of the
appropriate plan, program, practice or policy, the Company shall continue to
provide benefits to the Executive and the Executive's family at least equal to
those which would have been provided to them if the Executive's employment had
not been terminated, in accordance with the applicable Benefit Plans in effect
on the Measurement Date or, if more favorable to the Executive and [his/her]
family, in effect generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies; provided, however, that
if the Executive becomes reemployed with another employer and is eligible to
receive a particular type of benefits (e.g., health insurance benefits) from
such employer on terms at least as favorable to the Executive and [his/her]
family as those being provided by the Company, then the Company shall no longer
be required to provide those particular benefits to the Executive and [his/her]
family;
(iii)to the extent not previously paid or provided,
the Company shall timely pay or provide to the Executive any other amounts or
benefits required to be paid or provided or which the Executive is eligible to
receive following the Executive's termination of employment under any plan,
program, policy, practice, contract or agreement of the Company and its
affiliated companies (such other amounts and benefits shall be hereinafter
referred to as the "Other Benefits"); and
(iv) for purposes of determining eligibility (but not
the time of commencement of benefits) of the Executive for retiree benefits to
which the Executive is entitled, the Executive shall be considered to have
remained employed by the Company until [one/two/three] years after the Date of
Termination.
(b) Resignation without Good Reason; Termination for Death or
Disability. If the Executive voluntarily terminates [his/her] employment with
the Company within 18 months following the Change in Control Date, excluding a
termination for Good Reason, or if the Executive's employment with the Company
is terminated by reason of the Executive's death or Disability within 18 months
following the Change in Control Date, then the Company shall (i) pay the
Executive (or [his/her] estate, if applicable), in a lump sum in cash within 30
days after the Date of Termination, the Accrued Obligations and (ii) timely pay
or provide to the Executive the Other Benefits.
(c) Termination for Cause. If the Company terminates the
Executive's employment with the Company for Cause within 18 months following the
Change in Control Date, then the Company shall (i) pay the Executive, in a lump
sum in cash within 30 days after the Date of Termination, the sum of (A) the
Executive's annual base salary through the Date of Termination and (B) the
amount of any compensation previously deferred by the Executive, in each case to
the extent not previously paid, and (ii) timely pay or provide to the Executive
the Other Benefits.
4.3 Taxes.
(a) In the event that the Company undergoes a "Change in
Ownership or Control" (as defined below), and thereafter, the Executive becomes
eligible to receive "Contingent Compensation Payments" (as defined below) the
Company shall, as soon as administratively feasible after the Executive becomes
so eligible determine and notify the Executive (with reasonable detail regarding
the basis for its determinations) (i) which of the payments or benefits due to
the Executive following such Change in Ownership or Control constitute
Contingent Compensation Payments, (ii) the amount, if any, of the excise tax
(the "Excise Tax") payable pursuant to Section 4999 of the Internal Revenue Code
of 1986, as amended (the "Code"), by the Executive with respect to such
Contingent Compensation Payment and (iii) the amount of the "Gross-Up Payment"
(as defined below) due to the Executive with respect to such Contingent
Compensation Payment. Within 30 days after delivery of such notice to the
Executive, the Executive shall deliver a response to the Company (the "Executive
Response") stating either (A) that [he/she] agrees with the Company's
determination pursuant to the preceding sentence or (B) that [he/she] disagrees
with such determination, in which case [he/she] shall indicate which payment
and/or benefits should be characterized as a Contingent Compensation Payment,
the amount of the Excise Tax with respect to such Contingent Compensation
Payment and the amount of the Gross-Up Payment due to the Executive with respect
to such Contingent Compensation Payment. If the Executive states in the
Executive Response that [he/she] agrees with the Company's determination, the
Company shall make the Gross-Up Payment to the Executive within three business
days following delivery to the Company of the Executive Response. If the
Executive states in the Executive Response that [he/she] disagrees with the
Company's determination, then, for a period of 15 days following delivery of the
Executive Response, the Executive and the Company shall use good faith efforts
to resolve such dispute. If such dispute is not resolved within such 15-day
period, such dispute shall be settled exclusively by arbitration in Boston,
Massachusetts, in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction. The Company shall, within three business days
following delivery to the Company of the Executive Response, make to the
Executive those Gross-Up Payments as to which there is no dispute between the
Company and the Executive regarding whether they should be made. The balance of
the Gross-Up Payments shall be made within three business days following the
resolution of such dispute. The amount of any payments to be made to the
Executive following the resolution of such dispute shall be increased by the
amount of the accrued interest thereon computed at the prime rate announced from
time to time by The Wall Street Journal compounded monthly from the date that
such payments originally were due. In the event that the Executive fails to
deliver an Executive Response on or before the required date, the Company's
initial determination shall be final.
(b) For purposes of this Section 4.3, the following terms shall
have the following respective meanings:
(i) "Change in Ownership or Control" shall mean a
change in the ownership or effective control of the Company or in the ownership
of a substantial portion of the assets of the Company determined in accordance
with Section 280G(b)(2) of the Code.
(ii) "Contingent Compensation Payment" shall mean any
payment (or benefit) in the nature of compensation that is made or supplied to a
"disqualified individual" (as defined in Section 280G(c) of the Code) and that
is contingent (within the meaning of Section 280G(b)(2)(A)(i) of the Code) on a
Change in Ownership or Control of the Company.
(iii)"Gross-Up Payment" shall mean an amount equal to
the sum of (i) the amount of the Excise Tax payable with respect to a Contingent
Compensation Payment and (ii) the amount necessary to pay all additional taxes
imposed on (or economically borne by) the Executive (including the Excise Taxes,
state and federal income taxes and all applicable withholding taxes)
attributable to the receipt of such Gross-Up Payment. For purposes of the
preceding sentence, all taxes attributable to the receipt of the Gross-Up
Payment shall be computed assuming the application of the maximum tax rates
provided by law.
4.4 Outplacement Services. In the event the Executive is terminated
by the Company (other than for Cause, Disability or Death), or the Executive
terminates employment for Good Reason, within 18 months following the Change in
Control Date, the Company shall provide outplacement services through one or
more outside firms of the Executive's choosing up to an aggregate of
$[15,000/20,000/25,000], with such services to extend until the earlier of (i)
12 months following the termination of Executive's employment or (ii) the date
the Executive secures full time employment.
4.5 Mitigation. The Executive shall not be required to mitigate the
amount of any payment or benefits provided for in this Section 4 by seeking
other employment or otherwise. Further, except as provided in Section
4.2(a)(ii), the amount of any payment or benefits provided for in this Section 4
shall not be reduced by any compensation earned by the Executive as a result of
employment by another employer, by retirement benefits, by offset against any
amount claimed to be owed by the Executive to the Company or otherwise.
5. Disputes.
5.1 Settlement of Disputes; Arbitration. All claims by the Executive
for benefits under this Agreement shall be directed to and determined by the
Board of Directors of the Company and shall be in writing. Any denial by the
Board of Directors of a claim for benefits under this Agreement shall be
delivered to the Executive in writing and shall set forth the specific reasons
for the denial and the specific provisions of this Agreement relied upon. The
Board of Directors shall afford a reasonable opportunity to the Executive for a
review of the decision denying a claim. Any further dispute or controversy
arising under or in connection with this Agreement shall be settled exclusively
by arbitration in Boston, Massachusetts, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction.
5.2 Expenses. The Company agrees to pay as incurred, to the full
extent permitted by law, all legal, accounting and other fees and expenses which
the Executive may reasonably incur as a result of any claim or contest
(regardless of the outcome thereof) by the Company, the Executive or others
regarding the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive regarding the amount of any payment or benefits
pursuant to this Agreement), plus in each case interest on any delayed payment
at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the
Code.
6. Successors.
6.1 Successor to Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Company expressly to
assume and agree to perform this Agreement to the same extent that the Company
would be required to perform it if no such succession had taken place. Failure
of the Company to obtain an assumption of this Agreement at or prior to the
effectiveness of any succession shall be a breach of this Agreement and shall
constitute Good Reason if the Executive elects to terminate employment, except
that for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination. As used in
this Agreement, "Company" shall mean the Company as defined above and any
successor to its business or assets as aforesaid which assumes and agrees to
perform this Agreement, by operation of law or otherwise.
6.2 Successor to Executive. This Agreement shall inure to the benefit
of and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amount would still be payable to
the Executive or [his/her] family hereunder if the Executive had continued to
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the executors, personal
representatives or administrators of the Executive's estate.
7. Notice. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid, or (ii) prepaid via a reputable
nationwide overnight courier service, in each case addressed to the Company, at
81 Wyman Street, Waltham, Massachusetts and to the Executive at the Executive's
principal residence as currently reflected on the Company's records (or to such
other address as either the Company or the Executive may have furnished to the
other in writing in accordance herewith). Any such notice, instruction or
communication shall be deemed to have been delivered five business days after it
is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service. Either party may give any notice, instruction or
other communication hereunder using any other means, but no such notice,
instruction or other communication shall be deemed to have been duly delivered
unless and until it actually is received by the party for whom it is intended.
8. Miscellaneous.
8.1 Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
8.2 Injunctive Relief. The Company and the Executive agree that any
breach of this Agreement by the Company is likely to cause the Executive
substantial and irrevocable damage and therefore, in the event of any such
breach, in addition to such other remedies which may be available, the Executive
shall have the right to specific performance and injunctive relief.
8.3 Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the internal laws of the
Commonwealth of Massachusetts, without regard to conflicts of law principles.
8.4 Waivers. No waiver by the Executive at any time of any breach of,
or compliance with, any provision of this Agreement to be performed by the
Company shall be deemed a waiver of that or any other provision at any
subsequent time.
8.5 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original but both of which together shall
constitute one and the same instrument.
8.6 Tax Withholding. Any payments provided for hereunder shall be
paid net of any applicable tax withholding required under federal, state or
local law.
8.7 Entire Agreement. This Agreement sets forth the entire agreement
of the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto in respect of the
subject matter contained herein; and any prior agreement of the parties hereto
in respect of the subject matter contained herein is hereby terminated and
cancelled, including without limitation the Executive's Severance Benefit
Agreement with the Company dated, [1983/1988].
8.8 Amendments. This Agreement may be amended or modified only by a
written instrument executed by both the Company and the Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first set forth above.
THERMO ELECTRON CORPORATION
By:________________________________
Title:_______________________________
-----------------------------------
[NAME OF EXECUTIVE]
LG-TMO-Agreement 4420
Exhibit 10.2
September 15, 1998
Mr. John N. Hatsopoulos
3 Woodcock Lane
Lincoln, MA 01773
Dear John:
This letter confirms our arrangement regarding your retirement as chief
financial officer of Thermo Electron Corporation (the "Company") and as an
officer of any of its subsidiaries or affiliates, and also your subsequent
appointment as a consultant to the Company.
The following is our agreement related to your retirement from the
Company:
1. Termination of Employment: Your employment with the Company will
terminate as of December 31, 1998 (the "Employment Termination Date"). You will
be paid your regular salary through the Employment Termination Date.
2. 1998 Bonus: You will be entitled to receive a bonus for the 1998
calendar year in an amount to be determined on the same basis as other similarly
situated Company executives, which bonus shall be payable at such time as such
bonuses are normally paid.
3. Accrued Vacation/Expenses: You will be paid for any accrued but unused
vacation time you had earned through the Employment Termination Date. You will
not continue to earn vacation or other paid time off after the Employment
Termination Date. Reconciliation of your outstanding expense account as of the
Employment Termination Date shall be made with the approval of the chairman of
the audit committee of the Board of Directors of the Company. Any amount
outstanding on your account as of such date shall be deducted from the amount
payable for your accrued vacation time.
4. Full Payment: You agree that all payments provided to you under
paragraphs 1, 2 and 3 of this Agreement are in complete satisfaction of any and
all compensation due to you from the Company through the Employment Termination
Date.
5. Position: The Company shall nominate you for election to its Board of
Directors at its 1999 Annual Meeting of Stockholders and its 2002 Annual Meeting
of Stockholders. Assuming you are elected director by the Company's shareholders
and subject to the Board of Directors fiduciary duties, the Company shall use
its best efforts to cause you to remain Vice Chairman of the Board of Directors
of the Company, a non-executive position with the Company, during the term of
this Agreement. You will not be entitled to receive any cash compensation for
your service as a director of the Company or any subsidiary thereof.
6. Employee Benefit Programs: Your participation in all employee benefit
programs of the Company shall cease as of the Employment Termination Date in
accordance with the terms of those programs. The Company will use its best
efforts to obtain for you during the term of this Agreement health and dental
care insurance for you and your dependents with substantially the same coverage
as currently in effect, at the Company's sole cost and expense. You will also
have the option, at your sole expense, of converting your basic life insurance
coverage to an individual plan through Prudential. If interested, please let us
know within 15 days following the Employment Termination Date and conversion
information will be furnished to you. A conversion option is not available for
long term disability coverage.
7. Money Match Plus Plan: Your active participation in the Money Match
Plus Plan shall end on the Employment Termination Date. Information will be
provided to you regarding various election options available to you regarding
your account.
8. Stock Options: So long as you remain a director of one or more Thermo
Electron companies, you shall be entitled to retain your stock options in the
Company and any of its subsidiaries, subject to the terms and conditions of such
options.
9. Taxes: All payments by the Company under this Agreement will be reduced
by all taxes and other amounts that the Company is required to withhold under
applicable law and all other deductions authorized by you.
10. Consulting Services: You agree to provide, and make yourself available
to provide, consulting services to the Company on a half-time basis, at such
time or times as is mutually agreeable by the parties. The term of this
consulting arrangement shall commence on the day immediately following the
Employment Termination Date and terminate on the fifth anniversary of the
Employment Termination Date. The Company shall provide you with an office, which
will be equipped with one fully-operational quotron machine for your use. The
Company will also provide you with the support services of one full-time
secretary. You agree to use your best efforts, business judgment and skill in
rendering consulting services hereunder. This Agreement shall not prohibit you
from serving on the board of directors of LOIS/USA Inc. and Premier, Inc. or
from engaging in any other business activities during the consulting period
provided that such other business activities (i) shall be subject to the prior
approval of the Company, which approval shall not be unreasonably withheld, and
provided such approval or disapproval shall be communicated to you in writing
within 10 business days of such request for approval (it being understood that
the failure by the Company to so communicate its disapproval in writing within
such 10-day period shall be deemed an approval of such request), and (ii) do not
prevent you from performing your obligations under this consulting arrangement.
It is expressly agreed that you are acting as an independent contractor in
performing your services hereunder and not as an employee or agent of the
Company and as such will not be treated as an employee for any reason
whatsoever, including but not limited to federal or state tax purposes. In the
event of your death, disability or other incapacity resulting in your inability
to perform your consulting duties hereunder, all compensation due and owing
under this Section 10 shall continue to be payable to you or your estate. The
Company may terminate your consulting arrangement for Cause and, in such event,
the Company shall have no further obligation to you under this consulting
arrangement. "Cause" shall mean your (a) conviction of a felony, or a
misdemeanor involving material fraud or material dishonesty, (b) material fraud
or material dishonesty in the course of consulting hereunder, (c) gross
misconduct that is injurious to the Company or its subsidiaries and affiliates,
or (d) gross neglect of your duties and responsibilities under the terms of this
consulting arrangement.
11. Consultant Compensation: In consideration for your agreement to
provide consulting services, the Company shall pay you an amount equal to
$500,000 per year for the term of this Agreement, payable monthly in arrears,
provided you continue to comply with the terms of this Agreement. The Company
shall reimburse you for all reasonable out-of-pocket costs and expenses incurred
by you in connection with your provision of consulting services to the Company
hereunder, subject to the prior approval of the Company.
12. Company Property: You will return to the Company any and all
documents, materials and information related to the Company, or its
subsidiaries, affiliates or businesses, and all other property of the Company,
including, without limitation, files and personal computers in your possession
or control, on or before the Employment Termination Date. You may, however,
retain your Company credit cards. Further, the Company agrees to transfer to you
title to your Company leased vehicle for $100 and the difference between the
current market value of such vehicle and such purchase price will be deemed to
be additional wages and as such will be reported as wages on your W-2 statement.
13. Restriction on Purchase or Sale of Common Stock: You understand that
you will continue to be a "Reporting Person" for purposes of Section 16 of the
Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder, and you will remain subject to insider trading regulations under the
federal securities laws, for as long as you remain a director of the Company
and/or any of its subsidiaries and for a period of six months following the
termination of all such positions and that you are requested to preclear
transactions in the Company and its subsidiaries' securities with the Company's
Stock Transaction Coordinator, Ms. Pauline I. Northern. You are also urged to
contact the Corporate Secretary of the Company, Ms. Sandra L. Lambert, should
you have any questions regarding compliance with the insider trading regulations
under the federal securities laws.
14. Resignation: In connection with your retirement, you hereby resign
effective as of the day immediately following the Employment Termination Date
all of your positions as an officer of the Company and all of its subsidiaries
and affiliates.
<PAGE>
15. Company Information and Invention Agreement: You agree to execute and
comply with the terms of the Thermo Electron Company Information and Invention
Agreement, a copy of which is attached hereto. Such agreement supersedes any
prior agreement covering the same subject matter which you may have signed with
the Company.
16. Non-Disparagement: You agree that you will continue to support and
promote the interests of the Company and its subsidiaries and affiliates and
that you will not disparage the Company or its subsidiaries or affiliates, or
any of the people or organizations connected with them, or do or say anything
that could disrupt the good morale of the employees of the Company or otherwise
harm the interests or reputation of the Company and its subsidiaries and
affiliates and any of the organizations or people connected with them. The
Company agrees that it will cause the officers of the Company and its
subsidiaries not to disparage you or otherwise do or say anything that harms
your reputation and that the Company shall be solely responsible for any breach
of the provisions contained in this Section 16 by any such officers. Should any
party violate the requirements of this provision, any non-breaching party shall
be relieved of the requirements of this provision to the extent necessary to
respond to statements made by the breaching party. Nothing in this provision
shall prevent the parties from (i) complying with compulsory legal process or
otherwise making disclosures in connection with litigation or administrative
proceedings, (ii) making such disclosures as are necessary to obtain legal
advice, (iii) making disclosures as are required by federal, state or local
regulatory authorities, and (iv) making disclosures which by law are required or
cannot be prohibited.
17. Cooperation: You agree to reasonably cooperate with the Company with
respect to all matters arising during or related to your past employment and
your consulting services provided hereunder, including but not limited to
cooperation in connection with any governmental investigation, litigation or
regulatory or other proceeding which may have arisen or which may arise
following the signing of this Agreement.
18. Waiver of Trial by Jury: Each of the parties hereby expressly,
knowingly and voluntarily waives all benefit and advantage of any right to a
trial by jury, and each agrees that he or it will not at any time insist upon,
or plead or in any manner whatsoever claim or take the benefit or advantage of,
a trial by jury in any action arising in connection with this Agreement.
19. Entire Agreement: This letter contains the entire Agreement between
you and the Company and replaces all prior and contemporaneous agreements,
communications and understandings, whether written or oral, with respect to your
retirement, your employment and its termination and all related matters,
including without limitation your Severance Benefit Agreement with the Company
dated February 28, 1983. This Agreement will be governed by and interpreted in
accordance with the laws of the Commonwealth of Massachusetts without regard to
choice of law provisions.
20. Severability: If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and replaced with a provision which is enforceable and comes
closest to the intent of the parties underlying the unenforceable provision.
21. Relief: In the event of breach of the provisions of this Agreement by
any party, in addition to any other rights that the other party may have under
law or in equity, each party shall have the right to specific performance and
injunctive relief, it being acknowledged and agreed that money damages will not
provide an adequate remedy. In the event litigation is brought with respect to
this Agreement, the prevailing party shall be entitled to recover from the
losing party his or its reasonable attorney's fees and expenses.
22. Successors and Assigns: No party hereto may assign any of its rights
under this Agreement without the prior written consent of the other party. This
Agreement is binding on each of the parties' permitted assigns, successors in
interest, heirs, administrators and executors.
23. Term: This Agreement shall terminate on the fifth anniversary of the
Employment Termination Date. Notwithstanding the foregoing, the Thermo Electron
Company Information and Invention Agreement, a copy of which is attached hereto,
shall have no termination date.
<PAGE>
24. Voluntary Agreement: In signing this Agreement, you give the Company
assurance that you have signed it voluntarily and with a full understanding of
its terms and that you have had sufficient opportunity to consider this
Agreement and to consult with anyone of your choosing before signing it. If the
terms of this Agreement are acceptable to you, please sign and return it to the
undersigned. At the time you sign and return this Agreement, it will take effect
as a legally-binding agreement between you and the Company on the basis set
forth above.
THERMO ELECTRON CORPORATION
Anne Pol
-------------------------------
By: Anne Pol
Title: Senior Vice President
George N. Hatsopoulos
-------------------------------
By: George N. Hatsopoulos
Title: Chief Executive Officer
Accepted and Agreed to:
John N. Hatsopoulos
- ----------------------
John N. Hatsopoulos
Thermo Electron
COMPANY INFORMATION AND INVENTION AGREEMENT
In consideration and as a condition of my engagement as a consultant to
Thermo Electron Corporation (the "Company") and the compensation paid therefor:
1. I agree not to disclose to others or use for my own benefit during the
term of my consulting arrangement with the Company or thereafter any trade
secrets or private or confidential information pertaining to any of the
actual or anticipated business of the Company, its subsidiaries or
affiliates, or any of their respective customers, consultants, or
licensees, either previously acquired by me during the period of my
employment with the Company or acquired by me during the period of my
consulting arrangement with the Company, except to such an extent as may
be necessary in the ordinary course of performing my particular duties as
a consultant to the Company.
2. I agree not to disclose to the Company, its subsidiaries and affiliates,
or to induce the Company, its subsidiaries and affiliates, to use, any
confidential information or material belonging to persons other than the
Company, its subsidiaries or affiliates.
3. I understand that the making of inventions, improvements and discoveries
had been one of the incidents of my employment with the Company and may be
one of the incidents of my consulting arrangement, and I agree to assign
to the Company or its nominee my entire right, title and interest in any
invention, idea, device or process, whether patentable or not, (i) made or
conceived by me solely or jointly with others during the period of my
employment by the Company in an executive, managerial, planning,
technical, research, engineering, or other capacity and which relates in
any manner to the business of the Company, or relates to its actual or
planned research or development, or is suggested or results from any task
assigned to me or work performed by me for or on behalf of the Company, or
(ii) made or conceived by me solely or jointly with others during the
period of my consulting arrangement with the Company which relates in any
manner to the business of the Company or any of its subsidiaries or
affiliates.
4. I agree, in connection with any invention, idea, device or process covered
by paragraph 3:
a. To disclose it promptly in writing to the proper officers or attorney
of the Company.
b. To execute promptly, on request, patent applications and assignments
thereof to the Company or its nominee and to assist the Company in
any reasonable manner to enable it to secure a patent therefor in the
United States and any foreign countries, all without further
compensation except as provided herein.
5. I further agree that all papers and records of every kind, relating to any
invention or improvement included within the terms of this Agreement which
shall at any time come into my possession shall be the sole and exclusive
property of the Company and shall be surrendered to the Company upon any
termination of my consulting arrangement by me or the Company or upon
request at any other time either during or after the termination of such
consulting arrangement.
6. I further agree that the obligations and undertakings stated above in
paragraph 4b shall continue beyond the termination of my consulting
arrangement with the Company, but if I am called upon to render such
assistance after the termination of my consulting arrangement, then I
shall be entitled to a fair and reasonable per diem in addition to
reimbursement of any expenses incurred at the request of the Company.
7. I agree to identify in an attachment to this Agreement all
inventions or ideas related to the business or actual or
planned research or development of the Company or any of its
subsidiaries or affiliates, including the Company, in which
I have right, title or interest, and which had been
conceived either wholly or in part by me prior to my
employment by the Company but neither published nor filed in
the U.S. Patent and Trademark Office.
8. I understand that this Agreement supersedes any agreement
previously executed by me relating to the disclosure,
assignment and patenting of inventions, improvements and
discoveries made during the term of my consulting
arrangement with the Company. This Agreement shall inure to
the benefit of the successors and assigns of the Company,
and shall be binding upon my heirs, assigns, administrators
and representatives.
9. I understand that this Agreement does not apply to an invention which
qualifies fully under the provisions of any statute or regulation which
renders unenforceable the required assignment or transfer of certain
inventions made by an employee.
John N. Hatsopoulos
Consultant
Jonathan C. Wilk
Witness Date
THERMO ELECTRON CORPORATION
By: George N. Hatsopoulos
Seth H. Hoogasian
Witness Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
ELECTRON CORPORATION'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 3, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-03-1998
<CASH> 416,084
<SECURITIES> 1,135,876
<RECEIVABLES> 889,263
<ALLOWANCES> 55,315
<INVENTORY> 619,315
<CURRENT-ASSETS> 3,269,275
<PP&E> 1,268,395
<DEPRECIATION> 443,375
<TOTAL-ASSETS> 6,244,127
<CURRENT-LIABILITIES> 1,122,477
<BONDS> 1,894,543
0
0
<COMMON> 166,971
<OTHER-SE> 2,054,303
<TOTAL-LIABILITY-AND-EQUITY> 6,244,127
<SALES> 2,733,993
<TOTAL-REVENUES> 2,869,231
<CGS> 1,608,519
<TOTAL-COSTS> 1,727,160 <F1>
<OTHER-EXPENSES> 205,238 <F2>
<LOSS-PROVISION> 5,473
<INTEREST-EXPENSE> 77,077
<INCOME-PRETAX> 308,147
<INCOME-TAX> 130,069
<INCOME-CONTINUING> 140,043
<DISCONTINUED> 0
<EXTRAORDINARY> 4,817
<CHANGES> 0
<NET-INCOME> 144,860
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.84
<FN>
<F1>THIS LINE IS MADE UP OF THE FOLLOWING INCOME STATEMENT ACCOUNTS: "COST
OF PRODUCT AND SERVICE REVENUES" AND "COST OF RESEARCH AND DEVELOPMENT
CONTRACTS".
<F2>THIS LINE IS MADE UP OF THE FOLLOWING INCOME STATEMENT ACCOUNTS:
RESTRUCTURING AND OTHER NONRECURRING COSTS" AND "INTERNALLY FUNDED RESEARCH AND
DEVELOPMENT".
</FN>
</TABLE>
