SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 2, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-8002
THERMO ELECTRON CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2209186
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------------------- -----------------------------------------
Common Stock, $1.00 par value New York Stock Exchange
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to the filing requirements for
at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of January 29, 1999, was approximately $2,569,399,000.
As of January 29, 1999, the Registrant had 158,133,782 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
January 2, 1999, are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 27, 1999, are incorporated by reference into
Part III.
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
Thermo Electron Corporation and its subsidiaries (the Company or the
Registrant) develop and manufacture a broad range of products that are sold
worldwide. The Company is a world leader in monitoring, analytical, and
biomedical instrumentation; biomedical products including heart-assist devices,
respiratory-care equipment, and mammography systems; and paper recycling and
papermaking equipment. The Company also develops alternative-energy systems and
clean fuels, provides a range of services including industrial outsourcing and
environmental-liability management, and conducts research and development in
advanced imaging, laser, and electronic information-management technologies. The
Company performs its business through wholly owned subsidiaries and divisions,
as well as majority-owned subsidiaries that are partially owned by the public or
private investors.
A key element in the Company's growth has been its ability to commercialize
innovative products and services emanating from research and development
activities conducted by its various subsidiaries. The Company's strategy has
been to identify business opportunities arising from social, economic, and
regulatory issues, and to seek a leading market share through the application of
proprietary technology. As part of this strategy, the Company has acquired
complementary businesses that can be integrated into its existing core
businesses to leverage access to new markets.
The Company believes that maintaining an entrepreneurial atmosphere is
essential to its continued growth and development. To preserve this atmosphere,
the Company 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 for the management of the subsidiaries through the establishment of
subsidiary-level stock option incentive programs, as well as capital to support
the subsidiaries' growth. The Company's wholly and majority-owned subsidiaries
are provided with centralized corporate development, administrative, financial,
and other services that would not be available to many independent companies of
similar size. As of March 19, 1999, the Company had 29 subsidiaries that have
sold minority equity interests, 23 that are publicly traded and 6 that are
privately held. In addition, in February 1999, the Company's Thermo Instrument
Systems Inc. subsidiary completed the acquisition of Spectra-Physics AB, which
has an 80%-owned public subsidiary, Spectra-Physics Lasers, Inc.
During 1998, the Company announced a proposed reorganization involving the
Company and certain of its subsidiaries. The goals of the proposed
reorganization include consolidating and strategically realigning certain
businesses to enhance their competitive market positions and improve management
coordination and 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 16, excluding Spectra-Physics
Lasers, Inc. Each component of the reorganization is subject to numerous
conditions, as outlined in Note 17 to Consolidated Financial Statements in the
Registrant's 1998* Annual Report to Shareholders, which information is
incorporated herein by reference.
The Company is a Delaware corporation and was incorporated in 1956. The
Company completed its initial public offering in 1967 and was listed on the New
York Stock Exchange in 1980.
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Annual Report on Form
10-K. For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects,"
"seeks," "estimates," and similar expressions are intended to
- --------------------
* References to 1998, 1997, and 1996 herein are for the fiscal years ended
January 2, 1999, January 3, 1998, and December 28, 1996, respectively.
2
<PAGE>
identify forward-looking statements. There are a number of important factors
that could cause the results of the Company to differ materially from those
indicated by such forward-looking statements, including those detailed under the
heading "Forward-looking Statements" in the Registrant's 1998 Annual Report to
Shareholders, which statements are incorporated herein by reference.
(b) Financial Information About Segments
Financial information concerning the Company's segments is summarized in
Note 14 to Consolidated Financial Statements in the Registrant's 1998 Annual
Report to Shareholders, which information is incorporated herein by reference.
(c) Description of Business
(i) Principal Products and Services
The Company's products and services are divided into four segments:
Measurement and Detection, Biomedical and Emerging Technologies, Energy and
Environment, and Recycling and Resource Recovery. Products or services within a
particular segment are provided by more than one subsidiary, and the businesses
of one subsidiary (Thermedics Inc.) are included in two segments. The principal
products and services offered by the Company in the four industry segments are
described below.
Measurement and Detection
This segment includes the following businesses:
Thermo Instrument Systems Inc. and all of its subsidiaries:
Metrika Systems Corporation
ONIX Systems Inc.
Thermo BioAnalysis Corporation
Thermo Optek Corporation
ThermoQuest Corporation
ThermoSpectra Corporation
Thermo Vision Corporation
and certain public subsidiaries of Thermedics Inc.:
Thermedics Detection Inc.
Thermo Sentron Inc.
Thermo Voltek Corp.
Thermo Instrument Systems Inc.
Thermo Instrument, a majority-owned public subsidiary of the Company, is a
worldwide leader in the development, manufacture, and marketing of measurement
instruments used to monitor, collect, and analyze information. These systems are
used for multiple applications in a range of industries, including industrial
processing, food and beverage production, life sciences research, and medical
diagnostics.
Thermo Instrument historically has expanded both through the acquisition of
companies and product lines, and through the internal development of new
products and technologies. During the past several years, Thermo Instrument has
completed a number of key acquisitions that have provided complementary
technologies, specialized manufacturing or product-development expertise, and
broader capabilities in marketing and distribution.
3
<PAGE>
In February 1999, Thermo Instrument completed the acquisition of
Spectra-Physics AB, a Swedish company that manufactures a wide range of
laser-based instrumentation systems, primarily for the process-control,
industrial measurement, construction, research, commercial, and government
markets. Spectra-Physics reported revenues of $442 million in 1998 and has
operations throughout North America and Europe, and a presence in the Pacific
Rim. Spectra-Physics had approximately 17.6 million shares outstanding. The
aggregate cost for Spectra-Physics will total approximately $355 million.
Thermo Instrument adopted the Company's spinout strategy in an effort to
more clearly focus its many measurement and detection technologies on specific
market niches. Excluding Spectra-Physics Lasers, Inc., a public subsidiary of
Spectra-Physics, Thermo Instrument has seven majority-owned public subsidiaries,
described below.
Metrika Systems manufactures on-line process-optimization systems that
provide real-time nondestructive analysis of the composition of raw materials in
basic-materials production processes including coal, cement, and minerals. In
addition, Metrika Systems manufactures advanced systems used principally by
manufacturers of finished flat metals, such as sheet metal, and web materials,
such as rubber, plastic foils, and glass to measure and control parameters such
as thickness and coating weight.
ONIX Systems designs, develops, markets, and services sophisticated
field-measurement instruments and on-line sensors for process-control
industries, particularly the oil and gas industry. These systems provide
real-time data collection, analysis, and local control functions to enhance
production efficiency, improve process and quality control, ensure regulatory
compliance, and increase employee safety.
Thermo BioAnalysis develops, manufactures, and markets instruments,
consumables, and information-management systems used in pharmaceutical research
and production, and in clinical diagnostics, including point-of-care test kits
for rapid diagnosis of certain illnesses.
Thermo Optek is a worldwide leader in spectroscopy instrumentation for
molecular and elemental analysis based upon energy and light measurements, as
well as systems for materials sciences including surface analysis,
characterization, preparation, and physical-properties analysis.
ThermoQuest is a leading manufacturer of mass spectrometers, liquid
chromatographs, and gas chromatographs for the pharmaceutical, environmental,
and industrial marketplaces. These analytical instruments are used in the
quantitative and qualitative chemical analysis of organic and inorganic
compounds at ultratrace levels of detection. ThermoQuest also supplies
scientific equipment for the preparation and preservation of chemical samples,
and consumables for the chromatography industry.
ThermoSpectra develops, manufactures, and markets precision imaging and
inspection, temperature-control, and test and measurement instruments. These
instruments are generally combined with proprietary operations and analysis
software to provide industrial and research customers with integrated systems to
address specific needs.
Thermo Vision designs, manufactures, and markets a diverse array of
photonics products (light-based technologies) including optical components,
imaging sensors and systems, lasers, optically based instruments,
opto-electronics, and fiber optics. These products are used in applications
including medical diagnostics and analytical instrumentation; semiconductor
manufacturing; X-ray imaging; physics, chemistry, and biology research; and
telecommunications.
Thermo Instrument also includes wholly owned businesses, which produce
instruments and complete systems for detecting and monitoring environmental
pollutants from industrial and mobile sources, for worker safety, and for
detecting radioactive contamination.
4
<PAGE>
Thermedics Inc.
Three majority-owned public subsidiaries of Thermedics, a majority-owned
public subsidiary of the Company, manufacture measurement and detection
instruments.
Thermedics Detection develops, manufactures, and markets high-speed on-line
analysis systems used for product quality assurance, laboratory analysis, and
security. Thermedics Detection provides X-ray imaging systems that monitor a
wide range of containers for fill volume, net volume, and package integrity, as
well as systems that detect trace amounts of contaminants in refillable bottles,
for the beverage, food, and other industries. Thermedics Detection also makes
instruments that measure moisture and other product components, including fat,
protein, and solvents, in numerous consumer and industrial products, along with
electrode-based chemical-measurement systems used in the agricultural,
biomedical research, food processing, pharmaceutical, water-treatment, and other
industries. The company also offers an ultrahigh-speed gas chromatograph that
permits manufacturers to conduct laboratory-quality analysis for near-on-line
process-control applications. In addition, Thermedics Detection makes security
instruments that use trace particle- and vapor-detection techniques for
forensics, search, and screening applications.
Thermo Sentron designs and manufactures high-speed precision-weighing and
inspection equipment for two principal markets, packaged goods and bulk
materials, that use its products to meet quality and productivity objectives.
The company's checkweighers and metal detectors are used primarily by the
food-processing, pharmaceutical, and mail-order industries. Its bulk-materials
product line includes conveyor-belt scales, solid level-measurement and
conveyor-monitoring systems, and sampling systems sold to the mining and
material-processing industries, as well as to electric utilities and chemical
and other manufacturers. With its June 1998 acquisition of the
product-monitoring group of Graseby Limited, a subsidiary of Smiths Industries
plc, Thermo Sentron broadened its core product lines and also added the
production of thermal printers that apply information such as bar codes, lot
numbers, and "sell by" dates to labels on food and pharmaceutical products.
Thermo Voltek designs, manufactures, and markets test instruments and a
range of products related to power amplification, conversion, and quality.
Thermo Voltek's power products are used in communications, broadcast, research,
and medical imaging applications. Its test instruments allow manufacturers of
electronic systems and integrated circuits to test for electromagnetic
compatibility.
Biomedical and Emerging Technologies
This segment primarily includes the following businesses:
Thermo Biomedical
Certain subsidiaries of Thermedics Inc., including its public
subsidiary
Thermo Cardiosystems Inc.
ThermoTrex Corporation
Trex Medical Corporation
ThermoLase Corporation
Thermo Coleman Corporation
This segment comprises a number of diverse businesses, both wholly and
publicly owned, that supply a wide range of medical products such as medical
systems and devices for diagnostic imaging, cardiovascular support, respiratory
care, neurodiagnostics, sleep analysis, wireless patient monitoring, and
hemostasis management. The Company's biomedical products are provided to
hospitals, clinics, universities, private-practice medical offices, and medical
research facilities.
5
<PAGE>
Thermo Biomedical
Thermo Biomedical consists of a group of wholly owned companies that
serve a range of healthcare markets. Bear Medical Systems Inc. designs,
manufactures, and markets respiratory products, primarily ventilators, for
pediatric and adult care. Bird Medical Technologies, Inc. develops,
manufactures, and sells respiratory-care equipment and accessories and
infection-control products. Medical Data Electronics, Inc. is a
manufacturer of wireless, portable patient-monitoring systems. Nicolet
Biomedical Inc. is a leading manufacturer of instruments for assessing
muscle, nerve, sleep, hearing, and brain blood-flow disorders, various
neurologic disorders, and for related work in clinical neurophysiology.
Nicolet Biomedical is also a leading manufacturer of products used to
evaluate peripheral vascular disease, as well as products to detect fetal
heartbeat. SensorMedics Corporation is a leading provider of systems for
pulmonary function diagnosis, and a producer of respiratory gas analyzers,
physiological testing equipment, and automated sleep-analysis systems.
The Company's wholly owned Tecomet Inc. subsidiary provides specialty-metals
fabrication services required for biocompatible orthopedic devices used in human
joint reconstruction and trauma surgeries, surgical tools, and for high-quality
aerospace and other commercial applications.
Thermedics Inc.
Thermo Cardiosystems, a majority-owned public subsidiary of Thermedics, and
the wholly owned businesses of Thermedics also manufacture biomedical products.
Thermo Cardiosystems has developed an implantable left ventricular-assist
system (LVAS) called HeartMate(R) that, when implanted alongside the natural
heart, is designed to take over the pumping function of the left ventricle for
patients whose hearts are too damaged or diseased to produce adequate blood
flow. Thermo Cardiosystems has two versions of the LVAS: a pneumatic (or
air-driven) system that can be controlled by either a bedside console or
portable unit, and an electric system that features an internal electric motor
powered by an external battery-pack worn by the patient.
The air-driven HeartMate system has received both the European Conformity
(CE) Mark and U.S. Food and Drug Administration (FDA) approval for commercial
sale. The electric version of the LVAS, which also holds the CE Mark, was
granted FDA approval in September 1998 for use as a bridge to transplant. In
Europe, the electric device is used both as a bridge to transplant and as an
alternative to medical therapy.
Thermo Cardiosystems is also pursuing the development of next-generation
devices, including high-speed rotary blood pumps that are relatively small and
could potentially provide cardiac support in small adults and children.
Thermo Cardiosystems is also a leading manufacturer of hemostasis-management
products, including blood coagulation-monitoring instruments, and also supplies
skin-incision devices used to draw small blood samples precisely and with
minimal discomfort.
Thermedics' wholly owned businesses provide proprietary thermoplastic
polyurethanes used in medical disposables and industrial products, and
enteral-feeding systems for patients who are unable to feed themselves but do
not require intravenous support.
ThermoTrex Corporation
ThermoTrex, a majority-owned public subsidiary of the Company, including two
majority-owned public subsidiaries, are included in the Biomedical and Emerging
Technologies segment.
6
<PAGE>
Trex Medical, a public subsidiary of ThermoTrex, designs, manufactures, and
markets mammography equipment and minimally invasive digital breast-biopsy
systems; general-purpose and specialized medical X-ray equipment, including
imaging systems used during interventional cardiac procedures such as balloon
angioplasty; and dental X-ray systems. Trex Medical sells its systems worldwide
principally through a network of independent dealers and, to a lesser extent, on
a direct basis. In addition, Trex Medical manufactures breast-biopsy and X-ray
systems as an original equipment manufacturer for other medical equipment
companies such as the General Electric Company.
In early December 1997, Trex Medical submitted a 510(k) application to the
FDA seeking clearance to market its digital imaging system for mammography,
believing that this advanced technology could help radiologists manipulate and
enhance image quality to scrutinize subtle differences that may otherwise go
undetected on film-based X-rays. In December 1998, the FDA withdrew Trex
Medical's application on the basis that it was unable to determine substantial
equivalence between full-field digital mammography and conventional film-based
systems from the data provided. In January 1999, the FDA deemed the application
active again; however, Trex Medical will be required to submit additional
information.
ThermoLase, also a public subsidiary of ThermoTrex, developed a patented
hair-removal system called SoftLight(R), for which it received FDA clearance in
April 1995. The SoftLight system uses a low-energy dermatology laser in
combination with a lotion to remove hair. In May 1998, ThermoLase received
510(k) clearance from the FDA to use the SoftLight laser for cosmetic skin
resurfacing.
ThermoLase had initially implemented a strategy of offering its laser-based
hair-removal services through a network of spas and through physician licensees.
However, because results in the marketplace would not support the company's
premium pricing structure and its substantial infrastructure costs, ThermoLase
has reassessed its strategy and repositioned its offerings.
ThermoLase added its new skin-resurfacing service, and in June 1998,
acquired The Greenhouse Spa, Inc. in an effort to bring traditional destination
spa services to its day spa network. Of its 15 original spas, ThermoLase
announced the closure of three in the U.S. and one overseas, with the remaining
domestic spas now operating under the Greenhouse name. ThermoLase is evaluating
the performance of individual spas to determine which are most viable under the
Greenhouse format and, if appropriate, will close or sell additional spas.
Through its wholly owned Creative Beauty Innovations (CBI) subsidiary,
ThermoLase also offers personal-care products such as lotions, cleansers, and
energy drinks that are sold through the Greenhouse Spas and other high-end
salons, department stores, and discount chains under both CBI brand names and
private labels.
Trex Communications Corporation, a majority-owned privately held subsidiary
of ThermoTrex, manufactures and markets ground-based satellite communication
systems and related components and has developed and is in early-stage testing
of its laser communications technology designed to move very large amounts of
data quickly, via lasers without the need for wires or licensing from the
Federal Communications Commission.
ThermoTrex, through a wholly owned business conducts sponsored research and
development with the goal of commercializing new products based on advanced
technologies developed in its laboratories. Sponsored research and development,
conducted principally for the U.S. government, includes basic and applied
research in communications, avionics, digital imaging, signal processing,
advanced-materials technology, and lasers.
ThermoTrex is currently developing a number of additional technologies that
it believes may have future commercial potential. These include a passive
millimeter-wave camera intended to see through clouds and fog and certain opaque
objects to enhance safety in aerial navigation, a space surveillance system
designed to produce high-resolution images of low-earth-orbit satellites, a
rapid optical beam steering laser radar system, and direct-detection digital
imaging technology for certain medical imaging fields.
7
<PAGE>
Thermo Coleman Corporation
Thermo Coleman, a majority-owned privately held subsidiary of the Company,
provides systems engineering, technology support, and information-technology
services and products to government and commercial markets. Thermo Coleman also
provides defense- and environmental-systems engineering, integration, and
analysis services, and advanced technology research and development, primarily
to the U.S. government. Using expertise gained from its government contract
work, Thermo Coleman designs, develops, and commercializes services and products
in areas such as information technology and sensor and measurement systems for
customers in industries including healthcare, education, aircraft production,
government, utilities, and entertainment.
Thermo Information Solutions Inc., a majority-owned privately held
subsidiary of Thermo Coleman, develops commercial applications for information
technology, including integrated document management software, Internet products
and services, and virtual reality products for education and entertainment.
Other
A wholly owned subsidiary of the Company, Thermo Digital Technologies,
L.L.C., has a major contract to supply advanced digital passport printer
technology to the U.S. Department of State for its 15 passport issuing centers
throughout the country. This equipment prints photographic images and other
personal data in a single step to enhance speed and security in passport
production.
Energy and Environment
This segment includes the following businesses:
Thermo Ecotek Corporation
Thermo TerraTech Inc.
ThermoRetec Corporation
The Randers Killam Group Inc.
Thermo Power Corporation
Thermo Ecotek Corporation
Thermo Ecotek, a majority-owned subsidiary of the Company, develops, owns,
and operates independent (non-utility) electric power-generation facilities that
use environmentally responsible technologies, develops and markets clean
alternative fuels, and produces and sells biopesticides.
Thermo Ecotek currently operates seven power plants fueled by agricultural
and wood wastes known as biomass. Its facilities are typically developed and
operated through joint ventures or limited partnerships in which it has a
majority interest, or through wholly owned subsidiaries. Thermo Ecotek intends
to pursue the development of additional biomass projects overseas and other
power-generation projects both in the U.S. and overseas. In the U.S., where the
Company believes that utility deregulation may present opportunities for
updating aging plants, Thermo Ecotek purchased two deregulated plants in
southern California in November 1997 for refurbishing and repowering, and
recently acquired the rights to develop a similar site in Florida. Overseas,
Thermo Ecotek formed a joint venture in Italy and is in the process of
developing biomass-fueled electric power facilities that it will operate. In
early 1998, Thermo Ecotek, through a wholly owned subsidiary's participation in
a joint venture, indirectly acquired a majority interest in two energy centers
in the Czech Republic.
Thermo Ecotek is also expanding beyond power generation into other products
and processes that protect the environment. In August 1995, through two wholly
owned subsidiaries, Thermo Ecotek entered into a Limited Partnership Agreement
with KFx Wyoming, Inc., a subsidiary of KFx, Inc., to develop, construct, and
operate a coal- beneficiation plant in Gillette, Wyoming. The facility employs
patented "clean coal" technology to remove excess moisture and increase energy
from subbituminous coal extracted from Wyoming's Powder River Basin. Thermo
Ecotek has also recently established a natural gas gathering, storage, and
marketing business.
Thermo Ecotek also develops, manufactures, and markets environmentally
friendly products for agricultural pest control through its majority-owned
privately held Thermo Trilogy Corporation subsidiary.
8
<PAGE>
Thermo TerraTech Inc.
Thermo TerraTech, a majority-owned public subsidiary of the Company,
provides industrial outsourcing services and manufacturing support encompassing
a broad range of specializations, including infrastructure engineering, design
and construction, environmental compliance, laboratory testing, and metal
treating.
ThermoRetec, a majority-owned public subsidiary of Thermo TerraTech, is a
national provider of environmental management services in the areas of
industrial, nuclear, and soil remediation, as well as waste-fluids recycling.
ThermoRetec helps clients manage problems associated with environmental
compliance, waste management, and the cleanup of sites contaminated with organic
or toxic wastes.
The Randers Killam Group, another majority-owned public subsidiary of Thermo
TerraTech, provides comprehensive engineering and outsourcing services in such
areas as water and wastewater treatment, highway and bridge projects, process
engineering, construction management, and operational services.
Thermo EuroTech N.V., a majority-owned privately held subsidiary of Thermo
TerraTech, provides remediation and recycling services in Europe, specializing
in converting "off-spec" and contaminated petroleum fluids into usable oil
products, and providing comprehensive in-plant waste management and recycling
services to high-tech manufacturers.
In addition, two wholly owned subsidiaries of Thermo TerraTech provide
metallurgical processing services using thermal-treatment equipment for
customers in the automotive, aerospace, defense, and other industries, and
analytical laboratory services, primarily for pharmaceutical, environmental, and
food testing.
Thermo Power Corporation
Thermo Power, a majority-owned public subsidiary of the Company, develops
and commercializes advanced traffic-control systems and related products,
industrial refrigeration equipment, and commercial cooling and cogeneration
systems. The Company also conducts research and development on advanced power
and pollution-control technologies, and offers propane-powered lighting
products, as well as lighting products for the automotive, sporting goods, and
marine markets.
During 1998, Thermo Power completed its divestiture of the industrial and
marine engine product lines of its Crusader Engines division. This divestiture
was the result of changing market conditions that resulted in declining
profitability at Crusader, and the desire to improve its focus on promoting its
core traffic-control operations.
Thermo Power's Peek plc subsidiary, acquired in November 1997, is a
U.K.-based company that offers a range of traffic-control systems for urban
traffic control, motorway management, and public transportation management in
cities worldwide. Products include traffic-signal synchronization systems to
minimize congestion, variable message systems to advise drivers of accidents or
construction, video systems to provide real-time analysis of traffic flows at
intersections and on highways, as well as automatic toll-collection systems.
Peek also has developed high-resolution video equipment to aid police officers
in monitoring traffic violations.
Through its industrial refrigeration business, Thermo Power supplies
standard and custom-designed industrial refrigeration systems used for cooling,
freezing, and cold-storage applications primarily by the food-processing,
petrochemical, and pharmaceutical industries. Thermo Power is also a supplier of
both remanufactured and new commercial cooling equipment for sale or rental. The
commercial cooling equipment is used primarily in institutions and commercial
buildings, as well as by service contractors.
Thermo Power, through its privately held subsidiary, ThermoLyte Corporation,
is also developing and commercializing propane-powered lighting products for
home or recreational use, and, through a recent acquisition, provides specialty
lights for the automotive, sporting goods, and marine markets.
In addition, Thermo Power designs, develops, markets, and services packaged
cooling and cogeneration systems fueled principally by natural gas, and conducts
sponsored research involving various instrumentation, control, and heat-recovery
technologies.
9
<PAGE>
Recycling and Resource Recovery
This segment primarily includes the following businesses:
Thermo Fibertek Inc.
Thermo Fibergen Inc.
Thermo Fibertek, a majority-owned public subsidiary of the Company, designs
and manufactures stock-preparation equipment, accessories, and water-management
systems for the paper and paper recycling industries. Thermo Fibertek's
principal products include custom-engineered systems and equipment for the
preparation of wastepaper for conversion into recycled paper, accessory
equipment and related consumables important to the efficient operation of
papermaking machines, and water-management systems essential for draining,
purifying, and recycling process water. Thermo Fibertek is a leading equipment
manufacturer for the worldwide paper and paper recycling industries.
Thermo Fibergen, a majority-owned public subsidiary of Thermo Fibertek,
designs, builds, owns, and operates plants to help pulp and paper mill customers
"close the loop" in their water and solids systems on a long-term contract
basis. The plants clean and recycle water and long fiber for reuse in the
papermaking process. In July 1998, the Company completed construction, and began
operating, its first plant.
Thermo Fibergen also uses a patented process to convert papermaking
byproducts into granules that are used for various applications, including
carriers for agricultural chemicals, oil and grease absorption, and cat box
filler, with additional uses under development.
This segment also includes two wholly owned subsidiaries of the Company that
manufacture electroplating systems and related wastewater-treatment equipment
and accessories, and produce steam turbines and compressors.
(ii) and (xi) New Products; Research and Development
The Company's business includes the development and introduction of new
products and may include entry into new business segments. The Company has made
no commitments to new products that require the investment of a material amount
of the Company's assets, nor does it have any definitive plans to enter new
business segments that would require such an investment.
During 1998, 1997, and 1996, the Company expended $367.3 million, $335.4
million, and $299.3 million, respectively, on research and development. Of these
amounts, $154.2 million, $143.7 million, and $144.8 million, respectively, were
sponsored by customers and $213.2 million, $191.6 million, and $154.4 million,
respectively, were Company-sponsored.
(iii) Raw Materials
Certain raw materials used in the manufacture of Thermo Cardiosystems' LVAS
are available from only one or two suppliers. Thermo Cardiosystems is making
efforts to minimize the risks associated with sole sources and ensure long-term
availability, including qualifying alternative materials or developing
alternative sources for materials and components supplied by a single source.
Although the Company believes that it has adequate supplies of materials and
components to meet demand for the LVAS for the foreseeable future, no assurance
can be given that the Company will not experience shortages of certain materials
or components in the future that could delay shipments of Thermo Cardiosystems'
LVAS.
Except as described above, in the opinion of management, the Company has a
readily available supply of raw materials for all of its significant products
from various sources and does not anticipate any difficulties in obtaining the
raw materials essential to its business.
10
<PAGE>
(iv) Patents, Licenses, and Trademarks
The Company considers patents to be important in the present operation of
its business; however, the Company does not consider any patent, or related
group of patents, to be of such importance that its expiration or termination
would materially affect the Company's business taken as a whole. The Company
seeks patent protection for inventions and developments made by its personnel
and incorporated into its products or otherwise falling within its fields of
interest. Patent rights resulting from work sponsored by outside parties do not
always accrue exclusively to the Company and may be limited by agreements or
contracts.
The Company protects some of its technology as trade secrets and, where
appropriate, uses trademarks or registers its products. It also enters into
license agreements with others to grant and/or receive rights to patents and
know-how.
(v) Seasonal Influences
Certain businesses within the Energy and Environment segment are impacted by
seasonal influences:
Thermo Ecotek earns a disproportionately high share of its income from May
through October due to the rate structures under the power-sales agreements
relating to its California power plants, which provide strong incentives to
operate during this period of high demand. Conversely, Thermo Ecotek
historically has operated at a marginal profit during the first calendar quarter
due to the rate structure under these agreements.
Funding patterns of government entities, as well as seasonality, impact
quarterly revenues and income at Thermo Power's Peek subsidiary. Peek has
historically experienced relatively higher sales and net income in the second
and fourth calendar quarters and relatively lower sales and net income in the
first and third calendar quarters.
While Thermo TerraTech conducts significant operations year-round, the
majority of its businesses experience seasonal fluctuations due to adverse
weather during winter months.
There are no other material seasonal influences on the Company's sales of
products and services.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on the Company's working
capital.
(vii) Dependency on a Single Customer
No single customer accounted for more than 10% of the Company's total
revenues in any of the past three years.
(viii) Backlog
<TABLE>
<CAPTION>
<S> <C> <C>
The Company's backlog of firm orders at year-end 1998 and 1997 was:
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Measurement and Detection $309,600 $331,600
Biomedical and Emerging Technologies 281,300 214,000
Energy and Environment 288,100 274,700
Recycling and Resource Recovery 77,300 75,200
-------- --------
$956,300 $895,500
======== ========
</TABLE>
Backlog at the Measurement and Detection segment decreased due to a $15.4
million decline at Thermo Instrument primarily due to lower backlog at Thermo
Optek and ThermoSpectra, principally as a result of a decrease in demand in Asia
and the slowdown in the semiconductor and related industries. To a lesser
extent, the decrease in the Measurement and Detection segment backlog was due to
Thermedics Detection's completion of its contract with the U.S. Federal Aviation
Association and a decrease in demand at Thermo Voltek.
11
<PAGE>
Backlog includes the uncompleted portion of research and development
contracts and the uncompleted portion of certain contracts that are accounted
for using the percentage-of-completion method. Certain of such firm orders are
cancellable by the customer upon the payment of a cancellation charge. The
Company believes substantially all of the year-end 1998 backlog will be filled
during 1999.
(ix) Government Contracts
Not applicable.
(x) Competition
The Company is engaged in many highly competitive industries. The nature of
the competition in each of the Company's segments is described below:
Measurement and Detection
Within the markets for the Company's analytical instrument products, the
Company competes with several large corporations that have broad product
offerings, such as Hewlett-Packard Company; Perkin-Elmer Corp.; Varian
Associates, Inc.; and Hitachi, Ltd., as well as numerous smaller companies that
address particular segments of the industry or specific geographic areas. The
Company's instruments business generally competes on the basis of technical
advances that result in new products and improved price/performance ratios,
reputation among customers as a quality leader for products and services, and
active research and application-development programs. To a lesser extent, the
Company competes on the basis of price.
Thermo Sentron competes with several international and regional companies in
the market for its products. Thermo Sentron's competitors in the packaged goods
market differ from those in the bulk materials market. The principal competitive
factors in both markets are customer service and support, quality, reliability,
and price.
Thermedics Detection's product quality-assurance systems compete with
detection systems manufactured by several companies and with other technologies
and processes for product quality assurance. Competition in the markets for all
of the Company's detection products is based primarily on performance, ease of
use, service, and price. There are a number of competitors in the market for
instruments that detect explosives, including makers of other chemical-detection
instruments as well as enhanced X-ray detectors. Thermedics Detection's
electrode-based chemical-measurement products compete with several international
companies. In the markets for these products, the company competes on the basis
of performance, service, technology, and price.
Thermo Voltek competes in this market for electromagnetic compatibility
testing equipment primarily on the basis of performance, technical expertise,
reputation, and price. In the market for power amplifiers, Thermo Voltek
competes with several companies worldwide primarily on the basis of technical
expertise, reputation, and price.
Biomedical and Emerging Technologies
Competition in the markets for most of the Company's biomedical products,
including those manufactured by Thermo Cardiosystems, ThermoTrex, Nicolet
Biomedical, Bird Medical Technologies, SensorMedics, Medical Data Electronics,
and Bear Medical Systems, is based to a large extent upon technical performance.
The Company is aware of one other company, Baxter Healthcare Corporation,
that has received premarket approval (PMA) from the FDA for an implantable LVAS
similar to Thermo Cardiosystems' LVAS. Also, the Company is aware of one other
company, Thoratec Laboratories Corporation, that has received the same approval
from the FDA for its cardiac-assist device. This is an external device,
positioned on the outside of the patient's chest, and is intended for short-term
use in the hospital environment. In November, this company announced that it had
12
<PAGE>
received approval from the FDA for an investigational device exemption (IDE) for
a portable power source. The Company is aware that other cardiac-assist devices
are in various stages of development by other companies, including a total
artificial heart that is currently undergoing clinical trials. The requirement
of obtaining FDA approval for commercial sale of an LVAS in the United States is
a significant barrier to entry into the United States market for these devices.
There can be no assurance, however, that FDA regulations will not change in the
future, reducing the time and testing required for others to obtain FDA approval
for commercial sale. In addition, other research groups and companies, some that
have significantly greater resources than those of the Company, are developing
cardiac systems using alternative technologies or concepts, one or more of which
might prove functionally equivalent to, or more suitable than, the Company's
systems. Among products that have been approved for commercial sale, the Company
competes primarily on the basis of performance, service capability, and price.
Competition in the market for medical devices is also significantly affected by
the reimbursement policies of government and private insurers. Any product for
which reimbursement is not available from such third-party payors will be at a
significant competitive disadvantage.
The Company is one of a number of competitors in the markets for mammography
and general radiographic systems and is one of two competitors in the market for
stereotactic breast-biopsy systems. The Company competes in these markets
primarily on the basis of product features, product performance, and reputation,
as well as price and service. The markets in which the Company competes with
these products are characterized by rapid technological change. The Company
believes that in order to be competitive in these markets it will be important
to continue to be technologically innovative.
The Company's SoftLight laser hair-removal system competes with other
laser-based systems, electrolysis, and other traditional hair-removal methods,
such as shaving and waxing. A number of other companies have received clearance
from the FDA to market their laser-based systems for the removal of unwanted
facial and body hair. In addition, the SoftLight system competes with
electrolysis providers, many of whom are small practitioners with
well-established networks of client relationships. The Company believes that
competition for its hair-removal services is based primarily on efficacy, price,
comfort, and safety.
In its contract research and development business, the Company not only
competes with other companies and institutions that perform similar services,
but must also rely on the ability of government agencies and other clients to
obtain allocations of research and development monies to fund contracts with the
Company. The Company competes for research and development programs principally
on the basis of the nature of the services offered, the quality of products and
services, past performance, customer relationships, marketing competence,
infrastructure, and price. Federal procurement policies increasingly emphasize
past performance. As government funding becomes more scarce, particularly for
defense projects, the competition for such funding will become more intense.
Energy and Environment
The worldwide independent power market consists of numerous companies,
ranging from small startups to multinational industrial companies. In addition,
a number of regulated utilities have created subsidiaries that compete as
non-utility generators. Non-utility generators often specialize in market
"niches," such as a specific technology or fuel (i.e., gas-fired cogeneration,
refuse-to-energy, hydropower, geothermal, wind, solar, wood, or coal) or a
specific region of the country where they believe they have a market advantage.
However, many non-utility generators, including the Company, seek to develop
projects on a best-available-fuel basis. The Company competes primarily on the
basis of project experience, technical expertise, capital resources, and power
pricing.
The market in which the Company's biopesticide business competes is highly
competitive and subject to rapid technological change. Many competitors are
large chemical and pharmaceutical companies with greater financial, marketing,
and technological resources than the Company. The Company's biopesticide
business competes primarily based on performance, quality, and price.
13
<PAGE>
The market for traffic products and services is extremely competitive, and
the Company expects that competition will continue to increase, with the
principal factors being price, functionality, reliability, service and support,
and vendor and product reputation, along with industry and general economic
trends. The Company believes that it is a leading manufacturer and supplier of
traffic products, and considers its major competitors to be Siemens AG and
Econolite Control Products, Inc. However, the traffic market is highly
fragmented and competition varies significantly depending on the individual
product.
The Company's sale of industrial refrigeration systems is subject to intense
competition. The industrial refrigeration market is mature, highly fragmented,
and extremely dependent on close customer contacts. Major industrial
refrigeration companies, of which the Company is one, account for approximately
one-half of worldwide sales, with the balance generated by many smaller
companies. The Company competes principally on the basis of its advanced control
systems and overall quality, reliability, service, and to a lesser extent,
price. The Company believes it is a leader in remanufactured refrigeration
equipment. The Company competes in this market primarily based on price,
delivery time, and customized equipment.
The Company seeks to compete in the market for soil-remediation services
based on its ability to offer customers superior protection from environmental
liabilities. However, with relaxed regulatory standards in many states, the
Company faces intense competition in local markets from landfills, other
treatment technologies, and from companies competing with similar technologies,
limiting the volume of soil to be treated and the prices that can be charged by
the Company. Pricing is therefore a major competitive factor for the Company.
Hundreds of independent analytical testing laboratories and consulting firms
compete for environmental services business nationwide. Many of these firms use
equipment and processes similar to those of the Company. Competition is based
not only on price, but also on reputation for accuracy, quality, and the ability
to respond rapidly to customer requirements. In addition, many industrial
companies have their own in-house analytical testing capabilities. The Company
believes that its competitive strength lies in certain niche markets within
which the Company is recognized for its expertise.
Recycling and Resource Recovery
The Company faces significant competition in the markets for paper recycling
and water-handling equipment and papermaking accessories, and competes in these
markets primarily on the basis of quality, price, service, technical expertise,
and product innovation. A significant portion of the Company's business is
generated from its existing customer base. To maintain this base, the Company
has emphasized a problem-solving relationship with its customers.
(xii) Environmental Protection Regulations
The Company believes that compliance by the Company with federal, state, and
local environmental protection regulations will not have a material adverse
effect on its capital expenditures, earnings, or competitive position.
(xiii) Number of Employees
At January 2, 1999, the Company employed approximately 23,600 persons.
(d) Financial Information About Geographic Areas
Financial information about geographic areas is summarized in Note 14 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders, which information is incorporated herein by reference.
14
<PAGE>
(e) Executive Officers of the Registrant
Name Age Present Title (Fiscal Year First Became
Executive Officer)
------------------------------------------------------------------------
George N. Hatsopoulos 72 Chairman of the Board and Chief Executive
Officer (1956)
Arvin H. Smith 69 President (1983)
Brian D. Holt 49 Chief Operating Officer, Energy and
Environment (1998)
John T. Keiser 63 Chief Operating Officer, Biomedical and
Emerging Technologies (1998)
Earl R. Lewis 55 Chief Operating Officer, Measurement and
Detection (1998)
William A. Rainville 57 Chief Operating Officer, Recycling and
Resource Recovery (1993)
Theo Melas-Kyriazi 39 Chief Financial Officer and Vice President
(1998)
Paul F. Kelleher 56 Senior Vice President, Finance and
Administration (1982)
Each executive officer serves until his successor is chosen or appointed and
qualified or until earlier resignation, death, or removal. Messrs. Hatsopoulos
and Kelleher have held comparable positions with the Company for at least the
last five years. Mr. Smith was named President of the Company in September 1998.
From 1984 until 1985, he served as a Vice President of the Company. In 1986, he
was named Senior Vice President and, in 1991, Executive Vice President. Mr. Holt
was appointed Chief Operating Officer, Energy and Environment, in September
1998. From March 1996 to September 1998 he was a Vice President of the Company.
Mr. Holt has been President and Chief Executive Officer of Thermo Ecotek since
February 1994. For more than five years prior to that time, he was President and
Chief Executive Officer of Pacific Generation Company (financier, builder,
owner, and operator of independent power facilities). Mr. Keiser was appointed
Chief Operating Officer, Biomedical and Advanced Technology, in September 1998,
and his title changed to Chief Operating Officer, Biomedical and Emerging
Technologies, in March 1999. From 1985 until 1994, Mr. Keiser was President of
Eberline Instrument division of Thermo Instrument. In 1994 he was appointed
Senior Vice President of Thermedics and President of Thermo Biomedical. In March
1998, he was named President of Thermedics. Mr. Lewis was appointed Chief
Operating Officer, Instrumentation, in September 1998, and his title was changed
to Chief Operating Officer, Measurement and Detection, in March 1999. Mr. Lewis
was a Vice President of the Company from March 1996 to June 1998 and a Senior
Vice President of the Company from June 1998 to September 1998. Since 1990 Mr.
Lewis has held various positions with Thermo Instrument, and effective March
1997, was named President and in January 1998 was named Chief Executive Officer
of Thermo Instrument. Mr. Rainville was appointed Chief Operating Officer,
Recycling and Resource Recovery, in September 1998. He was a Senior Vice
President of the Company from 1993 until 1998 and was a Vice President of the
Company from 1986 to 1993. Mr. Melas-Kyriazi was appointed Chief Financial
Officer on January 1, 1999. He joined the Company in 1986 as Assistant
Treasurer, and became Treasurer in 1998. He was named President and Chief
Executive Officer of ThermoSpectra in 1994, a position he held until becoming
Vice President of Corporate Strategy of the Company in 1998. The Company
recently announced the appointment of Mr. Richard F. Syron as President and
Chief Executive Officer, effective June 1, 1999. Dr. George Hatsopoulos will
become non-executive Chairman of the Board and Mr. Smith will remain with the
Company in an advisory role.
Item 2. Properties
The location and general character of the Company's principal properties by
segment as of January 2, 1999, are:
Measurement and Detection
The Company owns approximately 2,176,000 square feet of office, engineering,
laboratory, and production space, principally in Wisconsin, Ohio, Germany, the
United Kingdom, California, New York, Massachusetts, and Italy, and leases
approximately 3,867,000 square feet of office, engineering, laboratory, and
production space, principally in Massachusetts, Texas, California, Wisconsin,
New Hampshire, the United Kingdom, Germany, and Finland, under leases expiring
from 1999 to 2017.
15
<PAGE>
Biomedical and Emerging Technologies
The Company owns approximately 538,000 square feet of office engineering,
laboratory, and production space, principally in Illinois, California,
Connecticut, and Texas, and leases approximately 2,300,000 square feet of
office, engineering, laboratory, and production space, principally in
California, Massachusetts, Texas, Florida, and France, under leases expiring
from 1999 to 2013.
Energy and Environment
The Company owns approximately 1,137,000 square feet of office, engineering,
laboratory, and production space, principally in California, Pennsylvania,
Minnesota, and the United Kingdom, and leases approximately 1,124,000 square
feet of office, engineering, laboratory, and production space, principally in
Illinois, California, Massachusetts, Pennsylvania, Florida, the United Kingdom,
and the Netherlands, under leases expiring from 1999 to 2023.
The Company operates four independent power plants in California, Maine, and
New Hampshire, under leases expiring from 2000 to 2010. The Company owns three
independent power plants in New Hampshire and California and a
coal-beneficiation plant in Wyoming.
The Company owns approximately 72 acres of land from which it provides
soil-remediation services principally in Maryland, Oregon, and California, and
leases approximately 26 acres of land from which it provides soil-remediation
and fluid-recycling services principally in New York, Arizona, and Washington,
under leases expiring from 1999 to 2006. The Company also leases approximately
15 acres in Holland, consisting of office, production, and oil storage
facilities, under a lease expiring in 2059.
Recycling and Resource Recovery
The Company owns approximately 1,474,000 square feet of office, engineering,
laboratory, and production space, principally in France, Connecticut, Ohio,
Massachusetts, and the United Kingdom, and leases approximately 282,000 square
feet of office, engineering, laboratory, and production space, principally in
Wisconsin and Sweden, under leases expiring from 1999 to 2006.
The Company believes that its facilities are in good condition and are
suitable and adequate to meet its current needs, and that suitable replacements
are available on commercially reasonable terms for any leases that expire in the
near term in the event that the Company is unable to renew such leases on
reasonable terms.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
16
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Information concerning the market and market price for the Registrant's
common stock, $1.00 par value, and dividend policy, is included under the
sections labeled "Common Stock Market Information" and "Dividend Policy" in the
Registrant's 1998 Annual Report to Shareholders
and is incorporated herein by reference.
Item 6. Selected Financial Data
The information required under this item is included under the sections
labeled "Ten Year Financial Summary" and "Dividend Policy" in the Registrant's
1998 Annual Report to Shareholders and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1998 Annual Report to Shareholders and
is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1998 Annual Report to Shareholders and
is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements as of January 2, 1999,
and Supplementary Data are included in the Registrant's 1998 Annual Report to
Shareholders and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not Applicable.
17
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the caption
"Election of Directors" in the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year. The information
concerning delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated herein by reference from the material contained under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance" under the caption
"Stock Ownership" in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
The information required under this item is incorporated herein by reference
from the material contained under the caption "Executive Compensation" in the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated herein by reference
from the material contained under the caption "Stock Ownership" in the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required under this item is incorporated herein by reference
from the material contained under the caption "Relationship with Affiliates" in
the Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
18
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a,d) Financial Statements and Schedules
(1)The financial statements set forth in the list below are filed as part
of this Report.
(2)The financial statement schedule set forth in the list below is filed as
part of this Report.
(3)Exhibits filed herewith or incorporated herein by reference are set
forth in Item 14(c) below.
List of Financial Statements and Schedules Referenced in this Item 14
Information incorporated by reference from Exhibit 13 filed herewith:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Comprehensive Income and Shareholders'
Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Schedule included herewith:
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or in the notes thereto.
(b) Reports on Form 8-K
On December 10, 1998, the Company filed a Current Report on Form 8-K dated
December 10, 1998, with respect to a proposed corporate reorganization.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 22, 1999 THERMO ELECTRON CORPORATION
By: /s/ George N. Hatsopoulos
George N. Hatsopoulos
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of March 22, 1999.
Signature Title
By: /s/ George N. Hatsopoulos Chief Executive Officer, Chairman of the
George N. Hatsopoulos Board, and Director
By: /s/ Theo Melas-Kyriazi Chief Financial Officer and Vice President
Theo Melas-Kyriazi
By: /s/ Paul F. Kelleher Senior Vice President, Finance and
Paul F. Kelleher Administration(Chief Accounting Officer)
By: /s/ John M. Albertine Director
John M. Albertine
By: /s/ Peter O. Crisp Director
Peter O. Crisp
By: /s/ Elias P. Gyftopoulos Director
Elias P. Gyftopoulos
By: /s/ John N. Hatsopoulos Vice Chairman of the Board and Director
John N. Hatsopoulos
By: /s/ Frank Jungers Director
Frank Jungers
By: /s/ Robert A. McCabe Director
Robert A. McCabe
By: /s/ Donald E. Noble Director
Donald E. Noble
By: /s/ Hutham S. Olayan Director
Hutham S. Olayan
By: /s/ Robert W. O'Leary Director
Robert W. O'Leary
By: /s/ Richard F. Syron Director
Richard F. Syron
By: /s/ Roger D. Wellington Director
Roger D. Wellington
20
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Electron Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Thermo Electron Corporation's
Annual Report to Shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 16, 1999 (except with respect to
the matter discussed in Note 19, as to which the date is March 1, 1999). Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The schedule listed in Item 14 on page 19 is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
February 16, 1999
21
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
THERMO ELECTRON CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Description Provision Accounts Accounts Other (a) Balance
Balance at Charged to Recovered Written at End
Beginning Expense Off of Year
of
Year
- ----------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Allowance for Doubtful Accounts
Year Ended January 2, 1999 $ 55,698 $ 10,038 $ 480 $(15,371) $ 1,762 $ 52,607
Year Ended January 3, 1998 $ 34,321 $ 9,078 $ 527 $ (8,594) $ 20,366 $ 55,698
Year Ended December 28, 1996 $ 29,318 $ 6,002 $ 760 $ (8,994) $ 7,235 $ 34,321
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Description Balance at Established Activity Other (c) Balance
Beginning as Cost of Charged at End
of Acquisitions to of Year
Year Reserve
- ----------------------------------------- ------------ ------------- ------------ ----------- ------------
Accrued Acquisition Expenses (b)
Year Ended January 2, 1999 $ 32,505 $ 12,112 $(17,496) $(3,929) $ 23,192
Year Ended January 3, 1998 $ 23,473 $ 35,456 $(20,775) $(5,649) $ 32,505
Year Ended December 28, 1996 $ 17,961 $ 41,683 $(28,998) $(7,173) $ 23,473
Description Balance at Provision Activity Balance
Beginning Charged to Charged Other (f) at End
of Expense (e) to Reserve of Year
Year
- ----------------------------------------- ------------ ------------- ----------- ------------ ------------
Accrued Restructuring Costs (d)
Year Ended January 2, 1999 $ 826 $ 28,773 $(11,117) $ 258 $ 18,740
Year Ended January 3, 1998 $ 1,228 $ 4,340 $(4,748) $ 6 $ 826
Year Ended December 28, 1996 $ - $ 2,828 (1,653) $ 53 $ 1,228
(a) Includes allowance of businesses acquired during the year as described in
Note 3 to Consolidated Financial Statements in the Registrant's 1998 Annual
Report to Shareholders and the effect of foreign currency translation.
(b) The nature of activity in this account is described in Note 3 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders.
(c) Represents reversal of accrued acquisition expenses and corresponding
reduction of cost in excess of net assets of acquired companies resulting
from finalization of restructuring plans and the effect of foreign currency
translation.
(d) The nature of activity in this account is described in Note 11 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders.
(e) Excludes provision of $15.7 million in 1998, $7.2 million in 1997, and $15.7
million in 1996, primarily for asset write-downs.
(f) Represents the effect of foreign currency translation.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3.1 Restated Certificate of Incorporation of the Registrant, as amended
(filed as Exhibit 3(i) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 29, 1996 [File No. 1-8002] and
incorporated herein by reference).
3.2 By-laws of the Registrant, as amended (filed as Exhibit 3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 3, 1998 [File No. 1-8002] and incorporated herein by
reference).
4.1 Fiscal Agency Agreement dated as of January 3, 1996, between the
Registrant and Chemical Bank pertaining to the Registrant's 4 1/4%
Subordinated Convertible Debentures due 2003 (filed as Exhibit 4.1 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 30, 1995 [File No. 1-8002] and incorporated herein by
reference).
The Registrant agrees, pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K, to furnish to the Commission upon request, a copy of
each instrument with respect to other long-term debt of the
Registrant or its consolidated subsidiaries.
4.2 Rights Agreement dated as of January 19, 1996, between the Registrant
and The First National Bank of Boston, which includes as Exhibit A
the Form of Certificate of Designations, as Exhibit B the Form of
Rights Certificate, and as Exhibit C the Summary of Rights to
Purchase Preferred Stock (filed as Exhibit 1 to the Registrant's
Registration Statement on Form 8-A, declared effective by the
Commission on January 31, 1996 [File No. 1-8002] and incorporated
herein by reference).
4.3 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).
4.4 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,
incorporated herein by reference).
10.1 Thermo Electron Corporate Charter as amended and restated effective
January 3, 1993 (filed as Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 2, 1993 [File
No. 1-8002] and incorporated herein by reference).
10.2 Thermo Electron Corporation 1998 Executive Retention Plan/Form of
Executive Retention Agreement (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 3, 1998 [File No. 1-8002] and incorporated herein by
reference).
10.3 Form of Indemnification Agreement with directors and officers (filed
as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 29, 1990 [File No. 1-8002] and
incorporated herein by reference).
23
<PAGE>
Exhibit
Number Description of Exhibit
10.4 Reserved.
10.5 Amended and Restated Reimbursement Agreement dated as of December 31,
1993, among Chemical Trust Company of California as Owner Trustee;
Delano Energy Company Inc.; ABN AMRO Bank N.V., Boston Branch, for
itself and as Agent; The First National Bank of Boston, as Co-agent;
Barclays Bank PLC, as Co-agent; Societe Generale, as Co-agent; and
BayBank, as Lead Manager (filed as Exhibit 10.5 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 1, 1994
[File No. 1-8002] and incorporated herein by reference).
10.6 Amended and Restated Participation Agreement dated as of December 31,
1991, among Delano Energy Company Inc.; Thermo Ecotek Corporation
(formerly Thermo Energy Systems Corporation); Chemical Trust Company
of California, as Owner Trustee; ABN AMRO Bank N.V., Boston Branch,
as Co-agent; Bank of Montreal, as Co-agent; Barclays Bank PLC, as
Co-agent; Society Generale, as Co-agent; BayBank, as Lead Manager;
and ABN AMRO Bank N.V., Cayman Island Branch, and joined in by the
Registrant (filed as Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended January 1, 1994 [File No.
1-8002] and incorporated herein by reference).
10.7 Turnkey Engineering, Procurement, Construction, and Initial Operation
Agreement for a de-inking pulp facility dated as of November 1, 1994,
between the Registrant, as contractor, and Great Lakes Pulp Partners
I, L.P., as owner (filed as Exhibit 10.7 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994 [File
No. 1-8002] and incorporated herein by reference). Pursuant to Item
601(b)(2) of Regulation S-K, schedules to this Agreement have been
omitted. The Company hereby undertakes to furnish supplementally a
copy of such schedules to the Commission upon request.
10.8 Revolving Credit Facility Letters from Barclays Bank PLC in favor of
the Registrant and its subsidiaries (filed as Exhibit 10.8 to the
Registrant's Annual Report on Form 10-K for the year ended January 3,
1998 [File No. 1-8002] and incorporated herein by reference).
10.9 Stock Holdings Assistance Plan and Form of Promissory Note (filed as
Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the
year ended January 3, 1998 [File No. 1-8002] and incorporated herein
by reference).
10.10 - 10.20 Reserved.
10.21 Deferred Compensation for Directors of the Registrant (filed as
Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended January 3, 1987 [File No. 1-8002] and
incorporated herein by reference). (Maximum number of shares
issuable is 679,218 shares, after adjustment to reflect share
increases approved in 1986 and 1992 and 3-for-2 stock splits
effected in October 1986, October 1993, May 1995, and June
1996.)
10.22 Amended and Restated Directors' Stock Option Plan of the Registrant
(filed as Exhibit 10.25 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994 [File No. 1-8002]
and incorporated herein by reference).
24
<PAGE>
Exhibit
Number Description of Exhibit
10.23 Incentive Stock Option Plan of the Registrant (filed as
Exhibit 4(d) to the Registrant's Registration Statement on
Form S-8 [Reg. No. 33-8993] and incorporated herein by
reference). (Maximum number of shares issuable in the
aggregate under this plan and the Registrant's Nonqualified
Stock Option Plan is 13,552,734 shares, after adjustment to
reflect share increases approved in 1984 and 1986, share
decrease approved in 1989, and 3-for-2 stock splits effected in
October 1986, October 1993, May 1995, and June 1996.)
10.24 Nonqualified Stock Option Plan of the Registrant (filed as Exhibit
4(e) to the Registrant's Registration Statement on Form S-8 [Reg. No.
33-8993] and incorporated herein by reference). (Plan amended in 1984
to extend expiration date to December 14, 1994; maximum number of
shares issuable in the aggregate under this plan and the Registrant's
Incentive Stock Option Plan is 13,552,734 shares, after adjustment to
reflect share increases approved in 1984 and 1986, share decrease
approved in 1989, and 3-for-2 stock splits effected in October 1986,
October 1993, May 1995, and June 1996.)
10.25 Amended and Restated Equity Incentive Plan (filed as Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 4, 1998 [File No. 1-8002] and incorporated herein by reference).
10.26 Thermo Electron Corporation - Thermedics Inc. Nonqualified Stock
Option Plan (filed as Exhibit 4 to a Registration Statement on Form
S-8 of Thermedics [Reg. No. 2-93747] and incorporated herein by
reference). (Maximum number of shares issuable is 450,000 shares,
after adjustment to reflect share increase approved in 1988, 5-for-4
stock split effected in January 1985, 4-for-3 stock split effected in
September 1985, and 3-for-2 stock splits effected in October 1986 and
November 1993.)
10.27 Thermo Electron Corporation - Thermo Instrument Systems Inc. (formerly
Thermo Environmental Corporation) Nonqualified Stock Option
Plan (filed as Exhibit 4(c) to a Registration Statement on Form
S-8 of Thermo Instrument [Reg. No. 33-8034] and incorporated
herein by reference). (Maximum number of shares issuable is
527,343 shares, after adjustment to reflect 3-for-2 stock
splits effected in July 1993 and April 1995, 5-for-4 stock
splits effected in December 1995 and October 1997.)
10.28 Thermo Electron Corporation - Thermo Instrument Systems Inc.
Nonqualified Stock Option Plan (filed as Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 3, 1987 [File No. 1-8002] and incorporated herein by
reference). (Maximum number of shares issuable is 750,356 shares,
after adjustment to reflect share increase approved in 1988, 3-for-2
stock splits effected in January 1988, July 1993, and April 1995, and
5-for-4 stock splits effected in December 1995 and October 1997.)
10.29 Thermo Electron Corporation - Thermo TerraTech Inc. (formerly Thermo
Process Systems Inc.) Nonqualified Stock Option Plan (filed as
Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 3, 1987 [File No. 1-8002] and incorporated
herein by reference). (Maximum number of shares issuable is 108,000
shares, after adjustment to reflect 6-for-5 stock splits effected in
July 1988 and March 1989, and 3-for-2 stock split effected in
September 1989.)
25
<PAGE>
Exhibit
Number Description of Exhibit
10.30 Thermo Electron Corporation - Thermo Power Corporation (formerly
Tecogen Inc.) Nonqualified Stock Option Plan (filed as Exhibit 10.14
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended January 3, 1987 [File No. 1-8002] and incorporated herein by
reference). (Amended in September 1995 to extend the plan expiration
date to December 31, 2005.)
10.31 Thermo Electron Corporation - Thermo Cardiosystems Inc. Nonqualified
Stock Option Plan (filed as Exhibit 10.11 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 29, 1990 [File
No. 1-8002] and incorporated herein by reference). (Maximum number of
shares issuable is 250,000 shares, after adjustment to reflect share
increases approved in 1990, 1992, and 1997, 3-for-2 stock split
effected in January 1990, 5-for-4 stock split effected in May 1990,
2-for-1 stock split effected in November 1993, and 3-for-2 stock
split effected in May 1996.)
10.32 Thermo Electron Corporation - Thermo Ecotek Corporation
(formerly Thermo Energy Systems Corporation) Nonqualified Stock
Option Plan (filed as Exhibit 10.12 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 29, 1990
[File No. 1-8002] and incorporated herein by reference).
(Maximum number of shares issuable is 487,500 shares, after
adjustment to reflect 3-for-2 stock split effected in October
1996.)
10.33 Thermo Electron Corporation - ThermoTrex Corporation (formerly Thermo
Electron Technologies Corporation) Nonqualified Stock Option Plan
(filed as Exhibit 10.13 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 29, 1990 [File No. 1-8002]
and incorporated herein by reference). (Maximum number of shares
issuable is 225,000 shares, after adjustment to reflect 3-for-2 stock
split effected in October 1993 and share increase approved in March
1997.)
10.34 Thermo Electron Corporation - Thermo Fibertek Inc. Nonqualified Stock
Option Plan (filed as Exhibit 10.14 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 28, 1991 [File No.
1-8002] and incorporated herein by reference). (Maximum number of
shares issuable is 900,000 shares, after adjustment to reflect
2-for-1 stock split effected in September 1992 and 3-for-2 stock
split effected in September 1995 and June 1996.)
10.35 Thermo Electron Corporation - Thermo Voltek Corp. (formerly Universal
Voltronics Corp.) Nonqualified Stock Option Plan (filed as Exhibit
10.17 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 2, 1993 [File No. 1-8002] and incorporated herein
by reference). (Maximum number of shares issuable is 86,250 shares,
after adjustment to reflect 3-for-2 stock split effected in November
1993, share increase approved in September 1995, and 3-for-2 stock
split effected in August 1996.)
10.36 Thermo Electron Corporation - Thermo BioAnalysis Corporation
Nonqualified Stock Option Plan (filed as Exhibit 10.31 to Thermo
Power's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995 [File No. 1-10573] and incorporated herein by
reference). (Maximum number of shares issuable is 150,000 shares,
after share increase approved in March 1997.)
10.37 Thermo Electron Corporation - ThermoLyte Corporation Nonqualified
Stock Option Plan (filed as Exhibit 10.32 to Thermo Power's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995
[File No. 1-10573] and incorporated herein by reference). (Maximum
number of shares issuable is 150,000 shares, after share increase
approved in March 1997.)
26
<PAGE>
Exhibit
Number Description of Exhibit
10.38 Thermo Electron Corporation - ThermoRetec Corporation (formerly
Thermo Remediation Inc.) Nonqualified Stock Option Plan (filed as
Exhibit 10.33 to Thermo Power's Annual Report on Form 10-K for the
fiscal year ended September 30, 1995 [File No. 1-10573] and
incorporated herein by reference).
10.39 Thermo Electron Corporation - ThermoSpectra Corporation Nonqualified
Stock Option Plan (filed as Exhibit 10.34 to Thermo Power's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995
[File No. 1-10573] and incorporated herein by reference).
10.40 Thermo Electron Corporation - ThermoLase Corporation Nonqualified
Stock Option Plan (filed as Exhibit 10.35 to Thermo Power's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995
[File No. 1-10573] and incorporated herein by reference).
10.41 Thermo Electron Corporation - ThermoQuest Corporation Nonqualified
Stock Option Plan (filed as Exhibit 10.41 to Thermo Cardiosystems'
Annual Report on Form 10-K for the fiscal year ended December 30,
1995 [File No. 1-10114] and incorporated herein by reference).
10.42 Thermo Electron Corporation - Thermo Optek Corporation Nonqualified
Stock Option Plan (filed as Exhibit 10.42 to Thermo Cardiosystems'
Annual Report on Form 10-K for the fiscal year ended December 30,
1995 [File No. 1-10114] and incorporated herein by reference).
10.43 Thermo Electron Corporation - Thermo Sentron Inc. Nonqualified Stock
Option Plan (filed as Exhibit 10.43 to Thermo Cardiosystems' Annual
Report on Form 10-K for the fiscal year ended December 30, 1995 [File
No. 1-10114] and incorporated
herein by reference).
10.44 Thermo Electron Corporation - Trex Medical Corporation Nonqualified
Stock Option Plan (filed as Exhibit 10.44 to Thermo Cardiosystems'
Annual Report on Form 10-K for the fiscal year ended December 30,
1995 [File No. 1-10114] and incorporated herein by reference).
10.45 Thermo Electron Corporation - Thermo Fibergen Inc. Nonqualified Stock
Option Plan (filed as Exhibit 10.19 to Trex Medical's Annual Report
on Form 10-K for the fiscal year ended September 28, 1996 [File No.
1-11827] and incorporated herein by reference).
10.46 Thermo Electron Corporation - Thermedics Detection Inc. Nonqualified
Stock Option Plan (filed as Exhibit 10.46 to the Registrant's Annual
Report on Form 10-K for the year ended January 3, 1998 [File No.
1-8002] and incorporated herein by reference).
10.47 Thermo Electron Corporation - Metrika Systems Corporation
Nonqualified Stock Option Plan (filed as Exhibit 10.47 to the
Registrant's Annual Report on Form 10-K for the year ended January 3,
1998 [File No. 1-8002] and incorporated herein by reference).
10.48 Thermo Electron Corporation - Thermo Vision Corporation Nonqualified
Stock Option Plan (filed as Exhibit 10.48 to the Registrant's Annual
Report on Form 10-K for the year ended January 3, 1998 [File No.
1-8002] and incorporated herein by reference).
10.49 Thermo Electron Corporation - ONIX Systems Inc. Nonqualified Stock
Option Plan (filed as Exhibit 10.49 to the Registrant's Annual Report
on Form 10-K for the year ended January 3, 1998 [File No. 1-8002] and
incorporated herein by reference).
27
<PAGE>
Exhibit
Number Description of Exhibit
10.50 Thermo Electron Corporation - The Randers Killam Group Inc. (formerly
The Randers Group Incorporated) Nonqualified Stock Option Plan (filed
as Exhibit 10.50 to the Registrant's Annual Report on Form 10-K for
the year ended January 3, 1998 [File No. 1-8002] and incorporated
herein by reference).
10.51 Thermo Electron Corporation - Trex Communications Corporation
Nonqualified Stock Option Plan (filed as Exhibit 10.51 to the
Registrant's Annual Report on Form 10-K for the year ended January 3,
1998 [File No. 1-8002] and incorporated herein by reference).
10.52 Thermo Electron Corporation - Thermo Trilogy Corporation Nonqualified
Stock Option Plan (filed as Exhibit 10.52 to the Registrant's Annual
Report on Form 10-K for the year ended January 3, 1998 [File No.
1-8002] and incorporated herein by reference).
10.53 Description of Arrangements Regarding Stock Ownership By Officers of the
Registrant (filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 4, 1998 [File No.
1-8002] and incorporated herein by reference).
10.54 Letter Agreement dated as of September 15, 1998, between the Registrant
and Mr. John N. Hatsopoulos (filed as Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 3, 1998
[File No. 1-8002] and incorporated herein by reference).
10.55 Subordinated Indenture, dated January 15, 1998, among the Registrant,
Thermo Instrument Systems Inc., and Bankers Trust Company as trustee,
relating to $250,000,000 principal amount of 4% Convertible
Subordinated Debentures due 2005 issued by Thermo Instrument Systems
Inc. (filed as Exhibit 4.1 to Thermo Instrument Systems' Current
Report on Form 8-K filed with the Commission on January 16, 1998
[File No. 1-9786] and incorporated herein by reference).
10.56 Employment Agreement dated as of March 12, 1999, between the
Registrant and Mr. Richard F. Syron.
13 Annual Report to Shareholders for the year ended January 2, 1999
(only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
</TABLE>
EMPLOYMENT AGREEMENT
AGREEMENT, made and entered into as of the 12th day of March, 1999 by and
between Thermo Electron Corporation, a Delaware corporation (together with its
successors and assigns permitted under this Agreement, the "Company"), and Mr.
Richard F. Syron (the "Executive").
W I T N E S S E T H :
WHEREAS, the Company desires to employ the Executive and to enter into an
agreement embodying the terms of such employment (the "Agreement") and the
Executive desires to enter into the Agreement and to accept such employment,
subject to the terms and provisions of the Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually a
"Party" and together the "Parties") agree as follows:
. Definitions.
() "Affiliate" of a person or other entity shall mean a person or
other entity that directly or indirectly controls, is controlled by, or is under
common control with the person or other entity specified.
() "Base Salary" shall mean the salary provided for in Section
4 below or any increased salary granted to the Executive pursuant to Section
4.
() "Board" shall mean the Board of Directors of the Company.
() "Cause" shall mean:
() the Executive commits a felony or any crime
involving moral turpitude; or
() in carrying out his duties, the Executive
engages in conduct that constitutes willful gross neglect or willful gross
misconduct resulting in material economic harm to the Company.
() A "Change in Control" shall mean an event or occurrence set forth
in Section 1.1 of the Executive Retention Agreement attached hereto as Exhibit
A.
() "Constructive Termination Without Cause" shall mean termination
by the Executive of his employment after written notice to the Company within 30
days following the occurrence of any of the following events without his
consent:
() a reduction in the Executive's then current
Base Salary or reference bonus opportunity;
() the failure to elect or reelect the Executive
to any of the positions described in Section 3(a) or the removal of him from
any such position;
() a material diminution in the Executive's duties
or responsibilities;
() a change in the reporting structure so that the
Executive reports to someone other than the Board; or
() the failure of the Company to obtain the
assumption in writing of its obligation to perform this Agreement by any
successor to all or substantially all of the assets of the Company within 15
days after a merger, consolidation, sale or similar transaction.
Following written notice from the Executive, as described above, the Company
shall have 15 days in which to cure. If the Company fails to cure, the
Executive's termination shall become effective on the 16th day following the
written notice.
() "Disability" shall mean the Executive's inability, due to
physical or mental incapacity, to substantially perform his duties and
responsibilities under this Agreement as determined by a medical doctor selected
by the Company and the Executive. If the Parties cannot agree on a medical
doctor, each Party shall select a medical doctor and the two doctors shall
select a third who shall be the approved medical doctor for this purpose.
() "Effective Date" shall mean June 1, 1999.
() "Stock" shall mean the Common Stock of the Company.
() "Transfer Restrictions" shall mean the transfer
restrictions on the Stock covered by the Initial Stock Option described in
Section 6(b) below.
. Term of Employment. The Term of Employment shall begin on the Effective
Date, and shall extend until the third anniversary of the Effective Date;
provided, however, that the Term of Employment shall automatically extend for
additional one year periods after the third anniversary of the Effective Date
unless either Party shall give the other Party at least 12 months prior written
notice that he/it is electing not to so extend the Term of Employment.
Notwithstanding the foregoing, the Term of Employment may be earlier terminated
by either Party in accordance with the provisions of Section 10.
. Position, Duties and Responsibilities.
() Commencing on the Effective Date and continuing for the remainder
of the Term of Employment, the Executive shall be employed as the President and
Chief Executive Officer and be responsible for the general management of the
affairs of the Company. The Executive, in carrying out his duties under this
Agreement, shall report to the Board.
() The Board will nominate the Executive for election as a Director
at the Annual Meeting of Stockholders to be held on May 27, 1999, to serve a
three-year term expiring on the date of the Annual Meeting of Stockholders to be
held in the year 2002. In the event of a termination of employment of the
Executive for any reason (other than death), the Executive shall immediately
resign as a Director of the Company and each of its subsidiaries.
() Nothing herein shall preclude the Executive from (i) serving on
the boards of directors of a reasonable number of other corporations subject to
the approval of the Board in each case (which approval has been given as to the
boards listed in Exhibit B attached), (ii) serving on the boards of a reasonable
number of trade associations and/or charitable organizations, (iii) engaging in
charitable activities and community affairs, and (iv) managing his personal
investments and affairs, provided that such activities set forth in this Section
3(c) do not materially interfere with the proper performance of his duties and
responsibilities under Section 3(a).
. Base Salary. The Executive shall be paid an annualized Base
Salary, payable in accordance with the regular payroll practices of the
Company, of $800,000. The Base Salary shall be reviewed annually for
increase in the discretion of the Board.
. Annual Incentive Award. During the Term of Employment, the Executive
shall participate in the annual incentive program of the Company. Under such
program, the Executive shall have a reference bonus each calendar year equal to
$500,000, prorated for partial years. The actual bonus paid will be a multiple
of the reference bonus (from zero to two times the reference bonus). The actual
multiple will reflect a variety of subjective and objective factors, as
determined by the Board. The Executive shall be paid his annual incentive award
no later than other senior executives are paid their annual incentive awards.
For the years 1999, 2000 and 2001, the Executive shall have a minimum guaranteed
bonus of $145,833.32 for calendar 1999, $250,000 for calendar 2000, and
$104,166.68 for the first five months of 2001 (the "Minimum Guaranteed Bonus"
amounts).
. Restricted Stock and Stock Option Awards.
() Restricted Stock Awards. On the Effective Date, and on the first
and second anniversaries of the Effective Date, the Company shall grant the
Executive an award of a number of shares of Stock (the "Restricted Stock")
having a market value equal to $200,000 based on the average of the closing
prices per share of Stock on the New York Stock Exchange for the five business
days preceding and including the corresponding grant date, substantially in
accordance with the terms set forth in Exhibit C to this Agreement, except that
vesting will occur on the third anniversary of each grant date.
() Initial Stock Option Award. On the Effective Date, the Company
shall grant the Executive a 7-year non-qualified stock option award,
substantially in the form attached to this Agreement as Exhibit D, as modified
by the terms of this Agreement, to purchase 1,000,000 shares of Stock,(the
"Initial Stock Option") with Transfer Restrictions lapsing on the first three
anniversaries of the date of grant (333,333 on June 1, 2000 and 2001 and 333,334
on June 1, 2002). The exercise price of the Initial Stock Option shall be the
average of the closing prices of the Stock on the New York Stock Exchange for
the five business days preceding and including June 1, 1999.
. Employee Benefit Programs. During the Term of Employment, the Executive
shall be entitled to participate in all employee pension and welfare benefit
plans and programs made available to the Company's senior level executives or to
its employees generally, as such plans or programs may be in effect from time to
time, including, without limitation, pension, profit sharing, savings and other
retirement plans or programs, medical, dental, hospitalization, short-term and
long-term disability and life insurance plans, accidental death and
dismemberment protection, travel accident insurance, and any other pension or
retirement plans or programs and any other employee welfare benefit plans or
programs that may be sponsored by the Company from time to time, including any
plans that supplement the above-listed types of plans or programs, whether
funded or unfunded. The Executive shall be entitled to four weeks paid vacation
per year of employment.
. Perquisites. During the Term of Employment, the Executive shall
be entitled to participate in all of the Company's executive perquisites in
accordance with the terms and conditions of such arrangements as are in
effect from time to time for the Company's senior-level executives.
. Reimbursement of Business and Other Expenses.
() The Executive is authorized to incur reasonable expenses in
carrying out his duties and responsibilities under this Agreement including,
without limitation, legal fees incurred in the negotiation and preparation of
this Agreement, and the Company shall promptly reimburse him for such expenses,
subject to documentation in accordance with the Company's policy.
() In connection with establishing a new principal residence in the
Boston area, the Company agrees to purchase the Executive's Bronxville house for
$1,500,000, and at the closing of the sale, the Executive shall deliver to the
Company a customary deed, together with related documents, conveying good and
marketable title to the property, free and clear of all material easements and
encumbrances. Following the purchase of the house, the Company will use its
reasonable best efforts to resell the house at a price subject to the prior
approval of the Executive, which approval shall not be unreasonably withheld.
Upon the sale of the house by the Company, either (a) the Company will pay the
Executive the excess, if any, of the gross sales price over $1,500,000, or (b)
the Executive will pay the Company the excess, if any, of $1,500,000 over the
gross sales price. The Company agrees to pay all closing costs, including
brokerage fees, incurred in connection with the purchase and subsequent sale of
the house. In addition, the Executive shall be entitled to reimbursement of his
relocation expenses including all reasonable out-of-pocket expenses of moving
his family and personal belongings to a new home in the Boston area. For a
period of up to six months, he shall also be entitled to reimbursement for
temporary living expenses in the Boston area while locating a permanent
residence. To the extent that certain relocation expenses are considered taxable
income to the Executive, the Company will relieve the Executive of the
additional tax burden (federal, FICA, and state income taxes) from such costs as
well as the tax impact of the tax reimbursement itself.
. Termination of Employment.
() Termination Due to Death. In the event that the
Executive's employment is terminated due to his death, his estate or his
beneficiaries, as the case may be, shall be entitled to the following
benefits:
() Base Salary through the end of the month in
which death occurs;
() a pro-rata annual incentive award for the year
in which the Executive's death occurs, based on the reference bonus for such
year, but in no event less than the Minimum Guaranteed Bonus for the year of
death, payable when annual incentive awards are normally paid to other senior
executives;
() Transfer Restrictions shall lapse on all
Initial Stock Options, including previously exercised Initial Stock Options; all
outstanding Initial Stock Options shall remain exercisable until the later of
June 1, 2002 or two years from the date of death (but in no event beyond the
option expiration date of June 1, 2006); and
() the restrictions on the Restricted Stock
granted pursuant to Section 6 shall lapse.
() Termination Due to Disability. In the event that the
Executive's employment is terminated by either party due to his Disability,
he shall be entitled to the following benefits:
() disability benefits in accordance with the
long-term disability ("LTD") program then in effect for senior executives of
the Company;
() Base Salary through the end of the LTD
elimination period;
() a pro-rata annual incentive award for the year
in which the Executive's termination occurs, based on the reference bonus for
such year, but in no event less than the Minimum Guaranteed Bonus for the year
of termination, payable when annual incentive awards are normally paid to other
senior executives;
() Transfer Restrictions shall lapse on all
Initial Stock Options, including previously exercised Initial Stock Options; all
outstanding Initial Stock Options shall remain exercisable until the later of
June 1, 2002 or two years from the employment termination date (but in no event
beyond the option expiration date of June 1, 2006); and
() the restrictions on the Restricted Stock
granted pursuant to Section 6 shall lapse.
() the Executive shall be entitled to continued
participation at Company expense in all medical and dental insurance coverage in
which he was participating on the date of his termination until the earlier of
(x) 18 months following the date of termination and (y) the date, or dates, he
receives equivalent coverage and benefits under the plans and programs of a
subsequent employer.
In no event shall a termination of the Executive's employment for
Disability occur until the Party terminating his employment gives written notice
to the other Party in accordance with Section 24 below.
() Termination by the Company for Cause. In the event the
Company terminates the Executive's employment for Cause:
() he shall be entitled to Base Salary through the
date of the termination;
() no further lapsing of Transfer Restrictions
shall occur; Executive shall have 90 days to exercise all outstanding Initial
Stock Options as to which Transfer Restrictions have previously lapsed; and
() all Restricted Stock granted under Section 6 as
to which restrictions have not lapsed shall be forfeited.
() Termination without Cause or Constructive Termination without
Cause. In the event the Executive's employment is terminated by the Company
without Cause, other than due to Disability, death or the failure of the Company
to extend this Agreement in accordance with Section 2 hereof, or in the event
there is a Constructive Termination without Cause, the Executive shall be
entitled to the following benefits:
() Base Salary through the date of termination;
() Base Salary, at the annualized rate in effect
on the date of termination, for the greater of (x) 12 months and (y) the
remaining Term of Employment following such termination (the "Salary
Continuation Period");
() a pro-rata annual incentive award for the year
in which termination occurs, based on his reference bonus for such year, but in
no event less than the Minimum Guaranteed Bonus for the year of termination,
payable when annual incentive awards are normally paid to other senior
executives;
() an annual incentive award for the Salary
Continuation Period, based on his reference bonus for the year in which
termination occurs and payable on a pro-rata basis in equal installments over
the Salary Continuation Period;
() Transfer Restrictions shall lapse on all
Initial Stock Options, including previously exercised Initial Stock Options; the
Initial Stock Options shall continue to be exercisable until the later of June
1, 2002 or two years from the employment termination date (but in no event
beyond the option expiration date of June 1, 2006);
() the restrictions on the Restricted Stock
granted pursuant to Section 6 shall lapse; and
() the Executive shall be entitled to continued
participation at Company expense in all medical and dental insurance coverage in
which he was participating on the date of his termination until the earlier of
(x) 18 months following the date of termination and (y) the date, or dates, he
receives equivalent coverage and benefits under the plans and programs of a
subsequent employer.
() Voluntary Termination. A termination of employment by the
Executive on his own initiative, other than a termination due to death or
Disability or a Constructive Termination without Cause, shall have the same
consequences as provided in Section 10(c) for a termination for Cause. A
voluntary termination under this Section 10(e) shall be effective upon 30 days
prior written notice to the Company.
() Other Termination Benefits. In the case of any of the
foregoing terminations, the Executive or his estate shall also be entitled to:
() the balance of any incentive awards due but not
yet paid, including awards due for performance periods which have been
completed, but which have not yet been paid;
() any expense reimbursements due the Executive;
() payment of all amounts when due as a result of
the termination;
() payment of any amounts due under Section 15(c);
and
() other benefits, if any, in accordance with
applicable plans and programs of the Company.
() Termination Following a Change in Control. Notwithstanding
anything to the contrary in this Agreement or in the Executive Retention
Agreement between the Executive and the Company, the form of which is attached
hereto as Exhibit A, in the event the Executive's employment with the Company is
terminated within 18 months following a Change in Control, the Executive shall
be entitled to benefits equal to the greater of (a) the benefits due and payable
to him under Section 4 of the Executive Retention Agreement as a result of such
termination, or (b) the benefits due and payable to him under Section 10 of this
Employment Agreement as a result of such termination. In furtherance thereof, it
is the Parties' understanding that in the event of a termination under such
circumstances, the Executive shall only be entitled to receive benefits payable
under one or the other of the foregoing agreements (but not both) determined on
a benefit by benefit basis by the Executive and that the term "Other Benefits"
as defined in the Executive Retention Agreement shall not include benefits
payable under this Employment Agreement.
() Nature of Payments. Any amounts due under this Section 10
are in the nature of severance payments considered to be reasonable by the
Company and are not in the nature of a penalty.
() No Mitigation; No Offset. The Executive shall not be required to
mitigate the amount of any payment or benefit provided in this Section 10 by
seeking other employment otherwise. Further, except as provided in Sections
10(b)(vi) and 10(d)(vii), the amount of any payment or benefits provided for in
this Section 10 shall not be reduced by any compensation earned by the Executive
as a result of employment by another employer or be offset by any amount claimed
to be owed by the Executive to the Company.
. Confidentiality.
() During the Term of Employment and thereafter, the Executive shall
not disclose to anyone or make use of any trade secret or proprietary or
confidential information of the Company, including such trade secret or
proprietary or confidential information of any customer or other entity to which
the Company owes an obligation not to disclose such information, which he
acquires during the Term of Employment, including but not limited to records
kept in the ordinary course of business, except (i) as such disclosure or use
may be required or appropriate in connection with his work as an employee of the
Company or (ii) when required to do so by a court of law, by any governmental
agency having supervisory authority over the business of the Company or by any
administrative or legislative body (including a committee thereof) with apparent
jurisdiction to order him to divulge, disclose or make accessible such
information.
() Upon the termination of the Executive's employment, the Executive
(or in the event of his death, the Executive's personal representative) shall
promptly surrender to the Company the original and all copies of any materials
containing confidential information of the Company which are then in the
Executive's possession or control, provided, however, the Executive shall not be
required to surrender his rolodexes, personal diaries and other items of a
personal nature.
. Noncompetition; Nonsolicitation.
() The Executive acknowledges (i) that in the course of his
employment with the Company he will become familiar with trade secrets and
customer lists of, and other confidential information concerning, the Company
and its Affiliates, customers, and clients and (ii) that his services will be of
special, unique and extraordinary value to the Company.
() The Executive agrees that during the Term of Employment and for a
period of one year following his termination of employment (the "Noncompetition
Period") he shall not in any manner, directly or indirectly, through any person,
firm, corporation or enterprise, alone or as a member of a partnership or as an
officer, director, stockholder, investor or employee of or advisor or consultant
to any person, firm, corporation or enterprise or otherwise, engage or be
engaged, or assist any other person, firm, corporation or enterprise in engaging
or being engaged, in any Competitive Activity. A Competitive Activity shall mean
a business that (i)is being conducted by the Company or any Affiliate at the
time in question and (ii) was being conducted, or was under active consideration
to be conducted, by the Company or any Affiliate, at the date of the termination
of the Executive's employment, provided that Competitive Activity shall not
include a business of the Company contributing less than 5% of the Company's
revenues for the year in question and provided further that an activity shall
not be deemed to be a Competitive Activity if the activity contributes less than
5% of the revenues for the year in question of the business by which the
Executive is employed or with which he is otherwise associated.
() The Executive further agrees that during the Noncompetition
Period he shall not (i) in any manner, directly or indirectly, induce or attempt
to induce any employee of or advisor or consultant to the Company or any of its
Affiliates to terminate or abandon his or her or its employment or relationship
with the Company or any of its Affiliates for any purpose whatsoever, or (ii) in
connection with any business to which Section 12(b) applies, call on, service,
solicit or otherwise do business with any customer of the Company or any of its
Affiliates; provided, however, that the restriction contained in clause (i) of
this Section 12(c) shall not apply to, or interfere with, the proper performance
by the Executive of his duties and responsibilities under Section 3 of this
Agreement.
() Nothing in this Section 12 shall prohibit the Executive from
being a passive owner of not more than one percent of the outstanding common
stock, capital stock and equity of any firm, corporation or enterprise so long
as the Executive has no active participation in the management of business of
such firm, corporation or enterprise.
() If the restrictions stated herein are found by a court to be
unreasonable, the parties hereto agree that the maximum period, scope or
geographical area reasonable under such circumstances shall be substituted for
the stated period, scope or area and that the court shall revise the
restrictions contained herein to cover the maximum period, scope and area
permitted by law.
. Resolution of Disputes. Any disputes arising under or in connection with
this Agreement shall be resolved by third party mediation of the dispute and,
failing that, by binding arbitration, to be held in Boston, Massachusetts, in
accordance with the rules and procedures of the American Arbitration
Association. Judgment upon the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction thereof. Costs of the mediation,
arbitration or litigation including, without limitation, reasonable attorneys'
fees of both parties, shall be borne by the Company. Pending the resolution of
the dispute, the Company shall continue payment of all amounts due and
provisions of all benefits to which Executive is entitled, which amounts shall
be subject to repayment to the Company if the Company prevails.
. Remedies. The Parties acknowledge that in the event of a breach or
threatened breach of Section 11 or 12 the Company shall not have an adequate
remedy at law. Accordingly, in the event of any breach or threatened breach of
Section 11 or 12, the Company shall be entitled to seek such equitable and
injunctive relief as may be available to restrain the Executive and any
business, firm, partnership, individual, corporation or entity participating in
the breach or threatened breach from the violation of the provisions of Section
11 or 12.
. Indemnification.
() The Executive shall continue to be indemnified under the
Indemnification Agreement signed as of September 25, 1997, a copy of which is
attached as Exhibit E.
() The Company agrees to continue and maintain a directors' and
officers' liability insurance policy covering the Executive to the extent the
Company provides such coverage for its other senior executives.
() The Company acknowledges the possibility that the Executive may
lose significant benefits at his current employer because of his entering into
this Agreement. In the event his current employer refuses to pay any such
benefit, the Executive agrees to use his best efforts to obtain the benefit,
including possible arbitration proceedings, if necessary. The Company will fully
indemnify the Executive for all his expenses, including legal fees, incurred in
attempting to obtain such benefits. If the Executive is not able to obtain the
benefit before June 1, 2000, the Company will indemnify the Executive by paying
an amount equal to the value of the benefit forfeited, but in no event more than
$1.5 million.
. Assignability; Binding Nature. This Agreement shall be binding upon and
inure to the benefit of the Parties and their respective successors, heirs (in
the case of the Executive) and assigns. Rights or obligations of the Company
under this Agreement may be assigned or transferred by the Company pursuant to a
merger or consolidation in which the Company is not the continuing entity, or
the sale or liquidation of all or substantially all of the assets of the
Company, provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or as a matter of law. The Company further
agrees that, in the event of a sale of assets or liquidation as described in the
preceding sentence, it shall take whatever action it reasonably can in order to
cause such assignee or transferee to expressly assume the liabilities,
obligations and duties of the Company hereunder. No rights or obligations of the
Executive under this Agreement may be assigned or transferred by the Executive
other than his rights to compensation and benefits, which may be transferred
only by will or operation of law.
. Representations. The Company represents and warrants that it is fully
authorized and empowered to enter into this Agreement and that the performance
of its obligations under this Agreement will not violate any agreement between
it and any other person, firm or organization. The Executive represents that he
knows of no agreement between him and any other person, firm or organization
that would be violated by the performance of his obligations under this
Agreement.
. Entire Agreement. This Agreement contains the entire
understanding and agreement between the Parties concerning the subject matter
hereof and supersedes all prior agreements, understandings, discussions,
negotiations and undertakings, whether written or oral, between the Parties
with respect thereto.
. Amendment or Waiver. No provision in this Agreement may be amended
unless such amendment is agreed to in writing and signed by the Executive and an
authorized officer of the Company. No waiver by either Party of any breach by
the other Party of any condition or provision contained in this Agreement to be
performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by the Executive or an authorized
officer of the Company, as the case may be.
. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions of this Agreement shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law so as to achieve the purposes of this Agreement.
. Survivorship. Except as otherwise expressly set forth in this
Agreement, the respective rights and obligations of the Parties hereunder
shall survive any termination of the Executive's employment. This Agreement
itself (as distinguished from the Executive's employment) may not be
terminated by either Party without the written consent of the other Party.
. References. In the event of the Executive's death or a judicial
determination of his incompetence, reference in this Agreement to the
Executive shall be deemed, where appropriate, to refer to his beneficiary,
estate or other legal representative.
. Governing Law/Jurisdiction. This Agreement shall be governed in
accordance with the laws of Massachusetts without reference to principles of
conflict of laws.
. Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be deemed given when (a) delivered
personally, (b) sent by certified or registered mail, postage prepaid, return
receipt requested or (c) delivered by overnight courier (provided that a written
acknowledgment of receipt is obtained by the overnight courier) to the Party
concerned at the address indicated below or to such changed address as such
Party may subsequently give such notice of:
If to the Company: Thermo Electron Corporation
81 Wyman Street
Waltham, MA 02254
Attention: Vice President and
General Counsel
Copy: Chairman, Human Resources Committee
of the Board of Directors
If to the Executive: Richard F. Syron
c/o Thermo Electron Corporation
81 Wyman Street
Waltham, MA 02254
. Headings. The headings of the sections contained in this
Agreement are for convenience only and shall not be deemed to control or
affect the meaning or construction of any provision of this Agreement.
. Counterparts. This Agreement may be executed in two or more
counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.
THERMO ELECTRON CORPORATION
By: /s/George N. Hatsopoulos
----------------------------
George N. Hatsopoulos
Chairman
/s/Richard F. Syron
-------------------
Richard F. Syron
Exhibit 13
Thermo Electron Corporation
Consolidated Financial Statements
1998
<PAGE>
<TABLE>
<CAPTION>
Thermo Electron Corporation 1998 Financial Statements
Consolidated Statement of Income
<S> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- ----------
Revenues
Product and service revenues $3,690,545 $3,392,575 $2,766,002
Research and development contract revenues 177,051 165,745 166,556
---------- ---------- ----------
3,867,596 3,558,320 2,932,558
---------- ---------- ----------
Costs and Operating Expenses:
Cost of product and service revenues 2,186,893 1,973,265 1,657,746
Expenses for research and development (a) 367,343 335,372 299,271
Selling, general, and administrative expenses 937,640 842,625 691,434
Restructuring and other nonrecurring costs, net (Note 11) 44,450 1,272 37,641
---------- ---------- ----------
3,536,326 3,152,534 2,686,092
---------- ---------- ----------
Operating Income 331,270 405,786 246,466
Gain on Issuance of Stock by Subsidiaries (Note 9) 51,775 80,055 126,599
Other Income, Net (Note 10) 8,465 2,626 1,486
---------- ---------- ----------
Income Before Income Taxes, Minority Interest, and Extraordinary 391,510 488,467 374,551
Items
Provision for Income Taxes (Note 8) 170,680 174,713 110,845
Minority Interest Expense 44,023 74,426 72,890
---------- ---------- ----------
Income Before Extraordinary Items 176,807 239,328 190,816
Extraordinary Items, Net of Provision for Income Taxes and 5,094 - -
Minority Interest of $8,247 (Note 5)
---------- ---------- ----------
Net Income $ 181,901 $ 239,328 $ 190,816
========== ========== ==========
Earnings per Share (Note 15)
Basic $ 1.12 $ 1.57 $ 1.35
========== ========== ==========
Diluted $ 1.07 $ 1.41 $ 1.17
========== ========== ==========
Weighted Average Shares (Note 15)
Basic 161,866 152,489 141,525
========== ========== ==========
Diluted 178,449 176,082 175,605
========== ========== ==========
(a) Includes Costs of:
Research and development contracts $ 154,172 $ 143,743 $ 144,823
Internally funded research and development 213,171 191,629 154,448
---------- ---------- ----------
$ 367,343 $ 335,372 $ 299,271
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
Thermo Electron Corporation 1998 Financial Statements
Consolidated Balance Sheet
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ------------ -----------
Assets
Current Assets:
Cash and cash equivalents $ 396,670 $ 593,580
Short-term available-for-sale investments, at quoted market value 1,150,585 929,118
(amortized cost of $1,144,785 and $925,855; Note 2)
Accounts receivable, less allowances of $52,607 and $55,698 875,615 797,399
Unbilled contract costs and fees 87,031 69,375
Inventories 599,707 543,589
Prepaid income taxes (Note 8) 143,352 118,182
Prepaid expenses 48,369 42,955
---------- ----------
3,301,329 3,094,198
---------- ----------
Property, Plant, and Equipment, at Cost, Net 832,962 789,046
---------- ----------
Long-term Available-for-sale Investments, at Quoted Market Value 95,537 63,306
---------- ----------
(amortized cost of $99,256 and $49,581; Note 2)
Other Assets 186,168 157,108
---------- ----------
Cost in Excess of Net Assets of Acquired Companies (Notes 3, 8, and 11) 1,915,649 1,692,211
---------- ----------
$6,331,645 $5,795,869
========== ==========
3
<PAGE>
Thermo Electron Corporation 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1998 1997
- ---------------------------------------------------------------------------------- ------------ -----------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable and current maturities of long-term obligations (Note 5) $ 134,071 $ 176,912
Accounts payable 272,503 251,677
Accrued payroll and employee benefits 142,323 140,698
Accrued income taxes 92,623 57,923
Accrued installation and warranty costs 71,118 72,710
Deferred revenue 60,582 54,999
Other accrued expenses (Notes 1 and 3) 365,103 337,316
---------- ----------
1,138,323 1,092,235
---------- ----------
Deferred Income Taxes (Note 8) 102,404 90,802
---------- ----------
Other Deferred Items 73,580 59,082
---------- ----------
Long-term Obligations (Note 5):
Senior convertible obligations 187,042 187,824
Senior notes 150,000 -
Subordinated convertible obligations 1,639,052 1,473,015
Nonrecourse tax-exempt obligations 15,500 37,600
Other 33,937 44,468
---------- ----------
2,025,531 1,742,907
---------- ----------
Minority Interest 649,382 719,622
---------- ----------
Commitments and Contingencies (Note 6)
Common Stock of Subsidiaries Subject to Redemption ($95,262 redemption 94,301 93,312
value; Note 1)
---------- ----------
Shareholders' Investment (Notes 4 and 7):
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized; 166,970,806 166,971 159,206
and 159,206,337 shares issued
Capital in excess of par value 1,033,799 843,709
Retained earnings 1,216,541 1,034,640
Treasury stock at cost, 8,477,707 and 95,684 shares (151,643) (3,839)
Accumulated other comprehensive items (Note 16) (17,544) (35,807)
---------- ----------
2,248,124 1,997,909
---------- ----------
$6,331,645 $5,795,869
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Thermo Electron Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------ ------------- ------------ ------------
Operating Activities
Net income $ 181,901 $ 239,328 $ 190,816
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 162,277 135,738 115,167
Noncash restructuring and other nonrecurring costs 15,524 (3,068) 24,331
(income), net (Note 11)
Provision for losses on accounts receivable 10,038 9,078 6,002
Change in deferred income taxes 2,476 1,111 20,869
Minority interest expense 44,023 74,426 72,890
Gain on issuance of stock by subsidiaries (Note 9) (51,775) (80,055) (126,599)
Gain on sale of investments, net (12,872) (5,077) (9,840)
Extraordinary items, net of income taxes and (5,094) - -
minority interest (Note 5)
Other noncash items, net 31,067 9,093 15,758
Changes in current accounts, excluding the effects
of acquisitions and dispositions:
Accounts receivable (10,845) (86,511) (17,078)
Inventories (13,961) 9,377 (1,298)
Other current assets (28,354) 31,445 (35,657)
Accounts payable (13,689) (8,308) (14,307)
Other current liabilities 17,745 (57,559) (16,549)
------------ ----------- -----------
Net cash provided by operating activities 328,461 269,018 224,505
------------ ----------- -----------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (253,192) (849,118) (366,317)
Refund of acquisition purchase price (Note 3) - 36,132 -
Proceeds from sale of businesses 11,905 27,102 -
Purchases of available-for-sale investments (2,194,838) (973,687) (1,644,094)
Proceeds from sale and maturities of available-for-sale 1,936,558 1,543,025 835,935
investments
Purchases of property, plant, and equipment (148,008) (111,605) (124,541)
Proceeds from sale of property, plant, and equipment 16,373 15,633 10,500
Increase in other assets (18,116) (13,425) (26,144)
Other 17,002 6,115 3,385
------------ ----------- -----------
Net cash used in investing activities (632,316) (319,828) (1,311,276)
------------ ----------- -----------
Financing Activities
Net proceeds from issuance of long-term obligations 394,068 490,821 953,376
(Note 5)
Repayment of long-term obligations (75,775) (78,287) (60,643)
Net proceeds from issuance of Company and subsidiary 476,139 164,855 303,954
common stock (Notes 7 and 9)
Purchases of Company and subsidiary common stock and (658,999) (311,092) (144,053)
subordinated convertible debentures (Note 5)
Decrease in short-term notes payable (27,929) (24,256) (13,391)
Other (5,326) (4,291) (1,279)
------------ ----------- -----------
Net cash provided by financing activities $ 102,178 $ 237,750 $ 1,037,964
------------ ----------- -----------
5
<PAGE>
Thermo Electron Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------- ------------- ------------ ------------
Exchange Rate Effect on Cash $ 4,767 $ (7,764) $ 350
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (196,910) 179,176 (48,457)
Cash and Cash Equivalents at Beginning of Year 593,580 414,404 462,861
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 396,670 $ 593,580 $ 414,404
=========== =========== ===========
See Note 12 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Thermo Electron Corporation 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Comprehensive Income
Net Income $ 181,901 $ 239,328 $ 190,816
---------- ---------- ----------
Other Comprehensive Items (Note 16):
Foreign currency translation adjustment 27,424 (45,835) (1,112)
Unrealized gains (losses) on available-for-sale investments, (9,161) 2,133 4,336
net of reclassification adjustment
---------- ---------- ----------
18,263 (43,702) 3,224
Minority interest (7,736) 12,874 139
---------- ---------- ----------
10,527 (30,828) 3,363
---------- ---------- ----------
$ 192,428 $ 208,500 $ 194,179
========== ========== ==========
Shareholders' Investment
Common Stock, $1 Par Value:
Balance at beginning of year $ 159,206 $ 149,997 $ 89,006
Public offering of Company common stock (Note 7) 7,475 - -
Issuance of stock under employees' and directors' stock plans 290 866 892
Conversions of convertible obligations - 8,343 13,449
Effect of three-for-two stock split - - 46,650
---------- ---------- ----------
Balance at end of year 166,971 159,206 149,997
---------- ---------- ----------
Capital in Excess of Par Value:
Balance at beginning of year 843,709 801,793 614,363
Public offering of Company common stock (Note 7) 282,655 - -
Activity under employees' and directors' stock plans (3,285) 13,185 8,172
Tax benefit related to employees' and directors' stock plans 10,938 5,456 12,821
Conversions of convertible obligations - 164,537 254,842
Effect of majority-owned subsidiaries' equity transactions (100,218) (141,262) (41,755)
Effect of three-for-two stock split - - (46,650)
---------- ---------- ----------
Balance at end of year 1,033,799 843,709 801,793
---------- ---------- ----------
Retained Earnings:
Balance at beginning of year 1,034,640 795,312 604,496
Net income 181,901 239,328 190,816
---------- ---------- ----------
Balance at end of year 1,216,541 1,034,640 795,312
---------- ---------- ----------
Treasury Stock:
Balance at beginning of year (3,839) (570) (536)
Purchases of Company common stock (148,132) - -
Activity under employees' and directors' stock plans 328 (3,269) (34)
---------- ---------- ----------
Balance at end of year $ (151,643) $ (3,839) $ (570)
---------- ---------- ----------
7
<PAGE>
Thermo Electron Corporation 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued)
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Accumulated Other Comprehensive Items (Note 16):
Balance at beginning of year $ (35,807) $ 7,895 $ 4,671
Other comprehensive items 18,263 (43,702) 3,224
---------- ---------- ----------
Balance at end of year (17,544) (35,807) 7,895
----------- ---------- ----------
Deferred Compensation:
Balance at beginning of year - (58) (2,271)
Amortization of deferred compensation - 58 296
ESOP II loan repayment (Note 4) - - 1,917
---------- ---------- ----------
Balance at end of year - - (58)
---------- ---------- ----------
$2,248,124 $1,997,909 $1,754,369
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
Thermo Electron Corporation 1998 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Electron Corporation and its subsidiaries (the Company or the
Registrant) develop and manufacture a range of products that are sold worldwide.
The Company is a world leader in monitoring, analytical, and biomedical
instrumentation; biomedical products including heart-assist devices,
respiratory-care equipment, and mammography systems; and paper recycling and
papermaking equipment. The Company also develops alternative-energy systems and
clean fuels, provides a range of services including industrial outsourcing and
environmental-liability management, and conducts research and development in
advanced imaging, laser, and electronic information-management technologies. The
Company performs its business through wholly owned subsidiaries and divisions,
as well as majority-owned subsidiaries that are partially owned by the public or
private investors.
Principles of Consolidation
The accompanying financial statements include the accounts of Thermo
Electron and its majority- and wholly owned subsidiaries. The Company's
majority-owned public and privately held subsidiaries are listed in Note 9. All
material intercompany accounts and transactions have been eliminated. The
Company accounts for investments in businesses in which it owns between 20% and
50% using the equity method. During 1998, the Company announced a proposed
reorganization involving certain of the Company's majority-owned subsidiaries
(Note 17).
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1998, 1997, and 1996 are for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996, respectively. Fiscal years 1998
and 1996 each included 52 weeks; fiscal year 1997 included 53 weeks.
Revenue Recognition
For the majority of its operations, the Company recognizes revenues upon
shipment of its products, or upon completion of services it renders. The Company
provides a reserve for its estimate of warranty and installation costs at the
time of shipment. Deferred revenue in the accompanying balance sheet consists
primarily of unearned revenue on service contracts. Substantially all of the
deferred revenue in the accompanying 1998 balance sheet will be recognized
within one year. Revenues on substantially all contracts are recognized using
the percentage-of-completion method. Revenues recorded under the
percentage-of-completion method were $489.8 million, $440.4 million, and $421.1
million in 1998, 1997, and 1996, respectively. The percentage of completion is
determined by relating either the actual costs or actual labor incurred to date
to management's estimate of total costs or total labor, respectively, to be
incurred on each contract. If a loss is indicated on any contract in process, a
provision is made currently for the entire loss. The Company's contracts
generally provide for billing of customers upon the attainment of certain
milestones specified in each contract. Revenues earned on contracts in process
in excess of billings are classified as unbilled contract costs and fees in the
accompanying balance sheet. There are no significant amounts included in the
accompanying balance sheet that are not expected to be recovered from existing
contracts at current contract values, or that are not expected to be collected
within one year, including amounts that are billed but not paid under retainage
provisions.
Gain on Issuance of Stock by Subsidiaries
At the time a subsidiary sells its stock to unrelated parties at a price
in excess of its book value, the Company's net investment in that subsidiary
increases. If at that time the subsidiary is an operating entity and not engaged
principally in research and development, the Company records the increase as a
gain.
If gains have been recognized on issuances of a subsidiary's stock and
shares of the subsidiary are subsequently repurchased by the subsidiary, by the
subsidiary's parent, or by the Company, gain recognition does not occur on
issuances subsequent to the date of a repurchase until such time as shares have
been issued in an amount equivalent to the number of repurchased shares. Such
transactions are reflected as equity transactions, and the net effect of these
transactions is reflected in the accompanying statement of comprehensive income
and shareholders' investment as "Effect of majority-owned subsidiaries' equity
transactions."
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 4). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
Income Taxes
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
Earnings per Share
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the year. Diluted earnings
per share have been computed assuming the conversion of convertible obligations
and the elimination of the related interest expense, and the exercise of stock
options, as well as their related income tax effects.
Cash and Cash Equivalents
Cash equivalents consists principally of corporate notes, U.S.
government-agency securities, commercial paper, money market funds, and other
marketable securities purchased with an original maturity of three months or
less. These investments are carried at cost, which approximates market value.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out or
weighted average basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ------------ -----------
Raw Materials and Supplies $267,901 $260,458
Work in Progress 127,144 108,327
Finished Goods 204,662 174,804
-------- --------
$599,707 $543,589
======== ========
</TABLE>
10
<PAGE>
<TABLE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: buildings and improvements, 5 to 40
years; electric generating facilities, 25 years; coal-beneficiation facility,
based upon units of production over the life of the facility; machinery and
equipment, 1 to 15 years; and leasehold improvements, the shorter of the term of
the lease or the life of the asset. Property, plant, and equipment consists of:
<CAPTION>
<S> <C> <C>
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ------------ -----------
Land $ 65,335 $ 59,867
Buildings 254,030 235,103
Electric Generating and Coal-beneficiation Facilities 331,319 247,361
Machinery, Equipment, and Leasehold Improvements 640,801 617,582
---------- ----------
1,291,485 1,159,913
Less: Accumulated Depreciation and Amortization 458,523 370,867
---------- ----------
$ 832,962 $ 789,046
========== ==========
Other Assets
Other assets in the accompanying balance sheet includes intangible assets,
notes receivable, deferred debt expense, prepaid pension costs, and other
assets. Intangible assets include the costs of acquired trademarks, patents,
product technology, and other specifically identifiable intangible assets and
are being amortized using the straight-line method over their estimated useful
lives, which range from 3 to 20 years. Intangible assets were $62.7 million and
$50.5 million, net of accumulated amortization of $54.1 million and $45.7
million, at year-end 1998 and 1997, respectively.
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method principally over 40 years.
Accumulated amortization was $186.8 million and $134.7 million at year-end 1998
and 1997, respectively. The Company assesses the future useful life of this
asset whenever events or changes in circumstances indicate that the current
useful life has diminished. The Company considers the future undiscounted cash
flows of the acquired companies in assessing the recoverability of this asset.
If impairment has occurred, any excess of carrying value over fair value is
recorded as a loss.
Common Stock of Subsidiaries Subject to Redemption
In March 1995, ThermoLyte sold 1,845,000 units, each unit consisting of
one share of ThermoLyte common stock and one redemption right, at $10.00 per
unit, for net proceeds of $17.3 million. Holders of the common stock issued in
the offering have the option to require ThermoLyte to redeem any or all of their
shares at $10.00 per share in December 1998 or December 1999. In December 1998,
1,707,000 shares of ThermoLyte common stock were redeemed for a total redemption
value of $17.1 million. A payable for the redeemed common stock of ThermoLyte of
$17.1 million and a liability for the remaining ThermoLyte common stock subject
to redemption of $1.4 million are included in other accrued expenses in the
accompanying 1998 balance sheet. The ThermoLyte common stock subject to
redemption of $18.1 million was included in other accrued expenses in the
accompanying 1997 balance sheet.
11
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
In September 1996, Thermo Fibergen sold 4,715,000 units, each unit
consisting of one share of Thermo Fibergen common stock and one redemption
right, at $12.75 per unit, for net proceeds of $55.8 million. The common stock
and redemption rights began trading separately on December 13, 1996. Holders of
a redemption right have the option to require Thermo Fibergen to redeem one
share of Thermo Fibergen common stock at $12.75 per share in September 2000 or
September 2001. The redemption rights carry terms that generally provide for
their expiration if the closing price of Thermo Fibergen's common stock exceeds
$19 1/8 for 20 of any 30 consecutive trading days prior to September 2001.
In April 1997, ThermoLase completed an exchange offer whereby its
shareholders had the opportunity to exchange one share of existing ThermoLase
common stock and $3.00 (in cash or ThermoLase common stock) for a new unit
consisting of one share of ThermoLase common stock and one redemption right. The
redemption right entitles the holder to sell the related share of common stock
to ThermoLase for $20.25 during the period from April 3, 2001, through April 30,
2001. The redemption right will expire if the closing price of ThermoLase common
stock is at least $26.00 for 20 of any 30 consecutive trading days. In
connection with this offer, ThermoLase issued in April 1997, 2,000,000 units in
exchange for 2,261,706 shares of its common stock and $0.5 million in cash, net
of expenses. As a result of these transactions, $40.5 million was reclassified
in 1997 from "Shareholders' investment" and "Minority interest" to "Common stock
of subsidiaries subject to redemption," based on the issuance of the 2,000,000
redemption rights, each carrying a maximum liability of $20.25.
The difference between the redemption value and the original carrying
amount of ThermoLyte and Thermo Fibergen common stock subject to redemption is
accreted over the period through the first redemption period. Accretion is
charged to minority interest expense in the accompanying statement of income.
ThermoLyte common stock subject to redemption was accreted to its full
redemption value in December 1998. All redemption rights are guaranteed on a
subordinated basis by the Company.
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment.
Foreign currency transaction gains and losses are included in the accompanying
statement of income and are not material for the three years presented.
Forward Contracts and Interest Rate Swap Agreements
The Company uses short-term forward foreign exchange contracts to manage
certain exposures to foreign currencies. The Company enters into forward foreign
exchange contracts to hedge firm purchase and sale commitments denominated in
currencies other than its subsidiaries' local currencies. These contracts
principally hedge transactions denominated in U.S. dollars, British pounds
sterling, French francs, and Japanese yen. The purpose of the Company's foreign
currency hedging activities is to protect the Company's local currency cash
flows related to these commitments from fluctuations in foreign exchange rates.
Gains and losses arising from forward foreign exchange contracts are recognized
as offsets to gains and losses resulting from the transactions being hedged.
Thermo Ecotek has interest rate swap agreements that convert its variable
rate obligations to fixed rate obligations (Note 5). Interest rate swap
agreements are accounted for under the accrual method. Amounts to be received
from or paid to the counterparties of the agreements are accrued during the
period to which the amounts relate and are reflected as interest expense. The
related amounts payable to the counterparties are included in other accrued
expenses in the accompanying balance sheet. The fair value of the swap
agreements is not recognized in the accompanying financial statements since the
agreements are accounted for as hedges.
The Company does not enter into speculative foreign currency or interest
swap agreements.
</TABLE>
12
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
Certain amounts in 1997 and 1996 have been reclassified to conform to the
presentation in the 1998 financial statements.
2. Available-for-sale Investments
The Company's debt and marketable equity securities are considered
available-for-sale investments in the accompanying balance sheet and are carried
at market value, with the difference between cost and market value, net of
related tax effects, recorded in the "Accumulated other comprehensive items"
component of shareholders' investment.
The aggregate market value, cost basis, and gross unrealized gains and
losses of short- and long-term available-for-sale investments by major security
type are:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(In thousands) Gross Gross
Market Cost Unrealized Unrealized
Value Basis Gains Losses
- -------------------------------------------------- ------------- ------------- ------------- --------------
1998
Corporate Bonds $ 698,607 $ 696,501 $ 2,253 $ (147)
Government-agency Securities 420,920 420,341 602 (23)
Other 126,595 127,199 6,362 (6,966)
---------- ---------- ---------- ----------
$1,246,122 $1,244,041 $ 9,217 $ (7,136)
========== ========== ========== ==========
1997
Corporate Bonds $ 513,956 $ 513,427 $ 717 $ (188)
Government-agency Securities 385,476 385,049 451 (24)
Other 92,992 76,960 16,628 (596)
---------- ---------- ---------- ----------
$ 992,424 $ 975,436 $ 17,796 $ (808)
========== ========== ========== ==========
Short- and long-term available-for-sale investments in the accompanying
1998 balance sheet include equity securities of $38.3 million and debt
securities of $809.1 million with contractual maturities of one year or less,
$386.8 million with contractual maturities of more than one year through five
years, and $11.9 million with contractual maturities of more than five years.
Actual maturities may differ from contractual maturities as a result of the
Company's intent to sell these securities prior to maturity and as a result of
put and call features of the securities that enable either the Company, the
issuer, or both to redeem these securities at an earlier date.
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains and losses recorded in the
accompanying statement of income. The net gain on sale of investments resulted
from gross realized gains of $13.6 million, $5.2 million, and $11.2 million and
gross realized losses of $0.7 million, $0.1 million, and $1.4 million in 1998,
1997, and 1996, respectively, relating to the sale of available-for-sale
investments.
13
<PAGE>
3. Acquisitions
In 1998, the Company and its majority-owned subsidiaries made several
acquisitions for $253.2 million in cash, net of cash acquired, the issuance of
subsidiary common stock valued at $16.5 million, and $7.7 million, which was
accrued as of January 2, 1999, subject to certain post-closing adjustments. The
Company does not expect that aggregate post-closing adjustments will be
material.
In March 1997, Thermo Instrument acquired Life Sciences International PLC,
a London Stock Exchange-listed company. The aggregate purchase price for Life
Sciences was $442.8 million, net of $55.8 million of cash acquired. The purchase
price includes the repayment of $105.0 million of Life Sciences' bank debt. Life
Sciences manufactures laboratory science equipment, appliances, instruments,
consumables, and reagents for the research, clinical, and industrial markets.
In 1997, in addition to the acquisition of Life Sciences, the Company and
its majority-owned subsidiaries made several other acquisitions for an aggregate
of $406.3 million in cash, net of cash acquired, the issuance of subsidiary
common stock and stock options valued at $4.5 million, and $5.1 million which
was paid in the first quarter of 1998.
In June 1996, the Company acquired SensorMedics Corporation in exchange
for 1,243,518 shares of the Company's common stock, including 156,590 shares
reserved for issuance upon exercise of assumed stock options and warrants.
SensorMedics manufactures systems for pulmonary function diagnosis,
respiratory-gas analyzers, physiological testing equipment, and automated
sleep-analysis systems. The acquisition has been accounted for under the
pooling-of-interests method.
In March 1996, Thermo Instrument completed the acquisition of a
substantial portion of the businesses constituting the Scientific Instruments
Division of Fisons plc (the Fisons businesses), a wholly owned subsidiary of
Rhone-Poulenc Rorer Inc. (RPR), for approximately $181.2 million in cash, net of
$7.7 million of cash acquired, and the assumption of approximately $47.2 million
of indebtedness. In December 1997, Thermo Instrument and RPR negotiated a
post-closing adjustment under the terms of the purchase agreement for the
acquisition of the Fisons businesses pertaining to determination of the net
assets of the Fisons businesses at the date of acquisition. This negotiation
resulted in a refund to Thermo Instrument of $36.1 million, plus $3.8 million of
interest from the date of acquisition. Thermo Instrument recorded $33.1 million
of the refund as a reduction of cost in excess of net assets of acquired
companies. The remaining $3.0 million represented payment for uncollected
accounts receivable acquired by Thermo Instrument that were guaranteed by RPR.
In 1996, in addition to the acquisitions of SensorMedics and the Fisons
businesses, the Company and its majority-owned subsidiaries made several other
acquisitions for an aggregate of $185.1 million in cash, net of cash acquired,
the issuance of common stock of the Company and its majority-owned subsidiaries
valued at $2.4 million, and the issuance of $26.6 million in debt.
These acquisitions, except for SensorMedics, have been accounted for using
the purchase method of accounting, and the acquired companies' 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 $1,154.4 million, which is being
amortized principally over 40 years. Allocation of the purchase price for these
acquisitions was based on estimates of the fair value of the net assets acquired
and, for acquisitions completed in 1998, is subject to adjustment upon
finalization of the purchase price allocation. The Company has gathered no
information that indicates the final purchase price allocations will differ
materially from the preliminary estimates. Pro forma data is not presented since
the acquisitions were not material to the Company's results of operations.
In connection with these acquisitions, the Company has undertaken
restructuring activities at the acquired businesses. The Company's restructuring
activities, which were accounted for in accordance with Emerging Issues Task
Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing
levels and the abandonment of excess facilities. In connection with these
restructuring activities, as part of the cost of the acquisitions, the Company
established reserves as detailed below, primarily for severance and excess
facilities. In accordance with EITF 95-3, the Company finalized, and for 1998
acquisitions intends to finalize, its restructuring plans no later than one year
from the respective dates of the acquisitions. Unresolved matters at January 2,
1999, primarily included completion of planned
14
<PAGE>
3. Acquisitions (continued)
severances and abandonment of excess facilities for certain acquisitions
completed during 1998. A summary of the changes in accrued acquisition expenses,
which are included in other accrued expenses in the accompanying balance sheet,
is:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- --------------
Balance at December 30, 1995 $ 7,499 $ 7,910 $ 2,552 $ 17,961
Reserves established 27,832 9,993 3,858 41,683
Usage (20,147) (6,134) (2,717) (28,998)
Decrease due to finalization of (2,089) (3,357) (1,912) (7,358)
restructuring plans, recorded as a
decrease in cost in excess of net
assets of acquired companies
Currency translation adjustment - - 185 185
-------- -------- -------- --------
Balance at December 28, 1996 13,095 8,412 1,966 23,473
Reserves established 18,207 12,737 4,512 35,456
Usage (13,580) (5,594) (1,601) (20,775)
Decrease due to finalization of (3,364) (1,405) (393) (5,162)
restructuring plans, recorded as a
decrease in cost in excess of net
assets of acquired companies
Currency translation adjustment - - (487) (487)
-------- -------- -------- --------
Balance at January 3, 1998 14,358 14,150 3,997 32,505
Reserves established 7,265 3,912 935 12,112
Usage (12,296) (3,398) (1,802) (17,496)
Decrease due to finalization of (1,980) (87) (2,555) (4,622)
restructuring plans, recorded as a
decrease in cost in excess of net
assets of acquired companies
Currency translation adjustment - - 693 693
-------- -------- -------- --------
Balance at January 2, 1999 $ 7,347 $ 14,577 $ 1,268 $ 23,192
======== ======== ======== ========
15
<PAGE>
4. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has stock-based compensation plans for its key employees,
directors, and others, which permit the award of stock-based incentives in the
stock of the Company and its majority-owned subsidiaries. Two of the plans
permit the grant of nonqualified and incentive stock options to key employees.
The incentive stock option plan expired in 1991, and no grants were made after
that date. The Company also has an equity incentive plan, which permits the
grant of a variety of stock and stock-based awards as determined by the human
resources committee of the Company's Board of Directors (the Board Committee),
including restricted stock, stock options, stock bonus shares, or
performance-based shares. The option recipients and the terms of options granted
under these plans are determined by the Board Committee. Generally, options
outstanding under these plans are exercisable immediately, but are subject to
certain transfer restrictions and the right of the Company to repurchase shares
issued upon exercise of the options at the exercise price, upon certain events.
The restrictions and repurchase rights may lapse over periods ranging from one
to ten years, depending on the term of the option, which may range from one to
twelve years. In addition, under certain options, shares acquired upon exercise
are restricted from resale until retirement or other events. Nonqualified
options are generally granted at fair market value, although the Board Committee
has discretion to grant options at a price at or above 85% of the fair market
value on the date of grant. Incentive stock options must be granted at not less
than the fair market value of the Company's stock on the date of grant.
Generally, stock options have been granted at fair market value. The Company
also has a directors' stock option plan that provides for the annual grant of
stock options of the Company and its majority-owned subsidiaries to outside
directors pursuant to a formula approved by the Company's shareholders. Options
awarded under this plan are exercisable six months after the date of grant and
expire three to seven years after the date of grant. In addition to the
Company's stock-based compensation plans, certain officers and key employees may
also participate in stock-based compensation plans of the Company's
majority-owned subsidiaries.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 1,513,000 shares at a weighted average exercise price of $36.15 per
share elected to participate in this exchange and, as a result, received options
to purchase 756,000 shares of Company common stock at $18.08 per share, which
are included in the 1998 grants in the table below. The other terms of the new
options are the same as the exchanged options except that the holders may not
sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.
</TABLE>
16
<PAGE>
4. Employee Benefit Plans (continued)
<TABLE>
<CAPTION>
A summary of the Company's stock option activity is:
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
------------------- ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- --------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 8,831 $24.19 8,421 $21.24 8,302 $17.46
Granted 3,554 23.64 1,401 37.06 1,183 39.03
Exercised (625) 15.96 (744) 13.37 (1,125) 10.71
Forfeited (334) 33.38 (247) 29.45 (89) 26.97
Canceled due to exchange (1,513) 36.15 - - - -
Assumed upon acquisition through - - - - 150 14.97
pooling-of-interests (Note 3)
----- ----- -----
Options Outstanding, End of Year 9,913 $22.38 8,831 $24.19 8,421 $21.24
===== ====== ===== ====== ===== ======
Options Exercisable 9,909 $22.38 8,821 $24.18 8,406 $21.23
===== ====== ===== ====== ===== ======
Options Available for Grant 3,417 5,132 1,291
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
A summary of the status of the Company's stock options at January 2, 1999,
is:
<S> <C> <C> <C>
Options Outstanding
-----------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ---------------------------------------------------- -------------- ------------------- -------------------
$ 6.33 - $ 15.61 1,204 2.9 years $12.58
15.62 - 24.89 6,320 6.2 years 18.70
24.90 - 34.17 549 8.0 years 32.24
34.18 - 43.46 1,840 8.6 years 38.48
-----
$ 6.33 - $ 43.46 9,913 6.3 years $22.38
=====
</TABLE>
The information disclosed above for options outstanding at January 2,
1999, does not differ materially for options exercisable.
17
<PAGE>
4. Employee Benefit Plans (continued)
Employee Stock Purchase Plan
Substantially all of the Company's full-time U.S. employees are eligible
to participate in an employee stock purchase plan sponsored by the Company.
Prior to the 1998 plan year, shares of the Company's common stock could be
purchased at the end of a 12-month period at 95% of the fair market value at the
beginning of the period, and the shares purchased were subject to a six-month
resale restriction. Beginning in November 1998, shares of the Company's common
stock may be purchased at 85% of the lower of the fair market value at the
beginning or end of the period, and the shares purchased are subject to a
one-year resale restriction. Shares are purchased through payroll deductions of
up to 10% of each participating employee's gross wages. Participants of employee
stock purchase programs sponsored by the Company's majority-owned public
subsidiaries may also elect to purchase shares of the common stock of the
subsidiary at which they are employed under the same general terms described
above. The Company issued no shares of its common stock under this plan during
1998. During 1997 and 1996, the Company issued 243,000 shares and 285,000
shares, respectively, of its common stock under this plan.
Employee Stock Ownership Plan
The Company's Employee Stock Ownership Plan (ESOP) was split into two
plans effective December 31, 1994: ESOP I and ESOP II. The ESOP I covers
eligible full-time U.S. employees of the Company's corporate office and its
wholly owned subsidiaries. The ESOP II, terminated effective December 31, 1994,
covered employees of certain of the Company's majority-owned subsidiaries. The
Company loaned funds to the ESOP to purchase shares of common stock of the
Company and its majority-owned subsidiaries. The shares purchased by the ESOP
were recorded as deferred compensation in the accompanying balance sheet. The
loan to the ESOP II was repaid in full in 1996 and all expense related to the
plans had been recognized. The loan repayment was recorded as a reduction in
deferred compensation in the accompanying balance sheet. Shares are allocated to
the plan participants based on employee compensation. For these plans, the
Company charged to expense $0.2 million in 1996.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
after 1994 under the Company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method set forth
under SFAS No. 123, the effect on the Company's net income and earnings per
share would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Net Income:
As reported $ 181,901 $ 239,328 $190,816
Pro forma 158,602 224,337 181,880
Basic Earnings per Share:
As reported 1.12 1.57 1.35
Pro forma .98 1.47 1.29
Diluted Earnings per Share:
As reported 1.07 1.41 1.17
Pro forma .94 1.32 1.12
18
<PAGE>
4. Employee Benefit Plans (continued)
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $8.13,
$15.14, and $13.03 in 1998, 1997, and 1996, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Volatility 29% 26% 24%
Risk-free Interest Rate 4.8% 6.2% 6.1%
Expected Life of Options 4.7 years 6.5 years 5.2 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plan
The Company's 401(k) savings plan covers the majority of the Company's
eligible full-time U.S. employees. Contributions to the plan are made by both
the employee and the Company. Company contributions are based on the level of
employee contributions. For this plan, the Company contributed and charged to
expense $12.2 million, $13.9 million, and $10.1 million in 1998, 1997, and 1996,
respectively.
Other Retirement Plans
Certain of the Company's subsidiaries offer retirement plans, in lieu of
participation in the Company's principal 401(k) savings plan. Company
contributions to these plans are based on formulas determined by the Company.
For these plans, the Company contributed and charged to expense $17.7 million,
$16.2 million, and $14.6 million in 1998, 1997, and 1996, respectively.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
5. Long-term Obligations and Other Financing Arrangements
(In thousands except per share amounts) 1998 1997
- ---------------------------------------------------------------------------------- ------------ -----------
4 1/2% Senior Convertible Debentures, Due 2003, Convertible Into Shares $ 172,500 $ 172,500
of Thermo Instrument at $34.46 per Share
3 3/4% Senior Convertible Debentures, Due 2000, Convertible Into Shares 14,542 15,324
of Thermo Instrument at $13.55 per Share
7 5/8% Senior Notes, Due 2008 150,000 -
4 1/4% Subordinated Convertible Debentures, Due 2003, Convertible at $37.80 per 585,000 585,000
Share
4% Subordinated Convertible Debentures, Due 2005, Convertible Into 250,000 -
Shares of Thermo Instrument at $35.65 per Share
5% Subordinated Convertible Debentures, Due 2000, Convertible Into 67,631 80,591
Shares of ThermoQuest at $16.50 per Share
5% Subordinated Convertible Debentures, Due 2000, Convertible Into 71,155 79,956
Shares of Thermo Optek at $13.94 per Share
Noninterest-bearing Subordinated Convertible Debentures, Due 2003, 31,565 62,300
Convertible Into Shares of Thermedics at $32.68 per Share
2 7/8% Subordinated Convertible Debentures, Due 2003, Convertible Into 15,859 -
Shares of Thermedics at $14.93
4 3/4% Subordinated Convertible Debentures, Due 2004, Convertible Into 70,000 70,000
Shares of Thermo Cardiosystems at $31.42 per Share
3 3/4% Subordinated Convertible Debentures, Due 2000, Convertible Into 5,250 7,750
Shares of Thermo Voltek at $7.83 per Share
4 5/8% Subordinated Convertible Debentures, Due 2003, Convertible Into 111,850 111,850
Shares of Thermo TerraTech at $15.90 per Share
4 7/8% Subordinated Convertible Debentures, Due 2000, Convertible Into 34,525 34,950
Shares of ThermoRetec at $17.92 per Share
2 1/2% Subordinated Convertible Debentures, Due 2001, Convertible Into 6,999 -
Shares of Thermo EuroTech at $5.25 per Share
4 1/2% Subordinated Convertible Debentures, Due 2004, Convertible Into 153,000 153,000
Shares of Thermo Fibertek at $12.10 per Share
3 1/4% Senior Convertible Debentures, Due 2007, Convertible Into Shares 78,948 114,500
of ThermoTrex at $27.00 per Share
4 3/8% Subordinated Convertible Debentures, Due 2004, Convertible Into 110,500 115,000
Shares of ThermoLase at $17.39 per Share
Noninterest-bearing Subordinated Convertible Debentures, Due 2001, 1,820 8,118
Convertible Into Shares of Thermo Ecotek at $13.56 per Share
4 7/8% Subordinated Convertible Debentures, Due 2004, Convertible Into 44,950 50,000
Shares of Thermo Ecotek at $16.50 per Share
8.3% Nonrecourse Tax-exempt Obligation, Payable in Semiannual 27,200 35,600
Installments, With Final Payment in 2000
6.0% Nonrecourse Tax-exempt Obligation, Payable in Semiannual 10,400 23,900
Installments, With Final Payment in 2000
Other 60,198 93,857
---------- ----------
2,073,892 1,814,196
Less: Current Maturities 48,361 71,289
---------- ----------
$2,025,531 $1,742,907
========== ==========
20
<PAGE>
5. Long-term Obligations and Other Financing Arrangements (continued)
In October 1998, the Company issued and sold $150.0 million principal
amount of 7 5/8% senior 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 senior notes is 8.87%.
The debentures that are convertible into subsidiary common stock have been
issued by the respective subsidiaries and are guaranteed by the Company, on a
subordinated basis in most cases.
In the event of a change in control of the Company (as defined in the
related fiscal agency agreement) that has not been approved by the continuing
members of the Company's Board of Directors, each holder of the 4 1/4%
subordinated convertible debentures issued by the Company will have the right to
require the Company to buy all or part of the holder's debentures, at par value
plus accrued interest, within 50 calendar days after the date of expiration of a
specified approval period. In addition, certain of the obligations convertible
into subsidiary common stock become exchangeable for common stock of the Company
at an exchange price equal to 50% of the average price of the Company's common
stock for the 30 trading days preceding the change in control.
Nonrecourse tax-exempt obligations represent obligations issued by the
California Pollution Control Financing Authority, the proceeds of which were
used to finance two alternative-energy facilities (Delano I and Delano II)
located in Delano, California. The obligations are credit-enhanced by a letter
of credit issued by a bank group. The obligations are payable only by a
subsidiary of Thermo Ecotek and are not guaranteed by the Company, except under
limited circumstances. As required by the financing bank group, Thermo Ecotek
entered into interest rate swap agreements that effectively convert these
obligations from floating rates to the fixed rates described above. These swaps
have terms expiring in 2000, commensurate with the final maturity of the debt.
During 1998 and 1997, the average variable rate received under the interest rate
swap agreements was 3.5% and 3.7%, respectively. The notional amount of the swap
agreements was $41.5 million and $61.3 million at year-end 1998 and 1997,
respectively. The interest rate swap agreements are with a different
counterparty than the holders of the underlying debt. Management believes that
any credit risk associated with these swaps is remote.
The annual requirements for long-term obligations are:
(In thousands)
- ----------------------------------------------------------------------------------------------- -----------
1999 $ 48,361
2000 221,318
2001 14,421
2002 5,038
2003 922,218
2004 and thereafter 862,536
----------
$2,073,892
==========
See Note 13 for fair value information pertaining to the Company's
long-term obligations. Notes payable and current maturities of long-term
obligations in the accompanying balance sheet includes $85.7 million and $105.6
million in 1998 and 1997, respectively, of short-term bank borrowings and
borrowings under lines of credit of certain of the Company's subsidiaries. The
weighted average interest rate for these borrowings was 4.1% and 5.7% at
year-end 1998 and 1997, respectively. Unused lines of credit were $234 million
as of year-end 1998.
During 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, during
1998, certain majority-owned subsidiaries of Thermo Instrument repurchased $14.3
million principal amount of their subordinated convertible debentures for $13.3
million in cash, which resulted in an extraordinary gain recorded by Thermo
Instrument. Thermedics and one of its majority-owned subsidiaries also
repurchased $14.2 million principal amount of their subordinated convertible
debentures for $11.4 million in cash, which resulted in an extraordinary gain
recorded by Thermedics during 1998.
21
<PAGE>
5. Long-term Obligations and Other Financing Arrangements (continued)
In June 1998, Thermedics offered holders of its noninterest-bearing
subordinated convertible debentures due 2003, convertible at $32.68 per share,
the opportunity to exchange such debentures for newly issued 2 7/8% subordinated
convertible debentures due 2003, convertible at $14.93 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 EITF 96-19.
The Company recorded aggregate extraordinary gains from these transactions
of $5.1 million, net of taxes and minority interest of $8.2 million.
6. Commitments and Contingencies
Operating Leases
The Company leases portions of its office and operating facilities under
various operating lease arrangements. The accompanying statement of income
includes expenses from operating leases of $83.8 million, $73.6 million, and
$62.6 million in 1998, 1997, and 1996, respectively. Future minimum payments due
under noncancelable operating leases at January 2, 1999, are $71.3 million in
1999, $61.8 million in 2000, $54.1 million in 2001, $48.7 million in 2002, $40.3
million in 2003, and $133.3 million in 2004 and thereafter. Total future minimum
lease payments are $409.5 million.
Letters of Credit
Outstanding letters of credit, principally relating to performance bonds,
totaled $100.6 million at January 2, 1999.
Litigation and Related Contingencies
Trex Medical is a defendant in a lawsuit brought by Fischer Imaging
Corporation, which alleges that the prone breast-biopsy systems of the Lorad
division of Trex Medical infringe Fischer's patents on a precision mammographic
needle-biopsy system and a motorized mammographic biopsy apparatus. Lorad's
cumulative revenues from these products totaled approximately $147.2 million
through January 2, 1999.
Thermo Coleman has been named as a defendant in a lawsuit initiated by
certain former employees. This suit was filed under the "qui tam" provisions of
the Federal False Claims Act (the Act), which permit an individual to bring suit
in the name of the United States and, if the United States obtains a judgment
against the defendant, to share in any recovery. The suit alleges, among other
things, that Thermo Coleman violated the Act as a result of its performance of
certain support-service functions under a subcontract from a third party, which,
in turn, contracted directly with the U.S. government. The complaint seeks an
order requiring Thermo Coleman to cease and desist from such allegedly improper
practices, the award of treble damages in an unspecified amount, plus other
penalties. The amount of billings under the contract activities in question were
approximately $7.6 million. The U.S. government has decided not to intervene in
the lawsuit.
ThermoQuest's Finnigan subsidiary has filed complaints against
Bruker-Franzen Analytik GmbH and its U.S. affiliate, and Hewlett-Packard
Company, for alleged violation of two U.S. patents owned by Finnigan pertaining
to methods used in ion-trap mass spectrometers. One of Finnigan's complaints was
filed in United States District Court and the other was filed with the United
States International Trade Commission (ITC). In April 1998, the ITC determined
that the defendants did not engage in unfair practices in U.S. import trade with
respect to the Finnigan patents, and that the Finnigan patents are invalid
and/or not infringed. Finnigan has appealed the ITC's determination with respect
to one of its patents to the United States Court of Appeals for the Federal
Circuit (CAFC). The CAFC heard arguments in the appeal on March 4, 1999. Bruker
has presented counterclaims alleging that the Finnigan patents are invalid and
unenforceable and are not infringed by the mass spectrometers co-marketed by
Bruker. They also allege that Finnigan has violated antitrust laws by attempting
to maintain a monopoly position and restrain trade through enforcement of
allegedly fraudulently obtained patents. Bruker has asked for judgment
consistent with its counterclaims, and for three times the antitrust damages
(including attorney's fees) it has sustained.
22
<PAGE>
6. Commitments and Contingencies (continued)
The Company intends to vigorously defend these matters. In the opinion of
management, the ultimate liability for all such matters will not be material to
the Company's financial position, but an unfavorable outcome in one or more of
the matters described above could materially affect the results of operations or
cash flows for a particular quarter or annual period.
7. 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 $290.1 million.
During 1998, in a series of transactions with an institutional
counterparty, the Company sold put options for 5,001,000 shares of its common
stock at an average exercise price per share of $14.76 and purchased call
options for 2,500,500 shares of its common stock at an average exercise price
per share of $15.62. 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 5,001,000 shares for an aggregate
of $73.8 million. These put and call options are exercisable only at maturity
and expire between November 1999 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. Under the call options,
the Company has the right, but not the obligation, to purchase from the
counterparty 2,500,500 shares of its common stock at an average price per share
of $15.62. The Company may, from time to time, enter into additional put and
call option arrangements.
At January 2, 1999, the Company had reserved 32,746,998 unissued shares of
its common stock for possible issuance under stock-based compensation plans, for
possible conversion of the Company's convertible debentures, and for possible
exchange of certain subsidiaries' convertible obligations into common stock of
the Company. Certain of the subsidiaries' obligations are exchangeable into
common stock of the Company in the event of a change in control (as defined in
the related fiscal agency agreement) that has not been approved by the
continuing members of the Company's Board of Directors (Note 5). The exchange
price would be equal to 50% of the average price of the Company's common stock
for the 30 trading days preceding the change in control.
In January 1996, the Company redeemed the share purchase rights
outstanding under its previously existing shareholder rights plan for $.02 per
right, or $.006 per share of the Company's common stock outstanding.
Simultaneous with this redemption, the Company distributed rights under a new
shareholder rights plan adopted by the Company's Board of Directors to holders
of outstanding shares of the Company's common stock. Each right entitles the
holder to purchase one ten-thousandth of a share (a Unit) of Series B Junior
Participating Preferred Stock, $100 par value, at a purchase price of $250 per
Unit, subject to adjustment. The rights will not be exercisable until the
earlier of (i) 10 days following a public announcement that a person or group of
affiliated or associated persons (an Acquiring Person) has acquired, or obtained
the right to acquire, beneficial ownership of 15% or more of the outstanding
shares of common stock (the Stock Acquisition Date), or (ii) 10 business days
following the commencement of a tender offer or exchange offer for 15% or more
of the outstanding shares of common stock.
In the event that a person becomes the beneficial owner of 15% or more of
the outstanding shares of common stock, except pursuant to an offer for all
outstanding shares of common stock approved by the outside Directors, each
holder of a right (except for the Acquiring Person) will thereafter have the
right to receive, upon exercise, that number of shares of common stock that
equals the exercise price of the right divided by one half of the current market
price of the common stock. In the event that, at any time after any person has
become an Acquiring Person, (i) the Company is acquired in a merger or other
business combination transaction in which the Company is not the surviving
corporation or its common stock is changed or exchanged (other than a merger
that follows an offer approved by the outside Directors), or (ii) 50% or more of
the Company's assets or earning power is sold or transferred, each holder of a
right (except for the Acquiring Person) shall thereafter have the right to
receive, upon exercise, the number of shares of common stock of the acquiring
company that equals the exercise price of the right divided by one half of the
current market price of such common stock.
</TABLE>
23
<PAGE>
7. Common Stock (continued)
At any time until 10 days following the Stock Acquisition Date, the
Company may redeem the rights in whole, but not in part, at a price of $.01 per
right (payable in cash or stock). The rights expire on January 29, 2006, unless
earlier redeemed or exchanged.
8. Income Taxes
The components of income before income taxes, minority interest, and
extraordinary items are:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Domestic $ 284,982 $414,146 $313,069
Foreign 106,528 74,321 61,482
--------- -------- --------
$ 391,510 $488,467 $374,551
========= ======== ========
The components of the provision for income taxes are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Currently Payable:
Federal $ 88,236 $105,889 $ 85,024
Foreign 44,197 30,928 31,851
State 16,696 18,380 18,445
--------- ------- ----------
149,129 155,197 135,320
--------- ------- ----------
Net Deferred (Prepaid):
Federal 23,741 12,018 (19,994)
Foreign (4,242) 3,966 (2,275)
State 2,052 3,532 (2,206)
--------- ------- ----------
21,551 19,516 (24,475)
--------- ------- ----------
$ 170,680 $174,713 $ 110,845
========= ======== =========
The Company and its majority-owned subsidiaries receive a tax deduction
upon exercise of nonqualified stock options by employees for the difference
between the exercise price and the market price of the underlying common stock
on the date of exercise. The provision for income taxes that is currently
payable does not reflect $16.6 million, $15.4 million, and $24.5 million of such
benefits of the Company and its majority-owned subsidiaries that have been
allocated to capital in excess of par value, directly or through the effect of
majority-owned subsidiaries' equity transactions, in 1998, 1997, and 1996,
respectively. In addition, the provision for income taxes that is currently
payable does not reflect $4.4 million, $1.9 million, and $6.5 million of tax
benefits used to reduce cost in excess of net assets of acquired companies in
1998, 1997, and 1996, respectively.
24
<PAGE>
8. Income Taxes (continued)
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income before income taxes, minority interest, and
extraordinary items due to:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Provision for Income Taxes at Statutory Rate $137,029 $170,963 $ 131,093
Increases (Decreases) Resulting From:
Gain on issuance of stock by subsidiaries (18,121) (28,019) (44,310)
Valuation allowance for ThermoLase losses 20,459 - -
State income taxes, net of federal tax 12,186 14,243 10,555
Amortization and write-off of cost in excess of net assets of 9,538 9,918 8,643
acquired companies
Foreign tax rate and tax law differential 2,670 8,937 8,528
Other, net 6,919 (1,329) (3,664)
-------- ------- ---------
$170,680 $174,713 $ 110,845
======== ======== =========
Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of:
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------- ---------- ----------
Prepaid Income Taxes:
Net operating loss and credit carryforwards $123,982 $ 64,615
Reserves and accruals 83,461 65,086
Inventory basis difference 36,085 29,829
Accrued compensation 18,315 17,775
Intangible assets 1,560 2,683
Other, net 17,088 5,504
-------- --------
280,491 185,492
Less: Valuation allowance 131,042 53,992
-------- --------
$149,449 $131,500
======== ========
Deferred Income Taxes:
Depreciation $ 85,445 $ 92,672
Intangible assets 13,465 7,906
Other 9,591 3,542
-------- --------
$108,501 $104,120
======== ========
25
<PAGE>
8. Income Taxes (continued)
The valuation allowance relates to the uncertainty surrounding the
realization of tax loss carryforwards and the realization of tax benefits
attributable to certain tax assets of the Company and certain subsidiaries. Of
the year-end 1998 valuation allowance, $95 million will be used to reduce cost
in excess of net assets of acquired companies when any portion of the related
deferred tax asset is recognized. During 1998, the valuation allowance increased
primarily due to pre-acquisition loss carryforwards and other deferred tax
assets at an acquired business and increased uncertainty surrounding the
realization of tax loss carryforwards at ThermoLase.
At year-end 1998, the Company had federal and foreign net operating loss
carryforwards of $97 million and $155 million, respectively. In addition, the
Company had $88 million of foreign capital loss carryforwards. Use of the
carryforwards is limited based on the future income of certain subsidiaries. The
federal net operating loss carryforwards expire in the years 1999 through 2012.
Of the foreign net operating loss carryforwards, $40 million expire in the years
1999 through 2004, and the remainder do not expire. Substantially all of the
foreign capital loss carryforwards do not expire.
The Company has not recognized a deferred tax liability for the difference
between the book basis and tax basis of its investment in the common stock of
its domestic subsidiaries (such difference relates primarily to unremitted
earnings and gains on issuance of stock by subsidiaries) because the Company
does not expect this basis difference to become subject to tax at the parent
level. The Company believes it can implement certain tax strategies to recover
its investment in its domestic subsidiaries tax-free.
A provision has not been made for U.S. or additional foreign taxes on $282
million of undistributed earnings of foreign subsidiaries that could be subject
to taxation if remitted to the U.S. because the Company plans to keep these
amounts permanently reinvested overseas.
9. Transactions in Stock of Subsidiaries
Gain on issuance of stock by subsidiaries in the accompanying statement of
income results primarily from the following transactions:
1998
Public offering of 5,175,000 shares of Trex Medical 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.
Private placement of 781,921 shares of Thermo Trilogy 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.
Initial public offering of 3,300,000 shares of ONIX Systems common stock
at $14.50 per share for net proceeds of $43.7 million resulted in a gain of
$10.0 million that was recorded by Thermo Instrument.
Private placement of 1,543,000 shares of Thermo Coleman common stock at
$10.00 per share for net proceeds of $14.3 million resulted in a gain of $7.2
million.
Public offering of 2,450,000 shares of Thermo BioAnalysis common stock at
$18.125 per share for net proceeds of $41.5 million resulted in a gain of $5.9
million that was recorded by Thermo Instrument.
Conversion of $1.8 million of Thermo Optek 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 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.
26
<PAGE>
9. Transactions in Stock of Subsidiaries (continued)
1997
Initial public offering of 2,671,292 shares of Thermedics Detection common
stock at $11.50 per share for net proceeds of $28.1 million resulted in a gain
of $17.1 million that was recorded by Thermedics.
Sale of 1,768,500 shares of ThermoQuest common stock at $15.00 per share
for net proceeds of $24.8 million and conversion of $15.7 million of ThermoQuest
5% subordinated convertible debentures, convertible at $16.50 per share, into
949,027 shares of ThermoQuest common stock, resulted in gains of $12.0 million
and $7.8 million, respectively, that were recorded by Thermo Instrument.
Private placements of 1,212,260 shares and 94,000 shares of Thermo
Information Solutions common stock at $9.00 and $10.00 per share, respectively,
for aggregate net proceeds of $11.0 million resulted in a gain of $6.6 million.
Initial public offering of 2,300,000 shares of Metrika Systems common
stock at $15.50 per share for net proceeds of $32.5 million resulted in a gain
of $13.2 million that was recorded by Thermo Instrument.
Private placement of 2,832,500 shares of Trex Communications common stock
at $4.00 per share for net proceeds of $10.6 million resulted in a gain of $5.9
million that was recorded by ThermoTrex.
Private placements of 1,639,640 shares of ONIX Systems common stock at
$14.25 per share for net proceeds of $22.0 million resulted in a gain of $7.9
million that was recorded by Thermo Instrument.
Private placement of 1,160,900 shares of Thermo Trilogy common stock at
$8.25 per share for net proceeds of $8.9 million resulted in a gain of $4.1
million that was recorded by Thermo Ecotek.
Initial public offering of 1,139,491 shares of Thermo Vision common stock
at $7.50 per share for net proceeds of $7.0 million resulted in a gain of $2.3
million that was recorded by Thermo Instrument.
Conversion of $13.1 million and $3.2 million of Thermo Optek 5%
subordinated convertible debentures, convertible at $14.85 per share and $13.94
per share, respectively, into 1,111,316 shares of Thermo Optek common stock
resulted in a gain of $3.2 million that was recorded by Thermo Instrument.
1996
Initial public offering of 3,450,000 shares of ThermoQuest common stock at
$15.00 per share for net proceeds of $47.8 million resulted in a gain of $27.2
million that was recorded by Thermo Instrument.
Private placements of 300,000 and 383,500 shares of Thermedics Detection
common stock at $10.00 and $10.75 per share, respectively, for aggregate net
proceeds of $7.0 million resulted in a gain of $5.7 million that was recorded by
Thermedics.
Initial public offering of 2,875,000 shares of Thermo Sentron common stock
at $16.00 per share for net proceeds of $42.3 million resulted in a gain of
$18.0 million that was recorded by Thermedics.
Initial public offering of 3,450,000 shares of Thermo Optek common stock
at $13.50 per share for net proceeds of $42.9 million resulted in a gain of
$25.1 million that was recorded by Thermo Instrument.
Initial public offering of 2,875,000 shares of Trex Medical common stock
and sale of 871,832 shares of Trex Medical common stock in a concurrent rights
offering at $14.00 per share and private placements of 100,000 and 300,000
shares of Trex Medical common stock at $10.75 and $14.50 per share,
respectively, for aggregate net proceeds of $54.3 million resulted in an
aggregate gain of $28.3 million that was recorded by ThermoTrex.
Initial public offering of 1,670,000 shares of Thermo BioAnalysis common
stock at $14.00 per share for net proceeds of $20.8 million resulted in a gain
of $9.8 million that was recorded by Thermo Instrument.
Private placement of 967,828 shares of Metrika Systems common stock at
$15.00 per share for net proceeds of $13.5 million resulted in a gain of $9.6
million that was recorded by Thermo Instrument.
27
<PAGE>
9. Transactions in Stock of Subsidiaries (continued)
The Company's ownership percentage in these subsidiaries changed primarily
as a result of the transactions listed above, purchases of shares of certain
majority-owned subsidiaries' stock by the Company or its direct subsidiaries,
certain subsidiaries' purchases of their own stock, the issuance of
subsidiaries' stock by the Company or by the subsidiaries under stock-based
compensation plans or in other transactions, the conversion of convertible
obligations held by the Company, its subsidiaries, or by third parties, and the
issuance of subsidiaries' stock in connection with acquisitions.
The Company's ownership percentages at year end were:
1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Thermedics Inc. 74% 58% 55%
Thermedics Detection Inc. (a) 88% 76% 94%
Thermo Cardiosystems Inc. (a) 60% 59% 54%
Thermo Sentron Inc. (a) 86% 78% 73%
Thermo Voltek Corp. (a) 69% 68% 51%
Thermo Ecotek Corporation 94% 88% 82%
Thermo Trilogy Corporation (b) 80% 87% 100%
Thermo Fibertek Inc. 91% 90% 84%
Thermo Fibergen Inc. (a) 73% 71% 68%
Thermo Instrument Systems Inc. 85% 82% 82%
Metrika Systems Corporation (a) 76% 60% 84%
ONIX Systems Inc. (a) 81% 87% 100%
Thermo BioAnalysis Corporation (a) 84% 78% 67%
Thermo Optek Corporation (a) 95% 92% 93%
ThermoQuest Corporation (a) 90% 88% 93%
ThermoSpectra Corporation (a) 92% 83% 73%
Thermo Vision Corporation(a) 80% 80% 100%
Thermo Power Corporation 79% 69% 64%
ThermoLyte Corporation (b) 98% 78% 78%
Thermo TerraTech Inc. 86% 82% 81%
The Randers Killam Group Inc. (a) 96% 96% 100%
ThermoRetec Corporation (a) 71% 70% 68%
Thermo EuroTech N.V. (a)(b) 89% 56% 53%
ThermoTrex Corporation 64% 55% 51%
ThermoLase Corporation (a) 80% 70% 64%
Trex Medical Corporation (a) 77% 79% 79%
Trex Communications Corporation (b) 69% 78% 100%
Thermo Coleman Corporation (b) 87% 100% 100%
Thermo Information Solutions Inc. (b) 79% 79% 100%
(a) Reflects combined ownership by direct parent company and Thermo Electron.
(b) Privately held subsidiary.
28
<PAGE>
10. Other Income, Net
The components of other income, net, in the accompanying statement of
income are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ---------- ---------- -----------
Interest Income $ 99,284 $ 90,559 $ 94,109
Interest Expense (104,035) (93,125) (96,695)
Equity in Losses of Unconsolidated Subsidiaries (723) (1,018) (28)
Gain on Sale of Investments, Net 12,872 5,077 9,840
Other Income (Expense), Net 1,067 1,133 (5,740)
--------- --------- ----------
$ 8,465 $ 2,626 $ 1,486
========= ========= ==========
11. Restructuring and Other Nonrecurring Costs, Net
1998
During 1998, the Company recorded restructuring and related costs and
other nonrecurring costs of $59.9 million as described below, including
restructuring and other nonrecurring costs of $44.4 million, inventory
write-downs of $8.6 million, and a tax asset write-off of $6.9 million.
Restructuring costs were accounted for in accordance with EITF 94-3. 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.
Thermo Instrument
Thermo Instrument recorded restructuring and related costs and other
nonrecurring costs of $31.8 million in 1998. Restructuring costs of $21.6
million consist of $16.2 million related to severance costs for approximately
780 employees across all functions, $4.2 million related primarily to
facility-closing costs, $0.8 million for the write-off of cost in excess of net
assets of acquired companies for a business that was closed, and $0.4 million
related to the loss on the sale of a division. The charge for facility-closing
costs includes $2.0 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 statement of income, 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 early 1999 totaling $2.4 million, for costs not permitted as
charges in 1998, pursuant to EITF 94-3. These costs primarily include costs for
certain employee relocation, moving, and related costs. Thermo Instrument
expects to complete the implementation of its restructuring plan in 1999. As of
year-end 1998, Thermo Instrument had terminated approximately 500 employees and
had expended $7.4 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 1998, and Thermo Instrument recorded $1.6
million of nonrecurring costs related to the resolution of this matter in 1998.
ThermoTrex
ThermoLase recorded restructuring and related costs of $17.0 million
during 1998, including $6.9 million for the write-off of a tax asset.
Restructuring costs of $8.2 million recorded during 1998 consist of $4.6 million
related to the closure of three Spa Thira locations and $3.6 million in
connection with the closure of another spa that was operated under a joint
venture agreement, primarily to liquidate the joint venture and to write-off
ThermoLase's remaining investment. The $4.6 million of costs includes $2.4
million for the write-off of leasehold improvements and related spa assets and
$2.2 million primarily for abandoned-facility payments. ThermoLase also recorded
restructuring costs
29
<PAGE>
11. Restructuring and Other Nonrecurring Costs, Net (continued)
of $1.9 million related to certain actions, including the relocation of its
headquarters from California to Texas, where it maintains another facility. This
amount included $1.1 million for severance for 40 terminated employees and $0.8
million for the write-off of fixed assets no longer of use. In addition,
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 1998 statement of
income.
ThermoLase's investment in leasehold improvements and related equipment at
its remaining spas totaled approximately $16.7 million at year-end 1998. The
realizability of these assets is dependent on future cash flows from spa
operations. ThermoLase's future cash flows from operating its spas are dependent
on the degree of success it experiences following the transition of its existing
spas to full-service luxury day spas offering an expanded line of services and
products, operated under The Greenhouse Spa, Inc. name. It is reasonably
possible that actual cash flows from spa operations will vary significantly from
ThermoLase's estimates of such cash flows. As a result, the carrying amount of
spa assets could change significantly in the near term. Additionally, at
year-end 1998, ThermoLase has operating lease commitments of approximately $28
million related to these spas. In the event any additional spas close in the
future, the amount of lease obligations related to such spas in excess of income
from subleasing the facilities would be recorded as a loss. In connection with
purchases of ThermoLase common stock, the Company has recorded cost in excess of
net assets of acquired companies, which totaled $27 million at year-end 1998.
The realizability of this asset is also dependent on the future success of
ThermoLase.
Thermo TerraTech
Thermo TerraTech recorded restructuring costs of $10.2 million during
1998. Of these restructuring costs, $9.2 million was recorded by ThermoRetec, 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
During 1998, Thermo Power recorded restructuring and other nonrecurring
costs of $1.0 million relating to a loss on discontinuance and subsequent sale
of its engines business and the Company's wholly owned SensorMedics subsidiary
recorded restructuring costs of $0.8 million, primarily for severance, in
connection with a reorganization of a subsidiary in the Netherlands. The 1998
amount also includes a gain of $1.4 million from the sale of a business at
Thermo Information Solutions and restructuring and other nonrecurring costs of
$0.5 million.
The remaining liability for severance and facility-closing costs of $18.7
million, as adjusted for the impact of foreign currency translation, is included
in other accrued expenses in the accompanying 1998 balance sheet.
1997
During 1997, the Company recorded restructuring and other nonrecurring
costs of $1.3 million as described below.
Thermo TerraTech
Thermo TerraTech recorded restructuring costs of $7.8 million in 1997 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-remediation business that resulted in closure of two
soil-remediation sites during 1997 and reduced cash flows at certain other
sites, such that analysis indicated that the investment in these assets would
not be recovered.
30
<PAGE>
11. Restructuring and Other Nonrecurring Costs, Net (continued)
Other
During 1997, the Company settled two legal cases in which it was a
defendant concerning development of a proposed waste-to-energy facility and
development and construction of an alternative-energy facility. These matters
were settled for amounts less than the damages that had been sought by the
plaintiffs and less than the amounts that had been reserved by the Company. As a
result, the Company reversed $9.7 million of reserves previously established for
these matters, which is included as a reduction of restructuring and other
nonrecurring costs in 1997. In addition, the 1997 amount includes $4.0 million
of restructuring and other nonrecurring costs, primarily severance, at several
businesses and $1.4 million at Trex Communications for the write-off of
in-process technology relating to an acquisition. This amount represents the
portion of the purchase price allocated to technology in development at the
acquired business. The 1997 amount also includes a gain of $2.2 million from the
sale of a business by ThermoSpectra.
1996
During 1996, the Company recorded restructuring and other nonrecurring
costs of $37.6 million as described below.
Thermedics
Thermedics recorded restructuring and other nonrecurring costs of $17.6
million during 1996. The 1996 amount includes a write-off of $12.7 million of
cost in excess of net assets of acquired company and certain other intangible
assets at Thermedics' Corpak subsidiary, as a result of Thermedics no longer
intending to further invest in this business and reduced cash flows, such that
analysis indicated that the investment in these assets would not be recovered.
In addition, Thermo Cardiosystems recorded $4.9 million for the write-off of
in-process technology relating to an acquisition. This amount represents the
portion of the purchase price allocated to technology in development at the
acquired business.
Wholly Owned Businesses
SensorMedics recorded nonrecurring costs of $11.4 million during 1996,
primarily as a result of its merger with the Company, including employee
compensation that became payable as a result of the merger, certain investment
banking fees and other related transaction costs, the settlement of a
pre-acquisition legal dispute, and severance costs for terminated employees. The
1996 amount also included a write-off of a nontrade receivable and severance
costs of $4.4 million that was recorded by Peter Brotherhood Ltd. and $0.7
million of other nonrecurring costs.
Thermo Instrument
Thermo Instrument recorded restructuring costs of $3.5 million for the
write-off of in-process technology relating to an acquisition. This amount
represents the portion of the purchase price allocated to technology in
development at the acquired business.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
12. Supplemental Cash Flow Information
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Cash Paid For
Interest $ 92,084 $ 100,165 $ 86,449
Income taxes 117,999 151,685 91,536
Noncash Activities
Conversions of Company and subsidiary convertible obligations $ 18,910 $ 246,088 $ 390,494
Issuance of subsidiary subordinated convertible debentures 15,859 - -
in connection with exchange offer
Exchange of subsidiary common stock for common stock of - 40,500 -
subsidiary subject to redemption
Sale of waste-recycling facility - - 112,553
Assumption by buyer of waste-recycling facility debt - - 109,862
Fair value of assets of acquired companies $ 404,431 $1,210,319 $ 673,662
Cash paid for acquired companies (274,825) (924,336) (383,685)
Issuance of Company and subsidiary common stock and stock (16,450) (4,543) (2,351)
options for acquired companies
Issuance of long-term obligations for acquired companies - - (26,560)
Amount payable for acquired company (7,715) (5,111) -
---------- ---------- ----------
Liabilities assumed of acquired companies $ 105,441 $ 276,329 $ 261,066
========== ========== ==========
</TABLE>
13. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale investments, accounts receivable, notes payable
and current maturities of long-term obligations, accounts payable, long-term
obligations, common stock of subsidiaries subject to redemption, forward foreign
exchange contracts, and interest rate swaps. The carrying amount of cash and
cash equivalents, accounts receivable, notes payable and current maturities of
long-term obligations, and accounts payable approximates fair value due to their
short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on quoted
market prices. See Note 2 for fair value information pertaining to these
financial instruments.
The carrying amount and fair value of the Company's long-term obligations
and off-balance-sheet financial instruments are:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1998 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -------------------------------------------------------- ------------ ------------ ----------- ------------
Long-term Obligations:
Convertible obligations $ 1,826,094 $ 1,577,598 $1,660,839 $ 1,856,570
Other 199,437 207,403 82,068 83,898
----------- ----------- ---------- -----------
$ 2,025,531 $ 1,785,001 $1,742,907 $ 1,940,468
=========== =========== ========== ===========
32
<PAGE>
13. Fair Value of Financial Instruments (continued)
1998 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -------------------------------------------------------- ------------ ------------ ----------- ------------
Common Stock of Subsidiaries Subject to Redemption $ 94,301 $ 85,876 $ 93,312 $ 89,093
Off-balance-sheet Financial Instruments:
Forward foreign exchange contracts payable $ 703 $ (1,731)
(receivable)
Interest rate swaps payable (receivable) $ (989) $ 1,324
The fair value of long-term obligations was determined based on quoted
market prices and on borrowing rates available to the Company at the respective
year ends. The fair value of common stock of subsidiaries subject to redemption
was determined based upon quoted market prices.
The notional amounts of forward foreign exchange contracts outstanding
totaled $47.1 million and $46.6 million at year-end 1998 and 1997, respectively.
Additionally, the notional amount of the Company's interest rate swap agreements
was $41.5 million and $61.3 million at year-end 1998 and 1997, respectively
(Note 5). The fair value of such contracts and swap agreements is the estimated
amount that the Company would pay or receive upon termination of the contract,
taking into account the change in foreign exchange rates on forward foreign
exchange contracts, and market interest rates and the creditworthiness of the
counterparties on interest rate swap agreements.
14. Business Segment and Geographical Information
The Company's businesses are managed in four segments:
- Measurement and Detection: monitoring, analytical, biomedical, and process-control
instruments
- Biomedical and Emerging Technologies: medical imaging systems,
respiratory-care equipment, left ventricular-assist systems, hematology
products, neurophysiology monitoring instruments, biomedical materials,
personal-care products and services, and systems engineering,
information-management services and products, and research in
communications, avionics, digital imaging, signal processing, advanced
materials, and lasers
- Energy and Environment: clean-power generation, biopesticides, traffic-control
systems, industrial-refrigeration systems, and environmental-liability management,
environmental cleanup, laboratory analysis, and metallurgical heat treating services
- Recycling and Resource Recovery: paper recycling and papermaking equipment,
water-management systems, and resource-recovery facilities and services
33
<PAGE>
14. Business Segment and Geographical Information (continued)
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Business Segment Information
Revenues:
Measurement and Detection (a) $1,888,259 $1,820,032 $1,422,501
Biomedical and Emerging Technologies (b) 894,126 812,844 647,309
Energy and Environment (c) 793,168 640,790 555,687
Recycling and Resource Recovery (d) 299,403 293,240 315,233
Intersegment (e) (7,360) (8,586) (8,172)
---------- ---------- ----------
$3,867,596 $3,558,320 $2,932,558
========== ========== ==========
Income Before Income Taxes, Minority Interest, and Extraordinary
Items:
Measurement and Detection $ 220,891 $ 265,583 $ 162,219
Biomedical and Emerging Technologies 43,863 63,121 26,666
Energy and Environment 64,468 79,193 58,603
Recycling and Resource Recovery 33,492 29,106 27,801
---------- ---------- ----------
Total Segment Income (f) 362,714 437,003 275,289
Corporate (g) 28,796 51,464 99,262
---------- ---------- ----------
$ 391,510 $ 488,467 $ 374,551
========== ========== ==========
Identifiable Assets:
Measurement and Detection $2,923,832 $2,696,336 $2,240,426
Biomedical and Emerging Technologies 1,208,294 1,135,252 783,830
Energy and Environment 1,202,346 1,202,901 967,992
Recycling and Resource Recovery 478,584 468,856 323,052
Corporate (h) 518,589 292,524 825,944
---------- ---------- ----------
$6,331,645 $5,795,869 $5,141,244
========== ========== ==========
Depreciation and Amortization:
Measurement and Detection $ 69,461 $ 62,117 $ 51,548
Biomedical and Emerging Technologies 32,913 27,209 21,505
Energy and Environment 47,056 36,032 33,923
Recycling and Resource Recovery 9,882 8,881 6,861
Corporate 2,965 1,499 1,330
---------- ---------- ----------
$ 162,277 $ 135,738 $ 115,167
========== ========== ==========
Capital Expenditures:
Measurement and Detection $ 35,719 $ 32,728 $ 24,320
Biomedical and Emerging Technologies 25,140 30,432 35,787
Energy and Environment 75,899 42,268 59,081
Recycling and Resource Recovery 8,639 4,839 4,601
Corporate 2,611 1,338 752
---------- ---------- ----------
$ 148,008 $ 111,605 $ 124,541
========== ========== ==========
34
<PAGE>
14. Business Segment and Geographical Information (continued)
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Geographical Information
Revenues (i):
United States $2,885,035 $2,732,335 $2,171,879
England 417,659 387,606 312,522
Other 870,779 724,935 670,678
Transfers among geographical areas (e) (305,877) (286,556) (222,521)
---------- ---------- ----------
$3,867,596 $3,558,320 $2,932,558
========== ========== ==========
Long-lived Assets (j):
United States $ 726,287 $ 697,127 $ 594,955
Other 128,758 112,232 142,352
---------- ---------- ----------
$ 855,045 $ 809,359 $ 737,307
========== ========== ==========
Export Sales Included in United States Revenues Above (k) $ 600,594 $ 593,850 $ 436,972
========== ========== ==========
(a) Includes intersegment sales of $1,893,000, $2,520,000, and $1,895,000 in
1998, 1997, and 1996, respectively.
(b) Includes intersegment sales of $5,025,000, $5,051,000, and $6,228,000 in
1998, 1997, and 1996, respectively.
(c) Includes intersegment sales of $435,000, $698,000, and $45,000 in 1998,
1997, and 1996, respectively.
(d) Includes intersegment sales of $7,000, $317,000, and $4,000 in 1998, 1997,
and 1996, respectively.
(e) Intersegment sales and transfers among geographical areas are accounted for
at prices that are representative of transactions with unaffiliated parties.
(f) Segment income is income before corporate general and administrative
expenses, other income and expense, minority interest expense, income taxes,
and extraordinary items.
(g) Includes corporate general and administrative expenses, other income and
expense, and gain on issuance of stock by subsidiaries.
(h) Primarily cash and cash equivalents, short- and long-term investments, and
property and equipment at the Company's Waltham, Massachusetts,
headquarters.
(i) Revenues are attributed to countries based on selling location.
(j) Includes property, plant, and equipment, net and other long-term tangible
assets.
(k) In general, export revenues are denominated in U.S. dollars.
</TABLE>
35
<PAGE>
15. Earnings per Share
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- --------- ----------
Basic
Net Income $ 181,901 $239,328 $ 190,816
--------- -------- ---------
Weighted Average Shares 161,866 152,489 141,525
--------- -------- ---------
Basic Earnings per Share $ 1.12 $ 1.57 $ 1.35
========= ======== =========
Diluted
Net Income $ 181,901 $239,328 $ 190,816
Effect of:
Convertible obligations 14,669 18,814 23,523
Majority-owned subsidiaries' dilutive securities (5,106) (9,925) (8,084)
--------- -------- ---------
Income Available to Common Shareholders, as Adjusted $ 191,464 $248,217 $ 206,255
--------- -------- ---------
Weighted Average Shares 161,866 152,489 141,525
Effect of:
Convertible obligations 15,476 21,596 31,735
Stock options 1,107 1,997 2,345
--------- -------- ---------
Weighted Average Shares, as Adjusted 178,449 176,082 175,605
--------- -------- ---------
Diluted Earnings per Share $ 1.07 $ 1.41 $ 1.17
========= ======== =========
The computation of diluted earnings per share for each period excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of January 2, 1999, there were 7,920,851 of
such options outstanding, with exercise prices ranging from $17.06 to $43.46 per
share. In addition, the computation of diluted earnings per share for 1998
excludes the effect of assuming the repurchase of 5,001,000 shares of Company
common stock at a weighted average exercise price of $14.76 per share in
connection with put options (Note 7), because the effect would be antidilutive.
During 1998, the Company recorded extraordinary gains in connection with
the repurchase and exchange of subsidiary subordinated convertible debentures,
which increased basic and diluted earnings per share by $.03 (Note 5).
36
<PAGE>
16. Comprehensive Income
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"other comprehensive items," 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.
Accumulated other comprehensive items in the accompanying balance sheet
consists of:
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------- ---------- ----------
Cumulative Translation Adjustment $(18,915) $(46,339)
Net Unrealized Gain on Available-for-sale Investments 1,371 10,532
-------- --------
$(17,544) $(35,807)
======== ========
Unrealized gains (losses) on available-for-sale investments, a component
of other comprehensive items in the accompanying statement of comprehensive
income and shareholders' investment, includes:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- -----------
Unrealized Holding Gains (Losses) Arising During the Year (net $ (1,309) $ 5,332 $ 10,240
of income tax provision (benefit) of $(726), $3,110, and
$6,828)
Reclassification Adjustment for Gains Included in Net Income (7,852) (3,199) (5,904)
(net of income tax provision of $5,020, $1,878, and $3,936)
-------- -------- --------
Net Unrealized Gains (Losses) (net of income tax provision $ (9,161) $ 2,133 $ 4,336
(benefit) of $(5,746), $1,231, and $2,892)
======== ======== ========
37
<PAGE>
17. Proposed Reorganization
During 1998, the Company announced a proposed reorganization involving the
Company and certain of its subsidiaries. The goals of the proposed
reorganization include consolidating and strategically realigning certain
businesses to enhance their competitive market positions and improve management
coordination and 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 16. 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.
One or more of the transactions may not occur if the applicable conditions
previously described are not satisfied.
The Company may transfer its wholly owned Thermo Biomedical group of
subsidiaries to Thermedics. The Company would transfer the Thermo Biomedical
group of subsidiaries to Thermedics in exchange for newly issued shares of
common stock of Thermedics and for Thermedics' equity interests in Thermo
Sentron, Thermedics Detection, and Thermo Voltek. Thermedics Detection and
Thermo Sentron would then be taken private and become wholly owned subsidiaries
of the Company. The public shareholders of Thermedics Detection and Thermo
Sentron would receive cash in exchange for their shares of common stock of
Thermedics Detection and Thermo Sentron, respectively. Thermo Voltek has signed
a definitive merger agreement with Thermedics, which, if the remaining
shareholder approvals are secured, will make Thermo Voltek 100%-owned by
Thermedics and the Company.
ThermoSpectra, a majority-owned public subsidiary of Thermo Instrument,
may be taken private. The public shareholders of ThermoSpectra would receive
cash in exchange for their shares of common stock.
The Randers Killam Group, ThermoRetec, and Thermo EuroTech, may merge into
Thermo TerraTech. Shareholders of each of the Randers Killam Group, ThermoRetec,
and Thermo EuroTech would receive shares of common stock of Thermo TerraTech in
exchange for their shares of common stock of the Randers Killam Group,
ThermoRetec, and Thermo EuroTech, respectively.
Thermo Power may be taken private and become a wholly owned subsidiary of
the Company. The public shareholders of Thermo Power would receive cash in
exchange for their shares of common stock of Thermo Power.
</TABLE>
38
<PAGE>
18. Unaudited Quarterly Information
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(In thousands except per share amounts)
1998 First Second Third Fourth
- ----------------------------------------------------------- ----------- ----------- ----------- ------------
Revenues $ 944,263 $ 947,799 $ 977,169 $ 998,365
Gross Profit 371,842 386,814 383,415 384,460
Income Before Extraordinary Items 64,770 59,622 15,651 36,764
Net Income (a) 65,493 61,785 17,582 37,041
Earnings per Share (a):
Basic .41 .37 .11 .23
Diluted .37 .34 .10 .23
1997 First Second Third Fourth
- ----------------------------------------------------------- ----------- ----------- ----------- ------------
Revenues $ 763,505 $ 875,016 $ 909,850 $ 1,009,949
Gross Profit 296,365 358,538 374,041 412,368
Net Income 52,058 56,158 61,859 69,253
Earnings per Share:
Basic .35 .37 .41 .44
Diluted .31 .34 .36 .40
(a) Reflects extraordinary items, net of taxes and minority interest, of $0.7
million, $2.2 million, $1.9 million, and $0.3 million in the first, second,
third, and fourth quarters, respectively. The extraordinary items increased
basic earnings per share by $.01 in each of the first, second, and third
quarters and diluted earnings per share by $.01 in each of the second and
third quarters.
19. Subsequent Event
On February 22, 1999, Thermo Instrument declared unconditional in all
respects its cash tender offer for all outstanding shares of Spectra-Physics AB,
a Stockholm Stock Exchange-listed company, for 160 Swedish krona per share
(approximately $20 per share). As of that date, the Company had purchased or
received acceptances representing approximately 98% of the Spectra-Physics
shares outstanding. There were approximately 17.6 million Spectra-Physics shares
outstanding. The aggregate cost for Spectra-Physics will total approximately
$355 million. Payment was made for all shares as to which acceptances had been
received by March 1, 1999. The acquisition will be accounted for using the
purchase method of accounting and its results will be included in the Company's
results from the date of acquisition. Spectra-Physics manufactures a wide range
of laser-based instrumentation systems, primarily for the process-control,
industrial measurement, construction, research, commercial, and government
markets. Spectra-Physics had revenues of approximately $442 million in 1998,
with operations throughout North America and Europe, and a presence in the
Pacific Rim.
39
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Electron Corporation:
We have audited the accompanying consolidated balance sheet of Thermo
Electron Corporation (a Delaware corporation) and subsidiaries as of January 2,
1999, and January 3, 1998, and the related consolidated statements of income,
cash flows, and comprehensive income and shareholders' investment for each of
the three years in the period ended January 2, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermo
Electron Corporation and subsidiaries as of January 2, 1999, and January 3,
1998, and the results of their operations and their cash flows for each of the
three years in the period ended January 2, 1999, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 16, 1999 (except with respect to the matter
discussed in Note 19, as to which the date is March 1, 1999)
40
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
The Company develops and manufactures a broad range of products that are
sold worldwide. The Company expands the product lines and services it offers by
developing and commercializing its own core technologies and by making strategic
acquisitions of complementary businesses. The majority of the Company's
businesses fall into four business segments: measurement and detection,
biomedical and emerging technologies, energy and environment, and recycling and
resource recovery.
An important component of the Company's strategy is to establish leading
positions in its markets through the application of proprietary technology,
whether developed internally or acquired. Another component that has contributed
to the growth of the Company's segment income (as defined in the results of
operations below), particularly over the last several years, has been the
ability to identify attractive acquisition opportunities, complete those
acquisitions, and derive a growing income contribution from the newly acquired
businesses as they are integrated into the Company's business segments and their
profitability improves.
The Company seeks to minimize its dependence on any specific product or
market by maintaining a diverse portfolio of businesses and technologies.
Similarly, the Company's goal is to maintain a balance in its businesses between
those affected by various regulatory cycles and those more dependent on the
general level of economic activity. Although the Company is diversified in terms
of technology, product offerings, and geographic markets served, the future
financial performance of the Company as a whole will be largely affected by the
strength of worldwide economies and the continued adoption and diligent
enforcement of health, safety, and environmental regulations and standards,
among other factors.
The Company believes that maintaining an entrepreneurial atmosphere is
essential to its continued growth and development. In order to preserve this
atmosphere, the Company 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
subsidiaries through the establishment of subsidiary-level stock option
programs, as well as capital to support the subsidiaries' 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 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.
During 1998, the Company proposed a reorganization plan that would
simplify its structure by reducing the number of public subsidiaries from 23 to
16 (Note 17).
41
<PAGE>
Overview (continued)
Further, in October 1995, the Financial Accounting Standards Board (FASB)
issued an exposure draft of a Proposed Statement of Financial Accounting
Standards, "Consolidated Financial Statements: Policy and Procedures." In
February 1999, the FASB issued a revision of the earlier document entitled
"Consolidated Financial Statements: Purpose and Policy." The October 1995
exposure draft proposed new rules for how consolidated financial statements
should be prepared. Under that proposed statement, there would be significant
changes in the way the Company records certain transactions of its controlled
subsidiaries. Among those changes, any sale of the stock of a subsidiary that
does not result in a loss of control would be accounted for in equity of the
consolidated entity with no gain or loss being recorded. The 1995 exposure draft
addressed rule changes concerning consolidation procedures which would affect
the Company's ability to record gains on issuance of subsidiary stock and
consolidation policy which does not affect the accounting for such gains. The
February 1999 revised exposure draft addresses only consolidation policy. The
FASB has indicated that it will consider resuming discussion on consolidation
procedures after completion of the efforts on consolidation policy. The timing
and contents of any final statement on consolidation procedures are uncertain.
Results of Operations
1998 Compared With 1997
Sales in 1998 were $3,867.6 million, an increase of $309.3 million, or 9%,
over 1997. Segment income, excluding inventory write-downs of $8.6 million and
restructuring and other nonrecurring costs, net, of $44.4 million in 1998 and
$1.3 million in 1997, described below, decreased to $415.8 million in 1998 from
$438.3 million in 1997. (Segment income is income before corporate general and
administrative expenses, other income and expense, minority interest expense,
income taxes, and extraordinary items.) Operating income, which includes
inventory write-downs and restructuring and other nonrecurring costs, net, was
$331.3 million in 1998, compared with $405.8 million in 1997.
Measurement and Detection
Sales from the Measurement and Detection segment increased $68.2 million
to $1,888.3 million in 1998. Sales increased due to acquisitions made by Thermo
Instrument and Thermo Sentron, which added $181.2 million of revenues 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 the Measurement
and Detection segment operates decreased revenues by $14.9 million in 1998.
Revenues from Thermo Instrument's analytical products, excluding the effects of
acquisitions and currency translation, decreased $61.7 million, primarily due to
lower sales to customers in Asia due to unstable economic conditions in that
region and, to a lesser extent, lower sales to customers in the semiconductor
industry. Revenues from Thermo Instrument's industrial products, excluding the
effects of acquisitions and currency translation, decreased $18.3 million,
primarily due to lower revenues at ThermoSpectra's existing businesses as a
result of a downturn in the semiconductor industry and lower sales to customers
overseas. Revenues at Thermedics Detection decreased $12.8 million, due in part
to lower shipments of its Alexus(R) systems following the fulfillment in 1997 of
a mandated product-line upgrade from The Coca-Cola Company to its existing
installed base. In addition, demand for Thermedics Detection's near-infrared
analyzers and explosives-detection systems decreased in 1998. Backlog at the
Measurement and Detection segment decreased $22.0 million during 1998. Backlog
declined $15.4 million at Thermo Instrument primarily due to lower backlog at
Thermo Optek and ThermoSpectra, principally as a result of a slowdown in the
semiconductor and related industries and a decrease in demand in Asia. To a
lesser extent, the decrease in the Measurement and Detection segment backlog was
due to Thermedics Detection's completion of a contract with the U.S. Federal
Aviation Administration (FAA) and a decrease in demand at Thermo Voltek. In
addition, revenues from Thermo Instrument's process-control products are
expected to be adversely impacted in the first half of 1999 by a decrease in
capital spending in the oil and gas and cement industries and increased
competition for process-control products relating to raw-materials analysis.
42
<PAGE>
1998 Compared With 1997 (continued)
Segment income margin (segment income margin is segment income as a
percentage of sales), excluding restructuring and other nonrecurring costs of
$23.2 million in 1998 and nonrecurring income of $1.3 million in 1997, decreased
to 12.9% in 1998 from 14.5% in 1997, primarily due to the effect on segment
income margin of lower revenues at certain business units and $8.6 million of
inventory write-downs for discontinued product lines and excess inventories
caused by lower product demand. Segment income margin in the 1997 period
included the unfavorable effect of an adjustment to expense of $3.6 million
relating to the sale of inventories revalued at the time of the acquisition of
Life Sciences International PLC by Thermo Instrument and an inventory write-down
at ThermoSpectra. Restructuring and other nonrecurring costs of $20.8 million in
1998 were recorded by wholly and majority-owned subsidiaries of Thermo
Instrument, primarily for severance costs. In connection with the closing of
certain facilities, Thermo Instrument expects to incur additional costs in early
1999 totaling $2.4 million. Thermo Instrument expects to complete the
implementation of its restructuring plan in 1999. Also in 1998, Thermo
Instrument recorded $1.6 million of nonrecurring costs relating to the
resolution of an arbitration proceeding and wrote off $0.8 million of cost in
excess of net assets of acquired companies for a business that has been closed
(Note 11). Nonrecurring income of $1.3 million in 1997 represents a gain of $2.2
million from the sale of a business by ThermoSpectra, offset in part by $0.9
million of severance costs for employees terminated at one of ThermoSpectra's
business units.
Biomedical and Emerging Technologies
Sales from the Biomedical and Emerging Technologies segment were $894.1
million in 1998, an increase of $81.3 million, or 10%, over the 1997 period.
Sales increased due to the inclusion of $103.8 million of sales from acquired
businesses. In addition, higher demand in 1998 resulted in increased sales from
the specialty-metals fabrication services business as well as higher revenues at
Thermo Cardiosystems and, to a lesser extent, Bird Medical Technologies, Inc.
These increases were offset in part by lower revenues in the existing business
units of Trex Medical and, to a lesser extent, ThermoLase. The decrease in
revenues at Trex Medical's existing businesses totaled $22.5 million. More than
half of this decrease resulted from the loss of a major customer following its
acquisition by another corporation. Sales to this customer totaled $26.5 million
in 1998. In addition, revenues decreased at Trex Medical due to lower demand for
breast-biopsy and other medical-imaging equipment. Revenue growth at Trex
Medical is expected to significantly decrease in the first half of 1999 as a
result of the loss of the significant customer, a slowing of sales of
breast-biopsy systems, and the effect in 1998 of a $9.0 million nonrecurring
order from a customer located in Russia. The decrease in revenues at ThermoLase
was due to lower demand at ThermoLase's spa services business, a decline of $5.9
million in fees from international licensing arrangements and, to a lesser
extent, lower revenues from the sale of beauty products. 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 would 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 announced plans to close four spas, three of which have
been closed, and has converted its remaining eleven Spa Thira locations into
full-service luxury day spas offering an expanded line of services and products.
Because costs at the spas continue to be high relative to revenues, ThermoLase
does not plan to expand its day spa operation and is assessing whether
particular spas should be closed or sold. Revenues decreased slightly at Thermo
Coleman, where an increase in government contract revenues was offset by lower
kiosk revenues at its Thermo Information Solutions unit. Thermo Information
Solutions exited the kiosk business in 1998 due to inherently low margins, lower
than expected orders from its sole customer, and the absence of additional
orders.
Segment income, excluding restructuring and nonrecurring costs of $10.0
million in 1998 and $1.9 million in 1997, decreased to $53.8 million in 1998
from $65.1 million in 1997. This change resulted primarily from $10.1 million of
lower segment income at Trex Medical and $9.0 million of increased segment loss
(excluding restructuring costs) at ThermoLase. The lower segment income at Trex
Medical was primarily due to the decrease in revenues at
43
<PAGE>
1998 Compared With 1997 (continued)
existing businesses without a corresponding decrease in costs. The segment loss
at ThermoLase, excluding restructuring costs of $10.1 million, totaled $27.4
million in 1998 and increased due to lower revenues as well as fixed costs of
operating more spas. In addition, ThermoLase reported operating losses from its
beauty products subsidiary in 1998, compared with profitable operations in 1997.
The effect of continuing to operate its spas below maximum capacity will
continue to have a negative effect on ThermoLase's segment income. These
decreases in segment income were offset in part by improved results at certain
businesses, primarily Bird Medical Technologies and the specialty-metals
fabrication services business. Restructuring and other nonrecurring costs of
$10.1 million in 1998 were recorded by ThermoLase in connection with the
announced closure of four spas and relocation of its headquarters to Texas where
it maintains another facility. The degree to which ThermoLase is successful in
improving its profitability will affect the future of its remaining spas and the
realizability of related assets (Note 11). Restructuring and other nonrecurring
costs in 1998 also include $0.8 million at SensorMedics Corporation, primarily
for severance, in connection with the reorganization of a subsidiary in the
Netherlands and $0.5 million at certain of the Company's other wholly owned
businesses. In addition, Thermo Information Solutions sold an Internet dial-up
service business in 1998, resulting in nonrecurring income of $1.4 million.
Restructuring and other nonrecurring costs in 1997 includes $1.4 million at Trex
Communications for the write-off of in-process technology associated with an
acquired business and $0.5 million at certain of the Company's wholly owned
businesses to close certain foreign sales offices.
Energy and Environment
Sales from the Energy and Environment segment increased to $793.2 million
in 1998 from $640.8 million in 1997. Revenues from Thermo Ecotek increased to
$206.2 million in 1998 from $189.5 million in 1997, primarily due to the
inclusion of $8.4 million of revenues from newly acquired power operations in
the Czech Republic and higher contractual energy rates at certain facilities. In
addition, the 1998 period included $1.9 million of nonrecurring revenue from
fees received for the release of Thermo Ecotek's rights to certain
power-generating equipment, while the 1997 period included $8.2 million of
nonrecurring revenue from a contractual settlement with a utility, relating to a
cogeneration facility Thermo Ecotek had planned to develop and construct on
Staten Island, New York. From various dates in 1998 onward, no further rate
increases will occur at Thermo Ecotek's four energy facilities in California. In
addition, as noted below, the periods during which Thermo Ecotek receives fixed
rates for power at these facilities ends in 1999 or 2000. The change from fixed
rates to avoided cost rates under the terms of the contracts, as discussed
below, will have a significant adverse effect on Thermo Ecotek's revenues and
profitability. Revenues from Thermo Ecotek's Thermo Trilogy biopesticide
subsidiary increased to $31.3 million in 1998 from $21.4 million in 1997,
primarily due to the inclusion of revenues from an acquired business. Sales at
Thermo Power increased to $281.4 million in 1998 from $155.8 million in 1997,
due to the inclusion of $131.8 million of revenues from acquired businesses,
primarily Peek plc, acquired in November 1997. This increase was offset in part
by a decrease in revenues at Thermo Power's Crusader engines division, which was
sold in December 1998. Sales at Crusader totaled $23.0 million in 1998, with
approximate breakeven segment income. Revenues at Thermo TerraTech increased to
$305.5 million in 1998 from $295.5 million in 1997. Revenues from Thermo
TerraTech's thermal-processing equipment business, sold in October 1997, were
$25.3 million in 1997. Revenues from Thermo TerraTech's environmental-liability
management services increased to $156.7 million in 1998 from $136.5 million in
1997, primarily due to higher demand at certain business units and, to a lesser
extent, the inclusion of $17.5 million of sales from acquired businesses. These
increases were offset in part by a $16.6 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 $14.3 million in 1998 due to the inclusion of $7.4 million of revenues
from an acquired business and an increase in construction and labor management
services.
44
<PAGE>
1998 Compared With 1997 (continued)
Segment income, excluding restructuring and other nonrecurring costs of
$11.2 million in 1998 and nonrecurring income of $1.9 million in 1997, was $75.7
million in 1998, compared with $77.3 million in 1997. Thermo Ecotek's segment
income was $44.5 million in 1998, compared with $50.4 million in 1997. The
decrease resulted primarily from the inclusion in 1997 of $8.2 million of
segment income from the contractual settlement with a utility. In addition,
Thermo Ecotek's coal-beneficiation facility in Gillette, Wyoming, began
operations in April 1998. This facility reported operating losses in 1998 and
Thermo Ecotek expects that it will continue to do so in the future. The
economics of this facility arise primarily from tax benefits associated with its
production. In 1998, the facility's losses included the effect of certain
operational issues described below. The decrease in segment income at Thermo
Ecotek was offset in part by 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. Segment income at Thermo Power, excluding
restructuring and other nonrecurring costs of $1.0 million in 1998, improved to
$17.4 million in 1998 from $7.5 million in 1997, primarily due to contributions
from Peek. Segment income at Thermo TerraTech, excluding restructuring and other
nonrecurring costs of $10.2 million in 1998 and $7.8 million in 1997, was $14.4
million in 1998, compared with $18.2 million in 1997. Segment income declined in
1998 due to a loss incurred at one of ThermoRetec's business units as a result
of losses on certain remedial-construction contracts and a decline in the number
of contracts in process. In addition, the 1997 period included segment income of
$1.8 million from Thermo TerraTech's thermal-processing equipment business,
which was sold in October 1997. These decreases in segment income were offset in
part by higher segment income from other business units within Thermo TerraTech,
principally due to higher revenues. Restructuring and other nonrecurring costs
of $10.2 million in 1998 and $7.8 million in 1997 were recorded by Thermo
TerraTech, principally 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-remediation business. This
resulted in the closure of two soil-remediation sites during 1997 and two
additional sites in 1998. The 1998 charge also included $1.0 million for
abandoned-facility payments at Thermo TerraTech relating to the consolidation of
facilities. The 1997 charge also included a write down of ThermoRetec's
investment in certain other soil-recycling sites in response to reduced cash
flows, which indicated that the investment in these assets would not be
recovered. Restructuring and other nonrecurring costs of $1.0 million were
recorded by Thermo Power in 1998 relating to a loss on discontinuance and
subsequent sale of its engines business. During 1997, the Company settled two
legal cases in which it was a defendant, concerning development of a proposed
waste-to-energy facility and development and construction of an
alternative-energy facility. These matters were settled for amounts less than
the damages that had been sought by the plaintiffs and less than the amounts
that had been reserved by the Company. As a result, in 1997, the Company
reversed $9.7 million of reserves previously established for these matters,
which is included in restructuring and other nonrecurring costs, net (Note 11).
The power-sales agreements for Thermo Ecotek's Woodland, Mendota, and
Delano plants in California are so-called standard offer #4 (SO#4) contracts,
which require Pacific Gas & Electric (PG&E), in the case of Woodland and
Mendota, and Southern California Edison (SCE), in the case of Delano I and
Delano II, to purchase the power output of the projects at fixed rates until
2000. However, with respect to Woodland and Mendota, PG&E has asserted that the
fixed rates under its agreements will terminate mid-1999, although Thermo Ecotek
disputes this assertion. Thereafter, the utility will pay a rate based upon the
costs that would have otherwise been incurred by the purchasing utilities in
generating their own electricity or in purchasing it from other sources (avoided
cost). At present, the avoided cost is substantially lower than the payments
currently being made by PG&E and SCE to Thermo Ecotek under the fixed-rate
portions of its contracts. In addition, although it is difficult to predict
future levels of avoided cost, based on current estimates, avoided cost is
expected to be substantially lower in 2000 than the rates currently being paid
by PG&E and SCE under its fixed-rate contracts. Thermo Ecotek expects, that at
current avoided cost rates, absent sufficient reductions in fuel prices and
other operating costs, Thermo Ecotek's Mendota and Delano plants will operate
45
<PAGE>
1998 Compared With 1997 (continued)
at substantially reduced operating income levels or at a loss beginning in 2000.
In 1998, the Mendota and Delano plants' aggregate operating income was
approximately $41.7 million. Further, if the Woodland plant were to operate at
projected avoided cost levels, substantial losses would result, primarily due to
nonrecourse lease obligations that extend beyond 2000. Absent sufficient
reductions in fuel prices and other operating costs, under such circumstances
Thermo Ecotek would draw down power reserve funds to cover operating cash
shortfalls and then, should such funds be depleted, either renegotiate its
nonrecourse lease for the Woodland plant or forfeit its interest in the plant.
The results of the Woodland facility were approximately breakeven in 1998 and
1997, as a result of recording as an expense the funding of reserves required
under Woodland's nonrecourse lease agreement to cover proposed shortfalls in
lease payments. If PG&E ultimately prevails in its assertion that its obligation
to pay fixed rates ends in mid-1999, and if Thermo Ecotek is unsuccessful in
renegotiating the terms of its lease or its power purchase agreement with PG&E,
Thermo Ecotek's investment in its Woodland operating assets could be impaired by
approximately $3 to $5 million, based on projected cash flows. This impairment
and the operating losses that would arise in 1999 and thereafter if the Woodland
facility's operating costs exceeded its revenues would have a material adverse
effect on Thermo Ecotek's future results of operations.
Two of Thermo Ecotek's plants are located in New Hampshire and have rate
orders from the New Hampshire Public Utilities Commission (NHPUC) to sell all of
their power to Public Service Company of New Hampshire (PSNH). The assets of
PSNH were acquired in 1990 by Northeast Utilities (NU) in connection with PSNH's
federal bankruptcy reorganization plan. Thereafter, PSNH sought to renegotiate
some of the terms of certain rate orders with small power producers, including
the plants that Thermo Ecotek operates in New Hampshire. PSNH reached an
agreement in principle with Thermo Ecotek's plants to settle the renegotiation
of their rate orders. The settlement agreement is subject to the approval of the
NHPUC. In January 1997, NU publicly announced that if a proposed deregulation
plan for the New Hampshire electric utility industry were adopted, PSNH could
default on certain financial obligations and seek bankruptcy protection. In
February 1997, NHPUC voted to adopt a deregulation plan, and in March 1997, PSNH
filed suit to block the plan. The federal district court issued a restraining
order which prohibits the NHPUC from implementing the deregulation plan as it
affects PSNH pending the outcome of the suit. In May 1998, NHPUC issued a
written ruling rejecting the settlement agreements and modifications that would
impact PSNH's ability to finance and secure the settlement agreement. No
assurances may be made as to the outcome of this matter. An unfavorable
resolution of this matter, including the bankruptcy of PSNH, could have a
material adverse effect on Thermo Ecotek's results of operations and financial
position.
As discussed above, Thermo Ecotek began reporting the results of
operations of its coal-beneficiation facility, located near Gillette, Wyoming,
in April 1998. Although the facility has operated and produced commercially
salable product, Thermo Ecotek has encountered certain difficulties in
optimizing its performance to achieve optimal and sustained operation. Thermo
Ecotek has addressed and resolved certain problems previously encountered,
however, it continues to experience other operational problems. Thermo Ecotek is
actively exploring solutions to these problems. Because the technology being
developed is new and untested, no assurance can be given that other difficulties
will not arise or that Thermo Ecotek will be able to correct these problems and
achieve optimal and sustained performance.
Recycling and Resource Recovery
Sales in the Recycling and Resource Recovery segment increased to $299.4
million in 1998 from $293.2 million in 1997. Sales from Thermo Fibertek
increased to $247.4 million in 1998 from $239.6 million in 1997, primarily due
to an increase in revenues of $14.0 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 twelve-month period in 1998 was offset in
part by a decrease in its revenues due to lower demand in Asia, Europe, and
North America, and a decrease in revenues from Thermo Fibertek's accessories and
water-management product lines. The unfavorable effects of currency translation
reduced Thermo Fibertek's revenues by $2.4 million in 1998. In February 1999,
Thermo Fibertek sold its Thermo Wisconsin, Inc. subsidiary for approximately
$13.0 million in cash. Thermo Wisconsin's revenues and
46
<PAGE>
1998 Compared With 1997 (continued)
segment income in 1998 totaled approximately $18.9 million and $2.7 million,
respectively. In addition, a decrease in sales of automated electroplating
equipment at Napco was offset in part by higher revenues from sales of turbine
generators at Peter Brotherhood Ltd.
Segment income, excluding restructuring costs of $2.5 million in 1997,
improved to $33.5 million in 1998 from $31.6 million in 1997. This increase
resulted primarily from improvements at Thermo Fibertek, and lower costs in 1998
associated with a dispute concerning an office wastepaper de-inking facility
completed in 1996. These improvements were offset in part by a decrease in
segment income at Napco due to lower sales. Thermo Fibertek recorded
restructuring and other nonrecurring costs of $1.1 million in 1997 relating to
the consolidation of two of its subsidiaries into the operations of Thermo Black
Clawson. Peter Brotherhood recorded a charge of $1.4 million in 1997 related
primarily to severance for employees terminated.
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 and $80.1 million in 1997. See Notes 1 and 9 of
Notes to Consolidated Financial Statements for a more complete description of
these transactions. Minority interest expense decreased to $44.0 million in 1998
from $74.4 million in 1997. Minority interest expense includes $13.9 million in
1998 and $19.0 million in 1997 related to gains recorded by the Company's
majority-owned subsidiaries as a result of the sale of stock and the issuance of
stock upon conversion of convertible debentures, by their subsidiaries. Minority
interest expense decreased primarily as a result of lower income at the
Company's majority-owned 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 1998 and 1997, respectively. The tax assets
written off were at ThermoLase and consisted primarily of tax loss carryforwards
(Note 8). The effective tax rate increased in 1998 primarily as a result of a
valuation allowance established at ThermoLase for net operating loss
carryforwards due to increased uncertainty surrounding their realization. The
effective tax rate also increased due to the larger relative effect of
nondeductible expenses, including amortization and the write off of cost in
excess of net assets of acquired companies, due to lower income. In 1998, the
effective tax rate exceeded the statutory federal income tax rate primarily due
to the valuation allowance established for ThermoLase tax loss carryforwards,
nondeductible expenses, and state income taxes. In 1997, the effective tax rate
exceeded the statutory federal tax rate primarily due to nondeductible expenses
and state income taxes.
Contingent Liabilities
At year-end 1998, the Company was contingently liable with respect to
certain lawsuits (Note 6). In the opinion of management, the ultimate liability
for all such matters will not be material to the Company's financial position,
but an unfavorable outcome in one or more of the matters described above could
materially affect the results of operations or cash flows for a particular
quarter or annual period.
1997 Compared With 1996
Sales in 1997 were $3,558.3 million, an increase of $625.8 million, or
21%, over 1996. Segment income, excluding restructuring and other nonrecurring
costs, net, of $1.3 million in 1997 and $37.6 million in 1996, described below,
increased to $438.3 million in 1997 from $312.9 million in 1996. Operating
income, which includes restructuring and other nonrecurring costs, net,
increased to $405.8 million in 1997 from $246.5 million in 1996.
47
<PAGE>
1997 Compared With 1996 (continued)
Measurement and Detection
Sales from the Measurement and Detection segment were $1,820.0 million in
1997, an increase of $397.5 million, or 28%, over 1996. Sales increased
primarily due to acquisitions, which added $417 million of sales in 1997. In
addition, revenues from Thermo Instrument's analytical products increased in
1997 due to higher sales at ThermoQuest's existing mass spectrometry business,
due in part to the continued success of a new product introduced in the first
quarter of 1996, offset in part by a decrease at Thermo Optek. Revenues from
Thermo Optek's existing businesses decreased slightly due to the inclusion in
1996 of several large nonrecurring sales to the Chinese and Japanese
governments, a decrease in demand for elemental products in Japan, and the
elimination of certain unprofitable acquired product lines, offset substantially
by greater demand at one of its business units. Revenues from Thermo
Instrument's process control products increased as a result of improvements at
ONIX Systems, primarily due to increased sales of industry-specific instruments
to the production segment of the oil and gas industry, and at Metrika Systems,
primarily due to increased sales in international markets at its on-line
raw-materials analyzer business. Revenues increased $9.8 million at Thermedics
Detection primarily due to the completion in 1997 of a mandated product-line
upgrade from The Coca-Cola Company to its existing installed base, which
contributed $6.6 million of revenues. In addition, Thermedics Detection's sales
increased due to $3.2 million of revenues from EGIS security systems sold to the
FAA. Revenues decreased at Thermo Voltek due to lower demand for electrostatic
compatibility test products, resulting from the declining influence of IEC 801,
the European Union directive on electromagnetic compatibility that took effect
on January 1, 1996. The unfavorable effects of currency translation decreased
revenues by $49.5 million in 1997.
Segment income margin, excluding nonrecurring income, net, of $1.3 million
in 1997 and nonrecurring costs of $3.5 million in 1996, improved to 14.5% in
1997 from 11.6% in 1996. The improvement was primarily due to operating margin
improvement at certain of the Fisons businesses acquired in 1996 and increased
sales of ThermoQuest's higher-margin mass spectrometry products. In addition,
segment income margin improved at Thermedics Detection due to higher sales in
1997 and the inclusion of higher costs in 1996 for inventory obsolescence and
other adjustments. The improvement in segment income margin was offset by the
inclusion of lower-margin revenues at certain acquired businesses, including
Life Sciences, which recorded an adjustment to expense of $3.6 million relating
to the sale of inventories revalued at the date of acquisition and, to a lesser
extent, a decrease in segment income margin at ThermoSpectra, primarily as a
result of an inventory write-off and a change in sales mix at one of its
business units. The 1996 period included a charge of $2.0 million relating to
the sale of inventories revalued at the date of the acquisition of the Fisons
businesses. In addition, Thermo Voltek had lower profitability in 1997.
Nonrecurring income of $1.3 million in 1997 represents a $2.2 million gain on
the sale of a business by ThermoSpectra, offset in part by $0.9 million of
severance costs for employees terminated during 1997 at one of ThermoSpectra's
business units. During 1996, the Company recorded nonrecurring costs of $3.5
million, which represented the write-off of acquired technology relating to the
acquisition of the Fisons businesses (Note 11).
Biomedical and Emerging Technologies
Sales from the Biomedical and Emerging Technologies segment were $812.8
million in 1997, an increase of $165.5 million, or 26%, over 1996. Sales
increased due to the inclusion of $76.2 million in sales from acquired
businesses, increased demand at Trex Medical and Bird Medical, and growth at
ThermoLase's hair-removal business due to the opening of new spas and higher
revenues from physician- and international-licensing arrangements. Sales at
Thermo Coleman were $156.2 million in 1997, compared with $144.2 million in
1996. This increase resulted primarily from its Thermo Information Solutions
subsidiary's contract to supply kiosk units and, to a lesser extent, higher
integrated document management revenues, offset in part by a decrease in
revenues from government contracts. Sales of kiosk units increased to $16.5
million in 1997 from $1.4 million in 1996. These increases in revenues were
offset in part by a $4.7 million decline in sales of Thermo Cardiosystems' left
ventricular-assist systems (LVAS), which Thermo Cardiosystems believes resulted
from delayed orders as customers awaited approval from the U.S. Food and Drug
Administration (FDA) for commercial sale of its advanced electric LVAS as a
bridge to transplant.
48
<PAGE>
1997 Compared With 1996 (continued)
Segment income, excluding restructuring and other nonrecurring costs of
$1.9 million in 1997 and $29.7 million in 1996, increased to $65.1 million in
1997 from $56.3 million in 1996. This increase resulted substantially from
improvements at existing businesses, primarily at Bird Medical, SensorMedics,
and Trex Medical's existing businesses and, to a lesser extent, the inclusion of
segment income from acquired businesses. In addition, ThermoTrex's
advanced-technology research center incurred a loss in 1996 due to cost overruns
and higher expenses for new lines of business. This increase in segment income
was offset in part by an increase in segment loss at ThermoLase to $18.4 million
in 1997 from $7.6 million in 1996, due to the operations of its spa services
business, which operated below maximum capacity, and by pre-opening costs
incurred in connection with new spa openings. Thermo Cardiosystems'
profitability declined by $4.7 million primarily due to a decrease in LVAS
revenues and Thermo Coleman had lower profits primarily due to a loss at Thermo
Information Solutions compared with profitable operations in 1996. Restructuring
and other nonrecurring costs in 1997 included $1.4 million at Trex
Communications for a write-off of in-process technology relating to an
acquisition and $0.5 million at certain of the Company's wholly owned businesses
to close certain foreign sales offices. Restructuring and other nonrecurring
costs of $29.7 million in 1996 included a write-off of $12.7 million of cost in
excess of net assets of acquired company and certain other intangible assets at
Thermedics' Corpak subsidiary, $11.4 million of costs incurred by SensorMedics
primarily as a result of its merger with the Company, $4.9 million for Thermo
Cardiosystems' write-off of in-process technology relating to an acquisition,
and $0.7 million of other costs (Note 11).
Energy and Environment
Sales from the Energy and Environment segment were $640.8 million in 1997,
compared with $555.7 million in 1996. Within this segment, revenues from Thermo
Ecotek increased to $189.5 million in 1997 from $154.3 million in 1996. Revenues
from Thermo Ecotek's Thermo Trilogy biopesticide subsidiary increased $18.7
million to $21.4 million, primarily due to the inclusion of revenue from two
acquired businesses. Thermo Ecotek's revenues in 1997 included $8.2 million of
nonrecurring revenue from a contractual settlement with a utility, under which
Thermo Ecotek surrendered its rights to a power-sales agreement. In addition,
higher contractual energy rates at all of Thermo Ecotek's facilities, except the
Hemphill plant in New Hampshire, contributed to higher revenues in 1997.
Revenues in 1996 from the Company's wholly owned waste-recycling facility in
southern California, which was sold in July 1996, were $9.2 million. Sales from
Thermo Power increased to $155.8 million in 1997 from $122.1 million in 1996,
primarily due to $38.8 million of sales from Peek, acquired in November 1997, as
well as higher engine sales due to a $3.6 million nonrecurring order from one
customer, offset in part by lower demand for Thermo Power's remaining product
lines. Revenues at Thermo TerraTech increased to $295.5 million in 1997 from
$270.3 million in 1996. Revenues from Thermo TerraTech's environmental-liability
management services increased to $136.5 million in 1997 from $121.2 million in
1996, primarily due to the inclusion of $22.9 million of sales from acquired
businesses, offset in part by a $6.4 million decrease in revenues at one of
ThermoRetec's business units resulting from a decline in the number of contracts
in process. In addition, revenues from ThermoRetec's soil-remediation services
decreased 18% to $18.5 million, resulting from lower volumes of soil processed
due to overcapacity in the industry and, to a lesser extent, competitive pricing
pressures early in the year. Revenues from engineering and design services
increased $5.7 million due to the inclusion of $12.8 million from acquired
businesses, offset in part by a decrease in revenues due to the completion of
two large contracts. Revenues from Thermo TerraTech's thermal-processing
equipment business were $25.3 million in 1997 and $25.5 million in 1996.
This business was sold in October 1997 for a nominal loss.
Segment income, excluding nonrecurring income, net, of $1.9 million in
1997, was $77.3 million in 1997, compared with $58.7 million in 1996. Thermo
Ecotek's segment income was $50.4 million in 1997, compared with $39.3 million
in 1996. The increase primarily resulted from $8.2 million of segment income
from the contractual settlement with a utility and, to a lesser extent, higher
contractual energy rates. These increases were offset in part by a decrease in
Thermo Ecotek's segment income of $4.6 million in 1997 as a result of the
funding of certain reserves required in connection with a nonrecourse lease
agreement for its Woodland, California plant. The Woodland plant's results were
approximately breakeven in 1997. Segment income in 1996 from the Company's
waste-recycling facility, which was sold in July 1996, was $4.6 million. Results
from this facility, net of related interest expense (not included
49
<PAGE>
1997 Compared With 1996 (continued)
in segment income), were approximately breakeven in 1996. Segment income at
Thermo Power improved to $7.5 million from $1.1 million in 1996, primarily due
to contributions from Peek and, to a lesser extent, improved segment income at
its engines and industrial refrigeration businesses, due to increased engine
revenues, lower warranty costs in both businesses, as well as lower overhead as
a result of consolidating two engine manufacturing facilities. Segment income at
Thermo TerraTech, excluding restructuring costs of $7.8 million in 1997,
increased to $18.2 million in 1997 from $13.7 million in 1996. Segment income
improved in 1997 due to the effect in 1996 of costs incurred at Thermo TerraTech
to reduce redundancies at regional laboratories, and costs incurred at Thermo
EuroTech relating primarily to the settlement of several contract disputes, as
well as the impact of severe winter weather in early 1996, which affected all
phases of Thermo EuroTech's business. The effect of these improvements was
offset in part by a decline in segment income from soil-remediation services due
to lower sales as discussed above and lower segment income from engineering and
design services due to the completion of two large contracts. Restructuring and
other nonrecurring income, net, of $1.9 million, consisted of $9.7 million of
previously established litigation reserves that were reversed upon settlement of
a related matter and $7.8 million at ThermoRetec principally 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 its
soil-remediation business. This resulted in the closure of two soil-remediation
sites during 1997 and reduced cash flows at certain other sites, such that
analysis indicated that the investment in these assets would not be recovered
(Note 11).
Recycling and Resource Recovery
Sales in the Recycling and Resource Recovery segment were $293.2 million
in 1997, compared with $315.2 million in 1996. A wholly owned subsidiary of the
Company recorded $58.0 million of revenues in 1996 from a contract to design and
construct an office wastepaper de-inking facility. This contract was
substantially completed in the second quarter of 1996. Sales from Thermo
Fibertek increased 25% to $239.6 million in 1997 from $192.2 million in 1996,
primarily due to revenues of $52.7 million from acquired businesses, principally
Thermo Black Clawson, which was acquired in May 1997. Increases in revenues from
Thermo Fibertek's accessories, water-management, and other businesses were
substantially offset by an $11.3 million decrease in revenues at its recycling
business due to a continuing decrease in demand resulting from a severe drop in
de-inked pulp prices in 1996. In addition, the unfavorable effects of currency
translation reduced Thermo Fibertek's revenues by $6.3 million in 1997. Sales of
automated electroplating equipment by Napco increased $3.4 million to $14.0
million, primarily due to higher demand. Sales at Peter Brotherhood declined to
$39.6 million in 1997 from $54.4 million in 1996, primarily due to the disposal
of certain business units, which resulted in a $14.2 million decrease in
revenues. The business units were sold for a nominal loss.
Segment income, excluding restructuring and other nonrecurring costs of
$2.5 million in 1997 and $4.4 million in 1996, was $31.6 million in 1997,
compared with $32.2 million in 1996. This decline primarily resulted from lower
sales at Thermo Fibertek's recycling business. In addition, the Company recorded
a segment loss in 1997 on the contract to design and construct the office
wastepaper de-inking facility due to a reserve established in 1997 for disputed
contractual items relating to this facility. Excluding restructuring and other
nonrecurring costs of $1.4 million in 1997 and $4.4 million in 1996, Peter
Brotherhood was profitable in 1997, compared with a segment loss of $2.5 million
in 1996. Thermo Fibertek recorded restructuring and other nonrecurring costs of
$1.1 million in 1997 relating to the consolidation of the operations of two of
its subsidiaries into the operations of Thermo Black Clawson. Peter Brotherhood
recorded $1.4 million of restructuring costs in 1997, primarily for severance.
In 1996, Peter Brotherhood incurred $4.4 million of nonrecurring costs related
primarily to the write-off of a nontrade receivable and severance costs (Note
11).
50
<PAGE>
1997 Compared With 1996 (continued)
Gain on Issuance of Stock by Subsidiaries
As a result of the sale of stock by subsidiaries and issuance of stock by
subsidiaries upon conversion of convertible debentures, the Company recorded
gains of $80.1 million in 1997 and $126.6 million in 1996. See Notes 1 and 9 of
Notes to Consolidated Financial Statements for a more complete description of
these transactions. Minority interest expense increased to $74.4 million in 1997
from $72.9 million in 1996. Minority interest expense includes $19.0 million in
1997 and $38.2 million in 1996 related to gains recorded by the Company's
majority-owned subsidiaries as a result of the sale of stock and the issuance of
stock upon conversion of convertible debentures, by their subsidiaries.
Income Taxes
Excluding nontaxable gains from issuance of subsidiary stock, the
Company's effective tax rates were 43% and 45% in 1997 and 1996, respectively.
The effective tax rate decreased in 1997 primarily as a result of the lower
relative effect of higher foreign tax rates and tax law differentials and the
lower relative effect of amortization of cost in excess of net assets of
acquired companies. In both periods, the effective tax rates exceed the
statutory federal income tax rate primarily due to nondeductible expenses and
state income taxes.
Liquidity and Capital Resources
Consolidated working capital was $2,163.0 million at January 2, 1999,
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
$1,547.3 million at January 2, 1999, compared with $1,522.7 million at January
3, 1998. In addition, the Company had $95.5 million of long-term
available-for-sale investments at January 2, 1999, compared with $63.3 million
at January 3, 1998. Of the total $1,642.8 million of cash, cash equivalents, and
short- and long-term available-for-sale investments at January 2, 1999, $1,243.9
million was held by the Company's majority-owned subsidiaries and the balance
was held by the Company and its wholly owned subsidiaries.
Cash provided by operating activities was $328.5 million during 1998. An
increase in accounts receivable used $10.9 million of cash, primarily at Thermo
Power due to slower payment patterns at its Peek subsidiary. Cash of $14.0
million was used to fund an increase in inventories, principally at Trex Medical
due to lower than anticipated sales. The increase in inventories at Trex Medical
was offset in part by a decrease at Thermo Instrument. An increase in other
current assets used $28.4 million of cash, primarily due to an increase in
prepaid income taxes and, to a lesser extent, an increase in unbilled contract
costs and fees as result of the timing of billings on percentage-of-completion
contracts. In addition, the Company used $13.7 million of cash to fund a
decrease in accounts payable, resulting principally from the timing of payments.
These reductions in cash provided by operating activities were offset in part by
a $17.7 million increase in other current liabilities, which was principally due
to reserves established for restructuring costs in 1998.
During 1998, the Company's primary investing activities, excluding
available-for-sale investments activity, included acquisitions and the purchase
of property, plant, and equipment. The Company expended $253.2 million, net of
cash acquired, for acquisitions and expended $148.0 million for purchases of
property, plant, and equipment.
The Company's financing activities provided $102.2 million of cash during
1998. Net proceeds from the issuance of long-term obligations totaled $394.1
million (Note 5). Net proceeds from the issuance of Company and subsidiary
stock, which includes $290.1 million of proceeds from the April 1998 sale of
Company common stock (Note 7), totaled $476.1 million. In addition, the Company
used $75.8 million of cash for the repayment of long-term obligations and $27.9
million of cash to fund a decrease in short-term notes payable.
During 1998, an aggregate principal amount of $18.9 million of subsidiary
convertible obligations were converted into shares of subsidiary common stock.
51
<PAGE>
Liquidity and Capital Resources (continued)
During 1998, the Company expended $148.1 million to purchase shares of its
common stock and the Company and certain of its majority-owned subsidiaries
expended $510.9 million to purchase shares of 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 January 2, 1999, $127.3 million
remained under the Company's authorization and $44.5 million and 126,000 shares
remained under authorizations of the Company's majority-owned subsidiaries.
Subsequent to January 2, 1999, certain majority-owned subsidiaries received
additional authorizations totaling $15.0 million. In addition to these
authorizations, Thermedics entered into a merger agreement with its Thermo
Voltek subsidiary to acquire all of the outstanding shares of Thermo Voltek's
common stock that Thermedics and the Company do not own, including the
assumption 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 $25 million. The Company may also expend
additional amounts to complete its reorganization plans (Note 17).
The Company has no material commitments for purchases of property, plant,
and equipment and expects that for 1999, such expenditures will approximate the
current level of expenditures. Since January 2, 1999, the Company and its
majority-owned subsidiaries have expended approximately $377 million on
acquisitions of businesses and as of March 18, 1999, the Company's
majority-owned subsidiaries had agreements or nonbinding letters of intent to
acquire new businesses totaling approximately $15 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.
As discussed above, a substantial percentage of the Company's consolidated
cash and investments is held by subsidiaries that are not wholly owned by the
Company. This percentage may vary significantly over time. Pursuant to the
Thermo Electron Corporate Charter (the Charter), to which each of the
majority-owned subsidiaries of the Company is a party, the combined financial
resources of Thermo Electron and its subsidiaries allow the Company to provide
banking, credit, and other financial services to its subsidiaries so that each
member of the Thermo Electron group of companies may benefit from the financial
strength of the entire organization. Toward that end, the Charter states that
each member of the group may be required to provide certain credit support to
the consolidated entity. This credit may rank junior, pari passu with, or senior
in priority to payment of the other indebtedness of these members. Nonetheless,
the Company's ability to access assets held by its majority-owned subsidiaries
through dividends, loans, or other transactions is subject in each instance to a
fiduciary duty owed to the minority shareholders of the relevant subsidiary. In
addition, dividends received by Thermo Electron from a subsidiary that does not
consolidate with Thermo Electron for tax purposes are subject to tax. Therefore,
under certain circumstances, a portion of the Company's consolidated cash and
short-term investments may not be readily available to Thermo Electron or
certain of its subsidiaries.
Market Risk
The Company is exposed to market risk from changes in interest rates,
foreign currency exchange rates, and equity prices, which could affect its
future results of operations and financial condition. The Company manages its
exposure to these risks through its regular operating and financing activities.
Additionally, the Company uses short-term forward contracts to manage certain
exposures to foreign currencies. The Company enters into forward foreign
exchange contracts to hedge firm purchase and sale commitments denominated in
currencies other than its subsidiaries' local currencies. The Company does not
engage in extensive foreign currency hedging activities; however, the purpose of
the Company's foreign currency hedging activities is to protect the Company's
local currency cash flows related to these commitments from fluctuations in
foreign exchange rates. The Company's forward foreign exchange contracts
principally hedge transactions denominated in U.S. dollars, British pounds
sterling, French francs, and Japanese yen. Gains and losses arising from forward
contracts are recognized as offsets to gains and losses resulting from the
transactions being hedged. The Company does not enter into speculative foreign
currency agreements.
52
<PAGE>
Market Risk (continued)
Interest Rates
Certain of the Company's short- and long-term available-for-sale
investments, long-term obligations, and interest rate swap agreements are
sensitive to changes in interest rates. Interest rate changes would result in a
change in the fair value of these financial instruments due to the difference
between the market interest rate and the rate at the date of purchase or
issuance of the financial instrument. A 10% decrease in year-end 1998 market
interest rates would result in a negative impact to the Company of $158 million
on the net fair value of its interest-sensitive financial instruments.
Foreign Currency Exchange Rates
The Company generally views its investment in foreign subsidiaries with a
functional currency other than the Company's reporting currency as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in British pounds sterling,
French francs, and German marks. The effect of a change in foreign exchange
rates on the Company's net investment in foreign subsidiaries is reflected in
the "Accumulated other comprehensive items" component of shareholders'
investment. A 10% depreciation in year-end 1998 functional currencies, relative
to the U.S. dollar, would result in an $82 million reduction of shareholders'
investment.
The fair value of forward foreign exchange contracts is sensitive to
changes in foreign currency exchange rates. The fair value of forward foreign
exchange contracts is the estimated amount that the Company would pay or receive
upon termination of the contract, taking into account the change in foreign
currency exchange rates. A 10% depreciation in year-end 1998 foreign currency
exchange rates related to the Company's contracts would result in a increase in
the unrealized loss on forward foreign exchange contracts of $3 million. Since
the Company uses forward foreign exchange contracts as hedges of firm purchase
and sale commitments, the unrealized gain or loss on forward foreign currency
exchange contracts resulting from changes in foreign currency exchange rates
would be offset by a corresponding change in the fair value of the hedged item.
Certain of the Company's cash and cash equivalents are denominated in
currencies other than the functional currency of the depositor and are sensitive
to changes in foreign currency exchange rates. A 10% depreciation in the related
foreign currency exchange rates would result in a negative impact of $2 million
on the Company's net income.
Equity Prices
The Company's available-for-sale investment portfolio includes equity
securities that are sensitive to fluctuations in price. In addition, the
Company's and its subsidiaries' convertible obligations are sensitive to
fluctuations in the price of Company or subsidiary common stock into which the
obligations are convertible. Changes in equity prices would result in changes in
the fair value of the Company's available-for-sale investments and convertible
obligations due to the difference between the current market price and the
market price at the date of purchase or issuance of the financial instrument. A
10% increase in the year-end 1998 market equity prices would result in a
negative impact to the Company of $53 million on the net fair value of its
price-sensitive equity financial instruments, principally its convertible
obligations.
The Company's common stock of subsidiaries subject to redemption is
sensitive to fluctuations in the price of the underlying redeemable common
stock. The holder of a redemption right may require the Company to redeem one
share of common stock at a special price per share at various dates through
September 2001. If the underlying common stock is trading on the open market at
a price that is less than the redemption price on the redemption date, then the
holders of redemption rights would more likely than not exercise their
redemption rights. In the event all redemption rights are exercised, the Company
may use up to $95 million in cash to settle redemption obligations.
In addition, changes in equity prices would result in changes in the fair
value of common stock of subsidiaries subject to redemption due to the
difference between the current market price and the price at the date of
issuance of the underlying financial instruments, subsidiary common stock and
redemption rights. Since the market price of redemption rights generally
fluctuates in the opposite direction of fluctuations in the market price of the
redeemable common stock, the effect of a 10% increase in the market price of the
redeemable common stock on the fair value of common stock of subsidiaries
subject to redemption would be negated in part by a decrease in the market price
of redemption rights.
53
<PAGE>
Year 2000
The following constitutes a "Year 2000 Readiness Disclosure" under the
Year 2000 Information and Readiness Disclosure Act. The Company continues to
assess the potential impact of the year 2000 on the Company's internal business
systems, products, and operations. The Company's year 2000 initiatives include
(i) testing and upgrading significant information technology systems and
facilities; (ii) testing and developing upgrades, if necessary, for the
Company's current products and certain discontinued products; (iii) contacting
key suppliers and vendors to determine their year 2000 compliance status; and
(iv) developing contingency plans.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical facilities. The Company is currently in phase two of its
program, during which any noncompliant systems or facilities that were
identified during phase one are prioritized and remediated. The Company is
currently upgrading or replacing such noncompliant information technology
systems, and the majority of this process was complete as of January 2, 1999.
The Company expects that all of its material information technology systems and
critical facilities will be year 2000 compliant by the end of October 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third-party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 2000 problems with its current products. The Company
believes that certain of its older products, which it no longer manufactures or
sells, may not be year 2000 compliant. The Company is continuing to test and/or
evaluate such products. The Company is focusing its efforts on products that are
still under warranty, early in their expected life, subject to FDA
considerations related to the year 2000, and/or pose a safety risk. The Company
is offering upgrades and/or identifying potential solutions where reasonably
practicable.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. The Company has begun to follow-up and
monitor the year 2000 compliance progress of significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. The Company has not completed the majority of its
assessment of third-party risk, but expects to be substantially completed by
October 1999.
Contingency Plans
The Company is developing contingency plans that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
These plans 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,
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plans as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred expenses to third parties (external costs)
related to year 2000 issues of approximately $6 million as of January 2, 1999,
and the total external costs of year 2000 remediation are expected to be
approximately $13 million. Year 2000 costs are funded from working capital. All
internal costs and related external
54
<PAGE>
Year 2000 (continued)
costs other than capital additions related to Year 2000 remediation have been
and will continue to be expensed as incurred. The Company does not track the
internal costs incurred for its year 2000 compliance project. Such costs are
principally the related payroll costs for its information systems group.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
significant suppliers or vendors experience business disruptions due to year
2000 issues, there may also be a material adverse effect on the Company. There
is expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
55
<PAGE>
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in 1999 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Risks Associated With Acquisition Strategy. One of the Company's principal
growth strategies is to supplement its internal growth with the acquisition of
businesses and technologies that complement or augment the Company's existing
product lines. Certain businesses recently acquired by the Company have had low
levels of profitability. In addition, businesses that the Company may seek to
acquire in the future may also be marginally profitable or unprofitable. In
order for any acquired businesses to achieve the level of profitability desired
by the Company, the Company must successfully change operations and improve
market penetration. No assurance can be given that the Company will be
successful in this regard. In addition, promising acquisitions are difficult to
identify and complete for a number of reasons, including competition among
prospective buyers, the need for regulatory approvals, including antitrust
approvals, and the high valuations of businesses resulting from historically
high stock prices in many countries. Acquisitions completed by the Company may
be made at substantial premiums over the fair value of the net assets of the
acquired companies. There can be no assurance that the Company will be able to
complete pending or future acquisitions or that the Company will be able to
successfully integrate any acquired businesses into its existing business or
make such businesses profitable. In order to finance any such acquisitions, it
may be necessary for the Company to raise additional funds either through public
or private financings. Any equity or debt financing, if available at all, may be
on terms which are not favorable to the Company and may result in dilution to
the Company's shareholders.
Risks Associated With Spinout of Subsidiaries. The Company adopted a
strategy of spinning out certain of its businesses into separate subsidiaries
and having these subsidiaries sell a minority interest to outside investors. As
a result of the sale of stock by subsidiaries, the issuance of stock by
subsidiaries upon conversion of convertible debentures, and similar
transactions, the Company records gains that represent the increase in the
Company's net investment in the subsidiaries. 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.
Further, in October 1995, the Financial Accounting Standards Board (FASB)
issued an exposure draft of a Proposed Statement of Financial Accounting
Standards, "Consolidated Financial Statements: Policy and Procedures." In
February 1999, the FASB issued a revision of the earlier document entitled
"Consolidated Financial Statements: Purpose and Policy." The October 1995
exposure draft proposed new rules for how consolidated financial statements
should be prepared. Under that proposed statement, there would be significant
changes in the way the Company records certain transactions of its controlled
subsidiaries. Among those changes, any sale of the stock of a subsidiary that
does not result in a loss of control would be accounted for in equity of the
consolidated entity with no gain or loss being recorded. The 1995 exposure draft
addressed rule changes concerning consolidation procedures which would affect
the Company's ability to record gains on issuance of subsidiary stock and
consolidation policy which does not affect the accounting for such gains. The
February 1999 revised exposure draft addresses only consolidation policy. The
FASB has indicated that it will consider resuming discussion on consolidation
procedures after completion of the efforts on consolidation policy. The timing
and contents of any final statement on consolidation procedures are uncertain.
56
<PAGE>
Competition. The Company encounters and expects to continue to encounter
significant competition in the sale of its products and services. The Company's
competitors include a number of large multinational corporations, some of which
may be able to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion and sale
of their products than the Company. Competition could increase if new companies
enter the market or if existing competitors expand their product lines or
intensify efforts within existing product lines. There can be no assurance that
the Company's current products, products under development, or ability to
develop new technologies will be sufficient to enable it to compete effectively.
Risks Associated With International Operations. International revenues
account for a substantial portion of the Company's revenues, and the Company
intends to continue to expand its presence in international markets.
International revenues are subject to a number of risks, including the
following: fluctuations in exchange rates may affect product demand and
adversely affect the profitability in U.S. dollars of products and services
provided by the Company in foreign markets where payment for the Company's
products and services is made in the local currency; agreements may be difficult
to enforce and receivables difficult to collect through a foreign country's
legal system; foreign customers may have longer payment cycles; foreign
countries may impose additional withholding taxes or otherwise tax the Company's
foreign income, impose tariffs, or adopt other restrictions on foreign trade;
U.S. export licenses may be difficult to obtain; and the protection of
intellectual property in foreign countries may be more difficult to enforce.
There can be no assurance that any of these factors will not have a material
adverse impact on the Company's business and results of operations. A portion of
the Company's revenues is derived from exports to Asia. Certain countries in
Asia are experiencing a severe economic crisis, which has been characterized by
sharply reduced economic activity and liquidity, highly volatile
foreign-currency-exchange and interest rates, and unstable stock markets. The
Company's export sales to Asia may continue to be adversely affected by the
unstable economic conditions there, which may continue to adversely affect the
Company's results of operations, financial condition, or business.
Rapid and Significant Technological Change and New Products. The markets
for the Company's products are characterized by rapid and significant
technological change, evolving industry standards and frequent new product
introductions and enhancements. Many of the Company's products and products
under development are technologically innovative and require significant
planning, design, development, and testing at the technological, product, and
manufacturing-process levels. These activities require significant capital
commitments and investment by the Company. In addition, products that are
competitive in the Company's markets are characterized by rapid and significant
technological change due to industry standards that may change on short notice
and by the introduction of new products and technologies that render existing
products and technologies uncompetitive or obsolete. There can be no assurance
that any of the products currently being developed by the Company, or those to
be developed in the future, will be technologically feasible or accepted by the
marketplace, that any such development will be completed in any particular time
frame, or that the Company's products or proprietary technologies will not
become uncompetitive or obsolete.
Possible Adverse Effect from Changes in Governmental Regulations. The
Company competes in several markets which involve compliance by its customers
with federal, state, local, and foreign regulations, such as environmental,
health and safety, and food and drug regulations. The Company develops,
configures, and markets its products to meet customer needs created by such
regulations. These regulations may be amended or eliminated in response to new
scientific evidence or political or economic considerations. Any significant
change in regulations could adversely affect demand for the Company's products
in regulated markets.
57
<PAGE>
Government Regulation; No Assurance of Regulatory Approvals. Certain of
the Company's products are subject to pre-marketing clearance or approval by the
U.S. Food and Drug Administration (FDA) and similar agencies in foreign
countries. The use or sale of certain of the Company's products under
development may require approvals by other government agencies. The process of
obtaining clearance and approval from the FDA and other government agencies is
time-consuming and expensive. Furthermore, there can be no assurance that the
necessary clearances or approvals for the Company's products, services, and
products and services under development will be obtained on a timely basis, if
at all.
FDA regulations also require continuing compliance with specific standards
in conjunction with the maintenance and marketing of products and services that
have been approved or cleared. Failure to comply with applicable regulatory
requirements can result in, among other things, civil and criminal penalties,
suspension of approvals, recalls, or seizures of products, injunctions, and
criminal prosecutions.
Risks Associated With Dependence on Capital Spending Policies and
Government Funding. The Company's customers include manufacturers of
semiconductors and products incorporating semiconductors, pharmaceutical and
chemical companies, laboratories, universities, healthcare providers, paper
manufacturers, consumer product companies, government agencies, and public and
private research institutions. The capital spending of these entities can have a
significant effect on the demand for the Company's products. Such spending is
based on a wide variety of factors, including the resources available to make
purchases, the spending priorities among various types of equipment, public
policy, and the effects of different economic cycles, including fluctuating
demand in the semiconductor industry. Any decrease in capital spending by any of
the customer groups that account for a significant portion of the Company's
sales could have a material adverse effect on the Company's business and results
of operations.
Dependence on Patents and Proprietary Rights. The Company places
considerable importance on obtaining patent and trade secret protection for
significant new technologies, products, and processes because of the length of
time and expense associated with bringing new products through the development
process and to the marketplace. The Company's success depends in part on its
ability to develop patentable products and obtain and enforce patent protection
for its products both in the United States and in other countries. The Company
owns numerous United States and foreign patents, and intends to file additional
applications for patents as appropriate to cover its products. No assurance can
be given that patents will issue from any pending or future patent applications
owned by or licensed to the Company or that the claims allowed under any issued
patents will be sufficiently broad to protect the Company's technology.
Proceedings initiated by the Company to protect its proprietary rights could
result in substantial cost to the Company. In addition, no assurance can be
given that any issued patents owned by or licensed to the Company will not be
challenged, invalidated, or circumvented, or that the rights granted thereunder
will provide competitive advantages to the Company. There can be no assurance
that third parties will not assert claims against the Company that the Company
infringes the intellectual property rights of such parties. The Company could
incur substantial costs and diversion of management resources with respect to
the defense of any such claims, which could have a material adverse effect on
the Company's business, financial condition, and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief, which
could effectively block the Company's ability to make, use, sell, distribute, or
market its products and services in the United States or abroad. In the event
that a claim relating to intellectual property is asserted against the Company,
the Company may seek licenses to such intellectual property. There can be no
assurance, however, that such licenses could be obtained on commercially
reasonable terms, if at all. The failure to obtain the necessary licenses or
other rights could preclude the sale, manufacture, or distribution of the
Company's products and, therefore, could have a material adverse effect on the
Company's business, financial condition, and results of operations.
The Company relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, by confidentiality agreements with its collaborators,
employees, and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.
58
<PAGE>
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 problems will
not have a material adverse impact on the Company's business, operations, or
financial condition. While the Company expects that upgrades to its internal
business systems will be completed in a timely fashion, there can be no
assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
significant suppliers or vendors experience business disruptions due to year
2000 issues, there may also be a material adverse effect on the Company. There
is expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
59
<PAGE>
Common Stock Market Information
The Company's common stock is traded on the New York Stock Exchange under
the symbol TMO. The following table sets forth the high and low sale prices of
the Company's common stock for 1998 and 1997, as reported in the consolidated
transaction reporting system.
1998 1997
-------------------- ----------------------
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
First $44 1/4 $36 5/8 $40 1/2 $30 7/8
Second 41 15/16 30 3/4 38 3/4 28 3/8
Third 35 3/16 14 3/16 41 1/2 32 1/8
Fourth 20 1/16 13 9/16 44 1/2 33 1/2
As of January 29, 1999, the Company had 8,277 holders of record of its
common stock. This does not include holdings in street or nominee names. The
closing market price on the New York Stock Exchange for the Company's common
stock on January 29, 1999, was $16 5/8 per share.
Common stock of the Company's majority-owned public subsidiaries is traded
on the American Stock Exchange: Thermedics Inc. (TMD), Thermedics Detection Inc.
(TDX), Thermo Cardiosystems Inc. (TCA), Thermo Voltek Corp. (TVL), Thermo
Sentron Inc. (TSR), Thermo Ecotek Corporation (TCK), Thermo Fibertek Inc. (TFT),
Thermo Fibergen Inc. (TFG), Thermo Instrument Systems Inc. (THI), Metrika
Systems Corporation (MKA), ONIX Systems Inc. (ONX), Thermo BioAnalysis
Corporation (TBA), Thermo Optek Corporation (TOC), ThermoQuest Corporation
(TMQ), ThermoSpectra Corporation (THS), Thermo Vision Corporation (VIZ), Thermo
Power Corporation (THP), Thermo TerraTech Inc. (TTT), The Randers Killam Group
Inc. (RGI), ThermoRetec Corporation (THN), ThermoTrex Corporation (TKN),
ThermoLase Corporation (TLZ), and Trex Medical Corporation (TXM).
Shareholder Services
Shareholders of Thermo Electron Corporation who desire information about
the Company are invited to contact the Investor Relations Department, Thermo
Electron Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts
02454-9046, (781) 622-1111. A mailing list is maintained to enable shareholders
whose stock is held in street name, and other interested individuals, to receive
quarterly reports, annual reports, and press releases as quickly as possible.
Distribution of printed quarterly reports is limited to the second quarter only.
All material is available from Thermo Electron's Internet site
(http://www.thermo.com).
Stock Transfer Agent
BankBoston N.A. is the stock transfer agent and maintains shareholder
activity records. The agent will respond to questions on issuance of stock
certificates, change of ownership, lost stock certificates, and change of
address. For these and similar matters, please direct inquiries to:
BankBoston N.A., c/o Boston EquiServe Limited Partnership, P.O. Box 8040,
Boston, Massachusetts 02266-8040, (781) 575-3120.
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Board of Directors and will depend upon, among other factors,
the Company's earnings, capital requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended January
2, 1999, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, Thermo Electron
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.
Annual Meeting
The annual meeting of shareholders will be held on Thursday, May 27, 1999,
at 3 p.m. at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ten Year Financial Summary
(In millions except 1998 (a) 1997 1996 (b) 1995 1994 (c) 1993 (d) 1992 (e) 1991 (f) 1990 1989
per share amounts)
- ------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Statement of Income Data
Revenues $3,867.6 $3,558.3 $2,932.6 $2,270.3 $1,729.2 $1,354.5 $ 999.2 $ 842.5 $ 744.5 $ 640.3
Gross Profit 1,526.5 1,441.3 1,130.0 863.4 650.9 482.3 326.7 256.5 233.8 176.0
Operating Income 331.3 405.8 246.5 225.2 182.1 119.2 70.5 43.6 40.9 23.6
Net Income 181.9 239.3 190.8 139.6 104.7 76.9 59.5 48.5 35.5 27.3
Earnings per Share:
Basic 1.12 1.57 1.35 1.10 .90 .74 .62 .56 .46 .37
Diluted 1.07 1.41 1.17 .95 .78 .65 .58 .53 .43 .35
Balance Sheet Data
Working Capital $2,163.0 $2,002.0 $2,218.6 $1,317.1 $1,150.7 $ 833.8 $ 508.7 $ 468.4 $ 244.1 $ 277.6
Total Assets 6,331.6 5,795.9 5,141.2 3,786.3 3,061.9 2,507.6 1,838.0 1,212.5 912.0 669.9
Long-term Obligations 2,025.5 1,742.9 1,550.3 1,118.1 1,049.9 647.6 494.2 255.1 210.5 177.0
Minority Interest 649.4 719.6 684.1 471.6 327.7 277.7 164.3 122.5 83.9 51.8
Common Stock of 94.3 93.3 76.5 17.5 - 14.5 5.5 5.5 8.7 13.1
Subsidiaries Subject
to Redemption
Shareholders' Investment 2,248.1 1,997.9 1,754.4 1,309.7 1,007.5 873.7 563.8 489.5 314.1 229.2
(a) Reflects the issuance of $150.0 million principal amount of the Company's
notes and the Company's public offering of common stock for net proceeds of
$290.1 million.
(b) Reflects the issuance of $585.0 million principal amount of the Company's
convertible debentures.
(c) Reflects the issuance of $345.0 million principal amount of the Company's
convertible debentures.
(d) Reflects the Company's public offering of common stock for net proceeds of
$246.0 million.
(e) Reflectsthe issuance of $260.0 million principal amount of the Company's
convertible debentures.
(f) Reflects the issuance of $164.0 million principal amount of the Company's
convertible debentures.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Exhibit 21
THERMO ELECTRON CORPORATION
Subsidiaries of the Registrant
At February 28, 1999, the Registrant owned the following companies:
<S> <C> <C>
STATE OR REGISTRANT'S
JURISDICTION OF PERCENT OF
NAME INCORPORATION OWNERSHIP
- ----------------------------------------------------------------------------------------------------------
Thermo Coleman Corporation Delaware 87.19**
Coleman Research Corporation Florida 100
Coleman Services Incorporated Delaware 100
Thermo Information Solutions Inc. Delaware 79.29**
Tera Systemes s.a.r.l. France 100
Thermo Info France S.A. France 100
Thermo Info UK Limited United Kingdom 100
Traveller Information Services, Inc. Alabama 75
Nicolet Biomedical Inc. California 100
Eden Medical Electronics, Inc. Delaware 100
Grason-Stadler, Inc. Massachusetts 100
Neuroscience Limited United Kingdom 100
Nicolet Biomedical Japan Inc. Japan 100
Nicolet Biomedical Ltd. United Kingdom 100
Nicolet Biomedical S.A.R.L. France 100
Nicolet - EME GmbH Germany 100
Nicolet Vascular Inc. Delaware 100
ILS, Inc. Delaware 100
IMEX International, Inc. Colorado 100
Peter Brotherhood Holdings Ltd. United Kingdom 100
Aircogen Ltd. United Kingdom 80
Peter Brotherhood Limited United Kingdom 100
D.S.T. Pattern & Engineering Co. Ltd. United Kingdom 100
Link Control Technology Ltd. United Kingdom 100
Peter Brotherhood Pension Fund Trustees Ltd. United Kingdom 100
Thermo Electron Realty Limited United Kingdom 100
Thermo Holdings Limited United Kingdom 100
SensorMedics Corporation Delaware 100
SensorMedics B.V. Netherlands 100
SensorMedics (Deutschland) GmbH Germany 100
SensorMedics FSC Corporation Virgin Islands 100
Thermo Electron, S.A. de C.V. Mexico 100
The Thermo Electron Companies Inc. Wisconsin 100
Bear Medical Systems Inc. Delaware 100
Bird Medical Technologies, Inc. California 100
Bird International, Inc. U.S. Virgin Islands 100
Bird Products Corporation California 100
Bird Life Design Corporation California 100
Stackhouse, Inc. California 100
Gulf Precision, Inc. Arizona 100
Seeley Enterprises, Inc. New Mexico 100
ITC Holdings Inc. Delaware 100
Loftus Furnace Company Pennsylvania 100
<PAGE>
Medical Data Electronics, Inc. Delaware 100
Met-Therm, Inc. Ohio 100
NAPCO, Inc. Connecticut 100
Nicolet Biomedical of California Inc. California 100
North East Surgical Tool Corp. Massachusetts 100
North Carbondale Minerals, Inc. California 100
Overly, Inc. Wisconsin 100
Perfection Heat Treating Company Michigan 100
San Marcos Resource Recovery, Inc. California 100
Southern Ocean County Resource Recovery, Inc. New Jersey 100
Staten Island Cogeneration Corporation New York 100
TE Great Lakes Inc. Michigan 100
TEC Cogeneration Inc. Florida 100
South Florida Cogeneration Associates Florida 50*
TEC Energy Corporation California 100
North County Resource Recovery Associates California 100*
(50% of which is owned directly by
San Marcos Resource Recovery, Inc.)
Tecomet Inc. Massachusetts 100
Thermedics Inc. Massachusetts 73.98**
Corpak Inc. Massachusetts 100
Walpak Company Illinois 100
TV Acquisition Corporation Delaware 100
TMD Holdings Inc. Delaware 100
TMO TCA Holdings, Inc. Delaware 100
Thermedics Detection Inc. Massachusetts 83.79**
(additionally, 4.57%** of the shares are owned
directly by The Thermo Electron Companies Inc.)
Detection Securities Corporation Massachusetts 100
Orion Research, Inc. Massachusetts 100
Advanced Sensor Technology Massachusetts 100
Orion Research Limited United Kingdom 100
Orion Research Puerto Rico, Inc. Delaware 100
Russell pH Limited Scotland 100
Rutter & Co. Netherlands 100
Rutter Instrumentation S.A.R.L. France 90
Systech B.V. Netherlands 50
ThermedeTec Corporation Delaware 100
Thermedics Detection de Argentina S.A. Argentina 100
(1% of which shares are owned
directly by Thermedics Detection Inc.)
Thermedics Detection de Mexico, S.A. de C.V. Mexico 100
Thermedics Detection GmbH Germany 100
Thermedics Detection Limited United Kingdom 100
Thermedics Detection Scandinavia AS Norway 100
2
<PAGE>
Thermo Sentron Inc. Delaware 74.25**
(additionally, 12.00%** of the shares are owned
directly by The Thermo Electron Companies Inc.)
Allen Coding Systems Limited United Kingdom 100
Allen Coding Corporation Delaware 100
Goring Kerr Limited United Kingdom 100
Best Checkweighers Limited United Kingdom 100
Intertest (UK) Limited United Kingdom 100
Goring Kerr Detection Limited United Kingdom 100
Graseby Goring Kerr (NZ) Limited New Zealand 100
Graseby Goring Kerr Canada Inc. Ontario 100
Graseby Product Monitoring GmbH Germany 100
Goring Kerr Inc. New York 100
Ramsey France S.A.R.L. France 100
Ramsey Ingenieros S.A. Spain 100
Ramsey Italia S.R.L. Italy 100
Tecno Europa Elettromeccanica S.R.L. Italy 100
Ramsey Technology Inc. Massachusetts 100
Xuzhou Ramsey Technology Development Co., Limited China 50*
Thermo Sentron Australia Pty. Ltd.. Australia 100
Thermo Sentron B.V. Netherlands 100
Thermo Sentron Canada Inc. Canada 100
Thermo Sentron GmbH Germany 100
Thermo Sentron Limited United Kingdom 100
Hitech Electrocontrols Limited United Kingdom 100
Hitech Licenses Ltd. United Kingdom 100
Hitech Metal Detectors Ltd. United Kingdom 100
Westerland Engineering Ltd. United Kingdom 100
Thermo Sentron SEC Corporation Massachusetts l00
Thermo Sentron (South Africa) Pty. Ltd. South Africa 100
TMD Securities Corporation Massachusetts 100
Thermo Cardiosystems Inc. Massachusetts 60.05**
(additionally, 0.21%** of the shares are owned
directly by The Thermo Electron Companies Inc.)
International Technidyne Corporation Delaware 100
International Technidyne Corporation Limited United Kingdom 100
Nimbus Inc. Massachusetts 100
TCA Securities Corporation Massachusetts 100
Thermo Voltek Corp. Delaware 66.45**
(additionally, 2.74%** of the shares are owned
directly by The Thermo Electron Companies Inc.)
Thermo Voltek Europe B.V. Netherlands 100
Comtest Instrumentation, B.V. Netherlands 100
Comtest Italia S.R.L. Italy 100
Comtest Limited United Kingdom 100
Milmega Limited United Kingdom 100
TVL Securities Corporation Delaware 100
UVC Realty Corp. New York 100
Thermo Administrative Services Corporation Delaware 100
3
<PAGE>
Thermo Amex Management Company Inc. Delaware 100
Thermo Amex Finance, L.P. Delaware 99*
Thermo Amex Convertible Growth Fund I., L.P. Delaware 99*
Thermo Ecotek Corporation Delaware 93.77**
Central Valley Fuels Management Inc. Delaware 100
Delano Energy Company Inc. Delaware 100
Eco Fuels Inc. Wyoming 100
EuroEnergy Group, B.V. Italy 50*
Independent Power Services Corporation Nevada 100
KFP Operating Company, Inc. Delaware 100
Lake Worth Generation LLC Delaware 100
Mountainview Power Company Delaware 100
Riverside Canal Power Company California 100
SFS Corporation New Hampshire 100
Star/RESC LLC Texas 75
TCK Fuels Inc. Delaware 100
KFx Fuel Partners, L.P. Delaware 95*
(2% of which is owned
directly by Eco Fuels Inc.)
TES Securities Corporation Delaware 100
Thermendota, Inc. California 100
Mendota Biomass Power, Ltd. California 100
MBPL Agriwaste Corporation California 100
Thermo Ecotek International Holdings Inc. Cayman Islands 100
Thermo Ecotek Europe Holdings B.V. Netherlands 100
EMD Ventures B.V. Netherlands 65*
ECS sro Czech Republic 50*
EMD Pribram sro Czech Republic 50*
EuroEnergy Group B.V. Netherlands 50*
Thermo EuroVentures sro Czech Republic 100
Thermo Ecotek International Inc. Cayman Islands 100
TCK Cogeneration Dominicana Inc. Cayman Islands 100
(1% of which shares are owned directly by Thermo Ecotek International
Holdings Inc.)
TCK Dominicana Holdings Inc. Cayman Islands 100
(1% of which shares are owned directly by
Thermo Ecotek International Holdings Inc.)
Thermo Electron of Maine, Inc. Maine 100
Gorbell/Thermo Electron Power Company Maine 80*
Thermo Electron of New Hampshire, Inc. New Hampshire 100
Hemphill Power and Light Company New Hampshire 66*
Thermo Electron of Whitefield, Inc. New Hampshire 100
Whitefield Power and Light Company New Hampshire 100*
(39% of which is owned
directly by SFS Corporation)
Star Natural Gas Company Delaware 95
Thermo Fuels Company, Inc. California 100
Thermo Trilogy Corporation Delaware 80.03**
Thermo Trilogy International Holdings, Inc. Cayman Islands 100
4
<PAGE>
AgriSense-BCS, Ltd. United Kingdom 100
P J Margo Pvt. Ltd. India 50*
Ulna Incorporated California 100
Woodland Biomass Power, Inc. California 100
Woodland Biomass Power, Ltd. California 100*
(.1% of which is owned directly
by Thermo Ecotek Corporation)
Thermo Electron Foundation, Inc. Massachusetts 100
Thermo Electron Metallurgical Services, Inc. Texas 100
Thermo Finance Company B.V. Netherlands 100
Thermo Fibertek Inc. Delaware 91.34**
AES Equipos y Sistemas S.A. de C.V. Mexico 100
Fibertek Construction Company, Inc. Maine 100
Thermo AES Canada Inc. Canada 100
Thermo Black Clawson Inc. Delaware 100
Thermo Black Clawson (China) China 100
Thermo Black Clawson S.A. France 100
Thermo Fibertek Holdings Limited United Kingdom 100
Thermo Black Clawson Limited United Kingdom 100
Thermo Fibertek U.K. Limited United Kingdom 100
Vickerys Holdings Limited United Kingdom 100
Vickerys Limited United Kingdom 100
Winterburn Limited United Kingdom 100
Thermo Web Systems, Inc. Massachusetts 100
Fiberprep Inc. Delaware 95
(31.05% of which shares are owned
directly by E. & M. Lamort, S.A.)
Fiberprep Securities Corporation Delaware 100
Thermo Fibergen Inc. Delaware 70.81**
(additionally, 1.81%** of the shares are owned
directly by The Thermo Electron Companies Inc.)
Fibergen Securities Corporation Massachusetts 100
GranTek Inc. Wisconsin 100
TMO Lamort Holdings Inc. Delaware 100
E. & M. Lamort, S.A. France 100
Lamort Black-Clawson Industrial Ltda. Brazil 70
Lamort GmbH Germany 100
Lamort Iberia S.A. Spain 100
Lamort Italia S.R.L. Italy 100
Lamort Paper Services Ltd. United Kingdom 100
Nordiska Lamort Lodding AB Sweden 100
Thermo Instrument Systems Inc. Delaware 85.40**
Analytical Instrument Development, Inc. Pennsylvania 100
Eberline Instrument Company Limited United Kingdom 100
Eberline Instrument Corporation New Mexico 100
Epsilon Industrial Inc. Texas 100
ESM Eberline Instruments Strahlen - und Umweltmesstechnik Germany 100
GmbH
5
<PAGE>
Fisons Instruments Vertriebs GmbH Germany 100
Gas Tech Inc. California 100
Gas Tech Australia, Pty. Ltd. Australia 50*
Gas Tech Partnership California 50*
Gastech Instruments Canada Ltd. Canada 100
Life Sciences International Limited United Kingdom 100
Comdata Services Limited England 100
Lipshaw Limited England 100
Luckham Limited England 100
Phicom Limited England 100
Shandon Scientific Limited England 100
Southions Investments Limited England 100
Sungei Puntar Rubber Estate Limited England 100
Westions Limited England 100
Whale Scientific Limited England 100
Helmet Securities Limited England 100
Life Sciences International GmbH Germany 100
Life Sciences International Kft Hungary 100
Life Sciences International, Inc. Pennsylvania 100
LSI (US) Inc. Delaware 100
LSI North America Service Inc. Delaware 100
Life Sciences International Holdings BV Netherlands 100
Life Sciences International (Poland) SP z O.O Poland 100
Angila Scientific Instruments Limited England 100
Britlowes Limited England 100
Commendstar Limited England 100
Consumer & Video Holdings Limited England 100
Video Communications Limited England 100
Greensecure Projects Limited England 100
Labsystems Europe GA Spain 100
Labsystems Ges mbH Austria 100
Omnigene Limited England 58.50
Shandon Southern Instruments Limited England 100
Shenbridge Limited England 100
Southern Instruments Holdings Limited England 100
Metrika Systems Corporation Delaware 67.49**
(additionally, 8.11%** of the shares are owned
directly by The Thermo Electron Companies Inc.)
Radiometrie RM GmbH Germany 100
Eberline Radiometrie S.A. France 100
Gamma-Metrics California 100
MF Physics Corporation Delaware 100
Radiometrie Corporation Delaware 100
DMC Mess & Regeltechnik GmbH Germany 100
Radiometrie U.S.A., Inc. California 100
Radiometrie Limited United Kingdom 100
National Nuclear Corporation California 100
6
<PAGE>
Thermo Nucleonics LLC Delaware 51
(additionally, 49% of the shares are owned
directly by TBA Nucleonics Holding Corporation)
ONIX Systems Inc. Delaware 80.31**
(additionally, 0.73%** of the shares are owned
directly by The Thermo Electron Companies Inc.)
Brandt Instruments, Inc. Delaware 100
CAC Inc. Delaware 100
Flow Automation Inc. Texas 100
Lots 82 and 83, Inc. Louisiana 100
Mid-South Power Systems, Inc. Louisiana 100
Mid-South Controls & Services, Inc. Louisiana 100
Thermo Instrument Controls de Mexico, S.A. de C.V. Mexico 100
(1% of which shares are owned directly
by ONIX Systems Inc.)
ONIX Process Analysis Inc. Texas 100
OnIX Holdings Limited England 100
CAC UK Limited England and Wales 100
ONIX Measurement Limited England and Wales 100
Peek Environmental Limited England and Wales 100
Sarasota Data Products Limited England and Wales 100
Sarasota Instrumentation Limited England and Wales 100
VG Gas Analysis Limited England and Wales 100
Polysonics, Inc. Texas 100
TN Spectrace Europe B.V. Netherlands 100
TN Technologies Inc. Texas 100
Kay-Ray/Sensall, Inc. Delaware 100
TN Technologies Canada Inc. Canada 100
Westronics Inc. Texas 100
Optek-Nicolet Holdings Inc. Wisconsin 100
Thermo Optek Corporation Delaware 92.70**
(additionally, 2.01%** of the shares are owned
directly by The Thermo Electron Companies Inc.)
Diametrix Detectors, Inc. Delaware 100
FI Instruments Inc. Delaware 100
Gebrueder Haake GmbH Germany 100
RHEO S.A. France 100
SWO Polymertechnik GmbH Germany 100
HB Instruments Inc. Delaware 100
Scintag, Inc. California 100
Spectronic Instruments, Inc. Delaware 100
SLM International Inc. Illinois 100
Thermo Jarrell Ash Corporation Massachusetts 100
A.R.L. Applied Research Laboratories S.A. Switzerland 100
Fisons Instruments (Proprietary) Limited South Africa 100
Thermo Optek Wissenschaftliche Gerate GesmbH Austria 100
Baird De Brazil Representacoes Ltda. Brazil 100
7
<PAGE>
Beijing Baird Analytical Instrument Technology China 100
Co. Limited
Cahn Instrument Corporation Wisconsin 100
Mattson Instruments Limited United Kingdom 100
Thermo Optek Limited United Kingdom 100
Norlab Instrument of Aberdeen (UK) United Kingdom 100
Thermo Elemental Limited United Kingdom 100
Unicam Limited United Kingdom 100
Unicam Export Limited United Kingdom 100
Unicam Analytical Technology Netherlands B.V. Netherlands 100
Unicam Italia SpA Italy 100
Unicam S.A. Belgium 100
Thermo Optek Nordic AB Sweden 100
Nicolet Instrument Corporation Wisconsin 100
Nicolet Japan K.K. Japan 100
Spectra-Tech, Inc. Wisconsin 100
Spectra-Tech, Europe Limited United Kingdom 100
Nicolet Instrument GmbH Germany 100
Optek Securities Corporation Massachusetts 100
Planweld Holding Limited United Kingdom 100
Nicolet Instrument Limited United Kingdom 100
Hilger Analytical Limited United Kingdom 100
Thermo Electron Limited United Kingdom 100
Thermo Instrument Systems Japan Holdings, Inc. Delaware 100
Nippon Jarrell-Ash Company, Ltd. Japan 100
Thermo Instruments (Canada) Inc. Canada 100
Fisons Instruments Inc. Canada 100
Unicam Analytical Inc. Canada 100
Thermo Optek France S.A. France 100
Thermo Optek Holding B.V. Netherlands 100
Baird Europe B.V. Netherlands 100
Baird France S.A.R.L. France 100
VG Systems Limited United Kingdom 100
VG Elemental Limited United Kingdom 100
Thermo Group B.V. Netherlands 100
Thermo Optek Materials Analysis (S.E.A.) Pte Limited Singapore 100
ThermoSpectra Corporation Delaware 82.45**
(additionally, 9.73%** of the shares are owned
directly by The Thermo Electron Companies Inc.)
Gould Instrument Systems, Inc. Ohio 100
Kevex Instruments Inc. Delaware 100
Kevex X-Ray Inc. Delaware 100
Neslab Instruments Europa BV Netherlands 100
Neslab Instruments, Inc. New Hampshire 100
Neslab Instruments Limited England 100
Nicolet Instrument Technologies Inc. Wisconsin 100
NORAN Instruments Inc. Wisconsin 100
ThermoMicroscopes Corp. California 100
ThermoMicroscopes S.A. Switzerland 100
8
<PAGE>
PSI Virgin Islands Incorporated U.S. Virgin Islands 100
Sierra Research and Technology, Inc. Delaware 100
ThermoSpectra B.V. Netherlands 100
Nicolet Technologies B.V. Netherlands 100
Bakker Electronics Limited United Kingdom 100
NORAN Instruments B.V. Netherlands 100
ThermoSpectra GmbH Germany 100
Gould Nicolet Messtechnik GmbH Germany 100
NORAN Instruments GmbH Germany 100
ThermoMicroscopes GmbH Germany 100
ThermoSpectra Limited United Kingdom 100
Nicolet Technologies Ltd. United Kingdom 100
ThermoSpectra S.A. France 100
Nicolet Technologies S.A.R.L. France 100
Spectrace Instruments Inc. California 100
TMO THI Acquisition Corp. Delaware 100
Thermo Electron Sweden Forvaltning AB Sweden 100
Quest-Finnigan Holdings Inc. Virginia 100
Quest-TSP Holdings Inc. Delaware 100
ThermoQuest Corporation Delaware 89.31**
(43.9%** of which shares are owned
directly by Quest-Finnigan Holdings Inc.)
(additionally, 0.31% of the shares are owned directly by The Thermo
Electron Companies Inc.)
Denley Instruments Limited England 100
E-C Apparatus Limited England 100
Finnigan FT/MS Inc. Delaware 100
Finnigan Corporation Delaware 100
Finnigan Instruments, Inc. New York 100
Finnigan International Sales, Inc. California 100
Finnigan MAT China, Inc. California 100
Finnigan MAT (Delaware), Inc. Delaware 100
Finnigan MAT Instruments, Inc. Nevada 100
Finnigan MAT International Sales, Inc. California 100
Finnigan MAT (Nevada), Inc. Nevada 100
Finnigan MAT GmbH Germany 100
ThermoQuest Analytische Systeme GmbH Germany 100
Finnigan MAT S.R.L. Italy 100
Thermo Separation Products S.R.L. Italy 100
Masslab Limited United Kingdom 100
Thermo Instruments Australia Pty. Limited Australia 100
ThermoQuest Ltd. United Kingdom 100
Finnigan MAT Ltd. United Kingdom 100
ThermoQuest AB Sweden 100
Thermo Separation Products Ltd. United Kingdom 100
Finnigan Properties, Inc. California 100
Forma Scientific, Inc. Delaware 100
Forma Ohio Inc. Ohio 100
International Equipment Company Delaware 100
9
<PAGE>
International Equipment Company Limited England 100
Savant Instruments, Inc. New York 100
Forma Scientific Limited England 100
Hypersil Inc. Delaware 100
Hypersil Limited England 100
Life Sciences International (Hong Kong) Limited Hong Kong 100
Life Sciences International, Inc. Pennsylvania 100
Life Sciences (Europe) Limited England 100
Life Sciences International (UK) Limited England 100
Kenbury Limited England 100
Savant Instruments Limited England 100
ThermoQuest B.V. Netherlands 100
Thermo Separation Products B.V. Netherlands 100
Thermo Separation Products B.V. B.A. Belgium 100
ThermoQuest France S.A. France 100
Finnigan Automass S.A. France 100
Finnigan MAT S.A.R.L. France 100
Thermo Separation Products S.A. France 100
ThermoQuest Italia S.p.A. Italy 100
ThermoQuest Spain S.A. Spain 100
ThermoQuest Wissenschaftliche Gerate GmbH Austria 100
Thermo Separation Products AG Switzerland 100
Thermo Separation Products Inc. Delaware 100
ThermoQuest K.K. Japan 100
RealFlex Systems Inc. Texas 100
SID Instruments Inc. Delaware 100
FI S.A. France 100
Fisons Instruments BV Netherlands 100
Fisons Instruments NV Belgium 100
Fisons Instruments K.K. Japan 100
NK Instruments Inc. Delaware 100
Thermo Capillary Electrophoresis Inc. Delaware 100
Thermo Haake Ltd. United Kingdom 100
Thermo Haake (U.K.) Limited United Kingdom 100
Thermo Instrumentos Cientificos S.A. Spain 100
Tera Systemes
Thermo BioAnalysis Corporation Delaware 61.98**
(4.1%** of which shares are owned directly by
Quest-TSP Holdings Inc. and 1.8% of which shares
are owned directly by Quest-Finnigan Holdings Inc.
Additionally, 21.75%** of the shares are owned directly by
The Thermo Electron Companies Inc.)
BioStar, Inc. Delaware 100
Data Medical Associates, Inc. Texas 100
DMA Latinoamerica S.A. de C.V. Mexico 50
Denley Instruments Inc. North Carolina 100
Fastighets AB Skrubba Sweden 100
Dynex Technologies spol. s.r.o. Czech Republic 100
DYNEX Technologies (Asia) Inc. Delaware 100
10
<PAGE>
DYNEX Technologies Inc. Virginia 100
DYNEX Technologies GmbH Germany 100
Hybaid Limited England 100
Hybaid BV Netherlands 100
Thermo Labsystems B.V. Netherlands 100
Labsystems Inc. Delaware 100
Thermo BioAnalysis Japan K.K. Japan 100
Labsystems OY Finland 100
Biosystems OY Finland 100
Labsystems (Hong Kong) Limited Hong Kong 99
Life Sciences International (Hong Kong) Limited Hong Kong 99
Labsystems BTD China 32.50
Labsystems LHD China 100
Labsystems Lenpipette Russia 95
Labsystems Pakistan (Private) Ltd Pakistan 33.50
Labsystems Sweden AB Sweden 100
Labsystems (UK) Limited England 100
Life Sciences International SNC France 100
Shandon SA France 100
Shandon (France) SA France 100
Shandon Scientific Limited United Kingdom 100
Anglia Scientific Instruments Limited United Kingdom 100
Shandon Southern Instruments Limited United Kingdom 100
Life Sciences International (Benelux) B.V. Netherlands 100
Shandon Inc. Pennsylvania 100
E-C Apparatus Corporation Florida 100
Whale Scientific Corporation Colorado 100
ALKO Diagnostic Corporation Massachusetts 100
TBA Nucleonics Holding Corporation Delaware 100
Thermo Nucleonics LLC Delaware 49
TBA Securities Corporation Massachusetts 100
Shandon GmbH Germany 100
Thermo BioAnalysis GmbH Germany 100
Hybaid GmbH Germany 100
Angewandte Gentechnologie Systems GmbH Germany 100
Labsystems GmbH Germany 100
Thermo LabSystems Vertriebs GmbH Germany 100
Thermo BioAnalysis (Guernsey) Ltd. Channel Islands 100
Thermo BioAnalysis Holdings, Limited United Kingdom 100
Thermo Fast U.K. Limited United Kingdom 100
Dynex Technologies Limited United Kingdom 100
Thermo BioAnalysis Limited United Kingdom 100
Thermo LabSystems Limited United Kingdom 100
Thermo BioAnalysis S.A. France 100
Thermo LabSystems S.A.R.L. France 100
Labsystems S.A.R.L. France 100
Thermo LabSystems (Australia) Pty Limited Australia 100
Thermo LabSystems Inc. Massachusetts 100
BioAnalysis LabSystems, S.A. Spain 100
Trace Scientific Limited Australia 100
11
<PAGE>
Trace BioSciences Ltd. Australia 100
Trace BioSciences NZ Limited New Zealand 99
Trace America, Inc. Florida 100
Herbos Dijaganosticka Croatia 50
Shanghai Long March Chiron Trace Medical Science Co. China 22
Ltd.
Thermo Environmental Instruments Inc. California 100
Andersen Instruments Inc. Delaware 100
Andersen Instruments Limited United Kingdom 100
MIE Corporation Massachusetts 100
Thermo Instruments do Brasil Ltda. Brazil 100
(1% of which shares are owned directly
by Thermo Jarrell Ash Corporation)
Van Hengel Holding B.V. Netherlands 100
Thermo Instrument Systems B.V. Netherlands 100
Euroglas B.V. Netherlands 100
Mesure de Traces Netherlands 100
ThIS Automation B.V. Netherlands 100
This Analytical B.V. Netherlands 100
This Gas Analysis B.V. Netherlands
This Lab Systems B.V. Netherlands 100
This Scientific B.V. Netherlands 100
Thermo Instruments GmbH Germany 100
Thermo Jarrell Ash, S.A. Spain 100
Thermo Vision Corporation Delaware 78.27**
(additionally, 1.27%** of the shares are owned
directly by The Thermo Electron Companies Inc.)
CID Technologies Inc. New York 100
Centro Vision Inc. Delaware 100
Hilger Crystals Limited United Kingdom 100
Laser Science, Inc. Delaware 100
Oriel Instruments Corporation Delaware 100
Thermo Vision Opticon Corporation Delaware 100
Thermo Power Corporation Massachusetts 78.62**
NuTemp, Inc. Illinois 100
Peek Limited Scotland 100
Peek Data Limited England 100
Peek Group Services Limited England 100
Dubilier Warminster Limited England 100
International Resistance Co Limited England 100
Minicircuits Limited England 100
Peek International Limited England 100
Peek Corporation Delaware 100
Peek Traffic Inc. Delaware 100
Peek Traffic Systems Inc. Florida 100
Saratec Measurement Inc. Florida 100
Signal Control Company Delaware 100
Signal Maintenance, Inc. Delaware 100
StreeterAmet Inc. Delaware 100
Peek Traffic USA Inc. Florida 100
Peek Traffic GmbH Germany 100
12
<PAGE>
Peek International B.V. Netherlands 100
Peek Projects BV Netherlands 100
Peek Promet doo Croatia 100
Peek Traffic A.B. Sweden 100
Peek Trafikk AS Norway 100
Peek Parking Systems AB Sweden 100
Peek Trafik a-s Denmark 100
Peek Traffic B.V. Netherlands 100
Peek Limited Hong Kong 100
Peek Trafikk Sendirian Bermad Malaysia 100
Peek Traffic (Thailand) Limited Thailand 100
Sichuan Modern Control System Engineering
Company Limited China 41*
Peek Traffic OY Finland 100
Peek Investments, Limited England 100
Dubilier America, Inc. Delaware 100
Automatic Connector Inc. New York 100
Peek Systems Limited England 100
Sotwell Limited England 100
Peek Technology Limited England 100
Peek Traffic Limited England 100
GK Instruments Limited England 100
Sarasota Traffic Limited England 100
Streeteramet Limited England 100
Weighwrite Limited England 100
Radley Services Limited England 100
Atest Electronics Limited England 100
Bartsign Limited England 100
Greenpar Holdings Limited England 100
Helvetia Automatic Products Limited England 100
Peek Field Services Limited England 100
Peek Traffic Systems B.V. Netherlands 100
Radley (1) Limited England 100
Smartways Limited England 100
Tollstar Limited England 100
Takepine Limited United Kingdom 100
Tecogen Securities Corporation Massachusetts 100
ThermoLyte Corporation Delaware 98**
Optronics, Inc. Oklahoma 100
Thermo TerraTech Inc. Delaware 85.95**
Holcroft (Canada) Limited Canada 100
Holcroft Corporation Delaware 100
Holcroft GmbH Germany 100
Metallurgical, Inc. Minnesota 100
Cal-Doran Metallurgical Services, Inc. California 100
Metal Treating Inc. Wisconsin 100
Normandeau Associates, Inc. New Hampshire 100
TMA/Hanford, Inc. Washington 100
13
<PAGE>
The Randers Killam Group Inc. Delaware 94.81**
(additionally, 0.99%** of the shares are owned
directly by Thermo Electron Corporation)
Clark-Trombley Consulting Engineers, Inc. Michigan 100
Randers Engineering, Inc. Michigan 100
Randers Engineering of Massachusetts, Inc. Michigan 100
Randers Group Property Corporation Michigan 100
Redeco Incorporated Michigan 100
Viridian Technology Incorporated Michigan 100
The Killam Group, Inc. Delaware 100
CarlanKillam Consulting Group, Inc. Florida 100
CarlanKillam Consulting Group of Alabama, Inc. Alabama 100
Thermo Consulting & Design Inc. Delaware 100
Engineering Technology and Knowledge Corporation Delaware 100
Elson T. Killam Associates, Inc. New Jersey 100
BAC Killam Inc. New York 100
N.H. Bettigole Co., Inc. Delaware 100
N.H. Bettigole P.A. New Jersey 100
N.H. Bettigole P.C. New York 100
CarlanKillam Construction Services, Inc. Florida 100
Duncan, Lagnese and Associates, Pennsylvania 100
Incorporated
E3-Killam, Inc. New York 100
Killam Associates, Inc. Ohio 100
Killam Management and Operational New Jersey 100
Services, Inc.
Fellows, Read & Associates, Inc. New Jersey 100
Killam Associates, New England Inc. Delaware 100
George A. Schock & Associates, Inc. New Jersey 100
Jennison Engineering, Inc. Vermont 100
Thermo Analytical Inc. Delaware 100
Skinner & Sherman, Inc. Massachusetts 100
Thermo EuroTech (Delaware) Inc. Delaware 77.83**
(additionally, 10.79% of the shares are owned
directly by The Thermo Electron Companies Inc.)
Thermo EuroTech N.V. Netherlands
Thermo EuroTech Ireland Ltd. Ireland 100
Green Sunrise Holdings Ltd. Ireland 70
AutoRod Ltd. Ireland 100
Green Sunrise Industries Ltd. Ireland 100
GreenStar Recycling Ltd. Ireland 100
Pipe & Drain Services Ltd. Ireland 100
GreenStar Products Ltd. Ireland 70
Grond- & Watersaneringstechniek Nederland B.V. Netherlands 100
Refining & Trading Holland B.V. Netherlands 100
14
<PAGE>
ThermoRetec Corporation Delaware 69.12**
(additionally, 1.89%** of the shares are owned
directly by The Thermo Electron Companies Inc.)
Benchmark Environmental Corporation New Mexico 100
Eberline Holdings Inc. Delaware 100
Eberline Analytical Corporation New Mexico 100
Thermo Hanford Inc. Delaware 100
TMA/NORCAL Inc. California 100
ThermoRetec Construction Corporation Virginia 100
ThermoRetec Resource Planning & Management Systems Connecticut 100
Corporation
ThermoRetec Consulting Corporation Delaware 100
GeoWest Golden Inc. Colorado 100
GeoWest TriTechnics of Ohio, LLC Colorado 100
Retec North Carolina, Inc. North Carolina 100
Retec Engineering P.C. New York 100
RETEC Thermal, Inc. Delaware 100
Thermo Fluids Inc. Delaware 100
TPS Technologies Inc. Florida 100
TPST Soil Recyclers of California Inc. California 100
California Hydrocarbon, Inc. Nevada 100
TPST Soil Recyclers of Maryland Inc. Maryland 100
Todds Lane Limited Partnership Maryland 100*
(1% of which is owned directly
by TPS Technologies Inc.)
TPST Soil Recyclers of New York Inc. New York 100
TPST Soil Recyclers of Oregon Inc. Oregon 100
TPST Soil Recyclers of South Carolina Inc. Delaware 100
TPST Soil Recyclers of Virginia Inc. Delaware 100
TPST Soil Recyclers of Washington Inc. Washington 100
TRI Oak Ridge Inc. Delaware 100
TRI Oak Ridge LLC Delaware 50
(additionally, 50% of the shares are owned
directly by Coleman Services Incorporated)
TRUtech L.L.C. Delaware 47.5*
Thermo Securities Corporation Delaware 100
Thermo Technology Ventures Inc. Idaho 100
Plasma Quench Investment Limited Partnership Delaware 60*
ThermoTrex Corporation Delaware 63.90**
ThermoLase Corporation Delaware 71.09**
(additionally, 8.47%** of the shares are owned
directly by The Thermo Electron Companies Inc.)
Creative Beauty Innovations, Inc. Texas
100
The Greenhouse Spa, Inc. Pennsylvania 100
ThermoLase England L.L.C. Delaware 50*
ThermoLase UK Limited United Kingdom 100
ThermoLase France L.L.C. Delaware 71.05*
ThermoDess S.A.S. France 71.05*
15
<PAGE>
ThermoLase International L.L.C. Delaware 35*
ThermoLase Japan L.L.C. Wyoming
50*
Thira Japan, Inc. Japan 100
ThermoTrex East Inc. Massachusetts 100
Trex Medical Corporation Delaware 70.20**
(additionally, 6.88%** of the shares are owned
directly by The Thermo Electron Companies Inc.)
Bennett X-Ray Corporation New York 100
Bennett International Corporation U.S. Virgin Islands 100
Eagle X-Ray, Inc. New York 100
Island X-Ray Incorporated New York 100
Continental X-Ray Corporation Delaware
100
Trex Medical France S.A. France 100
Societe Financiere Trophy S.A. France 100
Trophy Radiologie S.A. France 100
Stephan'X S.A. France 100
Trophy Benelux S.A. Belgium 100
Trophy Radiologie Italia S.R.L. Italy 100
Trophy Radiologie Japan Kabushiki Kaisha Japan 100
Trophy Radiologie GmbH (FRG) Germany 100
P.T. Trophy Rajawali Indonesia Indonesia 100
Trophy Radiologia Espana SL Spain 100
Trophy Rontgen Sanayi Anonim Sirketi Turkey 100
Trophy Radiologie U.K. Ltd. United Kingdom 100
Trex Trophy Dental Inc. Virginia 100
Ardet Italia S.R.L. Italy 100
SCI Boucher Debard Baudry Guillot France 100
XRE Corporation Delaware 100
Trex Communications Corporation Delaware 68.89**
CCS TrexCom, Inc. Georgia 100
Computer Communication Specialists UK Ltd United Kingdom 100
EMP TrexCom Inc. Delaware 100
LNR Communications, Inc. Delaware 100
TMO, Inc. Massachusetts 100
TMOI Inc. Delaware 100
Thermo Biomedical Inc. Delaware 100
Thermo Digital Technologies Corporation Delaware 100
Thermo Digital Technologies L.L.C. Delaware 100
Thermo Electron Export Inc. Barbados 100
(equally owned among TMO, TMD, TCA, TCK, TFT, THI, THP, TTT, TVL, TLZ, THS, TBA,
TOC, TMQ and TXM )
Thermo Electron (London) Ltd. United Kingdom 50*
Thermo Finance (UK) Limited United Kingdom 100
Thermo Foundation, Inc. Massachusetts 100
TMO THI Holdings Inc. Delaware 100
Thermo Leasing Corporation Delaware 100
Thermo Capital Company LLC Delaware 50
* Joint Venture/Partnership ** As of January 2, 1999
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
by reference of our reports dated February 16, 1999, (except with respect to the
matter discussed in Note 19, as to which the date is March 1, 1999) included in
or incorporated by reference into Thermo Electron Corporation's Annual Report on
Form 10-K for the year ended January 2, 1999, into the Company's previously
filed Registration Statement No. 33-00182 on Form S-8, Registration Statement
No. 33-8993 on Form S-8, Registration Statement No. 33-8973 on Form S-8,
Registration Statement No. 33-16460 on Form S-8, Registration Statement No.
33-16466 on Form S-8, Registration Statement No. 33-25052 on Form S-8,
Registration Statement No. 33-37865 on Form S-8, Registration Statement No.
33-37867 on Form S-8, Registration Statement No. 33-36223 on Form S-8,
Registration Statement No. 33-52826 on Form S-8, Registration Statement No.
33-52804 on Form S-8, Registration Statement No. 33-52806 on Form S-8,
Registration Statement No. 33-52800 on Form S-8, Registration Statement No.
33-37868 on Form S-3, Registration Statement No. 33-35657 on Form S-3,
Registration Statement No. 33-34752 on Form S-3, Registration Statement No.
33-39434 on Form S-3, Registration Statement No. 33-12748 on Form S-3,
Registration Statement No. 33-39773 on Form S-3, Registration Statement No.
33-40669 on Form S-3, Registration Statement No. 33-41256 on Form S-3,
Registration Statement No. 33-42694 on Form S-3, Registration Statement No.
33-43706 on Form S-3, Registration Statement No. 33-45401 on Form S-3,
Registration Statement No. 33-45603 on Form S-3, Registration Statement No.
33-50924 on Form S-3, Registration Statement No. 33-51187 on Form S-8,
Registration Statement No. 33-51189 on Form S-8, Registration Statement No.
33-54185 on Form S-3, Registration Statement No. 33-54347 on Form S-8,
Registration Statement No. 33-54453 on Form S-8, Registration Statement No.
33-59544 on Form S-3, Registration Statement No. 333-00197 on Form S-3,
Registration Statement No. 033-65237 on Form S-8, Registration Statement No.
033-61561 on Form S-8, Registration Statement No. 033-58487 on Form S-8,
Registration Statement No. 333-01277 on Form S-3, Registration Statement No.
333-01809 on Form S-3, Registration Statement No. 333-01893 on Form S-3,
Registration Statement No. 333-19549 on Form S-3, Registration Statement No.
333-19535 on Form S-8, Registration Statement No. 333-19633-01 on Form S-3,
Registration Statement No. 333-34909-01 on Form S-3, Registration Statement No.
333-14265 on Form S-8, and Registration Statement No. 333-62957 on Form S-3.
Arthur Andersen LLP
Boston, Massachusetts
March 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
ELECTRON CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 2,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 396,670
<SECURITIES> 1,150,585
<RECEIVABLES> 928,222
<ALLOWANCES> 52,607
<INVENTORY> 599,707
<CURRENT-ASSETS> 3,301,329
<PP&E> 1,291,485
<DEPRECIATION> 485,523
<TOTAL-ASSETS> 6,331,645
<CURRENT-LIABILITIES> 1,138,323
<BONDS> 2,025,531
0
0
<COMMON> 166,971
<OTHER-SE> 2,081,153
<TOTAL-LIABILITY-AND-EQUITY> 6,331,645
<SALES> 3,690,545
<TOTAL-REVENUES> 3,867,596
<CGS> 2,186,893
<TOTAL-COSTS> 2,341,065 <F1>
<OTHER-EXPENSES> 257,621 <F2>
<LOSS-PROVISION> 10,038
<INTEREST-EXPENSE> 104,035
<INCOME-PRETAX> 391,510
<INCOME-TAX> 170,680
<INCOME-CONTINUING> 176,807
<DISCONTINUED> 0
<EXTRAORDINARY> 5,094
<CHANGES> 0
<NET-INCOME> 181,901
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.07
<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>
