SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------------------------------- FORM 10-Q (mark one) [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended June 28, 1997. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Commission File Number 1-9786 THERMO INSTRUMENT SYSTEMS INC. (Exact name of Registrant as specified in its charter) Delaware 04-2925809 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1851 Central Drive Suite 314 Bedford, Texas 76021 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 622-1000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at July 25, 1997 ---------------------------- ---------------------------- Common Stock, $.10 par value 97,245,951 PAGE PART I - FINANCIAL INFORMATION Item 1 - Financial Statements THERMO INSTRUMENT SYSTEMS INC. Consolidated Balance Sheet (Unaudited) Assets June 28, December 28, (In thousands) 1997 1996 ------------------------------------------------------------------------ Current Assets: Cash and cash equivalents $ 459,328 $ 522,688 Available-for-sale investments, at quoted market value (amortized cost of $1,709 and $7,430) 1,713 7,452 Accounts receivable, less allowances of $23,470 and $16,981 353,206 303,331 Unbilled contract costs and fees 10,791 6,043 Inventories: Raw materials and supplies 128,282 95,920 Work in process 59,158 47,518 Finished goods 98,892 70,245 Prepaid expenses 25,240 13,417 Prepaid income taxes 64,023 58,296 ---------- ---------- 1,200,633 1,124,910 ---------- ---------- Property, Plant, and Equipment, at Cost 316,012 250,976 Less: Accumulated depreciation and amortization 84,632 72,313 ---------- ---------- 231,380 178,663 ---------- ---------- Patents and Other Assets 32,584 32,454 ---------- ---------- Cost in Excess of Net Assets of Acquired Companies (Note 3) 922,190 588,373 ---------- ---------- $2,386,787 $1,924,400 ========== ========== 2PAGE THERMO INSTRUMENT SYSTEMS INC. Consolidated Balance Sheet (continued) (Unaudited) Liabilities and Shareholders' Investment June 28, December 28, (In thousands except share amounts) 1997 1996 ------------------------------------------------------------------------ Current Liabilities: Notes payable (includes $115,000 due to parent company in 1997; Note 3) $ 184,377 $ 89,462 Accounts payable 92,295 83,161 Accrued payroll and employee benefits 52,096 51,728 Accrued income taxes 53,339 39,686 Accrued installation and warranty expenses 47,636 44,211 Accrued acquisition expenses (Note 3) 28,348 30,025 Deferred revenue 42,292 35,959 Other accrued expenses 114,977 101,646 Due to parent company 20,550 12,329 ---------- ---------- 635,910 488,207 ---------- ---------- Deferred Income Taxes 19,986 20,710 ---------- ---------- Other Deferred Items 28,328 29,805 ---------- ---------- Long-term Obligations: Senior convertible obligations (includes $140,000 due to parent company) 330,784 334,781 Subordinated convertible obligations 192,500 192,500 Other (includes $235,000 and $15,000 due to parent company; Note 3) 252,844 26,933 ---------- ---------- 776,128 554,214 ---------- ---------- Minority Interest 126,480 85,197 ---------- ---------- Shareholders' Investment: Common stock, $.10 par value, 250,000,000 shares authorized; 97,913,322 and 97,674,228 shares issued 9,791 9,767 Capital in excess of par value 321,093 319,464 Retained earnings 495,447 424,641 Treasury stock at cost, 673,391 and 750,055 shares (8,044) (8,679) Cumulative translation adjustment (18,335) 1,060 Net unrealized gain on available-for-sale investments 3 14 ---------- ---------- 799,955 746,267 ---------- ---------- $2,386,787 $1,924,400 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 3PAGE THERMO INSTRUMENT SYSTEMS INC. Consolidated Statement of Income (Unaudited) Three Months Ended ----------------------- June 28, June 29, (In thousands except per share amounts) 1997 1996 ------------------------------------------------------------------------ Revenues $405,235 $321,552 -------- -------- Costs and Operating Expenses: Cost of revenues 210,494 177,028 Selling, general, and administrative expenses 111,328 95,056 Research and development expenses 27,790 23,223 Nonrecurring costs (Note 5) 800 - -------- -------- 350,412 295,307 -------- -------- Operating Income 54,823 26,245 Interest Income 4,453 4,239 Interest Expense (includes $5,059 and $2,523 to parent company) (11,935) (7,227) Gain on Issuance of Stock by Subsidiaries (Note 4) 13,177 25,526 -------- -------- Income Before Provision for Income Taxes and Minority Interest Expense 60,518 48,783 Provision for Income Taxes 20,991 12,383 Minority Interest Expense 2,308 1,104 -------- -------- Net Income $ 37,219 $ 35,296 ======== ======== Earnings per Share: Primary $ .38 $ .37 ======== ======== Fully diluted $ .35 $ .34 ======== ======== Weighted Average Shares: Primary 97,222 95,074 ======== ======== Fully diluted 111,431 107,402 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 4PAGE THERMO INSTRUMENT SYSTEMS INC. Consolidated Statement of Income (Unaudited) Six Months Ended ----------------------- June 28, June 29, (In thousands except per share amounts) 1997 1996 ------------------------------------------------------------------------ Revenues $734,355 $547,123 -------- -------- Costs and Operating Expenses: Cost of revenues 383,942 295,235 Selling, general, and administrative expenses 200,897 160,765 Research and development expenses 51,197 39,772 Nonrecurring costs (Note 5) 800 3,500 -------- -------- 636,836 499,272 -------- -------- Operating Income 97,519 47,851 Interest Income 11,677 9,350 Interest Expense (includes $6,618 and $4,060 to parent company) (20,395) (13,517) Gain on Issuance of Stock by Subsidiaries (Note 4) 25,212 49,783 -------- -------- Income Before Provision for Income Taxes and Minority Interest Expense 114,013 93,467 Provision for Income Taxes 38,761 22,456 Minority Interest Expense 4,446 1,672 -------- -------- Net Income $ 70,806 $ 69,339 ======== ======== Earnings per Share: Primary $ .73 $ .74 ======== ======== Fully diluted $ .67 $ .67 ======== ======== Weighted Average Shares: Primary 97,146 93,474 ======== ======== Fully diluted 111,436 107,385 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 5PAGE THERMO INSTRUMENT SYSTEMS INC. Consolidated Statement of Cash Flows (Unaudited) Six Months Ended ----------------------- June 28, June 29, (In thousands) 1997 1996 ------------------------------------------------------------------------ Operating Activities: Net income $ 70,806 $ 69,339 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on accounts receivable 2,890 1,283 Depreciation and amortization 26,092 22,256 Nonrecurring costs (Note 5) 800 3,500 Gain on issuance of stock by subsidiaries (Note 4) (25,212) (49,783) Minority interest expense 4,446 1,672 Decrease in deferred income taxes (597) (109) Other noncash expenses 2,874 2,350 Changes in current accounts, excluding the effects of acquisitions: Accounts receivable (9,608) 19,264 Inventories (15,370) (7,653) Other current assets (5,983) 271 Accounts payable 11,425 (9,177) Other current liabilities (25,399) (8,249) Other (18) 170 --------- --------- Net cash provided by operating activities 37,146 45,134 --------- --------- Investing Activities: Acquisitions, net of cash acquired (Note 3) (476,420) (249,460) Purchases of available-for-sale investments - (4,650) Proceeds from sale and maturities of available-for-sale investments 5,600 - Purchases of property, plant, and equipment (10,026) (9,730) Proceeds from sale of property, plant, and equipment 4,974 1,059 Other 579 321 --------- --------- Net cash used in investing activities (475,293) (262,460) --------- --------- Financing Activities: Net proceeds from issuance of Company and subsidiaries' common stock (Note 4) 58,320 85,719 Proceeds from issuance of short-term obligations to parent company (Note 3) 115,000 95,000 Proceeds from issuance of long-term obligations to parent company (Note 3) 220,000 - Increase (decrease) in short-term obligations (7,550) 1,917 Repayment of long-term obligations (3,930) (409) --------- --------- Net cash provided by financing activities $ 381,840 $ 182,227 --------- --------- 6PAGE THERMO INSTRUMENT SYSTEMS INC. Consolidated Statement of Cash Flows (continued) (Unaudited) Six Months Ended ---------------------- June 28, June 29, (In thousands) 1997 1996 ----------------------------------------------------------------------- Exchange Rate Effect on Cash $ (7,053) $ 804 --------- --------- Decrease in Cash and Cash Equivalents (63,360) (34,295) Cash and Cash Equivalents at Beginning of Period 522,688 395,233 --------- --------- Cash and Cash Equivalents at End of Period $ 459,328 $ 360,938 ========= ========= Noncash Activities: Fair value of assets of acquired companies $ 599,409 $ 465,479 Cash paid for acquired companies (518,662) (252,088) Issuance of subsidiary stock options for acquired company (2,080) - --------- --------- Liabilities assumed of acquired companies $ 78,667 $ 213,391 ========= ========= Conversions of convertible obligations $ 3,997 $ 59,966 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 7PAGE THERMO INSTRUMENT SYSTEMS INC. Notes to Consolidated Financial Statements 1. General The interim consolidated financial statements presented have been prepared by Thermo Instrument Systems Inc. (the Company) without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the financial position at June 28, 1997, the results of operations for the three- and six-month periods ended June 28, 1997, and June 29, 1996, and the cash flows for the six-month periods ended June 28, 1997, and June 29, 1996. Interim results are not necessarily indicative of results for a full year. The consolidated balance sheet presented as of December 28, 1996, has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual financial statements and notes of the Company. The consolidated financial statements and notes included herein should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K, as amended, for the fiscal year ended December 28, 1996, filed with the Securities and Exchange Commission. 2. Presentation Certain amounts in 1996 have been reclassified to the presentation in the 1997 financial statements. 3. Acquisitions In March 1997, the Company acquired 95% of Life Sciences International PLC (Life Sciences), a London Stock Exchange-listed company. Subsequently, the Company acquired the remaining shares of Life Sciences' capital stock. The aggregate purchase price for Life Sciences was $447.9 million, net of $41.8 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 March 1997, to partially finance the acquisition of Life Sciences, the Company borrowed $210.0 million from Thermo Electron Corporation (Thermo Electron) pursuant to a promissory note due March 1999. In June 1997, to finance the repayment of Life Sciences' debt, the Company borrowed $115.0 million from Thermo Electron pursuant to a promissory note due December 1997. In August 1997, in connection with the Company's Thermo Optek Corporation (Thermo Optek) subsidiary's agreement in July 1997 to acquire Spectronic Instruments, Inc. (Spectronic) and VG Systems Limited (VG Systems) from the Company, Thermo Optek borrwoed $40.0 million from Thermo Electron pursuant to a promissory note due July 1998. Spectronic is a former subsidiary of Life Sciences and VG Systems is a business formerly part of the Scientific Instruments Division of Fisons plc (Fisons), a substantial portion of which was acquired by the Company in March 1996. The promissory notes bear interest at the 90-day 8PAGE THERMO INSTRUMENT SYSTEMS INC. 3. Acquisitions (continued) Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. In connection with the Company's ThermoSpectra Corporation (ThermoSpectra) subsidiary's agreement in July 1997 to acquire the NESLAB Instruments, Inc. (NESLAB) businesses of Life Sciences from the Company, Thermo Electron intends to lend ThermoSpectra $45.0 million pursuant to a promissory note payable in July 1999. The promissory note is expected to bear interest at the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. During the first six months of 1997, the Company made several other acquisitions for approximately $29.0 million in cash, including the repayment of $1.3 million of bank debt, the issuance of subsidiary stock options valued at an aggregate $2.1 million, and a subsidiary's issuance of a $10.0 million promissory note to Thermo Electron that is due March 1999 and bears interest at the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. The acquisitions completed in the first six months of 1997 have been accounted for using the purchase method of accounting and their results have been included in the accompanying financial statements from their respective dates of acquisition. The cost of these acquisitions exceeded the estimated fair value of the acquired net assets by $350.7 million, which is being amortized 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 is subject to adjustment upon finalization of the purchase price allocation. Based on unaudited data, the following table presents selected financial information for the Company and Life Sciences on a pro forma basis, assuming the companies had been combined since the beginning of 1996. The effect of the acquisitions not included in the pro forma data was not material to the Company's results of operations. Three Six Months Ended Months Ended ------------ --------------------- (In thousands except June 29, June 28, June 29, per share amounts) 1996 1997 1996 ------------------------------------------------------------------------ Revenues $415,201 $787,127 $722,433 Net income 38,238 55,581 68,548 Earnings per share: Primary .40 .57 .73 Fully diluted .37 .54 .66 The pro forma results are not necessarily indicative of future operations or the actual results that would have occurred had the acquisition of Life Sciences been made at the beginning of 1996. During 1996, the Company had undertaken a restructuring of a substantial portion of the businesses comprising the Scientific Instruments Division of Fisons, acquired in March 1996. During the first six months of 1997, the Company expended $10.5 million for restructuring 9PAGE THERMO INSTRUMENT SYSTEMS INC. 3. Acquisitions (continued) costs, primarily for severance and abandoned-facility payments. In connection with finalizing its restructuring plans for the businesses acquired from Fisons, the Company recorded an additional $8.1 million of acquisition reserves in the first quarter of 1997, primarily for the abandonment of excess facilities, as well as for severance pay. This amount was recorded as an increase in cost in excess of net assets of acquired companies. The remaining reserve for restructuring these businesses was $15.4 million at June 28, 1997, which primarily represents ongoing severance and abandoned-facility payments. As of June 28, 1997, the Company has accrued $28.3 million in connection with restructuring activities of all of its acquisitions, including the businesses acquired from Fisons. 4. Issuance of Stock by Subsidiaries In March 1997, the Company's ThermoQuest Corporation (ThermoQuest) subsidiary sold 1,768,500 shares of its common stock at $15.00 per share for net proceeds of approximately $25 million, resulting in a gain of approximately $12 million. Following the sale, the Company owned 90% of ThermoQuest's outstanding common stock. In June 1997, the Company's Metrika Systems Corporation (Metrika Systems) subsidiary sold 2,300,000 shares of its common stock in an initial public offering at $15.50 per share for net proceeds of approximately $33 million, resulting in a gain of $13 million. Following the initial public offering, the Company owned 60% of Metrika Systems' outstanding common stock. 5. Nonrecurring Costs In the second quarter of 1997, ThermoSpectra incurred an $0.8 million charge related to severance costs for employees terminated during the quarter at one of its business units. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the caption "Forward-looking Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996, filed with the Securities and Exchange Commission. 10PAGE THERMO INSTRUMENT SYSTEMS INC. Results of Operations Second Quarter 1997 Compared With Second Quarter 1996 Revenues increased $83.7 million, or 26%, to $405.2 million in the second quarter of 1997 from $321.6 million in the second quarter of 1996 due to acquisitions, which included Life Sciences in March 1997 (Note 3) and a substantial portion of the businesses comprising the Scientific Instruments Division of Fisons in late March 1996. Acquisitions added revenues of $88.7 million in the second quarter of 1997. In addition, revenues from ThermoQuest's existing mass spectrometry business increased, due in part to the continued success of a new product introduced in the first quarter of 1996. The increase in revenues was offset in part by a decrease of $7.7 million in revenues due to the unfavorable effects of currency translation as a result of the strengthening of the U.S. dollar relative to foreign currencies in countries in which the Company operates. International sales account for a significant portion of the Company's total revenues. Although the Company seeks to charge its customers in the same currency as its operating costs, the Company's financial performance and competitive position can be affected by currency exchange rate fluctuations. Where appropriate, the Company uses forward exchange contracts to reduce its exposure to currency fluctuations. The gross profit margin increased to 48.1% in the second quarter of 1997 from 44.9% in the second quarter of 1996, primarily due to margin improvements at certain of the businesses acquired from Fisons in 1996 and, to a lesser extent, the increase in sales of higher-margin mass spectrometry products. Selling, general, and administrative expenses as a percentage of revenues decreased to 27% in the second quarter of 1997 from 30% in the second quarter of 1996, primarily due to efforts to reduce selling and administrative costs at certain acquired businesses and the integration of products from businesses acquired from Fisons into the Company's existing distribution channels. Research and development expenses as a percentage of revenues remained relatively unchanged at 6.9% in 1997, compared with 7.2% in 1996. In the second quarter of 1997, ThermoSpectra incurred an $0.8 million charge related to severance costs for employees terminated during the quarter at one of its business units, which is classified as "Nonrecurring costs" in the accompanying 1997 statement of income. Interest income increased to $4.5 million in the second quarter of 1997 from $4.2 million in the second quarter of 1996, due to interest income earned on invested proceeds from the issuance of $172.5 million principal amount of 4 1/2% senior convertible debentures by the Company in October 1996 and, to a lesser extent, from the sale of common stock by ThermoQuest in March 1997 and Thermo BioAnalysis Corporation (Thermo BioAnalysis) and Metrika Systems in 1996. The increase in interest income was offset in part by a reduction in cash as a result of acquisitions. Interest expense increased to $11.9 million in 1997 from $7.2 million in 11PAGE THERMO INSTRUMENT SYSTEMS INC. Second Quarter 1997 Compared With Second Quarter 1996 (continued) 1996, primarily due to the issuance of an aggregate $220.0 million in promissory notes to Thermo Electron in connection with acquisitions (Note 3), 4 1/2% senior convertible debentures by the Company and, to a lesser extent, the inclusion of interest expense on debt assumed as part of the Life Sciences acquisition. The Company repaid approximately $105.0 million of Life Sciences' debt in the second quarter of 1997. The increases in interest expense were offset in part by the conversion of a portion of the Company's convertible obligations into common stock of the Company. Interest expense will increase as a result of a $40.0 million promissory note issued to Thermo Electron by Thermo Optek in August 1997, as well as a $45.0 million promissory note to be issued to Thermo Electron by ThermoSpectra, in connection with their agreements to acquire certain businesses from the Company (Note 3). The Company has adopted a strategy of spinning out certain of its businesses into separate subsidiaries and having these subsidiaries sell a minority interest to outside investors. The Company believes that this strategy provides additional motivation and incentives for the management of the subsidiaries through the establishment of subsidiary-level stock option incentive programs, as well as capital to support the subsidiaries' growth. As a result of the sale of stock by subsidiaries, the Company recorded gains of approximately $13 million in the second quarter of 1997 (Note 4) and $26 million in the second quarter of 1996. 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 realize gains from such transactions in the future. The effective tax rate increased to 35% in the second quarter of 1997 from 25% in the second quarter of 1996, primarily due to a lower nontaxable gain on issuance of stock by subsidiaries in 1997. Excluding the impact of the gain on issuance of stock by subsidiaries in 1997 and 1996, the effective tax rates in both periods exceeded the statutory federal income tax rate due to nondeductible amortization of cost in excess of net assets of acquired companies, the inability to provide a tax benefit on losses incurred at certain foreign subsidiaries, and the impact of state income taxes. Minority interest expense increased to $2.3 million in the second quarter of 1997 from $1.1 million in the second quarter of 1996, primarily due to higher earnings at ThermoQuest and Thermo BioAnalysis and, to a lesser extent, the minority interest associated with the Company's newly public Thermo Optek and Metrika Systems subsidiaries. These increases were offset in part by lower earnings at ThermoSpectra. First Six Months 1997 Compared With First Six Months 1996 Revenues increased $187.2 million, or 34%, to $734.4 million in the first six months of 1997 from $547.1 million in the first six months of 1996 due to acquisitions, which included Life Sciences in March 1997 (Note 3) and a substantial portion of the businesses comprising the Scientific Instruments Division of Fisons in late March 1996. Acquisitions added revenues of $198.3 million in the first six months 12PAGE THERMO INSTRUMENT SYSTEMS INC. First Six Months 1997 Compared With First Six Months 1996 (continued) of 1997. The increase in revenues from acquisitions was offset in part by a decrease of $15.4 million in revenues due to the unfavorable effects of currency translation as a result of the strengthening of the U.S. dollar relative to foreign currencies in countries in which the Company operates. An increase in revenues from ThermoQuest's existing mass spectrometry business, partly as a result of the continued success of a new product introduced in the first quarter of 1996, was offset in part by a decrease in revenues at certain of the Company's other existing businesses, principally at Thermo Optek. Revenues from Thermo Optek's existing businesses decreased due to the inclusion in 1996 of several large nonrecurring sales to the Chinese and Japanese governments and the elimination of certain unprofitable acquired product lines. The gross profit margin increased to 47.7% in the first six months of 1997 from 46.0% in the first six months of 1996. The increase was primarily due to an increase in ThermoQuest's gross profit margin as a result of the increase in sales of higher-margin mass spectrometry products, offset in part by the inclusion of lower-margin revenues from acquired businesses, including Life Sciences, which recorded an adjustment to expense of $3.2 million relating to the revaluation of the finished goods inventories acquired by the Company. The 1996 period included an adjustment to expense of $2.0 million for inventories revalued with the acquisition of the Fisons businesses. Selling, general, and administrative expenses as a percentage of revenues decreased to 27% in the first six months of 1997 from 29% in the first six months of 1996, primarily due to the reasons discussed in the results of operations for the second quarter. Research and development expenses as a percentage of revenues remained relatively unchanged at 7.0% in 1997, compared with 7.3% in 1996. In the first quarter of 1996, the Company wrote off $3.5 million of acquired technology in connection with the acquisition of a significant portion of the businesses comprising the Scientific Instruments Division of Fisons, which is classified as "Nonrecurring costs" in the accompanying 1996 statement of income. Interest income increased to $11.7 million in the first six months of 1997 from $9.4 million in the first six months of 1996, due to interest income earned on invested proceeds from the issuance of $172.5 million principal amount of 4 1/2% senior convertible debentures by the Company in October 1996 and, to a lesser extent, from the sale of common stock by ThermoQuest in March 1997 and in 1996 and by Thermo BioAnalysis and Metrika Systems in 1996. The increase in interest income was offset in part by a reduction in cash as a result of acquisitions. Interest expense increased to $20.4 million in 1997 from $13.5 million in 1996, primarily due to the issuance of an aggregate $220.0 million in promissory notes to Thermo Electron in connection with acquisitions (Note 3), 4 1/2% senior convertible debentures by the Company and, to a lesser extent, the inclusion of interest expense on debt assumed as part of the Fisons and Life Sciences acquisitions, which has subsequently been repaid. The increases in interest expense were offset in part by the conversion of a 13PAGE THERMO INSTRUMENT SYSTEMS INC. First Six Months 1997 Compared With First Six Months 1996 (continued) portion of the Company's convertible obligations into common stock of the Company. As a result of the sale of stock by subsidiaries, the Company recorded gains of approximately $25 million in the first six months of 1997 and $50 million in the first six months of 1996 (Note 4). The effective tax rate increased to 34% in the first six months of 1997 from 24% in the first six months of 1996, primarily due to a lower nontaxable gain on issuance of stock by subsidiaries in 1997. Excluding the impact of the gain on issuance of stock by subsidiaries in 1997 and 1996, the effective tax rates in both periods exceeded the statutory federal income tax rate due to nondeductible amortization of cost in excess of net assets of acquired companies, the inability to provide a tax benefit on losses incurred at certain foreign subsidiaries, the impact of state income taxes, and in 1996, the write-off of acquired technology in connection with the acquisition of the businesses from Fisons. Minority interest expense increased to $4.4 million in the first six months of 1997 from $1.7 million in the first six months of 1996, primarily due to the reasons discussed in the results of operations for the second quarter. Liquidity and Capital Resources Consolidated working capital was $564.7 million at June 28, 1997, compared with $636.7 million at December 28, 1996. Included in working capital are cash, cash equivalents, and available-for-sale investments of $461.0 million at June 28, 1997, and $530.1 million at December 28, 1996. Of the $461.0 million balance at June 28, 1997, $395.3 million was held by the Company's majority-owned subsidiaries and the balance was held by the Company and its wholly owned subsidiaries. The Company's operating activities provided cash of $37.1 million in the first six months of 1997. Accounts receivable increased $9.6 million primarily due to increased shipments at the end of the quarter by ThermoQuest, offset in part by improvement in accounts receivable at ThermoSpectra due in part to higher revenue levels in the fourth quarter of 1996 compared with the second quarter of 1997. An increase in inventories of $15.4 million, primarily due to replenishing year-end levels, which had decreased by $17.2 million during the fourth quarter of 1996, contributed to an increase in accounts payable of $11.4 million. Other current liabilities decreased $25.4 million, primarily due to restructuring expenditures at businesses acquired by the Company in 1996. At June 28, 1997, $92.5 million of the Company's cash and cash equivalents was held by its foreign subsidiaries. While this cash can be used outside of the United States, including for acquisitions, repatriation of this cash into the United States would be subject to foreign withholding taxes and could also be subject to a United States tax. 14PAGE THERMO INSTRUMENT SYSTEMS INC. Liquidity and Capital Resources (continued) The Company's investing activities used $475.3 million of cash in the first six months of 1997. The Company expended $476.4 million, net of cash acquired, for acquisitions, including the repayment of $106.3 million of bank debt, (Note 3) and $10.0 million for the purchase of property, plant, and equipment. The Company recorded proceeds of $5.0 million from the sale of property, plant, and equipment in the first six months of 1997. The Company's financing activities provided $381.8 million of cash in the first six months of 1997. In March 1997, to partially finance acquisitions, the Company borrowed an aggregate $220.0 million from Thermo Electron pursuant to promissory notes due March 1999 (Note 3). In March 1997, ThermoQuest sold shares of its common stock for net proceeds of approximately $25 million. In June 1997, Metrika Systems sold shares of its common stock in an initial public offering for net proceeds of approximately $33 million (Note 4). In June 1997, to finance the repayment of the debt assumed in connection with the acquisition of Life Sciences, the Company borrowed $115.0 million from Thermo Electron pursuant to a promissory note due December 1997 (Note 3). In July 1997, in connection with an acquisition, ThermoSpectra borrowed $5.0 million from Thermo Electron pursuant to a promissory note due July 1999 and bearing interest at the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. In August 1997, in connection with Thermo Optek's agreement in July 1997 to acquire Spectronic and VG Systems from the Company, Thermo Optek borrowed $40.0 million from Thermo Electron pursuant to a promissory note due July 1998 (Note 3). In connection with ThermoSpectra's agreement in July 1997 to acquire NESLAB from the Company, Thermo Electron intends to lend ThermoSpectra $45.0 million pursuant to a promissory note payable in July 1999 (Note 3). The Company expects to repay its $115.0 million promissory note to Thermo Electron with proceeds from the sale of certain of its wholly owned businesses to its majority-owned subsidiaries. During the remainder of 1997, the Company plans to make expenditures of approximately $15 million for property, plant, and equipment. The Company believes that its existing resources are sufficient to meet the capital requirements of its existing operations for the foreseeable future. The Company has historically complemented internal development with acquisitions of businesses or technologies that extend the Company's presence in current markets or provide opportunities to enter and compete effectively in new markets. The Company will consider making acquisitions of such businesses or technologies that are consistent with its plans for strategic growth. The Company expects that it will finance these acquisitions through a combination of internal funds, additional debt or equity financing from the capital markets, or short-term borrowings from Thermo Electron, although there is no agreement with Thermo Electron to ensure that funds will be available on acceptable terms or at all. 15PAGE THERMO INSTRUMENT SYSTEMS INC. PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders On June 2, 1997, at the Annual Meeting of Shareholders, the shareholders elected five incumbent directors to a one-year term expiring in 1998. The directors reelected at the meeting were: Frank Borman, Dr. George N. Hatsopoulos, John N. Hatsopoulos, Arvin H. Smith, and Polyvios C. Vintiadis. Mr. Borman received 91,902,732 shares voted in favor of election and 52,188 shares voted against; Dr. G. Hatsopoulos and Mr. J. Hatsopoulos each received 91,916,373 shares voted in favor of election and 38,547 shares voted against; Mr. Smith received 91,916,454 shares voted in favor of election and 38,466 shares voted against; and Mr. Vintiadis received 91,916,161 shares voted in favor of election and 38,759 shares voted against. No abstentions or broker nonvotes were recorded on the election of directors. The shareholders also approved a proposal to extend the term of the Company's employees' stock purchase program to November 2, 2005, as follows: 91,796,986 shares voted in favor, 106,644 shares voted against, and 51,290 shares abstained. No broker nonvotes were recorded on the proposal. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index on the page immediately preceding exhibits. (b) Reports on Form 8-K On April 4, 1997, the Company filed a Current Report on Form 8-K pertaining to its acquisition of Life Sciences International PLC. On June 9, 1997, the Company filed an amendment on Form 8-K/A, the purpose of which was to file the financial information required by Form 8-K concerning this acquisition. 16PAGE THERMO INSTRUMENT SYSTEMS INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 6th day of August 1997. THERMO INSTRUMENT SYSTEMS INC. Paul F. Kelleher ---------------------------- Paul F. Kelleher Chief Accounting Officer John N. Hatsopoulos ---------------------------- John N. Hatsopoulos Vice President and Chief Financial Officer 17PAGE THERMO INSTRUMENT SYSTEMS INC. EXHIBIT INDEX Exhibit Number Description of Exhibit ------------------------------------------------------------------------ 10 $115,000,000 Promissory Note dated as of June 24, 1997, issued by the Company to Thermo Electron Corporation. 11 Statement re: Computation of Earnings per Share. 27 Financial Data Schedule.