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 1-9786 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 Identification No.) incorporation or organization) 860 West Airport Freeway, Suite 301 Hurst, Texas 76054 (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, $.10 par value American Stock Exchange 4% Convertible Subordinated Debentures due 2005 American StockExchange 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 $273,411,000. As of January 29, 1999, the Registrant had 119,276,531 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. PART I Item 1. Business (a) General Development of Business Thermo Instrument Systems Inc. (the Company or the Registrant) 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. The businesses of Thermo Instrument operate in four instrumentation segments: Analytical, which includes the Company's 89%-owned ThermoQuest Corporation and 93%-owned Thermo Optek Corporation subsidiaries; Life Sciences, which includes 62%-owned Thermo BioAnalysis Corporation; Process Control, which includes the Company's 80%-owned ONIX Systems Inc. and 67%-owned Metrika Systems Corporation subsidiaries; and Industrial, which primarily includes the Company's 82%-owned ThermoSpectra Corporation, 78%-owned Thermo Vision Corporation, and wholly owned 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. 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. During 1998*, ONIX Systems sold shares of its common stock in an initial public offering and Thermo BioAnalysis sold shares of its common stock in a public offering for aggregate net proceeds of $102.7 million. See Note 10 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders for a description of the issuance of stock by the Company's subsidiaries. The Company historically has expanded both through the acquisition of companies and product lines and through internal development of new products and technologies. During the past several years, the Company has completed a number of complementary acquisitions that have provided additional technologies, specialized manufacturing or product development expertise, and broader capabilities in marketing and distribution. On February 22, 1999, the Company 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 acquired or received acceptances representing approximately 98% of the Spectra-Physics shares outstanding. There are 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. Spectra-Physics manufactures a wide range of laser-based instrumentation systems, primarily for the process-control, industrial measurement, construction, research, commercial, and government markets. The Company was incorporated in Delaware in May 1986 as a wholly owned subsidiary of Thermo Electron Corporation to operate the instruments businesses that were previously conducted by several Thermo Electron subsidiaries. As of January 2, 1999, Thermo Electron owned 101,865,192 shares, or 85%, of the Company's outstanding common stock. Thermo Electron is a world leader in monitoring, analytical, and biomedical instrumentation; biomedical products including heart-assist devices, respiratory-care equipment, and mammography systems; and paper recycling and papermaking equipment. Thermo Electron also develops alternative-energy systems and clean fuels, provides a range of services including industrial outsourcing and environmental-liability management, and conducts research and development in advanced imaging, laser, and electronic information-management technologies. - -------------------- * 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 Thermo Electron intends for the foreseeable future to maintain at least 80% ownership of the Company, so that it may continue to file consolidated U.S. federal and certain state income tax returns with the Company. This may require the purchase by Thermo Electron of additional shares of common stock and/or convertible debentures of the Company from time to time as the number of outstanding shares of the Company increases. These and any other purchases may be made either in the open market or directly from the Company or pursuant to conversions of the Company's 3 3/4% senior convertible note due 2000 held by Thermo Electron. See Notes 4 and 6 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders for a description of the Company's outstanding stock options and convertible obligations. During 1998, Thermo Electron purchased 2,046,300 shares of the Company's common stock in the open market at a total cost of $53.2 million. During 1998, Thermo Electron announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. As part of this reorganization, ThermoSpectra may be taken private. The public shareholders of ThermoSpectra would receive cash in exchange for their shares of common stock of ThermoSpectra. The completion of these transactions 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. 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 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 13 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 Analytical 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. 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. 3 Life Sciences 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. Process Control ONIX Systems, which became a public subsidiary of the Company in March 1998, 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 functions to enhance production efficiency, improve process and quality control, ensure regulatory compliance, and increase employee safety. 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 producers 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 of these materials. Industrial 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 that address their 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, that are used in a wide range of applications, including medical diagnostics and analytical instrumentation; semiconductor manufacturing; X-ray imaging; physics, chemistry, and biology research; and telecommunications. Thermo Instrument has wholly owned businesses, which produce instruments and complete systems for detecting and monitoring environmental pollutants generated from industrial and mobile sources and provides clinical laboratory equipment and consumables that assist in the diagnosis of various diseases. In addition, a wholly owned business of the Company has a joint venture with Thermo BioAnalysis. This company, Thermo Nucleonics LLC, was established to address the nuclear instrumentation market. (ii) and (xi) New Products; Research and Development The Company maintains active programs for the development of new technologies and the enhancement of existing products. Research and development expenses for the Company were $113.9 million, $107.6 million, and $84.1 million in 1998, 1997, and 1996, respectively (iii) Raw Materials Raw materials, components, and supplies purchased by the Company are generally either available from a number of different suppliers or from alternative sources that could be developed without a material adverse effect on the Company. To date, the Company has experienced no difficulties in obtaining these materials. 4 (iv) Patents, Licenses, and Trademarks The Company's policy is to protect its intellectual property rights, including applying for and obtaining patents when appropriate. The Company holds numerous patents related to its technologies, with additional patents pending. The Company also enters into licensing agreements with other companies in which it grants or receives rights to specific patents and technical know-how. The Company also considers technical know-how, trade secrets, and trademarks to be important to its business. (v) Seasonal Influences There are no significant seasonal influences on the Company's sales of its products. (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 The Company's backlog of firm orders at year-end 1998 and 1997 was: (In thousands) 1998 1997 - ------------------------------------------------------------------------------------- ---------- ---------- Analytical $142,607 $151,532 Life Sciences 32,183 24,973 Process Control 55,345 53,435 Industrial 53,366 68,948 --------- -------- $283,501 $298,888 ========= ======== Certain of these orders are cancelable by the customer upon payment of a cancellation charge. The Company anticipates that substantially all of the backlog as of January 2, 1999, will be shipped or completed during 1999. The Company does not believe that the level of, or changes in the level of, its backlog is necessarily indicative of intermediate or long-term trends in its business. The decreases in backlog in the Analytical and Industrial segments were principally due to a slowdown in the semiconductor and related industries and a decrease in demand in Asia. (ix) Government Contracts Not applicable. (x) Competition The Company 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. 5 In many markets, the Company competes with large analytical instrument companies such as Hewlett-Packard Co.; Perkin-Elmer Corporation; Varian Associates, Inc.; and Hitachi, Ltd. Certain products manufactured by the Company also compete with products sold by numerous smaller, specialized firms. Analytical ThermoQuest competes in each of its markets primarily on technical performance, customer service and support, and price. ThermoQuest's principal competitors include the Chemical Analysis Group of Hewlett-Packard; the MicroMass Group of Waters Corporation; Shimadzu Corporation; Perkin-Elmer; Varian; Merck Corporation; Phenomenex Inc.; and numerous regional suppliers. Thermo Optek competes in each of its markets primarily on performance, reliability, customer service, and price. Thermo Optek competes primarily with the Analytical Instruments division of Perkin-Elmer; Varian; Hewlett-Packard; SpectroAnalytical Instruments, Inc.; Shimadzu; and Physical Electronics, Inc. Life Sciences Thermo BioAnalysis competes primarily on the basis of technological innovation, performance, flexibility, function, customization, and price. Major competitors include Perkin-Elmer, Hewlett-Packard, and Waters. Process Control The Company competes in the field measurement instruments and sensors market primarily on quality and reliability, technical features, accuracy, ease of use, price, and reputation for after-market service. ONIX Systems competes with a few large competitors, including Fisher-Rosemount, a division of Emerson Electric Co., Inc.; Asea Brown Boveri (Holding) Ltd. (ABB); Elsag-Bailey Process Automation N.V., a division of ABB; and Yokogawa Electric Corporation, in each of its product areas and with many companies within specific industries. Metrika Systems competes primarily on the basis of performance and, to a lesser extent, price in the on-line coal, cement, and mineral analysis markets. Scantech Limited is the Company's primary competitor in the on-line coal and cement analysis market. Amdel of Australia is the Company's principal competitor in the on-line minerals analysis market. The market for solids and multiphase analyzers for process control is generally fragmented. Competition in the thickness-gauging business is highly fragmented with numerous competitors competing in various end-use market segments. As a result, competition varies according to the end-use segment. Metrika Systems competes primarily on the basis of quality, performance, and price. The Company has a relatively small presence within the large and varied process-control marketplace, which is extremely fragmented and is comprised of several large companies, including Fisher-Rosemount, Elsag Bailey, and Honeywell Process Control, as well as numerous smaller companies. The Company competes in this market primarily on the basis of technical performance, customer service, price, and reliability. Industrial Thermo Vision competes primarily on the basis of technical suitability, product performance, reliability, and price. Its principal competitors include Optical Coating Laboratory, Inc. and Newport Corporation. ThermoSpectra competes in each of its markets primarily on the basis of technical advances that result in new products and improved price/performance ratios and reputation among customers as a quality leader for products and services. To a lesser extent, ThermoSpectra competes on the basis of price. ThermoSpectra's principal competitors include Tektronix, Inc.; Brinkmann Instruments Inc.; Julabo USA Inc.; Hamamatsu Photonics KK; and Oxford Instruments plc. 6 The Company is a leading manufacturer of ambient air-monitoring instruments and a major manufacturer of source monitoring and worker-safety monitoring instruments. The Company competes in these markets on the basis of technical performance and reliability, as well as customer service. The Company's principal competitors include Monitor Labs Incorporated, Advanced Pollution Instruments, and Mine Safety Appliances Co. (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 As of January 2, 1999, the Company employed approximately 9,700 people. (d) Financial Information About Geographic Areas Financial information about geographic areas is summarized in Note 13 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders and is incorporated herein by reference. (e) Executive Officers of the Registrant Name Age Present Title (Fiscal Year First Became Executive Officer) ----------------------------------------------------------------- Earl R. Lewis 55 President and Chief Executive Officer (1990) Denis A. Helm 60 Executive Vice President (1986) Dr. Richard W. K. Chapman 54 Vice President (1994) Barry S. Howe 43 Vice President (1994) Theo Melas-Kyriazi 39 Chief Financial Officer (1998) Paul F. Kelleher 56 Chief Accounting Officer (1986) Each executive officer serves until his successor is chosen or appointed by the Board of Directors and qualified or until earlier resignation, death, or removal. All executive officers, except Mr. Lewis, Dr. Chapman, and Mr. Melas-Kyriazi, have held comparable positions for at least five years, either with the Company or with its parent company, Thermo Electron. Mr. Lewis was named President of the Company in March 1997 and Chief Executive Officer in January 1998. Mr. Lewis served as Chief Operating Officer of the Company from January 1996 through January 1998, as Executive Vice President from January 1996 through March 1997, as a Senior Vice President from January 1994 through January 1996, and as a Vice President from March 1992 through January 1994. Dr. Chapman has been President and Chief Executive Officer of ThermoQuest since its inception in June 1995, and served as President of Finnigan Corporation, a subsidiary of ThermoQuest, from 1992 to 1995. Mr. Melas-Kyriazi was appointed Chief Financial Officer of the Company and Thermo Electron on January 1, 1999. He joined Thermo Electron in 1986 as Assistant Treasurer, and became Treasurer in 1988. He was named President and Chief Executive Officer of ThermoSpectra in 1994, a position he held until becoming Vice President of Corporate Strategy for Thermo Electron in 1998. Mr. Melas-Kyriazi remains a Vice President of Thermo Electron. Messrs. Lewis, Helm, Chapman, and Howe are full-time employees of the Company. Messrs. Melas-Kyriazi and Kelleher are full-time employees of Thermo Electron and certain of its subsidiaries, but devote such time to the affairs of the Company as the Company's needs reasonably require. 7 Item 2. Properties The Company believes that its facilities are in good condition and are suitable and adequate for its present operations and that suitable space is readily available in the event any lease is not extended. With respect to leases expiring in the near future, in the event the Company does not renew such leases, the Company believes suitable alternate space is available for lease on acceptable terms. The location of the Company's principal properties by segment as of January 2, 1999, are: Analytical The Company owns approximately 1,553,000 square feet of office, engineering, laboratory, and production space, principally in Ohio, Wisconsin, Germany, Massachusetts, Italy, England, and California, and leases approximately 997,000 square feet of office, engineering, laboratory, and production space under leases expiring from 1999 through 2017, principally in the United Kingdom, Massachusetts, New York, and California. As of January 2, 1999, the Company had a $7.3 million mortgage loan that is secured by 200,000 square feet of property in California with a net book value of $14.9 million. Life Sciences The Company owns approximately 95,000 square feet of office, engineering, laboratory, and production space in Pennsylvania and leases approximately 748,000 square feet of office, engineering, laboratory, and production space under leases expiring from 1999 through 2016, principally in Finland, the United Kingdom, and Texas. Process Control The Company owns approximately 165,000 square feet of office, engineering, laboratory, and production space in Texas, France, and England, and leases approximately 638,000 square feet of office, engineering, laboratory, and production space under leases expiring from 1999 through 2007, principally in Texas, Maryland, and the United Kingdom. Industrial The Company owns approximately 282,000 square feet of office, engineering, laboratory, and production space, principally in Wisconsin, and leases approximately 783,000 square feet of office, engineering, laboratory, and production space under leases expiring from 1999 through 2008, principally in California, New Hampshire, Massachusetts, Germany, and the Netherlands. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 8 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, $.10 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 "Selected Financial Information" 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 Disclosure Not applicable. 9 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. 10 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a, d) Financial Statements and Schedules (1)The consolidated financial statements set forth in the list below are filed as part of this Report. (2)The consolidated 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 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 Statement Schedules filed 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, with respect to a proposed reorganization by the Company's ultimate parent corporation, Thermo Electron Corporation, involving certain of Thermo Electron's subsidiaries, including the Company. (c) Exhibits See Exhibit Index on the page immediately preceding exhibits. 11 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 INSTRUMENT SYSTEMS INC. By: /s/ Earl R. Lewis Earl R. Lewis President and 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/ Earl R. Lewis President, Chief Executive Officer, Earl R. Lewis and Director By: /s/ Theo Melas-Kyriazi Chief Financial Officer Theo Melas-Kyriazi By: /s/ Paul F. Kelleher Chief Accounting Officer Paul F. Kelleher By: /s/ Frank Borman Director Frank Borman By: /s/ George N. Hatsopoulos Director George N. Hatsopoulos By: /s/ John N. Hatsopoulos Director John N. Hatsopoulos By: /s/ Arvin H. Smith Chairman of the Board and Director Arvin H. Smith By: /s/ Polyvios C. Vintiadis Director Polyvios C. Vintiadis 12 Report of Independent Public Accountants To the Shareholders and Board of Directors of Thermo Instrument Systems Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Thermo Instrument Systems Inc.'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 18, 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 11 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 13 SCHEDULE II THERMO INSTRUMENT SYSTEMS INC. Valuation and Qualifying Accounts (In thousands) Description Provision Accounts Accounts Other (a) Balance Balance at Charged to Recovered Written Off at End Beginning Expense of Year of Year - ----------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- Allowance for Doubtful Accounts Year Ended January 2, 1999 $22,786 $ 4,169 $ 502 $(7,221) $ 3,490 $ 23,726 Year Ended January 3, 1998 $16,981 $ 4,366 $ 304 $(4,375) $ 5,510 $ 22,786 Year Ended December 28, 1996 $12,569 $ 2,274 $ 69 $(5,015) $ 7,084 $ 16,981 Description Balance at Established Activity Other (c) Balance Beginning as Cost of Charged to at End of Acquisitions Reserve of Year Year ------------------------------------------- ----------- -------------- ----------- ----------- ----------- Accrued Acquisition Expenses (b) Year Ended January 2, 1999 $ 21,966 $ 7,218 $ (9,517) $ (3,164) $ 16,503 Year Ended January 3, 1998 $ 20,563 $ 24,752 $(18,665) $ (4,684) $ 21,966 Year Ended December 28, 1996 $ 14,838 $ 38,782 $(26,571) $ (6,486) $ 20,563 Description Balance at Provision Activity Other (f) Balance Beginning Charged to Charged to at End of Expense (e) Reserve of Year Year -------------------------------------------- ----------- ------------- ----------- ----------- ----------- Accrued Restructuring Costs (d) Year Ended January 2, 1999 $ 244 $ 18,401 $(7,682) $ 263 $ 11,226 Year Ended January 3, 1998 $ 1,024 $ 953 $(1,733) $ - $ 244 Year Ended December 28, 1996 $ 308 $ 1,038 $ (322) $ - $ 1,024 (a) Includes allowance of businesses acquired during the year as described in Note 3 to Consolidated Financial Statements in the Company'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 $2.8 million for asset write-downs and $0.4 million for loss on division sold in 1998. (f) Represents the effect of foreign currency translation. 14 EXHIBIT INDEX Exhibit Number Description of Exhibit 2.1 Reserved. 2.2 Agreement and Release dated as of December 15, 1997, among Fisons plc, the Registrant, and Thermo Electron (filed as Exhibit 2.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9876] and incorporated herein by reference). 3.1 Amendment to Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 29, 1996 [File No. 1-9786] and incorporated herein by reference). 3.2 By-Laws of the Registrant (filed as Exhibit 3(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-9786] and incorporated herein by reference). 4.1 Subordinated Indenture, dated January 15, 1998, among the Registrant, Thermo Electron, and Bankers Trust Company as trustee, relating to $250,000,000 principal amount of 4% Convertible Subordinated Debentures due 2005 (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Commission on January 16, 1998, and incorporated herein by reference). 4.2 Senior convertible note purchase agreement by and between the Registrant and Thermo Electron as of September 15, 1993 (filed as Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 2, 1993 [File No. 1-9786] and incorporated by reference). The Registrant hereby 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 subsidiaries. 10.1 Amended and Restated Corporate Services Agreement, dated as of January 3, 1993, between Thermo Electron and the Registrant (filed as Exhibit 10(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-9786] and incorporated herein by reference). 10.2 Tax Allocation Agreement dated as of May 29, 1986, between Thermo Electron and the Registrant (filed as Exhibit 10(b) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6762] and incorporated herein by reference). 10.3 Thermo Electron Corporate Charter, as amended and restated effective January 3, 1993 (filed as Exhibit 10(f) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-9786] and incorporated herein by reference). 10.4 Form of Indemnification Agreement with Directors and Officers (filed as Exhibit 10(g) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 [File No. 1-9786] and incorporated herein by reference). 10.5 Plan for sale of shares by the Registrant to Thermo Electron (filed as Exhibit 10(dd) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1993 [File No. 1-9786] and incorporated herein by reference). 10.6 Master Repurchase Agreement dated December 28, 1996, between the Registrant and Thermo Electron (filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 [File No. 1-9786] and incorporated herein by reference). 15 Exhibit Number Description of Exhibit 10.7 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated December 2, 1997, by and among the Registrant and Thermo Electron (filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.8 Restated Stock Holdings Assistance Plan and Form of Promissory Note (filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.9-10.15 Reserved. 10.16 Deferred Compensation Plan for Directors of the Registrant (filed as Exhibit 10(f) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6762] and incorporated herein by reference). 10.17 Directors' Stock Option Plan of the Registrant (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 [File No. 1-9786] and incorporated herein by reference). 10.18 Incentive Stock Option Plan of the Registrant (filed as Exhibit 10(c) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6762] 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 3,515,625 shares, after adjustment to reflect share increase approved in 1990; 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). 10.19 Nonqualified Stock Option Plan of the Registrant (filed as Exhibit 10(d) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6762] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Registrant's Incentive Stock Option Plan is 3,515,625 shares, after adjustment to reflect share increase approved in 1990; 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). 10.20 Equity Incentive Plan of the Registrant (filed as Appendix A to the Proxy Statement dated April 27, 1993, of the Registrant [File No. 1-9786] and incorporated herein by reference). (Maximum number of shares issuable is 5,039,062 shares, after adjustment to reflect share increase approved in December 1993; 3-for-2 stock splits effected in July 1993 and April 1995; and 5-for-4 stock splits effected in December 1995 and October 1997). 10.21 Finnigan Corporation 1979 Long-term Incentive Stock Option Plan (filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 [File No. 1-9786] and incorporated herein by reference). 10.22 Former Thermo Environmental Corporation Incentive Stock Option Plan (filed as Exhibit 10(d) to Thermo Environmental's Registration Statement on Form S-1 [Reg. No. 33-329] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Former Thermo Environmental Corporation Nonqualified Stock Option Plan is 1,450,195 shares, after adjustment to reflect share increase approved in 1987; 3-for-2 stock splits effected in July 1993 and April 1995; and 5-for-4 stock splits effected in December 1995 and October 1997). 16 Exhibit Number Description of Exhibit 10.23 Former Thermo Environmental Corporation Nonqualified Stock Option Plan (filed as Exhibit 10(e) to Thermo Environmental's Registration Statement on Form S-1 [Reg. No. 33-329] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Former Thermo Environmental Corporation Incentive Stock Option Plan is 1,450,195 shares, after adjustment to reflect share increase approved in 1987; 3-for-2 stock splits effected in July 1993 and April 1995; and 5-for-4 stock splits effected in December 1995 and October 1997). 10.24 Thermo Instrument Systems Inc. - ThermoSpectra Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.51 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 [File No. 1-9786] and incorporated herein by reference). 10.25 Thermo Instrument Systems Inc. - ThermoQuest Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.65 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). 10.26 Thermo Instrument Systems Inc. - Thermo BioAnalysis Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.64 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). 10.27 Thermo Instrument Systems Inc. - Thermo Optek Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 [File No. 1-9786] and incorporated herein by reference). 10.28 Thermo Instrument Systems Inc. - Metrika Systems Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.29 Thermo Instrument Systems Inc. - Thermo Vision Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.29 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.30 Thermo Instrument Systems Inc. - ONIX Systems Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). In addition to the stock-based compensation plans of the Registrant, the executive officers of the Registrant may be granted awards under stock-based compensation plans of Thermo Electron for services rendered to the Registrant. The terms of such plans are substantially the same as those of the Registrant's Equity Incentive Plan. 10.31 - 10.32 Reserved. 10.33 3 3/4% Senior Convertible Note in the principal amount of $140,000,000 dated September 15, 1993, issued to Thermo Electron (filed as Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 2, 1993 [File No. 1-9786] and incorporated herein by reference). 17 Exhibit Number Description of Exhibit 10.34 $45,000,000 Promissory Note dated as of September 12, 1997, issued by ThermoSpectra to Thermo Electron (filed as Exhibit 10 to ThermoSpectra's Quarterly Report on Form 10-Q for the quarter ended September 27, 1997 [File No. 1-13876] and incorporated herein by reference). 10.35 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 5, 1997, between Thermo Optek and Thermo Electron (filed as Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.36 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 3, 1997, between ThermoQuest and Thermo Electron (filed as Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.37 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 3, 1997, between Metrika Systems and Thermo Electron (filed as Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.38 Master Guarantee Reimbursement and Loan Agreement dated as of November 14, 1997, between Thermo Vision and Thermo Electron (filed as Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.39 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 2, 1997, between Thermo BioAnalysis and Thermo Electron (filed as Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.40 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 4, 1997, between ThermoSpectra and Thermo Electron (filed as Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.41 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of January 5, 1998, between ONIX Systems and Thermo Electron (filed as Exhibit 10.5 to the Registration Statement of ONIX Systems on Form S-1 [Reg. No. 333-45333] and incorporated herein by reference). 10.42 Fiscal Agency Agreement dated as of August 3, 1995, among ThermoQuest, Thermo Electron, and The Chase Manhattan Bank (formerly Chemical Bank) (filed as Exhibit 10.12 to ThermoQuest's Registration Statement on Form S-1 [Reg. No. 333-00276] and incorporated herein by reference). 10.43 Fiscal Agency Agreement dated as of October 12, 1995, between Thermo Optek, Thermo Electron, and The Chase Manhattan Bank (formerly Chemical Bank) (filed as Exhibit 10.10 to Thermo Optek's Registration Statement on Form S-1 [Reg. No. 333-03630] and incorporated herein by reference). 10.44 $200,000,000 Promissory Note dated as of March 3, 1999, issued by the Registrant to Thermo Electron. 18 Exhibit Number Description of Exhibit 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.