Exhibit 13
ThermoSpectra Corporation
Consolidated Financial Statements
1998
ThermoSpectra Corporation 1998 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Revenues (Notes 8 and 12) $ 191,017 $198,900 $ 123,199
--------- -------- ---------
Costs and Operating Expenses:
Cost of revenues (Note 8) 110,915 115,747 62,900
Selling, general, and administrative expenses (Note 8) 53,643 53,182 36,493
Research and development expenses 16,298 17,303 12,910
Restructuring costs (Note 4) 4,320 953 1,038
Other nonrecurring income (Notes 3 and 4) (102) (2,210) (867)
--------- -------- ---------
185,074 184,975 112,474
--------- -------- ---------
Operating Income 5,943 13,925 10,725
Interest Income 1,333 692 935
Interest Expense (3) (66) -
Interest Expense, Related Party (Note 8) (4,334) (4,151) (773)
Gain on Sale of Investment (Note 3) 713 - -
--------- -------- ---------
Income Before Provision for Income Taxes 3,652 10,400 10,887
Provision for Income Taxes (Note 6) 1,827 4,552 4,270
--------- -------- ---------
Net Income $ 1,825 $ 5,848 $ 6,617
========= ======== =========
Earnings per Share (Note 13)
Basic $ .12 $ .40 $ .53
========= ======== =========
Diluted $ .12 $ .39 $ .53
========= ======== =========
Weighted Average Shares (Note 13)
Basic 15,324 14,694 12,437
========= ======== =========
Diluted 15,354 14,806 12,570
========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
ThermoSpectra Corporation 1998 Financial Statements
Consolidated Balance Sheet
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Assets
Current Assets:
Cash and cash equivalents $ 20,717 $ 20,672
Available-for-sale investments, at quoted market value (cost of $2,056 in - 2,083
1997; Note 2)
Accounts receivable, less allowances of $2,386 and $1,934 41,016 43,015
Inventories 31,745 34,785
Prepaid income taxes (Note 6) 10,188 7,337
Other current assets 2,271 1,774
--------- ---------
105,937 109,666
--------- ---------
Property, Plant, and Equipment, at Cost, Net 16,991 20,391
--------- ---------
Patents, Trademarks, and Other Assets 7,280 8,108
--------- ---------
Cost in Excess of Net Assets of Acquired Companies (Note 3) 119,674 115,232
--------- ---------
$ 249,882 $ 253,397
========= =========
3
ThermoSpectra Corporation 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable to Thermo Electron (Notes 3 and 8) $ 60,000 $ 15,000
Accounts payable 11,822 12,842
Accrued payroll and employee benefits 6,239 6,987
Accrued installation and warranty expenses 4,362 4,495
Deferred revenue 4,360 4,695
Accrued income taxes 3,735 2,050
Other accrued expenses (Notes 3 and 4) 13,143 8,496
Due to affiliated companies 4,528 1,561
--------- ---------
108,189 56,126
--------- ---------
Deferred Income Taxes (Note 6) 1,651 356
--------- ---------
Other Deferred Items 1,907 1,277
--------- ---------
Long-term Obligations, Due to Related Party (Notes 3 and 8) 7,300 67,300
--------- ---------
Commitments and Contingencies (Notes 7 and 8)
Shareholders' Investment (Notes 3, 5, and 10):
Common stock, $.01 par value, 25,000,000 shares authorized; 15,327,620 153 153
and 15,313,506 shares issued
Capital in excess of par value 111,549 111,262
Retained earnings 19,763 17,938
Treasury stock at cost, 423 shares (7) (7)
Accumulated other comprehensive items (Note 14) (623) (1,008)
--------- ---------
130,835 128,338
--------- ---------
$ 249,882 $ 253,397
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
ThermoSpectra Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Operating Activities
Net income $ 1,825 $ 5,848 $ 6,617
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,073 6,615 4,493
Provision for losses on accounts receivable 689 521 199
Gain on sales of building, investment, and business, net (Note 3) (815) (2,210) -
Other noncash expenses 2,554 1,417 839
Deferred income tax benefit (1,432) (40) (796)
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable 3,597 (733) (3,444)
Inventories 3,260 4,873 (3,105)
Other current assets (170) (81) 335
Accounts payable (1,988) (2,330) 2,123
Due to affiliated companies 2,967 (2,699) 426
Other current liabilities 3,841 (2,829) (2,238)
Other (343) 34 (21)
--------- --------- ---------
Net cash provided by operating activities 21,058 8,386 5,428
--------- --------- ---------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (7,943) (21,142) (22,521)
Proceeds from sale of product lines and business (Note 3) 750 4,980 -
Refund of acquisition purchase price (Note 4) - - 1,103
Purchases of property, plant, and equipment (2,199) (2,595) (2,762)
Proceeds from sale of property, plant, and equipment 2,052 91 168
Proceeds from sale and maturities of available-for-sale investments 2,769 - 3,000
(Note 3)
Purchases of available-for-sale investments - - (3,000)
Other, net (111) (926) (733)
--------- --------- ---------
Net cash used in investing activities (4,682) (19,592) (24,745)
--------- --------- ---------
Financing Activities
Repayment of long-term obligation to Thermo Electron (15,000) - -
Proceeds from issuance of long-term obligations to Thermo - 60,000 15,000
Electron (Note 8)
Payment to Thermo Instrument for debt assumed in connection - (44,907) -
with acquisition of NESLAB (Note 3)
Net proceeds from issuance of Company common stock 48 561 74
Other 239 (674) 552
--------- --------- ---------
Net cash provided by (used in) financing activities (14,713) 14,980 15,626
--------- --------- ---------
Exchange Rate Effect on Cash (1,618) 318 (35)
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents 45 4,092 (3,726)
Cash and Cash Equivalents at Beginning of Year 20,672 16,580 20,306
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 20,717 $ 20,672 $ 16,580
========= ========= =========
5
ThermoSpectra Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ----------
Cash Paid For
Interest $ 4,335 $ 4,217 $ 773
Income Taxes $ 1,158 $ 4,490 $ 3,419
Noncash Activities
Common stock received from sale of business (Note 3) $ - $ 2,056 $ -
Fair value of assets of acquired companies $ 10,519 $ 114,495 $ 29,757
Cash paid for acquired companies (7,967) (24,379) (22,525)
Stock options issued in connection with acquisition of PSI - (1,693) -
Stock issuable to Thermo Instrument in connection with - (31,315) -
acquisition of NESLAB
Debt assumed in connection with acquisition of NESLAB - (44,907) -
--------- --------- ---------
Liabilities assumed of acquired companies $ 2,552 $ 12,201 $ 7,232
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
ThermoSpectra Corporation 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Comprehensive Income
Net Income $ 1,825 $ 5,848 $ 6,617
--------- -------- ---------
Other Comprehensive Items, Net (Note 14):
Foreign currency translation adjustment 412 (776) 23
Unrealized gain (loss) on available-for-sale investments (27) 27 -
--------- -------- ---------
385 (749) 23
--------- -------- ---------
$ 2,210 $ 5,099 $ 6,640
========= ======== =========
Shareholders' Investment
Common Stock, $.01 Par Value:
Balance at beginning of year $ 153 $ 124 $ 124
Stock issued to Thermo Instrument in connection with acquisition - 28 -
of NESLAB (Note 3)
Issuance of Company common stock - 1 -
--------- -------- ---------
Balance at end of year 153 153 124
--------- -------- ---------
Capital in Excess of Par Value:
Balance at beginning of year 111,262 77,416 76,955
Stock issued to Thermo Instrument in connection with acquisition - 31,287 -
of NESLAB (Note 3)
Stock options issued in connection with acquisition of PSI (Note 3) - 1,693 -
Issuance of Company common stock 48 562 79
Capital contribution from parent company 125 - -
Tax benefit related to employees' and directors' stock plans 114 304 382
--------- -------- ---------
Balance at end of year 111,549 111,262 77,416
--------- -------- ---------
Retained Earnings:
Balance at beginning of year 17,938 12,345 5,728
Net income 1,825 5,848 6,617
Deemed distribution to Thermo Instrument in connection with - (255) -
acquisition of NESLAB (Note 3) --------- -------- ---------
Balance at end of year 19,763 17,938 12,345
--------- -------- ---------
Treasury Stock:
Balance at beginning of year (7) (5) -
Purchases of Company common stock - (2) (5)
--------- -------- ---------
Balance at end of year (7) (7) (5)
--------- -------- ---------
Accumulated Other Comprehensive Items (Note 14):
Balance at beginning of year (1,008) (259) (282)
Other comprehensive items, net 385 (749) 23
--------- -------- ---------
Balance at end of year (623) (1,008) (259)
--------- -------- ---------
$ 130,835 $128,338 $ 89,621
========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
ThermoSpectra Corporation (the Company) develops, manufactures, and
markets imaging and inspection, temperature control, and test and measurement
instruments, which represent 45%, 32%, and 23% of the Company's 1998 revenues,
respectively. The Company sells its products on a worldwide basis (Note 12).
Relationship with Thermo Instrument Systems Inc. and Thermo Electron Corporation
The Company was incorporated in August 1994 as an indirect, wholly owned
subsidiary of Thermo Instrument Systems Inc. As of January 2, 1999, Thermo
Instrument owned 12,637,417 shares of the Company's common stock, representing
82% of such stock outstanding. Thermo Instrument is an 85%-owned subsidiary of
Thermo Electron Corporation. As of January 2, 1999, Thermo Electron owned
1,491,453 shares of the Company's common stock, representing 10% of such stock
outstanding.
On August 12, 1998, Thermo Electron announced a proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company. As
part of this reorganization, Thermo Electron announced that the Company may be
taken private (Note 15).
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1998, 1997, and 1996 are for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996, respectively. Fiscal years 1998
and 1996 each included 52 weeks; 1997 included 53 weeks.
Revenue Recognition
The Company recognizes product revenue upon shipment. The Company provides
a reserve for its estimate of warranty and installation costs at the time of
shipment. Deferred revenue in the accompanying balance sheet consists of
unearned revenue on service contracts, which is recognized as revenue over the
life of the service contract. Substantially all of the deferred revenue included
in the accompanying 1998 balance sheet will be recognized within one year.
Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," software development costs are expensed as incurred until
technological feasibility has been established. The Company believes that, under
its current process for developing software, the software is essentially
completed concurrently with the establishment of technological feasibility.
Accordingly, no software development costs have been capitalized.
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 5). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
8
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Income Taxes
The Company's initial public offering in August 1995 resulted in a
reduction of Thermo Instrument's equity ownership of the Company below 80% and,
as a result, the Company was required to file its own federal income tax returns
for 1996 through 1998. Thermo Instrument's equity ownership of the Company now
exceeds 80%, therefore, effective January 3, 1999, the Company will be included
in Thermo Electron's consolidated tax return as provided for under a tax
allocation agreement between the Company and Thermo Instrument. This agreement
provides that, in years that the Company has taxable income, the Company will
pay to Thermo Instrument amounts comparable to the taxes the Company would have
paid if it had filed separate tax returns.
In accordance with SFAS No. 109, "Accounting for Income Taxes," the
Company recognizes deferred income taxes based on the expected future tax
consequences of differences between the financial statement basis and the tax
basis of assets and liabilities, calculated using enacted tax rates in effect
for the year in which the differences are expected to be reflected in the tax
return.
Earnings per Share
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the year. Diluted earnings
per share have been computed assuming the exercise of stock options, as well as
their related income tax effects.
Cash and Cash Equivalents
At year-end 1998 and 1997, $10,323,000 and $14,311,000, respectively, of
the Company's cash equivalents were invested in a repurchase agreement with
Thermo Electron. Under this agreement, the Company in effect lends excess cash
to Thermo Electron, which Thermo Electron collateralizes with investments
principally consisting of corporate notes, U.S. government-agency securities,
commercial paper, money market funds, and other marketable securities, in the
amount of at least 103% of such obligation. The Company's funds subject to the
repurchase agreement are readily convertible into cash by the Company. The
repurchase agreement earns a rate based on the 90-day Commercial Paper Composite
Rate plus 25 basis points, set at the beginning of each quarter.
At year-end 1998, $147,000 of the Company's cash equivalents, denominated
in Dutch guilders, were invested in a repurchase agreement with a wholly owned
subsidiary of Thermo Electron under terms similar to those outlined in the above
agreement, except that the rate earned is based on Netherlands market rates, set
at the beginning of each month.
The Company, along with other subsidiaries of Thermo Electron,
participates in a notional pool arrangement with Barclays Bank, which includes a
$71 million credit facility. The Company has access to $2,423,000 under this
credit facility, which is included in the amount available for use as discussed
in Note 9. Only U.K.-based subsidiaries of Thermo Electron participate in this
arrangement. Under this arrangement, Barclays notionally combines the positive
and negative cash balances held by the participants to calculate the net
interest yield/expense for the group. The benefit derived from this arrangement
is then allocated based on balances attributable to the respective participants.
Thermo Electron guarantees all of the obligations of each participant in this
arrangement. At year-end 1998 and 1997, the Company had a positive cash balance
under this arrangement of $1,958,000 and $44,000, respectively.
At year-end 1998 and 1997, the Company's cash equivalents also included
investments in short-term certificates of deposit held by the Company's foreign
operations, which have an original maturity of three months or less. Cash
equivalents are carried at cost, which approximates market value.
9
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market value and include materials, labor, and manufacturing overhead.
The components of inventories are:
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------- -------- ---------
Raw Materials and Supplies $18,355 $ 16,850
Work in Process 5,899 7,096
Finished Goods 7,491 10,839
------- --------
$31,745 $ 34,785
======= ========
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: buildings and improvements, 5 to 30
years; machinery and equipment, 2 to 10 years; and leasehold improvements, the
shorter of the term of the lease or the life of the asset. Property, plant, and
equipment consists of:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Land $ 2,424 $ 3,067
Buildings 6,238 6,910
Machinery, Equipment, and Leasehold Improvements 21,855 21,131
------- --------
30,517 31,108
Less: Accumulated Depreciation and Amortization 13,526 10,717
------- --------
$16,991 $ 20,391
======= ========
Patents, Trademarks, and Other Assets
Patents, trademarks, and other assets in the accompanying balance sheet
includes the costs of acquired patents and trademarks that are amortized using
the straight-line method over an estimated useful life of 3 to 20 years. These
assets were $4,028,000 and $4,826,000, net of accumulated amortization of
$2,965,000 and $2,135,000, at year-end 1998 and 1997, respectively.
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method over 40 years. Accumulated
amortization was $8,015,000 and $4,927,000 at year-end 1998 and 1997,
respectively. The Company assesses the future useful life of this asset whenever
events or changes in circumstances indicate that the current useful life has
diminished. The Company considers the future undiscounted cash flows of the
acquired businesses in assessing the recoverability of this asset. If impairment
occurs, any excess of carrying value over fair value is recorded as a loss.
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment
(Note 14). Foreign currency transaction gains and losses are included in the
accompanying statement of income and are not material for the three years
presented.
10
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Forward Contracts
The Company uses short-term forward foreign exchange contracts to manage
exposures related to firm purchase and sale commitments that are denominated in
currencies other than its subsidiaries' local currencies. These contracts
principally hedge transactions denominated in U.S. dollars, British pound
sterling, Japanese yen, French francs, and German marks. The purpose of the
Company's foreign currency hedging activities is to protect the Company's local
currency cash flows related to these commitments from fluctuations in foreign
exchange rates. Gains and losses arising from forward foreign exchange contracts
are recorded as an offset to the gains and losses resulting from the
transactions being hedged. The Company does not enter into speculative foreign
currency agreements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
Certain amounts in 1997 and 1996 have been reclassified to conform to the
presentation in the 1998 financial statements.
2. Available-for-sale Investments
The Company's marketable equity securities are considered
available-for-sale investments and are carried at market value, with the
difference between cost and market value, net of related tax effects, recorded
in the "Accumulated Other Comprehensive Items" component of shareholders'
investment. Available-for-sale investments in the accompanying 1997 balance
sheet represent common stock received in connection with the sale of its Linac
business (Note 3).
3. Acquisitions and Dispositions
Acquisitions
In October 1998, the Company acquired the assets, subject to certain
liabilities, of TopoMetrix Corporation, a scanning probe microscope
manufacturing business, for approximately $7,967,000 in cash, subject to a
post-closing adjustment. The cost of this acquisition exceeded the estimated
fair value of the net assets by $7,061,000. The businesses of Park Scientific
Instruments Corporation (PSI) and TopoMetrix were combined and renamed
ThermoMicroscopes Corporation.
In July 1997, the Company acquired Sierra Research and Technology Inc.
(SRT), a manufacturer of systems used for the rework and repair of printed
circuit boards, for $7,638,000 in cash. The cost of this acquisition exceeded
the estimated fair value of the net assets by $6,368,000. To partially finance
the acquisition, the Company borrowed $5,000,000 from Thermo Electron (Note 8).
In March 1997, Thermo Instrument acquired Life Sciences International PLC
(LSI), a London Stock Exchange-listed company. In July 1997, the Company agreed
to acquire NESLAB Instruments, Inc. and its related sales and service entity,
NESLAB Instruments Europa BV in the Netherlands, (collectively, NESLAB), a
global supplier of temperature control systems and former LSI subsidiary, from
Thermo Instrument for $76,222,000. The purchase price represents the sum of the
net tangible book value of the business as of June 28, 1997, plus a percentage
of Thermo Instrument's total cost in excess of net assets acquired associated
with its acquisition of LSI, based on NESLAB's 1996 revenues relative to LSI's
1996 consolidated revenues.
11
3. Acquisitions and Dispositions (continued)
The purchase price of NESLAB consisted of 2,759,042 shares of Company
common stock valued at $31,315,000 issued to Thermo Instrument and the
assumption of $44,907,000 of debt to Thermo Instrument, which was subsequently
paid. To repay the debt assumed from Thermo Instrument, the Company borrowed
$45,000,000 from Thermo Electron (Note 8). The cost of this acquisition exceeded
the estimated fair value of the net assets by $57,774,000.
Because the Company and NESLAB were deemed for accounting purposes to be
under control of their common majority owner, Thermo Instrument, the transaction
has been accounted for in a manner similar to a pooling of interests.
Accordingly, the accompanying financial statements include the results of NESLAB
from March 12, 1997, the date the business was acquired by Thermo Instrument and
the shares issued have been treated as outstanding from that date. The purchase
price included $255,000 for the increase in net book value from the date the
business was acquired by Thermo Instrument to June 28, 1997. This amount was
recorded as a reduction in retained earnings.
In March 1997, the Company acquired PSI, a manufacturer of scanning-probe
microscopes used in industry and academia to test and measure the topography and
other surface properties of materials, for $16,702,000 in cash, including the
repayment of $1,300,000 of bank debt, subject to a post-closing adjustment. In
addition, the Company assumed outstanding PSI stock options, which were
converted into stock options that are exercisable into 144,941 shares of Company
common stock at a weighted average exercise price of $3.07 per share, with an
aggregate value of $1,693,000 as of the date of the merger agreement. The cost
of this acquisition exceeded the estimated fair value of the net assets by
$14,132,000. To partially finance the acquisition, the Company borrowed
$10,000,000 from Thermo Electron (Note 8).
In March 1996, Thermo Instrument acquired a substantial portion of the
businesses comprising the Scientific Instruments Division of Fisons plc, a
wholly owned subsidiary of Rhone-Poulenc Rorer, Inc. Pursuant to an agreement
executed in August 1996, the Company acquired Kevex Instruments and Kevex X-Ray
(the Kevex businesses), which were formerly part of Fisons, from Thermo
Instrument for $21,567,000 in cash. To partially finance the acquisition, the
Company borrowed $15,000,000 from Thermo Electron, which was repaid in 1998
(Note 8). The purchase price was determined based on the net book value of the
Kevex businesses at March 29, 1996, and a pro rata allocation of Thermo
Instrument's total cost in excess of the net assets of acquired companies
recorded in connection with the acquisition of the Fisons businesses. The cost
of this acquisition exceeded the estimated fair value of the net assets by
$10,046,000. Kevex Instruments is a manufacturer of X-ray microanalyzers and
X-ray fluorescence instruments and Kevex X-Ray is a manufacturer of specialty
X-ray sources.
Because the Company and the Kevex businesses were deemed for accounting
purposes to be under control of their common majority owner, Thermo Instrument,
the transaction has been accounted for in a manner similar to a pooling of
interests. Accordingly, the Company's 1996 financial statements include the
results of the Kevex businesses from March 29, 1996, the date these businesses
were acquired by Thermo Instrument. During 1996, the Company acquired two
additional companies for an aggregate $900,000 in cash.
Except for NESLAB and the Kevex businesses, the acquisitions described
above have been accounted for using the purchase method of accounting and their
results of operations have been included in the accompanying financial
statements from their respective dates of acquisition. Allocation of the
purchase price for these acquisitions was based on estimates of the fair value
of the net assets acquired and, for TopoMetrix and PSI, is subject to
adjustment. The Company has gathered no information that indicates the final
allocation of purchase price for TopoMetrix and PSI will differ materially from
the preliminary estimate.
In connection with these acquisitions, the Company has undertaken
restructuring activities at the acquired businesses. The Company's restructuring
activities, which were accounted for in accordance with Emerging Issues Task
Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing
levels and the abandonment of excess facilities. In connection with these
restructuring activities, as part of the cost of the acquisitions, the Company
established reserves as detailed below, primarily for severance and excess
facilities. In accordance with EITF 95-3, the
12
3. Acquisitions and Dispositions (continued)
Company finalized its restructuring plans no later than one year from the
respective dates of the acquisitions, except for the October 1998 acquisition of
TopoMetrix for which such plans will be finalized no later than October 1999. A
summary of the changes in accrued acquisition expenses is:
Abandonment
of Excess
(In thousands) Severance Facilities Total
- --------------------------------------------------------------- -------------- ------------- --------------
Balance at December 30, 1995 $ 570 $ 989 $ 1,559
Reserves established 730 378 1,108
Usage (551) (1,035) (1,586)
Decrease due to finalization of restructuring plan, (191) (114) (305)
recorded as a decrease to cost in excess of net
assets of acquired companies -------- ------- --------
Balance at December 28, 1996 558 218 776
Reserves established 173 588 761
Usage (390) (127) (517)
Decrease due to finalization of restructuring plan, (155) (226) (381)
recorded as a decrease to cost in excess of net
assets of acquired companies
Currency translation adjustment - (53) (53)
-------- ------- --------
Balance at January 3, 1998 186 400 586
Reserves established 145 602 747
Usage (226) (450) (676)
Decrease due to finalization of restructuring plan, (75) (166) (241)
recorded as a decrease to cost in excess of net
assets of acquired companies
Currency translation adjustment - 30 30
-------- ------- --------
Balance at January 2, 1999 $ 30 $ 416 $ 446
======== ======= ========
Unresolved matters at January 2, 1999, primarily included completion of
abandonment of excess facilities for TopoMetrix. Accrued acquisition expenses
are included in other accrued expenses in the accompanying balance sheet.
Based on unaudited data, the following table presents selected financial
information for the Company, NESLAB, PSI, and the Kevex businesses, on a pro
forma basis, assuming that the Company and these acquired businesses had been
combined since the beginning of 1996. The effect of the acquisitions not
included in the pro forma data was not material to the Company's results of
operations.
(In thousands except per share amounts) 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Revenues $210,412 $ 202,813
Net Income 3,736 3,280
Earnings per Share:
Basic .25 .22
Diluted .24 .21
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisitions of NESLAB,
PSI, and the Kevex businesses been made at the beginning of 1996.
13
3. Acquisitions and Dispositions (continued)
Dispositions
In January 1998, the Company's Nicolet Imaging Systems subsidiary sold its
security screening product line to OSI Systems, Inc. for $750,000 in cash for a
nominal loss. The product line represented less than 1.0% of the Company's
revenues. During 1998, the Company sold real estate for a gain of $106,000.
In December 1997, the Company sold its Linac business to SteriGenics
International, Inc. for $4,980,000 in cash and 109,607 shares of SteriGenics
common stock valued at $2,056,000, resulting in a gain of $2,210,000. The Linac
business is an electron beam radiation business that offers contract
sterilization services. The Company sold its shares of SteriGenics common stock
in 1998 and realized a gain of $713,000.
4. Restructuring Costs and Other Nonrecurring Income
During 1998, the Company recorded restructuring and related costs of
$5,399,000. Restructuring costs of $4,320,000, which were accounted for in
accordance with EITF 94-3, consist of $3,712,000 related to severance costs for
259 employees across all functions and $608,000 related primarily to
facility-closing costs. The charge for facility-closing costs includes $490,000
for write-downs of related fixed assets. In addition, the Company recorded an
inventory write-down totaling $1,079,000 related to the discontinuation of
certain underperforming products, which is included in cost of revenues in the
accompanying statement of income. In connection with these actions, the Company
expects to incur an additional $1,300,000 of costs, principally in the first
quarter of 1999, for costs not permitted as charges in 1998, pursuant to the
requirements of EITF 94-3. These additional costs primarily include costs for
certain employee and business relocation and related costs. The Company plans to
complete implementation of its restructuring plan in early 1999. As of January
2, 1999, the Company had terminated 182 employees and had expended $1,371,000 of
the established reserves. The remaining liability of $2,459,000, net of foreign
currency effect, relates to severance costs for employees terminated in early
1999.
In 1997, the Company's Gould Instrument Systems, Inc. subsidiary incurred
a $953,000 restructuring charge, related primarily to severance costs for 40
employees terminated during 1997. Other accrued expenses in the accompanying
1997 balance sheet includes a reserve of $244,000 associated with these actions
which was expended during 1998.
In 1996, Gould incurred $1,038,000 in connection with a restructuring
plan, which included the termination of approximately 40 employees.
In 1996, the Company finalized negotiations with the former owner of Gould
in connection with amounts claimed by the Company for the discontinuance of the
Acqulab product line, which was sold to the Company as part of the 1995 purchase
of Gould. Of the $1,970,000 settlement received, $1,103,000 related to a
reduction of the purchase price principally for the unrealized earning potential
of the Acqulab product line, resulting in a reduction of "Cost in excess of net
assets of acquired companies" in 1996. The remaining $867,000 related to a
reimbursement of expenses incurred subsequent to the acquisition of Gould for
the ongoing development of Acqulab. This amount is classified as other
nonrecurring income in the accompanying 1996 statement of income.
5. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has stock-based compensation plans for its key employees,
directors, and others, which permit the grant of a variety of stock and
stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted stock,
stock options, stock bonus shares, or performance-based shares. The option
recipients and the terms of options granted under these plans are determined by
the Board Committee. As of year-end 1998, only nonqualified stock options have
been awarded under these plans. Generally, options granted to date are
exercisable immediately, but are subject to certain transfer restrictions and
the
14
5. Employee Benefit Plans (continued)
right of the Company to repurchase shares issued upon exercise of the options at
the exercise price, upon certain events. The restrictions and repurchase rights
generally lapse ratably over a one- to ten-year period, depending on the term of
the option, which generally ranges from five to twelve years. Nonqualified stock
options may be granted at any price determined by the Board Committee, although
incentive stock options must be granted at not less than the fair market value
of the Company's common stock on the date of grant. To date, all options have
been granted at fair market value. The Company also has a directors' stock
option plan that provides for the grant of stock options to outside directors
pursuant to a formula approved by the Company's shareholders. Options granted
under this plan have the same general terms as options granted under the
stock-based compensation plans described above, except that the restrictions and
repurchase rights generally lapse ratably over a four-year period and the option
term is five years. In addition to the Company's stock-based compensation plans,
certain officers and key employees may also participate in the stock-based
compensation plans of Thermo Electron and Thermo Instrument.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 87,000 shares at a weighted average exercise price of $14.50 per share
elected to participate in this exchange and, as a result, received options to
purchase 43,500 shares of Company common stock at $11.41 per share, which are
included in the 1998 grants in the table below. The other terms of the new
options are the same as the exchanged options except that the holders may not
sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.
A summary of the Company's stock option activity is:
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 1,256 $11.23 971 $12.10 862 $11.32
Issued upon acquisition of PSI - - 145 3.07 - -
Granted 370 10.73 374 10.46 183 15.26
Exercised (14) 3.44 (105) 4.20 (8) 10.00
Forfeited (306) 12.17 (129) 12.02 (66) 10.89
Canceled due to exchange (87) 14.50 - - - -
----- ----- ------
Options Outstanding, End of Year 1,219 $10.70 1,256 $11.23 971 $12.10
===== ====== ===== ====== ====== ======
Options Exercisable 1,212 $10.74 1,238 $11.35 971 $12.10
===== ====== ===== ====== ====== ======
Options Available for Grant 388 172 121
===== ===== ======
15
5. Employee Benefit Plans (continued)
A summary of the status of the Company's stock options at January 2, 1999,
is:
Options Outstanding
-----------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ------------------------------------------------ ----------------- ------------------- --------------------
$ 2.55 - $ 6.20 36 6.1 years $ 3.37
6.21 - 9.85 163 6.8 years 9.50
9.86 - 13.50 847 7.1 years 10.42
13.51 - 17.15 173 6.5 years 14.73
-----
$ 2.55 - $ 17.15 1,219 6.9 years $10.70
=====
The information disclosed above for options outstanding at January 2,
1999, does not differ materially for options exercisable.
Employee Stock Purchase Program
Effective November 1, 1996, substantially all of the Company's full-time
U.S. employees are eligible to participate in an employee stock purchase program
sponsored by the Company and Thermo Electron, under which employees can purchase
shares of the Company's and Thermo Electron's common stock. Prior to November 1,
1996, the program was sponsored by Thermo Instrument and Thermo Electron. Prior
to the 1998 program year, the applicable shares of common stock could be
purchased at the end of a 12-month period at 95% of the fair market value at the
beginning of the period, and the shares purchased were subject to a six-month
resale restriction. Effective November 1, 1998, the applicable shares of common
stock may be purchased at 85% of the lower of the fair market value at the
beginning or end of the plan year, and the shares purchased are subject to a
one-year resale restriction. Shares are purchased through payroll deductions of
up to 10% of each participating employee's gross wages. No shares were issued
under this program during 1998. During 1997, the Company issued 9,852 shares of
its common stock under this program.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
under the Company's stock-based compensation plans been determined based on the
fair value at the grant dates consistent with the method set forth under SFAS
No. 123, the effect on the Company's net income and earnings per share would
have been:
(In thousands except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Net Income:
As reported $1,825 $5,848 $6,617
Pro forma 1,070 5,343 6,277
Basic Earnings per Share:
As reported .12 .40 .53
Pro forma .07 .36 .50
Diluted Earnings per Share:
As reported .12 .39 .53
Pro forma .07 .36 .50
16
5. Employee Benefit Plans (continued)
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $4.04,
$3.74, and $5.80 in 1998, 1997, and 1996, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1998 1997 1996
- ----------------------------------------------------------------------- ----------- ---------- -----------
Volatility 28% 28% 26%
Risk-free Interest Rate 5.3% 5.9% 6.6%
Expected Life of Options 5.6 years 5.0 years 5.4 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plans
Substantially all of the Company's full-time U.S. employees are eligible
to participate in 401(k) savings plans. Contributions to the 401(k) savings
plans are made by both the employee and the Company. Company contributions are
based upon the level of employee contributions. For these plans, the Company
contributed and charged to expense $1,350,000, $1,427,000, and $689,000 in 1998,
1997, and 1996, respectively.
6. Income Taxes
The components of income before provision for income taxes are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------- -------- --------- --------
Domestic $ 2,306 $ 10,719 $ 8,969
Foreign 1,346 (319) 1,918
------- -------- -------
$ 3,652 $ 10,400 $10,887
======= ======== =======
17
6. Income Taxes (continued)
The components of the provision for income taxes are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------- -------- --------- --------
Currently Payable:
Federal $ 2,207 $ 3,834 $ 3,427
State 529 600 774
Foreign 523 158 865
------- ------- -------
3,259 4,592 5,066
------- ------- -------
Net Deferred (Prepaid):
Federal (1,248) (112) (608)
State (280) (24) (129)
Foreign 96 96 (59)
------- ------- -------
(1,432) (40) (796)
------- ------- -------
$ 1,827 $ 4,552 $ 4,270
======= ======= =======
The Company receives a tax deduction upon exercise of nonqualified stock
options by employees for the difference between the exercise price and the
market price of the underlying common stock on the date of exercise. The
provision for income taxes that is currently payable does not reflect $114,000,
$304,000, and $382,000 of such benefits that have been allocated to capital in
excess of par value in 1998, 1997, and 1996, respectively. In addition, the
provision for income taxes that is currently payable does not reflect $1,024,000
of tax benefits used to reduce cost in excess of net assets of acquired
companies in 1996.
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 34% to income before provision for income taxes due to:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------- --------- --------- --------
Provision for Income Taxes at Statutory Rate $ 1,242 $ 3,536 $3,702
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 164 380 426
Foreign tax rate and tax law differential 163 362 154
Amortization of cost in excess of net assets of acquired companies 841 685 146
Tax benefit of foreign sales corporation (362) (295) (268)
Other, net (221) (116) 110
------- ------- ------
$ 1,827 $ 4,552 $4,270
======= ======= ======
18
6. Income Taxes (continued)
Prepaid and deferred income taxes in the accompanying balance sheet
consist of:
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------- --------- --------
Prepaid Income Taxes:
Tax loss carryforwards $10,133 $9,052
Reserves and accruals 5,439 4,152
Inventory basis difference 4,749 3,185
------- ------
20,321 16,389
Less: Valuation allowance 10,133 9,052
------- ------
$10,188 $7,337
======= ======
Deferred Income Taxes:
Fixed and intangible assets $ 1,651 $ 356
======= ======
At year-end 1998, the Company had foreign and federal tax loss
carryforwards of $23,497,000 and $6,088,000, respectively. The valuation
allowance relates to uncertainty surrounding the realization of the tax loss
carryforwards, for which realization is limited to the future income of certain
subsidiaries. The federal tax loss carryforwards expire in the years 2008
through 2010. Foreign tax loss carryforwards of $313,000 expire in 2006, while
the remainder do not expire. Any resulting benefit from the loss carryforwards
will first be used to reduce "Cost in excess of net assets of acquired
companies," with any remaining benefit used to reduce other acquired intangible
assets.
A provision has not been made for U.S. or additional foreign taxes on
$5,695,000 of undistributed earnings of foreign subsidiaries that could be
subject to taxation if remitted to the U.S. because the Company plans to keep
these amounts permanently reinvested overseas.
7. Commitments and Contingencies
Operating Leases
The Company leases portions of its office and operating facilities under
various operating lease arrangements. The accompanying statement of income
includes expenses from operating leases of $2,333,000, $2,171,000, and
$2,818,000 in 1998, 1997, and 1996, respectively, net of sublease income of
$847,000 and $893,000 in 1998 and 1997, respectively. Future minimum payments
due under noncancelable operating leases at January 2, 1999, were $2,093,000 in
1999; $1,937,000 in 2000; $1,589,000 in 2001; $1,438,000 in 2002; $1,312,000 in
2003; and $1,580,000 in 2004 and thereafter. Total future minimum lease payments
are $9,949,000 and have not been reduced by minimum sublease rental income of
$3,744,000 due through 2004 and thereafter under noncancelable operating
subleases. See Note 8 for office and manufacturing space leased from related
parties.
Contingencies
The Company has received correspondence alleging that certain of its
products infringe patents owned by third parties, though no lawsuits have been
filed. The Company does not believe that its products infringe the intellectual
property rights of these parties; however, given the inherent uncertainty of
dispute resolution, there can be no assurance that the outcome of any such
lawsuit, if filed, would not result in a material adverse effect on the
Company's results of operations or financial position.
19
8. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In 1997 and 1996, the Company paid an amount equal to
1.0% of the Company's revenues. For these services, the Company was charged
$1,528,000, $1,989,000, and $1,232,000 in 1998, 1997, and 1996, respectively.
The fee is reviewed and adjusted annually by mutual agreement of the parties.
Management believes that the service fee charged by Thermo Electron is
reasonable and that such fees are representative of the expenses the Company
would have incurred on a stand-alone basis. The corporate services agreement is
renewed annually but can be terminated upon 30 days' prior notice by the Company
or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the
Thermo Electron Corporate Charter defines the relationship among Thermo Electron
and its majority-owned subsidiaries). For additional items such as employee
benefit plans, insurance coverage, and other identifiable costs, Thermo Electron
charges the Company based upon costs attributable to the Company.
Operating Leases
In addition to the operating leases discussed in Note 7, the Company
leases certain office and manufacturing space from subsidiaries of Thermo
Instrument under two leases expiring in 2000 and 2001. The accompanying
statement of income includes expenses from these operating leases of $899,000,
$602,000, and $208,000 in 1998, 1997, and 1996, respectively. At January 2,
1999, future minimum payments due under these leases are $906,000 in 1999,
$739,000 in 2000, and $236,000 in 2001. Total future minimum lease payments
under these leases are $1,881,000.
Other Related-party Transactions
The Company purchases and sells products and services in the ordinary
course of business with other companies affiliated with Thermo Electron. Sales
of products to such affiliated companies totaled $1,215,000, $825,000, and
$240,000 in 1998, 1997, and 1996, respectively. Purchases of products and
services from such affiliated companies totaled $2,013,000, $2,226,000, and
$1,310,000 in 1998, 1997, and 1996, respectively. During 1998, the Company sold
a product line to Thermo Optek for $125,000.
Repurchase Agreement
The Company invests excess cash in repurchase agreements with Thermo
Electron as discussed in Note 1.
Short- and Long-term Obligations
The accompanying balance sheet includes the following amounts borrowed
from Thermo Instrument and Thermo Electron to finance the acquisitions of
certain companies (Note 3):
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Promissory Notes to Thermo Electron, Due:
August 1998 $ - $ 15,000
March 1999 10,000 10,000
July 1999 50,000 50,000
Promissory Note to Thermo Instrument, Due September 2001 7,300 7,300
------- --------
$67,300 $ 82,300
======= ========
These notes bear interest at the 90-day Commercial Paper Composite Rate
plus 25 basis points, set at the beginning of each quarter. The interest rate
for the notes outstanding at year-end 1998 and 1997 was 5.36% and 5.76%,
respectively.
20
9. Lines of Credit
Unused amounts available under outstanding lines of credit were $3,345,000
and $3,249,000 at year-end 1998 and 1997, respectively. Borrowings under lines
of credit are guaranteed by Thermo Electron or Thermo Instrument.
10. Common Stock
At January 2, 1999, the Company had reserved 1,672,000 unissued shares of
its common stock for possible issuance under stock-based compensation plans.
11. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, notes payable to Thermo Electron, accounts
payable, due to affiliated companies, long-term obligations due to related
party, and forward foreign exchange contracts. Available-for-sale investments
were carried at fair value in the accompanying 1997 balance sheet (Note 2). The
Company's long-term obligations (Note 8) bear interest at a variable market rate
and, therefore, the carrying amounts approximate fair value. The carrying
amounts of the Company's remaining financial instruments, with the exception of
forward foreign exchange contracts, approximate fair value due to their
short-term nature.
The notional amounts of forward foreign exchange contracts outstanding
totaled $1,519,000 and $2,041,000 at year-end 1998 and 1997, respectively. The
fair value of the Company's forward foreign exchange contracts receivable was
$19,000 and $3,000 at year-end 1998 and 1997, respectively. The fair value of
such contracts is the estimated amount that the Company would receive upon
termination of the contracts, taking into account the change in foreign exchange
rates.
12. Business Segments and Geographical Information
The Company organizes and manages its business by functional operating
entity. The Company operates in three segments: Imaging and Inspection,
Temperature Control, and Test and Measurement. In classifying operational
entities into a particular segment, the Company aggregates businesses with
similar economic characteristics, products and services, production processes,
customers, and methods of distribution.
The Company, through its Imaging and Inspection segment, designs,
manufactures, and markets instruments and systems used in the analysis of
material samples by industrial, academic, and government laboratories. Principal
products manufactured by this segment include X-ray microanalysis systems that
analyze the chemical composition of microscopic samples; X-ray sources for
imaging, inspection, analytical, and thickness-gauging applications; X-ray
imaging systems for quality-control inspections; systems for the rework and
repair of printed circuit boards that have failed quality-control inspection;
scanning probe microscopes that measure physical surface properties; and
confocal laser scanning microscopes that create high-resolution
three-dimensional images.
The Temperature Control segment manufactures and markets precision
temperature control systems for analytical, laboratory, industrial, research and
development, laser, and semiconductor applications.
The Test and Measurement segment manufactures data-acquisition systems,
digital oscilloscopes, and recording systems used primarily in product
development and process monitoring settings.
21
12. Business Segments and Geographical Information (continued)
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Business Segment Information
Revenues:
Imaging and Inspection $ 85,824 $ 91,771 $ 66,755
Temperature Control 61,198 56,288 -
Test and Measurement 43,995 50,841 56,444
--------- -------- ---------
$ 191,017 $198,900 $ 123,199
========= ======== =========
Income Before Provision for Income Taxes:
Imaging and Inspection $ 1,580 $ 7,422 $ 9,219
Temperature Control 7,070 6,698 -
Test and Measurement (967) 2,713 3,942
Corporate (a) (1,740) (2,908) (2,436)
--------- -------- ---------
Total operating income 5,943 13,925 10,725
Interest income and other expense, net (2,291) (3,525) 162
---------- --------- ---------
$ 3,652 $ 10,400 $ 10,887
========= ======== =========
Total Assets:
Imaging and Inspection $ 110,695 $104,026 $ 84,547
Temperature Control 77,356 83,509 -
Test and Measurement 42,227 43,658 50,926
Corporate (b) 19,604 22,204 17,012
--------- -------- ---------
$ 249,882 $253,397 $ 152,485
========= ======== =========
22
12. Business Segments and Geographical Information (continued)
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Depreciation and Amortization:
Imaging and Inspection $ 3,019 $ 2,896 $ 2,109
Temperature Control 2,469 1,911 -
Test and Measurement 1,582 1,808 2,384
Corporate 3 - -
--------- -------- ---------
$ 7,073 $ 6,615 $ 4,493
========= ======== =========
Capital Expenditures:
Imaging and Inspection $ 1,083 $ 1,857 $ 2,215
Temperature Control 477 516 -
Test and Measurement 621 222 547
Corporate 18 - -
--------- -------- ---------
$ 2,199 $ 2,595 $ 2,762
========= ======== =========
Geographical Information
Revenues (c):
United States $ 165,363 $176,717 $ 94,493
Germany 11,495 12,217 14,673
England 10,853 12,546 14,260
Other 29,324 25,393 19,291
Transfers among geographical areas (d) (26,018) (27,973) (19,518)
--------- -------- ---------
$ 191,017 $198,900 $ 123,199
========= ======== =========
Long-lived Assets (e):
United States $ 18,462 $ 20,684 $ 20,361
International 863 2,104 2,190
--------- -------- ---------
$ 19,325 $ 22,788 $ 22,551
========= ======== =========
Export Revenues Included in United States Revenues Above (f) $ 59,413 $ 59,433 $ 36,472
========= ======== =========
(a) Primarily general and administrative expenses.
(b) Primarily cash, cash equivalents, and available-for-sale investments.
(c) Revenues are attributed to countries based on selling location.
(d) Transfers among geographical areas are accounted for at prices that are
representative of transactions with unaffiliated parties.
(e) Includes property, plant, and equipment, net, and other long-term tangible assets.
(f) In general, export revenues are denominated in U.S. dollars.
23
13. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------- -------- --------- --------
Basic
Net income $ 1,825 $ 5,848 $ 6,617
------- -------- -------
Weighted Average Shares, as Adjusted 15,324 14,694 12,437
------- -------- -------
Basic Earnings per Share $ .12 $ .40 $ .53
======= ======== =======
Diluted
Net Income $ 1,825 $ 5,848 $ 6,617
------- -------- -------
Weighted Average Shares 15,324 14,694 12,437
Effect of Stock Options 30 112 133
------- -------- -------
Weighted Average Shares, as Adjusted 15,354 14,806 12,570
------- -------- -------
Diluted Earnings per Share $ .12 $ .39 $ .53
======= ======== =======
The computation of diluted earnings per share for each period excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of January 2, 1999, there were 311,075 of such
options outstanding, with exercise prices ranging from $11.03 to $17.15 per
share.
14. Comprehensive Income
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"Other comprehensive items, net," which represents certain amounts that are
reported as components of shareholders' investment in the accompanying balance
sheet, including foreign currency translation adjustments and unrealized net of
tax gains and losses from available-for-sale investments.
Accumulated other comprehensive items in the accompanying balance sheet
consists of:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Cumulative Translation Adjustment $ (623) $ (1,035)
Net Unrealized Gain on Available-for-sale Investments - 27
------- --------
$ (623) $ (1,008)
======= ========
24
15. Proposed Reorganization
On August 12, 1998, Thermo Electron announced a proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company. As
part of this reorganization, Thermo Electron announced that the Company may be
taken private. It is currently contemplated that the Company's public
shareholders would receive cash in exchange for their shares of common stock of
the Company. The completion of this transaction is subject to numerous
conditions, including the establishment of the price; the approval of the Board
of Directors of Thermo Instrument; the negotiation and execution of a definitive
purchase and sale or merger agreement; the receipt of a fairness opinion from an
investment banking firm that the transaction is fair to the Company's
shareholders (other than Thermo Instrument and Thermo Electron) from a financial
point of view; the approval of the Company's independent directors who are
serving on a special committee for the purpose of evaluating and negotiating the
proposed transaction, as well as approval by the Company's entire Board of
Directors; and clearance by the Securities and Exchange Commission of any
necessary documents regarding the proposed transaction.
16. Unaudited Quarterly Information
(In thousands except per share amounts)
1998 First Second Third(a) Fourth
- ---------------------------------------------------------------- --------- ---------- ---------- ----------
Revenues $53,067 $49,058 $44,052 $44,840
Gross Profit 22,670 20,624 16,485 20,323
Net Income (Loss) 2,072 1,488 (2,503) 768
Basic and Diluted Earnings (Loss) per Share .14 .10 (.16) .05
1997 First(b) Second Third Fourth(c)
- ---------------------------------------------------------------- --------- ---------- ---------- ----------
Revenues $37,177 $49,692 $52,271 $59,760
Gross Profit 16,275 21,702 20,249 24,927
Net Income 1,188 1,337 705 2,618
Basic and Diluted Earnings per Share .09 .09 .05 .17
(a) Reflects a $5.4 million pretax charge for restructuring and related costs.
(b) Reflects the March 1997 acquisitions of NESLAB and PSI. (c) Reflects a $2.2
million gain from the sale of the Company's Linac business.
25
Report of Independent Public Accountants
To the Shareholders and Board of Directors of ThermoSpectra Corporation:
We have audited the accompanying consolidated balance sheet of
ThermoSpectra Corporation (a Delaware corporation and 82%-owned subsidiary of
Thermo Instrument Systems Inc.) and subsidiaries as of January 2, 1999, and
January 3, 1998, and the related consolidated statements of income, cash flows,
and comprehensive income and shareholders' investment for each of the three
years in the period ended January 2, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
ThermoSpectra Corporation and subsidiaries as of January 2, 1999, and January 3,
1998, and the results of their operations and their cash flows for each of the
three years in the period ended January 2, 1999, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 16, 1999
26
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
The Company develops, manufactures, and markets precision instruments in
three segments: Imaging and Inspection, Temperature Control, and Test and
Measurement. These instruments are generally combined with proprietary
operations and analysis software to provide industrial and research customers
with integrated systems that address their specific needs. The Imaging and
Inspection segment includes X-ray microanalysis instruments; X-ray fluorescence
instruments; nondestructive X-ray inspection systems; specialty X-ray tubes; and
confocal laser scanning microscopes. The Company broadened its product offerings
to include scanning probe microscopes through the acquisitions of Park
Scientific Instruments Corporation (PSI) in March 1997 and TopoMetrix
Corporation in October 1998 (Note 3). In addition, the Company acquired Sierra
Research and Technology Inc. (SRT) in July 1997, a manufacturer of systems used
for the rework and repair of printed circuit boards (Note 3). The Test and
Measurement segment consists of digital oscillographic recorders, digital
storage oscilloscopes (DSO's), and data acquisition systems. The Company
expanded into the Temperature Control segment through its March 1997 acquisition
of NESLAB Instruments, Inc., which manufactures and markets precision
Temperature Control systems for analytical, laboratory, industrial, research and
development, laser, and semiconductor applications (Note 3).
The Company's growth strategy includes acquiring complementary businesses,
developing new applications for its technologies to address related markets
segments, and strengthening its presence in selected geographic markets. Because
the Company competes primarily on the basis of its technology in all its
segments, it will also need to continually improve the technology underlying the
products of any company it acquires. One of the Company's principal goals during
recent quarters has been to improve operating margins. As part of this plan, the
Company completed the divestiture of two low-margin product lines in December
1997 and January 1998 (Note 3) and undertook certain other restructuring actions
during 1998 (Note 4).
A significant portion of the Company's total revenues, primarily in the
Imaging and Inspection and Temperature Control segments, is attributable to the
sale of products and related services to customers in the semiconductor
industry. The semiconductor industry has historically been cyclical and is
characterized by sudden and sharp changes in supply and demand. Demand for the
Company's products and services within the semiconductor industry is dependent
upon, among other things, the level of capital spending by semiconductor
companies. The semiconductor industry is currently experiencing a downturn in
demand for its products as a result of the current economic crisis in Asia,
excess manufacturing capacity, and a slowdown in sales of high-end personal
computers. Many semiconductor manufacturers have delayed construction or
expansion of their production facilities in response to the foregoing
conditions. Further decreases in semiconductor activities could continue to have
a significant adverse effect upon the demand for the Company's products and
related services, which could materially adversely affect the Company's business
and future results of operations.
The Company conducts all of its manufacturing operations in the United
States. The Company sells its products worldwide. During 1998, exports to the
Far East represented 15% of total revenues. Asia is experiencing a severe
economic crisis, which has been characterized by sharply reduced economic
activity and liquidity, highly volatile foreign currency exchange and interest
rates, and unstable stock markets. The Company's sales to Asia have been, and
27
Overview (continued)
are expected to continue to be, adversely affected by the unstable economic
conditions there. Additionally, certain of the Company's customers located
outside of the Asian region could be adversely affected by the unstable economic
conditions in Asia.
The Company anticipates that a significant portion of its revenues in all
three segments will be from sales to customers outside the United States. The
Company's business activities outside the United States are conducted through
sales and service subsidiaries and through third-party representatives and
distributors. The results of the Company's international operations are subject
to foreign currency fluctuations, and the exchange rate value of the dollar may
have a significant impact on both revenues and earnings. The Company may use
forward contracts to reduce its exposure to currency fluctuations.
Results of Operations
1998 Compared With 1997
Total revenues decreased $7.9 million to $191.0 million in 1998 from
$198.9 million in 1997. Revenues increased $17.6 million due to the inclusion of
revenues for the full year from NESLAB, PSI, and SRT, which were acquired during
1997, in addition to the inclusion of TopoMetrix, acquired October 1998, offset
by the exclusion of revenues from the Nicolet Imaging Systems (NIS) product
lines that were sold in late 1997 and early 1998. Revenues were adversely
affected by approximately $4.1 million due to the strengthening in the value of
the U.S. dollar relative to currencies in foreign countries in which the Company
operates. Excluding the impact of acquisitions, dispositions, and foreign
exchange, revenues at the Imaging and Inspection segment decreased $4.5 million
in 1998, primarily due to reduced demand for semiconductor related products, a
downturn in overseas markets, and a large shipment at Kevex Instruments that
occurred in the first quarter of 1997. Revenues at the Temperature Control
segment, excluding the impact of a full year of ownership of NESLAB, decreased
$10.2 million in 1998, due to a severe reduction in capital-equipment
expenditures in the semiconductor industry. Excluding the impact of foreign
exchange, revenues at the Test and Measurement segment decreased $6.6 million in
1998, primarily due to decreased demand. The Company's backlog decreased $14.4
million during 1998 to $26.0 million, primarily due to the downturn in the
semiconductor industry.
Excluding an inventory write-down of $1.1 million in 1998, primarily for
discontinuing certain underperforming products (Note 4) and an inventory
write-down in 1997 at NIS, the Company's gross profit margin was 42% in 1998 and
1997. Gross profit margin remained constant as savings resulting from
restructuring actions were offset by lower selling prices at Kevex Instruments
and Gould due to decreased demand.
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in 1998 from 27% in 1997, primarily due to decreased revenues.
The impact of decreased revenues was offset in part by lower employment and
spending levels at most of the Company's subsidiaries in response to the revenue
decline.
Research and development expenses decreased to $16.3 million in 1998 from
$17.3 million in 1997. Increases due to the inclusion of NESLAB and PSI for the
full period in 1998 were more than offset by decreased spending due to
discontinuing underperforming products, completion of efforts as a result of
new-product releases, and a decrease in professional services.
In addition to the inventory write-downs, the Company recorded
restructuring charges of $4.3 million in 1998, compared with $1.0 million in
1997 (Note 4). Of the 1998 charges, $3.7 million represents severance costs and
$0.6 million represents facility-closing costs. The Company plans to complete
the implementation of the restructuring plan in early 1999. In connection with
the closing of certain facilities, the Company expects to incur an additional
$1.3 million of costs, principally in the first quarter of 1999.
Interest income increased to $1.3 million in 1998 from $0.7 million in
1997, due to higher average invested balances. Interest expense, related party,
primarily represents interest incurred on the $60 million aggregate amount of
promissory notes issued to Thermo Electron in 1997 in connection with
acquisitions.
28
1998 Compared With 1997 (continued)
During 1998, the Company sold its shares of SteriGenics International Inc.
common stock that were received in connection with the 1997 sale of its Linac
business, resulting in a gain of $0.7 million.
The effective tax rate was 50% in 1998, compared with 44% in 1997. The
effective tax rates exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes and nondeductible amortization of costs in
excess of net assets of acquired companies for certain of the Company's
acquisitions. The effective tax rate increased principally due to the larger
relative impact of nondeductible amortization of cost in excess of net assets of
acquired companies.
1997 Compared With 1996
Revenues were $198.9 in 1997, compared with $123.2 million in 1996, an
increase of 61%. Revenues increased $76.6 million due to the inclusion of
revenues from NESLAB, PSI, and SRT, which were acquired during 1997 and the
inclusion of revenues for the full year in 1997 from Kevex Instruments and Kevex
X-Ray. Excluding the impact of acquisitions and foreign currency translation,
revenues increased 2% in 1997 compared with 1996. Imaging and Inspection segment
revenues, excluding the impact of acquisitions and foreign currency translation,
increased $6.1 million, or 7%, to $93.1 million in 1997 from $87.0 million in
1996. The increase in revenues resulted primarily from higher demand for
inspection systems manufactured by NIS and X-ray tubes manufactured by Kevex
X-Ray, offset by a decline in demand for confocal laser scanning microscopes at
its NORAN subsidiary. Test and Measurement segment revenues decreased $2.5
million, or 5%, to $53.0 million in 1997 from $55.5 million in 1996, primarily
due to a decline in demand. The Company's Temperature Control segment was
created with the 1997 acquisition of NESLAB.
The gross profit margin declined to 42% in 1997 from 49% in 1996. The
decline in the gross profit margin is primarily attributable to the inclusion of
lower-margin revenues from NESLAB, which has a gross profit margin of 36% in
1997, and to an eight percentage-point deterioration in margin levels at NIS due
to an inventory write-off in the third quarter of 1997 and a change in mix from
higher-margin manual systems to lower-margin automated systems. To a lesser
extent, the gross margin was adversely impacted in 1997 by a deterioration in
the gross profit margin for the Company's test and measurement systems and at
NORAN due in part to the strengthening of the U.S. dollar.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 27% in 1997 from 30% in 1996, primarily due to the inclusion of
lower selling expenses as a percentage of revenues at NESLAB and, to a lesser
extent, lower selling, general, and administrative expenses at Gould as a result
of ongoing expense reductions, including restructuring charges taken in 1997
that reduced employee cost levels at that subsidiary (Note 4). These
improvements were offset in part by the inclusion of higher selling, general,
and administrative expenses as a percentage of revenues at PSI and a higher
relative expense level at NORAN primarily due to lower revenues.
Research and development expenses increased to $17.3 million in 1997 from
$12.9 million in 1996, due to the inclusion of expenses at acquired businesses,
offset in part by overall reduced research and development spending levels at
the Company's existing operations.
Restructuring costs in both 1997 and 1996 primarily represent severance
costs incurred by Gould (Note 4).
Other nonrecurring income in 1997 represents the sale of the Company's
Linac business to SteriGenics International Inc. for $5.0 million in cash and
109,607 shares of SteriGenics common stock valued at $2.1 million. The Linac
business, which had revenues and operating income in 1997 of $3.7 million and
$1.2 million, respectively, is an electron beam radiation business that offers
contract sterilization services. Other nonrecurring income in 1996 represents a
settlement with the prior owner of Gould, for costs incurred by Gould in
connection with its Acqulab product line (Note 4).
Interest income decreased to $0.7 million in 1997 from $0.9 million in
1996 due to lower average invested cash balances as a result of cash used to
partially fund the acquisitions of the Kevex businesses, which was paid to
Thermo Instrument in August 1996, and the acquisition of PSI in March 1997.
Interest expense, related party, increased to $4.2 million in 1997 from $0.8
million in 1996 due to borrowings from Thermo Electron to fund acquisitions
(Note 8).
29
1997 Compared With 1996 (continued)
The effective tax rate was 44% in 1997, compared with 39% in 1996. The
effective tax rates exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes, nondeductible amortization of cost in
excess of net assets of acquired companies for certain of the Company's
acquisitions and, in 1997, the inability to benefit losses at certain of the
Company's foreign subsidiaries. The increase in the effective tax rate in 1997
was due to the impact of nondeductible amortization of cost in excess of net
assets of acquired companies from the acquisitions of NESLAB and PSI and
increased losses at certain of the Company's foreign subsidiaries that were not
benefited.
Liquidity and Capital Resources
The Company had negative working capital of $2.3 million at January 2,
1999, compared with working capital of $53.5 million at January 3, 1998.
Included in working capital are cash and cash equivalents of $20.1 million at
January 2, 1999, compared with $22.8 million at January 3, 1998. Also included
in working capital are notes payable to Thermo Electron of $60.0 million at
January 2, 1999, compared with $15.0 million at January 3, 1998.
Net cash provided by operating activities was $21.1 million in 1998. A
decrease in accounts receivable provided $3.6 million of cash and a decrease in
accounts payable used $2.0 million in cash, primarily due to the decline in
revenues and corresponding decline in purchases as result of the downturn in the
semiconductor industry. A decrease in inventories, primarily at the Test and
Measurement segment, provided $3.3 million due to lower sales volume. Other
current liabilities provided $3.8 million primarily due to restructuring costs
that were not paid by the end of 1998. Increases in amounts due to affiliates
provided $3.0 million as a result of the timing of payments at year-end.
The Company's investing activities used $4.7 million of cash in 1998. The
Company used $7.9 million, net of cash acquired, for the acquisition of
TopoMetrix and received $0.8 million of cash from the sale of a product line
(Note 3) and $2.1 million from the sale of property, plant, and equipment,
primarily from the sale of a building by Gould. During 1998, the Company
expended $2.2 million for the purchase of property, plant, and equipment. The
Company sold its shares of SteriGenics common stock for $2.8 million during 1998
(Note 3). The Company plans to expend approximately $4 million for the purchase
of property, plant, and equipment in 1999.
During 1998, the Company's financing activities consisted primarily of the
repayment of $15.0 million of long-term obligations to Thermo Electron. In March
1999, the Company paid $10.0 million of obligations to Thermo Electron.
Although the Company expects to generate positive cash flow from its
existing operations, the Company anticipates that it may require significant
amounts of cash to pursue the acquisition of complementary businesses. The
Company expects that it would seek to finance any such acquisitions through a
combination of internal funds and/or borrowings from Thermo Instrument or Thermo
Electron, although it has no agreement with these companies to ensure that any
additional funds will be available on acceptable terms or at all. Thermo
Electron has indicated that it will seek repayment of the notes due to it in
1999 only to the extent the Company's cash flow permits such repayment.
Accordingly, the Company believes that its existing resources and cash provided
by operations are sufficient to meet the capital requirements of its existing
businesses for the foreseeable future.
Market Risk
The Company is exposed to market risk from changes in foreign currency
exchange rates and interest rates, which could affect its future results of
operations and financial condition. The Company manages its exposure to these
risks through its regular operating and financing activities.
Foreign Currency Exchange Rates
The Company generally views its investment in foreign subsidiaries with a
functional currency other than the Company's reporting currency as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in British pounds sterling,
Japanese yen, French francs, Dutch guilders, and German marks.
30
Market Risk (continued)
The effect of a change in foreign exchange rates on the Company's net investment
in foreign subsidiaries is recorded in the "Accumulated Other Comprehensive
Items" component of shareholders' investment. A 10% decrease in year-end 1998
functional currencies, relative to the U.S. dollar, would result in a $875,000
reduction of shareholders' investment.
Interest Rates
The Company's cash and cash equivalents and certain long-term obligations
are sensitive to changes in interest rates. Interest rate changes would result
in a change in interest income and expense due to the difference between the
current interest rates on these financial instruments and the variable rate that
these financial instruments may adjust to in the future.
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 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 a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and 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 this process was approximately 60% complete as of January 2, 1999.
In many cases, such upgrades or replacements are being made in the ordinary
course of business, without accelerating previously scheduled upgrades or
replacements. As for the Company's critical facilities, the Company is in the
process of upgrading and/or replacing, for example, telephone and security
systems. The Company expects that all of its material information technology
systems and critical facilities will be year 2000 compliant by September 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
evaluate such products. The Company is focusing its efforts on products that are
still under warranty and/or are early in their expected life. The Company is
offering upgrades and/or identifying potential solutions where reasonably
practicable.
The Company 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.
31
Year 2000 (continued)
The Company has started 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 September 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
were funded from working capital. All internal costs and related external costs,
other than capital additions, related to year 2000 remediation have been and
will continue to be expensed as incurred. The Company does not track the
internal costs incurred for its year 2000 compliance project. Such costs are
principally the related payroll costs for its information systems group.
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
material suppliers or vendors experience business disruptions due to year 2000
issues, the Company might also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
32
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.
Uncertainty of Growth. Certain of the markets in which the Company
competes have been flat or declining over the past several years. The Company
has identified a number of strategies it believes will allow it to grow its
business, including, acquiring complementary businesses, developing new
applications for its technologies, and strengthening its presence in selected
geographic markets. No assurance can be given that the Company will be able to
successfully implement these strategies, or that these strategies will result in
growth of the Company's business.
Potential Increased Competition. The Company predominantly sells its
products in the high-performance segment of the markets in which it competes.
The products in this segment are generally characterized by superior engineering
and performance and compete more on product specifications than on price. The
other segments of these markets are dominated by companies with substantially
greater financial resources than those of the Company. If these larger companies
enter the high-performance segment of the market, no assurance can be given that
the Company will be able to successfully compete against them.
Need to Respond to Technological Change. Many of the Company's products
are marketed primarily based on their technologies. In order to be successful,
the Company believes that it will be important to continually improve the
technology underlying its products. No assurance can be given that the Company
will be able to do so or that a competitor of the Company will not develop
technology or products that will render the Company's competing products
noncompetitive or obsolete.
Risks Associated with Acquisition Strategy. The Company's strategy
includes the acquisition of underperforming businesses and technologies that
complement or augment the Company's existing product lines. Promising
acquisitions are difficult to identify and complete for a number of reasons,
including competition among prospective buyers and the need for regulatory
approvals, including antitrust approvals. Acquisitions completed by the Company
may be made at substantial premiums over the fair value of the net assets of the
acquired companies. There can be no assurance that the Company will be able to
complete future acquisitions or that the Company will be able to successfully
integrate any acquired businesses into its existing businesses or make such
businesses profitable.
Dependence on Semiconductor Industry; Industry Volatility. A significant
portion of the Company's total revenues is attributable to the sale of products
and related services to customers in the semiconductor industry. The
semiconductor industry has historically been cyclical and is characterized by
sudden and sharp changes in supply and demand. Demand for the Company's products
and services within the semiconductor industry is dependent upon, among other
factors, the level of capital spending by semiconductor companies. The
semiconductor industry is currently experiencing a downturn in demand for its
products as a result of the current economic crisis in Asia, excess
manufacturing capacity, and slowdowns in sales of high-end personal computers.
Many semiconductor manufacturers have delayed construction or expansion of their
production facilities in response to the foregoing conditions. Further decreases
in semiconductor activities could have a significant adverse effect upon the
demand for the Company's products and related services, which would materially
adversely affect the Company's business and future results of operations.
Possible Adverse Impact of Significant International Operations. The
Company expects that international sales will continue to represent a
significant portion of its revenues. In 1998, international sales accounted for
approximately half of the Company's total revenues. These sales carry a number
of inherent risks, including risks associated with currency exchange, tariffs
and other potential trade barriers, potentially reduced protection for
intellectual property, the impact of recessionary environments in economies
outside the United States, and generally longer receivable collection patterns.
In addition, exports to the Far East represented 15% of total revenues in 1998.
33
Exports to Japan represented 7% of total revenues and exports to Taiwan, South
Korea, and Singapore, collectively, represented 3% of total revenues. Asia is
experiencing a severe economic crisis, which has been characterized by sharply
reduced economic activity and liquidity, highly volatile
foreign-currency-exchange and interest rates, and unstable stock markets. There
can be no assurance that the Company's export sales to Asia will not be
adversely affected by the unstable economic conditions there. Additionally,
certain of the Company's customers located outside of the Asian region could be
adversely affected by the unstable economic conditions there.
Risks Associated with Protection, Defense, and Use of Intellectual
Property. The Company holds many patents relating to various aspects of its
products, and believes that proprietary technical know-how is critical to many
of its products. Proprietary rights relating to the Company's products are
protected from unauthorized use by third parties only to the extent that they
are covered by valid and enforceable patents or are maintained in confidence as
trade secrets. There can be no assurance that patents will issue from any
pending or future patent applications owned by or licensed to the Company or
that the claims allowed under any issued patents will be sufficiently broad to
protect the Company's technology and, in the absence of patent protection, the
Company may be vulnerable to competitors who attempt to copy the Company's
products or gain access to its trade secrets and know-how. Proceedings initiated
by the Company to protect its proprietary rights could result in substantial
costs to the Company. There can be no assurance that competitors of the Company
will not initiate litigation to challenge the validity of the Company's patents,
or that they will not use their resources to design comparable products that do
not infringe the Company's patents. There may also be pending or issued patents
held by parties not affiliated with the Company that relate to the Company's
products or technologies. The Company has received correspondence alleging that
certain of its products infringe patents owned by third parties, though no
lawsuits have been filed. The Company may need to acquire licenses to, or
contest the validity of, these or any other such patents. There can be no
assurance that any license required under any such patent would be made
available on acceptable terms or that the Company would prevail in any such
contest. In addition, if any such competitor were successful in enforcing such
patents, the Company could be subject to damages and enjoined from manufacturing
and selling any related products. The Company could incur substantial costs in
defending itself in suits brought against it or in suits in which the Company
may assert its patent rights against others. If the outcome of any such
litigation is unfavorable to the Company, the Company's business and results of
operations could be materially adversely affected. Further, the laws of some
jurisdictions do not protect the Company's proprietary rights to the same extent
as the laws of the U.S. and there can be no assurance that the available
protections will be adequate. In addition, the Company relies on trade secrets
and proprietary know-how 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.
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
material suppliers or vendors experience business disruptions due to year 2000
issues, the Company might also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
34
Selected Financial Information
(In thousands except per share amounts) 1998 (a) 1997 (b) 1996 (c) 1995 (d) 1994
- -------------------------------------------------- ---------- ----------- ---------- ---------- ----------
Statement of Income Data
Revenues $191,017 $ 198,900 $123,199 $ 91,714 $ 42,142
Net Income 1,825 5,848 6,617 4,594 2,368
Earnings per Share:
Basic .12 .40 .53 .41 .25
Diluted .12 .39 .53 .40 .25
Balance Sheet Data
Working Capital $ (2,252) $ 53,540 $ 44,683 $ 35,961 $ 27,377
Total Assets 249,882 253,397 152,485 122,917 78,701
Long-term Obligations 7,300 67,300 22,300 7,300 7,300
Shareholders' Investment 130,835 128,338 89,621 82,525 53,313
(a) Reflects the October 1998 acquisition of TopoMetrix and a $5.4 million
pretax charge for restructuring and related costs.
(b) Reflects the March 1997 acquisitions of NESLAB and PSI.
(c) Reflects the March 1996 acquisition of the Kevex businesses.
(d) Reflects the May 1995 acquisition of GIS and the net proceeds of the
Company's initial public offering and private placement of common stock.
35
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol THS. The following table sets forth the high and low sale prices for
1998 and 1997, as reported in the consolidated transaction reporting system.
1998 1997
----------------- --------------
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
First $10 3/4 $ 8 5/8 $15 1/8 $11 3/4
Second 12 3/4 8 5/8 14 1/2 11 3/8
Third 12 3/8 9 1/4 13 5/8 9 3/4
Fourth 11 3/4 8 1/4 13 5/8 9
As of January 29, 1999, the Company had 204 holders of record of its
common stock. This does not include holdings in street or nominee names. The
closing market price on the American Stock Exchange for the Company's common
stock on January 29, 1999, was $10 5/8 per share.
Shareholder Services
Shareholders of ThermoSpectra Corporation who desire information about the
Company are invited to contact the Investor Relations Department, ThermoSpectra
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046,
(781) 622-1111. A mailing list is maintained to enable shareholders whose stock
is held in street name, and other interested individuals, to receive quarterly
reports, annual reports, and press releases as quickly as possible. Distribution
of printed quarterly reports is limited to the second quarter only. All material
is available from Thermo Electron's Internet site
(http://www.thermo.com/subsid/ths1.html).
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent and
maintains shareholder activity records. The agent will respond to questions on
issuance of stock certificates, change of ownership, lost stock certificates,
and change of address. For these and similar matters, please direct inquiries
to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Board of Directors and will depend upon, among other factors,
the Company's earnings, capital requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended January
2, 1999, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, ThermoSpectra
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.
Annual Meeting
The annual meeting of shareholders will be held on Thursday, May 27, 1999,
at 11 a.m. at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.