SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended July 3, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-14262
THERMOQUEST CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 77-0407461
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2215 Grand Avenue Parkway
Austin, Texas 78728-3812
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at July 30, 1999
Common Stock, $.01 par value 50,573,080
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMOQUEST CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
July 3, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ---------- -----------
Current Assets:
Cash and cash equivalents (includes $97,073 under repurchase $ 46,920 $132,439
agreements with affiliated company in 1998)
Advance to affiliate (Note 7) 98,934 -
Accounts receivable, less allowances of $3,428 and $4,065 90,945 108,409
Inventories:
Raw materials and supplies 21,250 20,872
Work in process 15,636 15,344
Finished goods 32,098 34,396
Prepaid expenses 2,974 2,591
Prepaid income taxes 12,935 13,005
-------- --------
321,692 327,056
-------- --------
Property, Plant, and Equipment, at Cost 89,367 90,631
Less: Accumulated depreciation and amortization 29,425 27,168
-------- --------
59,942 63,463
-------- --------
Patents and Other Assets 2,596 3,041
-------- --------
Cost in Excess of Net Assets of Acquired Companies 240,756 249,682
-------- --------
$624,986 $643,242
======== ========
2
THERMOQUEST CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 3, January 2,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Notes payable and current maturities of long-term obligations $ 5,025 $12,074
Accounts payable 22,274 27,024
Accrued payroll and employee benefits 14,090 17,361
Accrued installation and warranty expenses 9,142 9,623
Accrued income taxes 21,675 23,009
Deferred revenue 13,149 10,785
Customer deposits 3,283 6,227
Other accrued expenses (Notes 5 and 6) 16,175 18,448
Due to parent company and affiliated companies 2,246 2,487
-------- --------
107,059 127,038
-------- --------
Deferred Income Taxes 8,370 8,370
-------- --------
Accrued Pension and Other Deferred Items 15,099 16,629
-------- --------
Long-term Obligations:
5% Subordinated convertible debentures 67,781 67,931
Other 5,632 6,273
-------- --------
73,413 74,204
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 100,000,000 shares authorized; 515 515
51,528,179 and 51,520,004 shares issued
Capital in excess of par value 309,096 309,009
Retained earnings 137,656 116,607
Treasury stock at cost, 955,099 and 550,342 shares (10,225) (5,300)
Deferred compensation (67) -
Accumulated other comprehensive items (Note 2) (15,930) (3,830)
-------- --------
421,045 417,001
-------- --------
$624,986 $643,242
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
THERMOQUEST CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $107,853 $98,123
-------- -------
Costs and Operating Expenses:
Cost of revenues 56,388 50,044
Selling, general, and administrative expenses 26,596 25,016
Research and development expenses 7,533 8,129
Gain on sale of property - (292)
-------- -------
90,517 82,897
-------- -------
Operating Income 17,336 15,226
Interest Income 1,576 1,539
Interest Expense (1,277) (1,970)
-------- -------
Income Before Provision for Income Taxes 17,635 14,795
Provision for Income Taxes 7,407 6,214
-------- -------
Net Income $ 10,228 $ 8,581
======== =======
Earnings per Share (Note 3):
Basic $ .20 $ .17
======== =======
Diluted $ .20 $ .16
======== =======
Weighted Average Shares (Note 3):
Basic 50,574 51,287
======== =======
Diluted 54,770 56,381
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMOQUEST CORPORATION
Consolidated Statement of Income
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $213,472 $206,241
-------- --------
Costs and Operating Expenses:
Cost of revenues 111,299 105,417
Selling, general, and administrative expenses 53,054 51,047
Research and development expenses 15,001 15,994
Gain on sale of property (1,604) (1,048)
-------- --------
177,750 171,410
-------- --------
Operating Income 35,722 34,831
Interest Income (includes $186 from related party in 1998) 3,203 2,877
Interest Expense (2,633) (3,414)
-------- --------
Income Before Provision for Income Taxes 36,292 34,294
Provision for Income Taxes 15,243 14,403
-------- --------
Net Income $ 21,049 $ 19,891
======== ========
Earnings per Share (Note 3):
Basic $ .41 $ .39
======== ========
Diluted $ .40 $ .37
======== ========
Weighted Average Shares (Note 3):
Basic 50,735 51,238
======== ========
Diluted 54,945 56,356
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
THERMOQUEST CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Operating Activities:
Net income $21,049 $ 19,891
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 7,217 7,351
Gain on sale of property (1,604) (1,048)
Provision for losses on accounts receivable 129 (78)
Other noncash expenses 419 474
Changes in current accounts, excluding the effects of acquisition:
Accounts receivable 12,427 9,324
Inventories (2,304) (4,213)
Other current assets (551) (1,555)
Accounts payable (3,525) (1,354)
Due to parent company and affiliated companies 158 (2,464)
Other current liabilities (4,676) (8,135)
Other - (5)
------- --------
Net cash provided by operating activities 28,739 18,188
------- --------
Investing Activities:
Acquisition of product line - (1,300)
Refund from parent company for acquisitions - 5,953
Advances to affiliate, net (Note 7) (98,934) -
Purchases of property, plant, and equipment (2,341) (2,215)
Proceeds from sale of property, plant, and equipment 1,740 3,028
------- --------
Net cash provided by (used in) investing activities (99,535) 5,466
------- --------
Financing Activities:
Repurchase of Company common stock and subordinated
convertible debentures (5,076) -
Net proceeds from issuance of Company common stock 11 368
Increase (decrease) in short-term obligations (6,612) 808
Repayment of long-term obligations (583) (828)
Other 301 749
------- --------
Net cash provided by (used in) financing activities (11,959) 1,097
------- --------
Exchange Rate Effect on Cash (2,764) 53
------- --------
Increase (Decrease) in Cash and Cash Equivalents (85,519) 24,804
Cash and Cash Equivalents at Beginning of Period 132,439 91,898
------- --------
Cash and Cash Equivalents at End of Period $46,920 $116,702
======= ========
6
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Noncash Activities:
Fair value of assets of acquired company $ - $ 1,300
Cash paid for acquired company - (1,300)
-------- -------
Liabilities assumed of acquired company $ - $ -
======== =======
Conversions of convertible debentures $ - $ 3,950
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
7
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by ThermoQuest Corporation (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at July 3, 1999, the results of
operations for the three- and six-month periods ended July 3, 1999, and July 4,
1998, and the cash flows for the six-month periods ended July 3, 1999, and July
4, 1998. Interim results are not necessarily indicative of results for a full
year.
The consolidated balance sheet presented as of January 2, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999,
filed with the Securities and Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents foreign currency translation adjustments, reported as a
component of shareholders' investment in the accompanying balance sheet. During
the second quarter of 1999 and 1998, the Company's comprehensive income totaled
$5,813,000 and $9,507,000, respectively. During the first six months of 1999 and
1998, the Company's comprehensive income totaled $8,949,000 and $19,106,000,
respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Basic
Net Income $10,228 $ 8,581 $21,049 $19,891
------- ------- ------- -------
Weighted Average Shares 50,574 51,287 50,735 51,238
------ ------- ------ -------
Basic Earnings per Share $ .20 $ .17 $ .41 $ .39
====== ======= ====== =======
Diluted
Net Income $10,228 $ 8,581 $21,049 $19,891
Effect of Convertible Obligations 500 585 1,001 1,180
------ ------- ------ -------
Income Available to Common Shareholders, as Adjusted $10,728 $ 9,166 $22,050 $21,071
------- ------- ------- -------
Weighted Average Shares 50,574 51,287 50,735 51,238
Effect of:
Convertible obligations 4,108 4,809 4,113 4,847
Stock options 88 285 97 271
------ ------- ------ -------
Weighted Average Shares, as Adjusted 54,770 56,381 54,945 56,356
------ ------- ------ -------
Diluted Earnings per Share $ .20 $ .16 $ .40 $ .37
====== ======= ====== =======
8
3. Earnings per Share (continued)
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 July 3, 1999, there were 2,192,000 of such
options outstanding, with exercise prices ranging from $11.63 to $17.20 per
share.
4. Business Segment Information
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- -----------
Revenues:
Analytical Instruments $73,816 $ 66,699 $147,673 $141,865
Scientific Equipment 34,037 31,424 65,799 64,376
------- -------- ------- --------
$107,853 $ 98,123 $213,472 $206,241
======== ======== ======== ========
Income Before Provision for Income Taxes:
Analytical Instruments $12,430 $ 10,699 $26,469 $ 25,137
Scientific Equipment 6,291 5,824 11,874 12,357
Corporate (a) (1,385) (1,297) (2,621) (2,663)
------- -------- ------- --------
Total operating income 17,336 15,226 35,722 34,831
Interest income (expense), net 299 (431) 570 (537)
------- -------- ------- --------
$17,635 $ 14,795 $36,292 $ 34,294
======= ======== ======= ========
(a) Primarily general and administrative expenses.
5. Accrued Acquisition Expenses
The Company has undertaken restructuring activities at certain 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 acquisitions, the Company established reserves, primarily for severance
and excess facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. As of January 2, 1999, the remaining reserve for these
restructuring activities totaled $331,000, and related to the abandonment of
excess facilities. During the first six months of 1999, the Company expended
$14,000 of the established reserve. As of July 3, 1999, the remaining reserve
for restructuring activities at acquired businesses totaled $298,000, as
adjusted for the impact of foreign currency translation, and is included in
other accrued expenses in the accompanying balance sheet.
6. Restructuring Costs
During 1998, the Company recorded restructuring costs, which were
accounted for in accordance with EITF 94-3, for severance for 85 employees. As
of January 2, 1999, the Company had terminated 49 employees and had $1,634,000
accrued for severance. During the first six months of 1999, the Company
terminated 31 employees and had expended $788,000 of the established reserve for
severance. As of July 3, 1999, the remaining reserve for severance totaled
$679,000, as adjusted for the impact of foreign currency translation, and is
included in other accrued expenses in the accompanying balance sheet.
9
7. Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron Corporation
commenced use of a new domestic cash management arrangement. Under the new
arrangement, amounts advanced to Thermo Electron by the Company for domestic
cash management purposes bear interest at the 30-day Dealer Commercial Paper
Rate plus 50 basis points, set at the beginning of each month. Thermo Electron
is contractually required to maintain cash, cash equivalents, and/or immediately
available bank lines of credit equal to at least 50% of all funds invested under
this cash management arrangement by all Thermo Electron subsidiaries other than
wholly owned subsidiaries. The Company has the contractual right to withdraw its
funds invested in the cash management arrangement upon 30 days' prior notice.
Amounts invested in this arrangement are included in "advance to affiliate" in
the accompanying balance sheet.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
year ended January 2, 1999, filed with the Securities and Exchange Commission.
Overview
The Company's businesses are reported in two segments: Analytical
Instruments and Scientific Equipment. The Company's Analytical Instruments
segment develops, manufactures, sells, and services mass spectrometers, liquid
chromatographs, and gas chromatographs used in the quantitative and qualitative
analysis of chemical compounds at ultratrace levels of detection. The Company's
Analytical Instruments segment also supplies consumables for the chromatography
industry. The Company's Scientific Equipment segment develops, manufactures,
sells, and services scientific equipment for the preparation and preservation of
chemical samples. The Company's products are used primarily by pharmaceutical
companies for drug research, testing, and quality control; by biotechnology
researchers to study proteins and other biological samples to gain knowledge
about diseases and possible treatments; by environmental laboratories for
testing water, air, and soil samples for compliance with environmental
regulations; by chemical companies for research and quality control; by
manufacturers for testing in certain industrial applications, such as the
manufacture of silicon chips, and for quality control; by food and beverage
companies for quality control and to test for product contamination; and in
forensic applications.
The Company sells its products worldwide. Although the Company seeks to
charge its customers in the same currency as its operating costs, the Company's
financial performance and competitive position can be affected by currency
exchange rate fluctuations. Where appropriate, the Company uses forward
contracts to reduce its exposure to currency fluctuations.
Results of Operations
Second Quarter 1999 Compared With Second Quarter 1998
Revenues increased 10% to $107.9 million in the second quarter of 1999
from $98.1 million in the second quarter of 1998. Revenues from the Analytical
Instruments segment increased $7.1 million, or 11%, to $73.8 million in 1999
from $66.7 million in 1998. The increase resulted from an increase in revenues
in North America due to the introduction of new products at the Pittsburgh
Conference in March 1999 and an increase in revenues to customers in Asia due to
the improved economic conditions there, compared with the second quarter of
1998. The increases were
10
Second Quarter 1999 Compared With Second Quarter 1998 (continued)
offset in part by a decrease in revenues of $0.7 million due to the unfavorable
effects of currency translation as a result of the strengthening in value of the
U.S. dollar relative to foreign currencies in countries in which the Company
operates. Revenues from the Scientific Equipment segment increased to $34.0
million in 1999 from $31.4 million in 1998, primarily due to an increase in
revenues in North America and Asia across all product lines.
The gross profit margin decreased to 48% in the second quarter of 1999
from 49% in the second quarter of 1998, primarily due to a shift in the product
mix at the Analytical Instruments segment.
Selling, general, and administrative expenses as a percentage of revenues
remained unchanged at 25% in the second quarter of 1999 and 1998. Selling,
general, and administrative expenses increased to $26.6 million in 1999 from
$25.0 million in 1998, primarily due to higher selling and marketing expenses in
both of the Company's segments.
Research and development expenses decreased to $7.5 million in the second
quarter of 1999 from $8.1 million in the second quarter of 1998, primarily due
to lower spending in the Analytical Instruments segment as a result of the
completed development of certain new products.
In the second quarter of 1998, the Company's Analytical Instruments
segment recorded a gain of $0.3 million, primarily relating to the sale of real
estate in California.
Interest income was relatively unchanged at $1.6 million in the second
quarter of 1999, compared with $1.5 million in the second quarter of 1998.
Interest expense decreased to $1.3 million in 1999 from $2.0 million in 1998,
primarily due to the conversion and repurchase of a portion of the Company's 5%
subordinated convertible debentures.
The effective tax rate was 42% in the second quarter of 1999 and 1998. The
effective tax rate exceeded the statutory federal income tax rate primarily due
to the effect of state income taxes, foreign tax rate and tax law differentials,
and nondeductible amortization of cost in excess of net assets of acquired
companies.
First Six Months 1999 Compared With First Six Months 1998
Revenues increased to $213.5 million in the first six months of 1999 from
$206.2 million in the first six months of 1998. Revenues from the Analytical
Instruments segment increased $5.8 million to $147.7 million in 1999 from $141.9
million in 1998. The increase was primarily due to an increase in revenues to
customers in Asia due to the improved economic conditions there and, to a lesser
extent, an increase in revenues of $1.4 million due to the favorable effects of
currency translation as a result of the weakening of the U.S. dollar relative to
foreign currencies in countries in which the Company operates, primarily the
Japanese yen. The increases were offset in part by a decline in revenues from
customers in Brazil due to the unstable economic conditions there and, to a
lesser extent, lower demand for the Company's Fourier transform mass
spectrometers. Revenues from the Scientific Equipment segment increased to $65.8
million in 1999 from $64.4 million in 1998, primarily due to an increase in
revenues in North America in one of the Company's product lines, offset in part
by a decline in revenues from customers in Europe as a result of heightened
competition in one of the Company's product lines.
The gross profit margin decreased to 48% in the first six months of 1999
from 49% in the first six months of 1998, primarily due to a shift in the
product mix at the Analytical Instruments segment.
Selling, general, and administrative expenses as a percentage of revenues
remained unchanged at 25% in the first six months of 1999 and 1998. Selling,
general, and administrative expenses increased to $53.1 million in 1999 from
$51.0 million in 1998, primarily due to higher selling and marketing expenses in
both of the Company's segments.
11
First Six Months 1999 Compared With First Six Months 1998 (continued)
Research and development expenses decreased to $15.0 million in the first
six months of 1999 from $16.0 million in the first six months of 1998, primarily
due to lower spending in the Analytical Instruments segment as a result of the
completed development of certain new products.
In the first six months of 1999 and 1998, the Company's Analytical
Instruments segment recorded gains of $1.6 million and $1.0 million,
respectively, primarily relating to the sale of real estate in California.
Interest income increased to $3.2 million in the first six months of 1999
from $2.9 million in the first six months of 1998, primarily due to higher
invested cash balances. Interest expense decreased to $2.6 million in 1999 from
$3.4 million in 1998, primarily due to the conversion and repurchase of a
portion of the Company's 5% subordinated convertible debentures.
The effective tax rate was 42% in the first six months of 1999 and 1998.
The effective tax rate exceeded the statutory federal income tax rate primarily
due to the effect of state income taxes, foreign tax rate and tax law
differentials, and nondeductible amortization of cost in excess of net assets of
acquired companies.
Liquidity and Capital Resources
Consolidated working capital was $214.6 million at July 3, 1999, compared
with $200.0 million at January 2, 1999. Included in working capital are cash and
cash equivalents of $46.9 million at July 3, 1999, compared with $132.4 million
at January 2, 1999. In addition, as of July 3, 1999, the Company had $98.9
million invested in an advance to affiliate. Prior to the use of a new domestic
cash management arrangement between the Company and Thermo Electron Corporation
(Note 7), which became effective June 1, 1999, amounts invested with Thermo
Electron were included in cash and cash equivalents. At July 3, 1999, $40.5
million of the Company's cash and cash equivalents was held by its foreign
subsidiaries. While this cash can be used outside of the United States,
including for acquisitions, repatriation of this cash into the United States
would be subject to foreign withholding taxes and could also be subject to a
U.S. tax.
Cash provided by operating activities was $28.7 million in the first six
months of 1999. A decrease in accounts receivable provided cash of $12.4
million, primarily due to lower revenues in the second quarter of 1999, compared
with the fourth quarter of 1998. Cash of $4.7 million was used to reduce other
current liabilities, primarily due to a reduction in accrued payroll and related
benefits and customer deposits. Cash of $3.5 million was used to fund a decrease
in accounts payable, primarily due to the timing of payments.
During the first six months of 1999, the Company's primary investing
activities, excluding advance to affiliate activity (Note 7), included the
purchase of property, plant, and equipment. The Company used cash of $2.3
million for purchases of property, plant, and equipment. In addition, the
Company received $1.7 million in proceeds from the sale of property, plant, and
equipment, primarily relating to the sale of real estate in California. During
the remainder of 1999, the Company plans to make capital expenditures of
approximately $5.0 million.
The Company's financing activities used $12.0 million of cash in the first
six months of 1999. The Company used $5.1 million of cash to purchase Company
common stock and subordinated convertible debentures pursuant to an
authorization by the Company's Board of Directors. As of July 3, 1999, the
Company had a remaining authorization to purchase $2.5 million of its own
securities, through September 25, 1999, in the open market, or in negotiated
transactions. Such purchases are funded from working capital. During the first
six months of 1999, the Company used cash of $7.2 million for the repayment of
short- and long-term obligations.
Although the Company expects to have positive cash flow from its existing
operations, the Company anticipates it will require significant amounts of cash
to pursue the acquisition of complementary businesses. The Company expects that
it will finance acquisitions through a combination of internal funds, and/or
short-term borrowings from Thermo Instrument Systems Inc. or Thermo Electron,
although there is no agreement with these companies to ensure that funds will be
available on acceptable terms or at all. The Company believes that its existing
resources are sufficient to meet the capital requirements of its existing
businesses for the foreseeable future.
12
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 date recognition issue
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; (iii) assessing the
year 2000 readiness of key suppliers and vendors; 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 non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems 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 non-information technology systems, which efforts included testing the
year 2000 readiness of its manufacturing, utility, and telecommunications
systems at its critical facilities. The Company is currently in phase two of its
program, during which any noncompliant systems or non-information technology
systems that were identified during phase one are prioritized and remediated.
Based on its evaluations of its critical non-information technology systems, the
Company does not believe any material upgrades or modifications are required.
The Company is currently upgrading or replacing its material noncompliant
information technology systems, and this process was approximately 80% complete
as of July 3, 1999. In many cases, such upgrades or replacements are being made
in the ordinary course of business, without accelerating previously scheduled
upgrades or replacements. The Company expects that all of its material
information technology systems and critical non-information technology systems
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, will not be year 2000 compliant.
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 has distributed questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. To date, no significant supplier or
vendor has indicated that it believes its business operations will be materially
disrupted by the year 2000 issue. 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 completed the majority of its
assessment of third-party risk, and 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 issues.
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. The Company expects to complete
its contingency plan by October 1999.
13
Year 2000 (continued)
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 internal
costs incurred for its year 2000 compliance project. Such costs are principally
the related payroll costs for its information systems group.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's significant
suppliers or vendors experience business disruptions due to the year 2000 issue
and are unable to provide materials and services to the Company on time. The
Company's operations could be delayed or temporarily shut down, and it could be
unable to meet its obligations to customers in a timely fashion. The Company's
business, operations, and financial condition could be adversely affected in
amounts that cannot be reasonably estimated at this time. If the Company
believes that any of its key suppliers or vendors may not be year 2000 ready, it
will seek to identify and secure other suppliers or vendors as part of its
contingency plan.
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
issues 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. As discussed above, if any of
the Company's significant 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 material adverse impact
on the Company's business, operations, and financial condition in amounts that
cannot be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices has not changed materially
from its exposure at year-end 1998.
14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On July 19, 1999, Bruker Daltronik GmbH filed a patent infringement
compliant against the Company and its German subsidiaries in the District Court
of Dusseldorf, Germany. The complaint alleges the Company is violating two of
Bruker's European patents. The patents pertain to ion-trap mass spectrometers.
The complaint requests damages to compensate for the alleged past infringement,
an injunction against future infringement, and costs. The Company intends to
vigorously defend this lawsuit; however, due to the inherent uncertainty of
litigation, the Company cannot predict the outcome of this matter.
Item 4 - Submission of Matters to a Vote of Security Holders
On May 27, 1999, at the Annual Meeting of Shareholders, the shareholders
elected six incumbent directors to a one-year term expiring in 2000. The
directors elected at the meeting were: Dr. Richard W.K. Chapman, Dr. George N.
Hatsopoulos, Mr. Frank Jungers, Mr. Earl R. Lewis, Mr. Anthony J. Pellegrino,
and Dr. Michael E. Porter. Each director, except Dr. Chapman and Dr. Porter,
received 50,352,349 shares voted in favor of his election and 26,088 shares
voted against. Dr. Chapman received 50,352,224 shares voted in favor of his
election and 26,213 shares voted against. Dr. Porter received 50,350,349 shares
voted in favor of his election and 28,088 shares voted against. No abstentions
or broker nonvotes were recorded on the election of directors.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
None.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 10th day of August 1999.
THERMOQUEST CORPORATION
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
16
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10.1 Master Cash Management, Guarantee Reimbursement, and Loan Agreement
dated June 1, 1999, by and between the Registrant and Thermo
Electron Corporation.
10.2 Amended and Restated Equity Incentive Plan of the Registrant.
10.3 Amended and Restated Deferred Compensation Plan for Directors of
the Registrant.
10.4 Amended and Restated Directors Stock Option Plan of the Registrant.
27 Financial Data Schedule.