Exhibit 13
THERMO OPTEK CORPORATION
Consolidated Financial Statements
1996
PAGE
Thermo Optek Corporation 1996 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1996 1995 1994
------------------------------------------------------------------------
Revenues (Notes 7 and 10) $350,639 $212,152 $165,398
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues (Note 7) 188,631 108,590 82,124
Selling, general, and administrative
expenses (Note 7) 98,316 62,109 46,532
Research and development expenses 21,979 13,018 10,496
-------- -------- --------
308,926 183,717 139,152
-------- -------- --------
Operating Income 41,713 28,435 26,246
Interest Income 5,479 1,514 89
Interest Expense (6,772) (2,450) (1,672)
-------- -------- --------
Income Before Provision for Income
Taxes 40,420 27,499 24,663
Provision for Income Taxes (Note 5) 17,019 11,490 10,240
--------- -------- --------
Net Income $ 23,401 $ 16,009 $ 14,423
======== ======== ========
Earnings per Share $ .50 $ .35 $ .32
======== ======== ========
Weighted Average Shares 46,944 45,157 45,157
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
2PAGE
Thermo Optek Corporation 1996 Financial Statements
Consolidated Balance Sheet
(In thousands) 1996 1995
-----------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 63,641 $116,890
Accounts receivable, less allowances of
$4,436 and $5,669 79,568 62,250
Inventories 62,684 44,116
Prepaid expenses 5,961 4,221
Prepaid income taxes (Note 5) 15,254 11,955
Due from affiliated companies (Note 7) 11,919 -
-------- --------
239,027 239,432
-------- --------
Property, Plant, and Equipment, at Cost, Net 53,586 42,001
-------- --------
Patents and Other Assets 10,232 11,400
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Notes 2 and 5) 195,513 140,049
-------- --------
$498,358 $432,882
======== ========
3PAGE
Thermo Optek Corporation 1996 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1996 1995
-----------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable and current maturities of
long-term obligations (Note 8) $ 27,736 $ 18,041
Accounts payable 23,101 19,657
Accrued payroll and employee benefits 11,494 7,551
Accrued commissions 6,377 5,301
Accrued income taxes 12,425 5,401
Accrued installation and warranty expenses 11,953 4,194
Deferred revenue 14,568 8,858
Other accrued expenses (Note 2) 27,484 25,888
-------- --------
135,138 94,891
-------- --------
Deferred Income Taxes (Note 5) 13,865 12,293
-------- --------
Other Deferred Items 3,413 3,631
-------- --------
Long-term Obligations (Note 8) 96,778 101,079
-------- --------
Commitments and Contingency (Note 6)
Shareholders' Investment (Notes 3 and 4):
Common stock, $.01 par value, 100,000,000 shares
authorized; 48,450,000 and 45,000,000 shares
issued and outstanding 485 450
Capital in excess of par value 222,123 215,342
Retained earnings 28,663 5,262
Cumulative translation adjustment (2,107) (66)
-------- --------
249,164 220,988
-------- --------
$498,358 $432,882
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
Thermo Optek Corporation 1996 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Operating Activities:
Net income $ 23,401 $ 16,009 $ 14,423
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 6,394 3,962 3,693
Amortization 4,856 2,760 2,294
Provision for losses on accounts
receivable 907 378 521
Deferred income tax (benefit)
expense (354) (370) 2,144
Other noncash expenses 1,813 1,231 1,201
Changes in current accounts,
excluding the effects of
acquisitions:
Accounts receivable (610) (5,856) (1,828)
Inventories 668 3,158 (35)
Other current assets (3,919) (70) 763
Accounts payable (8,574) (896) 3,990
Other current liabilities 1,373 2,099 (7,389)
Other 1,134 383 26
--------- --------- ---------
Net cash provided by operating
activities 27,089 22,788 19,803
--------- --------- ---------
Investing Activities:
Acquisitions, net of cash acquired
(Note 2) (67,583) (12,593) -
Payment to parent company for
acquired businesses (Note 2) (36,558) - -
Purchases of property, plant, and
equipment (7,502) (2,681) (1,804)
Other (927) 1,028 (1,049)
--------- --------- ---------
Net cash used in investing activities $(112,570) $ (14,246) $ (2,853)
--------- --------- ---------
5PAGE
Thermo Optek Corporation 1996 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of
Company common stock (Note 4) $ 42,937 $ - $ -
Repayment of short-term obligations,
net (6,163) (475) (1,968)
Repayment of long-term obligations (4,221) (618) (7,278)
Net proceeds from issuance of
subordinated convertible
debentures (Note 8) - 93,895 -
Transfer from parent company to
fund acquisition of Baird - 12,926 -
Net transfer to parent company - (100) (9,054)
-------- -------- --------
Net cash provided by (used in)
financing activities 32,553 105,628 (18,300)
-------- -------- --------
Exchange Rate Effect on Cash (321) (538) 160
-------- -------- --------
Increase (Decrease) in Cash and
Cash Equivalents (53,249) 113,632 (1,190)
Cash and Cash Equivalents at Beginning
of Year 116,890 3,258 4,448
-------- -------- --------
Cash and Cash Equivalents at End
of Year $ 63,641 $116,890 $ 3,258
======== ======== ========
Cash Paid For:
Interest $ 6,313 $ 1,285 $ 1,676
Income taxes $ 10,771 $ 187 $ 335
Noncash Activities:
Transfer of acquired businesses
from parent company $ - $ 36,558 $ 3,401
Fair value of assets of acquired
companies $133,312 $ 20,901 $ -
Cash paid for acquired companies (72,065) (12,926) -
-------- -------- --------
Liabilities assumed of acquired
companies $ 61,247 $ 7,975 $ -
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
6PAGE
Thermo Optek Corporation 1996 Financial Statements
Consolidated Statement of Shareholders' Investment
(In thousands) 1996 1995 1994
----------------------------------------------------------------------------
Common Stock, $.01 Par Value
Balance at beginning of year $ 450 $ - $ -
Issuance of Company common stock (Note 4) 35 - -
Capitalization of Company - 300 -
Effect of three-for-two stock split - 150 -
-------- -------- --------
Balance at end of year 485 450 -
-------- -------- --------
Capital in Excess of Par Value
Balance at beginning of year 215,342 - -
Issuance of Company common stock (Note 4) 42,902 - -
Tax benefit related to employees' and
directors' stock plans 437 - -
Payment to parent company for acquired
businesses (Note 2) (36,558) - -
Transfer of acquired businesses from parent
company - 36,558 -
Capitalization of Company - 178,934 -
Effect of three-for-two stock split - (150) -
-------- -------- --------
Balance at end of year 222,123 215,342 -
-------- -------- --------
Retained Earnings
Balance at beginning of year 5,262 - -
Net income after capitalization of Company 23,401 5,262 -
-------- -------- --------
Balance at end of year 28,663 5,262 -
-------- -------- --------
Cumulative Translation Adjustment
Balance at beginning of year (66) 514 27
Translation adjustment (2,041) (580) 487
-------- -------- --------
Balance at end of year (2,107) (66) 514
-------- -------- --------
Net Parent Company Investment
Balance at beginning of year - 155,661 146,891
Net income prior to capitalization of
Company - 10,747 14,423
Net transfer to parent company - (100) (9,054)
Transfer from parent company to fund
acquisition of Baird - 12,926 -
Transfer of acquired business from parent
company - - 3,401
Capitalization of Company - (179,234) -
-------- -------- --------
Balance at end of year - - 155,661
-------- -------- --------
Total Shareholders' Investment $249,164 $220,988 $156,175
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Optek Corporation (the Company) develops, manufactures, and
markets analytical instruments that are used in the quantitative and
qualitative chemical analysis of elements and molecular compounds, and
has technologies in electro-optic components and systems. The Company's
instruments are used by its customers for productivity enhancement,
research and development, quality control, and testing applications in
the environmental testing, chemical, metallurgical, food and beverage,
pharmaceutical, and petroleum industries; and by forensic laboratories,
research organizations, and educational institutions.
Relationship with Thermo Instrument Systems Inc. and Thermo Electron
Corporation
The Company was incorporated in August 1995 as a wholly owned
subsidiary of Thermo Instrument Systems Inc. (Thermo Instrument). After
the formation of the Company, Thermo Instrument transferred to the
Company all of the assets, liabilities, and businesses of Nicolet
Instrument Corporation (Nicolet) and Thermo Jarrell Ash Corporation (TJA)
in exchange for 45,000,000 shares of the Company's common stock. As of
December 28, 1996, Thermo Instrument owned 45,000,000 shares of the
Company's common stock, representing 93% of such stock outstanding.
Thermo Instrument is an 82%-owned subsidiary of Thermo Electron
Corporation (Thermo Electron). As of December 28, 1996, Thermo Electron
owned 144,900 shares of the Company's common stock, representing 0.3% of
such stock outstanding.
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 1996, 1995, and 1994 are for the fiscal years
ended December 28, 1996, December 30, 1995, and December 31, 1994,
respectively.
Revenue Recognition
The Company recognizes product revenues upon shipment of its products
and recognizes service contract revenues ratably over the term of the
contract. The Company provides a reserve for its estimate of warranty and
installation costs at the time of shipment. Deferred revenue in the
accompanying balance sheet consists primarily of unearned revenue on
service contracts. Substantially all of the deferred revenue included in
the accompanying 1996 balance sheet will be recognized within one year.
Revenues earned on contracts in process in excess of billings are
included in inventories in the accompanying balance sheet and were not
material at year-end 1996 and 1995.
8PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock-based compensation plans
(Note 3). 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
equity.
Income Taxes
The Company and Thermo Instrument have a tax allocation agreement
under which both the Company and Thermo Instrument are included in Thermo
Electron's consolidated federal and certain state income tax returns. The
agreement provides that in years in which the Company has taxable income,
it will pay to Thermo Electron amounts comparable to the taxes the
Company would have paid if it had filed separate tax returns. If Thermo
Instrument's equity ownership of the Company were to drop below 80%, the
Company would be required to file its own federal income tax return.
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes," the Company recognizes deferred
income taxes based on the expected future tax consequences of differences
between the financial statement basis and the tax basis of assets and
liabilities, calculated using enacted tax rates in effect for the year in
which the differences are expected to be reflected in the tax return.
Earnings per Share
Earnings per share has been computed based on the weighted average
number of shares outstanding during the year. Pursuant to Securities and
Exchange Commission requirements, earnings per share have been presented
for all periods. Weighted average shares for all periods include the
45,000,000 shares issued to Thermo Instrument in connection with the
initial capitalization of the Company and, for periods prior to the
Company's initial public offering, the effect of the assumed exercise of
stock options issued within one year prior to the Company's initial
public offering. Because the effect of the assumed exercise of stock
options would be immaterial, they have been excluded from weighted
average shares subsequent to the Company's initial public offering. Fully
diluted earnings per share has not been presented because the effect of
the assumed conversion of the Company's subordinated convertible
debentures and elimination of the related interest expense is not
material.
Stock Split
All share and per share information has been restated to reflect a
three-for-two stock split, effected in the form of a 50% stock dividend,
distributed in April 1996.
Cash and Cash Equivalents
As of December 28, 1996, $55,007,000 of the Company's cash
equivalents were invested in a repurchase agreement with Thermo Electron.
9PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Under this agreement, the Company in effect lends excess cash to Thermo
Electron, which Thermo Electron collateralizes with investments
principally consisting of U.S. government agency securities, corporate
notes, 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 and have an original maturity of
three months or less. 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. As of December 28, 1996, the Company's cash
equivalents also included investments in commercial paper and short-term
certificates of deposit of 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.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out
or weighted average basis) or market value and include materials, labor,
and manufacturing overhead. The components of inventories are as follows:
(In thousands) 1996 1995
-----------------------------------------------------------------------
Raw materials and supplies $27,865 $29,523
Work in process 10,353 5,762
Finished goods 24,466 8,831
------- -------
$62,684 $44,116
======= =======
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, 16
to 40 years; machinery and equipment, 3 to 10 years; and leasehold
improvements, the shorter of the term of the lease or the life of the
asset. Property, plant, and equipment consist of the following:
(In thousands) 1996 1995
-----------------------------------------------------------------------
Land $ 7,702 $ 5,051
Buildings 32,052 25,404
Machinery, equipment, and leasehold improvements 35,853 28,191
------- -------
75,607 58,646
Less: Accumulated depreciation and amortization 22,021 16,645
------- -------
$53,586 $42,001
======= =======
10PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Patents and Other Assets
Patents and other assets in the accompanying balance sheet includes
the costs of acquired patents that are amortized using the straight-line
method over their estimated useful lives, which range from 12 to 13
years. These assets were $7,527,000 and $8,592,000, net of accumulated
amortization of $6,102,000 and $4,833,000, at year-end 1996 and 1995,
respectively. Patents and other assets in the accompanying balance sheet
also includes deferred debt costs of $1,931,000 and $2,254,000, net of
accumulated amortization of $608,000 and $102,000, at year-end 1996 and
1995, respectively. Deferred debt costs are amortized through the
maturity of the related debt in 2000.
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 $13,788,000 and $8,932,000 at year-end 1996
and 1995, respectively. The Company assesses the future useful life of
this asset whenever events or changes in circumstances indicate that the
current useful life has diminished. The Company considers the future
undiscounted cash flows of the acquired companies in assessing the
recoverability of this asset. If impairment has occurred, any excess of
carrying value over fair value is recorded as a loss.
Environmental Liabilities
The Company accrues for costs associated with the remediation of
environmental pollution when it is probable that a liability has been
incurred and the Company's proportionate share of the amount can be
reasonably estimated. Any recorded liabilities have not been discounted.
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 as a separate component of shareholders' investment titled
"Cumulative translation adjustment." Foreign currency transaction gains
and losses are included in the accompanying statement of income and are
not material for the three years presented.
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 1995 have been reclassified to conform to the 1996
financial statement presentation.
11PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
2. Acquisitions
On March 29, 1996, Thermo Instrument acquired a substantial portion
of the businesses comprising the Scientific Instruments Division of
Fisons plc (Fisons), a wholly owned subsidiary of Rhone-Poulenc Rorer,
Inc. In November 1996, the Company acquired two businesses formerly part
of Fisons, A. R. L. Applied Research Laboratories S.A. (ARL) and VG
Elemental, from Thermo Instrument for an aggregate $55,196,000 in cash
and the assumption of $16,593,000 in debt. The purchase price is subject
to a post-closing adjustment based on a post-closing adjustment to be
negotiated with Fisons by Thermo Instrument in connection with the
negotiations for settlement of the final purchase price for all of the
businesses of Fisons acquired by Thermo Instrument in March 1996. The
purchase price was determined based on the net book value of ARL and VG
Elemental at March 29, 1996, and a pro rata allocation of Thermo
Instrument's total cost in excess of net assets of acquired companies
recorded in connection with the acquisition of the Fisons businesses. ARL
is a manufacturer of wavelength-dispersive X-ray fluorescence instruments
and arc/spark atomic emission spectrometers and VG Elemental is a
manufacturer of inductively coupled plasma/mass spectrometers.
Because the Company, ARL, and VG Elemental were deemed for accounting
purposes to be under control of their common majority owner, Thermo
Instrument, the November 1996 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 ARL and VG Elemental from
March 29, 1996, the date these businesses were acquired by Thermo
Instrument. During 1996, the Company acquired two additional companies,
for an aggregate $16,869,000 in cash and the assumption of $731,000 of
debt, which were accounted for using the purchase method of accounting.
On December 1, 1995, Thermo Instrument acquired the assets of the
analytical instruments division of Analytical Technology, Inc. (ATI). In
April 1996, the Company acquired the Mattson Instruments (Mattson) and
Unicam divisions of ATI from Thermo Instrument for $36,558,000 in cash.
Mattson is a manufacturer of Fourier transform infrared (FT-IR)
spectroscopy instruments and Unicam is a manufacturer of atomic
absorption and ultraviolet/visible spectroscopy instruments. Because the
Company, Mattson, and Unicam were deemed for accounting purposes to be
under control of their common majority owner, Thermo Instrument, the
accompanying historical financial information includes the results of
operations of Mattson and Unicam from December 1, 1995, the date these
businesses were acquired by Thermo Instrument. Because the Company had
not disbursed the funds in connection with these acquisitions as of
December 30, 1995, the transfer of these businesses was recorded as a
contribution of capital in excess of par value as of December 1, 1995.
The $36,558,000 payment to Thermo Instrument was accounted for as a
reduction of capital in excess of par value in April 1996.
In January 1995, TJA acquired the Analytical Instruments Division of
Baird Corporation (Baird), a wholly owned subsidiary of IMO Industries
Inc., for $12,926,000 in cash. Baird is a manufacturer of arc/spark and
other spectrometers. This acquisition was accounted for using the
purchase method of accounting.
12PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
2. Acquisitions (continued)
The cost of these acquisitions exceeded the estimated fair value of
the acquired net assets by $115,080,000, which is being amortized over 40
years. Allocation of the purchase price for these acquisitions was based
on estimates of the fair value of the net assets acquired and, for the
ARL and VG Elemental acquisitions, is subject to adjustment upon
finalization of the purchase price allocation.
Based on unaudited data, the following table presents selected
financial information for the Company and the businesses acquired, on a
pro forma basis, assuming the Company, ARL, and VG Elemental had been
combined since the beginning of 1995, and the Company, Baird, Mattson,
and Unicam had been combined since the beginning of 1994. 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) 1996 1995 1994
------------------------------------------------------------------------
Revenues $368,167 $352,832 $263,892
Net income 19,740 4,658 6,620
Earnings per share .42 .10 .15
The pro forma results are not necessarily indicative of future
operations or the actual results that would have occurred had the
acquisitions of ARL and VG Elemental been made at the beginning of 1995
and the acquisitions of Baird, Mattson, and Unicam been made at the
beginning of 1994.
In connection with the acquisitions of Mattson, Unicam, ARL, and VG
Elemental, the Company has undertaken a restructuring of the acquired
businesses. The restructuring activities include reductions in staffing
levels, abandonment of excess facilities, and other costs associated with
exiting certain activities of the acquired businesses. In connection with
these restructuring activities, the Company established reserves of
$10,878,000 for Mattson and Unicam in 1995 and $5,531,000 for ARL and VG
Elemental in 1996. These amounts were recorded as costs of the respective
acquisitions in accordance with Emerging Issues Task Force Pronouncement
95-3 (EITF 95-3). During 1996, the Company expended $7,350,000 and
$2,853,000 for restructuring costs at Mattson and Unicam and at ARL and
VG Elemental, respectively. These expenditures consisted primarily of
severance and abandoned facility payments. During 1996, the Company
finalized its restructuring plans for Mattson and Unicam. The remaining
balance of the reserve for Mattson and Unicam of $3,528,000 is for
ongoing severance and abandoned facility payments. At December 28, 1996,
unresolved matters related to the restructuring activities at ARL and VG
Elemental include completing the identification of specific employees for
termination and locations to be abandoned or consolidated, as well as
other decisions concerning the integration of the acquired businesses
into the Company. In accordance with EITF 95-3, finalization of the
Company's plan for restructuring ARL and VG Elemental will not occur
beyond one year from the date of acquisition. Any changes in estimates of
these costs prior to such finalization will be recorded as adjustments to
cost in excess of net assets of acquired companies. As of December 28,
1996, the Company had accrued a total of $8,237,000 for restructuring
13PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
2. Acquisitions (continued)
costs for all of its acquisitions, including those discussed above. These
reserves are included in other accrued expenses in the accompanying
balance sheet.
3. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
------------------
In November 1995, the Company adopted a stock-based compensation plan
for its key employees, directors, and others, which permits the grant of
a variety of stock and stock-based awards as determined by the human
resources committee of the Company's Board of Directors (the Board
Committee), including restricted stock, stock options, stock bonus
shares, or performance-based shares. To date, only nonqualified stock
options have been awarded under this plan. The option recipients and the
terms of options granted under this plan are determined by the Board
Committee. Options granted through the date of the Company's initial
public offering became exercisable on September 6, 1996. All options are
subject to certain transfer restrictions and the right of the Company to
repurchase shares issued upon exercise of the options at the exercise
price, upon certain events. The restrictions and repurchase rights
generally lapse ratably over a five to ten year period depending on the
term of the option, which generally ranges from ten 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, adopted in November
1995, 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 plan 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.
Employee Stock Purchase Program
-------------------------------
Substantially all of the Company's full-time U.S. employees are
eligible to participate in an employee stock purchase program sponsored
by Thermo Instrument and Thermo Electron. Under this program, shares of
Thermo Instrument's and Thermo Electron's common stock can 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 are subject to a
six-month resale restriction. Prior to November 1, 1995, the applicable
shares of common stock could be purchased at 85% of the fair market value
at the beginning of the period, and the shares purchased were subject to
a one-year resale restriction. Shares are purchased through payroll
deductions of up to 10% of each participating employee's gross wages.
14PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans (continued)
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 in 1996 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 as follows:
(In thousands except per share amounts) 1996
-----------------------------------------------------------------------
Net income:
As reported $23,401
Pro forma 22,526
Earnings per share:
As reported .50
Pro forma .48
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 fair value of each option grant is estimated on the grant date
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1996
-----------------------------------------------------------------------
Volatility 26%
Risk-free interest rate 6.8%
Expected life of options 7.7 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.
15PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans (continued)
Stock Option Activity
A summary of the Company's stock option activity is as follows:
1996
------------------
Weighted
Number Average
of Exercise
(Shares in thousands) Shares Price
----------------------------------------------------------------------
Options outstanding, beginning of year - $ -
Granted 2,511 12.06
Forfeited (114) 12.00
----- ------
Options outstanding, end of year 2,397 $12.07
===== ======
Options exercisable 2,397 $12.07
===== ======
Options available for grant 528
=====
Weighted average fair value per share
of options granted during year $ 5.77
======
As of December 28, 1996, the options outstanding were exercisable
at prices ranging from $11.98 to $13.58 and had a weighted-average
remaining contractual life of 10.3 years.
401(k) Savings Plans
Substantially all of the Company's full-time U.S. employees are
eligible to participate in Thermo Electron's or Nicolet's 401(k) savings
plans and, prior to 1995, in Thermo Electron's employee stock ownership
plan (ESOP). Contributions to the 401(k) savings plans are made by both
the employee and the Company. Company contributions to the 401(k) plans
are based upon the level of employee contributions. For these plans, the
Company contributed and charged to expense $1,242,000, $1,106,000, and
$1,005,000 in 1996, 1995, and 1994, respectively. Effective December 31,
1994, the ESOP was split into two plans: ESOP I, covering employees of
Thermo Electron's corporate office and its wholly owned subsidiaries and
ESOP II, covering employees of Thermo Electron's majority-owned
subsidiaries. Also, effective December 31, 1994, the ESOP II plan was
terminated and as a result, the Company's employees are no longer
eligible to participate in an ESOP.
16PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Common Stock
In June and July 1996, the Company sold 3,450,000 shares of its
common stock in an initial public offering at $13.50 per share for net
proceeds of $42,937,000.
At December 28, 1996, the Company had reserved 9,481,000 unissued
shares of its common stock for possible issuance under stock-based
compensation plans and for issuance upon possible conversion of the
Company's subordinated convertible debentures.
5. Income Taxes
The components of income before provision for income taxes are as
follows:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Domestic $29,532 $23,205 $22,877
Foreign 10,888 4,294 1,786
------- ------- -------
$40,420 $27,499 $24,663
======= ======= =======
The components of the provision for income taxes are as follows:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Currently payable:
Federal $10,443 $ 8,227 $ 5,687
State 2,102 1,658 1,412
Foreign 4,828 1,975 997
------- ------- -------
17,373 11,860 8,096
------- ------- -------
Net deferred (prepaid):
Federal (211) (435) 1,898
State (45) (92) 474
Foreign (98) 157 (228)
------- ------- -------
(354) (370) 2,144
------- ------- -------
$17,019 $11,490 $10,240
======= ======= =======
The 1995 provision for income taxes that is currently payable does
not reflect $1,000,000 of tax benefits used to reduce cost in excess of
net assets of acquired companies. In addition, 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 $437,000 of such
benefits that have been allocated to capital in excess of par value in
1996.
17PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Income Taxes (continued)
The provision for income taxes in the accompanying statement of
income differs from the provision calculated by applying the statutory
federal income tax rate of 35% to income before provision for income
taxes due to the following:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Provision for income taxes at
statutory rate $14,147 $ 9,625 $ 8,632
Increases (decreases) resulting from:
State income taxes, net of federal
tax 1,337 1,018 1,226
Amortization of cost in excess of
net assets of acquired companies 1,013 894 767
Net foreign losses not benefited
and tax rate differential 919 629 144
Tax benefit of foreign sales
corporation (606) (659) (642)
Other, net 209 (17) 113
------- ------- -------
$17,019 $11,490 $10,240
======= ======= =======
Prepaid income taxes and deferred income taxes in the accompanying
balance sheet consist of the following:
(In thousands) 1996 1995
-------------------------------------------------------------
Prepaid income taxes:
Foreign tax loss carryforwards $16,205 $11,220
Reserves and accruals 5,917 3,378
Inventory basis difference 4,698 3,592
Accrued compensation 1,107 1,010
Other, net 3,532 3,975
------- -------
31,459 23,175
Less: Valuation allowance 16,205 11,220
------- -------
$15,254 $11,955
======= =======
Deferred income taxes:
Depreciation $ 7,045 $ 8,427
Intangible assets 3,088 3,019
Other, net 3,732 847
------- -------
$13,865 $12,293
======= =======
18PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Income Taxes (continued)
As of December 28, 1996, Unicam had tax loss carryforwards in the
U.K. of $37,700,000 that are subject to review and adjustment by the U.K.
Inland Revenue Service as a result of the acquisition of the analytical
instruments division of ATI by Thermo Instrument. These and additional
foreign tax loss carryforwards of $9,300,000 can be used only to offset
taxable income generated in certain foreign countries. The loss
carryforwards generally do not expire and any resulting benefit will be
used to reduce cost in excess of net assets of acquired companies.
The valuation allowance relates to the uncertainty surrounding the
realization of foreign tax loss carryforwards, the realization of which
is limited to the future income of certain subsidiaries. The increase in
the valuation allowance results from valuation allowances established for
tax loss carryforwards of businesses acquired in 1996.
A provision has not been made for U.S. or additional foreign taxes on
$20,665,000 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. The Company
believes that any additional U.S. tax liability due upon remittance of
such earnings would be immaterial due to available U.S. foreign tax
credits.
6. Commitments and Contingency
Commitments
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 $6,779,000, $3,154,000,
and $2,989,000 in 1996, 1995, and 1994, respectively. Future minimum
payments due under noncancellable operating leases at December 28, 1996,
were $5,067,000 in 1997; $4,194,000 in 1998; $2,977,000 in 1999;
$2,362,000 in 2000; $2,281,000 in 2001; and $9,627,000 in 2002 and
thereafter. Total future minimum lease payments are $26,508,000.
Contingency
Prior to Nicolet's acquisition by the Company, the Wisconsin
Department of Natural Resources (DNR) notified Nicolet that the DNR had
begun a remedial investigation to determine the extent of releases of
hazardous substances from the Refuse Hideaway Landfill located in
Middleton, Wisconsin (the Landfill), and that Nicolet was a potential
responsible party (PRP) with regard to the Landfill. Approximately 50
other parties were also notified of their potential PRP status. The
Environmental Protection Agency (EPA) subsequently added the Landfill to
its National Priorities List under the Comprehensive Environmental
Response Compensation and Liability Act of 1980 (CERCLA). In February
1995, the EPA and the DNR recommended that various remediation efforts be
made at the Landfill at an estimated cost of approximately $5.2 million,
and the Company expects that such agencies will also seek to recover
their oversight costs and expenses related to the site. Under CERCLA,
responsible parties can include current and previous owners of a site,
19PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
6. Commitments and Contingency (continued)
generators of hazardous substances disposed of at a site, and
transporters of hazardous substances to a site. Each responsible party
can be jointly and severally liable, without regard to fault or
negligence, for all costs associated with the remediation of the site.
Although the Company believes that the quantity of materials generated by
Nicolet and transported to the Landfill is relatively small in comparison
to that of other named PRPs, there can be no assurance as to the exact
amount, if any, for which Nicolet will be held responsible by the EPA and
the DNR for costs associated with remediation of the Landfill.
In connection with the organization of the Company, Thermo Instrument
agreed to indemnify the Company for any cash damages resulting from this
matter. Notwithstanding this indemnification, the Company would be
required to report any such damages as an expense in its results of
operations, with any indemnification payment it receives from Thermo
Instrument being treated as a contribution to shareholders' investment.
In the opinion of management, resolution of this matter will not have a
material adverse effect on the Company's financial position or results of
operations.
7. 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 pays Thermo Electron
annually an amount equal to 1.0% of the Company's revenues. The Company
paid an annual fee equal to 1.20% and 1.25% of the Company's revenues in
1995 and 1994, respectively. The annual fee is reviewed and adjusted
annually by mutual agreement of the parties. For these services, the
Company was charged $3,506,000, $2,546,000, and $2,067,000 in 1996, 1995,
and 1994, respectively. 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). 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. 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.
20PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
7. Related Party Transactions (continued)
Other Related Party Services
Prior to 1995, the Company provided certain services to ThermoSpectra
Corporation (ThermoSpectra), a majority-owned subsidiary of Thermo
Instrument, and to Nicolet Biomedical Inc. (Nicolet Biomedical), a wholly
owned subsidiary of Thermo Electron. The costs of such services were
allocated based on the subsidiaries' revenues attributable to their
businesses operated at the Company's Wisconsin facilities as a percentage
of the total revenues of all businesses operated at such facilities.
These services included personnel administration, accounting, data
processing, and general administrative management. For these services,
the Company charged $672,000 in 1994.
Operating Leases
The Company leases office and manufacturing space to ThermoSpectra
and Nicolet Biomedical pursuant to an arrangement whereby the Company
charges ThermoSpectra and Nicolet Biomedical their allocated share of the
occupancy expenses of the Company's Wisconsin facility, based on the
space ThermoSpectra and Nicolet Biomedical utilize. The Company recorded
operating lease income of $913,000, $898,000, and $1,120,000 in 1996,
1995, and 1994, respectively, which is deducted from selling, general,
and administrative expenses in the accompanying statement of income.
These leases are effective until December 31, 1998, but may be terminated
by ThermoSpectra and Nicolet Biomedical upon 30 days' prior notice to the
Company.
Other Related Party Transactions
The Company purchases and sells products in the ordinary course of
business with other companies affiliated with Thermo Instrument. Sales of
products to such affiliated companies totaled $28,155,000, $5,280,000,
and $3,389,000 in 1996, 1995, and 1994, respectively. Purchases of
products from such affiliated companies totaled $8,680,000, $1,720,000,
and $1,555,000 in 1996, 1995, and 1994, respectively.
The increase in related party sales in 1996 results from the
Company's acquisition of ARL and VG Elemental. Throughout most of 1996,
the marketing and ultimate resale of products manufactured by these
businesses were performed by business units that were formerly part of
Fisons and that were acquired by Thermo Instrument. These products were
sold at prices and commercial terms that are representative of
transactions with unaffiliated parties. In late 1996, the Company began
selling these products through its existing distribution channels and,
therefore the amount of related party sales in 1997 is expected to
decline. Due from affiliated companies in the accompanying balance sheet
primarily represents amounts receivable from the sale of ARL and VG
Elemental products.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
21PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
8. Short- and Long-term Obligations
Short-term Obligations
Notes payable and current maturities of long-term obligations in the
accompanying balance sheet includes $27,097,000 and $17,275,000 in 1996
and 1995, respectively, of short-term bank borrowings by the Company's
foreign subsidiaries. The weighted average interest rate for these
borrowings was 4.5% and 5.8% at year-end 1996 and 1995, respectively.
Long-term Obligations
Long-term obligations of the Company are as follows:
(In thousands except per share amounts) 1996 1995
------------------------------------------------------------------------
5% Subordinated convertible debentures,
due 2000, convertible at $14.85 per share $ 96,250 $ 96,250
Other 1,039 5,524
-------- --------
97,289 101,774
Less: Current maturities of long-term
obligations 511 695
-------- --------
$ 96,778 $101,079
======== ========
The $96,250,000 principal amount 5% subordinated convertible
debentures are guaranteed on a subordinated basis by Thermo Electron.
Thermo Instrument and the Company have agreed to reimburse Thermo
Electron in the event Thermo Electron is required to make a payment under
the guarantee. In addition, the Company has agreed to reimburse Thermo
Instrument in the event Thermo Instrument is required to make a payment
under the guarantee.
The annual requirements of long-term obligations as of December 28,
1996, are $511,000 in 1997; $96,000 in 1998; $63,000 in 1999; $96,313,000
in 2000; $63,000 in 2001; and $243,000 in 2002 and thereafter. Total
future requirements of long-term obligations are $97,289,000.
The fair value of the Company's 5% subordinated convertible
debentures was $96,250,000 and $100,000,000 as of year-end 1996 and 1995,
respectively. The carrying amount of the Company's other long-term
obligations approximates fair value as of December 28, 1996. The fair
value of long-term obligations was determined based on quoted market
prices and on borrowing rates available to the Company at the respective
year-ends.
9. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and
cash equivalents, accounts receivable, due from affiliated companies,
notes payable and current maturities of long-term obligations, accounts
payable, long-term obligations, and forward exchange contracts. The
carrying amounts of these financial instruments, with the exception of
long-term obligations and forward exchange contracts, approximate fair
value due to their short-term nature. See Note 8 for fair value
information pertaining to the Company's long-term obligations.
22PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
9. Fair Value of Financial Instruments (continued)
The Company enters into forward exchange contracts to hedge certain
firm purchase and sale commitments denominated in currencies other than
its subsidiaries' local currencies, principally U.S. dollars, British
pounds sterling, Japanese yen, French francs, and Swiss francs. The
purpose of the Company's foreign currency hedging activities is to
protect the Company's local currency cash flows related to these
commitments from fluctuations in foreign exchange rates. The amounts of
such forward exchange contracts at year-end 1996 and 1995 were $2,411,000
and $500,000, respectively.
The fair value of the Company's forward exchange contracts
receivable was $63,000 and $43,000 at year-end 1996 and 1995,
respectively. The fair value of forward exchange contracts is the
estimated amount that the Company would receive upon termination of the
contract, taking into account the change in foreign exchange rates.
23PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
10. Geographical Information
The Company is engaged in one business segment: developing,
manufacturing, and selling analytical instruments. The following table
shows data for the Company by geographical area:
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Revenues:
United States $204,939 $152,282 $124,634
United Kingdom 69,180 20,013 15,718
Switzerland 36,489 - -
Other Europe 55,726 41,212 24,929
Japan 25,401 26,377 18,559
Other 13,084 4,976 4,274
Transfers among geographical
areas (a) (54,180) (32,708) (22,716)
-------- -------- --------
$350,639 $212,152 $165,398
======== ======== ========
Income before provision for income taxes:
United States (b) $ 29,747 $ 22,834 $ 23,169
United Kingdom 3,807 951 589
Switzerland 4,690 - -
Other Europe 504 2,794 1,340
Japan 2,064 1,543 894
Other 901 313 254
-------- -------- --------
Total operating income 41,713 28,435 26,246
Interest expense, net (1,293) (936) (1,583)
-------- -------- --------
$ 40,420 $ 27,499 $ 24,663
======== ======== ========
Identifiable assets:
United States (c) $296,235 $340,566 $182,967
United Kingdom 84,866 45,208 13,568
Switzerland 56,458 - -
Other Europe 36,586 27,574 18,154
Japan 16,171 15,895 14,020
Other 8,042 3,639 1,897
-------- -------- --------
$498,358 $432,882 $230,606
======== ======== ========
24PAGE
Thermo Optek Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
10. Geographical Information (continued)
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Export revenues included in United
States revenues above (d):
Europe $ 29,390 $ 22,001 $ 18,504
Asia 40,138 30,770 15,625
Other 14,752 14,317 6,906
-------- -------- --------
$ 84,280 $ 67,088 $ 41,035
======== ======== ========
(a) Transfers among geographical areas are accounted for at prices that
are representative of transactions with unaffiliated parties.
(b) Includes corporate general and administrative expenses.
(c) Includes $42.9 million in net proceeds from the 1996 initial public
offering of Company common stock, net of cash payments of $104.1
million in 1996 for companies acquired, and $93.9 million in net
proceeds from the 1995 issuance of 5% subordinated convertible
debentures.
(d) In general, export sales are denominated in U.S. dollars.
11. Unaudited Quarterly Information
(In thousands except per share amounts)
1996 First Second(a) Third Fourth
----------------------------------------------------------------------
Revenues $69,668 $93,321 $90,693 $96,957
Gross profit 33,908 42,012 42,775 43,313
Net income 4,296 5,424 6,426 7,255
Earnings per share .10 .12 .13 .15
1995 First Second Third Fourth(b)
----------------------------------------------------------------------
Revenues $50,862 $51,780 $45,932 $63,578
Gross profit 25,152 25,848 24,897 27,665
Net income 4,220 4,309 3,916 3,564
Earnings per share .09 .10 .09 .08
(a) Includes the results of the ARL and VG Elemental divisions of Fisons
since their acquisition by Thermo Instrument in March 1996.
(b) Includes the results of the Mattson and Unicam divisions of ATI since
their acquisition by Thermo Instrument in December 1995.
25PAGE
Thermo Optek Corporation 1996 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Optek Corporation:
We have audited the accompanying consolidated balance sheet of Thermo
Optek Corporation (a Delaware corporation and 93%-owned subsidiary of
Thermo Instrument Systems Inc.) and subsidiaries as of December 28, 1996,
and December 30, 1995, and the related consolidated statements of income,
shareholders' investment, and cash flows for each of the three years in
the period ended December 28, 1996. 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
Thermo Optek Corporation and subsidiaries as of December 28, 1996, and
December 30, 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 28, 1996,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 11, 1997
26PAGE
Thermo Optek Corporation 1996 Financial Statements
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
caption "Forward-looking Statements."
Overview
Prior to 1996, the Company's principal operating units included
Thermo Jarrell Ash Corporation (TJA), a manufacturer and distributor of
atomic absorption (AA) and atomic emission (AE) spectrometry products
based in Franklin, Massachusetts, and Nicolet Instrument Corporation
(Nicolet), a manufacturer and distributor of Fourier Transform Infrared
(FT-IR) and FT-Raman spectrometry products based in Madison, Wisconsin.
During 1996, the Company acquired five additional companies, summarized
below, significantly increasing its operations.
The Company's strategy is to supplement its internal growth with the
acquisition of businesses and technologies that complement and augment
its existing product lines. Effective December 1, 1995, the Company
acquired Mattson Instruments (Mattson), a manufacturer of FT-IR
spectroscopy instruments, and Unicam, a manufacturer of AA and
ultraviolet/visible spectroscopy instruments, from Thermo Instrument
Systems Inc. (Thermo Instrument) (Note 2). In February 1996, the Company
acquired Oriel Corporation (Oriel), a manufacturer and distributor of
electro-optical instruments and components, and Corion Corporation
(Corion), a manufacturer of commercial optical filters.
In addition, effective March 29, 1996, the Company acquired A.R.L.
Applied Research Laboratories S.A. (ARL), a manufacturer of
wavelength-dispersive X-ray fluorescence instruments and arc/spark atomic
emission spectrometers, and VG Elemental, a manufacturer of inductively
coupled plasma/mass spectrometers, from Thermo Instrument (Note 2).
The Company has a subsidiary, Thermo Vision Corporation (Thermo
Vision), that addresses the photonics marketplace for optical components,
imaging systems, analytical instruments, and lasers. Thermo Vision is
pursuing applications of the Company's technologies for cost-effective,
application-specific instruments and for optical components, systems, and
subassemblies for analytical instrumentation and other applications. In
September 1996, the Company announced its intent to spin out Thermo
Vision through a distribution of 100 percent of its outstanding capital
stock in the form of a dividend to the Company's shareholders. The
Company anticipates completing the spinout in 1997. The Company intends
to seek a Letter Ruling from the Internal Revenue Service stating that
this proposed spinout would have no current tax effect on the Company or
27PAGE
Thermo Optek Corporation 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview (continued)
its shareholders. The Company would distribute the shares upon receipt of
the Letter Ruling and satisfaction of other conditions, including the
listing of the Thermo Vision shares on the American Stock Exchange.
Thermo Vision, which includes Oriel and Corion, had revenues of $30.5
million and $6.1 million in 1996 and 1995, respectively.
The Company sells its products on a worldwide basis. 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
1996 Compared With 1995
Revenues increased 65% to $350.6 million in 1996 from $212.2 million
in 1995, primarily as a result of the inclusion of $137.2 million from
acquisitions (Note 2). To a lesser extent, revenues increased due to
greater product demand, primarily at Nicolet. These increases were offset
in part by a decrease of $6.6 million in revenues due to the unfavorable
effects of currency translation as a result of the strengthening of the
U.S. dollar relative to foreign currencies in countries where the Company
operates.
The gross profit margin declined to 46% in 1996 from 49% in 1995,
primarily due to the inclusion of lower-margin revenues from acquired
businesses.
Selling, general, and administrative expenses as a percentage of
revenues decreased to 28% in 1996 from 29% in 1995, primarily due to the
acquisitions of ARL and VG Elemental. Prior to their acquisition by the
Company and throughout 1996, ARL and VG Elemental sold products primarily
to other business units formerly part of the Scientific Instruments
Division of Fisons plc for marketing and ultimate resale to the customer,
and thus the Company's results for 1996 exclude selling, general, and
administrative costs relating to these sales. In late 1996, the Company
began distributing these products primarily through its existing
distribution channels and, therefore the Company expects that selling,
general, and administrative expenses as a percentage of revenues at these
businesses will increase. However, the Company's goal is to increase the
gross profit margin to cover these additional costs by increasing selling
prices, as well as through improving product mix and manufacturing
efficiencies. There can be no assurance that the Company will be
successful in these efforts.
Research and development expenses as a percentage of revenues were
unchanged at 6% in 1996 and 1995.
Interest income increased to $5.5 million in 1996 from $1.5 million
in 1995 as a result of interest income earned on the invested proceeds
from the Company's October 1995 issuance of $96.3 million principal
amount of 5% subordinated convertible debentures and the June and July
28PAGE
Thermo Optek Corporation 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1996 Compared With 1995 (continued)
1996 initial public offering of common stock, offset in part by a
reduction in interest income as a result of cash expended for
acquisitions. Interest expense increased to $6.8 million in 1996 from
$2.5 million in 1995, primarily due to interest expense incurred on the
Company's 5% convertible subordinated debentures.
The effective tax rate was 42% in both 1996 and 1995. The effective
tax rates exceeded the statutory federal income tax rate due to the
impact of state income taxes, the nondeductible amortization of cost in
excess of net assets of acquired companies, and the inability to provide
a tax benefit on foreign losses, offset in part by the tax benefit
associated with a foreign sales corporation.
1995 Compared With 1994
Revenues increased 28% to $212.2 million in 1995 from $165.4 million
in 1994. Revenues increased $25.9 million and $9.2 million due to the
January 1995 acquisition of Baird, a manufacturer of arc/spark
spectrometers that was subsequently consolidated into TJA, and the
December 1995 acquisitions of Mattson and Unicam. In addition, revenues
from Nicolet increased $10.4 million due to increased demand for its
products, particularly in Japan and the Pacific Rim and, to a lesser
extent, due to currency fluctuations. Overall, revenues increased $5.7
million in 1995 due to the weakness of the U.S. dollar in relation to
foreign currencies.
The gross profit margin declined to 49% in 1995 from 50% in 1994.
This decline was primarily due to the inclusion of lower-margin products
from Baird and disruption in operations caused by the consolidation of
the manufacturing operations of Baird and TJA into a new facility in
mid-1995. In addition, increased competition due to the contraction of
the environmental market had a negative impact on the margins of TJA in
1995. The U.S. environmental market has been consolidating, which has
negatively affected sales of several of TJA's products. The declines at
Baird and TJA were offset in part due to improved margins at Nicolet
resulting primarily from the weakness of the U.S. dollar in relation to
foreign currencies, in particular the Japanese yen and German mark, as
well as improved margins for its newly introduced products.
Selling, general, and administrative expenses as a percentage of
revenues increased to 29% in 1995 from 28% in 1994 as a result of higher
expenses at Baird prior to the consolidation of Baird's operations with
TJA and expanded selling efforts in China and Brazil. Research and
development expenses as a percentage of revenues were relatively
unchanged at 6% in 1995 and 1994.
Interest income increased to $1.5 million in 1995 as a result of
interest income earned on the invested proceeds from the Company's
October 1995 issuance of $96.3 million principal amount of 5%
subordinated convertible debentures. Interest expense increased to $2.5
million in 1995 from $1.7 million in 1994, primarily due to interest
expense incurred on the Company's 5% convertible subordinated debentures.
The effective tax rate was 42% in both 1995 and 1994. The effective
tax rates exceeded the statutory federal income tax rate due to the
impact of state income taxes, nondeductible amortization of cost in
excess of net assets of acquired companies, and the inability in 1995 to
29PAGE
Thermo Optek Corporation 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1995 Compared With 1994 (continued)
provide a tax benefit on foreign losses, offset in part by the tax
benefit associated with a foreign sales corporation.
Liquidity and Capital Resources
Consolidated working capital was $103.9 million at December 28, 1996,
compared with $144.5 million at December 30, 1995. Included in working
capital are cash and cash equivalents of $63.6 million at December 28,
1996, and $116.9 million at December 30, 1995. During 1996, $27.1 million
of cash was provided by operating activities. The Company used $8.6
million of cash to reduce its accounts payable, primarily for inventories
received in the fourth quarter of 1995, and accounts payable acquired at
ARL and VG Elemental.
The Company's investing activities used $112.6 million of cash in
1996. The Company expended an aggregate of $104.1 million, net of cash
acquired, for acquisitions (Note 2), and $7.5 million for the purchase of
property, plant, and equipment. In February 1997, the Company acquired
Laser Science, Inc., a manufacturer of nitrogen, tunable dye, and pulsed
lasers, for $3.6 million in cash. During 1997, the Company plans to make
capital expenditures of approximately $5.0 million.
The Company's financing activities provided $32.6 million of cash in
1996. In June and July 1996, the Company sold 3,450,000 shares of its
common stock in an initial public offering for net proceeds of $42.9
million (Note 3). During 1996, the Company repaid $10.4 million of short-
and long-term borrowings.
Although the Company expects to have positive cash flow from its
existing operations, the Company may require significant amounts of cash
for any acquisition of complementary businesses. The Company expects that
it will finance any such acquisitions through a combination of internal
funds, additional debt or equity financing from capital markets, or
short-term borrowings from Thermo Instrument or Thermo Electron, although
it has no agreement with these companies to ensure that funds will be
available on acceptable terms or at all. The Company believes its
existing resources are sufficient to meet the capital requirements of its
existing operations for the foreseeable future.
30PAGE
Thermo Optek Corporation 1996 Financial Statements
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 1997 and beyond to differ
materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
Risks Associated with Technological Change, Obsolescence, and the
Development and Acceptance of New Products. The market for the Company's
products is characterized by rapid and significant technological change
and evolving industry standards. New product introductions responsive to
these factors require significant planning, design, development, and
testing at the technological, product, and manufacturing process levels,
and may render existing products and technologies uncompetitive or
obsolete. There can be no assurance that the Company's products will not
become uncompetitive or obsolete. In addition, industry acceptance of new
technologies developed by the Company may be slow to develop due to,
among other things, existing regulations written specifically for older
technologies and general unfamiliarity of users with new technologies.
Risks Associated with Acquisition Strategy; No Assurance of a
Successful Acquisition Strategy. The Company's growth strategy is to
supplement its internal growth with the acquisition of businesses and
technologies that complement or augment the Company's existing product
lines. The Company has acquired certain businesses within the former
analytical instruments division of ATI and the former Scientific
Instruments Division of Fisons plc that were initially acquired by Thermo
Instrument in December 1995 and March 1996, respectively. Certain of
these businesses have low levels of profitability, and businesses that
the Company may seek to acquire in the future may also be marginally
profitable or unprofitable. In order for any acquired businesses to
achieve the level of profitability desired by the Company, the Company
must successfully reduce expenses and improve market penetration. No
assurance can be given that the Company will be successful in this
regard. In addition, promising acquisitions are difficult to identify and
complete for a number of reasons, including competition among prospective
buyers and the need for regulatory approvals, including antitrust
approvals. There can be no assurance that the Company will be able to
complete pending or future acquisitions. In order to finance any such
acquisitions, it may be necessary for the Company to raise additional
funds either through public or private financings. Any equity or debt
financing, if available at all, may be on terms which are not favorable
to the Company.
Possible Adverse Effect From Consolidation in the Environmental
Market and Changes in Environmental Regulations. One of the largest
markets for the Company's products is environmental analysis. In recent
years, there has been a contraction in the market for analytical
instruments used for environmental analysis. This contraction has caused
consolidation in the businesses serving this market. Such consolidation
may have an adverse impact on certain of the Company's businesses. In
addition, most air, water, and soil analysis is conducted to comply with
federal, state, local, and foreign environmental regulations. These
regulations are frequently specific as to the type of technology required
for a particular analysis and the level of detection required for that
31PAGE
Thermo Optek Corporation 1996 Financial Statements
Forward-looking Statements
analysis. The Company develops, configures, and markets its products to
meet customer needs created by existing and anticipated environmental
regulations. These regulations may be amended or eliminated in response
to new scientific evidence or political or economic considerations. Any
significant change in environmental regulations could result in a
reduction in demand for the Company's products.
Possible Adverse Impact of Significant International Operations.
Sales outside the United States accounted for approximately 65% of the
Company's revenues in 1996, and the Company expects that international
sales will continue to account for a significant portion of the Company's
revenues in the future. Sales to customers in foreign countries are
subject to a number of risks, including the following: agreements may be
difficult to enforce and receivables difficult to collect through a
foreign country's legal system; foreign customers may have longer payment
cycles; foreign countries could impose withholding taxes or otherwise tax
the Company's foreign income, impose tariffs, or adopt other restrictions
on foreign trade; fluctuations in exchange rates may affect product
demand and adversely affect the profitability in U.S. dollars of products
and services provided by the Company in foreign markets where payment for
the Company's products and services is made in the local currency; U.S.
export licenses may be difficult to obtain; and the protection of
intellectual property in foreign countries may be more difficult to
enforce. There can be no assurance that any of these factors will not
have a material adverse effect on the Company's business and results of
operations.
Competition. The Company encounters and expects to continue to
encounter intense competition in the sale of its products. The Company
believes that the principal competitive factors affecting the market for
its products include product performance, price, reliability, and
customer service. The Company's competitors include large multinational
corporations and their operating units, including The Perkin-Elmer
Corporation and Varian Associates, Inc. These companies and certain of
the Company's other competitors have substantially greater financial,
marketing, and other resources than those of the Company. As a result,
they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to
the promotion and sale of their products than the Company. In addition,
competition could increase if new companies enter the market or if
existing competitors expand their product lines or intensify efforts
within existing product lines. There can be no assurance that the
Company's current products, products under development, or ability to
discover new technologies will be sufficient to enable it to compete
effectively with its competitors.
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
32PAGE
Thermo Optek Corporation 1996 Financial Statements
Forward-looking Statements
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 may need to acquire licenses to, or
contest the validity of, any 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.
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. 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.
33PAGE
Thermo Optek Corporation 1996 Financial Statements
Selected Financial Information
(In thousands except
per share amounts) 1996(a) 1995(b) 1994 1993 1992
-------------------------------------------------------------------------
Statement of Income
Data:
Revenues $350,639 $212,152 $165,398 $161,006 $102,232
Net income 23,401 16,009 14,423 15,372 7,881
Earnings per share .50 .35 .32 .34 .17
Balance Sheet Data:
Working capital $103,889 $144,541 $ 33,429 $ 31,448 $ 34,148
Total assets 498,358 432,882 230,606 229,034 226,130
Long-term obligations 96,778 101,079 1,037 8,589 9,106
Shareholders'
investment 249,164 220,988 156,175 146,918 149,304
(a) Includes the results of the ARL and VG Elemental divisions of Fisons
since their acquisition by Thermo Instrument in March 1996 and the net
proceeds from the Company's initial public offering in June and July
1996.
(b) Includes the results of Baird since its acquisition by Thermo Instrument
in January 1995 and the Mattson and Unicam divisions of ATI since their
acquisition by Thermo Instrument in December 1995. Also reflects the
issuance in October 1995 of $96,250,000 principal amount of 5%
convertible subordinated debentures due 2000.
34PAGE
Thermo Optek Corporation 1996 Financial Statements
Common Stock Market Information
The following table shows the market range for the Company's common
stock based on reported sales prices on the American Stock Exchange
(symbol TOC) since June 7, 1996, the date the Company's common stock
began trading on that exchange.
1996
-----------------------
Quarter High Low
---------------------------------------------------------------------
Second $14 $12
Third 15 1/4 10 3/4
Fourth 14 7/8 10 1/2
As of January 24, 1997, the Company had 57 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 24, 1997, was $12 per share.
Shareholder Services
Shareholders of Thermo Optek Corporation who desire information about
the Company are invited to contact John N. Hatsopoulos, Chief Financial
Officer, Thermo Optek Corporation, 81 Wyman Street, P.O. Box 9046,
Waltham, Massachusetts 02254-9046, (617) 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. Beginning in 1997,
quarterly distribution will be limited to the second quarter report only.
All quarterly reports and press releases are available through the
Internet from Thermo Electron's home page on the World Wide Web
(http://www.thermo.com/subsid/toc.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.
35PAGE
Thermo Optek Corporation 1996 Financial Statements
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended
December 28, 1996, as filed with the Securities and Exchange Commission,
may be obtained at no charge by writing to John N. Hatsopoulos, Chief
Financial Officer, Thermo Optek Corporation, 81 Wyman Street, P.O. Box
9046, Waltham, Massachusetts 02254-9046.
Annual Meeting
The annual meeting of shareholders will be held on Monday, June 2,
1997, at 10:00 a.m., at the Hyatt Regency Hotel, Hilton Head, South
Carolina.
36