-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A88O6k9A1Yk2ahq0Xztu6IJWA17krHlTWEmyfGesrr8uMb6DdIgSUiDce4gsVHjb aEhiJ+TJlRz3poKmaDaPFA== 0000795986-99-000005.txt : 19990325 0000795986-99-000005.hdr.sgml : 19990325 ACCESSION NUMBER: 0000795986-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERMO INSTRUMENT SYSTEMS INC CENTRAL INDEX KEY: 0000795986 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 042925809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09786 FILM NUMBER: 99570214 BUSINESS ADDRESS: STREET 1: 860 WEST AIRPORT FREEWAY STREET 2: SUITE 301 CITY: HURST STATE: TX ZIP: 76054 BUSINESS PHONE: 8174856663 MAIL ADDRESS: STREET 1: 860 WEST AIRPORT FREEWAY STREET 2: SUITE 301 CITY: HURST STATE: TX ZIP: 76054 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------------------------------------------- FORM 10-K (mark one) [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 2, 1999 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-9786 THERMO INSTRUMENT SYSTEMS INC. (Exact name of Registrant as specified in its charter) Delaware 04-2925809 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 860 West Airport Freeway, Suite 301 Hurst, Texas 76054 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (781) 622-1000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------------------ ----------------------------------------- Common Stock, $.10 par value American Stock Exchange 4% Convertible Subordinated Debentures due 2005 American StockExchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of January 29, 1999, was approximately $273,411,000. As of January 29, 1999, the Registrant had 119,276,531 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended January 2, 1999, are incorporated by reference into Parts I and II. Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 27, 1999, are incorporated by reference into Part III. PART I Item 1. Business (a) General Development of Business Thermo Instrument Systems Inc. (the Company or the Registrant) is a worldwide leader in the development, manufacture, and marketing of measurement instruments used to monitor, collect, and analyze information. These systems are used for multiple applications in a range of industries, including industrial processing, food and beverage production, life sciences research, and medical diagnostics. The businesses of Thermo Instrument operate in four instrumentation segments: Analytical, which includes the Company's 89%-owned ThermoQuest Corporation and 93%-owned Thermo Optek Corporation subsidiaries; Life Sciences, which includes 62%-owned Thermo BioAnalysis Corporation; Process Control, which includes the Company's 80%-owned ONIX Systems Inc. and 67%-owned Metrika Systems Corporation subsidiaries; and Industrial, which primarily includes the Company's 82%-owned ThermoSpectra Corporation, 78%-owned Thermo Vision Corporation, and wholly owned subsidiaries. The Company adopted a strategy of spinning out certain of its businesses into separate subsidiaries and having these subsidiaries sell a minority interest to outside investors. The Company believes that this strategy provides additional motivation and incentives for the management of the subsidiaries through the establishment of subsidiary-level stock option incentive programs, as well as capital to support the subsidiaries' growth. During 1998*, ONIX Systems sold shares of its common stock in an initial public offering and Thermo BioAnalysis sold shares of its common stock in a public offering for aggregate net proceeds of $102.7 million. See Note 10 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders for a description of the issuance of stock by the Company's subsidiaries. The Company historically has expanded both through the acquisition of companies and product lines and through internal development of new products and technologies. During the past several years, the Company has completed a number of complementary acquisitions that have provided additional technologies, specialized manufacturing or product development expertise, and broader capabilities in marketing and distribution. On February 22, 1999, the Company declared unconditional in all respects its cash tender offer for all outstanding shares of Spectra-Physics AB, a Stockholm Stock Exchange-listed company, for 160 Swedish krona per share (approximately $20 per share). As of that date, the Company had acquired or received acceptances representing approximately 98% of the Spectra-Physics shares outstanding. There are approximately 17.6 million Spectra-Physics shares outstanding. The aggregate cost for Spectra-Physics will total approximately $355 million. Payment was made for all shares as to which acceptances had been received by March 1, 1999. Spectra-Physics manufactures a wide range of laser-based instrumentation systems, primarily for the process-control, industrial measurement, construction, research, commercial, and government markets. The Company was incorporated in Delaware in May 1986 as a wholly owned subsidiary of Thermo Electron Corporation to operate the instruments businesses that were previously conducted by several Thermo Electron subsidiaries. As of January 2, 1999, Thermo Electron owned 101,865,192 shares, or 85%, of the Company's outstanding common stock. Thermo Electron is a world leader in monitoring, analytical, and biomedical instrumentation; biomedical products including heart-assist devices, respiratory-care equipment, and mammography systems; and paper recycling and papermaking equipment. Thermo Electron also develops alternative-energy systems and clean fuels, provides a range of services including industrial outsourcing and environmental-liability management, and conducts research and development in advanced imaging, laser, and electronic information-management technologies. - -------------------- * References to 1998, 1997, and 1996 herein are for the fiscal years ended January 2, 1999, January 3, 1998, and December 28, 1996, respectively. 2 Thermo Electron intends for the foreseeable future to maintain at least 80% ownership of the Company, so that it may continue to file consolidated U.S. federal and certain state income tax returns with the Company. This may require the purchase by Thermo Electron of additional shares of common stock and/or convertible debentures of the Company from time to time as the number of outstanding shares of the Company increases. These and any other purchases may be made either in the open market or directly from the Company or pursuant to conversions of the Company's 3 3/4% senior convertible note due 2000 held by Thermo Electron. See Notes 4 and 6 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders for a description of the Company's outstanding stock options and convertible obligations. During 1998, Thermo Electron purchased 2,046,300 shares of the Company's common stock in the open market at a total cost of $53.2 million. During 1998, Thermo Electron announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. As part of this reorganization, ThermoSpectra may be taken private. The public shareholders of ThermoSpectra would receive cash in exchange for their shares of common stock of ThermoSpectra. The completion of these transactions is subject to numerous conditions, as outlined in Note 17 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders, which information is incorporated herein by reference. Forward-looking Statements Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Annual Report on Form 10-K. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Forward-looking Statements" in the Registrant's 1998 Annual Report to Shareholders, which statements are incorporated herein by reference. (b) Financial Information About Segments Financial information concerning the Company's segments is summarized in Note 13 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders, which information is incorporated herein by reference. (c) Description of Business (i) Principal Products and Services Analytical ThermoQuest is a leading manufacturer of mass spectrometers, liquid chromatographs, and gas chromatographs for the pharmaceutical, environmental, and industrial marketplaces. These analytical instruments are used in the quantitative and qualitative chemical analysis of organic and inorganic compounds at ultratrace levels of detection. ThermoQuest also supplies scientific equipment for the preparation and preservation of chemical samples, and consumables for the chromatography industry. Thermo Optek is a worldwide leader in spectroscopy instrumentation for molecular and elemental analysis based upon energy and light measurements, as well as systems for materials sciences including surface analysis, characterization, preparation, and physical-properties analysis. 3 Life Sciences Thermo BioAnalysis develops, manufactures, and markets instruments, consumables, and information-management systems used in pharmaceutical research and production, and in clinical diagnostics, including point-of-care test kits for rapid diagnosis of certain illnesses. Process Control ONIX Systems, which became a public subsidiary of the Company in March 1998, designs, develops, markets, and services sophisticated field-measurement instruments and on-line sensors for process-control industries, particularly the oil and gas industry. These systems provide real-time data collection, analysis, and local functions to enhance production efficiency, improve process and quality control, ensure regulatory compliance, and increase employee safety. Metrika Systems manufactures on-line process optimization systems that provide real-time, nondestructive analysis of the composition of raw materials in basic-materials production processes, including coal, cement, and minerals. In addition, Metrika Systems manufactures advanced systems used principally by producers of finished flat metals, such as sheet metal, and web materials, such as rubber, plastic foils, and glass, to measure and control parameters such as thickness and coating weight of these materials. Industrial ThermoSpectra develops, manufactures, and markets precision imaging and inspection, temperature-control, and test and measurement instruments. These instruments are generally combined with proprietary operations and analysis software to provide industrial and research customers with integrated systems that address their specific needs. Thermo Vision designs, manufactures, and markets a diverse array of photonics products (light-based technologies) including optical components, imaging sensors and systems, lasers, optically based instruments, opto-electronics, and fiber optics, that are used in a wide range of applications, including medical diagnostics and analytical instrumentation; semiconductor manufacturing; X-ray imaging; physics, chemistry, and biology research; and telecommunications. Thermo Instrument has wholly owned businesses, which produce instruments and complete systems for detecting and monitoring environmental pollutants generated from industrial and mobile sources and provides clinical laboratory equipment and consumables that assist in the diagnosis of various diseases. In addition, a wholly owned business of the Company has a joint venture with Thermo BioAnalysis. This company, Thermo Nucleonics LLC, was established to address the nuclear instrumentation market. (ii) and (xi) New Products; Research and Development The Company maintains active programs for the development of new technologies and the enhancement of existing products. Research and development expenses for the Company were $113.9 million, $107.6 million, and $84.1 million in 1998, 1997, and 1996, respectively (iii) Raw Materials Raw materials, components, and supplies purchased by the Company are generally either available from a number of different suppliers or from alternative sources that could be developed without a material adverse effect on the Company. To date, the Company has experienced no difficulties in obtaining these materials. 4 (iv) Patents, Licenses, and Trademarks The Company's policy is to protect its intellectual property rights, including applying for and obtaining patents when appropriate. The Company holds numerous patents related to its technologies, with additional patents pending. The Company also enters into licensing agreements with other companies in which it grants or receives rights to specific patents and technical know-how. The Company also considers technical know-how, trade secrets, and trademarks to be important to its business. (v) Seasonal Influences There are no significant seasonal influences on the Company's sales of its products. (vi) Working Capital Requirements There are no special inventory requirements or credit terms extended to customers that would have a material adverse effect on the Company's working capital. (vii) Dependency on a Single Customer No single customer accounted for more than 10% of the Company's total revenues in any of the past three years. (viii) Backlog
The Company's backlog of firm orders at year-end 1998 and 1997 was: (In thousands) 1998 1997 - ------------------------------------------------------------------------------------- ---------- ---------- Analytical $142,607 $151,532 Life Sciences 32,183 24,973 Process Control 55,345 53,435 Industrial 53,366 68,948 --------- -------- $283,501 $298,888 ========= ========
Certain of these orders are cancelable by the customer upon payment of a cancellation charge. The Company anticipates that substantially all of the backlog as of January 2, 1999, will be shipped or completed during 1999. The Company does not believe that the level of, or changes in the level of, its backlog is necessarily indicative of intermediate or long-term trends in its business. The decreases in backlog in the Analytical and Industrial segments were principally due to a slowdown in the semiconductor and related industries and a decrease in demand in Asia. (ix) Government Contracts Not applicable. (x) Competition The Company generally competes on the basis of technical advances that result in new products and improved price/performance ratios, reputation among customers as a quality leader for products and services, and active research and application-development programs. To a lesser extent, the Company competes on the basis of price. 5 In many markets, the Company competes with large analytical instrument companies such as Hewlett-Packard Co.; Perkin-Elmer Corporation; Varian Associates, Inc.; and Hitachi, Ltd. Certain products manufactured by the Company also compete with products sold by numerous smaller, specialized firms. Analytical ThermoQuest competes in each of its markets primarily on technical performance, customer service and support, and price. ThermoQuest's principal competitors include the Chemical Analysis Group of Hewlett-Packard; the MicroMass Group of Waters Corporation; Shimadzu Corporation; Perkin-Elmer; Varian; Merck Corporation; Phenomenex Inc.; and numerous regional suppliers. Thermo Optek competes in each of its markets primarily on performance, reliability, customer service, and price. Thermo Optek competes primarily with the Analytical Instruments division of Perkin-Elmer; Varian; Hewlett-Packard; SpectroAnalytical Instruments, Inc.; Shimadzu; and Physical Electronics, Inc. Life Sciences Thermo BioAnalysis competes primarily on the basis of technological innovation, performance, flexibility, function, customization, and price. Major competitors include Perkin-Elmer, Hewlett-Packard, and Waters. Process Control The Company competes in the field measurement instruments and sensors market primarily on quality and reliability, technical features, accuracy, ease of use, price, and reputation for after-market service. ONIX Systems competes with a few large competitors, including Fisher-Rosemount, a division of Emerson Electric Co., Inc.; Asea Brown Boveri (Holding) Ltd. (ABB); Elsag-Bailey Process Automation N.V., a division of ABB; and Yokogawa Electric Corporation, in each of its product areas and with many companies within specific industries. Metrika Systems competes primarily on the basis of performance and, to a lesser extent, price in the on-line coal, cement, and mineral analysis markets. Scantech Limited is the Company's primary competitor in the on-line coal and cement analysis market. Amdel of Australia is the Company's principal competitor in the on-line minerals analysis market. The market for solids and multiphase analyzers for process control is generally fragmented. Competition in the thickness-gauging business is highly fragmented with numerous competitors competing in various end-use market segments. As a result, competition varies according to the end-use segment. Metrika Systems competes primarily on the basis of quality, performance, and price. The Company has a relatively small presence within the large and varied process-control marketplace, which is extremely fragmented and is comprised of several large companies, including Fisher-Rosemount, Elsag Bailey, and Honeywell Process Control, as well as numerous smaller companies. The Company competes in this market primarily on the basis of technical performance, customer service, price, and reliability. Industrial Thermo Vision competes primarily on the basis of technical suitability, product performance, reliability, and price. Its principal competitors include Optical Coating Laboratory, Inc. and Newport Corporation. ThermoSpectra competes in each of its markets primarily on the basis of technical advances that result in new products and improved price/performance ratios and reputation among customers as a quality leader for products and services. To a lesser extent, ThermoSpectra competes on the basis of price. ThermoSpectra's principal competitors include Tektronix, Inc.; Brinkmann Instruments Inc.; Julabo USA Inc.; Hamamatsu Photonics KK; and Oxford Instruments plc. 6 The Company is a leading manufacturer of ambient air-monitoring instruments and a major manufacturer of source monitoring and worker-safety monitoring instruments. The Company competes in these markets on the basis of technical performance and reliability, as well as customer service. The Company's principal competitors include Monitor Labs Incorporated, Advanced Pollution Instruments, and Mine Safety Appliances Co. (xii) Environmental Protection Regulations The Company believes that compliance by the Company with federal, state, and local environmental protection regulations will not have a material adverse effect on its capital expenditures, earnings, or competitive position. (xiii) Number of Employees As of January 2, 1999, the Company employed approximately 9,700 people. (d) Financial Information About Geographic Areas Financial information about geographic areas is summarized in Note 13 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders and is incorporated herein by reference. (e) Executive Officers of the Registrant Name Age Present Title (Fiscal Year First Became Executive Officer) ----------------------------------------------------------------- Earl R. Lewis 55 President and Chief Executive Officer (1990) Denis A. Helm 60 Executive Vice President (1986) Dr. Richard W. K. Chapman 54 Vice President (1994) Barry S. Howe 43 Vice President (1994) Theo Melas-Kyriazi 39 Chief Financial Officer (1998) Paul F. Kelleher 56 Chief Accounting Officer (1986) Each executive officer serves until his successor is chosen or appointed by the Board of Directors and qualified or until earlier resignation, death, or removal. All executive officers, except Mr. Lewis, Dr. Chapman, and Mr. Melas-Kyriazi, have held comparable positions for at least five years, either with the Company or with its parent company, Thermo Electron. Mr. Lewis was named President of the Company in March 1997 and Chief Executive Officer in January 1998. Mr. Lewis served as Chief Operating Officer of the Company from January 1996 through January 1998, as Executive Vice President from January 1996 through March 1997, as a Senior Vice President from January 1994 through January 1996, and as a Vice President from March 1992 through January 1994. Dr. Chapman has been President and Chief Executive Officer of ThermoQuest since its inception in June 1995, and served as President of Finnigan Corporation, a subsidiary of ThermoQuest, from 1992 to 1995. Mr. Melas-Kyriazi was appointed Chief Financial Officer of the Company and Thermo Electron on January 1, 1999. He joined Thermo Electron in 1986 as Assistant Treasurer, and became Treasurer in 1988. He was named President and Chief Executive Officer of ThermoSpectra in 1994, a position he held until becoming Vice President of Corporate Strategy for Thermo Electron in 1998. Mr. Melas-Kyriazi remains a Vice President of Thermo Electron. Messrs. Lewis, Helm, Chapman, and Howe are full-time employees of the Company. Messrs. Melas-Kyriazi and Kelleher are full-time employees of Thermo Electron and certain of its subsidiaries, but devote such time to the affairs of the Company as the Company's needs reasonably require. 7 Item 2. Properties The Company believes that its facilities are in good condition and are suitable and adequate for its present operations and that suitable space is readily available in the event any lease is not extended. With respect to leases expiring in the near future, in the event the Company does not renew such leases, the Company believes suitable alternate space is available for lease on acceptable terms. The location of the Company's principal properties by segment as of January 2, 1999, are: Analytical The Company owns approximately 1,553,000 square feet of office, engineering, laboratory, and production space, principally in Ohio, Wisconsin, Germany, Massachusetts, Italy, England, and California, and leases approximately 997,000 square feet of office, engineering, laboratory, and production space under leases expiring from 1999 through 2017, principally in the United Kingdom, Massachusetts, New York, and California. As of January 2, 1999, the Company had a $7.3 million mortgage loan that is secured by 200,000 square feet of property in California with a net book value of $14.9 million. Life Sciences The Company owns approximately 95,000 square feet of office, engineering, laboratory, and production space in Pennsylvania and leases approximately 748,000 square feet of office, engineering, laboratory, and production space under leases expiring from 1999 through 2016, principally in Finland, the United Kingdom, and Texas. Process Control The Company owns approximately 165,000 square feet of office, engineering, laboratory, and production space in Texas, France, and England, and leases approximately 638,000 square feet of office, engineering, laboratory, and production space under leases expiring from 1999 through 2007, principally in Texas, Maryland, and the United Kingdom. Industrial The Company owns approximately 282,000 square feet of office, engineering, laboratory, and production space, principally in Wisconsin, and leases approximately 783,000 square feet of office, engineering, laboratory, and production space under leases expiring from 1999 through 2008, principally in California, New Hampshire, Massachusetts, Germany, and the Netherlands. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information concerning the market and market price for the Registrant's common stock, $.10 par value, and dividend policy is included under the sections labeled "Common Stock Market Information" and "Dividend Policy" in the Registrant's 1998 Annual Report to Shareholders and is incorporated herein by reference. Item 6. Selected Financial Data The information required under this item is included under the sections labeled "Selected Financial Information" and "Dividend Policy" in the Registrant's 1998 Annual Report to Shareholders and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required under this item is included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1998 Annual Report to Shareholders and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required under this item is included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1998 Annual Report to Shareholders and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Registrant's Consolidated Financial Statements as of January 2, 1999, and Supplementary Data are included in the Registrant's 1998 Annual Report to Shareholders and are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 9 PART III Item 10. Directors and Executive Officers of the Registrant The information concerning directors required under this item is incorporated herein by reference from the material contained under the caption "Election of Directors" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. The information concerning delinquent filers pursuant to Item 405 of Regulation S-K is incorporated herein by reference from the material contained under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" under the caption "Stock Ownership" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 11. Executive Compensation The information required under this item is incorporated herein by reference from the material contained under the caption "Executive Compensation" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required under this item is incorporated herein by reference from the material contained under the caption "Stock Ownership" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 13. Certain Relationships and Related Transactions The information required under this item is incorporated herein by reference from the material contained under the caption "Relationship with Affiliates" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. 10 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a, d) Financial Statements and Schedules (1)The consolidated financial statements set forth in the list below are filed as part of this Report. (2)The consolidated financial statement schedule set forth in the list below is filed as part of this Report. (3)Exhibits filed herewith or incorporated herein by reference are set forth in Item 14(c) below. List of Financial Statements and Schedules Referenced in this Item 14 Information incorporated by reference from Exhibit 13 filed herewith: Consolidated Statement of Income Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Comprehensive Income and Shareholders' Investment Notes to Consolidated Financial Statements Report of Independent Public Accountants Financial Statement Schedules filed herewith: Schedule II: Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or not required, or because the required information is shown either in the financial statements or in the notes thereto. (b) Reports on Form 8-K On December 10, 1998, the Company filed a Current Report on Form 8-K, with respect to a proposed reorganization by the Company's ultimate parent corporation, Thermo Electron Corporation, involving certain of Thermo Electron's subsidiaries, including the Company. (c) Exhibits See Exhibit Index on the page immediately preceding exhibits. 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 22, 1999 THERMO INSTRUMENT SYSTEMS INC. By: /s/ Earl R. Lewis Earl R. Lewis President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, as of March 22, 1999. Signature Title By: /s/ Earl R. Lewis President, Chief Executive Officer, Earl R. Lewis and Director By: /s/ Theo Melas-Kyriazi Chief Financial Officer Theo Melas-Kyriazi By: /s/ Paul F. Kelleher Chief Accounting Officer Paul F. Kelleher By: /s/ Frank Borman Director Frank Borman By: /s/ George N. Hatsopoulos Director George N. Hatsopoulos By: /s/ John N. Hatsopoulos Director John N. Hatsopoulos By: /s/ Arvin H. Smith Chairman of the Board and Director Arvin H. Smith By: /s/ Polyvios C. Vintiadis Director Polyvios C. Vintiadis 12 Report of Independent Public Accountants To the Shareholders and Board of Directors of Thermo Instrument Systems Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Thermo Instrument Systems Inc.'s Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 16, 1999 (except with respect to the matter discussed in Note 18, as to which the date is March 1, 1999). Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 on page 11 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Boston, Massachusetts February 16, 1999 13
SCHEDULE II THERMO INSTRUMENT SYSTEMS INC. Valuation and Qualifying Accounts (In thousands) Description Provision Accounts Accounts Other (a) Balance Balance at Charged to Recovered Written Off at End Beginning Expense of Year of Year - ----------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- Allowance for Doubtful Accounts Year Ended January 2, 1999 $22,786 $ 4,169 $ 502 $(7,221) $ 3,490 $ 23,726 Year Ended January 3, 1998 $16,981 $ 4,366 $ 304 $(4,375) $ 5,510 $ 22,786 Year Ended December 28, 1996 $12,569 $ 2,274 $ 69 $(5,015) $ 7,084 $ 16,981
Description Balance at Established Activity Other (c) Balance Beginning as Cost of Charged to at End of Acquisitions Reserve of Year Year ------------------------------------------- ----------- -------------- ----------- ----------- ----------- Accrued Acquisition Expenses (b) Year Ended January 2, 1999 $ 21,966 $ 7,218 $ (9,517) $ (3,164) $ 16,503 Year Ended January 3, 1998 $ 20,563 $ 24,752 $(18,665) $ (4,684) $ 21,966 Year Ended December 28, 1996 $ 14,838 $ 38,782 $(26,571) $ (6,486) $ 20,563 Description Balance at Provision Activity Other (f) Balance Beginning Charged to Charged to at End of Expense (e) Reserve of Year Year -------------------------------------------- ----------- ------------- ----------- ----------- ----------- Accrued Restructuring Costs (d) Year Ended January 2, 1999 $ 244 $ 18,401 $(7,682) $ 263 $ 11,226 Year Ended January 3, 1998 $ 1,024 $ 953 $(1,733) $ - $ 244 Year Ended December 28, 1996 $ 308 $ 1,038 $ (322) $ - $ 1,024 (a) Includes allowance of businesses acquired during the year as described in Note 3 to Consolidated Financial Statements in the Company's 1998 Annual Report to Shareholders and the effect of foreign currency translation. (b) The nature of activity in this account is described in Note 3 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders. (c) Represents reversal of accrued acquisition expenses and corresponding reduction of cost in excess of net assets of acquired companies resulting from finalization of restructuring plans and the effect of foreign currency translation. (d) The nature of activity in this account is described in Note 11 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders. (e) Excludes provision of $2.8 million for asset write-downs and $0.4 million for loss on division sold in 1998. (f) Represents the effect of foreign currency translation.
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EXHIBIT INDEX Exhibit Number Description of Exhibit 2.1 Reserved. 2.2 Agreement and Release dated as of December 15, 1997, among Fisons plc, the Registrant, and Thermo Electron (filed as Exhibit 2.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9876] and incorporated herein by reference). 3.1 Amendment to Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 29, 1996 [File No. 1-9786] and incorporated herein by reference). 3.2 By-Laws of the Registrant (filed as Exhibit 3(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-9786] and incorporated herein by reference). 4.1 Subordinated Indenture, dated January 15, 1998, among the Registrant, Thermo Electron, and Bankers Trust Company as trustee, relating to $250,000,000 principal amount of 4% Convertible Subordinated Debentures due 2005 (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Commission on January 16, 1998, and incorporated herein by reference). 4.2 Senior convertible note purchase agreement by and between the Registrant and Thermo Electron as of September 15, 1993 (filed as Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 2, 1993 [File No. 1-9786] and incorporated by reference). The Registrant hereby agrees, pursuant to Item 601(b) (4) (iii) (A) of Regulation S-K, to furnish to the Commission upon request, a copy of each instrument with respect to other long-term debt of the Registrant or its subsidiaries. 10.1 Amended and Restated Corporate Services Agreement, dated as of January 3, 1993, between Thermo Electron and the Registrant (filed as Exhibit 10(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-9786] and incorporated herein by reference). 10.2 Tax Allocation Agreement dated as of May 29, 1986, between Thermo Electron and the Registrant (filed as Exhibit 10(b) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6762] and incorporated herein by reference). 10.3 Thermo Electron Corporate Charter, as amended and restated effective January 3, 1993 (filed as Exhibit 10(f) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-9786] and incorporated herein by reference). 10.4 Form of Indemnification Agreement with Directors and Officers (filed as Exhibit 10(g) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 [File No. 1-9786] and incorporated herein by reference). 10.5 Plan for sale of shares by the Registrant to Thermo Electron (filed as Exhibit 10(dd) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1993 [File No. 1-9786] and incorporated herein by reference). 10.6 Master Repurchase Agreement dated December 28, 1996, between the Registrant and Thermo Electron (filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 [File No. 1-9786] and incorporated herein by reference). 15 Exhibit Number Description of Exhibit 10.7 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated December 2, 1997, by and among the Registrant and Thermo Electron (filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.8 Restated Stock Holdings Assistance Plan and Form of Promissory Note (filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.9-10.15 Reserved. 10.16 Deferred Compensation Plan for Directors of the Registrant (filed as Exhibit 10(f) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6762] and incorporated herein by reference). 10.17 Directors' Stock Option Plan of the Registrant (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 [File No. 1-9786] and incorporated herein by reference). 10.18 Incentive Stock Option Plan of the Registrant (filed as Exhibit 10(c) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6762] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Registrant's Nonqualified Stock Option Plan is 3,515,625 shares, after adjustment to reflect share increase approved in 1990; 3-for-2 stock splits effected in January 1988, July 1993, and April 1995; and 5-for-4 stock splits effected in December 1995 and October 1997). 10.19 Nonqualified Stock Option Plan of the Registrant (filed as Exhibit 10(d) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-6762] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Registrant's Incentive Stock Option Plan is 3,515,625 shares, after adjustment to reflect share increase approved in 1990; 3-for-2 stock splits effected in January 1988, July 1993, and April 1995; and 5-for-4 stock splits effected in December 1995 and October 1997). 10.20 Equity Incentive Plan of the Registrant (filed as Appendix A to the Proxy Statement dated April 27, 1993, of the Registrant [File No. 1-9786] and incorporated herein by reference). (Maximum number of shares issuable is 5,039,062 shares, after adjustment to reflect share increase approved in December 1993; 3-for-2 stock splits effected in July 1993 and April 1995; and 5-for-4 stock splits effected in December 1995 and October 1997). 10.21 Finnigan Corporation 1979 Long-term Incentive Stock Option Plan (filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 [File No. 1-9786] and incorporated herein by reference). 10.22 Former Thermo Environmental Corporation Incentive Stock Option Plan (filed as Exhibit 10(d) to Thermo Environmental's Registration Statement on Form S-1 [Reg. No. 33-329] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Former Thermo Environmental Corporation Nonqualified Stock Option Plan is 1,450,195 shares, after adjustment to reflect share increase approved in 1987; 3-for-2 stock splits effected in July 1993 and April 1995; and 5-for-4 stock splits effected in December 1995 and October 1997). 16 Exhibit Number Description of Exhibit 10.23 Former Thermo Environmental Corporation Nonqualified Stock Option Plan (filed as Exhibit 10(e) to Thermo Environmental's Registration Statement on Form S-1 [Reg. No. 33-329] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Former Thermo Environmental Corporation Incentive Stock Option Plan is 1,450,195 shares, after adjustment to reflect share increase approved in 1987; 3-for-2 stock splits effected in July 1993 and April 1995; and 5-for-4 stock splits effected in December 1995 and October 1997). 10.24 Thermo Instrument Systems Inc. - ThermoSpectra Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.51 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 [File No. 1-9786] and incorporated herein by reference). 10.25 Thermo Instrument Systems Inc. - ThermoQuest Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.65 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.26 Thermo Instrument Systems Inc. - Thermo BioAnalysis Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.64 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.27 Thermo Instrument Systems Inc. - Thermo Optek Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 [File No. 1-9786] and incorporated herein by reference). 10.28 Thermo Instrument Systems Inc. - Metrika Systems Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.29 Thermo Instrument Systems Inc. - Thermo Vision Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.29 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.30 Thermo Instrument Systems Inc. - ONIX Systems Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). In addition to the stock-based compensation plans of the Registrant, the executive officers of the Registrant may be granted awards under stock-based compensation plans of Thermo Electron for services rendered to the Registrant. The terms of such plans are substantially the same as those of the Registrant's Equity Incentive Plan. 10.31 - 10.32 Reserved. 10.33 3 3/4% Senior Convertible Note in the principal amount of $140,000,000 dated September 15, 1993, issued to Thermo Electron (filed as Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 2, 1993 [File No. 1-9786] and incorporated herein by reference). 17 Exhibit Number Description of Exhibit 10.34 $45,000,000 Promissory Note dated as of September 12, 1997, issued by ThermoSpectra to Thermo Electron (filed as Exhibit 10 to ThermoSpectra's Quarterly Report on Form 10-Q for the quarter ended September 27, 1997 [File No. 1-13876] and incorporated herein by reference). 10.35 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 5, 1997, between Thermo Optek and Thermo Electron (filed as Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.36 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 3, 1997, between ThermoQuest and Thermo Electron (filed as Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.37 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 3, 1997, between Metrika Systems and Thermo Electron (filed as Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.38 Master Guarantee Reimbursement and Loan Agreement dated as of November 14, 1997, between Thermo Vision and Thermo Electron (filed as Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.39 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 2, 1997, between Thermo BioAnalysis and Thermo Electron (filed as Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.40 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 4, 1997, between ThermoSpectra and Thermo Electron (filed as Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9786] and incorporated herein by reference). 10.41 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of January 5, 1998, between ONIX Systems and Thermo Electron (filed as Exhibit 10.5 to the Registration Statement of ONIX Systems on Form S-1 [Reg. No. 333-45333] and incorporated herein by reference). 10.42 Fiscal Agency Agreement dated as of August 3, 1995, among ThermoQuest, Thermo Electron, and The Chase Manhattan Bank (formerly Chemical Bank) (filed as Exhibit 10.12 to ThermoQuest's Registration Statement on Form S-1 [Reg. No. 333-00276] and incorporated herein by reference). 10.43 Fiscal Agency Agreement dated as of October 12, 1995, between Thermo Optek, Thermo Electron, and The Chase Manhattan Bank (formerly Chemical Bank) (filed as Exhibit 10.10 to Thermo Optek's Registration Statement on Form S-1 [Reg. No. 333-03630] and incorporated herein by reference). 10.44 $200,000,000 Promissory Note dated as of March 3, 1999, issued by the Registrant to Thermo Electron. 18 Exhibit Number Description of Exhibit 13 Annual Report to Shareholders for the year ended January 2, 1999 (only those portions incorporated herein by reference). 21 Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP. 27 Financial Data Schedule.
EX-10.44 2 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT, AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, PLEDGED, MORTGAGED, HYPOTHECATED OR OTHERWISE TRANSFERRED (1) WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT COVERING THESE SECURITIES OR (2) UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THERMO INSTRUMENT SYSTEMS INC. Promissory Note Due August 27, 1999 Hurst, Texas March 3, 1999 For value received, Thermo Instrument Systems Inc., a Delaware corporation (the "Company"), hereby promises to pay to Thermo Electron Corporation (hereinafter referred to as the "Payee"), or its assigns, on or before August 27, 1999, the principal sum of two hundred million dollars ($200,000,000) or such part thereof as then remains unpaid. The Company shall pay interest from the date hereof through April 3, 1999 on the principal amount remaining from time to time unpaid at a rate per annum equal to 5.03%. Thereafter, if the Company's total U.S. consolidated cash invested with the Payee equals or exceeds the aggregate outstanding principal amount of this Note, the Company shall pay interest on the principal amount remaining from time to time unpaid at a rate per annum equal to the Dealer Commercial Paper Rate for 30-day maturities as reported in the Wall Street Journal on the first business day of each fiscal month of the Company (the "DCP Rate"), plus twenty-five (25) basis points, which rate shall be adjusted on the second business day of each fiscal month of the Company and shall be in effect for the entirety of such fiscal month. If, however, the Company's total U.S. consolidated cash invested with the Payee is less than the aggregate outstanding principal amount of this Note, (A) the Company shall pay interest at a rate per annum equal to the DCP Rate plus one hundred twenty-five (125) basis points on that portion (the "Excess Portion") of the unpaid principal amount equal to (i) the aggregate outstanding principal amount, minus (ii) the Company's total U.S. consolidated cash invested with the Payee, and (B) the Company shall pay interest at a rate per annum equal to the DCP Rate plus twenty-five (25) basis points on that portion of the unpaid principal amount equal to (i) the aggregate outstanding principal amount, minus (ii) the Excess Portion. Each of the interest rates set forth in the prior sentence shall be adjusted on the second business day of each fiscal month of the Company and shall be in effect for the entirety of such fiscal month. Interest is payable in arrears on the third day of each fiscal month of the Company, until all amounts outstanding are paid in full. Overdue principal and interest shall bear interest at a rate per annum equal to the rate of interest announced from time to time by BankBoston Corporation at its head office in Boston, Massachusetts as its "base rate" plus one percent (1%). Principal and all accrued but unpaid interest shall be due and payable on August 27, 1999. Principal and interest shall be payable in lawful money of the United States of America, in immediately available funds, at the principal office of the Payee or at such other place as the legal holder may designate from time to time in writing to the Company. Interest shall be computed on an actual 360-day basis. This Note may be prepaid at any time or from time to time, in whole or in part, without any premium or penalty. All prepayments shall be applied first to accrued interest and then to principal. The then unpaid principal amount of, and interest outstanding on, this Note shall be 2 and become immediately due and payable without notice or demand, at the option of the holder hereof, upon the occurrence of any of the following events: (a) the failure of the Company to pay any amount due hereunder within ten (10) days of the date when due; (b) any representation, warranty or statement made or furnished to the Payee by the Company in connection with this Note or the transaction from which it arises shall prove to have been false or misleading in any material respect as of the date when made or furnished; (c) the failure of the Company to pay its debts as they become due, the insolvency of the Company, the filing by or against the Company of any petition under the U.S. Bankruptcy Code (or the filing of any similar petition under the insolvency law of any jurisdiction), or the making by the Company of an assignment or trust mortgage for the benefit of creditors or the appointment of a receiver, custodian or similar agent with respect to, or the taking by any such person of possession of, any property of the Company; (d) the sale by the Company of all or substantially all of its assets; (e) the merger or consolidation of the Company with or into any other corporation in a transaction in which the Company is not the surviving entity; (f) the issuance of any writ of attachment, by trustee process or otherwise, or any restraining order or injunction not removed, repealed or dismissed within thirty (30) days of issuance, against or affecting the person or property of the Company or any liability or obligation of the Company to the holder hereof; and (g) the suspension of the transaction of the usual business of the Company. Upon surrender of this Note for transfer or exchange, a new Note or new Notes of the same tenor dated the date to which interest has been paid on the surrendered Note and in an aggregate principal amount equal to the unpaid principal amount of the Note so surrendered will be issued to, and registered in the name of, the transferee or transferees. The Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes. In case any payment herein provided for shall not be paid when due, the Company further promises to pay all cost of collection, including all reasonable attorneys' fees. No delay or omission on the part of the Payee in exercising any right hereunder shall operate as a waiver of such right or of any other right of the Payee, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. The Company hereby waives presentment, demand, notice of prepayment, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note. The undersigned hereby assents to any indulgence and any extension of time for payment of any indebtedness evidenced hereby granted or permitted by the Payee. This Note shall be governed by and construed in accordance with, the laws of the Commonwealth of Massachusetts and shall have the effect of a sealed instrument. THERMO INSTRUMENT SYSTEMS INC. By: /s/Earl R. Lewis ----------------------------------- Earl R. Lewis President and CEO [Corporate Seal] Attest: /s/Sandra Lambert - ------------------------------ Sandra L. Lambert Secretary EX-13 3 Exhibit 13 Thermo Instrument Systems Inc. Consolidated Financial Statements 1998
Thermo Instrument Systems Inc. 1998 Financial Statements Consolidated Statement of Income (In thousands except per share amounts) 1998 1997 1996 - ----------------------------------------------------------------------- ----------- ----------- ----------- Revenues $1,659,981 $1,592,314 $1,209,362 ---------- ---------- ---------- Costs and Operating Expenses: Cost of revenues (Note 11) 889,575 842,009 654,165 Selling, general, and administrative expenses (Note 8) 447,860 424,695 340,963 Research and development expenses 113,917 107,613 84,091 Restructuring and nonrecurring (income) expense, net (Notes 3 and 11) 23,209 (1,257) 3,500 ---------- ---------- ---------- 1,474,561 1,373,060 1,082,719 ---------- ---------- ---------- Operating Income 185,420 219,254 126,643 Interest Income 33,509 28,253 20,490 Interest Expense (includes $11,136, $18,014, and $8,145 to (45,458) (45,894) (28,923) parent company) Gain on Issuance of Stock by Subsidiaries (Note 10) 18,582 46,404 71,713 Other Income 1,863 - - ---------- ---------- ---------- Income Before Provision for Income Taxes, Minority Interest, and 193,916 248,017 189,923 Extraordinary Item Provision for Income Taxes (Note 5) 74,674 88,113 51,727 Minority Interest Expense 15,677 12,646 5,445 ---------- ---------- ---------- Income Before Extraordinary Item 103,565 147,258 132,751 Extraordinary Item, Net of Provision for Income Taxes and 519 - - Minority Interest of $391 (Note 6) ---------- ---------- ---------- Net Income $ 104,084 $ 147,258 $ 132,751 ========== ========== ========== Earnings per Share (Note 15) Basic $ .86 $ 1.21 $ 1.12 ========== ========== ========== Diluted $ .79 $ 1.09 $ 1.01 ========== ========== ========== Weighted Average Shares (Note 15) Basic 120,975 121,548 118,857 ========== ========== ========== Diluted 133,103 139,415 135,351 ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 2 Thermo Instrument Systems Inc. 1998 Financial Statements Consolidated Balance Sheet (In thousands) 1998 1997 - ----------------------------------------------------------------------------------- ----------- ------------ Assets Current Assets: Cash and cash equivalents (includes $408,490 and $283,995 under $ 553,825 $ 468,848 repurchase agreements with parent company) Available-for-sale investments, at quoted market value (amortized cost of - 8,328 $8,287 in 1997; Note 2) Accounts receivable, less allowances of $23,726 and $22,786 407,430 364,075 Unbilled contract costs and fees 13,114 9,191 Inventories 276,589 264,719 Prepaid expenses 19,705 19,292 Prepaid and refundable income taxes (Note 5) 62,921 54,915 ---------- ---------- 1,333,584 1,189,368 ---------- ---------- Property, Plant, and Equipment, at Cost, Net 220,231 219,939 ---------- ---------- Other Assets (Notes 2 and 4) 73,705 45,477 ---------- ---------- Cost in Excess of Net Assets of Acquired Companies (Notes 3 and 5) 938,254 896,369 ---------- ---------- $2,565,774 $2,351,153 ========== ========== 3 Thermo Instrument Systems Inc. 1998 Financial Statements Consolidated Balance Sheet (continued) (In thousands except share amounts) 1998 1997 - ----------------------------------------------------------------------------------- ----------- ----------- Liabilities and Shareholders' Investment Current Liabilities: Notes payable and current maturities of long-term obligations (includes $ 130,772 $ 116,226 $60,000 and $55,000 due to parent company; Notes 3 and 6) Accounts payable 101,009 97,516 Accrued payroll and employee benefits 59,649 59,745 Accrued income taxes (includes $12,500 and $20,000 due to parent company) 59,984 61,409 Accrued installation and warranty expenses 39,958 42,404 Deferred revenue 46,354 41,759 Other accrued expenses 135,708 135,616 Due to parent company and affiliated companies (Note 3) 14,195 22,027 ---------- ---------- 587,629 576,702 ---------- ---------- Deferred Income Taxes (Note 5) 29,278 30,430 ---------- ---------- Other Deferred Items 31,056 27,273 ---------- ---------- Long-term Obligations (Note 6): Senior convertible obligations (includes $140,000 due to parent company) 327,042 327,824 Subordinated convertible obligations 389,436 160,547 Other (includes $3,800 and $168,800 due to parent company; Note 3) 26,965 184,823 ---------- ---------- 743,443 673,194 ---------- ---------- Minority Interest 229,361 165,996 ---------- ---------- Commitments and Contingencies (Note 7) Shareholders' Investment (Notes 4 and 9): Common stock, $.10 par value, 250,000,000 shares authorized; 122,879,889 12,288 12,265 and 122,645,040 shares issued Capital in excess of par value 331,621 333,580 Retained earnings 675,983 571,899 Treasury stock at cost, 3,603,358 and 670,827 shares (63,671) (6,965) Accumulated other comprehensive items (Note 14) (11,214) (33,221) ---------- ---------- 945,007 877,558 ---------- ---------- $2,565,774 $2,351,153 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 4 Thermo Instrument Systems Inc. 1998 Financial Statements Consolidated Statement of Cash Flows (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------- ---------- ----------- ---------- Operating Activities Net income $ 104,084 $ 147,258 $ 132,751 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 61,429 54,993 44,233 Provision for losses on accounts receivable 4,169 4,366 2,274 Noncash restructuring and nonrecurring (income) expense, 3,226 (1,257) 3,500 net (Notes 3 and 11) Gain on issuance of stock by subsidiaries (Note 10) (18,582) (46,404) (71,713) Gain on sale of investments (Note 2) (713) - - Minority interest expense 15,677 12,646 5,445 Increase (decrease) in deferred income taxes (53) 2,742 (757) Extraordinary item, net of income taxes and minority interest (519) - - (Note 6) Other noncash expenses 14,730 6,158 4,889 Change in current accounts, excluding the effects of acquisitions: Accounts receivable (1,404) (19,157) 1,394 Inventories 10,110 13,768 14,184 Other current assets 963 3,547 3,978 Accounts payable (5,310) 14,317 (9,903) Other current liabilities (14,763) (23,868) (24,686) Other (1,638) 205 290 --------- ---------- --------- Net cash provided by operating activities 171,406 169,314 105,879 --------- ---------- --------- Investing Activities Acquisitions, net of cash acquired (Note 3) (129,598) (508,059) (248,150) Payment to affiliated company for acquired business (Note 3) (19,117) - - Refund of acquisition purchase price (Note 3) - 36,132 - Proceeds from sale of businesses (Note 11) - 4,980 - Purchase of available-for-sale investments (6,919) (9,000) (10,250) Proceeds from sale and maturities of available-for-sale 9,005 10,250 3,000 investments Purchases of property, plant, and equipment (30,902) (29,198) (19,134) Proceeds from sale of property, plant, and equipment 9,510 7,877 4,597 Other, net 730 2,030 530 --------- ---------- --------- Net cash used in investing activities $(167,291) $ (484,988) $(269,407) --------- ---------- --------- 5 Thermo Instrument Systems Inc. 1998 Financial Statements Consolidated Statement of Cash Flows (continued) (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------- ---------- ----------- ----------- Financing Activities Net proceeds from issuance of Company and subsidiary common $ 103,327 $ 91,375 $ 127,024 stock (Note 10) Net proceeds from issuance of subordinated convertible 244,111 - - debentures (Note 6) Net proceeds from issuance of long-term obligations 11,502 - 168,850 Proceeds from issuance of short- and long-term obligations to - 428,800 110,000 parent company (Notes 3 and 6) Repurchase of Company and subsidiary common stock, and (119,792) - - subordinated convertible debentures (Note 6) Repayment of short- and long-term obligations to parent company (160,000) (220,000) (95,000) (Note 6) Increase (decrease) in short-term obligations, net 500 (21,528) (12,770) Repayment of long-term obligations (2,780) (7,817) (5,133) --------- ---------- ---------- Net cash provided by financing activities 76,868 270,830 292,971 --------- ---------- ---------- Exchange Rate Effect on Cash 3,994 (8,996) (1,988) --------- ---------- ---------- Increase (Decrease) in Cash and Cash Equivalents 84,977 (53,840) 127,455 Cash and Cash Equivalents at Beginning of Year 468,848 522,688 395,233 --------- ---------- ---------- Cash and Cash Equivalents at End of Year $ 553,825 $ 468,848 $ 522,688 ========= ========== ========== Cash Paid For Interest $ 44,899 $ 43,755 $ 25,837 Income taxes $ 66,423 $ 62,895 $ 42,636 Noncash Activities Fair value of assets of acquired companies $ 165,220 $ 673,382 $ 487,218 Cash paid for acquired companies (132,933) (545,303) (258,785) Due to affiliated company for acquired company - (19,117) - Issuance of subsidiary stock options for acquired company - (1,693) - --------- ---------- ---------- Liabilities assumed of acquired companies $ 32,287 $ 107,269 $ 228,433 ========= ========== ========== Conversions of Company and subsidiary convertible obligations $ 7,562 $ 38,910 $ 67,594 ========= ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
6
Thermo Instrument Systems Inc. 1998 Financial Statements Consolidated Statement of Comprehensive Income and Shareholders' Investment (In thousands) 1998 1997 1996 - --------------------------------------------------------------------------- ---------- ---------- --------- Comprehensive Income Net Income $ 104,084 $147,258 $ 132,751 --------- -------- --------- Other Comprehensive Items (Note 14): Foreign currency translation adjustment 22,917 (34,317) (1,754) Unrealized gains (losses) on available-for-sale investments, net (910) 22 14 --------- -------- --------- of reclassification adjustment 22,007 (34,295) (1,740) --------- -------- --------- Minority Interest (4,248) 4,162 (339) --------- -------- --------- $ 121,843 $117,125 $ 130,672 ========= ======== ========= Shareholders' Investment Common Stock, $.10 Par Value: Balance at beginning of year $ 12,265 $ 9,767 $ 9,257 Issuance of stock under employees' and directors' stock plans 17 4 5 Conversions of convertible obligations 6 45 505 Effect of stock split - 2,449 - --------- -------- --------- Balance at end of year 12,288 12,265 9,767 --------- -------- --------- Capital in Excess of Par Value: Balance at beginning of year 333,580 319,464 248,468 Issuance of stock under employees' and directors' stock plans 590 1,270 950 Tax benefit related to employees' and directors' stock plans 158 514 199 Conversions of convertible obligations 765 6,817 65,924 Effect of stock split - (2,449) - Effect of majority-owned subsidiaries' equity transactions (3,472) 7,964 3,923 --------- -------- --------- Balance at end of year 331,621 333,580 319,464 --------- -------- --------- Retained Earnings: Balance at beginning of year 571,899 424,641 291,890 Net income 104,084 147,258 132,751 --------- -------- --------- Balance at end of year $ 675,983 $571,899 $ 424,641 --------- -------- --------- 7 Thermo Instrument Systems Inc. 1998 Financial Statements Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued) (In thousands) 1998 1997 1996 - --------------------------------------------------------------------------- ---------- ---------- --------- Treasury Stock: Balance at beginning of year $ (6,965) $ (8,679) $ (9,724) Activity under employees' and directors' stock plans 102 1,714 1,045 Purchases of Company common stock (56,808) - - --------- -------- --------- Balance at end of year (63,671) (6,965) (8,679) --------- -------- --------- Accumulated Other Comprehensive Items (Note 14): Balance at beginning of year (33,221) 1,074 2,814 Other comprehensive (income) expense 22,007 (34,295) (1,740) --------- -------- --------- Balance at end of year (11,214) (33,221) 1,074 --------- -------- --------- $ 945,007 $877,558 $ 746,267 ========= ======== ========= The accompanying notes are an integral part of these consolidated financial statements. 8 Thermo Instrument Systems Inc. 1998 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Thermo Instrument Systems Inc. (the Company) is a worldwide leader in the development, manufacture, and marketing of measurement instruments used to monitor, collect, and analyze information. These systems are used for multiple applications in a range of industries, including industrial processing, food and beverage production, life sciences research, and medical diagnostics. Relationship With Thermo Electron Corporation The Company was incorporated on May 28, 1986, as a wholly owned subsidiary of Thermo Electron Corporation. As of January 2, 1999, Thermo Electron owned 101,865,192 shares of the Company's common stock, representing 85% of such stock outstanding. During 1998, Thermo Electron announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company and ThermoSpectra Corporation, a publicly traded subsidiary of the Company. As part of this reorganization, Thermo Electron announced that ThermoSpectra may be taken private (Note 17). Principles of Consolidation The accompanying financial statements include the accounts of the Company; its wholly owned subsidiaries; and its majority-owned public subsidiaries, ThermoSpectra, ThermoQuest Corporation, Thermo Optek Corporation, Thermo BioAnalysis Corporation, Metrika Systems Corporation, Thermo Vision Corporation, and ONIX Systems Inc. All material intercompany accounts and transactions have been eliminated. The Company accounts for investments in businesses in which it owns between 20% and 50% using the equity method. Fiscal Year The Company has adopted a fiscal year ending the Saturday nearest December 31. References to 1998, 1997, and 1996 are for the fiscal years ended January 2, 1999, January 3, 1998, and December 28, 1996, respectively. Fiscal years 1998 and 1996 each included 52 weeks; fiscal 1997 included 53 weeks. Revenue Recognition The Company generally 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 in the accompanying 1998 balance sheet will be recognized within one year. Gain on Issuance of Stock by Subsidiaries At the time a subsidiary sells its stock to unrelated parties at a price in excess of its book value, the Company's net investment in that subsidiary increases. If at that time the subsidiary is an operating entity, and not engaged principally in research and development, the Company records the increase as a gain. If gains have been recognized on issuances of a subsidiary's stock and shares of the subsidiary are subsequently repurchased by the subsidiary, the Company, or Thermo Electron, gain recognition does not occur on issuances subsequent to the date of a repurchase until such time as shares have been issued in an amount equivalent to the number of repurchased shares. Such transactions are reflected as equity transactions, and the net effect of these transactions is reflected in the accompanying statement of comprehensive income and shareholders' investment as "Effect of majority-owned subsidiaries' equity transactions." 9 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 4). Accordingly, no accounting recognition is given to stock options granted at fair market value until they are exercised. Upon exercise, net proceeds, including tax benefits realized, are credited to shareholders' investment. Income Taxes The Company and Thermo Electron have a tax allocation agreement under which the Company and its greater than 80%-owned subsidiaries, exclusive of foreign operations, 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 Electron'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 Basic earnings per share have been computed by dividing net income by the weighted average number of shares outstanding during the year. Diluted earnings per share have been computed assuming the conversion of convertible obligations and the elimination of the related interest expense, and the exercise of stock options, as well as their related income tax effects. Stock Split All share and per share information has been restated to reflect a five-for-four stock split, effected in the form of a 25% stock dividend, which was distributed in October 1997. Cash and Cash Equivalents At year-end 1998 and 1997, $392.0 million and $284.0 million, respectively, of the Company's cash equivalents were invested in a repurchase agreement with Thermo Electron. Under this agreement, the Company in effect lends excess cash to Thermo Electron, which Thermo Electron collateralizes with investments principally consisting of corporate notes, U.S. government-agency securities, commercial paper, money market funds, and other marketable securities, in the amount of at least 103% of such obligation. The Company's funds subject to the repurchase agreement are readily convertible into cash by the Company. The repurchase agreement earns a rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. At year-end 1998, $16.5 million of the Company's cash equivalents, denominated in Dutch guilders, were invested in a repurchase agreement with a wholly owned subsidiary of Thermo Electron. Under this agreement, the Company in effect lends excess cash to the subsidiary, which Thermo Electron collateralizes with investments principally consisting of corporate notes, U.S. government-agency securities, commercial paper, money market funds, and other marketable securities, in the amount of at least 103% of such obligation. The Company's funds subject to the repurchase agreement are readily convertible into cash by the Company. The repurchase agreement earns a rate based on Netherlands market rates, set at the beginning of each month. The Company, along with other subsidiaries of Thermo Electron, participates in a notional pool arrangement with Barclays Bank, which includes a $71 million credit facility. The Company has access to $45 million under this credit facility. Only U.K.-based subsidiaries of Thermo Electron participate in this arrangement. Under this 10 1. Nature of Operations and Summary of Significant Accounting Policies (continued) arrangement, Barclays notionally combines the positive and negative cash balances held by the participants to calculate the net interest yield/expense for the group. The benefit derived from this arrangement is then allocated based on balances attributable to the respective participants. Thermo Electron guarantees all of the obligations of each participant in this arrangement. At year-end 1998 and 1997, the Company had a positive cash balance under this arrangement of $26.7 million and a negative cash balance of $1.5 million, respectively. At year-end 1998 and 1997, the Company's cash equivalents also include investments in short-term certificates of deposit of the Company's foreign subsidiaries, 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: (In thousands) 1998 1997 - -------------------------------------------------------------------------------------- ---------- ---------- Raw Materials and Supplies $ 118,286 $ 118,611 Work in Progress 55,086 52,870 Finished Goods 103,217 93,238 --------- --------- $ 276,589 $ 264,719 ========= ========= Property, Plant, and Equipment The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the property as follows: buildings and improvements, 5 to 40 years; machinery and equipment, 1 to 12 years; and leasehold improvements, the shorter of the term of the lease or the life of the asset. Property, plant, and equipment consists of: (In thousands) 1998 1997 - -------------------------------------------------------------------------------------- ---------- ---------- Land $ 33,335 $ 33,539 Buildings 124,875 123,533 Machinery and Equipment 171,307 148,930 Leasehold Improvements 14,851 11,603 --------- --------- 344,368 317,605 Less: Accumulated Depreciation and Amortization 124,137 97,666 --------- --------- $ 220,231 $ 219,939 ========= ========= Other Assets Other assets in the accompanying balance sheet includes the costs of acquired trademarks, patents, and other specifically identifiable intangible assets. These assets are amortized using the straight-line method over their estimated useful lives, which range from 3 to 20 years. These assets were $32.3 million and $16.2 million, net of accumulated amortization of $22.9 million and $19.3 million, at year-end 1998 and 1997, respectively. Other assets in the accompanying balance sheet also includes prepaid pension costs (Note 4), deferred debt expense, and, in 1998, long-term available-for-sale investments (Note 2). 11 1. Nature of Operations and Summary of Significant Accounting Policies (continued) 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 periods not exceeding 40 years. Accumulated amortization was $104.5 million and $78.0 million at year-end 1998 and 1997, respectively. The Company assesses the future useful life of this asset whenever events or changes in circumstances indicate that the current useful life has diminished. The Company considers the future undiscounted cash flows of the acquired 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, net of minority interest, are reflected in the "Accumulated other comprehensive items" component of shareholders' investment (Note 14). In 1998, the Company recorded a foreign currency transaction gain of $1.2 million, arising from the repayment of a foreign subsidiary's intercompany borrowings denominated in U.S. dollars, which is included in other income in the accompanying statement of income. Foreign currency transaction gains and losses are included in the accompanying statement of income and are not material for 1997 and 1996. Forward Contracts The Company uses short-term forward foreign exchange contracts to manage certain exposures to foreign currencies. The Company enters into forward foreign exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than its subsidiaries' local currencies. These contracts principally hedge transactions denominated in U.S. dollars, British pounds sterling, Japanese yen, French francs, and German marks. The purpose of the Company's foreign currency hedging activities is to protect the Company's local currency cash flows related to these commitments from fluctuations in foreign exchange rates. Gains and losses arising from forward foreign exchange contracts are recognized as offsets to gains and losses resulting from the transactions being hedged. The Company does not enter into speculative foreign currency agreements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Presentation Certain amounts in 1997 and 1996 have been reclassified to conform to the presentation in the 1998 financial statements.
12 2. Available-for-sale Investments The Company's debt and marketable equity securities are considered available-for-sale investments in the accompanying balance sheet and are carried at market value, with the difference between cost and market value, net of related tax effects and minority interest, recorded in the "Accumulated other comprehensive items" component of shareholders' investment. The aggregate market value, cost basis, and gross unrealized gains of short- and long-term available-for-sale investments by major security type are:
(In thousands) Gross Market Cost Unrealized Value Basis Gains (Losses) - ------------------------------------------------------------------------ ----------- ----------- ----------- 1998 Equity Securities $ 5,574 $ 6,919 $(1,345) ======= ======= ======= 1997 Corporate Bonds $ 6,105 $ 6,091 $ 14 Equity Securities 2,083 2,056 27 Other 140 140 - ------- ------- ------- $ 8,328 $ 8,287 $ 41 ======= ======= ======= Long-term available-for-sale investments are included in other assets in the accompanying 1998 balance sheet. The cost of available-for-sale investments that were sold was based on specific identification in determining realized gains recorded in the accompanying statement of income. Other income in the accompanying 1998 statement of income includes a gain of $0.7 million from the sale of an available-for-sale investment. 3. Acquisitions During 1998, the Company acquired several businesses for $129.6 million in cash, net of cash acquired. In March 1997, the Company acquired 95% of Life Sciences International PLC, a London Stock Exchange-listed company. Subsequently, the Company acquired the remaining shares of Life Sciences' capital stock. The aggregate purchase price for Life Sciences was approximately $442.8 million, net of $55.8 million of cash acquired. The purchase price includes the repayment of $105.0 million of Life Sciences' bank debt. Life Sciences manufactures laboratory science equipment, appliances, instruments, consumables, and reagents for the research, clinical, and industrial markets. In March 1997, to partially finance the acquisition of Life Sciences, the Company borrowed $210.0 million from Thermo Electron pursuant to a promissory note due March 1999 (Note 6). The Company repaid $105.0 million of this promissory note in September 1997 and the remaining $105.0 million in January 1998 (Note 6). On November 6, 1997, Thermo Power Corporation, a majority-owned subsidiary of Thermo Electron, acquired Peek plc. Thereafter, ONIX Systems acquired from Thermo Power the stock of three businesses comprising the Peek Measurement Business for $19.1 million. The purchase price was determined based on the net book value of the Peek Measurement Business at November 6, 1997, a pro rata allocation of Thermo Power's total cost in excess of net assets of acquired companies recorded in connection with its acquisition of Peek plc based on the 1997 revenues of the Peek Measurement Business relative to Peek plc's total revenues, plus an estimate of Thermo Power's tax liability that arose from the sale of the business to ONIX Systems. The Peek Measurement Business manufactures flow and density measurement systems for use in the water/wastewater and oil and gas industries. The purchase price is included in due to parent company and affiliated companies in the accompanying 1997 balance sheet and was paid in 1998. 13 3. Acquisitions (continued) During 1997, the Company made several other acquisitions for approximately $46.2 million, net of cash acquired and including the repayment of $1.3 million of bank debt, and the issuance of subsidiary stock options valued at an aggregate $1.7 million. To partially finance 1997 acquisitions, ThermoSpectra borrowed an aggregate of $60.0 million from Thermo Electron pursuant to promissory notes due 1999 and Thermo Vision borrowed $3.8 million from Thermo Electron pursuant to a promissory note due 2000 (Note 6). In March 1996, the Company completed the acquisition of a substantial portion of the businesses constituting the Scientific Instruments Division of Fisons plc (the Fisons businesses), a wholly owned subsidiary of Rhone-Poulenc Rorer Inc. (RPR), for approximately $181.2 million, net of $7.7 million of cash acquired, and the assumption of approximately $47.2 million of indebtedness. In December 1997, the Company and RPR negotiated a post-closing adjustment under the terms of the purchase agreement for the acquisition of the Fisons businesses pertaining to determination of the net assets of the Fisons businesses at the date of acquisition. This negotiation resulted in a refund to the Company of $36.1 million, plus $3.8 million of interest from the date of acquisition. The Company recorded $33.1 million of the refund as a reduction of cost in excess of net assets of acquired companies. The remaining $3.0 million represented payment for uncollected accounts receivable acquired by the Company that was guaranteed by RPR. In 1996, the Company wrote off $3.5 million of acquired technology relating to this acquisition, which represents the portion of the purchase price allocated to technology in development based on estimated replacement cost. The Fisons businesses are involved in the research, development, manufacture, and sale of analytical instruments to industrial and research laboratories worldwide. To finance the acquisition of the Fisons businesses, the Company used available cash in addition to borrowings from Thermo Electron (Note 6). During 1996, the Company made several other acquisitions for an aggregate $67.0 million in cash, net of cash acquired. These acquisitions have been accounted for using the purchase method of accounting, and their results have been included in the accompanying financial statements from their respective dates of acquisition. The aggregate cost of these acquisitions exceeded the estimated fair value of the acquired net assets by $609.4 million, which is being amortized over periods not exceeding 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 acquisitions completed in fiscal 1998, is subject to adjustment upon finalization of the purchase price allocation. The Company has gathered no information that indicates the final purchase price allocations will differ materially from the preliminary estimates. Based on unaudited data, the following table presents selected financial information for the Company, Life Sciences, and the Fisons businesses, on a pro forma basis, assuming the Company, Life Sciences, and the Fisons businesses had been combined since the beginning of 1996. The effect of the acquisitions not included in the pro forma data was not material to the Company's results of operations. (In thousands except per share amounts) 1997 1996 - ----------------------------------------------------------------------- ----------- ----------- ----------- Revenues $1,645,086 $1,637,582 Net Income 126,528 119,842 Earnings per Share: Basic 1.04 1.01 Diluted .95 .92 The pro forma results are not necessarily indicative of future operations or the actual results that would have occurred had the acquisition of Life Sciences or the Fisons businesses been made at the beginning of 1996.
14 3. Acquisitions (continued) In connection with these acquisitions, the Company has undertaken restructuring activities at the acquired businesses. The Company's restructuring activities, which were accounted for in accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing levels and the abandonment of excess facilities. In connection with these restructuring activities, as part of the cost of the acquisitions, the Company established reserves as detailed below, primarily for severance and excess facilities. In accordance with EITF 95-3, the Company finalizes its restructuring plans no later than one year from the respective dates of the acquisitions. A summary of the changes in accrued acquisition expenses, which are included in other accrued expenses in the accompanying balance sheet, is:
Abandonment of Excess (In thousands) Severance Facilities Other Total - ----------------------------------------------- -------------- -------------- -------------- -------------- Balance at December 30, 1995 $ 5,974 $ 8,416 $ 448 $ 14,838 Reserves established 25,256 9,730 3,796 38,782 Usage (18,121) (6,985) (1,465) (26,571) Decrease due to finalization of (1,872) (3,560) (1,243) (6,675) restructuring plan, recorded as a decrease to cost in excess of net assets of acquired companies Currency translation adjustment - - 189 189 -------- -------- -------- -------- Balance at December 28, 1996 11,237 7,601 1,725 20,563 Reserves established 9,493 11,804 3,455 24,752 Usage (12,137) (5,153) (1,375) (18,665) Decrease due to finalization of (3,260) (1,160) (21) (4,441) restructuring plan, recorded as a decrease to cost in excess of net assets of acquired companies Currency translation adjustment - - (243) (243) -------- -------- -------- -------- Balance at January 3, 1998 5,333 13,092 3,541 21,966 Reserves established 4,164 2,140 914 7,218 Usage (4,862) (3,297) (1,358) (9,517) Decrease due to finalization of (829) (253) (2,389) (3,471) restructuring plan, recorded as a decrease to cost in excess of net assets of acquired companies Currency translation adjustment - - 307 307 -------- -------- -------- -------- Balance at January 2, 1999 $ 3,806 $ 11,682 $ 1,015 $ 16,503 ======== ======== ======== ======== Unresolved matters at January 2, 1999, primarily included completion of planned severances and consolidation of excess facilities for certain acquisitions completed during 1998.
15 4. Employee Benefit Plans Stock-based Compensation Plans Stock Option Plans The Company has stock-based compensation plans for its key employees, directors, and others. These plans permit the grant of a variety of stock and stock-based awards as determined by the human resources committee of the Company's Board of Directors (the Board Committee), including restricted stock, stock options, stock bonus shares, or performance-based shares. The option recipients and the terms of options granted under these plans are determined by the Board Committee. As of year-end 1998, only nonqualified stock options have been awarded under these plans. Generally, options granted to date are exercisable immediately, but are subject to certain transfer restrictions and the right of the Company to repurchase shares issued upon exercise of the options at the exercise price, upon certain events. The restrictions and repurchase rights generally lapse ratably over a one- to ten-year period, depending on the term of the option, which may range from five to twelve years. Nonqualified stock options may be granted at any price determined by the Board Committee, although incentive stock options must be granted at not less than the fair market value of the Company's stock on the date of grant. Generally, all options have been granted at fair market value. The Company also has a directors' stock option plan that provides for the grant of stock options in the Company and its majority-owned subsidiaries to outside directors pursuant to a formula approved by the Company's shareholders. Options in the Company awarded under this plan are exercisable six months after the date of grant and expire three or seven years after the date of grant. 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. In November 1998, the Company's employees, excluding its officers and directors, were offered the opportunity to exchange previously granted options to purchase shares of Company common stock for an amount of options equal to half of the number of options previously held, exercisable at a price equal to the fair market value at the time of the exchange offer. Holders of options to acquire 669,000 shares at a weighted average exercise price of $29.69 per share elected to participate in this exchange and, as a result, received options to purchase 334,000 shares of Company common stock at $13.11 per share, which are included in the 1998 grants in the table below. The other terms of the new options are the same as the exchanged options except that the holders may not sell shares purchased pursuant to such new options for six months from the exchange date. The options exchanged were canceled by the Company. A summary of the Company's stock option activity is:
1998 1997 1996 ------------------- ------------------ ------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Price Price Price Number Number Number of of of (Shares in thousands) Shares Shares Shares - ---------------------------------------------- --------- ---------- -------- ---------- --------- --------- Options Outstanding, Beginning of Year 4,365 $16.83 4,066 $13.98 4,026 $11.88 Granted 698 13.30 727 30.24 472 27.59 Exercised (325) 9.23 (263) 9.50 (255) 7.31 Forfeited (181) 17.88 (165) 17.56 (177) 12.00 Canceled due to exchange (669) 29.69 - - - - ----- ---- ----- Options Outstanding, End of Year 3,888 $14.57 4,365 $16.83 4,066 $13.98 ===== ====== ===== ====== ===== ====== Options Exercisable 3,886 $14.56 4,365 $16.83 4,066 $13.98 ===== ====== ===== ====== ===== ====== Options Available for Grant 2,498 2,346 1,908 ===== ===== =====
16 4. Employee Benefit Plans (continued)
A summary of the status of the Company's stock options at January 2, 1999, is: Options Outstanding ------------------------------------------------------ Range of Exercise Prices Number Weighted Weighted of Average Average Shares Remaining Exercise (In thousands) Contractual Life Price - ---------------------------------------------- -------------------- ------------------- -------------------- $ 6.51 - $ 12.72 844 4.3 years $11.53 12.73 - 18.93 2,631 6.8 years 13.34 25.15 - 31.35 413 7.3 years 28.63 ------ $ 6.51 - $ 31.35 3,888 6.3 years $14.57 ===== The information disclosed above for options outstanding at January 2, 1999, does not differ materially for options exercisable. 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 the Company and Thermo Electron. Prior to the 1998 program year, shares of the Company's and Thermo Electron's common stock could be purchased at the end of a 12-month period at 95% of the fair market value at the beginning of the period and the shares purchased were subject to a six-month resale restriction. Effective November 1, 1998, the applicable shares of common stock may be purchased at 85% of the lower of the fair market value at the beginning or end of the plan year, and shares purchased are subject to a one-year resale restriction. Shares are purchased through payroll deductions of up to 10% of each participating employee's gross wages. No shares were issued under this program during 1998. During 1997 and 1996, the Company issued 52,000 shares and 62,000 shares, respectively, of its common stock under this program. Pro Forma Stock-based Compensation Expense In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-based Compensation," which sets forth a fair-value based method of recognizing stock-based compensation expense. As permitted by SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account for its stock-based compensation plans. Had compensation cost for awards granted after 1994 under the Company's stock-based
17 4. Employee Benefit Plans (continued)
compensation plans been determined based on the fair value at the grant dates consistent with the method set forth under SFAS No. 123, the effect on the Company's net income and earnings per share would have been: (In thousands except per share amounts) 1998 1997 1996 - -------------------------------------------------------------------------- ---------- ---------- ---------- Net Income: As reported $ 104,084 $ 147,258 $ 132,751 Pro forma 96,922 143,083 129,591 Basic Earnings per Share: As reported .86 1.21 1.12 Pro forma .80 1.18 1.09 Diluted Earnings per Share: As reported .79 1.09 1.01 Pro forma .74 1.06 .99 Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation expense may not be representative of the amount to be expected in future years. Pro forma compensation expense for options granted is reflected over the vesting period; therefore, future pro forma compensation expense may be greater as additional options are granted. The weighted average fair value per share of options granted was $3.93, $11.09, and $10.90 in 1998, 1997, and 1996, respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1998 1997 1996 - -------------------------------------------------------------------------- ---------- ---------- ---------- Volatility 29% 28% 26% Risk-free Interest Rate 4.5% 5.9% 6.2% Expected Life of Options 3.8 years 5.2 years 6.2 years The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including expected stock price volatility. Because the company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 401(k) Savings Plans The majority of the Company's full-time U.S. employees are eligible to participate in Thermo Electron's 401(k) savings plan. Contributions to the Thermo Electron 401(k) savings plan are made by both the employee and the Company. Company contributions are based upon the level of employee contributions. For this plan, the Company contributed and charged to expense $4.2 million, $6.0 million, and $3.7 million in 1998, 1997, and 1996, respectively. 18 4. Employee Benefit Plans (continued) Other Retirement Plans Certain of the Company's subsidiaries offer other retirement plans in lieu of participation in the Thermo Electron 401(k) savings plan. Company contributions to these plans are based on formulas determined by the Company. For these plans, the Company contributed and charged to expense $7.5 million, $6.5 million, and $4.2 million in 1998, 1997, and 1996, respectively. Defined Benefit Pension Plan Life Sciences International PLC has a defined benefit pension plan covering substantially all of its full-time U.K. employees. Net periodic benefit income included the following components: (In thousands) 1998 1997 - -------------------------------------------------------------------------------------- -------- --------- Service Cost $ 2,523 $ 2,749 Interest Cost on Benefit Obligation 3,182 3,031 Expected Return on Plan Assets (6,337) (6,239) ------- -------- $ (632) $ (459) ======= ========
The Company's defined benefit plan activity is: (In thousands) 1998 1997 - ---------------------------------------------------------------------------------- ----------- ----------- Change in Benefit Obligation: Benefit obligation, beginning of year $ 45,890 $ 38,086 Service cost 2,523 2,749 Interest cost 3,182 3,031 Benefits paid (1,271) (1,343) Actuarial loss 6,909 3,777 Currency translation adjustment 673 (410) -------- -------- Benefit obligation, end of year 57,906 45,890 -------- -------- Change in Plan Assets: Fair value of plan assets, beginning of year 63,707 56,273 Actual return on plan assets 10,857 9,408 Benefits paid (1,271) (1,343) Currency translation adjustment 886 (631) ------- -------- Fair value of plan assets, end of year 74,179 63,707 ------- -------- Funded Status 16,273 17,817 Unrecognized Net Actuarial (Gain) Loss 2,233 (172) -------- -------- Prepaid Pension Costs $ 18,506 $ 17,645 ======== ======== 19 4. Employee Benefit Plans (continued) Significant actuarial assumptions used to determine the net periodic pension cost were: 1998 1997 - -------------------------------------------------------------------------- ---------- --------- ---------- Discount Rate 7% 8.25% Rate of Increase in Salary Levels 6.5% 8% Expected Long-term Rate of Return on Assets 10% 10%
5. Income Taxes
The components of income before provision for income taxes, minority interest, and extraordinary item are: (In thousands) 1998 1997 1996 - --------------------------------------------------------------------------- ---------- --------- ---------- Domestic $ 119,584 $186,133 $ 143,377 Foreign 74,332 61,884 46,546 --------- -------- --------- $ 193,916 $248,017 $ 189,923 ========= ======== ========= The components of the provision for income taxes are: (In thousands) 1998 1997 1996 - --------------------------------------------------------------------------- ---------- --------- ---------- Currently Payable: Federal $ 35,085 $ 47,121 $ 29,593 State 6,263 8,154 6,978 Foreign 30,775 26,242 27,100 --------- -------- --------- 72,123 81,517 63,671 --------- -------- --------- Net Deferred (Prepaid): Federal 2,721 3,860 (5,553) State 304 819 (1,178) Foreign (474) 1,917 (5,213) --------- -------- --------- 2,551 6,596 (11,944) --------- -------- --------- $ 74,674 $ 88,113 $ 51,727 ========= ======== ========= The Company and its majority-owned subsidiaries receive 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 $1.5 million, $1.6 million, and $2.0 million of such benefits of the Company and its majority-owned subsidiaries that have been allocated to capital in excess of par value, directly or through the effect of majority-owned subsidiaries' equity 20 5. Income Taxes (continued) transactions, in 1998, 1997, and 1996, respectively. The provision for income taxes that is currently payable does not reflect $4.4 million, $2.4 million, and $4.7 million of tax benefits used to reduce cost in excess of net assets of acquired companies in 1998, 1997, and 1996, respectively. 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, minority interest, and extraordinary item due to: (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------- ---------- ---------- ---------- Provision for Income Taxes at Statutory Rate $ 67,871 $ 86,806 $ 66,473 Increases (Decreases) Resulting from: Gain on issuance of stock by subsidiaries (6,504) (16,241) (25,100) Foreign tax rate and tax loss differential 4,285 6,500 5,596 State income taxes, net of federal tax 4,269 5,832 3,770 Amortization of cost in excess of net assets of acquired 5,344 4,492 2,445 companies Tax benefit of foreign sales corporation (2,606) (2,517) (2,102) Other, net 2,015 3,241 645 --------- --------- --------- $ 74,674 $ 88,113 $ 51,727 ========= ========= ========= Prepaid income taxes and deferred income taxes in the accompanying balance sheet consist of: (In thousands) 1998 1997 - ------------------------------------------------------------------------------------- ---------- ---------- Prepaid Income Taxes: Tax loss carryforwards $ 51,563 $ 43,559 Inventory basis difference 22,557 13,109 Reserves and accruals 27,192 33,717 Accrued compensation 7,733 5,306 Allowance for doubtful accounts 4,358 2,459 --------- --------- 113,403 98,150 Less: Valuation Allowance 51,563 43,235 --------- --------- $ 61,840 $ 54,915 ========= ========= Deferred Income Taxes: Depreciation $ 17,631 $ 24,928 Intangible assets 7,840 5,502 Other, net 3,807 - --------- --------- $ 29,278 $ 30,430 ========= ========= 21 5. Income Taxes (continued) The valuation allowance relates to uncertainty surrounding the realization of certain tax assets, including $129.1 million of foreign tax loss carryforwards and $6.8 million of certain federal tax loss carryforwards in 1998, the realization of which is limited to the future income of certain subsidiaries. Of the $129.1 million of foreign tax loss carryforwards, approximately $68 million expire from 1999 through 2006 and the remainder do not expire. The federal tax loss carryforwards expire from 1999 through 2012. Any tax benefit resulting from the use of acquired loss carryforwards will be used to reduce cost in excess of net assets of acquired companies. The increase in the valuation allowance results primarily from the increase in foreign net operating loss carryforwards. The Company has not recognized a deferred tax liability for the difference between the book basis and tax basis of its investment in the common stock of its domestic subsidiaries (such difference relates primarily to unremitted earnings and gains on issuance of stock by subsidiaries) because the Company does not expect this basis difference to become subject to tax at the parent level. The Company believes it can implement certain tax strategies to recover its investment in its domestic subsidiaries tax-free. A provision has not been made for U.S. or additional foreign taxes on approximately $192 million 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. 6. Short- and Long-term Obligations Short-term Obligations Notes payable and current maturities of long-term obligations in the accompanying balance sheet includes $59.4 million and $58.8 million of bank borrowings at several of the Company's foreign subsidiaries at year-end 1998 and 1997, respectively. Unused lines of credit were $168.9 million at year-end 1998. Borrowings under lines of credit are generally guaranteed by Thermo Electron. In addition, the Company's Netherlands-based subsidiaries have an agreement with a wholly owned subsidiary of Thermo Electron under which the subsidiaries can borrow funds that bear interest at a rate based on Netherlands market rates, set at the beginning of each month. At year-end 1998, the Company had borrowings under this agreement of $6.1 million, which are included in notes payable and current maturities of long-term obligations in the accompanying balance sheet. The weighted average interest rate for these borrowings was 3.48% and 4.80% at year-end 1998 and 1997, respectively. In June 1997, to finance the repayment of Life Sciences' debt, the Company borrowed $115.0 million from Thermo Electron, which was repaid in September 1997. 22 6. Short- and Long-term Obligations (continued) Long-term Obligations (In thousands except per share amounts) 1998 1997 - -------------------------------------------------------------------------------------- ---------- --------- 3 3/4% Senior Convertible Note to Parent Company, Due 2000, Convertible $ 140,000 $140,000 at $13.55 Per Share 3 3/4% Senior Convertible Debentures, Due 2000, Convertible at $13.55 Per 14,542 15,324 Share 4 1/2% Senior Convertible Debentures, Due 2003, Convertible at $34.46 Per 172,500 172,500 Share 4% Subordinated Convertible Debentures, Due 2005, Convertible at $35.65 Per 250,000 - Share (b) 5% Subordinated Convertible Debentures, Due 2000, Convertible Into Shares of 67,931 80,591 ThermoQuest at $16.50 Per Share 5% Subordinated Convertible Debentures, Due 2000, Convertible Into Shares of 71,505 79,956 Thermo Optek at $13.94 Per Share 10.23% Mortgage Loan Secured by Property With a Net Book Value of $14,863, 7,319 8,343 Payable in Monthly Installments With Final Payments in 2004 Promissory Note to Parent Company (a) (b) - 105,000 Promissory Notes to Parent Company From ThermoSpectra, Due 1999 (a) 60,000 60,000 Promissory Note to Parent Company From Thermo Vision, Due 2000 (a) 3,800 3,800 Promissory Notes to Parent Company From Thermo Optek and ThermoSpectra, - 55,000 Due August 1998 (a) Other 21,179 10,101 --------- -------- 808,776 730,615 Less: Current Maturities of Long-term Obligations 65,333 57,421 --------- -------- $ 743,443 $673,194 ========= ======== (a) Bears interest at the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. The interest rate for the notes outstanding at year-end 1998 and 1997 was 5.36% and 5.76%, respectively. (b) The Company used a portion of the proceeds from the 4% subordinated convertible debentures to repay the $105.0 million promissory note to Thermo Electron. The $105.0 million promissory note was classified as long-term in the accompanying 1997 balance sheet, as its repayment was made using the proceeds of debt with a maturity beyond one year. The senior convertible debentures are guaranteed on a senior basis by Thermo Electron. The 4% subordinated convertible debentures of the Company and the 5% subordinated convertible debentures of ThermoQuest and Thermo Optek are guaranteed on a subordinated basis by Thermo Electron. The Company has agreed to reimburse Thermo Electron in the event Thermo Electron is required to make a payment under the guarantee. In lieu of issuing all or a portion of the Company's common stock upon conversion of the 3 3/4% senior convertible debentures due 2000, the Company has the option to pay holders of the debentures cash equal to the weighted average market price of the Company's common stock on the last trading date prior to conversion. The annual requirements for long-term obligations as of January 2, 1999, are $65.3 million in 1999; $302.6 million in 2000; $4.7 million in 2001; $4.7 million in 2002; $177.2 million 2003; and $254.3 million in 2004 and thereafter. Total future requirements of long-term obligations are $808.8 million. 23 6. Short- and Long-term Obligations (continued) During 1998, 1997, and 1996, convertible obligations of $7.6 million, $38.9 million, and $67.6 million, respectively, were converted into common stock of the Company or its subsidiaries. During 1998, Thermo Optek and ThermoQuest repurchased a total of $14.3 million principal amount of their subordinated convertible debentures for $13.3 million in cash, resulting in an extraordinary gain of $0.5 million, net of taxes and minority interest of $0.4 million. The extraordinary gain recorded by the Company did not affect the reported amounts of 1998 basic and diluted earnings per share. See Note 12 for the fair value information pertaining to the Company's long-term obligations. 7. Commitments and Contingencies Operating Leases The Company leases portions of its office and operating facilities under various operating lease arrangements. The accompanying statement of income includes expenses from operating leases of $32.4 million, $28.2 million, and $21.1 million in 1998, 1997, and 1996, respectively. Future minimum payments due under noncancelable operating leases at January 2, 1999, are $25.0 million in 1999; $21.0 million in 2000; $16.6 million in 2001; $13.5 million in 2002; $11.9 million in 2003; and $31.5 million in 2004 and thereafter. Total future minimum lease payments are $119.5 million. Contingencies ThermoQuest's Finnigan subsidiary has filed complaints against Bruker-Franzen Analytik GmbH and its U.S. affiliate, and Hewlett-Packard Company, for alleged violation of two U.S. patents owned by Finnigan pertaining to methods used in ion-trap mass spectrometers. One of Finnigan's complaints was filed in United States District Court and the other was filed with the United States International Trade Commission (ITC). In April 1998, the ITC determined that the defendants did not engage in unfair practices in U.S. import trade with respect to the Finnigan patents, and that the Finnigan patents are invalid and/or not infringed. Finnigan has appealed the ITC's determination with respect to one of its patents to the United States Court of Appeals for the Federal Circuit (CAFC). The CAFC heard arguments in the appeal on March 4, 1999. Bruker has presented counterclaims alleging that the Finnigan patents are invalid and unenforceable and are not infringed by the mass spectrometers co-marketed by Bruker. They also allege that Finnigan has violated antitrust laws by attempting to maintain a monopoly position and restrain trade through enforcement of allegedly fraudulently obtained patents. Bruker has asked for judgment consistent with its counterclaims, and for three times the antitrust damages (including attorney's fees) it has sustained. Although the Company intends to vigorously defend this matter, there can be no assurance as to its outcome. In the opinion of management, while an unfavorable resolution of this matter could materially affect the Company's results of operations and cash flows in a particular quarter or year, any such resolution would not have a material adverse effect on the Company's financial position. The Company is also contingently liable with respect to certain other lawsuits and matters which, in the opinion of management, will not have a material effect upon the financial position of the Company or its results of operations. Letters of Credit Outstanding letters of credit, principally related to performance bond obligations, totaled $36.5 million at January 2, 1999. 24 8. Related-party Transactions Corporate Services Agreement The Company and Thermo Electron have a corporate services agreement under which Thermo Electron's corporate staff provides certain administrative services, including certain legal advice and services, risk management, certain employee benefit administration, tax advice and preparation of tax returns, centralized cash management, and certain financial and other services, for which the Company currently pays Thermo Electron annually an amount equal to 0.8% of the Company's revenues. In 1997 and 1996, the Company paid an amount equal to 1.0% of the Company's revenues. For these services, the Company was charged $13.3 million, $15.9 million, and $12.1 million in 1998, 1997, and 1996, respectively. The fee is reviewed and adjusted annually by mutual agreement of the parties. Management believes that the service fee charged by Thermo Electron is reasonable and that such fees are representative of the expenses the Company would have incurred on a stand-alone basis. The corporate service agreement is renewed annually but can be terminated upon 30 days' prior notice by the Company or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron Corporate Charter defines the relationship among Thermo Electron and its majority-owned subsidiaries). For additional items such as employee benefit plans, insurance coverage, and other identifiable costs, Thermo Electron charges the Company based upon costs attributable to the Company. Repurchase Agreements The Company invests excess cash in repurchase agreements and a notional pool arrangement with Thermo Electron as discussed in Note 1. Short- and Long-term Obligations See Note 6 for short- and long-term obligations of the Company held by Thermo Electron. 9. Common Stock At January 2, 1999, the Company had reserved 30,254,000 unissued shares of its common stock for possible issuance under stock-based compensation plans and for issuance upon possible conversion of the Company's convertible obligations. 10. Issuance of Stock by Subsidiaries Gain on issuance of stock by subsidiaries in the accompanying statement of income results from the following transactions: 1998 Sale of 2,450,000 shares of Thermo BioAnalysis common stock in a public offering at $18.125 per share for net proceeds of $41.5 million resulted in a gain of $5.9 million. In addition, in the same offering, Thermo BioAnalysis sold 1,000,000 shares of its common stock to Thermo Electron for proceeds, net of commissions, of $17.5 million, for which no gain was recognized. Sale of 3,300,000 shares of ONIX Systems common stock in an initial public offering at $14.50 per share for net proceeds of $43.7 million resulted in a gain of $10.0 million. Conversion of $1.8 million of Thermo Optek 5% subordinated convertible debentures, convertible at $13.94 per share, into 127,646 shares of Thermo Optek common stock resulted in a gain of $0.9 million. Conversion of $4.0 million of ThermoQuest 5% subordinated convertible debentures, convertible at $16.50 per share, into 239,393 shares of ThermoQuest common stock resulted in a gain of $1.8 million. 25 10. Issuance of Stock by Subsidiaries (continued) 1997 Sale of 1,768,500 shares of ThermoQuest common stock at $15.00 per share for net proceeds of $24.8 million and conversion of $15.7 million of ThermoQuest 5% subordinated convertible debentures, convertible at $16.50 per share, into 949,027 shares of ThermoQuest common stock resulted in gains of $12.0 million and $7.8 million, respectively. Initial public offering of 2,300,000 shares of Metrika Systems common stock at $15.50 per share for net proceeds of $32.5 million resulted in a gain of $13.2 million. Private placements of 1,639,640 shares of ONIX Systems common stock at $14.25 per share for net proceeds of $22.0 million resulted in a gain of $7.9 million. Conversion of $13.1 million and $3.2 million of Thermo Optek 5% subordinated convertible debentures, convertible at $14.85 per share and $13.94 per share, respectively, into 1,111,316 shares of Thermo Optek common stock resulted in a gain of $3.2 million. Initial public offering of 1,139,491 shares of Thermo Vision common stock at $7.50 per share for net proceeds of $7.0 million resulted in a gain of $2.3 million. 1996 Initial public offering of 3,450,000 shares of ThermoQuest common stock at $15.00 per share for net proceeds of $47.8 million resulted in a gain of $27.2 million. Initial public offering of 3,450,000 shares of Thermo Optek common stock at $13.50 per share for net proceeds of $42.9 million resulted in a gain of $25.1 million. Initial public offering of 1,670,000 shares of Thermo BioAnalysis common stock at $14.00 per share for net proceeds of $20.8 million resulted in a gain of $9.8 million. Private placement of 967,828 shares of Metrika Systems common stock at $15.00 per share for net proceeds of $13.5 million resulted in a gain of $9.6 million. The Company's ownership percentages of its majority-owned subsidiaries at year end were: 1998 1997 1996 - -------------------------------------------------------------------------- ---------- ---------- ---------- ThermoSpectra 82% 77% 72% ThermoQuest 89% 88% 93% Thermo Optek 93% 91% 93% Thermo BioAnalysis 62% 70% 67% Metrika Systems 67% 60% 84% Thermo Vision (a) 78% 78% 93% ONIX Systems 80% 87% 100% (a) Thermo Vision was a wholly owned subsidiary of Thermo Optek until December 1997, when Thermo Optek distributed to its shareholders 100% of the common stock of Thermo Vision in the form of a dividend. 26 11. Restructuring and Nonrecurring (Income) Expense, Net During 1998, the Company and its subsidiaries recorded restructuring and related costs and other nonrecurring costs of $31.8 million, including restructuring costs of $21.6 million, an inventory write-down of $8.6 million, and other nonrecurring costs of $1.6 million. Restructuring costs of $21.6 million, which were accounted for in accordance with EITF 94-3, consist of $16.2 million related to severance costs for approximately 780 employees across all functions, $4.2 million related primarily to facility-closing costs, $0.8 million for the write-off of cost in excess of net assets of acquired companies for a business that was closed, and $0.4 million related to the loss on the sale of a division. The charge for facility-closing costs includes $2.0 million for write-downs of related fixed assets. In addition, the Company recorded $8.6 million of inventory write-downs, included in cost of revenues in the accompanying statement of income, related to discontinuing certain product lines and increased excess and obsolescence reserves associated with lower product demand. In connection with these actions, the Company expects to incur additional costs in early 1999 totaling $2.4 million, for costs not permitted as charges in 1998, pursuant to EITF No. 94-3. These costs primarily include costs for certain employee relocation, moving, and related costs. The Company expects to complete the implementation of its restructuring plan in 1999. As of year-end 1998, the Company had terminated approximately 500 employees and had expended $7.4 million of the established reserves. The remaining liability for severance and facility-closing costs of $11.2 million, as adjusted for the impact of currency translation, is included in other accrued expenses in the accompanying 1998 balance sheet. In December 1996, five former employees of the Company's Epsilon Industrial, Inc. subsidiary sought damages in an arbitration proceeding for alleged breaches of agreements entered into with such employees prior to Epsilon's acquisition by the Company. The arbitrators rendered a decision with respect to such claims during 1998 and the Company recorded $1.6 million of nonrecurring costs related to the resolution of this matter. Nonrecurring income, net in 1997 reflects a gain of $2.2 million recognized by ThermoSpectra on the sale of its Linac business for $5.0 million in cash and $2.1 million in equity securities, offset in part by a $0.9 million charge incurred by ThermoSpectra, primarily related to severance expense for 40 employees terminated during the year. Nonrecurring expense in 1996 reflects the write-off of in-process technology relating to the acquisition of the Fisons businesses (Note 3). 12. Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash and cash equivalents, available-for-sale investments, accounts receivable, notes payable and current maturities of long-term obligations, accounts payable, due to parent company and affiliated companies, long-term obligations, and forward exchange contracts. The carrying amounts of these financial instruments, with the exception of available-for-sale investments, long-term obligations, and forward foreign exchange contracts, approximate fair value due to their short-term nature. Available-for-sale investments are carried at fair value in the accompanying balance sheet. The fair values were determined based on quoted market prices (Note 2).
27 12. Fair Value of Financial Instruments (continued)
The carrying amounts and fair value of the Company's long-term obligations and off-balance-sheet financial instruments are: 1998 1997 -------------------- ---------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value - -------------------------------------------------------------- ---------- ---------- ---------- ----------- Long-term Obligations: Convertible obligations $716,478 $668,978 $488,371 $ 767,769 Other 26,965 29,440 184,823 186,653 -------- -------- -------- --------- $743,443 $698,418 $673,194 $ 954,422 ======== ======== ======== ========= Off-balance-sheet Financial Instruments: Forward exchange contracts receivable (payable) $ (828) $ 923 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. The notional amounts of forward foreign exchange contracts outstanding totaled $28.4 million and $33.1 million at year-end 1998 and 1997, respectively. The fair value of such contracts is the estimated amount that the Company would receive or pay if it were to terminate the contracts, taking into account the change in foreign exchange rates. 13. Business Segment and Geographical Data The Company's businesses operate in four instrumentation segments: Analytical, Life Sciences, Process Control, and Industrial. The Analytical segment, which includes Thermo Optek (excluding Thermo Vision for the periods prior to its December 1997 spinout) and ThermoQuest, develops and manufactures analytical instruments that are used in the quantitative and qualitative analysis of elements and molecular compounds in gases, liquids, and solids. The Life Sciences segment includes Thermo BioAnalysis (excluding its Eberline Heath Physics business for periods prior to July 1998, when Thermo BioAnalysis contributed this business to a joint venture in the Industrial segment). This segment develops, manufactures, and markets a broad range of products, including biomolecular instruments and consumables, clinical laboratory equipment and supplies, rapid point-of-care diagnostic test kits, and laboratory information-management systems used in biochemical research, clinical diagnosis, and pharmaceutical production. The Process Control segment, consisting of Metrika Systems and ONIX Systems, specializes in on-line instruments that measure and control products such as oil, gas, chemicals, raw materials, and finished goods throughout a variety of industrial processes. The Industrial segment, which generally includes Thermo Vision, ThermoSpectra, and the Company's wholly owned subsidiaries, provides components and systems for applications such as test and measurement, environmental and nuclear monitoring, and imaging and inspection. 28 13. Business Segment and Geographical Data (continued) (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------ ----------- ----------- ----------- Business Segment Information Revenues: Analytical $ 874,704 $ 906,863 $ 724,276 Life Sciences 219,949 185,415 56,840 Process Control 223,682 178,239 147,363 Industrial 359,076 344,963 283,503 Intersegment sales eliminations (a) (17,430) (23,166) (2,620) ---------- ---------- ---------- $1,659,981 $1,592,314 $1,209,362 ========== ========== ========== Income Before Provision for Income Taxes, Minority Interest, and Extraordinary Item: Analytical $ 127,883 $ 147,469 $ 93,764 Life Sciences 19,677 20,654 (774) Process Control 20,409 23,092 15,199 Industrial 18,625 29,158 21,484 Corporate (b) (1,174) (1,119) (3,030) ---------- ---------- ---------- Total operating income 185,420 219,254 126,643 Interest and other income, net 8,496 28,763 63,280 ---------- ---------- ---------- $ 193,916 $ 248,017 $ 189,923 ========== ========== ========== Total Assets: Analytical $1,200,259 $1,170,893 $1,122,600 Life Sciences 395,394 314,236 112,747 Process Control 286,021 262,661 170,831 Industrial 490,554 456,930 320,464 Corporate (c) 193,546 146,433 197,758 ---------- ---------- ---------- $2,565,774 $2,351,153 $1,924,400 ========== ========== ========== Depreciation and Amortization: Analytical $ 30,289 $ 29,970 $ 23,514 Life Sciences 10,707 8,758 2,379 Process Control 6,147 4,588 4,198 Industrial 14,218 11,586 9,784 Corporate 68 91 4,358 --------- ---------- ---------- $ 61,429 $ 54,993 $ 44,233 ========= ========== ========== 29 13. Business Segment and Geographical Data (continued) (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------ ---------- ----------- ----------- Capital Expenditures: Analytical $ 15,301 $ 11,979 $ 9,143 Life Sciences 7,607 4,317 1,287 Process Control 2,201 2,610 2,148 Industrial 5,773 10,259 6,386 Corporate 20 33 170 --------- ---------- ---------- $ 30,902 $ 29,198 $ 19,134 ========= ========== ========== Geographical Information Revenues (d): United States $1,067,995 $1,010,964 $ 688,865 England 281,431 296,570 227,375 Germany 176,584 172,696 182,958 Other 400,035 380,179 326,600 Transfers among geographical areas (a) (266,064) (268,095) (216,436) --------- ---------- ---------- $1,659,981 $1,592,314 $1,209,362 ========== ========== ========== Long-lived Assets (e): United States $ 145,981 $ 146,978 $ 107,220 England 19,814 23,444 23,861 Germany 24,197 23,264 29,701 Other 34,942 30,142 25,508 --------- ---------- ---------- $ 224,934 $ 223,828 $ 186,290 ========= ========== ========== Export Revenues Included in United States Revenues Above (f) $ 342,796 $ 334,853 $ 253,705 ========= ========== ========== (a) Intersegment sales and transfers among geographical areas are accounted for at prices that are representative of transactions with unaffiliated parties. (b) Primarily corporate general and administrative expenses. (c) Primarily cash, cash equivalents, and available-for-sale investments. (d) Revenues are attributed to countries based on selling location. (e) Includes property, plant, and equipment, net and other long-term tangible assets. (f) In general, export revenues are denominated in U.S. dollars. 30 14. Comprehensive Income During the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This pronouncement sets forth requirements for disclosure of the Company's comprehensive income and accumulated other comprehensive items. In general, comprehensive income combines net income and "other comprehensive items," which represents certain amounts that are reported as components of shareholders' investment in the accompanying balance sheet, including foreign currency translation adjustments and unrealized net of tax gains and losses on available-for-sale investments. Accumulated other comprehensive items in the accompanying balance sheet consists of: (In thousands) 1998 1997 - ------------------------------------------------------------------------------------- ---------- ---------- Cumulative Translation Adjustment $ (10,340) $ (33,257) Net Unrealized Gains (Losses) on Available-for-sale Investments (874) 36 --------- --------- $ (11,214) $ (33,221) ========= ========= Unrealized gains (losses) on available-for-sale investments, which is also a component of other comprehensive items in the accompanying statement of comprehensive income and shareholders' investment, includes: (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------- ---------- ---------- ---------- Unrealized Holding Gains (Losses) Arising During the Year (net $ (454) $ 22 $ 14 of income tax (provision) benefit of $219, $3, and $(8)) Reclassification Adjustment for Gains Included in Net Income (456) - - (net of income tax provision of $257 in 1998) --------- --------- --------- Net Unrealized Gains (Losses) (net of income tax (provision) $ (910) $ 22 $ 14 benefit of $476, $3, and $(8)) ========= ========= ========= 31 15. Earnings per Share Basic and diluted earnings per share were calculated as follows: (In thousands except per share amounts) 1998 1997 1996 - --------------------------------------------------------------------------- ---------- --------- ---------- Basic Net Income $ 104,084 $147,258 $ 132,751 --------- -------- --------- Weighted Average Shares 120,975 121,548 118,857 --------- -------- --------- Basic Earnings per Share $ .86 $ 1.21 $ 1.12 ========= ======== ========= Diluted Net Income $ 104,084 $147,258 $ 132,751 Effect of: Convertible obligations 3,423 8,089 5,288 Majority-owned subsidiaries' dilutive securities (2,343) (2,839) (922) --------- -------- --------- Income Available to Common Shareholders, as Adjusted $ 105,164 $152,508 $ 137,117 --------- -------- --------- Weighted Average Shares 120,975 121,548 118,857 Effect of: Convertible obligations 11,422 16,713 15,292 Stock options 706 1,154 1,202 --------- -------- --------- Weighted Average Shares, as Adjusted 133,103 139,415 135,351 --------- -------- --------- Diluted Earnings per Share $ .79 $ 1.09 $ 1.01 ========= ======== ========= The computation of diluted earnings per share for 1998 excludes the effect of assuming the conversion of the Company's $172.5 million principal amount 4 1/2% senior convertible debentures, convertible at $34.46 per share, and $250.0 million principal amount 4% subordinated convertible debentures, convertible at $35.65 per share, because the effect would be antidilutive. In addition, the computation of diluted earnings per share for 1998 excludes the effect of assuming the exercise of certain outstanding stock options because the effect would be antidilutive. As of January 2, 1999, there were 3,044,000 of such options outstanding, with exercise prices ranging from $12.91 to $31.35 per share. The extraordinary gain recorded by the Company in 1998 (Note 6) did not affect the reported amounts of 1998 basic and diluted earnings per share. 32 16. Unaudited Quarterly Information (In thousands except per share amounts) 1998 First Second Third Fourth - ---------------------------------------------------------------- --------- ---------- ---------- ---------- Revenues $407,943 $395,392 $407,010 $449,636 Gross Profit 193,734 190,717 176,776 209,179 Income Before Extraordinary Item 37,855 37,596 2,882 25,232 Net Income (a) 37,855 37,596 3,077 25,556 Earnings per Share (a): Basic .31 .31 .03 .21 Diluted .28 .28 .03 .20 1997 First Second Third Fourth - ---------------------------------------------------------------- --------- ---------- ---------- ---------- Revenues $329,120 $405,235 $403,900 $454,059 Gross Profit 155,672 194,741 188,901 210,991 Net Income 33,587 37,219 37,273 39,179 Earnings per Share: Basic .28 .31 .31 .32 Diluted .25 .28 .28 .29 (a) Reflects an extraordinary item of $0.2 million and $0.3 million in the third quarter and fourth quarter, respectively, net of taxes and minority interest. The extraordinary item increased diluted earnings per share by $.01 in the fourth quarter. 17. Proposed Reorganization During 1998, Thermo Electron announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. As part of this reorganization, ThermoSpectra may be taken private. The public shareholders of ThermoSpectra would receive cash in exchange for their shares of common stock of ThermoSpectra. The completion of this transaction is subject to numerous conditions, including the establishment of prices; confirmation of anticipated tax consequences; the approval of the boards of directors (including the independent directors) of ThermoSpectra and the Company; the negotiation and execution of a definitive agreement; the receipt of a fairness opinion from an investment banking firm on certain financial aspects of the transaction; and clearance by the Securities and Exchange Commission of any necessary documents regarding the proposed transaction. This transaction may not occur if the applicable conditions described above are not satisfied. 33 18. Subsequent Event On February 22, 1999, the Company declared unconditional in all respects its cash tender offer for all outstanding shares of Spectra-Physics AB, a Stockholm Stock Exchange-listed company, for 160 Swedish krona per share (approximately $20 per share). As of that date, the Company had acquired or received acceptances representing approximately 98% of the Spectra-Physics shares outstanding. There are approximately 17.6 million Spectra-Physics shares outstanding. The aggregate cost for Spectra-Physics will total approximately $355 million. Payment was made for all shares as to which acceptances had been received by March 1, 1999. To finance this acquisition, the Company used a combination of available cash and $200.0 million of borrowings from Thermo Electron, pursuant to a promissory note due August 1999. The promissory note bears interest at a variable commercial paper-based rate, which is initially 5.03%. The acquisition will be accounted for using the purchase method of accounting and its results will be included in the Company's results from the date of acquisition. Spectra-Physics manufactures a wide range of laser-based instrumentation systems, primarily for the process-control, industrial measurement, construction, research, commercial, and government markets. Spectra-Physics had revenues of approximately $442 million in 1998, with operations throughout North America and Europe, and a presence in the Pacific Rim. 34 Report of Independent Public Accountants To the Shareholders and Board of Directors of Thermo Instrument Systems Inc.: We have audited the accompanying consolidated balance sheet of Thermo Instrument Systems Inc. (a Delaware corporation and 85%-owned subsidiary of Thermo Electron Corporation) and subsidiaries as of January 2, 1999, and January 3, 1998, and the related consolidated statements of income, cash flows, and comprehensive income and shareholders' investment for each of the three years in the period ended January 2, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thermo Instrument Systems Inc. and subsidiaries as of January 2, 1999, and January 3, 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 1999, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts February 16, 1999 (except with respect to the matter discussed in Note 18, as to which the date is March 1, 1999) 35 Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed immediately after this Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading "Forward-looking Statements." Overview Thermo Instrument Systems Inc. (the Company) is a worldwide leader in the development, manufacture, and marketing of measurement instruments used to monitor, collect, and analyze information. These systems are used for multiple applications in a range of industries, including industrial processing, food and beverage production, life sciences research, and medical diagnostics. The Company's businesses operate in four instrumentation segments: Analytical, Life Sciences, Process Control, and Industrial. The Analytical segment, which includes the Company's Thermo Optek Corporation (excluding Thermo Vision Corporation for the periods prior to its December 1997 spinout) and ThermoQuest Corporation subsidiaries, develops and manufactures analytical instruments that are used in the quantitative and qualitative analysis of elements and molecular compounds in gases, liquids, and solids. The Life Sciences segment includes Thermo BioAnalysis Corporation (excluding its Eberline Health Physics business for periods prior to July 1998, when it contributed this business to a joint venture in the Industrial segment). This segment develops, manufactures, and markets a broad range of products, including biomolecular instruments and consumables, clinical laboratory equipment and supplies, rapid point-of-care diagnostic test kits, and laboratory information-management systems used in biochemical research, clinical diagnosis, and pharmaceutical production. The Process Control segment, consisting of the Company's Metrika Systems Corporation and ONIX Systems Inc. subsidiaries, specializes in on-line instruments that measure and control products such as oil, gas, chemicals, raw materials, and finished goods throughout a variety of industrial processes. The Industrial segment, which generally includes the Company's Thermo Vision, ThermoSpectra Corporation, and wholly owned subsidiaries, provides components and systems for applications such as test and measurement, environmental and nuclear monitoring, and imaging and inspection. International sales account for a significant portion of the Company's total revenues. Although the Company seeks to charge its customers in the same currency as its operating costs, the Company's financial performance and competitive position can be affected by currency exchange rate fluctuations. Where appropriate, the Company uses short-term forward foreign exchange contracts to reduce its exposure to currency fluctuations (Note 12). Results of Operations 1998 Compared With 1997 Revenues increased $67.7 million to $1,660.0 million in 1998 from $1,592.3 million in 1997, primarily due to acquisitions. Revenues increased $156.6 million due to 1998 acquisitions and the inclusion of revenues from 1997 acquisitions for the full year. The increase in revenues was offset in part by a decrease of $12.7 million due to the unfavorable effects of currency translation as a result of the strengthening of the U.S. dollar relative to foreign currencies in countries in which the Company operates. Excluding the impact of acquisitions and currency translation, revenues decreased $76.2 million. Analytical segment revenues decreased to $874.7 million in 1998 from $906.9 million in 1997. Revenues decreased $6.7 million due to the unfavorable effects of currency translation. Revenues from existing operations 36 1998 Compared With 1997 (continued) decreased primarily as a result of lower sales to customers in Asia due to unstable economic conditions in that region and, to a lesser extent, due to lower sales to customers in the semiconductor industry. These decreases were offset in part by the inclusion of $36.2 million of revenues from acquisitions. Life Sciences segment revenues increased to $219.9 million in 1998 from $185.4 million in 1997, primarily due to the inclusion of $34.8 million from acquisitions. Process Control segment revenues increased to $223.7 million in 1998 from $178.2 million in 1997, primarily due to the inclusion of $47.8 million from acquisitions. Industrial segment revenues increased to $359.1 million in 1998 from $345.0 million in 1997. An increase in revenues of $37.8 million from acquisitions was offset in part by lower revenues at existing businesses and a decrease of $5.4 million due to the unfavorable effects of currency translation. Revenues from existing operations decreased primarily at ThermoSpectra, due to a downturn in the semiconductor industry and lower sales to customers overseas. The Company's backlog decreased $15.4 million during 1998 to $283.5 million. Backlog decreased primarily in the Industrial and Analytical segments, principally as a result of the slowdown in the semiconductor and related industries and a decrease in demand in Asia. In addition, Process Control segment revenues in the first half of 1999 are expected to be adversely impacted by a decrease in capital spending in the oil and gas and cement industries and increased competition resulting from the entry of new competitors into the raw-material marketplace. The gross profit margin decreased to 46% in 1998 from 47% in 1997, primarily due to inventory write-downs of $8.6 million recorded in 1998 for discontinued product lines and excess inventories caused by lower product demand (Note 11). The 1997 period included an adjustment to expense of $3.6 million relating to the sale of inventories revalued at the time of the acquisition of Life Sciences International PLC and an inventory write-down in the Industrial segment. Selling, general, and administrative expenses as a percentage of revenues was unchanged at 27% in 1998 and 1997. Research and development expenses increased to $113.9 million in 1998 from $107.6 million in 1997, primarily due to the inclusion of expenses at acquired businesses. In addition to the inventory write-downs discussed above, the Company recorded restructuring and nonrecurring costs of $23.2 million in 1998 (Note 11). The Company recorded $21.6 million of restructuring costs, including $16.2 million of severance costs for approximately 780 employees across all functions, $4.2 million for facility-closing costs, $0.8 million for the write-off of cost in excess of net assets of acquired companies for a business that was closed, and $0.4 million for the loss on the sale of a division. The Company expects to complete the implementation of its restructuring plan in 1999. In connection with these actions, the Company expects to incur an additional $2.4 million of costs in early 1999, primarily for employee relocation, moving, and related costs. The Company also recorded $1.6 million of nonrecurring costs relating to the resolution of an arbitration proceeding. In 1997, the Industrial segment recognized a gain of $2.2 million on the sale of ThermoSpectra's Linac business, which was offset in part by a charge by ThermoSpectra of $0.9 million for severance costs for employees terminated during 1997 (Note 11). Interest income increased to $33.5 million in 1998 from $28.3 million in 1997. This increase was primarily due to interest income earned on invested proceeds from the Company's January 1998 issuance of $250.0 million principal amount of 4% subordinated convertible debentures, offset in part by the use of a portion of the proceeds to repay a $105.0 million promissory note to Thermo Electron Corporation (Note 6). To a lesser extent, interest income increased due to higher average invested balances as a result of the sale of common stock by the Company's subsidiaries in 1998 and 1997. Interest expense was relatively unchanged at $45.5 million in 1998 and $45.9 million in 1997. Increased interest expense due to the issuance of an aggregate $428.8 million of promissory notes to Thermo Electron in 1997 in connection with acquisitions and the Company's January 1998 issuance of 4% subordinated convertible debentures 37 1998 Compared With 1997 (continued) (Note 6) was offset in part by the repayment of certain promissory notes to Thermo Electron issued in connection with acquisitions, and, to a lesser extent, the conversion of a portion of the Company's and subsidiaries' convertible obligations into common stock of the Company and its subsidiaries. The Company adopted a strategy of spinning out certain of its businesses into separate subsidiaries and having these subsidiaries sell a minority interest to outside investors. The Company believes that this strategy provides additional motivation and incentives for the management of the subsidiaries through the establishment of subsidiary-level stock option programs, as well as capital to support the subsidiaries' growth. As a result of the sale of stock by subsidiaries and issuance of stock by subsidiaries upon conversion of convertible debentures, the Company recorded gains of $18.6 million in 1998 and $46.4 million in 1997 (Note 10). These gains represent an increase in the Company's net investment in the subsidiaries and are classified as "Gain on issuance of stock by subsidiaries" in the accompanying statement of income. The size and timing of these transactions are dependent on market and other conditions that are beyond the Company's control. Accordingly, there can be no assurance that the Company will be able to generate gains from such transactions in the future. Further, in October 1995, the Financial Accounting Standards Board (FASB) issued an exposure draft of a Proposed Statement of Financial Accounting Standards, "Consolidated Financial Statements: Policy and Procedures." In February 1999, the FASB issued a revision of the earlier document entitled "Consolidated Financial Statements: Purpose and Policy." The October 1995 exposure draft had proposed new rules for how consolidated financial statements should be prepared. Under that proposed statement, there would be significant changes in the way the Company records certain transactions of its controlled subsidiaries. Among those changes, any sale of the stock of a subsidiary that does not result in a loss of control would be accounted for in equity of the consolidated entity with no gain or loss being recorded. The 1995 exposure draft addressed rule changes concerning consolidation procedures which would affect the Company's ability to record gains on issuance of subsidiary stock and consolidation policy, which does not affect the accounting for such gains. The February 1999 revised exposure draft addresses only consolidation policy. The FASB has indicated that it will consider resuming discussion on consolidation procedures after completion of the efforts on consolidation policy. The timing and content of any final statement on consolidation procedures are uncertain. Other income of $1.9 million in 1998 includes a $1.2 million foreign currency transaction gain at Thermo BioAnalysis, arising from the repayment of a foreign subsidiary's intercompany borrowings denominated in U.S. dollars. In addition, other income includes a $0.7 million gain in the Industrial segment resulting from the 1998 sale by ThermoSpectra of its shares of common stock of SteriGenics International, which were received in connection with the 1997 sale of one of its product lines. The effective tax rate was 39% in 1998, compared with 36% in 1997. Excluding the impact of the nontaxable gains on issuance of stock by subsidiaries in 1998 and 1997, the effective tax rates in both periods exceeded the statutory federal income tax rate due to nondeductible amortization of cost in excess of net assets of acquired companies, foreign tax rate and tax law differences, and the impact of state income taxes. Excluding the impact of the nontaxable gains, the effective tax rate decreased in 1998, primarily due to certain foreign tax losses not benefited in the first half of 1997, offset in part by higher nondeductible amortization. Minority interest expense increased to $15.7 million in 1998 from $12.6 million in 1997, primarily due to minority interest associated with the Company's newly public ONIX Systems and Metrika Systems subsidiaries, the earnings of certain of the Life Sciences International PLC businesses sold to ThermoQuest and Thermo Optek in 1997, and the increase in minority ownership as a result of the 1998 sale of common stock by Thermo BioAnalysis. This increase was offset in part by lower profits at the Company's majority-owned subsidiaries as a result of restructuring and related costs recorded in 1998. During 1998, two majority-owned subsidiaries repurchased a portion of their subordinated convertible debentures resulting in an extraordinary gain, net of taxes and minority interest, of $0.5 million (Note 6). See Note 7 for a description of certain legal proceedings involving the Company. 38 1997 Compared With 1996 Revenues increased $382.9 million to $1,592.3 million in 1997 from $1,209.4 million in 1996. Revenues increased $407 million due to 1997 acquisitions and the inclusion of revenues from 1996 acquisitions for the full year. This increase in revenues was offset in part by a decrease of $46.8 million due to the unfavorable effects of currency translation as a result of the strengthening of the U.S. dollar relative to foreign currencies in countries in which the Company operates. Excluding the impact of acquisitions and currency translation, revenues increased $22.7 million. Analytical segment revenues increased to $906.9 million in 1997 from $724.3 million in 1996, primarily due to the inclusion of $219.2 million of revenues from acquisitions, offset in part by a decrease of $37.3 million due to the unfavorable effects of currency translation. Revenues increased due to higher sales at ThermoQuest's existing mass spectrometry business, due in part to the continued success of a new product introduced in the first quarter of 1996. Revenues from Thermo Optek's existing businesses decreased slightly due to the inclusion in 1996 of several large nonrecurring sales to the Chinese and Japanese governments, a decrease in demand for elemental products in Japan, and the elimination of certain unprofitable acquired product lines, offset substantially by greater demand at one of its business units. Life Sciences segment revenues increased to $185.4 million in 1997 from $56.8 million in 1996, primarily due to the inclusion of $125.8 million from acquisitions. Process Control segment revenues increased to $178.2 million in 1997 from $147.4 million in 1996. Revenues increased $21.3 million due to acquisitions. Revenues from existing operations increased at ONIX Systems, primarily due to increased sales of industry-specific instruments to the production segment of the oil and gas industry, and at Metrika Systems, primarily as a result of increased sales in international markets from its on-line raw materials analyzer business. Industrial segment revenues increased to $345.0 million in 1997 from $283.5 million in 1996. An increase in revenues of $40.4 million from acquisitions was offset in part by a decrease of $8.5 million due to the unfavorable effects of currency translation. The gross profit margin was 47% in 1997 and 46% in 1996. The increase was primarily due to margin improvements at certain of the businesses acquired from Fisons plc in 1996, increased sales of the Analytical segment's higher-margin mass spectrometry products, and the inclusion in 1996 of an adjustment to expense of $2.0 million relating to the sale of inventories revalued at the time of the acquisition of Fisons plc. These increases were offset in part by the inclusion of lower-margin revenues from acquired businesses, including Life Sciences International PLC, which recorded an adjustment to expense of $3.6 million in 1997 relating to the sale of inventories revalued at the time of acquisition and, to a lesser extent, a decrease in the gross profit margin at ThermoSpectra, primarily as a result of a one-time inventory write-off and a change in sales mix at one of its business units. Selling, general, and administrative expenses as a percentage of revenues was 27% in 1997 and 28% in 1996. The decrease was primarily due to efforts to reduce selling and administrative expenses at acquired businesses and, to a lesser extent, lower selling costs associated with certain of the Life Sciences International PLC businesses. Research and development expenses increased to $107.6 million in 1997 from $84.1 million in 1996, primarily due to acquisitions. Restructuring and nonrecurring income, net, in 1997 represents a gain of $2.2 million recognized by the Industrial segment on the sale of ThermoSpectra's Linac business, offset in part by a charge by ThermoSpectra of $0.9 million for severance costs for employees terminated during 1997 (Note 11). In 1996, the Company wrote off $3.5 million of in-process technology relating to the acquisition of the Fisons businesses (Note 3). Interest income increased to $28.3 million in 1997 from $20.5 million in 1996. The increase was due to interest income earned on invested proceeds from the Company's October 1996 issuance of $172.5 million principal amount of 39 1997 Compared With 1996 (continued) 4 1/2% senior convertible debentures and, to a lesser extent, on the invested proceeds from the sale of common stock by the Company's subsidiaries in 1997 and 1996 (Note 10). The increase in interest income was offset in part by a reduction in cash as a result of acquisitions. Interest expense increased to $45.9 million in 1997 from $28.9 million in 1996. The increase was primarily due to the issuance in 1997 of an aggregate $428.8 million of promissory notes to Thermo Electron in connection with acquisitions (Note 6), the Company's October 1996 issuance of 4 1/2% senior convertible debentures and, to a lesser extent, the inclusion of interest expense on debt assumed in connection with the acquisitions of the Fisons businesses and Life Sciences International PLC, which has been subsequently repaid. In September 1997, the Company repaid $220.0 million of its outstanding promissory notes to Thermo Electron (Notes 3 and 6). The increase in interest expense was offset in part by the conversion of a portion of the Company's and subsidiaries' convertible obligations into common stock of the Company and its subsidiaries. The Company recorded gains from the issuance of subsidiary common stock of $46.4 million in 1997 and $71.7 million in 1996 (Note 10). The effective tax rate was 36% in 1997 and 27% in 1996. The effective tax rate increased primarily due to a lower nontaxable gain on issuance of stock by subsidiaries in 1997. Excluding the impact of the gains on issuance of stock by subsidiaries, the effective tax rates exceeded the statutory federal income tax rate due to the inability to provide a tax benefit on losses incurred at certain foreign subsidiaries, the impact of foreign and state income taxes, the nondeductible amortization of cost in excess of net assets of acquired companies and, in 1996, the write-off of acquired technology relating to the acquisition of the Fisons businesses. Minority interest expense increased to $12.6 million in 1997 from $5.4 million in 1996, primarily due to higher earnings at Thermo BioAnalysis, ThermoQuest, and Thermo Optek and, to a lesser extent, minority interest associated with the Company's Metrika Systems subsidiary. These increases were offset in part by lower earnings at ThermoSpectra. Liquidity and Capital Resources Consolidated working capital was $746.0 million at January 2, 1999, compared with $612.7 million at January 3, 1998. Included in working capital are cash, cash equivalents, and available-for-sale investments of $553.8 million at January 2, 1999, compared with $477.2 million at January 3, 1998. Of the $553.8 million balance at January 2, 1999, $333.5 million was held by the Company's majority-owned subsidiaries and the balance was held by the Company and its wholly owned subsidiaries. Cash provided by operating activities in 1998 was $171.4 million. The Company generated $10.1 million of cash from a decrease in inventories, primarily in the Analytical segment, resulting from management programs to decrease inventories as a result of lower revenues. The Company used $20.1 million of cash to reduce accounts payable and other current liabilities, primarily in the Process Control and Analytical segments. The decrease was primarily due to a decline in customer deposits and commissions, as a result of lower bookings and revenues, and lower amounts accrued in 1998 for income taxes and certain employee benefits. At January 2, 1999, $150.4 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, for activities including acquisitions, repatriation of this cash into the United States would be subject to foreign withholding taxes and could also be subject to a United States tax. The Company's investing activities used $167.3 million of cash in 1998. The Company expended $148.7 million, net of cash acquired, for acquisitions, including $19.1 million paid by ONIX Systems to Thermo Power Corporation for the Peek Measurement Business, acquired effective November 1997 (Note 3). In addition, the Company expended $30.9 million for purchases of property, plant, and equipment and received proceeds of $9.5 million from the sale of property, plant, and equipment in 1998. 40 Liquidity and Capital Resources (continued) The Company's financing activities provided $76.9 million of cash in 1998. Net proceeds from the issuance of Company and subsidiary common stock totaled $103.3 million (Note 10). In January 1998, the Company sold at par value $250.0 million principal amount of 4% subordinated convertible debentures due 2005 for net proceeds of $244.1 million. The Company used a portion of the proceeds to repay a $105.0 million promissory note to Thermo Electron. In addition, Thermo Optek and ThermoSpectra repaid $55.0 million of obligations to Thermo Electron. Thermo Electron has indicated that it will seek repayment of $60.0 million of notes due to it in 1999 by ThermoSpectra only to the extent ThermoSpectra's cash flow permits such repayment. During 1998, an aggregate principal amount of $7.6 million of the Company's and subsidiaries' convertible obligations were converted into shares of Company and subsidiary common stock. During 1998, the Company and its majority-owned subsidiaries expended $119.8 million to purchase common stock of the Company and common stock and debentures of certain of the Company's majority-owned subsidiaries. These purchases were made pursuant to authorizations by the Company's and certain majority-owned subsidiaries' Boards of Directors. As of January 2, 1999, $22.4 million remained under the Company's majority-owned subsidiaries' authorizations to purchase their securities. In 1999, the Company plans to make expenditures of approximately $40 million for property, plant, and equipment. Since January 2, 1999, the Company and its majority-owned subsidiaries have expended approximately $377 million on acquisitions of businesses, including Spectra-Physics AB, discussed below, and as of March 18, 1999, the Company and its majority-owned subsidiaries had agreements or nonbinding letters of intent to acquire new businesses totaling approximately $11 million. Proposed acquisitions of new businesses are subject to various conditions to closing, and there can be no assurance that all proposed transactions will be consummated. The Company believes that its existing resources are sufficient to meet the capital requirements of its existing operations for the foreseeable future. The Company has historically complemented internal development with acquisitions of businesses or technologies that extend the Company's presence in current markets or provide opportunities to enter and compete effectively in new markets. The Company will consider making acquisitions of such businesses or technologies that are consistent with its plans for strategic growth. The Company expects that it will finance these acquisitions through a combination of internal funds, and/or short-term borrowings from Thermo Electron although there is no agreement with Thermo Electron to ensure that funds will be available on acceptable terms or at all. On February 22, 1999, the Company declared unconditional in all respects its cash tender offer for all outstanding shares of Spectra-Physics AB for 160 Swedish krona per share (approximately $20 per share) (Note 18). As of that date, the Company had acquired or received acceptances representing approximately 98% of the Spectra-Physics shares outstanding. There are approximately 17.6 million Spectra-Physics shares outstanding. The aggregate cost for Spectra-Physics will total approximately $355 million. Payment was made for all shares as to which acceptances had been received by March 1, 1999. To finance this acquisition, the Company used a combination of available cash and $200.0 million of borrowings from Thermo Electron, pursuant to a promissory note due August 1999. The Company intends to refinance this obligation through borrowings from external sources, however, there can be no assurance that the Company can obtain debt financing on acceptable terms or at all. Thermo Electron has indicated that it will seek repayment of this note due to it in 1999 only to the extent the Company's cash flow permits such repayment. 41 Market Risk The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, and equity prices, which could affect its future results of operations and financial condition. The Company manages its exposure to these risks through its regular operating and financing activities. Additionally, the Company uses short-term forward contracts to manage certain exposures to foreign currencies. The Company enters into forward foreign exchange contracts to hedge firm purchase and sale commitments denominated in currencies other than its subsidiaries' local currencies. The Company does not engage in extensive foreign currency hedging activities; however, 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 Company's forward foreign exchange contracts principally hedge transactions denominated in U.S. dollars, British pounds sterling, Japanese yen, French francs, and German marks. Gains and losses arising from forward contracts are recognized as offsets to gains and losses resulting from the transactions being hedged. The Company does not enter into speculative foreign currency agreements. Foreign Currency Exchange Rates The Company generally views its investment in foreign subsidiaries with a functional currency other than the Company's reporting currency as long-term. The Company's investment in foreign subsidiaries is sensitive to fluctuations in foreign currency exchange rates. The functional currencies of the Company's foreign subsidiaries are principally denominated in British pounds sterling, German marks, Dutch guilders, and French francs. The effect of a change in foreign currency exchange rates on the Company's net investment in foreign subsidiaries is reflected in the "Accumulated other comprehensive items" component of shareholders' investment. A 10% depreciation in year-end 1998 functional currencies, relative to the U.S. dollar, would result in a $58 million reduction of shareholders' investment. Forward foreign exchange contracts are sensitive to changes in foreign currency exchange rates. The fair value of forward foreign exchange contracts is the estimated amount that the Company would pay or receive upon termination of the contract, taking into account the change in foreign currency exchange rates. A 10% depreciation in year-end 1998 foreign currency exchange rates related to the Company's contracts would result in an increase in the unrealized loss on forward foreign exchange contracts of $1.5 million. Since the Company uses forward foreign exchange contracts as hedges of firm purchase and sale commitments, the unrealized gain or loss on forward foreign currency exchange contracts resulting from changes in foreign currency exchange rates would be offset by a corresponding change in the fair value of the hedged item. Certain of the Company's cash and cash equivalents are denominated in currencies other than the functional currency of the depositor and are sensitive to changes in foreign currency exchange rates. A 10% depreciation in the related foreign currency exchange rates would result in a negative impact of $1.4 million on the Company's net income. Interest Rates Certain of the Company's available-for-sale investments and long-term obligations are sensitive to changes in interest rates. Interest rate changes would result in a change in the fair value of these financial instruments due to the difference between the market interest rate and the rate at the date of purchase or issuance of the financial instrument. A 10% decrease in year-end 1998 market interest rates would result in a negative impact to the Company of $45 million on the net fair value of its interest-sensitive financial instruments. The Company's cash, cash equivalents, and variable-rate short- and long-term obligations are sensitive to changes in interest rates. Interest rate changes would result in a change in interest income and expense due to the difference between the current interest rates on cash, cash equivalents, and the variable-rate short- and long-term obligations and the rate that these financial instruments may adjust to in the future. A 10% decrease in year-end 1998 interest rates would result in a negative impact of $1.3 million on the Company's net income. 42 Market Risk (continued) Equity Prices The Company's available-for-sale investment portfolio includes equity securities that are sensitive to fluctuations in price. In addition, the Company's and its subsidiaries' subordinated convertible debentures are sensitive to fluctuations in the price of Company or subsidiary common stock into which the obligations are convertible. Changes in equity prices would result in changes in the fair value of the Company's available-for-sale investments and subordinated convertible debentures due to the difference between the current market price and the market price at the date of purchase or issuance of the debentures. A 10% increase in the year-end 1998 market equity prices would result in a negative impact to the Company of $23.9 million on the net fair value of its price-sensitive equity financial instruments. Year 2000 The following information constitutes a "Year 2000 Readiness Disclosure" under the Year 2000 Information and Readiness Disclosure Act. The Company continues to assess the potential impact of the year 2000 on the Company's internal business systems, products, and operations. The Company's year 2000 initiatives include (i) testing and upgrading significant information technology systems and facilities; (ii) testing and developing upgrades, if necessary, for the Company's current products and certain discontinued products; (iii) contacting key suppliers and vendors to determine their year 2000 compliance status; and (iv) developing a contingency plan. The Company's State of Readiness The Company has implemented a compliance program to ensure that its critical information technology systems and facilities will be ready for the year 2000. The first phase of the program, testing and evaluating the Company's critical information technology systems and facilities for year 2000 compliance, has largely been completed. During phase one, the Company tested and evaluated its significant computer systems, software applications, and related equipment for year 2000 compliance. The Company also evaluated the potential year 2000 impact on its critical facilities. The Company is currently in phase two of its program, during which any noncompliant systems or facilities that were identified during phase one are prioritized and remediated. The Company is currently upgrading or replacing such noncompliant information technology systems, and this process was approximately 60% complete as of January 2, 1999. In many cases, such upgrades or replacements are being made in the ordinary course of business, without accelerating previously scheduled upgrades or replacements. The Company expects that all of its material information technology systems and critical facilities will be year 2000 compliant by October 1999. The Company has also implemented a compliance program to test and evaluate the year 2000 readiness of the material products that it currently manufactures and sells. The Company believes that all of such material products are year 2000 compliant. However, as many of the Company's products are complex, interact with or incorporate third-party products, and operate on computer systems that are not under the Company's control, there can be no assurance that the Company has identified all of the year 2000 problems with its current products. The Company believes that certain of its older products, which it no longer manufactures or sells, may not be year 2000 compliant. The Company is continuing to test and evaluate certain of such products. The Company is focusing its efforts on products that are still under warranty, early in their expected life, and/or subject to U.S. Food and Drug Administration considerations related to the year 2000. The Company is offering upgrades and/or identifying potential solutions where reasonably practicable. 43 Year 2000 (continued) The Company is in the process of identifying and contacting suppliers and vendors that are believed to be significant to the Company's business operations in order to assess their year 2000 readiness. As part of this effort, the Company has developed and is distributing questionnaires relating to year 2000 compliance to its significant suppliers and vendors. The Company has started to follow-up and monitor the year 2000 compliance progress of significant suppliers and vendors that indicate that they are not year 2000 compliant, or that do not respond to the Company's questionnaires. The Company has not completed the majority of its assessment of third-party risk, 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 problems. This plan may include identifying and securing other suppliers, increasing inventories, and modifying production facilities and schedules. As the Company continues to evaluate the year 2000 readiness of its business systems and facilities, products, and significant suppliers and vendors, it will modify and adjust its contingency plan as may be required. Estimated Costs to Address the Company's Year 2000 Issues The Company had incurred expenses to third parties (External Costs) related to year 2000 issues of approximately $2.6 million as of January 2, 1999, and the total External Costs of year 2000 remediation are expected to be approximately $5 million. Year 2000 costs were funded from working capital. All internal costs and related External Costs other than capital additions related to year 2000 remediation have been and will continue to be expensed as incurred. The Company does not track the internal costs incurred for its year 2000 compliance project. Such costs are principally the related payroll costs for its information systems group. Risks of the Company's Year 2000 Issues While the Company is attempting to minimize any negative consequences arising from the year 2000 issue, there can be no assurance that year 2000 problems will not have a material adverse impact on the Company's business, operations, or financial condition. While the Company expects that upgrades to its internal business systems will be completed in a timely fashion, there can be no assurance that the Company will not encounter unexpected costs or delays. Despite its efforts to ensure that its material current products are year 2000 compliant, the Company may see an increase in warranty and other claims, especially those related to Company products that incorporate, or operate using, third-party software or hardware. In addition, certain of the Company's older products, which it no longer manufactures or sells, may not be year 2000 compliant, which may expose the Company to claims. If any of the Company's material suppliers or vendors experience business disruptions due to year 2000 issues, the Company might also be materially adversely affected. There is expected to be a significant amount of litigation relating to the year 2000 issue and there can be no assurance that the Company will not incur material costs in defending or bringing lawsuits. In addition, if any year 2000 issues are identified, there can be no assurance that the Company will be able to retain qualified personnel to remedy such issues. Any unexpected costs or delays arising from the year 2000 issue could have a significant adverse impact on the Company's business, operations, and financial condition in amounts that cannot be reasonably estimated at this time. 44 Forward-looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause its actual results in 1999 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Risks Associated With Spinout of Subsidiaries. The Company adopted a strategy of spinning out certain of its businesses into separate subsidiaries and having these subsidiaries sell a minority interest to outside investors. As a result of the sale of stock by subsidiaries, the issuance of stock by subsidiaries upon conversion of convertible debentures, and similar transactions, the Company records gains that represent the increase in the Company's net investment in the subsidiaries. These gains have represented a substantial portion of the net income reported by the Company in certain periods. The size and timing of these transactions are dependent on market and other conditions that are beyond the Company's control. Accordingly, there can be no assurance that the Company will be able to generate gains from such transactions in the future. Further, in October 1995, the Financial Accounting Standards Board (FASB) issued an exposure draft of a Proposed Statement of Financial Accounting Standards, "Consolidated Financial Statements: Policy and Procedures." The October 1995 exposure draft had proposed new rules for how consolidated financial statements should be prepared. In February 1999, the FASB issued a revision of the earlier document entitled "Consolidated Financial Statements: Purpose and Policy." Under that proposed statement, there would be significant changes in the way the Company records certain transactions of its controlled subsidiaries. Among those changes, any sale of the stock of a subsidiary that does not result in a loss of control would be accounted for in equity of the consolidated entity with no gain or loss being recorded. The 1995 exposure draft addressed rule changes concerning consolidation procedures which would affect the Company's ability to record gains on issuance of subsidiary stock and consolidation policy, which does not affect the accounting for such gains. The February 1999 revised exposure draft addresses only consolidation policy. The FASB has indicated that it will consider resuming discussion on consolidation procedures after completion of the efforts on consolidation policy. The timing and content of any final statement on consolidation procedures are uncertain. Uncertainty of Growth. Certain of the markets in which the Company competes have been flat or declining over the past several years. The Company has pursued a number of potential growth strategies, including acquiring complementary businesses; developing new applications for its technologies; and strengthening its presence in selected geographic markets. No assurance can be given that the Company will be able to successfully implement these strategies, or that these strategies will result in growth of the Company's business. Risks Associated With Acquisition Strategy. One of the Company's growth strategies is to supplement its internal growth with the acquisition of businesses and technologies that complement or augment the Company's existing product lines. Certain businesses acquired by the Company have had low levels of profitability. In addition, 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 change operations 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, the need for regulatory approvals, including antitrust approvals, and the high valuations of businesses resulting from historically high stock prices in many countries. Acquisitions made by the Company may be made at substantial premiums over the fair value of the net assets of the acquired companies. There can be no assurance that the Company will be able to complete pending or future acquisitions or that the Company will be able to successfully integrate any acquired business into its existing business or make such businesses profitable. In order to finance any such acquisitions, it may be necessary for the Company to raise additional funds either through public or private financing. Any equity or debt financing, if available at all, may be on terms which are not favorable to the Company and may result in dilution to the Company's shareholders. 45 Risks Associated With Technological Change, Obsolescence, and the Development and Acceptance of New Products. The market for the Company's products and services 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 Dependence on Capital Spending Policies and Government Funding. The Company's customers include manufacturers of semiconductors and products incorporating semiconductors, pharmaceutical and chemical companies, laboratories, government agencies, and public and private research institutions. The capital spending of these entities can have a significant effect on the demand for the Company's products. Such spending levels are based on a wide variety of factors, including the resources available to make such purchases, the spending priorities among various types of research equipment, public policy, and the effects of different economic cycles, including fluctuating demand in the semiconductor industry. Any decrease in capital spending by any of the customer groups that account for a significant portion of the Company's sales could have a material adverse effect on the Company's business and results of operations. Possible Adverse Effect From Consolidation in the Environmental Market and Changes in Environmental Regulations. One of the important markets for the Company's products is environmental analysis. During the past several 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 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 or enforcement efforts could result in a reduction in demand for the Company's products. Risks Associated With the Sale of Products to the Pharmaceutical Industry. The pharmaceutical industry is one of the important markets for the Company's products. Although the Company's existing general purpose analytical equipment and services are not subject to regulation by the U.S. Food and Drug Administration (the FDA), FDA regulations apply to the processes and production facilities used to manufacture pharmaceutical products. Any material change by a pharmaceutical company in its manufacturing process or equipment could necessitate additional FDA review and approval. Such requirements may make it more difficult for the Company to sell its products and services to pharmaceutical customers that have already applied for or obtained approval for production processes using different equipment and supplies. Any changes in the regulations that apply to the processes and production facilities used to manufacture pharmaceutical products may adversely affect the market for the Company's products. In addition, from time to time as a result of industry consolidation and other factors, the pharmaceutical industry has reduced its capital expenditures for equipment such as that manufactured by the Company, and there can be no assurance that further changes in the pharmaceutical industry will not adversely affect demand for the Company's products. 46 Possible Adverse Impact of Significant International Operations. International revenues accounted for a significant portion of the Company's total revenues in 1998, and the Company expects that international revenues 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: 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; 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; export licenses, if required, 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. A portion of the Company's revenues is derived from exports to Asia. Certain countries in Asia are experiencing a severe economic crisis, which has been characterized by sharply reduced economic activity and liquidity, highly volatile foreign-currency-exchange and interest rates, and unstable stock markets. The Company's export sales to Asia may continue to be adversely affected by the unstable economic conditions there, which may continue to adversely affect the Company's results of operations, financial condition, or business. 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. Some of the Company's 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 the Company's technology. 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. Further, the laws of some jurisdictions do not protect the Company's proprietary rights to the same 47 extent as the laws of the U.S. and there can be no assurance that available protections will be adequate. In addition, the Company relies on trade secrets and proprietary know-how which it seeks to protect, in part, by confidentiality agreements with its collaborators, employees, and consultants. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. Potential Impact of Year 2000 on Processing of Date-sensitive Information. While the Company is attempting to minimize any negative consequences arising from the year 2000 issue, there can be no assurance that year 2000 problems will not have a material adverse impact on the Company's business, operations, or financial condition. While the Company expects that upgrades to its internal business systems will be completed in a timely fashion, there can be no assurance that the Company will not encounter unexpected costs or delays. Despite its efforts to ensure that its material current products are year 2000 compliant, the Company may see an increase in warranty and other claims, especially those related to Company products that incorporate, or operate using, third-party software or hardware. In addition, certain of the Company's older products, which it no longer manufactures or sells, may not be year 2000 compliant, which may expose the Company to claims. If any of the Company's material suppliers or vendors experience business disruptions due to year 2000 issues, the Company might also be materially adversely affected. There is expected to be a significant amount of litigation relating to the year 2000 issue and there can be no assurance that the Company will not incur material costs in defending or bringing lawsuits. In addition, if any year 2000 issues are identified, there can be no assurance that the Company will be able to retain qualified personnel to remedy such issues. Any unexpected costs or delays arising from the year 2000 issue could have a significant adverse impact on the Company's business, operations, and financial condition in amounts that cannot be reasonably estimated at this time.
48
Selected Financial Information (In thousands except per share amounts) 1998 (a) 1997 (b) 1996 (c) 1995 (d) 1994 - ---------------------------------------------- ----------- ----------- ------------ ----------- ----------- Statement of Income Data Revenues $1,659,981 $1,592,314 $1,209,362 $ 782,662 $ 649,992 Income From Continuing Operations 104,084 147,258 132,751 79,306 58,261 Operations Net Income 104,084 147,258 132,751 79,306 60,220 Earnings per Share From Continuing Operations: Basic .86 1.21 1.12 .70 .53 Diluted .79 1.09 1.01 .64 .49 Earnings per Share: Basic .86 1.21 1.12 .70 .55 Diluted .79 1.09 1.01 .64 .50 Balance Sheet Data Working Capital $ 745,955 $ 612,666 $ 636,703 $ 489,895 $ 230,306 Total Assets 2,565,774 2,351,153 1,924,400 1,372,813 1,011,917 Long-term Obligations 743,443 673,194 554,214 441,034 263,559 Shareholders' Investment 945,007 877,558 746,267 542,705 440,763 (a) Reflects a $31.8 million pretax charge, primarily for restructuring costs and inventory write-downs, nontaxable gains of $18.6 million from the issuance of stock by subsidiaries, and the January 1998 issuance of $250.0 million principal amount of 4% subordinated convertible debentures due 2005. (b) Reflects the March 1997 acquisition of Life Sciences International PLC and nontaxable gains of $46.4 million from the issuance of stock by subsidiaries. (c) Reflects the March 1996 acquisition of the Fisons businesses, the October 1996 issuance of $172.5 million principal amount of 4 1/2% senior convertible debentures due 2003, and nontaxable gains of $71.7 million from the issuance of stock by subsidiaries. (d) Reflects the August and October 1995 issuance of $96.3 million principal amount of 5% subordinated convertible debentures due 2000 by each of ThermoQuest and Thermo Optek, respectively, and nontaxable gains of $20.1 million from the issuance of stock by subsidiaries. 49 Common Stock Market Information The Company's common stock is traded on the American Stock Exchange under the symbol THI. The following table sets forth the high and low sale prices of the Company's common stock for 1998 and 1997, as reported in the consolidated transaction reporting system. 1998 1997 -------------------- --------------------- Quarter High Low High Low - ------------------------------------------------------------ ---------- ---------- ---------- ----------- First $35 7/16 $27 13/16 $29 1/5 $23 1/10 Second 34 5/8 25 7/8 28 1/2 22 1/2 Third 26 3/4 11 34 1/5 24 3/5 Fourth 15 1/8 7 7/8 34 1/2 23 As of January 29, 1999, the Company had 2,653 holders of record of its common stock. This does not include holdings in street or nominee names. The closing market price on the American Stock Exchange for the Company's common stock on January 29, 1999, was $16 5/8 per share. Common stock of the Company's majority-owned public subsidiaries is traded on the American Stock Exchange: ThermoSpectra Corporation (symbol THS), ThermoQuest Corporation (symbol TMQ), Thermo Optek Corporation (symbol TOC), Thermo BioAnalysis Corporation (symbol TBA), Metrika Systems Corporation (symbol MKA), Thermo Vision Corporation (symbol VIZ), and ONIX Systems Inc. (symbol ONX). Shareholder Services Shareholders of Thermo Instrument Systems Inc. who desire information about the Company are invited to contact the Investor Relations Department, Thermo Instrument Systems Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046, (781) 622-1111. A mailing list is maintained to enable shareholders whose stock is held in street name, and other interested individuals, to receive quarterly reports, annual reports, and press releases as quickly as possible. Distribution of printed quarterly reports is limited to the second quarter only. All material is available from Thermo Electron's Internet site (http://www.thermo.com/subsid/thi1.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. 50 Form 10-K Report A copy of the Annual Report on Form 10-K for the fiscal year ended January 2, 1999, as filed with the Securities and Exchange Commission, may be obtained at no charge by writing to the Investor Relations Department, Thermo Instrument Systems Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046. Annual Meeting The annual meeting of shareholders will be held on Thursday, May 27, 1999, at 11 a.m., at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.
51 EX-21 4
Exhibit 21 THERMO INSTRUMENT SYSTEMS INC. Subsidiaries of the Registrant At February 28, 1999, the Registrant owned the following companies: STATE OR REGISTRANT'S JURISDICTION OF PERCENT OF NAME INCORPORATION OWNERSHIP - ---------------------------------------------------------------------------------------------------------- Thermo Instrument Systems Inc. Delaware 85.40** Analytical Instrument Development, Inc. Pennsylvania 100 Eberline Instrument Company Limited United Kingdom 100 Eberline Instrument Corporation New Mexico 100 Epsilon Industrial Inc. Texas 100 ESM Eberline Instruments Strahlen - und Umweltmesstechnik Germany 100 GmbH Fisons Instruments Vertriebs GmbH Germany 100 Gas Tech Inc. California 100 Gas Tech Australia, Pty. Ltd. Australia 50* Gas Tech Partnership California 50* Gastech Instruments Canada Ltd. Canada 100 Life Sciences International Limited United Kingdom 100 Comdata Services Limited England 100 Lipshaw Limited England 100 Luckham Limited England 100 Phicom Limited England 100 Shandon Scientific Limited England 100 Southions Investments Limited England 100 Sungei Puntar Rubber Estate Limited England 100 Westions Limited England 100 Whale Scientific Limited England 100 Helmet Securities Limited England 100 Life Sciences International GmbH Germany 100 Life Sciences International Kft Hungary 100 Life Sciences International, Inc. Pennsylvania 100 LSI (US) Inc. Delaware 100 LSI North America Service Inc. Delaware 100 Life Sciences International Holdings BV Netherlands 100 Life Sciences International (Poland) SP z O.O Poland 100 Angila Scientific Instruments Limited England 100 Britlowes Limited England 100 Commendstar Limited England 100 Consumer & Video Holdings Limited England 100 Video Communications Limited England 100 Greensecure Projects Limited England 100 Labsystems Europe GA Spain 100 Labsystems Ges mbH Austria 100 Omnigene Limited England 58.50 Shandon Southern Instruments Limited England 100 Shenbridge Limited England 100 Southern Instruments Holdings Limited England 100 Metrika Systems Corporation Delaware 67.49** (additionally, 8.11%** of the shares are owned directly by The Thermo Electron Companies Inc.) Radiometrie RM GmbH Germany 100 Eberline Radiometrie S.A. France 100 Gamma-Metrics California 100 MF Physics Corporation Delaware 100 Radiometrie Corporation Delaware 100 DMC Mess & Regeltechnik GmbH Germany 100 Radiometrie U.S.A., Inc. California 100 Radiometrie Limited United Kingdom 100 National Nuclear Corporation California 100 Thermo Nucleonics LLC Delaware 51 (additionally, 49% of the shares are owned directly by TBA Nucleonics Holding Corporation) ONIX Systems Inc. Delaware 80.31** (additionally, 0.73% of the shares are owned directly by The Thermo Electron Companies Inc.) Brandt Instruments, Inc. Delaware 100 CAC Inc. Delaware 100 Flow Automation Inc. Texas 100 Lots 82 and 83, Inc. Louisiana 100 Mid-South Power Systems, Inc. Louisiana 100 Mid-South Controls & Services, Inc. Louisiana 100 Thermo Instrument Controls de Mexico, S.A. de C.V. Mexico 100 (1% of which shares are owned directly by ONIX Systems Inc.) ONIX Process Analysis Inc. Texas 100 OnIX Holdings Limited England 100 CAC UK Limited England and Wales 100 ONIX Measurement Limited England and Wales 100 Peek Environmental Limited England and Wales 100 Sarasota Data Products Limited England and Wales 100 Sarasota Instrumentation Limited England and Wales 100 VG Gas Analysis Limited England and Wales 100 Polysonics, Inc. Texas 100 TN Spectrace Europe B.V. Netherlands 100 TN Technologies Inc. Texas 100 Kay-Ray/Sensall, Inc. Delaware 100 TN Technologies Canada Inc. Canada 100 Westronics Inc. Texas 100 Optek-Nicolet Holdings Inc. Wisconsin 100 Thermo Optek Corporation Delaware 92.70** (additionally, 2.01%** of the shares are owned directly by The Thermo Electron Companies Inc.) Diametrix Detectors, Inc. Delaware 100 FI Instruments Inc. Delaware 100 Gebrueder Haake GmbH Germany 100 2 RHEO S.A. France 100 SWO Polymertechnik GmbH Germany 100 HB Instruments Inc. Delaware 100 Scintag, Inc. California 100 Spectronic Instruments, Inc. Delaware 100 SLM International Inc. Illinois 100 Thermo Jarrell Ash Corporation Massachusetts 100 A.R.L. Applied Research Laboratories S.A. Switzerland 100 Fisons Instruments (Proprietary) Limited South Africa 100 Thermo Optek Wissenschaftliche Gerate GesmbH Austria 100 Baird De Brazil Representacoes Ltda. Brazil 100 Beijing Baird Analytical Instrument Technology China 100 Co. Limited Cahn Instrument Corporation Wisconsin 100 Mattson Instruments Limited United Kingdom 100 Thermo Optek Limited United Kingdom 100 Norlab Instrument of Aberdeen (UK) United Kingdom 100 Thermo Elemental Limited United Kingdom 100 Unicam Limited United Kingdom 100 Unicam Export Limited United Kingdom 100 Unicam Analytical Technology Netherlands B.V. Netherlands 100 Unicam Italia SpA Italy 100 Unicam S.A. Belgium 100 Thermo Optek Nordic AB Sweden 100 Nicolet Instrument Corporation Wisconsin 100 Nicolet Japan K.K. Japan 100 Spectra-Tech, Inc. Wisconsin 100 Spectra-Tech, Europe Limited United Kingdom 100 Nicolet Instrument GmbH Germany 100 Optek Securities Corporation Massachusetts 100 Planweld Holding Limited United Kingdom 100 Nicolet Instrument Limited United Kingdom 100 Hilger Analytical Limited United Kingdom 100 Thermo Electron Limited United Kingdom 100 Thermo Instrument Systems Japan Holdings, Inc. Delaware 100 Nippon Jarrell-Ash Company, Ltd. Japan 100 Thermo Instruments (Canada) Inc. Canada 100 Fisons Instruments Inc. Canada 100 Unicam Analytical Inc. Canada 100 Thermo Optek France S.A. France 100 Thermo Optek Holding B.V. Netherlands 100 Baird Europe B.V. Netherlands 100 Baird France S.A.R.L. France 100 VG Systems Limited United Kingdom 100 VG Elemental Limited United Kingdom 100 Thermo Group B.V. Netherlands 100 Thermo Optek Materials Analysis (S.E.A.) Pte Limited Singapore 100 3 ThermoSpectra Corporation Delaware 82.45** (additionally, 9.73%** of the shares are owned directly by The Thermo Electron Companies Inc.) Gould Instrument Systems, Inc. Ohio 100 Kevex Instruments Inc. Delaware 100 Kevex X-Ray Inc. Delaware 100 Neslab Instruments Europa BV Netherlands 100 Neslab Instruments, Inc. New Hampshire 100 Neslab Instruments Limited England 100 Nicolet Instrument Technologies Inc. Wisconsin 100 NORAN Instruments Inc. Wisconsin 100 ThermoMicroscopes Corp. California 100 ThermoMicroscopes S.A. Switzerland 100 PSI Virgin Islands Incorporated U.S. Virgin Islands 100 Sierra Research and Technology, Inc. Delaware 100 ThermoSpectra B.V. Netherlands 100 Nicolet Technologies B.V. Netherlands 100 Bakker Electronics Limited United Kingdom 100 NORAN Instruments B.V. Netherlands 100 ThermoSpectra GmbH Germany 100 Gould Nicolet Messtechnik GmbH Germany 100 NORAN Instruments GmbH Germany 100 ThermoMicroscopes GmbH Germany 100 ThermoSpectra Limited United Kingdom 100 Nicolet Technologies Ltd. United Kingdom 100 ThermoSpectra S.A. France 100 Nicolet Technologies S.A.R.L. France 100 Spectrace Instruments Inc. California 100 TMO THI Acquisition Corp. Delaware 100 Thermo Electron Sweden Forvaltning AB Sweden 100 Quest-Finnigan Holdings Inc. Virginia 100 Quest-TSP Holdings Inc. Delaware 100 ThermoQuest Corporation Delaware 89.31** (43.9%** of which shares are owned directly by Quest-Finnigan Holdings Inc.) (additionally, 0.31% of the shares are owned directly by The Thermo Electron Companies Inc.) Denley Instruments Limited England 100 E-C Apparatus Limited England 100 Finnigan FT/MS Inc. Delaware 100 Finnigan Corporation Delaware 100 Finnigan Instruments, Inc. New York 100 Finnigan International Sales, Inc. California 100 Finnigan MAT China, Inc. California 100 Finnigan MAT (Delaware), Inc. Delaware 100 Finnigan MAT Instruments, Inc. Nevada 100 Finnigan MAT International Sales, Inc. California 100 Finnigan MAT (Nevada), Inc. Nevada 100 Finnigan MAT GmbH Germany 100 4 ThermoQuest Analytische Systeme GmbH Germany 100 Finnigan MAT S.R.L. Italy 100 Thermo Separation Products S.R.L. Italy 100 Masslab Limited United Kingdom 100 Thermo Instruments Australia Pty. Limited Australia 100 ThermoQuest Ltd. United Kingdom 100 Finnigan MAT Ltd. United Kingdom 100 ThermoQuest AB Sweden 100 Thermo Separation Products Ltd. United Kingdom 100 Finnigan Properties, Inc. California 100 Forma Scientific, Inc. Delaware 100 Forma Ohio Inc. Ohio 100 International Equipment Company Delaware 100 International Equipment Company Limited England 100 Savant Instruments, Inc. New York 100 Forma Scientific Limited England 100 Hypersil Inc. Delaware 100 Hypersil Limited England 100 Life Sciences International (Hong Kong) Limited Hong Kong 100 Life Sciences International, Inc. Pennsylvania 100 Life Sciences (Europe) Limited England 100 Life Sciences International (UK) Limited England 100 Kenbury Limited England 100 Savant Instruments Limited England 100 ThermoQuest B.V. Netherlands 100 Thermo Separation Products B.V. Netherlands 100 Thermo Separation Products B.V. B.A. Belgium 100 ThermoQuest France S.A. France 100 Finnigan Automass S.A. France 100 Finnigan MAT S.A.R.L. France 100 Thermo Separation Products S.A. France 100 ThermoQuest Italia S.p.A. Italy 100 ThermoQuest Spain S.A. Spain 100 ThermoQuest Wissenschaftliche Gerate GmbH Austria 100 Thermo Separation Products AG Switzerland 100 Thermo Separation Products Inc. Delaware 100 ThermoQuest K.K. Japan 100 RealFlex Systems Inc. Texas 100 SID Instruments Inc. Delaware 100 FI S.A. France 100 Fisons Instruments BV Netherlands 100 Fisons Instruments NV Belgium 100 Fisons Instruments K.K. Japan 100 NK Instruments Inc. Delaware 100 Thermo Capillary Electrophoresis Inc. Delaware 100 Thermo Haake Ltd. United Kingdom 100 Thermo Haake (U.K.) Limited United Kingdom 100 Thermo Instrumentos Cientificos S.A. Spain 100 Tera Systemes 5 Thermo BioAnalysis Corporation Delaware 61.98** (4.1%** of which shares are owned directly by Quest-TSP Holdings Inc. and 1.8% of which shares are owned directly by Quest-Finnigan Holdings Inc. Additionally, 21.75%** of the shares are owned directly by The Thermo Electron Companies Inc.) BioStar, Inc. Delaware 100 Data Medical Associates, Inc. Texas 100 DMA Latinoamerica S.A. de C.V. Mexico 50 Denley Instruments Inc. North Carolina 100 Fastighets AB Skrubba Sweden 100 Dynex Technologies spol. s.r.o. Czech Republic 100 DYNEX Technologies (Asia) Inc. Delaware 100 DYNEX Technologies Inc. Virginia 100 DYNEX Technologies GmbH Germany 100 Hybaid Limited England 100 Hybaid BV Netherlands 100 Thermo Labsystems B.V. Netherlands 100 Labsystems Inc. Delaware 100 Thermo BioAnalysis Japan K.K. Japan 100 Labsystems OY Finland 100 Biosystems OY Finland 100 Labsystems (Hong Kong) Limited Hong Kong 99 Life Sciences International (Hong Kong) Limited Hong Kong 99 Labsystems BTD China 32.50 Labsystems LHD China 100 Labsystems Lenpipette Russia 95 Labsystems Pakistan (Private) Ltd Pakistan 33.50 Labsystems Sweden AB Sweden 100 Labsystems (UK) Limited England 100 Life Sciences International SNC France 100 Shandon SA France 100 Shandon (France) SA France 100 Shandon Scientific Limited United Kingdom 100 Anglia Scientific Instruments Limited United Kingdom 100 Shandon Southern Instruments Limited United Kingdom 100 Life Sciences International (Benelux) B.V. Netherlands 100 Shandon Inc. Pennsylvania 100 E-C Apparatus Corporation Florida 100 Whale Scientific Corporation Colorado 100 ALKO Diagnostic Corporation Massachusetts 100 TBA Nucleonics Holding Corporation Delaware 100 Thermo Nucleonics LLC Delaware 49 TBA Securities Corporation Massachusetts 100 Shandon GmbH Germany 100 Thermo BioAnalysis GmbH Germany 100 6 Hybaid GmbH Germany 100 Angewandte Gentechnologie Systems GmbH Germany 100 Labsystems GmbH Germany 100 Thermo LabSystems Vertriebs GmbH Germany 100 Thermo BioAnalysis (Guernsey) Ltd. Channel Islands 100 Thermo BioAnalysis Holdings, Limited United Kingdom 100 Thermo Fast U.K. Limited United Kingdom 100 Dynex Technologies Limited United Kingdom 100 Thermo BioAnalysis Limited United Kingdom 100 Thermo LabSystems Limited United Kingdom 100 Thermo BioAnalysis S.A. France 100 Thermo LabSystems S.A.R.L. France 100 Labsystems S.A.R.L. France 100 Thermo LabSystems (Australia) Pty Limited Australia 100 Thermo LabSystems Inc. Massachusetts 100 BioAnalysis LabSystems, S.A. Spain 100 Trace Scientific Limited Australia 100 Trace BioSciences Ltd. Australia 100 Trace BioSciences NZ Limited New Zealand 99 Trace America, Inc. Florida 100 Herbos Dijaganosticka Croatia 50 Shanghai Long March Chiron Trace Medical Science Co. China 22 Ltd. Thermo Environmental Instruments Inc. California 100 Andersen Instruments Inc. Delaware 100 Andersen Instruments Limited United Kingdom 100 MIE Corporation Massachusetts 100 Thermo Instruments do Brasil Ltda. Brazil 100 (1% of which shares are owned directly by Thermo Jarrell Ash Corporation) Van Hengel Holding B.V. Netherlands 100 Thermo Instrument Systems B.V. Netherlands 100 Euroglas B.V. Netherlands 100 Mesure de Traces Netherlands 100 ThIS Automation B.V. Netherlands 100 This Analytical B.V. Netherlands 100 This Gas Analysis B.V. Netherlands This Lab Systems B.V. Netherlands 100 This Scientific B.V. Netherlands 100 Thermo Instruments GmbH Germany 100 Thermo Jarrell Ash, S.A. Spain 100 Thermo Vision Corporation Delaware 78.27** (additionally, 1.27%** of the shares are owned directly by The Thermo Electron Companies Inc.) CID Technologies Inc. New York 100 Centro Vision Inc. Delaware 100 Hilger Crystals Limited United Kingdom 100 Laser Science, Inc. Delaware 100 Oriel Instruments Corporation Delaware 100 Thermo Vision Opticon Corporation Delaware 100 * Joint Venture/Partnership ** As of January 2, 1999
EX-23 5 Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation by reference of our reports dated February 16, 1999 (except with respect to the matter discussed in Note 18, as to which the date is March 1, 1999), included in or incorporated by reference into Thermo Instrument Systems Inc.'s Annual Report on Form 10-K for the year ended January 2, 1999, into the Company's previously filed Registration Statements as follows: Registration Statement No. 33-14980 on Form S-8, Registration Statement No. 33-16461 on Form S-8, Registration Statement No. 33-14974 on Form S-8, Post Effective Amendment to Registration Statement on Form S-4 No. 33-32579-02 on Form S-8, Registration Statement No. 33-33577 on Form S-8, Registration Statement No. 33-36221 on Form S-8, Registration Statement No. 33-37866 on Form S-8, Registration Statement No. 33-42270 on Form S-3, Registration Statement No. 33-69526 on Form S-3, Registration Statement No. 33-65275 on Form S-8, Registration Statement No. 33-37559 on Form S-8, Registration Statement No. 333-02163 on Form S-3, and Registration Statement No. 333-17707 on Form S-3. Arthur Andersen LLP Boston, Massachusetts March 18, 1999 EX-27 6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO INSTRUMENT SYSTEMS INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-02-1999 JAN-02-1999 553,825 0 431,156 23,726 276,589 1,333,584 344,368 124,137 2,565,774 587,629 599,643 0 0 12,288 932,719 2,565,774 1,659,981 1,659,981 889,575 889,575 113,917 4,169 45,458 193,916 74,674 103,565 0 519 0 104,084 0.86 0.79
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