-----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, Pb2sLjwSmE4rgiSyFmtYq6OUTKMU63nqDsbQ1b0jYSMGIE/DE99XjzWGw+6xagr6 lVDOdgeGn2f+59mTEKtfjg== 0000795986-00-000022.txt : 20000324 0000795986-00-000022.hdr.sgml : 20000324 ACCESSION NUMBER: 0000795986-00-000022 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000323 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: 0102 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09786 FILM NUMBER: 576022 BUSINESS ADDRESS: STREET 1: 81 WYMAN ST STREET 2: PO BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02454-9046 BUSINESS PHONE: 7816221000 MAIL ADDRESS: STREET 1: 81 WYMAN ST STREET 2: PO BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02454 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 1, 2000 [ ] 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 incorporation or organization) (I.R.S. Employer Identification No.) 81 Wyman Street, P.O. Box 9046 Waltham, Massachusetts 02454-9046 (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 Stock Exchange 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 28, 2000, was approximately $221,069,000. As of January 28, 2000, the Registrant had 118,851,664 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended January 1, 2000, are incorporated by reference into Parts I and II. The information required by Part III of Form 10-K will be filed as part of an amendment to this Form 10-K no later than 120 days after January 1, 2000, and such information is incorporated by reference from such filing. PART I Item 1. Business (a) General Development of Business Thermo Instrument Systems Inc. (the Company or the Registrant) is a global leader in the development, manufacture, and sale of measurement and detection instruments used in virtually every industry to monitor, collect, and analyze data that provides knowledge for the user. For example, the Company's powerful analysis technologies help researchers sift through data to make the discoveries that will fight disease and prolong life; allow manufacturers to fabricate ever-smaller components required to increase the speed and quality of communications; or monitor and control industrial processes on-line to ensure that critical quality standards are met efficiently and safely. The Company operates in three segments: Life Sciences, which includes the Company's 90%-owned ThermoQuest Corporation and 67%-owned Thermo BioAnalysis Corporation subsidiaries, as well as certain wholly-owned subsidiaries; Optical Technologies, which includes the Company's 93%-owned Thermo Optek Corporation, 78%-owned Thermo Vision Corporation, 90%-owned ThermoSpectra Corporation, and 80%-owned Spectra-Physics-Lasers, Inc. subsidiaries, in addition to certain wholly-owned subsidiaries; and Measurement and Control, which includes the Company's 80%-owned ONIX Systems Inc. and 70%-owned Metrika Systems Corporation subsidiaries, as well as certain of the Company' wholly owned subsidiaries, including certain of the businesses of Spectra-Physics AB, acquired in February 1999. Historically, the Company had adopted a strategy of spinning out certain of its businesses into separate public subsidiaries in which it held the majority ownership. See Note 10 to Consolidated Financial Statements in the Registrant's 1999* Annual Report to Shareholders for a description of the issuance of stock by the Company's subsidiaries, which statements are incorporated herein by reference. ThermoSpectra and Thermo Vision announced in May and July 1999, respectively, that they had entered into definitive agreements and plans of merger with the Company pursuant to which the Company would acquire all of the outstanding shares of common stock of ThermoSpectra and Thermo Vision held by the public shareholders in exchange for $16.00 per share and $7.00 per share in cash, respectively. The mergers of ThermoSpectra and Thermo Vision were completed in December 1999 and January 2000, respectively, for $22.7 million and $11.2 million in cash, respectively. The common stock of these companies has ceased to be publicly traded. The Company's parent, Thermo Electron Corporation, owns 10% and 3% of the outstanding shares of ThermoSpectra and Thermo Vision, respectively. In January 2000, the Company announced that it plans to take private ThermoQuest, Thermo Optek, Thermo BioAnalysis, Metrika Systems, and ONIX Systems. In addition, the Company announced that Thermo Electron plans to take it private. These actions are part of a major reorganization plan under which Thermo Electron will spin in, spin off, and sell various businesses to focus solely on its core measurement and detection instruments business. Each component of the reorganization is subject to certain conditions, as outlined in Note 18 to Consolidated Financial Statements in the Registrant's 1999 Annual Report to Shareholders, which statements are incorporated herein by reference. Historically the Company has grown through the acquisition of companies, technologies, and product lines, as well as 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. The Company completed its acquisition of Spectra-Physics AB, a Stockholm Stock Exchange-listed company, in February 1999, when it acquired 17,494,684 shares of Spectra-Physics (or approximately 99%) for approximately 160 Swedish krona per share (approximately $20 per share) in completion of the Company's tender offer to acquire all of the - -------------------- * References to 1999, 1998, and 1997 herein are for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998, respectively. 2 outstanding shares of Spectra-Physics. In March 2000, the Company completed the acquisition of the remaining Spectra-Physics shares outstanding pursuant to compulsory acquisition rules applicable to Swedish companies. The aggregate purchase price was $351.5 million, including related expenses. Spectra-Physics manufactures a wide range of laser-based instrumentation systems, primarily for the process-control, industrial measurement, construction, research, commercial, and government markets. Acquisitions slowed during the months preceding the reorganization announcement, while Thermo Electron evaluated its businesses and the markets it serves. Thermo Electron has commenced its acquisition strategy once again and expects to use proceeds from the sale of businesses under its reorganization plan to bolster the Company's instrument technologies, product lines, sales and marketing, and distribution channels. The Company also plans to emphasize internal development as a source of growth in revenues and profitability. The strategy calls for increasing research and development expenses, particularly in, but not limited to, the high-growth Life Sciences segment and telecommunications area of its Optical Technologies segment; developing strategic partnerships to increase product sales; and divesting of slower-growth businesses. The Company's goal is to balance revenue growth equally, with half from acquisitions and half from internal development. The Company was incorporated in Delaware in May 1986 as a wholly owned subsidiary of Thermo Electron to operate the instruments businesses that were previously conducted by several Thermo Electron subsidiaries. During 1999, Thermo Electron purchased 2,424,700 shares of the Company's common stock in the open market at a total cost of $37.4 million. As of January 1, 2000, Thermo Electron owned 104,271,860 shares, or 87.8%, of the Company's outstanding common stock. In February 2000, the Company's $140.0 million principal amount 3 3/4% senior convertible note, convertible at $13.55 per share, was converted by Thermo Electron into 10,334,620 shares of Company common stock. Following the conversion, Thermo Electron owned 88.8% of the Company's outstanding common stock. 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 1999 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 1999 Annual Report to Shareholders, which information is incorporated herein by reference. (c) Description of Business (i) Principal Products and Services Life Sciences The Company's Life Sciences segment addresses the biotechnology and pharmaceutical markets, as well as the clinical laboratory and healthcare industries. The segment is organized into five groups: biosciences instruments and consumables; advanced instrumentation and consumables; scientific equipment; clinical equipment and supplies; and information management systems. 3 Biosciences instruments and consumables encompass a broad range of instruments, such as microplate-based handling and reading equipment, optical biosensors, polymerase chain reaction (PCR) thermal cyclers for deoxyribonucleic acid (DNA) amplification, and capillary electrophoresis (CE). Consumables - disposable, one-time use, or limited life span products - include reagents, microtiter plates, liquid-handling pipettes, and pipette tips. Biosciences instruments are used primarily by pharmaceutical companies for drug discovery and development, testing, and quality control, and by biotechnology companies for research leading to knowledge about diseases and possible treatments. These products are typically used on the "front end" of multi-instrument systems, as the instruments prepare and handle samples prior to being loaded into other, advanced instruments. Advanced instrumentation and consumables includes the Company's offerings of mass spectrometers, liquid chromatographs, gas chromatographs, and multi-instrument combinations of these products, along with the vials, syringes, and columns necessary for chromatography. As with biomolecular instruments, these products are used by the pharmaceutical industry for drug development, testing, and quality control; and by the biotechnology industry for research leading to knowledge about disease and possible treatments. A significant, and growing, application for these instruments is proteomics, which is the study of proteins. Most drugs - about 90 percent - interact with proteins, so multi-instrument systems that rapidly identify and quantify proteins are of increasing value to pharmaceutical and biotechnology customers. In 2000, the Company introduced an integrated, high-throughput system for the quantitative analysis of proteins, employing the Company's new Surveyor high performance liquid chromatograph, LCQ Deca mass spectrometer, and new TurboSEQUEST software. Scientific equipment is used for the preparation and preservation of chemical samples, principally in research settings for pharmaceutical, academic, and government customers. Products in this group include ultralow-temperature freezers, high-speed centrifuges, centrifugal vacuum concentrators, and laboratory freeze dryers. Clinical equipment and supplies are used by such healthcare facilities as reference laboratories, physician-office laboratories, and hospital laboratories to detect and diagnose disease. Products in this group include sample preparation instruments and materials to highlight abnormal cells, blood gas and ion-selective electrolyte (ISE) consumables, chemistry reagents, clinical biochemistry instruments and automation equipment, and rapid diagnostic tests for use in physicians' offices. The Company received U.S. Food and Drug Administration (FDA) clearance in December 1998 for its FLU OIA 15-minute diagnostic test, which detects influenza A and B in patient samples. The Company also received FDA clearance in 1999 to market a rapid diagnostic test for Clostridium difficile, an intestinal disease. Information management systems provided by the Company facilitate the monitoring and analysis of samples, as well as storage and organization of information in laboratories, industrial settings, and clinical testing sites. The Company is a leading supplier of laboratory information management systems (LIMS) and provides chromatography data systems (CDS) to analyze chromatographic data obtained via gas or liquid chromatography and capillary electrophoresis. Optical Technologies The Company is a leader in optical and energy-based systems and technologies that control and apply light throughout the electromagnetic spectrum for many different uses. Products within the Optical Technologies segment are used in multiple markets, particularly the scientific instrument, semiconductor, and telecommunications industries, to fabricate, analyze, and implement advanced materials. These products are grouped into four categories: spectroscopy, semiconductor, physical properties, and photonics. In addition, the Company's majority owned Spectra-Physics Lasers, Inc. (SPLI) subsidiary, a leader in the design, development, manufacture, and distribution of lasers and laser systems for a broad range of markets, is also part of the Optical Technologies segment. SPLI was acquired indirectly by the Company as part of its acquisition of Spectra-Physics AB. 4 Spectroscopy instrumentation is used for molecular and elemental analysis based upon energy and light measurements. These precision instruments use optics to determine, in a nondestructive manner, the composition of a wide range of complex liquids and solids. Customers include pharmaceutical, specialty chemical, and basic material producers, who use these instruments either in a laboratory or integrated into the production line. Semiconductor products are used in the manufacture of capital equipment that produces and tests semiconductors. In particular, the Company is the leading supplier of molecular-beam epitaxy (MBE) reactors for the manufacture of gallium arsenide and other compound semiconductor devices. The largest application is for microwave devices used in cellular telephones and other high-speed wireless communications devices. In 1999, the Company introduced the V150 MBE, a successor to its market-leading V100 MBE system. The V150 MBE helps customers keep up with the rapidly growing demand for high-speed telecommunications devices by significantly increasing semiconductor production capacity. Physical properties products analyze materials for viscosity, surface tension, and thermal properties. Significant customers include the food and beverage industries, which use high-precision viscometers to maintain quality and consistency of their products. In addition, the Company manufactures products for precision temperature control necessary for analytical, laboratory, industrial, research and development, laser, and semiconductor applications. Photonics businesses manufacture optical components that are used in a variety of industries, including scientific and medical instruments, telecommunications, and semiconductor applications. Also a part of this segment, SPLI offers technologies of high-power semiconductor-based laser and semiconductor laser pumped solid state laser technologies, as well as conventional lasers and laser-related products. Conventional lasers have unique performance characteristics that make them the only current solution for certain demanding technical applications. SPLI also manufactures high-power semiconductor-based lasers, which are generally more efficient, reliable, cost-effective, and compact than conventional lasers. SPLI's customers are in the materials processing, life sciences, research and development, printing, and telecommunications markets. Research and development emphasis will be on creating components for the next generation of high-speed fiber-optic telecommunications. In 1999, SPLI introduced a new line of thin-film filters, which are used to separate data (light) within fiber-optic cable, allowing more wavelengths of light to travel down the cable to increase what is known as the "bandwidth" or capacity of the fiber. Measurement and Control The Company provides a range of real-time, on-line sensors, monitors and control systems through its Measurement and Control segment that not only help manufacturers ensure their processes and industrial practices meet their own and government standards for quality, reliability, and safety, but also reduce costs, save materials, and increase productivity. The segment is organized into four groups: environmental, quality control, field instruments and sensors, and oil and gas. Environmental products include a complete line of instruments and systems for monitoring environmental pollutants generated by industrial and mobile sources. These include continuous gaseous and aerosol monitors, and water quality instruments for assessing ambient air quality and emissions from stationary sources. Specific compounds measured include oxides of nitrogen, sulfur dioxide, ozone, carbon monoxide, carbon dioxide, volatile organic compounds, fine particulates, total organic carbon, and total organic halogens. The Company also provides a comprehensive line of radiation and gas detectors for controlling and detecting the presence of harmful radiation and combustible and toxic gases for worker and plant safety. These products range from the simplest handheld general-purpose portable equipment to more sophisticated stationary installed systems. 5 Quality control systems are manufactured by the Company for on-line process optimization, taking ultrahigh-speed, noninvasive measurements and analyzing the physical and chemical properties of streams of raw materials in real time. These systems are used primarily to analyze the composition of raw materials for certain basic industries, such as coal, cement, and minerals production. This technology allows the entire stream of material to be analyzed and eliminates the need for off-line sampling, which adds production time and cost. Process optimization systems are also provided by the Company for the continuous production of certain web-type finished materials, such as metal strip, plastics, foil, rubber, glass, and paper. The Company's instruments measure the total thickness, basis weight, and coating thickness of such materials, and are also capable of detecting defects the size of a pinhole in these webs. They can measure a single point on the material, several points, or generate a web profile. Measurements are gathered without contacting the material or interfering with the production process, and are highly accurate and extremely reliable - even in hostile environments such as steel mills. These systems provide tangible economic benefits for customers, while reducing material waste and energy consumption. Field instruments and sensors are provided by the Company for use in the process control industry. These instruments measure level, density, flow, and composition, acquiring data for use in controlling industrial and chemical processes. Level and density instruments include point-level, continuous-level, and density sensors that use a variety of technologies, including commercial radiation, radar, ultrasonic, and vibrational measurement principles. Flow instrumentation includes ultrasonic flowmeters, in-line turbine meters, pitostatic air flow monitors, and electronic flow metering instruments used for natural gas custody transfer. The Company's on-line composition analysis instruments are used to measure chemical compounds in a variety of liquids, gases, and solids using gas chromatographic, mass spectrographic, and X-ray fluorescent technologies. The Company also offers strip chart and video graphic recorders along with instrumentation for measuring and recording AC power in industrial facilities. Oil and gas products cover specifically designed and installed sensor systems that are used to provide real-time measurement, data communication, and local control of process functions, primarily for customers in the production segment of the oil and gas industry. These special-purpose instruments and sensors include rod pump controllers, remote terminal units, gas-injection systems, and both topside and subsea wellhead safety and control systems. These systems and the aftermarket services provided are required by oil and gas companies throughout the world, particularly those operating offshore platforms. The Company's electrical generators, switchgear, and motor control units are used in a wide variety of industrial and commercial applications. (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 were $157.3 million, $113.9 million, and $107.6 million in 1999, 1998, and 1997, 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. (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. 6 (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 1999 and 1998 was as follows:
(In thousands) 1999 1998 - ------------------------------------------------------------------------------------- -------- -------- Life Sciences $107,784 $ 89,679 Optical Technologies 200,421 122,361 Measurement and Control 94,432 71,461 -------- -------- $402,637 $283,501 ======== ======== 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 1, 2000, will be shipped or completed during 2000. 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. (ix) Government Contracts Not applicable. (x) Competition The markets for the Company's products are highly competitive. 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. In many markets, the Company competes with large analytical instrument companies such as Agilent Technologies; PerkinElmer, Inc.; Varian Associates, Inc.; Waters Corporation; and Hitachi, Ltd. Certain products manufactured by the Company also compete with products sold by numerous smaller, specialized firms. Life Sciences Biosciences instruments and consumables. The Company competes with PerkinElmer; Molecular Devices Corporation; Beckman Coulter, Inc.; Bio-Rad Laboratories, Inc.; Agilent; MJ Research Technology; Qiagen Corporation; Biacore International, Inc.; Nalge Nunc Inc.; Corning-Costar Corporation; Rainen Instruments; Greiner GmbH; and Eppendorf GmbH. The Company competes primarily on the basis of technical performance, user convenience, and, to a lesser extent, price. 7 Advanced instrumentation and consumables. The Company's principal competitors include Agilent, Waters, Shimadzu Corporation, and PerkinElmer. The Company competes primarily on the basis of technical performance, customer service and support, and price. Scientific equipment. The Company's principal competitors in this market are Jouan S.A., NuAire Inc., Sanyo Electric Co. Ltd., and Labconco Corporation. In this market, the Company competes primarily on the basis of technical performance, customer service and support, and price. Clinical equipment and supplies. The Company competes with Leica Microsystems; Sakura Finetek U.S.A., Inc.; Ventana Corporation; Cytyc Corporation; Wescor Inc.; Jewett Inc.; and Mopec Inc. The Company competes primarily on the basis of quality, price, and service. In the clinical chemistry reagent market, the Company's competitors include Abbott Laboratories; BioChem Pharma; Chiron Corporation; and Sigma Diagnostics, a division of Sigma-Aldrich Co. The Company competes in this market primarily on the basis of product quality and price. Competitors in the market for rapid diagnostic test kits are Abbott Laboratories; Becton; Dickinson and Company; Roche-Boeringher Manheim; and Quidel Corporation. The Company competes primarily on the basis of its innovative technology as well as price. Information management systems. The Company's competitors include PerkinElmer, PE Biosystems, Beckman Coulter, Agilent, LabVantage Solutions, LIMS U.S., Scientific Software Inc., and Waters. The Company competes primarily on the basis of product performance and price. Optical Technologies Spectroscopy. In the spectroscopy market, the Company competes primarily with the Analytical Instrument division of PerkinElmer, Varian, Agilent, and Bio-Rad. The Company competes primarily on the basis of quality, performance, technology, and price. Semiconductor. The Company competes primarily with Riber Instruments S.A. and Oxford Instruments plc. In this market, the Company competes primarily on the basis of quality, performance, technology, and price. Physical properties. The Company competes with TA Instruments, Inc., a subsidiary of Waters; and Rheometrics Scientific Inc. The Company offers mid-level products in this market, with instruments that operate on a personal-computer platform. The Company competes in this market primarily on the basis of quality, performance, and price. Photonics. The Company competes primarily on the basis of technical suitability, product performance, reliability, and price. Principal competitors include Optical Coating Laboratory, Inc. and Newport Corporation. Measurement and Control Environmental. The Company's principal competitors include Monitor Labs Incorporated; Advanced Pollution Instruments; Rupprecht & Pataschnick Co., Inc.; and Mine Safety Appliances Co. The Company competes in this market primarily on the basis of technical performance, price, reliability, and customer service. Quality control. The Company's principal competitors include Scantech Limited, Integrated Measurement Systems, Inc., Toshiba Corporation, Yokogawa Electric Corporation, and Infrared Engineering Limited. The Company competes primarily on the basis of technical performance, customer service, and, to a lesser extent, price. 8 Field instruments and sensors. In the field measurement instruments and sensors market the Company competes primarily on quality and reliability, technical features, accuracy, ease of use, price, and reputation for aftermarket service. The Company competes with a few large competitors in each product area and with many companies within specific industries. Major competitors include Fisher-Rosemount, a division of Emerson Electric Co., Inc.; Asea Brown Boveri (Holding) Ltd.; and Yokogawa. Oil and gas. The Company has a relatively small presence within the large and varied process-control marketplace, which is extremely fragmented and consists 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. (xii) Environmental Protection Regulations The Company believes that compliance 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 1, 2000, the Company employed approximately 12,200 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 1999 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 56 President and Chief Executive Officer (1990) Denis A. Helm 61 Executive Vice President (1986) Richard W.K. Chapman 55 Senior Vice President (1994) Barry S. Howe 44 Vice President (1994) Theo Melas-Kyriazi 40 Chief Financial Officer (1998) Paul F. Kelleher 57 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. In 1994, he was named President and Chief Executive Officer of ThermoSpectra. In 1998, he became Vice President of Corporate Strategy for 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. 9 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 1, 2000, are as follows: Life Sciences The Company owns approximately 1,070,000 square feet of office, engineering, laboratory, and production space in Ohio, California, Pennsylvania, Massachusetts, Italy, and Germany, and leases approximately 1,000,000 square feet of office, engineering, laboratory, and production space under leases expiring from 2000 through 2016, principally in Finland, England, France, New York, Virginia, Texas, and Colorado. As of January 1, 2000, the Company had a $6.2 million mortgage loan that is secured by 200,000 square feet of property in California with a net book value of $14.6 million. Optical Technologies The Company owns approximately 860,000 square feet of office, engineering, laboratory, and production space, principally in Wisconsin, California, New York, Arizona, Germany, Switzerland, and England, and leases approximately 1,330,000 square feet of office, engineering, laboratory, and production space under leases expiring from 2000 through 2017, principally in Massachusetts, California, Connecticut, New Hampshire, and England. Measurement and Control The Company owns approximately 400,000 square feet of office, engineering, laboratory, and production space in New Mexico, California, Indiana, Texas, Louisiana, Arkansas, Germany, and England, and leases approximately 1,570,000 square feet of office, engineering, laboratory, and production space under leases expiring from 2000 through 2011, principally in Ohio, Texas, Maryland, California, Massachusetts, Georgia, Sweden, England, Germany, the Netherlands, and Australia. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 10 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 1999 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 1999 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 1999 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 1999 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 1, 2000, and Supplementary Data are included in the Registrant's 1999 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. PART III The information required by Items 10, 11, 12, and 13 of Form 10-K will be filed as part of an amendment to this Form 10-K no later than 120 days after January 1, 2000, the end of the Registrant's fiscal year covered by this Form 10-K. 11 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 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 None. (c) Exhibits See Exhibit Index on the page immediately preceding exhibits. 12 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, 2000 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, 2000. Signature Title By: /s/ Earl R. Lewis President, Chief Executive Officer, and Director Earl R. Lewis By: /s/ Theo Melas-Kyriazi Chief Financial Officer Theo Melas-Kyriazi By: /s/ Paul F. Kelleher Chief Accounting Officer Paul F. Kelleher By: /s/ George N. Hatsopoulos Director George N. Hatsopoulos By: /s/ Polyvios C. Vintiadis Director Polyvios C. Vintiadis 13 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 15, 2000 (except with respect to the matters discussed in Note 18, as to which the date is March 8, 2000). 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 12 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 15, 2000
14 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 at End Beginning Expense Off of Year of Year - ----------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- Allowance for Doubtful Accounts Year Ended January 1, 2000 $23,726 $ 7,301 $ 329 $(8,128) $ 6,609 $ 29,837 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 Description Balance at Established Activity Other (c) Balance Beginning as Cost of Charged to at End of Year Acquisitions Reserve of Year ------------------------------------------- ----------- -------------- ----------- ----------- ----------- Accrued Acquisition Expenses (b) Year Ended January 1, 2000 $ 15,319 $ 16,453 $(10,399) $ (2,144) $ 19,229 Year Ended January 2, 1999 $ 20,424 $ 7,078 $ (9,444) $ (2,739) $ 15,319 Year Ended January 3, 1998 $ 19,509 $ 24,280 $(18,528) $ (4,837) $ 20,424 Description Balance at Provision Activity Other (f) Balance Beginning Charged to Charged to at End of Year Expense (e) Reserve of Year --------------------------------------------- ----------- ------------- ----------- ----------- ----------- Accrued Restructuring Costs (d) Year Ended January 1, 2000 $ 11,225 $ 1,100 $(9,994) $ (649) $ 1,682 Year Ended January 2, 1999 $ 244 $ 18,401 $(7,682) $ 262 $ 11,225 Year Ended January 3, 1998 $ - $ 953 $ (709) $ - $ 244 (a) Includes allowance of businesses acquired during the year as described in Note 3 to Consolidated Financial Statements in the Company's 1999 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 1999 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 1999 Annual Report to Shareholders. (e) Includes reversal of previously recorded restructuring costs of $2.3 million and excludes provision of $0.1 million for asset write-down in 1999. 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. 15 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 Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-9786] and incorporated herein by reference). 3.3 By-Laws of the Registrant (filed as Exhibit 3 to the Registrant's Amendment No. 1 on Form 8-A, filed with the Commission on January 24, 2000 [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). 16 Exhibit Number Description of Exhibit 10.5 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated as of June 1, 1999, between the Registrant and Thermo Electron (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-9786] and incorporated herein by reference). 10.6 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). 10.7-10.15 Reserved. 10.16 Amended and Restated Deferred Compensation Plan for Directors of the Registrant (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-9786] and incorporated herein by reference). 10.17 Amended and Restated Directors Stock Option Plan of the Registrant (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [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 Amended and Restated Nonqualified Stock Option Plan of the Registrant (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-9786] 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 Amended and Restated Equity Incentive Plan of the Registrant (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [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). 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. 10.21 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). 17 Exhibit Number Description of Exhibit 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). 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 Amended and Restated Thermo Instrument Systems Inc. - ThermoSpectra Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-9786] and incorporated herein by reference). (On December 9, 1999, ThermoSpectra merged with Thermo Instrument. All outstanding options granted under this plan were assumed by Thermo Instrument and converted into options to purchase 72,356 shares of Thermo Instrument.) 10.25 Amended and Restated Thermo Instrument Systems Inc. - ThermoQuest Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-9786] and incorporated herein by reference). 10.26 Amended and Restated Thermo Instrument Systems Inc. - Thermo BioAnalysis Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-9786] and incorporated herein by reference). 10.27 Amended and Restated Thermo Instrument Systems Inc. - Thermo Optek Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-9786] and incorporated herein by reference). 10.28 Amended and Restated Thermo Instrument Systems Inc. - Metrika Systems Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-9786] and incorporated herein by reference). 10.29 Amended and Restated Thermo Instrument Systems Inc. - Thermo Vision Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-9786] and incorporated herein by reference). (On January 8, 2000, Thermo Vision merged with Thermo Instrument. All outstanding options under this plan were assumed by Thermo Instrument and converted into options to purchase 35,826 shares of Thermo Instrument.) 10.30 Amended and Restated Thermo Instrument Systems Inc. - ONIX Systems Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-9786] and incorporated herein by reference). 18 Exhibit Number Description of Exhibit 10.31 1997 Spectra-Physics Lasers, Inc. Stock Option Plan (filed as Exhibit 10.6 of Amendment No. 1 to Spectra-Physics Lasers, Inc.'s Registration Statement on Form S-1 [Reg. No. 333-38329] and incorporated herein by reference). 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). 10.34 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). 10.35 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). 10.36 $150,000,000 Promissory Note dated as of August 27, 1999, issued by the Registrant to Thermo Electron (filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 2, 1999 [File No. 1-9786] and incorporated herein by reference). 10.37 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated as of June 1, 1999 between ThermoQuest Corporation and Thermo Electron (filed as Exhibit 10.1 to ThermoQuest's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-14262] and incorporated herein by reference). 10.38 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated as of June 1, 1999, between Thermo BioAnalysis Corporation and Thermo Electron (filed as Exhibit 10.1 to Thermo BioAnalysis' Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-12179] and incorporated herein by reference). 10.39 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated as of June 1, 1999, between Thermo Optek Corporation and Thermo Electron (filed as Exhibit 10.1 to Thermo Optek's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-11757] and incorporated herein by reference). 10.40 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated as of June 1, 1999, between Metrika Systems Corporation and Thermo Electron (filed as Exhibit 10.1 to Metrika Systems' Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-13085] and incorporated herein by reference). 10.41 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated as of June 1, 1999, between ONIX Systems Inc. and Thermo Electron (filed as Exhibit 10.1 to ONIX Systems' Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-13975] and incorporated herein by reference). 19 Exhibit Number Description of Exhibit 13 Annual Report to Shareholders for the year ended January 1, 2000 (only those portions incorporated herein by reference). 21 Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP. 27 Financial Data Schedule.
EX-13 2 Exhibit 13 Thermo Instrument Systems Inc. Consolidated Financial Statements 1999
Thermo Instrument Systems Inc. 1999 Financial Statements Consolidated Statement of Income (In thousands except per share amounts) 1999 1998 1997 - ----------------------------------------------------------------------- ----------- ----------- ---------- Revenues (Note 13) $2,093,537 $1,659,981 $1,592,314 ---------- ---------- ---------- Costs and Operating Expenses: Cost of revenues (Note 11) 1,136,675 889,575 842,009 Selling, general, and administrative expenses (Note 8) 580,432 447,860 424,695 Research and development expenses 157,255 113,917 107,613 Restructuring and other unusual costs (income), net (Note 11) 1,211 23,209 (1,257) ---------- ---------- ---------- 1,875,573 1,474,561 1,373,060 ---------- ---------- ---------- Operating Income 217,964 185,420 219,254 Interest Income 22,124 33,509 28,253 Interest Expense (includes $16,498, $11,136, and $18,014 (50,988) (45,458) (45,894) to parent company) Equity in Losses of Unconsolidated Subsidiaries (Notes 3 and 11) (7,886) - - Gain on Sale of Investments (Note 2) 1,159 713 - Gain on Issuance of Stock by Subsidiaries (Note 10) - 18,582 46,404 Other Income (Expense), Net (Note 11) (2,690) 1,150 - ---------- ---------- ---------- Income Before Provision for Income Taxes, Minority Interest, and 179,683 193,916 248,017 Extraordinary Item Provision for Income Taxes (Note 5) 75,437 74,674 88,113 Minority Interest Expense 16,447 15,677 12,646 ---------- ---------- ---------- Income Before Extraordinary Item 87,799 103,565 147,258 Extraordinary Item, Net of Provision for Income Taxes and - 519 - Minority Interest of $391 (Note 6) ---------- ---------- ---------- Net Income $ 87,799 $ 104,084 $ 147,258 ========== ========== ========== Earnings per Share (Note 15) Basic $ .74 $ .86 $ 1.21 ========== ========== ========== Diluted $ .67 $ .79 $ 1.09 ========== ========== ========== Weighted Average Shares (Note 15) Basic 119,305 120,975 121,548 ========== ========== ========== Diluted 130,518 133,103 139,415 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 2
Thermo Instrument Systems Inc. 1999 Financial Statements Consolidated Balance Sheet (In thousands) 1999 1998 - ---------------------------------------------------------------------------------- ------------ ---------- Assets Current Assets: Cash and cash equivalents (includes $408,490 under repurchase $ 185,492 $ 553,825 agreements with parent company in 1998) Advance to affiliate 256,522 - Accounts receivable, less allowances of $29,837 and $23,726 489,264 407,430 Unbilled contract costs and fees 17,570 13,114 Inventories 327,901 276,589 Deferred tax asset and refundable income taxes (Note 5) 67,627 62,921 Other current assets 27,710 19,705 ---------- ---------- 1,372,086 1,333,584 ---------- ---------- Property, Plant, and Equipment, at Cost, Net 287,407 220,231 ---------- ---------- Other Assets (Notes 2, 3, and 4) 159,574 73,705 ---------- ---------- Cost in Excess of Net Assets of Acquired Companies (Notes 3, 5, and 11) 1,066,291 938,254 ---------- ---------- $2,885,358 $2,565,774 ========== ========== 3 Thermo Instrument Systems Inc. 1998 Financial Statements Consolidated Balance Sheet (continued) (In thousands except share amounts) 1999 1998 - ----------------------------------------------------------------------------------- ----------- ---------- Liabilities and Shareholders' Investment Current Liabilities: Short-term obligations and current maturities of long-term $ 292,702 $ 70,772 obligations (includes advance from affiliate of $54,855 and related-party debt of $8,755 in 1999; Note 6) Short-term obligations and current maturities of long-term obligations, 153,800 60,000 due to parent company (Notes 3 and 6) Accounts payable 119,956 101,009 Accrued payroll and employee benefits 73,077 59,649 Accrued income taxes (includes $18,139 and $12,500 due to parent company) 90,734 59,984 Accrued installation and warranty expenses 41,796 39,958 Deferred revenue 46,592 46,354 Other accrued expenses (Notes 3 and 11) 175,436 135,708 Due to parent company and affiliated companies 9,193 14,195 ---------- ---------- 1,003,286 587,629 ---------- ---------- Deferred Income Taxes (Note 5) 22,034 29,278 ---------- ---------- Other Deferred Items 35,433 31,056 ---------- ---------- Long-term Obligations (Note 6): Senior convertible obligations (includes $140,000 due to parent company; 312,500 327,042 Note 18) Subordinated convertible obligations (includes $3,000 and $650 of 250,000 389,436 related-party debt) Other (includes $3,800 due to parent company in 1998) 33,994 26,965 ---------- ---------- 596,494 743,443 ---------- ---------- Minority Interest 243,545 229,361 ---------- ---------- Commitments and Contingencies (Note 7) Shareholders' Investment (Notes 4 and 9): Common stock, $.10 par value, 250,000,000 shares authorized; 123,591,238 and 12,359 12,288 122,879,889 shares issued Capital in excess of par value 343,891 331,621 Retained earnings 763,782 675,983 Treasury stock at cost, 4,824,335 and 3,603,358 shares (75,914) (63,671) Deferred compensation (373) - Accumulated other comprehensive items (Note 14) (59,179) (11,214) ---------- ---------- 984,566 945,007 ---------- ---------- $2,885,358 $2,565,774 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 4
Thermo Instrument Systems Inc. 1999 Financial Statements Consolidated Statement of Cash Flows (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ----------- --------- Operating Activities Net income $ 87,799 $ 104,084 $ 147,258 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 81,244 65,078 58,051 Noncash restructuring and other unusual costs (income), net 111 3,226 (1,257) (Note 11) Provision for losses on accounts receivable 7,301 4,169 4,366 Equity in losses of unconsolidated subsidiaries (Notes 3 and 11) 7,886 - - Gain on sale of investments (Note 2) (1,159) (713) - Gain on issuance of stock by subsidiaries (Note 10) - (18,582) (46,404) Minority interest expense 16,447 15,677 12,646 Increase (decrease) in deferred income taxes (116) (53) 2,742 Extraordinary item, net of income taxes and minority - (519) - interest (Note 6) Other noncash expenses 13,316 11,081 3,100 Change in current accounts, excluding the effects of acquisitions: Accounts receivable (24,698) (1,404) (19,157) Inventories 10,868 10,110 13,768 Other current assets (7,809) 963 3,547 Accounts payable 6,717 (5,310) 14,317 Other current liabilities (7,916) (14,763) (23,868) Other (2,298) (1,638) 205 --------- ---------- --------- Net cash provided by operating activities 187,693 171,406 169,314 --------- ---------- --------- Investing Activities Acquisitions, net of cash acquired (Note 3) (344,816) (129,598) (508,059) Acquisition of minority interest of subsidiary (Note 17) (22,694) - - Payment to affiliated company for acquired business (Note 3) - (19,117) - Refunds of acquisition purchase price (Note 3) 8,969 - 36,132 Proceeds from sale of businesses (Note 11) - - 4,980 Advances to affiliate, net (257,314) - - Purchases of available-for-sale investments - (6,919) (9,000) Proceeds from sale of available-for-sale investments 9,691 - - Proceeds from maturities of available-for-sale investments - 9,005 10,250 Purchases of property, plant, and equipment (51,677) (30,902) (29,198) Proceeds from sale of property, plant, and equipment 7,939 9,510 7,877 Other, net 1,420 730 2,030 --------- ---------- --------- Net cash used in investing activities $(648,482) $ (167,291) $(484,988) --------- ---------- --------- 5 Thermo Instrument Systems Inc. 1999 Financial Statements Consolidated Statement of Cash Flows (continued) (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------ ---------- ----------- ---------- Financing Activities Net proceeds from issuance of Company and subsidiary $ 1,914 $ 103,327 $ 91,375 common stock (Note 10) Net proceeds from issuance of subordinated convertible - 244,111 - debentures Purchases of Company and subsidiary common stock and (37,613) (119,792) - subordinated convertible debentures (Note 6) Net proceeds from issuance of short- and long-term 200,000 - 428,800 obligations to parent company (Notes 3 and 6) Repayment of short- and long-term obligations to parent (110,000) (160,000) (220,000) company (Note 6) Increase (decrease) in short-term obligations, net 61,930 500 (21,528) Net proceeds from issuance of long-term obligations 16,692 11,502 - Repayment of long-term obligations (20,870) (2,780) (7,817) --------- ---------- ---------- Net cash provided by financing activities 112,053 76,868 270,830 --------- ---------- ---------- Exchange Rate Effect on Cash (19,597) 3,994 (8,996) --------- ---------- ---------- Increase (Decrease) in Cash and Cash Equivalents (368,333) 84,977 (53,840) Cash and Cash Equivalents at Beginning of Year 553,825 468,848 522,688 --------- ---------- ---------- Cash and Cash Equivalents at End of Year $ 185,492 $ 553,825 $ 468,848 ========= ========== ========== Cash Paid For Interest $ 49,101 $ 44,899 $ 43,755 Income taxes $ 64,066 $ 66,423 $ 62,895 Noncash Activities Fair value of assets of acquired companies $ 598,459 $ 165,220 $ 673,382 Cash paid for acquired companies (385,275) (132,933) (545,303) Issuance of short- and long-term obligations for acquired company (14,852) - - Cash to be paid for remaining outstanding shares of tender offer (1,864) - - Due to affiliated company for acquired company - - (19,117) Issuance of subsidiary stock options for acquired company - - (1,693) --------- ---------- ---------- Liabilities assumed of acquired companies $ 196,468 $ 32,287 $ 107,269 ========= ========== ========== Conversions of Company and subsidiary convertible obligations $ 9,277 $ 7,562 $ 38,910 ========= ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 6 Thermo Instrument Systems Inc. 1999 Financial Statements Consolidated Statement of Comprehensive Income and Shareholders' Investment (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ----------- --------- Comprehensive Income Net Income $ 87,799 $ 104,084 $147,258 -------- --------- -------- Other Comprehensive Items (Note 14): Foreign currency translation adjustment (48,601) 22,917 (34,317) Unrealized gains (losses) on available-for-sale investments, 636 (910) 22 net of reclassification adjustment -------- --------- -------- (47,965) 22,007 (34,295) Minority Interest 7,676 (4,248) 4,162 -------- --------- -------- $ 47,510 $ 121,843 $117,125 ======== ========= ======== Shareholders' Investment Common Stock, $.10 Par Value: Balance at beginning of year $ 12,288 $ 12,265 $ 9,767 Issuance of stock under employees' and directors' stock plans 3 17 4 Conversions of convertible obligations 68 6 45 Effect of stock split - - 2,449 -------- --------- -------- Balance at end of year 12,359 12,288 12,265 -------- --------- -------- Capital in Excess of Par Value: Balance at beginning of year 331,621 333,580 319,464 Issuance of stock under employees' and directors' stock plans (1,284) 590 1,270 Tax benefit related to employees' and directors' stock plans 632 158 514 Conversions of convertible obligations 9,209 765 6,817 Effect of stock split - - (2,449) Effect of majority-owned subsidiaries' equity transactions 3,713 (3,472) 7,964 -------- --------- -------- Balance at end of year 343,891 331,621 333,580 -------- --------- -------- Retained Earnings: Balance at beginning of year 675,983 571,899 424,641 Net income 87,799 104,084 147,258 -------- --------- -------- Balance at end of year $763,782 $ 675,983 $571,899 -------- --------- -------- 7 Thermo Instrument Systems Inc. 1999 Financial Statements Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued) (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ----------- --------- Treasury Stock: Balance at beginning of year $(63,671) $ (6,965) $ (8,679) Activity under employees' and directors' stock plans 3,271 102 1,714 Purchases of Company common stock (15,514) (56,808) - -------- -------- -------- Balance at end of year (75,914) (63,671) (6,965) -------- -------- -------- Deferred Compensation: Balance at beginning of year - - - Issuance of restricted stock under employees' stock plans (Note 4) (547) - - Amortization of deferred compensation 174 - - -------- -------- -------- Balance at end of year (373) - - -------- -------- -------- Accumulated Other Comprehensive Items (Note 14): Balance at beginning of year (11,214) (33,221) 1,074 Other comprehensive (income) expense (47,965) 22,007 (34,295) -------- -------- -------- Balance at end of year (59,179) (11,214) (33,221) -------- -------- -------- $984,566 $945,007 $877,558 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 8 Thermo Instrument Systems Inc. 1999 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 global leader in the development, manufacture, and sale of measurement and detection instruments used in virtually every industry to monitor, collect, and analyze data that provide knowledge for the user. For example, the Company's powerful analysis technologies help researchers sift through data to make the discoveries that will fight disease or prolong life; allow manufacturers to fabricate ever-smaller components required to increase the speed and quality of communications; or monitor and control industrial processes on-line to ensure that critical quality standards are met efficiently and safely. 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 1, 2000, Thermo Electron owned 104,271,860 shares of the Company's common stock, representing 88% of such stock outstanding. In January 2000, Thermo Electron announced a reorganization plan under which the Company would take private ThermoQuest Corporation, Thermo Optek Corporation, Thermo BioAnalysis Corporation, Metrika Systems Corporation, and ONIX Systems Inc. In addition, Thermo Electron would take the Company private (Note 18). Principles of Consolidation The accompanying financial statements include the accounts of the Company; its wholly owned subsidiaries; and its majority-owned public subsidiaries, ThermoQuest, Thermo Optek, Thermo BioAnalysis, Metrika Systems, ONIX Systems, ThermoSpectra Corporation (Note 17), Thermo Vision Corporation (Note 17), and Spectra-Physics Lasers, Inc. (SPLI), which was acquired indirectly by the Company as part of its acquisition of Spectra-Physics AB (Note 3). 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 (Note 3). Under the equity method, the Company records its initial investment in the business at cost, and adjusts the carrying value of the investment to recognize its proportionate share of the business's earnings or losses. Fiscal Year The Company has adopted a fiscal year ending the Saturday nearest December 31. References to 1999, 1998, and 1997 are for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998, respectively. Fiscal years 1999 and 1998 each included 52 weeks; fiscal year 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 1999 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. 9 1. Nature of Operations and Summary of Significant Accounting Policies (continued) 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." 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. Except where the result would be antidilutive, 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 (Note 15). Cash and Cash Equivalents The Company, along with certain European-based subsidiaries of Thermo Electron, participates in a notional pool arrangement in the U.K. with Barclays Bank. Under this arrangement, Barclays notionally combines the positive and negative cash balances held by the participants to calculate the net interest yield/expense for the group. The benefit derived from this arrangement is then allocated based on balances attributable to the respective participants. The Company has access to a $60.2 million bank line of credit under this arrangement. Thermo Electron guarantees all of the obligations of each participant in this arrangement. At year-end 1999 and 1998, the Company had invested $41.4 million and $51.1 million, respectively, and borrowed $41.4 million and $24.3 million, respectively, under this arrangement (Note 6). The Company, along with certain European-based subsidiaries of Thermo Electron, participates in a cash management arrangement in the Netherlands with a wholly owned subsidiary of Thermo Electron through ABN AMRO. Under this arrangement, participants' balances are pooled for interest calculation purposes. Interest under this arrangement is based on Euro market rates. The Company has access to an $8.7 million bank line of credit under this arrangement. Thermo Electron guarantees all of the obligations of each participant in this arrangement. At year-end 1999, the Company had $16.5 million invested and $5.5 million borrowed under this arrangement (Note 6). 10 1. Nature of Operations and Summary of Significant Accounting Policies (continued) At year-end 1998, $392.0 million of the Company's cash equivalents were invested in a repurchase agreement with Thermo Electron. Under this agreement, the Company in effect lent excess cash to Thermo Electron, which Thermo Electron collateralized 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 were readily convertible into cash by the Company. The repurchase agreement earned a rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. Effective June 1999, the Company adopted a new cash management arrangement with Thermo Electron, described below, that replaces the repurchase agreement. At year-end 1998, the Company had invested $16.5 million and borrowed $6.1 million in a similar arrangement in the Netherlands (Note 6). At year-end 1999 and 1998, 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. Advance to/from Affiliate Effective June 1999, the Company and Thermo Electron commenced use of a new domestic cash management arrangement. Under the new arrangement, amounts advanced to Thermo Electron by the Company for domestic cash management purposes bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis points, set at the beginning of each month. Thermo Electron is contractually required to maintain cash, cash equivalents, and/or immediately available bank lines of credit equal to at least 50% of all funds invested under this cash management arrangement by all Thermo Electron subsidiaries other than wholly owned subsidiaries. The Company has the contractual right to withdraw its funds invested in the cash management arrangement upon 30 days' prior notice. At year-end 1999, the Company had borrowed $36.2 million under this arrangement (Note 6). In addition, certain of the Company's European-based subsidiaries participate in new cash management arrangements with a wholly owned subsidiary of Thermo Electron. The Company has access to a $43.3 million line of credit from such wholly owned subsidiary of Thermo Electron under these arrangements, of which the Company had borrowed $18.7 million at year-end 1999 (Note 6). Interest under these arrangements is based on Euro market rates. The other terms of these arrangements are similar to the domestic cash management arrangement.
Inventories Inventories are stated at the lower of cost (on a first-in, first-out or weighted average basis) or net realizable value and include materials, labor, and manufacturing overhead. The components of inventories are as follows:
(In thousands) 1999 1998 - ------------------------------------------------------------------------------------- ---------- --------- Raw Materials and Supplies $ 152,865 $ 118,286 Work in Progress 60,227 55,086 Finished Goods 114,809 103,217 --------- --------- $ 327,901 $ 276,589 ========= ========= The Company periodically reviews its quantities of inventories on hand and compares these amounts to expected usage of each particular product or product line. The Company records as a charge to cost of revenues any amounts required to reduce the carrying value of inventories to net realizable value. 11 1. Nature of Operations and Summary of Significant Accounting Policies (continued) 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, 3 to 40 years; machinery and equipment, 1 to 20 years; and leasehold improvements, the shorter of the term of the lease or the life of the asset. Property, plant, and equipment consists of the following: (In thousands) 1999 1998 - ------------------------------------------------------------------------------------- ---------- --------- Land $ 41,858 $ 33,335 Buildings 152,055 124,875 Machinery and Equipment 230,175 171,307 Leasehold Improvements 17,489 14,851 --------- --------- 441,577 344,368 Less: Accumulated Depreciation and Amortization 154,170 124,137 --------- --------- $ 287,407 $ 220,231 ========= ========= 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 $44.3 million and $32.3 million, net of accumulated amortization of $28.2 million and $22.9 million, at year-end 1999 and 1998, respectively. Other assets in the accompanying balance sheet also includes an investment in FLIR Systems, Inc. common stock (Note 3), prepaid pension costs (Note 4), deferred debt costs, and long-term available-for-sale investments (Note 2). 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 $134.3 million and $104.5 million at year-end 1999 and 1998, 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. Such events or circumstances generally include the occurrence of operating losses or a significant decline in earnings associated with the acquired business or asset. The Company considers the future undiscounted cash flows of the acquired companies in assessing the recoverability of this asset. The Company assesses cash flows before interest charges and, when impairment is indicated, writes the asset down to fair value. If quoted market values are not available, the Company estimates fair value by calculating the present value of future cash flows. 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. 12 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Foreign Currency All assets and liabilities of the Company's foreign subsidiaries are translated at year-end exchange rates, and revenues and expenses are translated at average exchange rates for the year in accordance with SFAS No. 52, "Foreign Currency Translation." Resulting translation adjustments are reflected in the "Accumulated other comprehensive items" component of shareholders' investment (Note 14). In 1998, the Company recorded a foreign currency transaction gain of $1.2 million, arising from the repayment of certain foreign subsidiaries' intercompany borrowings denominated in U.S. dollars, which is included in other income in the accompanying statement of income. In 1999, the Company recorded a charge of $2.8 million related to foreign exchange contracts at SPLI, which is included in other expense in the accompanying statement of income (Note 11). Foreign currency transaction gains and losses included in the accompanying 1997 statement of income are not material. 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, Swiss francs, German marks, Swedish krona, and Netherlands guilders. 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 generally enter into speculative foreign currency agreements. See Note 11 for the effect of SPLI's early adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Recent Accounting Pronouncement In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." SAB 101 includes requirements for when shipments may be recorded as revenue when the terms of the sale include customer acceptance provisions or an obligation of the seller to install the product. In such instances, SAB 101 generally requires that revenue recognition occur upon customer acceptance and/or at completion of installation. SAB 101 requires that companies conform their revenue recognition practices to the requirements therein during the first quarter of calendar 2000 through recording a cumulative net of tax effect of the change in accounting. The Company has not completed the analysis to determine the effect that SAB 101 will have on its financial statements. 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. 13 2. Available-for-sale Investments The Company's 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, recorded in the "Accumulated other comprehensive items" component of shareholders' investment. The market value of long-term available-for-sale investments at year-end 1999 and 1998 was $1.9 million and $5.6 million, respectively, and the cost basis of long-term available-for-sale investments was $2.4 million and $6.9 million, respectively. The difference between the market value and the cost basis of long-term available-for-sale investments at year-end 1999 and 1998 was $0.5 million and $1.3 million, respectively, which represents gross unrealized losses on those investments. Long-term available-for-sale investments are included in other assets in the accompanying 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 in 1999 and 1998. 3. Acquisitions During the first quarter of 1999, the Company acquired 17,494,684 shares (or approximately 99%) of Spectra-Physics AB, a Stockholm Stock Exchange-listed company, for approximately 160 Swedish krona per share (approximately $20 per share) in completion of the Company's tender offer to acquire all of the outstanding shares of Spectra-Physics. In March 2000, the Company completed the acquisition of the remaining Spectra-Physics shares outstanding pursuant to compulsory acquisition rules applicable to Swedish companies. The aggregate purchase price was approximately $351.5 million, including related expenses. On the date of acquisition, Spectra-Physics had $39.1 million of cash, which included $30.5 million held by its majority-owned SPLI subsidiary. The accompanying balance sheet as of January 1, 2000, includes $1.9 million accrued for the acquisition of the remaining Spectra-Physics shares outstanding that were purchased in March 2000. 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. 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. In August 1999, the Company repaid $50.0 million of the principal amount outstanding under the promissory note and refinanced the balance of the note through borrowings from Thermo Electron due February 2000. In February 2000, Thermo Electron extended the maturity of the promissory note to August 2000 (Note 6). During 1999, the Company's majority-owned subsidiaries made several other acquisitions for approximately $32.4 million in cash, net of cash acquired, subject to post-closing adjustments. 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. The Company repaid $105.0 million of this promissory note in September 1997 and the remaining $105.0 million in January 1998. In addition, 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. 14 3. Acquisitions (continued) 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, which was paid in 1998. 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. During 1997, the Company made several other acquisitions for approximately $46.2 million, net of cash acquired, 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 that were repaid in 1999 and Thermo Vision borrowed $3.8 million from Thermo Electron pursuant to a promissory note due 2000 (Note 6). 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 $606.6 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 1999, 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, Spectra-Physics, and Life Sciences on a pro forma basis, assuming the Company and Spectra-Physics had been combined since the beginning of 1998, and the Company and Life Sciences had been combined since the beginning of 1997. 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) 1999 1998 1997 - -------------------------------------------------------------------- ------------ ------------ ----------- Revenues $ 2,132,826 $ 2,102,384 $ 1,645,086 Net Income 81,964 108,101 126,528 Earnings per Share: Basic .69 .89 1.04 Diluted .63 .82 .95 The pro forma results are not necessarily indicative of future operations or the actual results that would have occurred had the acquisition of Spectra-Physics and Life Sciences been made at the beginning of 1998 and 1997, respectively. 15 3. Acquisitions (continued) In July 1998, Metrika Systems acquired the stock of Honeywell-Measurex Data Measurement Corporation, a wholly owned subsidiary of Honeywell-Measurex Corporation. During 1999, Metrika Systems received a refund of $0.6 million related to a previously agreed upon purchase price adjustment in connection with the acquisition. Also during 1999, Metrika Systems and Honeywell negotiated a post-closing adjustment under the terms of the purchase agreement pertaining to the determination of the amount of certain assets and liabilities at the date of acquisition for which Honeywell had maintained responsibility. This negotiation resulted in an amount due to Metrika Systems of $7.8 million, all of which was received in three installments during 1999. A corresponding increase in the allowance for bad debts and certain liability accounts has been recorded to reflect the transfer of responsibility for these matters to Metrika Systems. 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 connection with its 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. Accrued acquisition expenses are included in other accrued expenses in the accompanying balance sheet.
16 3. Acquisitions (continued) A summary of the changes in accrued acquisition expenses for acquisitions completed before and during 1997 is as follows:
1997 Acquisitions -------------------------------------- Abandonment of Excess Pre-1997 (In thousands) Severance Facilities Other Acquisitions Total - --------------------------------- -------------- -------------- ------------- -------------- ------------- Balance at December 28, 1996 $ - $ - $ - $ 19,509 $ 19,509 Reserves established 9,021 2,848 2,401 - 14,270 Increases in reserves related - - - 10,010 10,010 to 1996 acquisitions Usage (4,965) (309) (337) (12,917) (18,528) Decrease due to finalization (8) - - (4,765) (4,773) of restructuring plans, recorded as a decrease in cost in excess of net assets of acquired companies Currency translation 20 3 69 (156) (64) -------- -------- ------- -------- -------- Balance at January 3, 1998 4,068 2,542 2,133 11,681 20,424 Reserves established 1,078 791 30 - 1,899 Usage (3,757) (1,005) (577) (2,257) (7,596) Decrease due to finalization (608) (63) (1,346) (1,004) (3,021) of restructuring plans, recorded as a decrease in cost in excess of net assets of acquired companies Currency translation (22) 54 49 191 272 -------- -------- ------- -------- -------- Balance at January 2, 1999 759 2,319 289 8,611 11,978 Usage (681) (834) - (855) (2,370) Currency translation (55) (65) (41) (319) (480) -------- -------- ------- -------- -------- Balance at January 1, 2000 $ 23 $ 1,420 $ 248 $ 7,437 $ 9,128 ======== ======== ======= ======== ======== The principal accrued acquisition expenses for pre-1997 acquisitions were for severance and abandoned facilities, primarily from the 1996 acquisition of the Fisons businesses. In 1996 and 1997, the Company established reserves for severance for 542 employees of Fisons and for lease obligations for Fisons' former headquarters in Uxbridge, England, and a Fisons operating facility in Hayworth, England, with obligations through 2007. The Company finalized its restructuring plans for the 1996 acquisitions in 1997. 17
3. Acquisitions (continued) The principal acquisition expenses for 1997 acquisitions were for severance for 368 employees across all functions and for abandoned facilities, primarily at the Life Sciences acquisition. The Life Sciences facilities primarily include an operating location in Runcorn, England, with an obligation through 2014. The amounts captioned as "other" in 1997 primarily represent costs to exit certain joint venture arrangements of Life Sciences. The Company finalized its restructuring plans for the 1997 acquisitions in 1998. A summary of accrued acquisition expenses for acquisitions completed during 1998 is as follows:
Abandonment of Excess (In thousands) Severance Facilities Other Total - ----------------------------------------------- -------------- -------------- -------------- ------------- Reserves established $ 3,400 $ 1,311 $ 468 $ 5,179 Usage (1,198) (403) (247) (1,848) Currency translation 14 (27) 23 10 -------- -------- -------- -------- Balance at January 2, 1999 2,216 881 244 3,341 Reserves established 511 313 554 1,378 Usage (1,539) (833) (730) (3,102) Decrease due to finalization of (827) (255) - (1,082) restructuring plans, recorded as a decrease in cost in excess of net assets of acquired companies Currency translation (80) 11 (25) (94) -------- -------- -------- -------- Balance at January 1, 2000 $ 281 $ 117 $ 43 $ 441 ======== ======== ======== ======== The principal acquisition expenses for 1998 were for severance for 160 employees across all functions and the cancellation of operating leases at a sales and service office in Germany and a manufacturing facility in California, both of which were closed. The amounts captioned as "other" were primarily for employee relocation expenses and moving expenses for two manufacturing facilities. The Company finalized its restructuring plans for the 1998 acquisitions in 1999. A summary of accrued acquisition expenses for acquisitions completed during 1999 is as follows: Abandonment of Excess (In thousands) Severance Facilities Other Total - ----------------------------------------------- -------------- -------------- -------------- ------------- Reserves established $ 9,186 $ 2,247 $ 3,642 $ 15,075 Usage (3,899) (71) (957) (4,927) Currency translation (303) (111) (74) (488) -------- -------- -------- -------- Balance at January 1, 2000 $ 4,984 $ 2,065 $ 2,611 $ 9,660 ======== ======== ======== ======== 18 3. Acquisitions (continued) The principal acquisition expenses for 1999 acquisitions are severance for approximately 175 employees across all functions and for abandoned facilities, primarily at Spectra-Physics. The Spectra-Physics facilities include operating facilities in Sweden, Germany, and France with lease terms through 2000. The amounts captioned as "other" primarily represent relocation, contract termination, and other exit costs. The Company expects to pay amounts accrued for severance and other primarily in 2000 and amounts accrued for abandoned facilities over the respective lease terms. The Company finalized its restructuring plans for Spectra-Physics in 1999. Unresolved matters at year-end 1999 include completion of planned severances and abandonment of excess facilities for other acquisitions completed in 1999. Such matters will be resolved no later than one year from the respective acquisition dates. In connection with the acquisition of Spectra-Physics, the Company acquired 4,162,000 shares of FLIR Systems, Inc. common stock. FLIR designs, manufactures, and markets thermal imaging and broadcast camera systems that detect infrared radiation or heat emitted directly by all objects and materials. The Company accounts for its investment in FLIR using the equity method with a one quarter lag to ensure the availability of FLIR's operating results in time to enable the Company to include its pro rata share of FLIR's results with its own. During FLIR's first calendar quarter of 1999, FLIR recorded a loss in connection with a pooling-of-interests transaction and certain restructuring actions. The Company has recorded its pro rata share of this loss, $5.1 million, in equity in losses of unconsolidated subsidiaries in the accompanying 1999 statement of income. In addition, as a result of the pooling consummated by FLIR and related issuance of FLIR shares in March 1999, the Company's pro rata share of FLIR's equity decreased to 29.4% from 34.6% prior to the transaction. This decrease totaled $6.0 million and has been recorded as a loss in equity in losses of unconsolidated subsidiaries in the accompanying 1999 statement of income, pursuant to Securities and Exchange Commission SAB 51. The Company's investment in FLIR is included in other assets in the accompanying 1999 balance sheet. 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. 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 to outside directors pursuant to a formula approved by the Company's shareholders. Options in the Company awarded under this plan are immediately exercisable and expire three to 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. 19 4. Employee Benefit Plans (continued) 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 could not sell shares purchased pursuant to such new options for six months from the exchange date. The options exchanged were canceled by the Company. In 1999, the Company awarded 12,300 shares of restricted Company common stock to certain key employees. The shares had an aggregate value of $0.2 million and vest three years from the date of award, assuming continued employment, with certain exceptions. Also in 1999, certain of the Company's majority-owned subsidiaries awarded shares of restricted common stock of their respective companies. The shares of subsidiary common stock have the same terms as the Company's restricted common stock and had an aggregate value of $0.3 million. The Company has recorded the fair value of the restricted stock as deferred compensation in the accompanying balance sheet and is amortizing such amount over the vesting period. A summary of the Company's stock option activity is as follows:
1999 1998 1997 ------------------ ------------------ ------------------- 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 3,888 $14.57 4,365 $16.83 4,066 $13.98 Granted 1,265 13.42 698 13.30 727 30.24 Assumed in merger with subsidiary (Note 17) 1,082 7.45 - - - - Exercised (186) 9.51 (325) 9.23 (263) 9.50 Forfeited (291) 16.67 (181) 17.88 (165) 17.56 Canceled due to exchange - - (669) 29.69 - - ----- ----- ----- Options Outstanding, End of Year 5,758 $13.04 3,888 $14.57 4,365 $16.83 ===== ====== ===== ====== ===== ====== Options Exercisable 5,758 $13.04 3,886 $14.56 4,365 $16.83 ===== ====== ===== ====== ===== ====== Options Available for Grant 2,254 2,498 2,346 ===== ===== =====
20 4. Employee Benefit Plans (continued) A summary of the status of the Company's stock options at January 1, 2000, is as follows:
Options Outstanding and Exercisable ---------------------------------------------------- Range of Exercise Prices Number Weighted Weighted of Average Average Shares Remaining Exercise (In thousands) Contractual Life Price - ---------------------------------------------- -------------------- ------------------- ------------------ $ 1.82 - $ 9.20 994 8.0 years $ 7.21 9.21 - 16.59 4,380 5.4 years 13.08 16.60 - 23.98 35 5.2 years 17.29 23.99 - 31.37 349 7.2 years 28.61 ----- $ 1.82 - $ 31.37 5,758 6.0 years $13.04 ===== 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. Under this program, shares of the Company's and Thermo Electron's 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. 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. Shares are purchased through payroll deductions of up to 10% of each participating employee's gross wages. During 1999 and 1997, the Company issued 22,000 and 52,000 shares, respectively, of its common stock under this program. No shares of Company common stock were issued under this program during 1998. 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 compensation plans been determined based on the fair value at the grant dates consistent with the method set forth under SFAS No. 123, the effect on the Company's net income and earnings per share would have been as follows: (In thousands except per share amounts) 1999 1998 1997 - --------------------------------------------------------------------------- ---------- --------- --------- Net Income: As reported $ 87,799 $104,084 $ 147,258 Pro forma 78,517 96,922 143,083 Basic Earnings per Share: As reported .74 .86 1.21 Pro forma .66 .80 1.18 Diluted Earnings per Share: As reported .67 .79 1.09 Pro forma .61 .74 1.06 21 4. Employee Benefit Plans (continued) Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation expense may not be representative of the amount to be expected in future years. Pro forma compensation expense for options granted is reflected over the vesting period; therefore, future pro forma compensation expense may be greater as additional options are granted. The weighted average fair value per share of options granted was $4.11, $3.93, and $11.09 in 1999, 1998, and 1997, 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: 1999 1998 1997 - --------------------------------------------------------------------------- ---------- --------- --------- Volatility 31% 29% 28% Risk-free Interest Rate 5.5% 4.5% 5.9% Expected Life of Options 3.6 years 3.8 years 5.2 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 Plan 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 plan are made by both the employee and the Company. Company contributions are based on the level of employee contributions. For this plan, the Company contributed and charged to expense $5.5 million, $4.2 million, and $4.7 million in 1999, 1998, and 1997, respectively. Defined Benefit Pension Plans Two of the Company's German subsidiaries and one of its U.K. subsidiaries have defined benefit pension plans covering substantially all full-time employees at the respective subsidiaries. One of the German subsidiaries' plans is unfunded. Net periodic benefit costs for the plans in aggregate included the following components: (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------------- -------- --------- ------- Service Cost $ 2,639 $ 2,859 $ 3,104 Interest Cost on Benefit Obligation 3,899 4,414 4,188 Expected Return on Plan Assets (5,264) (6,616) (6,406) Recognized Net Actuarial Gain (34) (39) (45) Amortization of Unrecognized Gain (23) (50) (67) Amortization of Unrecognized Initial Obligation 41 43 44 ------- -------- ------- $ 1,258 $ 611 $ 818 ======= ======== =======
22 4. Employee Benefit Plans (continued) The activity under the Company's defined benefit plans is as follows:
(In thousands) 1999 1998 - ----------------------------------------------------------------------------------- ----------- ---------- Change in Benefit Obligation: Benefit obligation, beginning of year $ 77,013 $ 62,584 Service cost 2,639 2,859 Interest cost 3,899 4,414 Benefits paid (1,876) (1,794) Actuarial (gain) loss (5,288) 6,957 Currency translation (4,625) 1,993 -------- -------- Benefit obligation, end of year 71,762 77,013 -------- -------- Change in Plan Assets: Fair value of plan assets, beginning of year 79,893 68,676 Company contributions 186 186 Benefits paid (1,482) (1,391) Actual return on plan assets 13,981 11,144 Currency translation (3,185) 1,278 ------- ------- Fair value of plan assets, end of year 89,393 79,893 ------- ------- Funded Status 17,631 2,880 Unrecognized Net Actuarial Gain (14,595) (967) Unrecognized Initial Obligation 155 226 -------- -------- Prepaid Pension Costs $ 3,191 $ 2,139 ======== ========
The aggregate projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $17.7 million, $14.6 million, and $5.2 million, respectively, at year-end 1999 and $19.1 million, $16.4 million, and $5.7 million, respectively, at year-end 1998. The weighted average rates used to determine the net periodic pension costs were as follows:
1999 1998 1997 - ------------------------------------------------------------------------ ---------- ----------- ---------- Discount Rate 5.1% 7.0% 8.2% Rate of Increase in Salary Levels 4.4% 6.3% 7.7% Expected Long-term Rate of Return on Assets 6.9% 9.7% 9.7% 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 $7.2 million, $6.4 million, and $5.3 million in 1999, 1998, and 1997, respectively. 23 5. Income Taxes The components of income before provision for income taxes, minority interest, and extraordinary item are as follows: (In thousands) 1999 1998 1997 - --------------------------------------------------------------------------- ---------- --------- --------- Domestic $ 101,347 $119,584 $ 186,133 Foreign 78,336 74,332 61,884 --------- -------- --------- $ 179,683 $193,916 $ 248,017 ========= ======== ========= The components of the provision for income taxes are as follows: (In thousands) 1999 1998 1997 - --------------------------------------------------------------------------- ---------- --------- --------- Currently Payable: Federal $ 37,310 $35,085 $ 47,121 State 7,302 6,263 8,154 Foreign 35,259 30,775 26,242 -------- ------- -------- 79,871 72,123 81,517 -------- ------- -------- Net Deferred (Prepaid): Federal (4,322) 2,721 3,860 State 2 304 819 Foreign (114) (474) 1,917 -------- ------- -------- (4,434) 2,551 6,596 -------- ------- -------- $ 75,437 $74,674 $ 88,113 ======== ======= ======== 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 $1.1 million, $1.5 million, and $1.6 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 transactions, in 1999, 1998, and 1997, respectively. The provision for income taxes that is currently payable does not reflect $3.5 million, $4.4 million, and $2.4 million of tax benefits used to reduce cost in excess of net assets of acquired companies in 1999, 1998, and 1997, respectively. 24 5. Income Taxes (continued) The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate of 35% to income before provision for income taxes, minority interest, and extraordinary item due to the following: (In thousands) 1999 1998 1997 - -------------------------------------------------------------------------- ---------- ---------- --------- Provision for Income Taxes at Statutory Rate $ 62,889 $ 67,871 $ 86,806 Increases (Decreases) Resulting From: Gain on issuance of stock by subsidiaries - (6,504) (16,241) Foreign tax rate and tax loss differential 6,330 4,285 6,500 State income taxes, net of federal tax 4,747 4,269 5,832 Amortization of cost in excess of net assets of acquired 5,502 5,344 4,492 companies Tax benefit of foreign sales corporation (3,385) (2,606) (2,517) Research and development tax credit claims from prior years (1,740) - - Other, net 1,094 2,015 3,241 -------- -------- -------- $ 75,437 $ 74,674 $ 88,113 ======== ======== ========
Deferred tax asset and deferred income taxes in the accompanying balance sheet consist of the following:
(In thousands) 1999 1998 - ------------------------------------------------------------------------------------- ---------- --------- Deferred Tax Asset: Tax loss carryforwards $ 39,220 $ 51,563 Inventory basis difference 25,600 22,557 Reserves and accruals 25,104 27,192 Accrued compensation 8,518 7,733 Allowance for doubtful accounts 4,251 4,358 -------- -------- 102,693 113,403 Less: Valuation allowance 39,220 51,563 -------- -------- $ 63,473 $ 61,840 ======== ======== Deferred Income Taxes: Depreciation $ 9,889 $ 17,631 Intangible assets (4,392) 7,840 Other, net 16,537 3,807 -------- -------- $ 22,034 $ 29,278 ======== ======== The valuation allowance relates to uncertainty surrounding the realization of certain tax assets, including $116.2 million of foreign tax loss carryforwards and $6.1 million of certain federal tax loss carryforwards in 1999, the realization of which is limited to the future income of certain subsidiaries. Of the $116.2 million of foreign tax loss 25 5. Income Taxes (continued) carryforwards, approximately $60 million expire from 2000 through 2009 and the remainder do not expire. The federal tax loss carryforwards expire from 2000 through 2012. The decrease in the valuation allowance results primarily from the expiration of acquired foreign net operating loss carryforwards. Any tax benefit resulting from the use of acquired loss carryforwards is used to reduce cost in excess of net assets of acquired companies. 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 $391 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 Short-term obligations and current maturities of long-term obligations in the accompanying balance sheet includes $94.1 million and $59.4 million of bank borrowings at several of the Company's foreign subsidiaries at year-end 1999 and 1998, respectively, including borrowings under an arrangement with Barclays Bank (Note 1). The weighted average interest rate for these borrowings was 4.0% and 3.4% at year-end 1999 and 1998, respectively. At year-end 1999, the Company had borrowings of $36.2 million under a domestic cash management arrangement with Thermo Electron (Note 1). The borrowings bear interest at a rate equal to the 30-day Dealer Commercial Paper Rate plus 150 basis points, set at the beginning of each month, provided such rate shall be reduced to the Dealer Commercial Paper Rate plus 50 basis points to the extent of any funds invested by the Company's majority-owned subsidiaries in this arrangement. The weighted average interest rate for these borrowings was 6.0 % at year-end 1999. At year-end 1999, the Company had borrowings of $24.2 million under arrangements with a wholly owned subsidiary of Thermo Electron (Note 1). The weighted average interest rate for these borrowings was 4.0% at year-end 1999. At year-end 1998, certain of the Company's Netherlands-based subsidiaries had borrowings of $6.1 million under an arrangement with a wholly owned subsidiary of Thermo Electron (Note 1). The weighted average interest rate for these borrowings was 4.5% at year-end 1998. Unused lines of credit, including amounts available under arrangements with a wholly owned subsidiary of Thermo Electron, were $147.9 million at year-end 1999. Borrowings under lines of credit are generally guaranteed by Thermo Electron. In addition, in February 1999, to finance the acquisition of Spectra-Physics, the Company borrowed $200.0 million from Thermo Electron pursuant to a promissory note due August 1999 (Note 3). In August 1999, the Company repaid $50.0 million of the principal amount outstanding under the promissory note and refinanced the balance of the note through borrowings from Thermo Electron due February 2000. In February 2000, Thermo Electron extended the maturity of the promissory note to August 2000. The borrowings bear interest at a rate equal to the 30-day Dealer Commercial Paper Rate plus 150 basis points, set at the beginning of each month, provided such rate shall be reduced to the Dealer Commercial Paper Rate plus 50 basis points to the extent of any funds invested by the Company's majority-owned subsidiaries in the domestic cash management arrangement with Thermo Electron. The interest rate for the promissory note was 6.0% at year-end 1999. 26 6. Short- and Long-term Obligations (continued) Long-term Obligations (In thousands except per share amounts) 1999 1998 - -------------------------------------------------------------------------------------- ---------- -------- 3 3/4% Senior Convertible Note to Parent Company, Due 2000, $ 140,000 $140,000 Convertible at $13.55 per Share 3 3/4% Senior Convertible Debentures, Due 2000, Convertible at - 14,542 $13.55 per Share 4 1/2% Senior Convertible Debentures, Due 2003, Convertible at 172,500 172,500 $34.46 per Share 4% Subordinated Convertible Debentures, Due 2005, Convertible at 250,000 250,000 $35.65 per Share (a) 5% Subordinated Convertible Debentures, Due 2000, Convertible Into Shares 61,031 67,931 of ThermoQuest at $16.50 per Share 5% Subordinated Convertible Debentures, Due 2000, Convertible Into Shares of 68,985 71,505 Thermo Optek at $13.94 per Share 10.23% Mortgage Loan Secured by Property with a Net Book Value of $14,601, 6,187 7,319 Payable in Monthly Installments with Final Payments in 2004 Promissory Notes to Parent Company from ThermoSpectra, Due 1999 (b) - 60,000 Promissory Note to Parent Company from Thermo Vision, Due 2000 (b) 3,800 3,800 Other 35,981 21,179 --------- -------- 738,484 808,776 Less: Current Maturities of Long-term Obligations 141,990 65,333 --------- -------- $ 596,494 $743,443 ========= ======== (a) The Company used a portion of the proceeds from the 4% subordinated convertible debentures to repay a $105.0 million promissory note to Thermo Electron. (b) 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 1999 and 1998 was 5.55% and 5.36%, respectively. 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. The terms of the debentures of ThermoQuest and Thermo Optek will require repayment of the obligations upon completion of the transactions described in Note 18. On February 15, 2000, the Company's $140.0 million principal amount 3 3/4% senior convertible note was converted by Thermo Electron into 10,334,620 shares of Company common stock. Accordingly, the note has been classified as noncurrent at year-end 1999 (Note 18). The annual requirements for long-term obligations as of January 1, 2000, excluding the $140.0 million note converted to equity by Thermo Electron in February 2000, are $142.0 million in 2000; $7.2 million in 2001; $7.8 million in 2002; $179.8 million 2003; $0.7 million in 2004; and $261.0 million in 2005 and thereafter. Total future requirements of long-term obligations are $598.5 million. 27 6. Short- and Long-term Obligations (continued) During 1999, 1998, and 1997, convertible obligations of $9.3 million, $7.6 million, and $38.9 million, respectively, were converted into common stock of the Company or its subsidiaries. During 1999, ThermoQuest and Thermo Optek repurchased an aggregate $9.4 million principal amount of their subordinated convertible debentures for $9.2 million in cash, resulting in a nominal gain. During 1998, ThermoQuest and Thermo Optek repurchased an aggregate $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 $40.9 million, $32.4 million, and $28.2 million in 1999, 1998, and 1997, respectively. Future minimum payments due under noncancelable operating leases at January 1, 2000, are $28.0 million in 2000; $23.5 million in 2001; $19.5 million in 2002; $15.5 million in 2003; $12.1 million in 2004; and $19.5 million in 2005 and thereafter. Total future minimum lease payments are $118.1 million. Contingencies ThermoQuest's Finnigan Corporation 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. The complaint was filed in the U.S. District Court for the District of Massachusetts. Finnigan has asked for damages to compensate for the infringement, and for injunctions against further infringement. The District Court action was stayed pending completion of a parallel investigation by 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 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 issued its decision in June 1999 affirming the ITC's determination of noninfringement but reversing the ITC's determination of invalidity. Bruker presented counterclaims in the ITC investigation. The counterclaims were removed to the District Court in Massachusetts and also stayed. These claims allege that the Finnigan patents are invalid and unenforceable and are not infringed by the mass spectrometers manufactured by Bruker. They also allege that Finnigan has violated U.S. and Massachusetts antitrust laws and engaged in unfair competition 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 attorneys' fees) it has sustained. The stays on both cases in the District Court in Massachusetts have been lifted and the cases are proceeding in the District Court. In February 1999, Finnigan filed complaints against Bruker-Franzen Analytik GmbH and Hewlett-Packard GmbH, in District Court in Dusseldorf, Germany, for violation of four German patents owned by Finnigan. The patents pertain to methods used in ion-trap mass spectrometers. Bruker and Hewlett-Packard have challenged the validity of these patents in Federal Patent Court in Munich. Bruker has filed a complaint against Finnigan in District Court in Dusseldorf for alleged violation of two German patents owned by Bruker. 28 7. Commitments and Contingencies (continued) 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 bonds, totaled $71.8 million at January 1, 2000. 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 pays Thermo Electron annually an amount equal to 0.8% of the Company's revenues, excluding the revenues of SPLI. SPLI, acquired indirectly by the Company as part of its acquisition of Spectra-Physics in February 1999, does not participate in the corporate services agreement and, as a result, the Company is not charged the fee based on SPLI's revenues. The Company paid an amount equal to 0.8% and 1.0% of the Company's revenues in 1998 and 1997, respectively. For these services, the Company was charged $15.7 million, $13.3 million, and $15.9 million in 1999, 1998, and 1997, respectively. The fee is reviewed and adjusted annually by mutual agreement of the parties. Management believes that the service fee charged by Thermo Electron is reasonable and that such fees are representative of the expenses the Company would have incurred on a stand-alone basis. The corporate services agreement is renewed annually but can be terminated upon 30 days' prior notice by the Company or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron Corporate Charter defines the relationship among Thermo Electron and its majority-owned subsidiaries). For additional items such as employee benefit plans, insurance coverage, and other identifiable costs, Thermo Electron charges the Company based upon costs attributable to the Company. Cash Management The Company invests excess cash and borrows short-term funds under arrangements with Thermo Electron as discussed in Note 1. Short- and Long-term Obligations See Notes 6 and 18 for short- and long-term obligations of the Company held by Thermo Electron. 9. Common Stock At January 1, 2000, the Company had reserved 30,350,000 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. 29 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. 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. The Company's ownership percentages of its majority-owned subsidiaries at year end were as follows:
1999 1998 1997 - -------------------------------------------------------------------------- ---------- ---------- --------- ThermoQuest 90% 89% 88% Thermo Optek 93% 93% 91% Thermo BioAnalysis 67% 62% 70% Metrika Systems 70% 67% 60% ONIX Systems 80% 80% 87% Thermo Vision (a) 78% 78% 78% ThermoSpectra (b) 90% 82% 77% Spectra-Physics Lasers, Inc. (c) 80% - - (a) In January 2000, Thermo Vision was taken private (Note 17). (b) Minority interest in ThermoSpectra in 1999 is held by Thermo Electron (Note 17). (c) Acquired indirectly as part of the acquisition of Spectra-Physics AB (Note 3). 30 11. Restructuring and Other Unusual Costs (Income), Net In response to a downturn in business at many of its operating units, the Company and its subsidiaries recorded restructuring and related costs and other unusual costs of $31.8 million in 1998, including restructuring costs of $21.6 million, inventory write-downs of $8.6 million, and other unusual costs of $1.6 million, discussed below. The charges occurred as a result of an economic crisis in Asia; a related downturn in the semiconductor industry; and depressed prices in the oil, petrochemical, and natural resources industries. Restructuring costs of $21.6 million, which were accounted for in accordance with EITF 94-3, consist of $15.7 million related to severance costs for approximately 729 employees across all functions, $3.7 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, $1.0 million for miscellaneous items, including costs for terminating certain contracts and agency relationships, and $0.4 million related to the loss on the sale of a division. The charge for facility-closing costs includes $1.7 million for lease payments on abandoned facilities, primarily for manufacturing facilities in the United Kingdom with lease obligations through 2000, and $2.0 million to write-down related fixed assets. These actions were undertaken to reduce costs as a response to the lower volume of business at the operating units, and occurred across the Company's principal businesses. 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 the discontinuation of certain product lines and increased excess and obsolescence reserves associated with lower product demand. During 1998, the Company had terminated approximately 500 employees and had expended $7.4 million of the established reserves. During 1999, the Company terminated 216 additional employees and recorded additional restructuring costs of $3.4 million. The restructuring costs consist of $1.5 million of costs related to severance for 32 employees, $1.3 million for facility-closing costs, $0.1 million for the write-off of fixed assets no longer of use, and $0.7 million of other restructuring costs. In addition, the Company determined that 38 employees would not be terminated and also settled certain severance matters for less than what had been accrued. Accordingly, the Company reversed an aggregate $2.3 million of previously established restructuring reserves. In connection with these actions, the Company expects to incur additional restructuring costs totaling $0.1 million in 2000, which are not permitted as charges until incurred pursuant to the requirements of EITF 94-3. Accrued restructuring costs are included in other accrued expenses in the accompanying balance sheet. In connection with its acquisition of Spectra-Physics (Note 3), the Company recorded an adjustment to cost of revenues of $6.7 million relating to the sale of inventories that were revalued on the date of acquisition. Of this amount, $3.5 million was recorded by the Measurement and Control segment and $3.2 million by the Optical Technologies segment. In addition, the Company's Measurement and Control segment recorded unusual charges of $11.1 million relating to the Company's equity investment in FLIR, which was acquired in connection with the acquisition of Spectra-Physics (Note 3). This charge was recorded to equity in losses of unconsolidated subsidiaries in the accompanying statement of income. Prior to its acquisition by the Company, SPLI elected early adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company has not elected early adoption of SFAS No. 133, although it must adopt the statement no later than 2001. Under SFAS No. 133, SPLI is permitted under certain conditions to enter foreign exchange contracts to hedge anticipated transactions without recording gains and losses on such contracts in income. Such contracts are deemed speculative hedges under SFAS No. 52, "Foreign Currency Translation," and must be marked to market with the resulting gain or loss reported as a component of the Company's results of operations. During 1999, the Company recorded a loss on foreign exchange contracts entered into by SPLI of $2.8 million, which is included in other expense in the accompanying statement of income. The Company's results may continue to be affected by such transactions during 2000. 31 11. Restructuring and Other Unusual Costs (Income), Net (continued) 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 unusual costs related to the resolution of this matter in 1998. Unusual 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. In addition, ThermoSpectra recorded restructuring costs of $0.9 million, primarily related to severance costs for 40 employees terminated during the year. The Company recorded restructuring and other unusual costs, net, as follows:
Abandonment of Excess (In thousands) Severance Facilities Other Total - ----------------------------------------------- -------------- -------------- -------------- ------------- 1997 Restructuring Plan Costs incurred in 1997 (a) $ 953 $ - $ - $ 953 1997 Usage (709) - - (709) ------- ------- ------- ------- Balance at January 3, 1998 (b) 244 - - 244 1998 Usage (244) - - (244) ------- ------- ------- ------- Balance at January 2, 1999 and January 1, 2000 $ - $ - $ - $ - ======= ======= ======= ======= 1998 Restructuring Plan Costs incurred in 1998 (c) $15,700 $ 1,656 $ 1,045 $18,401 1998 Usage (6,630) (418) (390) (7,438) Currency translation 211 24 27 262 ------- ------- ------- ------- Balance at January 2, 1999 (d) 9,281 1,262 682 11,225 Costs incurred in 1999 (e) 1,486 1,280 652 3,418 Reversal of reserves (f) (2,101) (217) - (2,318) 1999 Usage (7,205) (2,046) (743) (9,994) Currency translation (568) (55) (26) (649) ------- ------- ------- ------- Balance at January 1, 2000 (g) $ 893 $ 224 $ 565 $ 1,682 ======= ======= ======= ======= (a) Excludes a $2.2 million gain on the sale of a business in the Optical Technologies segment. (b) The balance of accrued severance at year-end 1997 represents amounts for planned severances in the Optical Technologies segment. The severances occurred in 1998. (c) Reflects restructuring and other unusual costs of $11.3 million, $4.8 million, and $2.3 million in the Optical Technologies, Life Sciences, and Measurement and Control segments, respectively. Excludes noncash charges of $1.1 million, $1.1 million, and $1.0 million in the Optical Technologies, Life Sciences, and Measurement and Control segments, respectively, and $1.6 million of cash costs related to an arbitration matter, which was paid in 1998. (d) The balance of accrued severance at year-end 1998 represents amounts for planned severances principally at the Optical Technologies and Life Sciences segments, substantially all of which occurred in 1999. The balance of accrued abandoned facility costs represents lease costs that will be paid through 2000. The balance of accrued other represents exit costs at the Optical Technologies segment, for costs that will be paid through 2000. 32 11. Restructuring and Other Unusual Costs (Income), Net (continued) (e) Reflects restructuring costs of $3.1 million and $0.3 million in the Optical Technologies and Measurement and Control segments, respectively. Excludes a noncash asset write-down of $0.1 million in the Measurement and Control segment. (f) Reflects reversals of previously recorded restructuring costs of $1.4 million, $0.6 million, and $0.3 million in the Optical Technologies, Measurement and Control, and Life Sciences segments, respectively. (g) The balance of accrued severance at year-end 1999 represents severance obligations, principally at the Optical Technologies and Measurement and Control segments. These payments will occur primarily through 2000. The balance of accrued abandoned facility costs represent lease costs that will be paid during 2000. The balance of accrued other represents exit costs at the Optical Technologies segment, expected to be paid during 2000. 12. Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash and cash equivalents, advance to affiliate, accounts receivable, long-term available-for-sale investments, short-term obligations and current maturities of long-term obligations, accounts payable, due to parent company and affiliated companies, long-term obligations, and forward foreign exchange contracts. The carrying amounts of these financial instruments, with the exception of available-for-sale investments, current maturities of convertible obligations, 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). The carrying amounts and fair value of the Company's long-term obligations and off-balance-sheet financial instruments are as follows: 1999 1998 ------------------- -------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value - -------------------------------------------------------------- ---------- ---------- ---------- ---------- Current Maturities of Convertible Obligations $130,016 $126,879 $ - $ - ======== ======== ======== ========= Long-term Obligations: Convertible obligations $562,500 $452,388 $716,478 $ 668,978 Other 33,994 35,614 26,965 29,440 -------- -------- -------- --------- $596,494 $488,002 $743,443 $ 698,418 ======== ======== ======== ========= Off-balance-sheet Financial Instruments: Forward foreign exchange contracts payable $ 400 $ 828 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, excluding the contracts at SPLI discussed below, totaled $76.2 million and $28.4 million at year-end 1999 and 1998, 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, 33 12. Fair Value of Financial Instruments (continued) taking into account the change in foreign exchange rates. The forward foreign exchange contracts of SPLI that are not hedges of firm commitments are recorded in the balance sheet at fair value. The fair value of these contracts was $2.0 million at year-end 1999 and is included in other deferred items in the accompanying balance sheet (Note 11). 13. Business Segment and Geographical Information The Company's businesses operate in three instrumentation segments: Life Sciences, Optical Technologies, and Measurement and Control. The Life Sciences segment, which 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 Measurement and Control segment), ThermoQuest, and certain wholly owned subsidiaries, develops and manufactures systems for drug discovery and medical diagnosis and for chemical analysis at ultratrace levels. The Optical Technologies segment, which includes Thermo Optek, ThermoSpectra, Thermo Vision, SPLI, and certain wholly owned subsidiaries, develops and manufactures optical and energy-based analytical systems; high-power laser systems; and industrial imaging, inspection, and measurement instruments. The Measurement and Control segment, which generally includes ONIX Systems, Metrika Systems, and certain of the Company's wholly owned subsidiaries, including businesses of Spectra-Physics AB, acquired in February 1999, develops and manufactures on-line systems for industrial processes and quality control, field-measurement instruments, and real-time sensors.
34 13. Business Segment and Geographical Information (continued)
(In thousands) 1999 1998 1997 - ----------------------------------------------------------------------- ----------- ----------- ---------- Business Segment Information Revenues: Life Sciences $ 715,665 $ 652,221 $ 612,011 Optical Technologies 802,008 677,079 715,296 Measurement and Control 585,489 342,435 283,429 Intersegment sales eliminations (a) (9,625) (11,754) (18,422) ---------- ---------- ---------- $2,093,537 $1,659,981 $1,592,314 ========== ========== ========== Income Before Provision for Income Taxes, Minority Interest, and Extraordinary Item: Life Sciences (b) $ 103,195 $ 85,119 $ 89,587 Optical Technologies (c) 79,393 70,013 93,067 Measurement and Control (d) 38,695 31,414 37,192 Corporate (e) (3,319) (1,126) (592) ---------- ---------- ---------- Total operating income 217,964 185,420 219,254 Interest and other income (expense), net (38,281) 8,496 28,763 ---------- ---------- ---------- $ 179,683 $ 193,916 $ 248,017 ========== ========== ========== Total Assets: Life Sciences $1,080,857 $1,082,438 $ 941,342 Optical Technologies 1,069,318 865,472 888,880 Measurement and Control 726,983 424,318 372,238 Corporate (f) 8,200 193,546 148,693 ---------- ---------- ---------- $2,885,358 $2,565,774 $2,351,153 ========== ========== ========== Depreciation and Amortization: Life Sciences $ 28,504 $ 26,863 $ 23,982 Optical Technologies 32,867 26,414 26,292 Measurement and Control 19,839 11,733 7,686 Corporate 34 68 91 ---------- ---------- ---------- $ 81,244 $ 65,078 $ 58,051 ========== ========== ========== Capital Expenditures: Life Sciences $ 13,350 $ 14,691 $ 9,520 Optical Technologies 28,171 12,718 11,051 Measurement and Control 10,019 3,473 8,594 Corporate 137 20 33 ---------- ---------- ---------- $ 51,677 $ 30,902 $ 29,198 ========== ========== ========== 35 13. Business Segment and Geographical Information (continued) (In thousands) 1999 1998 1997 - ----------------------------------------------------------------------- ----------- ----------- ---------- Geographical Information Revenues (g): United States $1,379,405 $1,067,995 $1,010,964 England 300,546 281,431 296,570 Germany 217,969 176,584 172,696 Other 549,800 400,035 380,179 Transfers among geographical areas (a) (354,183) (266,064) (268,095) ---------- ---------- ---------- $2,093,537 $1,659,981 $1,592,314 ========== =========== ========== Long-lived Assets (h): United States $ 198,004 $ 145,981 $ 146,978 Sweden 66,339 93 754 Germany 26,057 24,197 23,264 England 25,841 19,814 23,444 Other 43,559 34,849 29,388 ---------- --------- ---------- $ 359,800 $ 224,934 $ 223,828 ========== ========= ========== Export Revenues Included in United States Revenues Above (i) $ 391,886 $ 345,691 $ 334,853 ========== ========= ========== (a) Intersegment sales and transfers among geographical areas are accounted for at prices that are representative of transactions with unaffiliated parties. (b) Includes reversal of previously recorded restructuring costs of $0.3 million in 1999 and restructuring costs of $5.9 million in 1998. Includes charges of $2.8 million in 1998 for inventory write-downs and $2.9 million in 1997 for the sale of inventories revalued in connection with an acquisition. (c) Includes restructuring costs and other unusual costs (income), net, of $1.7 million, $12.4 million, and $(1.3) million in 1999, 1998, and 1997, respectively. Includes charges of $3.2 million and $0.7 million in 1999 and 1997, respectively, for the sale of inventories revalued in connection with acquisitions. Includes charges of $5.3 million and $0.8 million in 1998 and 1997, respectively, for inventory write-downs. (d) Includes a net reversal of previously recorded restructuring costs of $0.2 million in 1999 and restructuring and other unusual costs of $4.9 million in 1998. Includes charges of $3.5 million in 1999 for the sale of inventories revalued in connection with an acquisition and $0.5 million of inventory write-downs. (e) Primarily corporate general and administrative expenses. (f) Primarily cash, cash equivalents, and available-for-sale investments. (g) Revenues are attributed to countries based on selling location. (h) Includes property, plant, and equipment, net and other long-term tangible assets. (i) In general, export revenues are denominated in U.S. dollars.
36 14. Comprehensive Income 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 the following:
(In thousands) 1999 1998 - ------------------------------------------------------------------------------------- ---------- --------- Cumulative Translation Adjustment $ (58,941) $ (10,340) Net Unrealized Losses on Available-for-sale Investments (238) (874) --------- --------- $ (59,179) $ (11,214) ========= =========
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 the following:
(In thousands) 1999 1998 1997 - -------------------------------------------------------------------------- ---------- ---------- --------- Unrealized Holding Gains (Losses) Arising During the Year (net $1,378 $ (454) $ 22 of income tax provision (benefit) of $714, $(219), and $(3)) Reclassification Adjustment for Gains Included in Net Income (742) (456) - (net of income tax provision of $417 in 1999 and $257 in 1998) ------ ------ ------ Net Unrealized Gains (Losses) (net of income tax provision $ 636 $ (910) $ 22 (benefit) of $297, $(476), and $(3)) ====== ====== ====== 37 15. Earnings per Share Basic and diluted earnings per share were calculated as follows: (In thousands except per share amounts) 1999 1998 1997 - --------------------------------------------------------------------------- ---------- --------- --------- Basic Net Income $ 87,799 $104,084 $ 147,258 --------- -------- --------- Weighted Average Shares 119,305 120,975 121,548 --------- -------- --------- Basic Earnings per Share $ .74 $ .86 $ 1.21 ========= ======== ========= Diluted Net Income $ 87,799 $104,084 $ 147,258 Effect of: Convertible obligations 3,300 3,423 8,089 Majority-owned subsidiaries' dilutive securities (3,079) (2,343) (2,839) --------- -------- --------- Income Available to Common Shareholders, as Adjusted $ 88,020 $105,164 $ 152,508 --------- -------- --------- Weighted Average Shares 119,305 120,975 121,548 Effect of: Convertible obligations 11,011 11,422 16,713 Stock options 202 706 1,154 --------- -------- --------- Weighted Average Shares, as Adjusted 130,518 133,103 139,415 --------- -------- --------- Diluted Earnings per Share $ .67 $ .79 $ 1.09 ========= ======== ========= Options to purchase 2,329,000, 1,197,000, and 218,000 shares of common stock were not included in the computation of diluted earnings per share for fiscal 1999, 1998, and 1997, respectively, because their effect would have been antidilutive due to the options' exercise prices exceeding the average market price for the common stock. In addition, the computation of diluted earnings per share excludes the effect of assuming the conversion of the Company's $250.0 million principal amount of 4% subordinated convertible debentures, convertible at $35.65 per share, and $172.5 million principal amount of 4 1/2% subordinated convertible debentures, convertible at $34.46 per share, for fiscal 1999 and 1998, respectively, because the effect would be antidilutive. The extraordinary gain recorded by the Company in 1998 (Note 6) did not affect the reported amounts of basic and diluted earnings per share.
38 16. Unaudited Quarterly Information (In thousands except per share amounts)
1999 (a) First (b) Second Third Fourth - ------------------------------------------------- -------------- ------------- ------------- ------------- Revenues $ 463,579 $535,634 $523,210 $ 571,114 Gross Profit 211,456 245,881 240,548 258,977 Net Income 18,885 12,549 23,670 32,695 Earnings per Share: Basic .16 .11 .20 .28 Diluted .15 .10 .18 .25 1998 (c) 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 (d) 37,855 37,596 3,077 25,556 Earnings per Share (d): Basic .31 .31 .03 .21 Diluted .28 .28 .03 .20 (a) Reflects restructuring and other unusual charges (income) of $5.9 million, $13.7 million, $2.8 million, and $(0.7) million in the first, second, third, and fourth quarters, respectively. (b) Reflects the February 1999 acquisition of Spectra-Physics. (c) Reflects restructuring and other unusual charges (income) of $1.4 million, $30.5 million, and $(0.1) million in the second, third, and fourth quarters, respectively. (d) 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. Acquisition of ThermoSpectra and Thermo Vision Minority Interests The Company's ThermoSpectra and Thermo Vision subsidiaries announced in May and July 1999, respectively, that they had entered into definitive agreements and plans of merger with the Company pursuant to which the Company would acquire all of the outstanding shares of common stock of ThermoSpectra and Thermo Vision held by the public shareholders in exchange for $16.00 per share and $7.00 per share in cash, respectively. The mergers of ThermoSpectra and Thermo Vision were completed in December 1999 and January 2000, respectively, and their common stock has ceased to be publicly traded. 18. Subsequent Events Proposed Reorganization In January 2000, the Company announced that it plans to take private Thermo Optek, ThermoQuest, Thermo BioAnalysis, Metrika Systems, and ONIX Systems. In addition, the Company announced that Thermo Electron plans to take the Company private. These actions are part of a major reorganization plan under which Thermo Electron will spin in, spin off, and sell various businesses to focus solely on its core measurement and detection instruments business. Because the Company currently owns more than 90% of the outstanding shares of Thermo Optek and 39 18. Subsequent Events (continued) ThermoQuest common stock, these two companies are expected to be spun in for cash through a "short-form" merger, at $15.00 and $17.00 per share, respectively. In addition, the Company will conduct cash tender offers of $28.00 per share for Thermo BioAnalysis, $9.00 per share for Metrika Systems, and $9.00 per share for ONIX Systems, in order to bring its own equity ownership, collective with Thermo Electron, in each of these companies to at least 90%. If the tender offers are successful, each of these companies would then be spun into the Company through a short-form merger at the same cash prices as the tender offers. The Company currently owns approximately 67.3%, 70.5%, and 80.3% of the outstanding shares of Thermo BioAnalysis, Metrika Systems, and ONIX Systems common stock, respectively, and Thermo Electron currently owns approximately 20.8%, 8.5%, and 2.1% of the outstanding shares of Thermo BioAnalysis, Metrika Systems, and ONIX Systems common stock, respectively. Thermo Electron has announced that it plans to conduct an exchange offer for any and all of the outstanding shares of the Company's common stock held by minority shareholders. The Company's shareholders would receive 0.85 shares of Thermo Electron common stock for each share of Company common stock held. Thermo Electron, which currently owns approximately 88.8% of the outstanding shares of the Company's common stock, will condition the exchange offer on receiving acceptances from holders of enough shares so that, when combined with its current share ownership, Thermo Electron's ownership reaches at least 90%. If Thermo Electron achieves this 90%-ownership threshold, it will acquire all remaining outstanding shares of the Company's common stock through a short-form merger. In the short-form merger, minority shareholders who do not participate in the exchange offer would also receive shares of Thermo Electron common stock in exchange for their shares of the Company's common stock at the same ratio. The short-form mergers for ThermoQuest and Thermo Optek, the tender offers, and the exchange offer will require Securities and Exchange Commission clearance of necessary filings. The exchange offer and subsequent short-form merger of the Company with Thermo Electron would not require approval by the Company's Board of Directors or shareholders. The Company plans to conduct its subsidiary tender offers during the second quarter of 2000. If the Company successfully obtains ownership, collective with Thermo Electron, of at least 90% of the outstanding Thermo BioAnalysis, Metrika Systems, and ONIX Systems shares, it expects to complete these spin-ins by the end of the second quarter of 2000. The Company expects to complete the Thermo Optek and ThermoQuest transactions by the end of the second quarter of 2000. Thermo Electron plans to conduct the exchange offer for the Company's common stock during the second quarter of 2000. If Thermo Electron successfully obtains ownership of at least 90% of the outstanding shares of the Company's common stock, it expects to complete the spin-in of the Company by the end of the second quarter of 2000. Obligations under the Company's 4% subordinated convertible debentures due January 15, 2005, and its 4 1/2% senior convertible debentures due October 15, 2003, would be assumed by Thermo Electron in the short-form merger, and the debentures would be convertible into Thermo Electron common stock. SPLI, acquired indirectly by the Company as part of its February 1999 acquisition of Spectra-Physics (Note 3), will remain a public subsidiary while the Company and Thermo Electron continue to evaluate the SPLI business. The Company owns approximately 80.4% of the outstanding shares of SPLI common stock. Senior Convertible Note Due to Parent Company On February 15, 2000, the Company's $140.0 million principal amount 3 3/4% senior convertible note, convertible at $13.55 per share, was converted by Thermo Electron into 10,334,620 shares of Company common stock. Accordingly, the note has been classified as noncurrent at year-end 1999. Following the conversion, Thermo Electron owned 88.8% of the outstanding shares of the Company's common stock. 40 Thermo Instrument Systems Inc. 1999 Financial Statements 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 88%-owned subsidiary of Thermo Electron Corporation) and subsidiaries as of January 1, 2000, and January 2, 1999, 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 1, 2000. 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 1, 2000, and January 2, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2000, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts February 15, 2000 (except with respect to the matters discussed in Note 18, as to which the date is March 8, 2000) 41 Thermo Instrument Systems Inc. 1999 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed immediately after this Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading "Forward-looking Statements." Overview The Company is a global leader in the development, manufacture, and sale of measurement and detection instruments used in virtually every industry to monitor, collect, and analyze data that provide knowledge for the user. For example, the Company's powerful analysis technologies help researchers sift through data to make the discoveries that will fight disease or prolong life; allow manufacturers to fabricate ever-smaller components required to increase the speed and quality of communications; or monitor and control industrial processes on-line to ensure that critical quality standards are met efficiently and safely. The Company's businesses operate in three instrumentation segments: Life Sciences, Optical Technologies, and Measurement and Control. The Life Sciences segment includes the Company's Thermo BioAnalysis Corporation (excluding its Eberline Health Physics business for periods prior to July 1998, when Thermo BioAnalysis contributed this business to a joint venture in the Measurement and Control segment) and ThermoQuest Corporation subsidiaries, as well as certain wholly owned subsidiaries. This segment develops and manufactures systems for drug discovery and medical diagnosis and for chemical analysis at ultratrace levels. The Optical Technologies segment consists of Thermo Optek Corporation, ThermoSpectra Corporation, Thermo Vision Corporation, Spectra-Physics Lasers, Inc. (SPLI), and certain wholly owned businesses. This segment develops and manufactures optical and energy-based analytical systems; high-power laser systems; and industrial imaging, inspection, and measurement instruments. The Measurement and Control segment includes the Company's ONIX Systems Inc. and Metrika Systems Corporation subsidiaries, as well as certain wholly owned subsidiaries, including businesses of Spectra-Physics AB, acquired in February 1999 (Note 3). This segment develops and manufactures on-line systems for industrial processes and quality control, field-measurement instruments, and real-time sensors. 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 1999 Compared With 1998 Revenues increased $433.6 million to $2.09 billion in 1999 from $1.66 billion in 1998. Revenues increased $491.2 million due to 1999 acquisitions and the inclusion of revenues from 1998 acquisitions for the full period. This increase in revenues was offset in part by a decrease in revenues of $22.2 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 $35.4 million, principally in the first half of 1999. 42 Thermo Instrument Systems Inc. 1999 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations 1999 Compared With 1998 (continued) Life Sciences segment revenues increased to $715.7 million in 1999 from $652.2 million in 1998, primarily due to the inclusion of $59.6 million in revenues from acquisitions. Revenues at Thermo BioAnalysis' existing operations increased $17.3 million due to higher demand in Asia for its products and the expansion of sales and distribution channels into new markets. These increases were offset in part by lower revenues at ThermoQuest, primarily due to a $5.8 million decline in revenues in Asia as a result of lower shipments to Japan, and $3.2 million of lower demand for its Fourier-transform mass spectrometers, offset in part by increased demand for other mass spectrometers. In addition, the unfavorable effects of currency translation decreased revenues in this segment by $9.9 million. Optical Technologies segment revenues increased to $802.0 million in 1999 from $677.1 million in 1998, due to the inclusion of $147.7 million in revenues from acquisitions, primarily SPLI, which was acquired in connection with the acquisition of Spectra-Physics in February 1999 (Note 3). In addition, revenues at Thermo Optek's existing operations increased $7.2 million, primarily due to increased demand from the semiconductor industry and higher sales of its V150 molecular-beam epitaxy (MBE) systems. Revenues from ThermoSpectra's existing operations decreased $21.3 million, principally due to a continued downturn in the semiconductor industry in the first half of 1999. ThermoSpectra's existing businesses had modest revenue growth in the last half of 1999. In addition, the unfavorable effects of currency translation decreased revenues in this segment by $8.2 million. Measurement and Control segment revenues increased to $585.5 million in 1999 from $342.4 million in 1998, due to inclusion of $283.9 million in revenues from acquisitions, primarily Spectra-Physics in February 1999. These increases were offset in part by lower revenues from existing businesses, primarily at ONIX Systems and Metrika Systems. Revenues from ONIX Systems' existing operations decreased $19.2 million, primarily as a result of reduced discretionary capital spending by companies in the process control industry and by the oil and gas production sector. Energy prices declined precipitously in 1998 and, while prices have rebounded in 1999, capital equipment spending has not returned to prior levels. In addition, lower prices for natural resources in the first half of 1999 reduced spending in that industry during all of 1999. Revenues from Metrika Systems' existing operations decreased $11.9 million, primarily due to a reduction in spending by raw-material producers, particularly in the cement sector due to depressed pricing. The balance of the decrease in revenues from existing operations resulted from lower demand for nuclear-sensing products. In addition, the unfavorable effects of currency translation decreased revenues in this segment by $4.1 million. The gross profit margin remained unchanged at 46% in 1999 and 1998. The 1999 period included lower-margin revenues from Spectra-Physics, which recorded a charge of $6.7 million relating to the sale of inventories revalued at the date of acquisition, of which $3.5 million was recorded by the Measurement and Control segment and $3.2 million by the Optical Technologies segment. The 1998 period included inventory write-downs of $8.6 million, of which $5.3 million was recorded by the Optical Technologies segment, $2.8 million by the Life Sciences segment, and $0.5 million by the Measurement and Control segment. The inventory write-downs related to the discontinuation of certain product lines and increased excess and obsolescence reserves associated with lower product demand and were included in cost of revenues in the accompanying statement of income. Excluding the charge for the sale of revalued inventories in 1999 and provisions for inventory in 1998, the gross profit margin decreased to 46% in 1999 from 47% in 1998, primarily due to the inclusion of lower-margin revenues from acquisitions, principally Spectra-Physics. Selling, general, and administrative expenses as a percentage of revenues increased to 28% in 1999 from 27% in 1998, principally due to the inclusion of higher selling, general, and administrative expenses as a percentage of revenues at acquired businesses, primarily Spectra-Physics and, to a lesser extent, lower sales volume at several of the Company's subsidiaries. In addition, expanded selling efforts in India and China resulted in higher costs. 43 1999 Compared With 1998 (continued) Research and development expenses increased to $157.3 million in 1999 from $113.9 million in 1998, primarily due to the inclusion of expenses at Spectra-Physics and, to a lesser extent, other acquired businesses. In addition, research and development expenses increased $2.8 million at Thermo Optek, primarily due to increased spending on new product development, including the V150 MBE system. Research and development expenses as a percentage of revenues were 7.5% in 1999, compared with 6.9% in 1998. Excluding the expenses at acquired businesses, research and development expenses as a percentage of revenues were 7.1% in 1999. In connection with the restructuring actions undertaken by the Company in 1998, the Company incurred additional net restructuring costs of $1.2 million in 1999 (Note 11). Of the $1.2 million of restructuring costs, $1.7 million was recorded by the Optical Technologies segment and net reversals of previously recorded restructuring costs of $0.3 million and $0.2 million were recorded by the Life Sciences and Measurement and Control segments, respectively. During 1998, the Company recorded restructuring and unusual costs of $23.2 million, in addition to the inventory write-downs discussed above. These costs consisted of $21.6 million of restructuring costs as discussed in the results of operations for 1998 and $1.6 million of unusual costs relating to the resolution of an arbitration proceeding, which was recorded by the Measurement and Control segment. Of the $21.6 million of restructuring costs, $12.4 million was recorded by the Optical Technologies segment, $5.9 million by the Life Sciences segment, and $3.3 million by the Measurement and Control segment. In connection with the closing of certain facilities, the Company expects to incur approximately $0.1 million of additional costs in 2000. The restructuring activities resulted in annualized cost savings of approximately $29.3 million, beginning primarily in the fourth quarter of 1999. The total of annualized cost savings includes $16.2 million, $7.7 million, and $5.4 million at the Optical Technologies, Life Sciences, and Measurement and Control segments, respectively. Interest income decreased to $22.1 million in 1999 from $33.5 million in 1998, primarily due to a reduction in invested balances as a result of acquisitions, including the acquisition of Spectra-Physics in February 1999 and, to a lesser extent, the repurchase of Company and subsidiary common stock and debentures in the second half of 1998 and during 1999. Interest expense increased to $51.0 million in 1999 from $45.5 million in 1998, primarily due to borrowings from Thermo Electron Corporation in connection with the acquisition of Spectra-Physics, offset in part by the repayment in 1998 of certain promissory notes to Thermo Electron that were issued in connection with acquisitions. Equity in losses of unconsolidated subsidiaries of $7.9 million in 1999 primarily relates to charges associated with Spectra-Physics' minority investment in FLIR that were recorded in the second quarter of 1999 (Note 11). Of this amount, $5.1 million represents the Company's pro rata share of FLIR's loss that arose in connection with restructuring activities following a merger completed by FLIR, which was accounted for as a pooling of interests. In addition, $6.0 million of the loss resulted from a decrease in the Company's pro rata share of FLIR's equity following completion of the pooling transaction and related issuance of FLIR shares. Gain on sale of investments in 1999 resulted from the sale of shares of common stock of Fairey Group PLC and PSC, Inc. by the Company. The shares of PSC common stock were obtained in connection with the acquisition of Spectra-Physics. Gain on sale of investments in 1998 resulted from the sale of shares of common stock of SteriGenics International, Inc. by ThermoSpectra, which were obtained in connection with the 1997 sale of one of its product lines. Other expense, net, in 1999 primarily represents losses on foreign exchange contracts entered into by SPLI (Note 11). The Company's results may continue to be affected by such transactions in 2000. Other income in 1998 represents a foreign currency transaction gain at Thermo BioAnalysis, arising from the repayment of certain foreign subsidiaries' intercompany borrowings denominated in U.S. dollars. As a result of the sale of stock by subsidiaries, the Company recorded a gain of $18.6 million in 1998 (Note 10). 44 1999 Compared With 1998 (continued) Excluding the impact of a nontaxable gain on issuance of stock by subsidiaries in 1998, the effective tax rate was 42% in 1999, compared with 43% in 1998. The effective tax rate exceeded the statutory federal income tax rate in both periods due to foreign tax rate and tax law differences, nondeductible amortization of cost in excess of net assets of acquired companies, and the impact of state income taxes. The 1999 tax rate was favorably affected by $1.7 million of research and development tax credits as a result of the resolution of prior year claims. Minority interest expense increased to $16.4 million in 1999 from $15.7 million in 1998, primarily due to lower earnings at the Company's majority-owned subsidiaries in 1998 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. 1998 Compared With 1997 Revenues increased $67.7 million to $1.66 billion in 1998 from $1.59 billion 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. Life Sciences segment revenues increased to $652.2 million in 1998 from $612.0 million in 1997, primarily due to the inclusion of $59.0 million in revenues from acquisitions. Revenues from ThermoQuest's existing operations decreased $15.5 million, primarily as a result of a $7.8 million decline in sales to customers in Asia due to unstable economic conditions in that region and heightened competition in two of its product lines. In addition, revenues in this segment decreased $4.6 million due to the unfavorable effects of currency translation. Optical Technologies segment revenues decreased to $677.1 million in 1998 from $715.3 million in 1997, primarily due to a decline in revenues from existing operations at Thermo Optek, ThermoSpectra, and Thermo Vision. Revenues from Thermo Optek's existing operations decreased $34.3 million in 1998, primarily due to lower sales to Asia and, to a lesser extent, the semiconductor industry. Revenues from ThermoSpectra's existing operations decreased $21.4 million in 1998, primarily due to a downturn in the semiconductor industry. Revenues from Thermo Vision's existing operations decreased, primarily as a result of the slowdown in the semiconductor industry and the economic crisis in Asia. In addition, revenues in this segment decreased $7.1 million due to the unfavorable effects of currency translation. These decreases were offset in part by the inclusion of $33.7 million in revenues from acquisitions. Measurement and Control segment revenues increased to $342.4 million in 1998 from $283.4 million in 1997, primarily due to the inclusion of $63.9 million in revenues from acquisitions, offset in part by lower revenues at existing businesses due to lower demand. In addition, revenues in this segment decreased $1.0 million due to the unfavorable effects of currency translation. 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 the discontinuation of certain product lines and increased excess and obsolescence reserves associated with lower product demand (Note 11). The 1997 period included a charge of $3.6 million relating to the sale of inventories revalued at the time of the acquisition of Life Sciences International PLC, of which $2.9 million was recorded by the Life Sciences segment and $0.7 million by the Optical Technologies segment. In addition, the 1997 period included an inventory write-down $0.8 million recorded by the Optical Technologies segment related primarily to the discontinuation of an underperforming product. 45 1998 Compared With 1997 (continued) 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 unusual costs of $23.2 million in 1998 (Note 11). The Company recorded $21.6 million of restructuring costs, including $15.7 million of severance costs for approximately 729 employees across all functions, $3.7 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, $1.0 million for miscellaneous items, including costs for terminating certain contracts and agency relationships, and $0.4 million related to the loss on the sale of a division. The Company also recorded $1.6 million of unusual costs relating to the resolution of an arbitration proceeding. In 1997, the Optical Technologies 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. 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. An increase in 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 (Note 6) was offset 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. Gain on sale of investments in 1998 resulted from the sale of shares of common stock of SteriGenics International by ThermoSpectra, which were obtained in connection with the 1997 sale of one of its product lines. 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). Other income in 1998 represents a foreign currency transaction gain at Thermo BioAnalysis, arising from the repayment of certain foreign subsidiaries' intercompany borrowings denominated in U.S. dollars. 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 businesses sold by the Company 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). 46 Liquidity and Capital Resources Consolidated working capital was $368.8 million at January 1, 2000, compared with $746.0 million at January 2, 1999. Included in working capital are cash and cash equivalents of $185.5 million at January 1, 2000, compared with $553.8 million at January 2, 1999. Of the cash and cash equivalents balance at January 1, 2000, $154.3 million was held by the Company's majority-owned subsidiaries and the balance was held by the Company and its wholly owned subsidiaries. In addition, as of January 1, 2000, the Company had $256.5 million invested in an advance to affiliate. Of the advance to affiliate at January 1, 2000, $252.7 million was held by the Company's majority-owned subsidiaries and the balance was advanced by the Company and its wholly owned subsidiaries. Prior to the use of new cash management arrangements between the Company and Thermo Electron, which became effective in 1999, such amounts were included in cash and cash equivalents. At January 1, 2000, $146.3 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. Also reflected in working capital are $153.8 million of short-term obligations and current maturities of long-term obligations due to Thermo Electron in 2000 and an aggregate $130.0 million principal amount of ThermoQuest and Thermo Optek 5% subordinated convertible debentures due August and October 2000, respectively. Of the $153.8 million due to Thermo Electron, $150.0 million represents a promissory note due February 2000, the maturity of which Thermo Electron extended to August 2000 (Note 6). Cash provided by operating activities in 1999 was $187.7 million. An increase in accounts receivable used cash of $24.7 million, principally in the Life Sciences segment due in part to the majority of fourth quarter shipments by one of ThermoQuest's factories being made in December 1999 as a result of delays caused by the implementation of a new management information system. In addition, accounts receivable increased at Thermo BioAnalysis, primarily due to the timing of customer payments and shipments, as well as an increase in revenues. The Company generated $10.9 million of cash from a decrease in inventories, primarily in the Measurement and Control segment, principally resulting from a reduction in inventories at Spectra-Physics from its date of acquisition. The Company used $7.9 million of cash to reduce other current liabilities, primarily as a result of payments for accrued restructuring and accrued acquisition costs. As of January 1, 2000, the Company had $1.7 million of accrued restructuring costs, all of which it expects to pay in 2000. As of January 1, 2000, the Company had $19.2 million of accrued acquisition costs. The Company expects to pay $5.3 million of this amount relating to severance over the next three to six months and the remainder relating primarily to the abandonment of excess facilities over the term of the leases of such facilities. During 1999, the Company's primary investing activities, excluding advance to affiliate and available-for-sale investments activity, included acquisitions and the purchase of property, plant, and equipment. The Company expended $344.8 million, net of cash acquired, for acquisitions, including the acquisition of Spectra-Physics, and received an aggregate $9.0 million of purchase price adjustments for acquisitions, primarily for an acquisition by Metrika Systems in 1998 (Note 3). The Company expended $51.7 million for purchases of property, plant, and equipment and received proceeds of $7.9 million from the sale of property, plant, and equipment in 1999. During 2000, the Company plans to make expenditures of approximately $58 million for property, plant, and equipment. In December 1999, the Company acquired all of the outstanding shares of ThermoSpectra common stock that were held by public shareholders, in completion of its merger agreement, for $22.7 million in cash. In January 2000, the Company acquired all of the outstanding shares of Thermo Vision held by public shareholders in completion of its merger agreement for $11.2 million in cash (Note 17). The Company's financing activities provided $112.1 million of cash in 1999. To finance the acquisition of Spectra-Physics, the Company borrowed $200.0 million from Thermo Electron pursuant to a promissory note due August 1999. In August 1999, the Company repaid $50.0 million of the principal amount outstanding under this 47 Liquidity and Capital Resources (continued) promissory note and refinanced the balance of the note through borrowings from Thermo Electron due February 2000. In February 2000, Thermo Electron extended the maturity of this note to August 2000 (Note 3). In 1999, ThermoSpectra repaid an aggregate $60.0 million of borrowings to Thermo Electron. During 1999, a net increase in short-term obligations provided $61.9 million of cash. Net proceeds from the issuance of long-term obligations of $16.7 million in 1999 primarily represents borrowings by certain divisions of Thermo BioAnalysis, principally to fund acquisitions. Such debt is denominated in foreign currencies of countries where the divisions operate. The Company used $20.9 million of cash for the repayment of long-term obligations. During 1999, the Company and certain of its majority-owned subsidiaries expended $37.6 million to repurchase 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 1, 2000, $9.5 million remained under the Company's authorization and $28.1 million remained under the authorizations of the Company's majority-owned subsidiaries. The Company and its subsidiaries do not expect to expend any additional amounts on purchases of their securities as a result of Thermo Electron's plan to take the Company and its subsidiaries private (Note 18). In August 1999, the Company called for redemption on September 3, 1999, all of the outstanding $14.5 million principal amount of its 3 3/4% senior convertible debentures due 2000. Of the total principal amount outstanding, $9.3 million was converted into the Company's common stock and the remaining balance was repaid. In February 2000, the Company's $140.0 million principal amount 3 3/4% senior convertible note was converted by Thermo Electron into 10,334,620 shares of Company common stock. Excluding its $140.0 million principal amount senior convertible note that was converted in February 2000 (Note 18), the Company has short-term obligations and current maturities of long-term obligations due to Thermo Electron totaling $153.8 million at January 1, 2000. Thermo Electron extended the maturity of $150.0 million of this amount to August 2000. In addition, ThermoQuest's $61.0 million and Thermo Optek's $69.0 million principal amount 5% subordinated convertible debentures are due in August and October 2000, respectively, and may require earlier repayment upon completion of the transaction discussed in Note 18. The Company has an agreement with Thermo Electron under which the Company may borrow up to $400 million on a short-term basis in connection with the acquisition of the minority interest of its publicly held subsidiaries, excluding SPLI, and the redemption of the subsidiary debentures. Thermo Electron has indicated that it will seek repayment from the Company of such borrowings, in addition to the Company's $150.0 million promissory note, only to the extent the Company's cash flow permits such repayments. Excluding such debt and the 5% subordinated convertible debentures of ThermoQuest and Thermo Optek, 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. 48 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, Swiss francs, German marks, Swedish krona, and Netherlands guilders. 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 generally enter into speculative foreign currency agreements. See Note 11 for the effect of SPLI's early adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Foreign Currency Exchange Rates The Company generally views its investment in foreign subsidiaries with a functional currency other than the Company's reporting currency as long-term. The Company's investment in foreign subsidiaries is sensitive to fluctuations in foreign currency exchange rates. The functional currencies of the Company's foreign subsidiaries are principally denominated in British pounds sterling, German marks, Netherlands guilders, Swedish krona, 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 1999 and 1998 functional currencies, relative to the U.S. dollar, would result in a reduction of the Company's shareholders' investment of $33 million and $58 million, respectively. 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 1999 and 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 $10.5 million and $1.5 million, respectively. 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 year-end 1999 and 1998 foreign currency exchange rates would result in a negative impact on the Company's net income of $1.1 million and $1.4 million, respectively. 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 1999 and 1998 market interest rates would result in a negative impact of $13.8 million and $45.4 million, respectively, on the net fair value of the Company's 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 49 Market Risk (continued) 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 1999 and 1998 interest rates would result in a negative impact of $0.4 million and $1.3 million, respectively, on the Company's net income. 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 1999 and 1998 market equity prices would result in a negative impact of $11.2 million and $23.9 million, respectively, on the net fair value of the Company's price-sensitive equity financial instruments. Year 2000 As of the date of this report, the Company has completed its year 2000 initiatives, which included: (i) testing and upgrading significant information technology systems and facilities; (ii) testing and developing upgrades, where necessary, for the Company's current products and certain discontinued products; (iii) assessing the year 2000 readiness of its key suppliers, vendors, and customers; and (iv) developing contingency plans. As a result of completing these initiatives, the Company believes that all of its material information technology systems and critical non-information technology systems are year 2000 compliant. The Company believes that all of the material products that it currently manufactures and sells are year 2000 compliant or are not date sensitive. In addition, the Company is not aware of any significant supplier or vendor that has experienced material disruption due to year 2000 issues. The Company has also developed a contingency plan to allow its primary business operations to continue despite disruptions due to year 2000 problems, if any, that might yet arise in the future. The Company has incurred expenses to third parties (external costs) related to year 2000 issues of approximately $4.4 million as of January 1, 2000, and the total external costs of year 2000 remediation are expected to be approximately $5.0 million. While the Company to date has been successful in minimizing negative consequences arising from year 2000 issues, there can be no assurance that in the future the Company's business operations or financial condition may not be impacted by year 2000 problems, such as increased warranty claims, vendor and supplier disruptions, or litigation relating to year 2000 issues. 50 Thermo Instrument Systems Inc. 1999 Financial Statements Forward-looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause its actual results in 2000 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Uncertainty of Growth. Certain of the markets in which the Company competes have been flat or declining over the past several years. The Company has 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 financing, if available at all, may be on terms that are not favorable to the Company. Risks Associated with Product Development, Technological Change, Obsolescence, and the Acceptance of New Products. The Company's growth strategy includes significant investment in product development and it intends to increase spending in the area of research and development. In addition, the market for the Company's products and services is characterized by rapid and significant technological change and evolving industry standards. New product development and introductions require significant investments, 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 products or technologies developed by the Company may be slow to develop due to, among other things, that such products or technologies represent alternatives to traditional methods or technologies which may require further validation of its efficiency, or that existing regulations are written specifically for older technologies and general unfamiliarity of users with new products or technologies. There can be no assurance that the Company will be successful in developing effective new products in a timely manner or at all. 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, 51 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. Possible Adverse Impact of Significant International Operations. International revenues accounted for a significant portion of the Company's total revenues in 1999, 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 experienced a severe economic crisis in the late 1990s, involving 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 were adversely affected in 1998 and early 1999 and 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. Competitors 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. 52 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 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. Risks Associated with Cash Management Arrangement with Thermo Electron. The Company participates in a cash management arrangement with Thermo Electron. Under this cash management arrangement, the Company lends its excess cash to Thermo Electron on an unsecured basis. The Company has the contractual right to withdraw its funds invested in the cash management arrangement upon 30 days' prior notice. Thermo Electron is contractually required to maintain cash, cash equivalents and/or immediately available bank lines of credit equal to at least 50% of all funds invested under the cash management arrangement by all Thermo Electron subsidiaries other than wholly owned subsidiaries. The funds are held on an unsecured basis and therefore are subject to the credit risk of Thermo Electron. The Company's ability to receive its cash upon notice of withdrawal could be adversely affected if participants in the cash management arrangement demand withdrawal of their funds in an aggregate amount in excess of the 50% reserve required to be maintained by Thermo Electron. In the event of a bankruptcy of Thermo Electron, the Company would be treated as an unsecured creditor and its right to receive funds from the bankruptcy estate would be subordinated to secured creditors and would be treated on a pari passu basis with all other unsecured creditors. Further, all cash withdrawn by the Company from the cash management arrangement within one year before the bankruptcy would be subject to rescission. The inability of Thermo Electron to return the Company's cash on a timely basis or at all could have a material adverse effect on the Company's results of operations and financial position.
53 Selected Financial Information
(In thousands except per share amounts) 1999 (a) 1998 (b) 1997 (c) 1996 (d) 1995 - ------------------------------------------ ------------ ------------ ------------ ------------ ----------- Statement of Income Data Revenues $2,093,537 $1,659,981 $1,592,314 $1,209,362 $ 782,662 Net Income 87,799 104,084 147,258 132,751 79,306 Earnings per Share: Basic .74 .86 1.21 1.12 .70 Diluted .67 .79 1.09 1.01 .64 Balance Sheet Data Working Capital $ 368,800 $ 745,955 $ 612,666 $ 636,703 $ 489,895 Total Assets 2,885,358 2,565,774 2,351,153 1,924,400 1,372,813 Long-term Obligations 596,494 743,443 673,194 554,214 441,034 Shareholders' Investment 984,566 945,007 877,558 746,267 542,705 (a) Reflects a pretax charge of $21.7 million for restructuring and related costs, consisting of restructuring and unusual costs, net, of $15.0 million and inventory provisions of $6.7 million. Also reflects the February 1999 acquisition of Spectra-Physics AB, the reclassification as short-term of an aggregate $130.0 million of 5% subordinated convertible debentures of ThermoQuest and Thermo Optek due August and October 2000, respectively, and the classification as noncurrent of the Company's $140.0 million 3 3/4% senior convertible note as a result of its conversion by Thermo Electron in February 2000. (b)Reflects a pretax charge of $31.8 million, consisting of restructuring and unusual costs, net, of $23.2 million and inventory provisions of $8.6 million. Also reflects 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. (c) Reflects the March 1997 acquisition of Life Sciences International PLC and nontaxable gains of $46.4 million from the issuance of stock by subsidiaries. (d) Reflects the March 1996 acquisition of a substantial portion of the businesses constituting the Scientific Instruments Division of Fisons plc, 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. 54 Thermo Instrument Systems Inc. 1999 Financial Statements 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 1999 and 1998, as reported in the consolidated transaction reporting system.
1999 1998 ------------------- --------------------- Quarter High Low High Low - -------------------------------------------------------------- ---------- ---------- ----------- --------- First $17 7/16 $13 1/2 $35 7/16 $27 13/16 Second 16 7/8 12 3/16 34 5/8 25 7/8 Third 17 10 3/8 26 3/4 11 Fourth 12 1/2 8 1/4 15 1/8 7 7/8 As of January 28, 2000, the Company had 2,519 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 28, 2000, was $15 11/16 per share. Common stock of the Company's following majority-owned public subsidiaries is traded on the American Stock Exchange: ThermoQuest Corporation (symbol TMQ), Thermo Optek Corporation (symbol TOC), Thermo BioAnalysis Corporation (symbol TBA), Metrika Systems Corporation (symbol MKA), and ONIX Systems Inc. (symbol ONX). Common stock of the Company's majority-owned Spectra-Physics Lasers, Inc. subsidiary is traded on the NASDAQ National Market System (symbol SPLI). 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. Distribution of printed quarterly reports is limited to the second quarter only. Company information is available at http://www.thermo.com/subsid/thi1.html on Thermo Electron's Internet site. Stock Transfer Agent American Stock Transfer & Trust Company is the stock transfer agent and maintains shareholder activity records. The agent will respond to questions on issuance of stock certificates, change of ownership, lost stock certificates, and change of address. For these and similar matters, please direct inquiries to: American Stock Transfer & Trust Company Shareholder Services Department 40 Wall Street, 46th Floor New York, New York 10005 (718) 921-8200 Dividend Policy The Company has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future because its policy has been to use earnings to finance expansion and growth. Payment of dividends will rest within the discretion of the Board of Directors and will depend upon, among other factors, the Company's earnings, capital requirements, and financial condition. Form 10-K Report A copy of the Annual Report on Form 10-K for the fiscal year ended January 1, 2000, 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.
EX-21 3 Exhibit 21 THERMO INSTRUMENT SYSTEMS INC. Subsidiaries of the Registrant
As of February 23, 2000, Thermo Instrument Systems Inc. owned the following companies: NAME STATE OR JURISDICTION PERCENT OF OF INCORPORATION OWNERSHIP - ---------------------------------------------------------------------------------------------------------- Analytical Instrument Development, Inc. Pennsylvania 100 Eberline Instrument Company Limited England 100 Eberline Instrument Corporation New Mexico 100 Epsilon Industrial Inc. Texas 100 Gas Tech Inc. California 100 Gas Tech Partnership California 50* Gastech Instruments Canada Ltd. Canada 100 Life Sciences International Limited England 100 Comdata Services Limited England 100 Lipshaw Limited England 100 Luckham Limited England 100 Phicom 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 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 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 SA Spain 100 Labsystems Ges mbH Austria 100 Omnigene Limited England 58.50 Shenbridge Limited England 100 Southern Instruments Holdings Limited England 100 Metrika Systems Corporation Delaware 70.46 (additionally 8.47% of the shares are owned directly by Thermo Electron Corporation) Gamma-Metrics Minerals Pty Ltd. South Australia 100 Radiometrie RM GmbH Germany 100 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 England 100 National Nuclear Corporation California 100 Thermo Nucleonics LLC (additionally, 49% of the shares are owned directly by TBA Nucleonics Holding Corporation) Delaware 51 ESM Eberline Instruments Strahlen - und Umweltmesstechnik GmbH Germany 100 ONIX Systems Inc. Delaware 80.27 (additionally, 2.05% of the shares are owned directly by Thermo Electron Corporation) 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. (1% of which shares are owned directly by ONIX Systems Inc.) Mexico 100 ONIX Process Analysis Inc. Texas 100 OnIX Holdings Limited England 100 CAC UK Limited England 100 ONIX Measurement Limited England 100 ONIX Process Analysis Limited England 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 93.15 (additionally, 2.01% of the shares are owned directly by Thermo Electron Corporation) Diametrix Detectors, Inc. Delaware 100 FI Instruments Inc. Delaware 100 Gebruder Haake GmbH Germany 100 RHEO S.A. France 100 SWO Polymertechnik GmbH Germany 100 HAAKE 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 Beijing Baird Analytical Instrument Technology Co. Limited China 100 Cahn Instrument Corporation Wisconsin 100 Mattson Instruments Limited England 100 Thermo Optek Limited England 100 Norlab Instruments Ltd. England 100 Thermo Elemental Limited England 100 Unicam Limited England 100 Unicam Export Limited England 100 Unicam Italia SpA Italy 100 Unicam S.A. Belgium 100 Thermo Instruments Nordic AB Sweden 100 Thermo Instruments Nordic AS Norway 100 Nicolet Instrument Corporation Wisconsin 100 Nicolet Japan K.K. Japan 100 Spectra-Tech, Inc. Wisconsin 100 Nicolet Instrument GmbH Germany 100 Optek Securities Corporation Massachusetts 100 Planweld Holding Limited England 100 Nicolet Instrument Limited England 100 Hilger Analytical Limited England 100 Thermo Electron Limited England 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 S.A.R.L. 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 England 100 VG Elemental Limited England 100 Tein Benelux B.V. Netherlands 100 Thermo Optek Materials Analysis (S.E.A.) Pte Limited Singapore 100 ThermoSpectra Corporation Delaware 90.35 (additionally, 9.65% of the shares are owned directly by Thermo Electron Corporation) Gould Instrument Systems, Inc. Ohio 100 Gould & Nicolet S.A. (additionally, 5% of the shares are owned directly by France 95 ThermoSpectra Corporation) Kevex X-Ray Inc. Delaware 100 Neslab Instruments Europa BV Netherlands 100 Neslab Instruments, Inc. New Hampshire 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 England 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 England 100 Nicolet Technologies Ltd. England 100 Spectrace Instruments Inc. California 100 TMO THI Acquisition Corp. Delaware 100 Thermo Electron Sweden Forvaltning AB Sweden 100 Spectra-Physics AB Sweden 99 Spectra-Physics Holdings USA, Inc. Delaware 100 Spectra Precision, Inc. Delaware 100 Spectra Precision USA, Inc. Delaware 100 Spectra Precision Software, Inc. Georgia 100 Spectra Precision B.V.B.A. Belgium 100 Spectra Precision K.K. Japan 100 Spectra Precision Ltd. England 100 Spectra Precision Pty. Ltd. Australia 100 SPHM, Inc. Delaware 100 Spectra Precision de Mexico S.A. De C.V. Mexico 100 SPSE Inc. Delaware 100 Pharos Holdings, Inc. Delaware 100 BLH Electronics, Inc. Delaware 100 Pharos de Costa Rica S.A. Costa Rica 100 Automatic Power, Inc. Delaware 100 Spectra-Physics VisionTech, Inc. Delaware 100 Pharos Tech, Inc. Delaware 100 Spectra-Physics Lasers, Inc. Delaware 80.4 Opto Power Corporation Delaware 100 Spectra-Physics Laser Data Systems, Inc. Delaware 100 Spectra-Physics France S.A. France 100 Spectra-Physics GmbH Germany 100 Spectra-Physics K.K. Japan 100 Spectra-Physics Lasers B.V. Netherlands 100 Spectra-Physics Lasers Ltd. England 100 Spectra-Physics Foreign Sales Corp. Barbados 100 Spectra-Physics Credit Corporation Delaware 100 Spectra-Physics Canada Ltd. Canada 100 Spectra-Physics Holdings Plc England 100 AB Pharos Marine Ltd. England 100 Pharos Marine Pte Ltd. Singapore 100 Automatic Power Ltd. England 100 Continental Satellite TV Ltd. England 100 Spectra-Physics Holdings S.A. France 100 Spectra Precision S.A. (additionally, 10% owned by Spectra Precision France 90 AB) Nobel Electronique S.A.R.L. France 100 Spectra Precision Europe Holdings B.V. Netherlands 100 Spectra Precision B.V. Netherlands 100 Spectra-Physics Holdings GmbH Germany 100 ZSP Geodatische Systeme GmbH (25% of total outstanding stock represents 100% of the voting stock) Germany 25 Spectra Precision GmbH Germany 100 BLH SR-4 Sensoren GmbH Germany 100 Spectra Precision Kaiserslautern GmbH Germany 100 Spectra-Physics S.R.L. Italy 100 Spectra Precision AB Sweden 100 Spectra Precision Scandinavia AB Sweden 100 Spectra Precision of Canada Ltd. Canada 100 Spectra Precision Handelsges, mbH Austria 100 Geotronics S.A. Spain 100 Spectra Precision S.A. France 100 Nobel Elektronik AB Sweden 100 Nobel Elektroniikka Oy AB Finland 100 Nobel Elektronikk A/S Norway 100 AB Givareteknik Sweden 100 Nobel Systems Ltd. England 100 AB Pharos Marine Sweden 100 Pharos AB Sweden 100 Spectra-Physics Industri AB Sweden 100 Permanova Lasersystem AB Sweden 100 Chemtronics AB Sweden 100 Spectra-Physics Vision Tech Oy Finland 100 Spectra-Physics Vision Tech KK Japan 100 Spectra Precision (Asia) Pte. Ltd. Singapore 100 Quest-Finnigan Holdings Inc. Virginia 100 Quest-TSP Holdings Inc. Delaware 100 ThermoQuest Corporation Delaware 90.32 (43.9% of which shares are owned directly by Quest-Finnigan Holdings Inc.) (additionally, 0.32% of the shares are owned directly by Thermo Electron Corporation) 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 ThermoQuest Analytische Systeme GmbH Germany 100 Finnigan MAT S.R.L. Italy 100 Thermo Separation Products S.R.L. Italy 100 Masslab Limited England 100 H.D. Technologies Limited England 100 Thermo Instruments Australia Pty. Limited Australia 100 ThermoQuest Ltd. England 100 Finnigan Properties, Inc. California 100 Forma Scientific, Inc. Delaware 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 Hypersil S.A. France 100 Life Sciences International (Hong Kong) Limited Hong Kong 100 Life Sciences (Europe) Limited England 100 Life Sciences International (UK) Limited England 100 Kenbury Limited England 100 Savant Instruments Limited England 100 TMQ SEG (Hong Kong) Limited Hong Kong 100 ThermoQuest 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 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 Thru-Put Systems, Inc. Florida 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. England 100 Thermo Haake (U.K.) Limited England 100 Thermo Instrumentos Cientificos S.A. Spain 100 Thermo BioAnalysis Corporation Delaware 67.22 (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, 20.80% of the shares are owned directly by Thermo Electron Corporation) BioStar, Inc. Delaware 100 Data Medical Associates, Inc. Texas 100 DMA Latinoamericana S.A. de C.V. Mexico 50 Labsystems (SEA) Pte. Ltd. Singapore 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 Konelab OY Finland 100 AO Analytical Systems Russian Fed. 100 Labsystems (Hong Kong) Limited Hong Kong 99 Labsystems BTD China 67 Labsystems LHD China 90 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 France SA France 100 Shandon Scientific Limited England 100 Anglia Scientific Instruments Limited England 100 Shandon Southern Instruments Limited England 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 TBA Securities Corporation Massachusetts 100 Shandon GmbH Germany 100 Thermo BioAnalysis GmbH Germany 100 Hybaid GmbH Germany 100 Angewandte Gentechnologie Systems GmbH Germany 100 Interactiva Biotechnologie GmbH Germany 100 Labsystems GmbH Germany 100 Thermo LabSystems Vertriebs GmbH Germany 100 Thermo BioAnalysis (Guernsey) Ltd. Channel Islands 100 Thermo BioAnalysis Holdings, Limited England 100 Thermo Fast U.K. Limited England 100 Dynex Technologies Limited England 100 Thermo BioAnalysis Limited England 100 Thermo LabSystems Limited England 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 Pty. 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. Ltd. China 22 Thermo Environmental Instruments Inc. California 100 Andersen Instruments Inc. Delaware 100 Andersen Instruments Limited England 100 ESM Andersen Instruments GmbH Germany 100 MIE Corporation Massachusetts 100 Thermo Instruments do Brasil Ltda. (1% of which shares are owned directly by Thermo Jarrell Ash Corporation) Brazil 100 Van Hengel Holding B.V. Netherlands 100 Thermo Instrument Systems B.V. Netherlands 100 Euroglas B.V. Netherlands 100 Mesure de Traces S.A. 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 97.10 (additionally, 2.90% of the shares are owned directly by Thermo Electron Corporation) CID Technologies Inc. New York 100 Centro Vision Inc. Delaware 100 Hilger Crystals Limited England 100 Laser Science, Inc. Delaware 100 Oriel Instruments Corporation Delaware 100 Thermo Vision Opticon Corporation Delaware 100
* Joint Venture/Partnership EX-23 4 Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation by reference of our reports dated February 15, 2000 (except with respect to the matters discussed in Note 18, as to which the date is March 8, 2000), included in or incorporated by reference into Thermo Instrument Systems Inc.'s Annual Report on Form 10-K for the year ended January 1, 2000, 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. 33-65275 on Form S-8, Registration Statement No. 33-37559 on Form S-8, Registration Statement No. 333-02163 on Form S-3, Registration Statement No. 333-17707 on Form S-3, Registration Statement No. 333-86357 on Form S-8, Registration Statement No. 333-92821 on Form S-8, and Registration Statement No. 333-96495 on Form S-8. Arthur Andersen LLP Boston, Massachusetts March 21, 2000 EX-27 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO INSTRUMENT SYSTEM INC.'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JANUARY 1,2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-01-2000 JAN-01-2000 185,492 0 519,101 29,837 327,901 1,372,086 441,577 154,170 2,885,358 1,003,286 453,494 0 0 12,359 972,207 2,885,358 2,093,537 2,093,537 1,136,675 1,136,675 158,466 7,301 50,988 179,683 75,437 87,799 0 0 0 87,799 0.74 0.67
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