-----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, Lkb8DEvU0aAhCDZi05bt32sVi4jWifyGoFnS7tXCMCQErmTzw9psNs9094fg/AF1 gabOAsU0UHkuI0qJ5NdH1Q== 0000097745-01-500063.txt : 20010810 0000097745-01-500063.hdr.sgml : 20010810 ACCESSION NUMBER: 0000097745-01-500063 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERMO ELECTRON CORP CENTRAL INDEX KEY: 0000097745 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 042209186 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08002 FILM NUMBER: 1702769 BUSINESS ADDRESS: STREET 1: 81 WYMAN ST STREET 2: P O BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02454-9046 BUSINESS PHONE: 7816221000 10-Q 1 tmo201q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------------------------------------------- FORM 10-Q (mark one) [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended June 30, 2001 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-8002 THERMO ELECTRON CORPORATION (Exact name of Registrant as specified in its charter) Delaware (State or other jurisdiction of 04-2209186 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 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 such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at July 27, 2001 ----------------------------- ---------------------------- Common Stock, $1.00 par value 181,676,323 PART I - Financial Information Item 1 - Financial Statements THERMO ELECTRON CORPORATION Consolidated Balance Sheet (Unaudited) Assets
June 30, December 30, (In thousands) 2001 2000 - ---------------------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $ 506,351 $ 505,524 Short-term available-for-sale investments, at quoted market value (amortized cost of $754,886 and $510,312) 776,198 521,329 Accounts receivable, less allowances of $27,008 and $30,593 405,530 431,476 Unbilled contract costs and fees 22,075 18,520 Inventories: Raw materials and supplies 164,927 169,885 Work in process 69,854 65,625 Finished goods (includes $16,626 and $33,605 at customer locations) 155,171 158,642 Deferred tax asset 149,917 148,051 Advance receivable from affiliates 16,178 - Other current assets 54,504 75,007 Net assets of discontinued operations (Notes 8 and 11) 107,903 371,470 ---------- ---------- 2,428,608 2,465,529 ---------- ---------- Property, Plant, and Equipment, at Cost 494,574 484,555 Less: Accumulated depreciation and amortization 207,426 198,677 ---------- ---------- 287,148 285,878 ---------- ---------- Long-term Available-for-sale Investments, at Quoted Market Value (amortized cost of $6,585 and $9,883) 11,472 17,110 ---------- ---------- Other Assets 220,627 183,974 ---------- ---------- Goodwill 1,346,931 1,378,663 ---------- ---------- Long-term Net Assets of Discontinued Operations (Notes 8 and 11) 402,137 531,823 ---------- ---------- $4,696,923 $4,862,977 ========== ========== < 2 > THERMO ELECTRON CORPORATION Consolidated Balance Sheet (continued) (Unaudited) Liabilities and Shareholders' Investment June 30, December 30, (In thousands except share amounts) 2001 2000 - ---------------------------------------------------------------------------------------------------------- Current Liabilities: Short-term obligations and current maturities of long-term obligations $ 84,569 $ 103,356 Advance payable to affiliates - 16,088 Accounts payable 117,834 139,662 Accrued payroll and employee benefits 70,825 78,483 Accrued income taxes 95,279 95,344 Deferred revenue 51,402 50,341 Accrued installation and warranty costs 34,952 37,058 Other accrued expenses (Notes 6 and 7) 207,751 208,219 ---------- ---------- 662,612 728,551 ---------- ---------- Deferred Income Taxes and Other Deferred Items 63,082 47,230 ---------- ---------- Long-term Obligations: Senior convertible obligations 171,021 172,500 Senior notes 147,000 150,000 Subordinated convertible obligations 1,161,998 1,177,565 Other 14,045 28,418 ---------- ---------- 1,494,064 1,528,483 ---------- ---------- Minority Interest 22,414 24,737 ---------- ---------- Shareholders' Investment: Preferred stock, $100 par value, 50,000 shares authorized; none issued Common stock, $1 par value, 350,000,000 shares authorized; 198,653,715 and 195,877,421 shares issued 198,654 195,877 Capital in excess of par value 1,722,964 1,681,452 Retained earnings 985,665 1,005,857 Treasury stock at cost, 17,024,931 and 13,708,863 shares (321,727) (246,228) Deferred compensation (4,623) (6,640) Accumulated other comprehensive items (Notes 2 and 9) (126,182) (96,342) ---------- ---------- 2,454,751 2,533,976 ---------- ---------- $4,696,923 $4,862,977 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. < 3 > THERMO ELECTRON CORPORATION Consolidated Statement of Operations (Unaudited) Three Months Ended ----------------------- June 30, July 1, (In thousands except per share amounts) 2001 2000 - ---------------------------------------------------------------------------------------------------------- Revenues $542,472 $579,950 -------- -------- Costs and Operating Expenses: Cost of revenues 304,410 313,701 Selling, general, and administrative expenses 155,498 166,971 Research and development expenses 44,706 46,102 Restructuring and other unusual costs (income), net (Note 7) 23,693 (1,594) -------- -------- 528,307 525,180 -------- -------- Operating Income 14,165 54,770 Other Expense, Net (Note 3) (148) (10,750) -------- -------- Income from Continuing Operations Before Provision for Income Taxes and Minority Interest 14,017 44,020 Provision for Income Taxes (5,411) (17,840) Minority Interest (Expense) Income 817 (4,482) -------- -------- Income from Continuing Operations 9,423 21,698 Income from Discontinued Operations (net of income taxes and minority interest of $2,751; Note 8) - 2,557 Gain on Disposal of Discontinued Operations (net of income taxes of $17,259; Note 8) 15,560 - -------- -------- Net Income $ 24,983 $ 24,255 ======== ======== Earnings per Share from Continuing Operations (Note 4): Basic $ .05 $ .14 ======== ======== Diluted $ .05 $ .13 ======== ======== Earnings per Share (Note 4): Basic $ .14 $ .16 ======== ======== Diluted $ .14 $ .15 ======== ======== Weighted Average Shares (Note 4): Basic 181,628 156,018 ======== ======== Diluted 185,056 157,767 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. < 4 > THERMO ELECTRON CORPORATION Consolidated Statement of Operations (Unaudited) Six Months Ended ------------------------- June 30, July 1, (In thousands except per share amounts) 2001 2000 - -------------------------------------------------------------------------------------------------------- Revenues $1,115,561 $1,156,554 ---------- ---------- Costs and Operating Expenses: Cost of revenues 622,245 621,710 Selling, general, and administrative expenses 315,665 336,654 Research and development expenses 89,071 94,546 Restructuring and other unusual costs (income), net (Note 7) 34,575 (8,982) ---------- ---------- 1,061,556 1,043,928 ---------- ---------- Operating Income 54,005 112,626 Other Expense, Net (Note 3) (3,894) (32,303) ---------- ---------- Income from Continuing Operations Before Provision for Income Taxes, Minority Interest, Extraordinary Item, and Cumulative Effect of Change in Accounting Principle 50,111 80,323 Provision for Income Taxes (19,668) (33,925) Minority Interest (Expense) Income 799 (10,221) ---------- ---------- Income from Continuing Operations Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 31,242 36,177 Income from Discontinued Operations (net of income taxes and minority interest of $4,197; Note 8) - 4,018 Provision for Loss on Disposal of Discontinued Operations, Net (net of income tax benefit of $22,741; Note 8) (50,440) - ---------- ---------- Income (Loss) Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle (19,198) 40,195 Extraordinary Item (net of income taxes of $333) - 532 ---------- ---------- Income (Loss) Before Cumulative Effect of Change in Accounting Principle (19,198) 40,727 Cumulative Effect of Change in Accounting Principle (net of income tax benefit and minority interest of $663 and $8,986; Note 9) (994) (12,918) ---------- ---------- Net Income (Loss) $ (20,192) $ 27,809 ========== ========== Earnings per Share from Continuing Operations Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle (Note 4): Basic $ .17 $ .23 ========== ========== Diluted $ .17 $ .22 ========== ========== Earnings (Loss) per Share (Note 4): Basic $ (.11) $ .18 ========== ========== Diluted $ (.11) $ .17 ========== ========== Weighted Average Shares (Note 4): Basic 182,242 156,416 ========== ========== Diluted 186,117 157,616 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. < 5 > THERMO ELECTRON CORPORATION Consolidated Statement of Cash Flows (Unaudited) Six Months Ended ------------------------ June 30, July 1, (In thousands) 2001 2000 - -------------------------------------------------------------------------------------------------------- Operating Activities: Net income (loss) $ (20,192) $ 27,809 Income from discontinued operations (Note 8) - (4,018) Provision for loss on disposal of discontinued operations, net (Note 8) 50,440 - --------- --------- Income from continuing operations 30,248 23,791 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 48,536 47,955 Noncash restructuring and other unusual costs, net (Note 7) 15,106 1,242 Provision for losses on accounts receivable 1,591 2,510 Minority interest (income) expense (799) 10,221 Equity in (earnings) losses of unconsolidated subsidiaries (Note 7) (1,260) 15,062 Cumulative effect of change in accounting principle, net of income taxes and minority interest (Note 9) 994 12,918 Change in deferred income taxes (82) (3,897) (Gain) loss on sale of businesses 19 (12,480) (Gain) loss on investments, net 807 (6,372) Extraordinary item, net of income taxes - (532) Other noncash items, net 17,343 3,705 Changes in current accounts, excluding the effects of acquisitions and dispositions: Accounts receivable (1,869) 13,997 Inventories (25,986) (56,492) Other current assets (17,186) (2,546) Accounts payable (14,206) (967) Other current liabilities 9,532 (74,163) --------- --------- Net cash provided by (used in) continuing operations 62,788 (26,048) Net cash provided by discontinued operations 38,136 78,534 --------- --------- Net cash provided by operating activities 100,924 52,486 --------- --------- Investing Activities: Acquisitions, net of cash acquired (14,129) (10,117) Acquisition of minority interests of subsidiaries - (295,714) Proceeds from sale of businesses, net of cash divested 16,789 44,917 Purchases of available-for-sale investments (688,522) (171,035) Proceeds from sale of available-for-sale investments 270,152 95,892 Proceeds from maturities of available-for-sale investments 176,358 332,084 Purchases of property, plant, and equipment (46,657) (28,973) Proceeds from sale of property, plant, and equipment 10,284 6,959 Advance (to) from affiliates (32,266) 38,407 < 6 > THERMO ELECTRON CORPORATION Consolidated Statement of Cash Flows (continued) (Unaudited) Six Months Ended ------------------------ June 30, July 1, (In thousands) 2001 2000 - -------------------------------------------------------------------------------------------------------- Investing Activities (continued): Increase in other assets $ (2,668) $ (1,732) Other 1,804 9,141 --------- --------- Net cash provided by (used in) continuing operations (308,855) 19,829 Net cash provided by discontinued operations 379,528 81,283 --------- --------- Net cash provided by investing activities 70,673 101,112 --------- --------- Financing Activities: Repayment of long-term obligations (23,397) (139,675) Net proceeds from issuance of long-term obligations 153 6,975 Net proceeds from issuance of Company and subsidiary common stock 34,225 12,205 Purchases and redemption of Company and subsidiary common stock and subordinated convertible debentures (97,810) (43,787) Increase (decrease) in short-term notes payable (5,284) 7,733 Other 258 1,545 --------- --------- Net cash used in continuing operations (91,855) (155,004) Net cash provided by (used in) discontinued operations (39,297) 6,088 --------- --------- Net cash used in financing activities (131,152) (148,916) --------- --------- Exchange Rate Effect on Cash of Continuing Operations (4,067) (15,013) Exchange Rate Effect on Cash of Discontinued Operations (363) 2,009 --------- --------- Increase (Decrease) in Cash and Cash Equivalents 36,015 (8,322) Cash and Cash Equivalents at Beginning of Period 636,252 357,215 --------- --------- 672,267 348,893 Cash and Cash Equivalents of Discontinued Operations at End of period (165,916) (93,710) --------- --------- Cash and Cash Equivalents at End of Period $ 506,351 $ 255,183 ========= ========= Noncash Activities: Fair value of assets of acquired companies $ 18,161 $ 13,512 Cash paid for acquired companies (14,834) (10,381) --------- --------- Liabilities assumed of acquired companies $ 3,327 $ 3,131 ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
< 7 > THERMO ELECTRON CORPORATION Notes to Consolidated Financial Statements 1. General The interim consolidated financial statements presented have been prepared by Thermo Electron Corporation (the Company) without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the financial position at June 30, 2001, the results of operations for the three- and six-month periods ended June 30, 2001, and July 1, 2000, and the cash flows for the six-month periods ended June 30, 2001, and July 1, 2000. Certain prior-period amounts have been reclassified to conform to the presentation in the current financial statements. Interim results are not necessarily indicative of results for a full year. Historical financial results have been restated to reflect the Company's power generation business as discontinued operations (Note 8). Historical results have also been restated to reflect the Company's adoption of Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The consolidated balance sheet presented as of December 30, 2000, has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual financial statements and notes of the Company. The consolidated financial statements and notes included herein should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000, filed with the SEC. 2. Comprehensive Income Comprehensive income combines net income and "other comprehensive items" that represents certain amounts that are reported as components of shareholders' investment in the accompanying balance sheet, including foreign currency translation adjustments, unrealized net of tax gains and losses on available-for-sale investments, and, in 2001, unrealized net of tax gains and losses on derivative instruments (Note 9). During the second quarter of 2001 and 2000, the Company had comprehensive income of $14.6 million and $6.5 million, respectively. During the first six months of 2001 and 2000, the Company had a comprehensive loss of $50.3 million and comprehensive income of $8.2 million, respectively. 3. Other Expense, Net The components of other expense, net, in the accompanying statement of operations are as follows:
Three Months Ended Six Months Ended ----------------------- ----------------------- June 30, July 1, June 30, July 1, (In thousands) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------- Interest Income $ 16,397 $ 7,926 $ 34,858 $ 17,604 Interest Expense (19,154) (21,728) (39,384) (44,652) Equity in Earnings (Losses) of Unconsolidated Subsidiaries 1,051 (1,726) 1,260 (15,062) Gain (Loss) on Investments, Net (Note 7) 1,345 2,907 (807) 6,372 Other Items, Net 213 1,871 179 3,435 -------- -------- -------- -------- $ (148) $(10,750) $ (3,894) $(32,303) ======== ======== ======== ======== < 8 > THERMO ELECTRON CORPORATION 4. Earnings (Loss) per Share Basic and diluted earnings (loss) per share were calculated as follows: Three Months Ended Six Months Ended ------------------------ ---------------------- June 30, July 1, June 30, July 1, (In thousands except per share amounts) 2001 2000 2001 2000 - ---------------------------------------------- -------------- -------------- -------------- ------------- Basic Income from Continuing Operations Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle $ 9,423 $ 21,698 $ 31,242 $ 36,177 Income from Discontinued Operations - 2,557 - 4,018 Gain (Loss) on Disposal of Discontinued Operations, Net 15,560 - (50,440) - Extraordinary Item - - - 532 Cumulative Effect of Change in Accounting Principle - - (994) (12,918) -------- -------- -------- -------- Net Income (Loss) $ 24,983 $ 24,255 $(20,192) $ 27,809 -------- -------- -------- -------- Weighted Average Shares 181,628 156,018 182,242 156,416 -------- -------- -------- -------- Basic Earnings (Loss) per Share: Continuing operations before extraordinary item and cumulative effect of change in accounting principle $ .05 $ .14 $ .17 $ .23 Discontinued operations .09 .02 (.28) .03 Extraordinary item - - - - Cumulative effect of change in accounting principle - - (.01) (.08) -------- -------- -------- -------- $ .14 $ .16 $ (.11) $ .18 ======== ======== ======== ======== < 9 > THERMO ELECTRON CORPORATION 4. Earnings (Loss) per Share (continued) Three Months Ended Six Months Ended ----------------------- ----------------------- June 30, July 1, June 30, July 1, (In thousands except per share amounts) 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------- Diluted Income from Continuing Operations Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle $ 9,423 $ 21,698 $ 31,242 $ 36,177 Income from Discontinued Operations - 2,557 - 4,018 Gain (Loss) on Disposal of Discontinued Operations, Net 15,560 - (50,440) - Extraordinary Item - - - 532 Cumulative Effect of Change in Accounting Principle - - (994) (12,918) -------- -------- -------- -------- Net Income (Loss) 24,983 24,255 (20,192) 27,809 Effect of: Majority-owned subsidiaries' dilutive securities - continuing operations - (460) - (1,331) Majority-owned subsidiaries' dilutive securities - discontinued operations - (20) - (27) -------- -------- -------- -------- Income (Loss) Available to Common Shareholders, as Adjusted $ 24,983 $ 23,775 $(20,192) $ 26,451 -------- -------- -------- -------- Weighted Average Shares 181,628 156,018 182,242 156,416 Effect of: Stock options 2,996 1,749 3,415 1,200 Convertible debentures 432 - 460 - -------- -------- -------- -------- Weighted Average Shares, as Adjusted 185,056 157,767 186,117 157,616 -------- -------- -------- -------- Diluted Earnings (Loss) per Share: Continuing operations before extraordinary item and cumulative effect of change in accounting principle $ .05 $ .13 $ .17 $ .22 Discontinued operations .08 .02 (.27) .03 Extraordinary item - - - - Cumulative effect of change in accounting principle - - (.01) (.08) -------- -------- -------- -------- $ .14 $ .15 $ (.11) $ .17 ======== ======== ======== ======== Options to purchase 4,890,000 and 5,642,000 shares of common stock for the second quarter of 2001 and 2000, respectively, and 3,855,000 and 6,024,000 shares of common stock for the first six months of 2001 and 2000, respectively, were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price for the common stock and their effect would have been antidilutive.
< 10 > THERMO ELECTRON CORPORATION 4. Earnings (Loss) per Share (continued) The computation of diluted earnings per share for the 2000 periods excludes the effect of assuming the conversion of the Company's 4 1/4% subordinated convertible debentures, convertible at $37.80 per share, because the effect would be antidilutive. During 2000, convertible obligations of certain of the Company's formerly public subsidiaries became convertible into Company common stock. The computation of diluted earnings per share for the 2001 periods excludes the effect of assuming the conversion of the following of the Company's subordinated convertible debentures because the effect would be antidilutive:
Conversion Price per Share at Principal Interest June 30, Amount Rate 2001 ----------------------------------------- (In thousands) $560,063 4 1/4% $ 37.80 247,000 4% 41.94 171,021 4 1/2% 40.54 100,715 4 5/8% 40.30 93,945 4 3/8% 131.71 78,048 3 1/4% 49.06 35,029 4 7/8% 38.28 15,778 2 7/8% 33.17
As a result of the spinoff to shareholders discussed in Note 11, in July 2001 the conversion price of each of the Company's convertible debentures was reduced to 95.3% of the conversion price at June 30, 2001. 5. Business Segment Information
Three Months Ended Six Months Ended ------------------------- ------------------------- June 30, July 1, June 30, July 1, (In thousands) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------- Revenues: Life Sciences $ 202,583 $ 190,490 $ 411,730 $ 381,329 Optical Technologies 129,133 108,696 269,097 214,874 Measurement and Control 215,293 285,091 443,553 569,266 Intersegment (a) (4,537) (4,327) (8,819) (8,915) ---------- ---------- ---------- ---------- $ 542,472 $ 579,950 $1,115,561 $1,156,554 ========== ========== ========== ========== Income from Continuing Operations Before Provision for Income Taxes, Minority Interest, Extraordinary Item, and Cumulative Effect of Change in Accounting Principle: Life Sciences (b) $ 17,176 $ 24,292 $ 41,883 $ 52,498 Optical Technologies (c) (153) 7,534 11,174 16,127 Measurement and Control (d) 9,911 29,549 25,976 63,926 ---------- ---------- ---------- ---------- Total segment income (e) 26,934 61,375 79,033 132,551 Corporate and Other (f) (12,917) (17,355) (28,922) (52,228) ---------- ---------- ---------- ---------- $ 14,017 $ 44,020 $ 50,111 $ 80,323 ========== ========== ========== ========== < 11 > THERMO ELECTRON CORPORATION 5. Business Segment Information (continued) Three Months Ended Six Months Ended ------------------------- ------------------------- June 30, July 1, June 30, July 1, (In thousands) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------- Depreciation: Life Sciences $ 4,110 $ 3,945 $ 8,116 $ 7,889 Optical Technologies 4,535 3,528 8,854 7,089 Measurement and Control 3,522 6,264 7,048 11,492 Corporate 551 307 895 623 ---------- ---------- ---------- ---------- $ 12,718 $ 14,044 $ 24,913 $ 27,093 ========== ========== ========== ========== Amortization: Life Sciences $ 5,764 $ 4,332 $ 11,460 $ 8,445 Optical Technologies 1,902 1,345 3,801 2,665 Measurement and Control 4,210 4,723 8,362 9,251 Corporate - 251 - 501 ---------- ---------- ---------- ---------- $ 11,876 $ 10,651 $ 23,623 $ 20,862 ========== ========== ========== ========== (a) Intersegment sales are accounted for at prices that are representative of transactions with unaffiliated parties. (b) Includes restructuring and other unusual costs of $7.8 million and $11.1 million in the second quarter and first six months of 2001, respectively. (c) Includes restructuring and other unusual costs, net, of $10.9 million, $0.1 million, $11.4 million, and $0.1 million in the second quarter of 2001 and 2000 and first six months of 2001 and 2000, respectively. (d) Includes restructuring and other unusual costs of $14.9 million and $20.5 million in the second quarter and first six months of 2001, respectively, and restructuring and other unusual income, net, of $0.6 million and $12.8 million in the second quarter and first six months of 2000, respectively. (e) Segment income is income before corporate general and administrative expenses, other income and expense, minority interest expense, income taxes, and extraordinary item. (f) Includes corporate, general, and administrative expenses and other income and expense. Includes corporate restructuring and other unusual costs, net, of $3.3 million, $4.9 million, and $3.8 million in the second quarter of 2001 and the first six months of 2001 and 2000, respectively, and restructuring and other unusual income, net, of $1.1 million in the second quarter of 2000. Other expense, net, in the first six months of 2001 includes a charge of $2.0 million for impairment of an available-for-sale investment. Other expense, net, in the second quarter and first six months of 2000 includes a charge of $1.8 million and $15.2 million, respectively, related to the Company's investment in FLIR Systems, Inc., which is accounted for under the equity method, and other unusual income of $1.8 million and $3.5 million, respectively, related to a subsidiary's early adoption of SFAS No. 133.
6. Accrued Acquisition Expenses The Company has undertaken restructuring activities at certain acquired businesses. The Company's restructuring activities, which were accounted for in accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing levels and the abandonment of excess facilities. In connection with these restructuring activities, as part of the cost of acquisitions, the Company established reserves, primarily for severance and excess facilities. In accordance with EITF 95-3, the Company finalizes its restructuring plans no later than one year from the respective dates of the acquisitions. Accrued acquisition expenses are included in other accrued expenses in the accompanying balance sheet. < 12 > THERMO ELECTRON CORPORATION 6. Accrued Acquisition Expenses (continued) A summary of the changes in accrued acquisition expenses for acquisitions completed before and during 1999 is as follows:
1999 Acquisitions --------------------------------------- Abandonment of Excess Pre-1999 (In thousands) Severance Facilities Other Acquisitions Total - ---------------------------------------------------------------------------------------------------------- Balance at December 30, 2000 $ 1,846 $ 510 $ 513 $ 7,167 $10,036 Payments (227) (136) (108) (530) (1,001) Currency translation (44) (19) (33) (362) (458) ------- ------- ------- ------- ------- Balance at June 30, 2001 $ 1,575 $ 355 $ 372 $ 6,275 $ 8,577 ======= ======= ======= ======= ======= The remaining accrued acquisition expenses for pre-1999 acquisitions primarily represent lease obligations for four operating facilities in England with leases expiring through 2014. The principal accrued acquisition expenses for 1999 acquisitions were for severance for approximately 175 employees across all functions and for abandoned facilities, primarily at Spectra-Physics AB. The abandoned facilities at Spectra-Physics include operating facilities in Sweden, Germany, and France with obligations primarily through 2001. The amounts captioned as "other" primarily represent relocation, contract termination, and other exit costs. The Company expects to pay amounts accrued for acquisition expenses primarily through 2001. The Company finalized its restructuring plans for Spectra-Physics and other 1999 acquisitions in 1999 and 2000. The Company has not established material reserves for restructuring businesses acquired in 2000 or the first six months of 2001. 7. Restructuring and Other Unusual Costs (Income), Net In response to a downturn in telecommunications, semiconductor, and other markets served by the Company's businesses, the Company initiated restructuring actions in the second quarter of 2001 in a number of business units to reduce costs and shed unproductive assets. The restructuring and related actions primarily consist of headcount reductions, discontinuing certain mature or unprofitable product lines, providing a reserve for excess telecommunication inventories at Spectra-Physics, Inc. (formerly Spectra-Physics Lasers, Inc.), and consolidation of facilities to streamline operations and reduce costs. The Company expects to incur an additional $3.4 million of restructuring costs in the remainder of 2001 for charges that can not be recorded until incurred. The Company expects that the restructuring actions undertaken in 2001 will be substantially completed by the end of 2001. The Company recorded restructuring and other unusual charges, net, of $37.0 million during the second quarter of 2001, as detailed by segment below: Measurement Optical and (In thousands) Life Sciences Technologies Control Corporate Total - ---------------------------------------------------------------------------------------------------------- Cost of Revenues $ 1,838 $ 6,963 $ 4,476 $ - $13,277 Restructuring and Other Unusual Costs, Net 5,992 3,948 10,405 3,348 23,693 ------- ------- ------- ------- ------- $ 7,830 $10,911 $14,881 $ 3,348 $36,970 ======= ======= ======= ======= ======= < 13 > THERMO ELECTRON CORPORATION 7. Restructuring and Other Unusual Costs (Income), Net (continued) The Company recorded restructuring and other unusual charges, net, of $49.8 million during the first six months of 2001, as detailed by segment below: Measurement Optical and (In thousands) Life Sciences Technologies Control Corporate Total - ---------------------------------------------------------------------------------------------------------- Cost of Revenues $ 1,838 $ 6,963 $ 4,476 $ - $13,277 Restructuring and Other Unusual Costs, Net 9,301 4,399 16,000 4,875 34,575 Loss on Investments - - 1,983 - 1,983 ------- ------- ------- ------- ------- $11,139 $11,362 $22,459 $ 4,875 $49,835 ======= ======= ======= ======= =======
The components of restructuring and unusual costs by segment are as follows: Life Sciences The Life Sciences segment recorded $7.8 million of restructuring and other unusual costs in the second quarter of 2001. The segment recorded $1.8 million of charges to cost of revenues, primarily for discontinued product lines, and $6.0 million of other costs. The other restructuring and unusual costs include $3.8 million of cash costs including $3.1 million for severance for 90 employees across all functions, $0.6 million of ongoing lease costs through 2007 for facilities described below, and $0.1 million of other costs. The charge also includes $2.2 million of asset writedowns. The asset writedowns principally include $1.8 million of goodwill and other intangibles for a small business unit that was closed and $0.4 million of assets at facilities being closed. The facility consolidations include closure of sales and service offices in Florida and the United Kingdom and the transfer of their activities to other offices, consolidation of two German factories into one facility, and relocation of a factory to other facilities within Finland. Of the employees to be terminated, 66 had been severed as of June 30, 2001. In the first quarter of 2001, this segment recorded $3.3 million of restructuring and other unusual costs, net. The restructuring and unusual costs consisted of a charge of $3.4 million to write off in-process research and development costs at an acquired business. This amount was determined through established valuation techniques and was charged to expense upon acquisition because technological feasibility had not been established and no future alternative uses existed. This segment also recorded the reversal of $0.1 million of previously established reserves due to the settlement of certain severance matters for less than had been accrued. Optical Technologies The Optical Technologies segment recorded $10.9 million of restructuring and other unusual costs, net, in the second quarter of 2001. The segment recorded $7.0 million of charges to cost of revenues, primarily for excess telecommunication inventories at Spectra-Physics and discontinued product lines, and $3.9 million of other costs, net. The excess telecommunication inventories resulted from a severe slowdown in this market and the writedown reduced the carrying value of the inventories to net realizable value. The other restructuring and unusual costs include $3.6 million of cash costs, including $1.5 million for severance for 311 employees, primarily in manufacturing positions; $0.3 million of ongoing lease costs through 2004 for facilities described below; and $1.8 million of other exit costs. The other exit costs primarily represent cancellation fees for fixed asset purchases and termination of distributor agreements. The segment also recorded $0.6 million of asset writedowns, principally at facilities being closed, and a gain on the sale of a facility of $0.3 million. The facility consolidations include closure of sales offices in New Jersey, France, and Germany and the transfer of their activities to other offices, and the consolidation of distribution facilities within Europe. Of the employees to be terminated, 167 had been severed as of June 30, 2001. In the first quarter of 2001, this segment recorded $0.5 million of restructuring and unusual costs. The costs are primarily associated with a postponed financing at Spectra-Physics. < 14 > THERMO ELECTRON CORPORATION 7. Restructuring and Other Unusual Costs (Income), Net (continued) Measurement and Control The Measurement and Control segment recorded $14.9 million of restructuring and other unusual costs in the second quarter of 2001. The segment recorded $4.5 million of charges to cost of revenues, primarily for discontinued product lines, and $10.4 million of other costs. The other restructuring and unusual costs include $7.4 million of cash costs, including $5.3 million for severance for 166 employees across all functions; $1.7 million of ongoing lease costs through 2004 for facilities described below; and $0.4 million of other costs. The charge also includes $2.5 million of asset writedowns and $0.5 million related to a post-closing adjustment on two businesses sold in 2000. The asset writedowns principally include $1.6 million of goodwill for an adjustment to a writedown recorded in the first quarter of 2001 for the planned disposal of ThermoMicroscopes and $0.9 million of assets at facilities being closed. ThermoMicroscopes manufactures scanning probe microscopes and is a noncore business that was sold in July 2001. The facility consolidations include closure of a sales office in Sweden and the transfer of its activities to another office, consolidation of two sales offices in the United Kingdom into one office, and consolidation of manufacturing facilities within the United States and the United Kingdom. Of the employees to be terminated, 39 had been severed as of June 30, 2001. In the first quarter of 2001, the Measurement and Control segment recorded $5.6 million of restructuring and unusual costs, net. The segment recorded charges of $4.8 million for a writedown of goodwill to reduce the carrying value of ThermoMicroscopes to estimated disposal value; $1.0 million for impairment of a note receivable that was a pre-acquisition asset of a business acquired in 1999; and $0.3 million of cash costs, primarily representing severance for 16 employees terminated in the first quarter of 2001 across all functions at the segment's business that manufactures and sells quality control systems. The segment also recorded a gain of $0.5 million on the sale of a product line. This segment also recorded $2.0 million of other nonoperating charges in the first quarter of 2001 to write down an available-for-sale investment that was a pre-acquisition asset of a business acquired in 1999, due to an impairment that the Company deemed other than temporary based upon recent market prices. Corporate The Company recorded $3.3 million of restructuring and unusual costs at its corporate office in the second quarter of 2001. This amount includes $3.1 million of cash costs, including $1.4 million for severance for 5 employees, all of whom were terminated as of June 30, 2001; $0.9 million of investment banking, consulting, and legal fees associated with the Company's reorganization plan; and $0.8 million of employee retention costs that are being accrued ratably over the period through which the employees must work to qualify for a payment. The charge also includes $0.2 million of noncash severance costs. In the first quarter of 2001, the Company recorded $1.5 million of restructuring and unusual costs at its corporate office. This amount included $0.7 million of investment banking, consulting, and legal fees associated with the Company's reorganization plan and $0.8 million of employee retention costs. < 15 > THERMO ELECTRON CORPORATION 7. Restructuring and Other Unusual Costs (Income), Net (continued) General The following table summarizes the severance actions of the Company in 2000 and 2001.
Number of 2000 Restructuring Plans Employees - --------------------------------------------------------------------------------------------------------- Terminations Announced in 2000 249 Terminations Occurring in 2000 (168) Adjustment to Plan (1) ---- Remaining Terminations at December 30, 2000 80 Additional Terminations Announced in 2001 16 Terminations Occurring in 2001 (63) Adjustment to Plan (1) ---- Remaining Terminations at June 30, 2001 32 ==== 2001 Restructuring Plans - --------------------------------------------------------------------------------------------------------- Terminations Announced in 2001 572 Terminations Occurring in 2001 (277) ---- Remaining Terminations at June 30, 2001 295 ====
The following tables summarize the cash components of the Company's restructuring plans. The noncash components and other amounts reported as restructuring and other unusual costs (income), net, in the accompanying 2001 statement of operations have been summarized in the notes to the tables. Accrued restructuring costs are included in other accrued expenses in the accompanying balance sheet.
Abandonment Employee of Excess (In thousands) Severance Retention (a) Facilities Other Total - --------------------------------------------------------------------------------------------------------- 1998 Restructuring Plans Balance at December 30, 2000 $ 97 $ - $ - $ 520 $ 617 Payments (90) - - - (90) Currency translation (7) - - (26) (33) -------- -------- -------- -------- -------- Balance at June 30, 2001 $ - $ - $ - $ 494 $ 494 ======== ======== ======== ======== ======== 1999 Restructuring Plans Balance at December 30, 2000 $ 886 $ - $ - $ - $ 886 Payments (168) - - - (168) -------- -------- -------- -------- -------- Balance at June 30, 2001 $ 718 $ - $ - $ - $ 718 ======== ======== ======== ======== ======== < 16 > THERMO ELECTRON CORPORATION 7. Restructuring and Other Unusual Costs (Income), Net (continued) Abandonment Employee of Excess (In thousands) Severance Retention (a) Facilities Other Total - --------------------------------------------------------------------------------------------------------- 2000 Restructuring Plans Balance at December 30, 2000 $ 3,824 $ 3,283 $ 2,820 $ 9,594 $ 19,521 Costs incurred in 2001 (b) 241 1,576 21 1,689 3,527 Reserves reversed (105) - (21) - (126) Payments (1,152) (104) (453) (8,637) (10,346) Currency translation (77) - (70) (81) (228) -------- -------- -------- -------- -------- Balance at June 30, 2001 $ 2,731 $ 4,755 $ 2,297 $ 2,565 $ 12,348 ======== ======== ======== ======== ======== 2001 Restructuring Plans Costs incurred in 2001 (c) $ 11,301 $ 144 $ 2,633 $ 2,124 $ 16,202 Payments (2,075) - (53) (163) (2,291) Currency translation 26 - 4 6 36 -------- -------- -------- -------- -------- Balance at June 30, 2001 $ 9,252 $ 144 $ 2,584 $ 1,967 $ 13,947 ======== ======== ======== ======== ======== (a) Employee retention costs are accrued ratably over the period through which employees must work to qualify for a payment. The awards were based on specified percentages of employees' salaries and were generally awarded to help ensure continued employment at least through completion of the Company's reorganization plan. (b) Excludes noncash charges, net, of $3.4 million, $0.5 million, and $5.3 million in the Life Sciences, Optical Technologies, and Measurement and Control segments, respectively. (c) Excludes noncash charges, net, of $2.2 million, $0.3 million, $3.1 million, and $0.2 million in the Life Sciences, Optical Technologies, and Measurement and Control segments, and at the corporate office, respectively.
The Company expects to pay accrued restructuring costs as follows: severance, primarily in 2001; employee retention obligations, primarily in 2001 and January 2002; abandoned-facility payments, over lease terms expiring through 2007; and other costs in 2001. 8. Discontinued Operations In February 2001, the Company entered into a definitive agreement to sell its power generation business. In June 2001, the Company sold a substantial portion of this business for $238 million in cash. The Company realized a gain on disposition of $15.6 million, net of tax. In accordance with the provisions of Accounting Principles Board (APB) Opinion No. 30 concerning reporting the effects of disposal of a segment of a business, the Company has classified the results of this business as discontinued in the accompanying 2000 statement of operations. In addition, the net assets of this business together with businesses previously announced as discontinued in early 2000 were classified as net assets of discontinued operations in the accompanying balance sheet. Current net assets of discontinued operations primarily consist of cash, inventories, and accounts receivable, net of certain liabilities, primarily accrued expenses and accounts payable. Long-term net assets of discontinued operations primarily consist of shares of common stock of Thoratec Corporation (see below), machinery and equipment, and goodwill. In addition, long-term net assets of discontinued operations reflect subordinated convertible debentures of Kadant Inc. (formerly Thermo Fibertek Inc.; Note 11). < 17 > THERMO ELECTRON CORPORATION 8. Discontinued Operations (continued) Summary operating results of the power generation business were as follows:
Three Six Months Months Ended Ended July 1, July 1, (In thousands) 2000 2000 - -------------------------------------------------------------------------------------------------------- Revenues $26,366 $52,316 Costs and Expenses 21,058 44,101 ------- ------- Income from Discontinued Operations Before Provision for Income Taxes and Minority Interest 5,308 8,215 Provision for Income Taxes 2,128 3,186 Minority Interest 623 1,011 ------- ------- Income from Discontinued Operations $ 2,557 $ 4,018 ======= =======
During the second quarter and first six months of 2001, the Company's discontinued operations had revenues of $216.3 million and $438.1 million, respectively, and operating income of $24.6 million and $34.8 million, respectively. During the second quarter and first six months of 2000, the Company's discontinued operations other than the power generation business, detailed above, had revenues of $403.9 million and $801.7 million, respectively, and operating income of $21.2 million and $37.0 million, respectively. In February 2001, the Company sold Thermo Cardiosystems Inc. to Thoratec in exchange for 19.3 million shares of Thoratec common stock. Certain restrictions limit the Company's ability to sell these shares, although the restrictions fully lapse in August 2002. Subsequent to receipt of the Thoratec common stock, the market value of the shares declined significantly at the same time as a downturn in major equity markets. The Company recorded an after-tax charge of $66.0 million in the first quarter of 2001 for the decline in market value of Thoratec common stock as a loss on disposal of discontinued operations. Further changes in the market value of Thoratec common stock may materially affect the ultimate proceeds from the disposal of discontinued operations. Excluding potential changes in the market value of Thoratec common stock, the Company is not currently aware of any known trends, events, or other uncertainties involving discontinued operations that it expects will cause the ultimate loss on disposal of discontinued operations to differ materially from the amounts recorded to date. Any difference from the amounts recorded would be reported as an adjustment to the ultimate loss on disposal of discontinued operations. In July 2001, the Company completed the sale of 3.4 million shares of Thoratec for proceeds of $50.5 million. A substantial majority of the businesses announced for sale have been sold as of June 30, 2001. Three small operating units remained for sale at June 30, 2001, in addition to a component of the power generation business that was sold in July 2001. The Company completed the spinoff of Kadant on August 8, 2001 (Note 11) and expects to complete the previously announced spinoff of Viasys Healthcare Inc., the medical products business, during the fourth quarter of 2001. 9. Derivative Instruments and Hedging Effective in the first quarter of 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, requires that all derivatives, including forward currency exchange contracts, be recognized on the balance sheet at fair value. Derivatives that are not hedges must be recorded at fair value through earnings. If a derivative is a hedge, < 18 > THERMO ELECTRON CORPORATION 9. Derivative Instruments and Hedging (continued) depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged item through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company immediately records in earnings the extent to which a hedge is not effective in achieving offsetting changes in fair value. Adoption of SFAS No. 133 in the first quarter of 2001 resulted in a charge representing the cumulative effect of the change in accounting principle on periods prior to 2001 that increased net loss by $1.0 million. Forward currency exchange contracts are used by the Company primarily to hedge certain operational (cash-flow hedges) and balance sheet (fair value hedges) exposures resulting from changes in currency exchange rates. Such exposures result from sales that are denominated in currencies other than the functional currencies of the respective operations. The Company enters into these currency exchange contracts to hedge anticipated product sales and recorded accounts receivable made in the normal course of business, and accordingly, the hedges are not speculative in nature. As part of the Company's overall strategy to manage the level of exposure to the risk of currency exchange fluctuations, certain operating units hedge a portion of their currency exposures anticipated over the ensuing twelve month period, using exchange contracts that have maturities of twelve months or less. The Company does not hold or engage in transactions involving derivative instruments for purposes other than risk management. The Company records its forward currency exchange contracts at fair value in its consolidated balance sheet as other current assets or other accrued expenses and, for cash flow hedges, the related gains or losses on these contracts are deferred as a component of other comprehensive items in the accompanying balance sheet. These deferred gains and losses are recognized in income in the period in which the underlying anticipated transaction occurs. At June 30, 2001, the Company had deferred gains relating to foreign currency contracts of approximately $2.2 million (net of income taxes), substantially all of which is expected to be recognized as income over the next twelve months. Unrealized gains and losses resulting from the impact of currency exchange rate movements on fair value hedges are recognized in earnings in the period in which the exchange rates change and offset the currency gains and losses on the underlying exposure being hedged. 10. Recent Accounting Pronouncement In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, "Goodwill and Other Intangible Assets." The Company will adopt the requirements of SFAS No. 142 effective December 30, 2001, unless earlier required. SFAS No. 142 requires companies to test all goodwill for impairment and to cease amortization of this asset. The provisions of SFAS No. 142 apply to all goodwill regardless of when it was acquired. The Company is evaluating the impact of adoption of this standard and has not yet determined the effect of adoption on its financial statements. Amortization of goodwill for the three- and six-month periods ended June 30, 2001, was $10.1 million and $20.1 million, respectively. 11. Subsequent Event On July 9, 2001, the Company's Board of Directors approved the spinoff of the Company's 91%-owned Kadant subsidiary as a dividend to the Company's shareholders. On August 8, 2001, the Company distributed all of its shares of Kadant to the Company's shareholders of record as of July 30, 2001. Immediately after the distribution, the Company no longer owned shares of Kadant. The Company had received a ruling from the Internal Revenue Service that the dividend of Kadant shares qualifies in large part as a tax-free distribution for U.S. federal income tax purposes, subject to limited exceptions. Approximately 8% of the shares distributed to each shareholder are taxable because the Company purchased them during the past five years. Cash distributed in lieu of fractional shares is also taxable. The stock dividend will result in a reduction of net assets of discontinued operations and retained earnings of approximately $200 million. The intrinsic value of the options issued under the Company's employee stock plans was maintained in accordance with the methodology set forth in FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation." < 19 > THERMO ELECTRON CORPORATION 11. Subsequent Event (continued) In connection with the spinoff, the Company and Kadant entered into a plan and agreement of distribution. The agreement provides for, among other things, the Company to continue to guarantee Kadant's subordinated convertible debentures due 2004 and Thermo Fibergen's obligations to redeem its outstanding shares that are not held by Kadant. These obligations totaled $170 million at June 30, 2001. The agreement also provides for restrictions relating to Kadant's ability to use cash or incur debt during the time that the Company guarantees these obligations. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Forward-looking Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000, filed with the Securities and Exchange Commission (SEC). Results of Operations Second Quarter 2001 Compared With Second Quarter 2000 Continuing Operations Sales in the second quarter of 2001 were $542.5 million, a decrease of $37.5 million from the second quarter of 2000. Excluding the effect of acquisitions, divestitures, and foreign currency translation, revenues increased $48.3 million, or 10%. Foreign currency translation had an unfavorable effect on revenues as discussed below by segment, due to the strengthening of the U.S. dollar relative to other currencies of countries in which the Company operates. Operating income was $14.2 million in 2001, compared with $54.8 million in 2000. Segment income decreased to $26.9 million in 2001 from $61.3 million in 2000. (Segment income is operating income excluding corporate general and administrative expenses and corporate restructuring and other unusual items, net.) Operating and segment income in the second quarter of 2001 were affected by charges associated with a restructuring plan initiated during the quarter and certain other unusual charges (Note 7). Operating and segment income in the second quarter of 2000 were affected by a gain from termination of a lease, offset in part by restructuring and other unusual costs. Excluding these unusual items, which totaled $33.6 million of expense in 2001 and $0.5 million of income in 2000, segment income was $60.6 million in 2001 and $60.8 million in 2000. Segment income excluding unusual items was flat due to revenue and profitability growth at certain businesses discussed below, offset in part by a reduction in segment income of $12.1 million from businesses divested. The Company also recorded $1.2 million of incremental amortization expense in the second quarter of 2001, which resulted primarily from the purchase of the minority interests of formerly public subsidiaries, offset in part by lower amortization expense following certain divestitures. The Company undertook restructuring actions in the second quarter of 2001 to reduce costs in businesses affected by a severe slowdown in the telecommunications and semiconductor industries as well as other market sectors hurt by a slowing economy, including the U.S. steel industry. In addition to the actions to reduce costs, the Company recorded a provision for inventories to discontinue certain mature or unprofitable product lines and inventories made redundant by combining businesses and for excess telecommunication inventories at Spectra-Physics, Inc. The unusual items in both periods are discussed below and in more detail in Note 7. The Company expects that the restructuring actions will result in annual cost reductions of $25 million generally beginning in the fourth quarter of 2001 and in 2002, including $4 million in the Life Sciences segment, $12 million in the Optical Technologies segment, $7 million in the Measurement and Control segment, and $2 million at the Company's corporate office. < 20 > THERMO ELECTRON CORPORATION Second Quarter 2001 Compared With Second Quarter 2000 (continued) - ----------------------------------------------------- Life Sciences Sales in the Life Sciences segment increased $12.1 million to $202.6 million in the second quarter of 2001. Sales increased $4.0 million due to acquisitions. The unfavorable effects of currency translation resulted in a decrease in revenues of $7.9 million in 2001. Excluding the effect of acquisitions and currency translation, revenues increased $16.0 million, or 8%. Approximately half of the increase in revenues was due to higher sales of mass spectrometers, primarily due to strong sales of ion trap instruments used in proteomics and drug discovery research. Sales of sample-preparation equipment and microplate and liquid handling products increased $5.6 million due to strong demand from pharmaceutical customers and, to a lesser extent, sales initiatives in China. In addition, revenues increased due to higher demand for clinical diagnostic products. Segment income margin decreased to 8.5% in the second quarter of 2001 from 12.8% in the second quarter of 2000. The segment's margin decreased primarily due to restructuring and unusual charges recorded in 2001, discussed below. Excluding restructuring and unusual costs of $7.8 million in 2001, segment income margin was 12.3% in 2001 and 12.8% in 2000. The decrease in segment income margin was primarily due to an increase in goodwill amortization as a result of the purchase in 2000 of the minority interests of formerly public subsidiaries. Excluding the additional amortization expense and the restructuring and unusual charges, segment income margin was 13.1% in 2001. Higher profitability from an increase in revenues was offset in part by research and development expenditures on proteomics initiatives. In the second quarter of 2001, the segment recorded charges of $7.8 million, including cash costs of $3.8 million for severance and abandoned facilities, $2.2 million of asset writedowns, and $1.8 million of provisions for inventories (Note 7). Optical Technologies Sales in the Optical Technologies segment increased $20.4 million to $129.1 million in the second quarter of 2001. Sales increased $1.2 million due to acquisitions. The unfavorable effects of currency translation resulted in a decrease in revenues of $2.6 million in 2001. Excluding the effect of acquisitions and currency translation, revenues increased $21.9 million, or 20%. The increase in revenues was due in part to $11.6 million of increased demand for semiconductor-based lasers used in industrial, research and development, and life sciences applications. The balance of the increase in revenues resulted primarily from higher shipments of molecular beam epitaxy systems and components to the semiconductor industry. The growth and profitability of this segment is, in part, dependent on the semiconductor and telecommunication industries, which tend to be cyclical. These industries were in a period of strong growth in 2000 but have experienced severe slowdowns in 2001. These slowdowns will unfavorably affect the segment's comparative results in the third quarter of 2001 when the Company expects the segment's internal revenue growth will be nominal. Since year-end 2000, the segment's backlog has decreased 12% to $223.0 million. Segment income margin was approximately breakeven in the second quarter of 2001, compared with 6.9% in the second quarter of 2000. Excluding restructuring and unusual costs, net, of $10.9 million in 2001 and $0.1 million in 2000, segment income margin was 8.3% in 2001 and 7.0% in 2000. The increase in segment income margin was primarily due to increased sales, offset by the unfavorable effect of growth in revenues at Spectra-Physics, which had breakeven operating margins excluding restructuring and unusual charges. In addition, the segment recorded $0.6 million of higher goodwill amortization following the purchase of the minority interests of formerly public subsidiaries. In the second quarter of 2001, the segment recorded charges of $10.9 million, including $7.0 million of provisions for inventories; cash costs of $3.6 million for severance, abandoned facilities, and other exit costs; $0.6 million of asset writedowns; and income of $0.3 million from the sale of a facility (Note 7). Restructuring costs in 2000 represent abandoned-facility costs. < 21 > THERMO ELECTRON CORPORATION Second Quarter 2001 Compared With Second Quarter 2000 (continued) - ----------------------------------------------------- Measurement and Control Sales in the Measurement and Control segment decreased $69.8 million to $215.3 million in the second quarter of 2001. Sales decreased $73.4 million due to divestitures, net of an acquisition. The segment's divestitures that affected the comparison primarily included the Spectra Precision businesses in July 2000, and the CAC and the Mid South businesses in April 2001. The unfavorable effects of currency translation resulted in a decrease in revenues of $7.1 million in 2001. Excluding the effect of divestitures, an acquisition, and currency translation, revenues increased $10.7 million, or 5%. Revenues from the sale of spectroscopy instruments increased $5.2 million due to higher shipments following the release of new products. Revenues from the sale of environmental-monitoring equipment increased $3.0 million due in part to demand from the construction industry and upgrades of power plants in response to regional energy shortages. Sales of process optimization equipment increased $1.8 million due to sales growth in Europe and Australia, offset in part by lower demand from U.S. steel manufacturers due to slowdowns in that market. A downturn in certain markets served by the segment will unfavorably affect the segment's comparative results in the third quarter of 2001 when the Company expects the segment's internal revenue growth will be nominal. Excluding divestitures, the segment's backlog has decreased 17% since year-end 2000 to $146.8 million. In July 2001, the segment sold its ThermoMicroscopes unit, a manufacturer of scanning probe microscopes. In April 2001, the segment sold its CAC and the Mid South businesses, which provide the oil and gas industry with wellhead safety and control products. The businesses were sold for net proceeds of $38 million and were cyclical and/or noncore units. The businesses had aggregate revenues and segment income before restructuring and unusual costs of $21.0 million and $3.2 million, respectively, in the first six months of 2001, and aggregate revenues and segment loss before restructuring and unusual costs of $54.8 million and $2.8 million, respectively, in the full year 2000. Segment income margin decreased to 4.6% in the second quarter of 2001 from 10.4% in the second quarter of 2000, primarily due to restructuring and unusual costs, in 2001. Segment income margin, excluding restructuring and unusual costs of $14.9 million in 2001 and restructuring and unusual income, net, of $0.6 million in 2000, increased to 11.5% in 2001 from 10.2% in 2000. The increase in segment income margin resulted primarily from higher revenues at certain of the businesses discussed above together with cost reduction measures initiated in the fall of 2000. In the second quarter of 2001, the segment recorded charges of $14.9 million, including cash costs of $7.4 million for severance, abandoned facilities, and other exit costs; $4.5 million of provisions for inventories; $1.6 million as a revision to the estimated loss recorded in the first quarter of 2001 for the disposal of ThermoMicroscopes; $0.9 million of asset writedowns; and $0.5 million for a post-closing adjustment on two businesses sold in 2000 (Note 7). Restructuring and unusual income, net, of $0.6 million in 2000 primarily represents a gain on the termination of a lease agreement. Other Expense, Net The Company reported other expense, net, of $0.1 million and $10.8 million in the second quarter of 2001 and 2000, respectively (Note 3). Other expense, net, includes interest income, interest expense, equity in earnings (losses) of unconsolidated subsidiaries, gain (loss) on investments, net, and other items, net. Interest income increased to $16.4 million in 2001 from $7.9 million in 2000, primarily due to proceeds from the sale of businesses, including discontinued operations, offset in part by cash used in 2000 for the purchase of the minority interests of formerly public subsidiaries. The Company expects that a trend of lower market interest rates in 2001 will continue to adversely affect the yield it earns from investments. Interest expense decreased to $19.2 million in 2001 from $21.7 million in 2000, as a result of the maturity and repurchase of debentures. < 22 > THERMO ELECTRON CORPORATION Second Quarter 2001 Compared With Second Quarter 2000 (continued) - ----------------------------------------------------- The Company had income from equity in earnings of unconsolidated subsidiaries of $1.1 million in 2001, compared with a loss of $1.7 million in 2000. Equity in earnings of unconsolidated subsidiaries primarily relates to an investment in FLIR Systems, Inc. FLIR undertook significant restructuring actions in 2000. During 2001, the Company had a gain on investments, net, of $1.3 million, compared with gains of $2.9 million in 2000. In 2000, other expense, net, also includes $1.9 million of net currency gains, including $1.7 million resulting from hedging activities at Spectra-Physics, which elected early adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." Provision for Income Taxes The Company's effective tax rate was 38.6% and 40.5% in the second quarter of 2001 and 2000, respectively. The effective tax rate exceeded the statutory federal income tax rate in both periods due to the impact of state income taxes and nondeductible expenses, including amortization of goodwill. The effective tax rate decreased due to an ongoing reorganization of the Company's operations in several tax jurisdictions to achieve a more efficient tax structure. Minority Interest (Expense) Income The Company recorded minority interest income of $0.8 million in the second quarter of 2001, representing minority shareholders' allocable share of a loss at Spectra-Physics. The Company recorded minority interest expense of $4.5 million in the second quarter of 2000, representing minority shareholders' allocable share of subsidiary earnings. Minority interest expense decreased due to the purchase in 2000 of the minority interest in all of the Company's formerly public subsidiaries in continuing operations except Spectra-Physics. Income from Continuing Operations Income from continuing operations was $9.4 million in the second quarter of 2001, compared with $21.7 million in the second quarter of 2000. Results were affected by unusual items, discussed above. Excluding unusual items in both periods, income from continuing operations increased to $31.4 million in 2001 from $21.1 million in 2000 due to the improvements discussed above. Litigation and Related Contingency The Company's Thermo Finnigan subsidiary is involved in an ongoing patent dispute with Bruker Daltonics, Inc. and Agilent, Inc. In the first quarter of 2001, a court in Germany ruled that Thermo Finnigan's GCQ and LCQ series of ion trap mass spectrometers infringe a Bruker German patent. The Company is appealing this decision and is continuing to assert its own claims against Bruker and Agilent. Discontinued Operations The Company sold a substantial portion of its discontinued power generation business in June 2001 for $238 million and realized a net of tax gain of $15.6 million on the disposition. The power generation business had income of $2.6 million in the second quarter of 2000, net of taxes and minority interest. < 23 > THERMO ELECTRON CORPORATION First Six Months 2001 Compared With First Six Months 2000 Continuing Operations Sales in the first six months of 2001 were $1.116 billion, a decrease of $41.0 million from the first six months of 2000. Excluding the effect of acquisitions, divestitures, and foreign currency translation, revenues increased $121.9 million, or 12%. Foreign currency translation had an unfavorable effect on revenues as discussed below by segment, due to the strengthening of the U.S. dollar relative to other currencies of countries in which the Company operates. Operating income was $54.0 million in 2001, compared with $112.6 million in 2000. Segment income decreased to $79.0 million in 2001 from $132.6 million in 2000. Operating and segment income in 2001 were affected by restructuring and other unusual costs (Note 7). Operating and segment income in 2000 were affected by gains on the sale of businesses, net, and restructuring and other unusual costs. Excluding these unusual items, which totaled $43.0 million of expense in 2001 and $12.8 million of income in 2000, segment income increased to $122.0 million in 2001 from $119.8 million in 2000. The unusual items in both periods are discussed below. Segment income excluding unusual items increased due to revenue and profitability growth at certain businesses discussed below, offset in part by a reduction in segment income of $8.9 million from businesses divested. The Company also recorded $2.8 million of incremental amortization expense in 2001, which resulted primarily from the purchase of the minority interests of formerly public subsidiaries, offset in part by lower amortization expense following certain divestitures. Life Sciences Sales in the Life Sciences segment increased $30.4 million to $411.7 million in the first six months of 2001. Sales increased $8.0 million due to acquisitions. The unfavorable effects of currency translation resulted in a decrease in revenues of $16.0 million in 2001. Excluding the effect of acquisitions and currency translation, revenues increased $38.5 million, or 10%. Sales of sample-preparation equipment and microplate and liquid handling products increased $17.5 million due to strong demand from the drug discovery market and expanded distribution channels. Sales of mass spectrometers increased $16.5 million, primarily due to strong sales of ion trap instruments used in proteomics and drug discovery research. In addition, the segment had higher revenues from clinical diagnostic products, including rapid diagnostic tests. Segment income margin decreased to 10.2% in the first six months of 2001 from 13.8% in the first six months of 2000. The segment's margin decreased primarily due to restructuring and unusual charges recorded in 2001, discussed below. Excluding restructuring and unusual costs, net, of $11.1 million in 2001, segment income margin was 12.9% in 2001 and 13.8% in 2000. The decrease in segment income margin was primarily due to an increase in goodwill amortization as a result of the purchase of the minority interests of formerly public subsidiaries. Excluding the additional amortization expense and the restructuring and unusual charges, segment income margin was 13.6% in 2001. Lower profitability due to research and development expenditures on proteomics initiatives was offset in part by the effect of higher revenues at the businesses discussed above. In the first six months of 2001, the segment recorded charges of $11.1 million, including cash costs of $3.8 million for severance and abandoned facilities, $2.2 million of asset writedowns, and $1.8 million of provisions for inventories. The segment also recorded a charge of $3.4 million for the writeoff of in-process research and development at an acquired business. The Company does not expect that the effort required to complete the products in development at the acquired business will materially affect the segment's future results of operations. In addition, the segment reversed $0.1 million of previously established restructuring reserves that were no longer required (Note 7). < 24 > THERMO ELECTRON CORPORATION First Six Months 2001 Compared With First Six Months 2000 (continued) - --------------------------------------------------------- Optical Technologies Sales in the Optical Technologies segment increased $54.2 million to $269.1 million in the first six months of 2001. Sales increased $1.3 million from acquisitions. The unfavorable effects of currency translation resulted in a decrease in revenues of $7.1 million in 2001. Excluding the effect of acquisitions and currency translation, revenues increased $60.0 million, or 28%. The increase in revenues was due in part to $28.7 million of increased demand for semiconductor-based lasers used in industrial, research and development, and life sciences applications. Higher shipments of molecular beam epitaxy systems and components to the semiconductor industry contributed to sales increases of $17.5 million. The balance of the increase in revenues was approximately evenly divided among temperature-control systems and material science instrumentation used in semiconductor applications and photonics products including gratings and other optical components used in systems for lithography and telecommunication devices. Segment income margin was 4.2% in the first six months of 2001 and 7.5% in the first six months of 2000. Excluding restructuring and unusual costs of $11.4 million in 2001 and $0.1 million in 2000, segment income margin was 8.4% in 2001 and 7.5% in 2000. The increase in segment income margin excluding unusual costs was primarily due to increased sales, offset by the unfavorable effect of growth in revenues at Spectra-Physics, which had breakeven operating margins excluding restructuring and unusual costs. In addition, the segment recorded $1.1 million of higher goodwill amortization following the purchase of the minority interests of formerly public subsidiaries. In the first six months of 2001, the segment recorded net charges of $11.4 million, including $7.0 million of provisions for inventories; cash costs of $3.6 million for severance, abandoned facilities, and other exit costs; $1.1 million of asset writedowns; and income of $0.3 million from the sale of a facility (Note 7). Restructuring costs in 2000 represent abandoned-facility costs. Measurement and Control Sales in the Measurement and Control segment decreased $125.7 million to $443.6 million in the first six months of 2001. Sales decreased $133.9 million due to divestitures, net of an acquisition. The segment's 2000 divestitures that affected the comparison primarily included Spectra Precision, Nicolet Imaging Systems, Sierra Research and Technology, Inc., CAC, and the Mid South businesses. The unfavorable effects of currency translation resulted in a decrease in revenues of $15.1 million in 2001. Excluding the effect of divestitures, an acquisition, and currency translation, revenues increased $23.3 million, or 5%. Revenues from the sale of spectroscopy instruments increased $9.0 million due to higher shipments following the release of new products. Revenues from the sale of instruments for the oil and gas market increased $7.3 million, primarily due to strong demand from the natural gas industry, which benefited from higher gas consumption. In April 2001, the segment sold businesses that contributed $4.4 million of the revenue growth in the first six months of 2001 from the oil and gas industry. Revenues from the sale of environmental monitoring equipment increased $7.1 million due in part to demand from the construction industry and upgrades of power plants in response to regional energy shortages. In addition, sales from other industrial products increased $2.4 million due to higher demand. These increases were offset in part by lower sales of quality control systems to U.S. steel producers due to a cyclical downturn in this market. In addition, continuing lower sales of weighing and inspection equipment resulted from reduced demand in the global packaged food industry. Segment income margin decreased to 5.9% in the first six months of 2001 from 11.2% in the first six months of 2000, primarily due to restructuring and unusual charges, net, in 2001 and unusual income, net, in 2000. Segment income margin, excluding restructuring and unusual costs, net, of $20.5 million in 2001 and unusual income, net, of $12.8 million in 2000, increased to 10.5% in 2001 from 9.0% in 2000. The increase in segment income margin resulted primarily from higher revenues at certain of the businesses discussed above together with cost reduction measures initiated in the fall of 2000 and, to a lesser extent, the inclusion in 2000 of lower-margin results from businesses subsequently divested. These improvements were offset in part by lower profitability at the business units < 25 > THERMO ELECTRON CORPORATION First Six Months 2001 Compared With First Six Months 2000 (continued) - --------------------------------------------------------- discussed above that had declining revenues. In the first six months of 2001, the segment recorded charges of $20.5 million, including cash costs of $7.6 million for severance, abandoned facilities, and other exit costs; $6.4 million to reduce the carrying value of ThermoMicroscopes to disposal value; $4.5 million of provisions for inventories; $1.9 million of asset writedowns; and $0.1 million, net, of loss on the sale of businesses (Note 7). ThermoMicroscopes was sold in July 2001. Unusual income, net, of $12.8 million in 2000 includes a gain of $12.4 million on the sale of two businesses. Other Expense, Net The Company reported other expense, net, of $3.9 million and $32.3 million in the first six months of 2001 and 2000, respectively (Note 3). Interest income increased to $34.9 million in 2001 from $17.6 million in 2000, primarily due to proceeds from the sale of businesses, including discontinued operations, offset in part by cash used in 2000 for the purchase of the minority interests of formerly public subsidiaries. Interest expense decreased to $39.4 million in 2001 from $44.7 million in 2000, as a result of the maturity and repurchase of debentures. The Company had income from equity in earnings of unconsolidated subsidiaries of $1.3 million in 2001 and incurred a net loss of $15.1 million in 2000, including $15.2 million related to its investment in FLIR. FLIR undertook significant restructuring actions in 2000. During 2001, the Company had a loss on investments, net, of $0.8 million, compared with gains of $6.4 million in 2000. The loss in 2001 includes $2.0 million to write down an available-for-sale investment due to impairment that the Company deemed other than temporary. In 2000, other expense, net, also includes $3.4 million of net currency gains, including $3.5 million resulting from hedging activities at Spectra-Physics, which elected early adoption of SFAS No. 133. Provision for Income Taxes The Company's effective tax rate was 39.2% and 42.2% in the first six months of 2001 and 2000, respectively. Excluding the tax effect of restructuring and unusual costs or income, the effective tax rate was 39.0% and 39.9% in 2001 and 2000, respectively. The effective tax rate exceeded the statutory federal income tax rate in both periods due to the impact of state income taxes and nondeductible expenses, including amortization of goodwill. Minority Interest (Expense) Income The Company recorded minority interest income of $0.8 million in the first six months of 2001 and minority interest expense of $10.2 million in the first six months of 2000, representing minority shareholders' allocable share of subsidiary losses or earnings. Minority interest expense decreased due to the purchase in 2000 of the minority interest in all of the Company's formerly public subsidiaries in continuing operations except Spectra-Physics. Income from Continuing Operations Income from continuing operations was $31.2 million in the first six months of 2001, compared with $36.2 million in the first six months of 2000. Results were affected by unusual items, discussed above. Excluding unusual items in both periods, income from continuing operations increased to $60.9 million in 2001 from $39.5 million in 2000 due to the improvements discussed above. < 26 > THERMO ELECTRON CORPORATION First Six Months 2001 Compared With First Six Months 2000 (continued) - --------------------------------------------------------- Cumulative Effect of Change in Accounting Principle The Company adopted SFAS No. 133, as amended, in the first quarter of 2001 and recorded a charge representing the cumulative effect of the change in accounting principle of $1.0 million, net of an income tax benefit of $0.7 million. In addition, in accordance with the requirements of SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements," the Company adopted the pronouncement as of January 2, 2000, and recorded a charge in the first quarter of 2000 representing the cumulative effect of the change in accounting principle of $12.9 million, net of an income tax benefit of $8.5 million and minority interest of $0.5 million. Discontinued Operations In February 2001, the Company sold Thermo Cardiosystems to Thoratec Corporation in exchange for 19.3 million shares of Thoratec common stock. Certain restrictions limit the Company's ability to sell these shares, although the restrictions fully lapse in August 2002. The Company recorded an after-tax charge of $66.0 million in the first quarter of 2001 for the decline in market value of Thoratec common stock as a loss on disposal of discontinued operations. Further changes in the market value of Thoratec common stock may materially affect the ultimate proceeds from the disposal of discontinued operations. Excluding potential changes in the market value of Thoratec common stock, the Company is not currently aware of any known trends, events, or other uncertainties involving discontinued operations that it expects will cause the ultimate loss on disposal of discontinued operations to differ materially from the amounts recorded to date. Any difference from the amounts recorded would be reported as an adjustment to the ultimate loss on disposal of discontinued operations. In July 2001, the Company completed the sale of 3.4 million shares of Thoratec for proceeds of $50.5 million. The Company sold a substantial portion of its discontinued power generation business in June 2001 for $238 million and realized a net of tax gain of $15.6 million on the disposition. The power generation business had income of $4.0 million in the first six months of 2000, net of taxes and minority interest. Liquidity and Capital Resources Consolidated working capital was $1.77 billion at June 30, 2001, compared with $1.74 billion at December 30, 2000. Included in working capital were cash, cash equivalents, and short-term available-for-sale investments of $1.28 billion at June 30, 2001, compared with $1.03 billion at December 30, 2000. In addition, the Company had $11.5 million of long-term available-for-sale investments at June 30, 2001, compared with $17.1 million at December 30, 2000. Cash provided by operating activities was $100.9 million during the first six months of 2001, including $62.8 million from continuing operations. Cash of $26.0 million was used to fund an increase in inventories. Approximately half of the increase in inventories was at the Measurement and Control segment due to new product introductions in certain units and lower than anticipated shipments in other units. In connection with certain restructuring actions undertaken by the Company's continuing operations, the Company had accrued $27.5 million for restructuring and unusual costs at June 30, 2001. The Company expects to pay $22.6 million of this amount for severance, employee retention, and other costs primarily through January 2002. The remaining balance of $4.9 million will be paid through the expiration of lease obligations in 2007. In addition, at June 30, 2001, the Company had accrued $8.7 million for acquisition expenses. Accrued acquisition expenses includes $1.6 million of severance obligations, which the Company expects to pay primarily through 2001. The balance, which primarily represents abandoned-facility payments, will be paid over the remaining terms of the leases through 2014. < 27 > THERMO ELECTRON CORPORATION Liquidity and Capital Resources (continued) During the first six months of 2001, the primary investing activities of the Company's continuing operations, excluding available-for-sale investment activities, included the purchase of property, plant, and equipment and acquisitions. The Company's continuing operations expended $36.4 million, net of dispositions, for purchases of property, plant, and equipment and $14.1 million, net of cash acquired, for acquisitions during the first six months of 2001. During the first six months of 2001, investing activities of the Company's discontinued operations provided $379.5 million of cash, primarily representing proceeds, net of cash divested, of $331.8 million from the sale of businesses. The Company's financing activities used $131.2 million of cash during the first six months of 2001, including $91.9 million for continuing operations. During the first six months of 2001, the Company's continuing operations expended $23.4 million for the repayment of long-term obligations and received net proceeds of $34.2 million from the exercise of employee stock options. During the first six months of 2001, the Company expended $97.8 million to repurchase its securities and securities of its subsidiaries. As of June 30, 2001, the Company had $15 million remaining under Board of Directors' authorizations to repurchase its own securities. In July 2001, the Company's Board of Directors authorized the repurchase of an additional $100 million of its own securities through July 25, 2002. Such purchases may be made in the open market, or in negotiated transactions. The financing activities of the Company's discontinued operations were primarily the repayment of debt. The Company has no material commitments for purchases of property, plant, and equipment and expects that for 2001, such expenditures will approximate $100 million. The Company believes that its existing resources are sufficient to meet the working capital requirements of its existing businesses for the foreseeable future, including at least the next 24 months. Item 3 - Quantitative and Qualitative Disclosures About Market Risk The Company's exposure to market risk from changes in interest rates, foreign currency exchange rates, and equity prices has not changed materially from its exposure at year-end 2000, except that the Company owns 15.9 million shares of Thoratec Corporation common stock from the sale of Thermo Cardiosystems (Note 8). During the first quarter of 2001, the Company recorded a writedown of its carrying value of the Thoratec shares due to a decline in Thoratec's market value. Thoratec's market value per share increased significantly in the second quarter. As a result of the increase in market value of Thoratec shares, a 10% decline in the market value of Thoratec shares at June 30, 2001, will not result in an additional loss from discontinued operations. The ultimate proceeds from the disposition of discontinued operations, however, may be materially affected by changes in the market value of Thoratec common stock. A 10% decline in the market value of Thoratec common stock at June 30, 2001, would result in a reduction in the after-tax proceeds from the disposal of discontinued operations of $15 million. Item 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ On May 16, 2001, at the Annual Meeting of Shareholders, the shareholders elected three incumbent directors to a three-year term expiring in 2003. The directors elected at the meeting were: Marijn E. Dekkers, Robert A. McCabe, and Robert W. O'Leary. Mr. Dekkers received 164,796,805 shares voted in favor of his election and 2,554,145 shares voted against. Mr. McCabe received 164,763,249 shares voted in favor of his election and 2,587,701 shares voted against. Mr. O'Leary received 152,872,248 shares voted in favor of his election and 14,478,702 shares voted against. No abstentions or broker nonvotes were recorded on the election of directors. At the Annual Meeting, the shareholders also approved the Company's 2001 equity incentive plan and the reservation of 5,000,000 shares for issuance under the plan, as follows: 156,059,026 shares were voted in favor of the proposal, 10,398,848 shares were voted against, 893,076 shares abstained, and no broker nonvotes were recorded on the proposal. The shareholders also approved the Company's 2000 employees' stock purchase plan, as follows: 161,896,861 shares were voted in favor of the proposal, 4,751,032 shares were voted against, 703,057 shares abstained, and no broker nonvotes were recorded on the proposal. < 28 > THERMO ELECTRON CORPORATION PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index on page immediately preceding exhibits. (b) Reports on Form 8-K On May 15, 2001, the Company filed a Current Report on Form 8-K with respect to the Company's financial results for the quarter ended March 31, 2001. < 29 > THERMO ELECTRON CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 9th day of August 2001. THERMO ELECTRON CORPORATION /s/ Theo Melas-Kyriazi ------------------------------------------------- Theo Melas-Kyriazi Vice President and Chief Financial Officer /s/ Peter E. Hornstra ------------------------------------------------- Peter E. Hornstra Corporate Controller and Chief Accounting Officer < 30 > THERMO ELECTRON CORPORATION Exhibit Index Exhibit Number Description of Exhibit - -------------------------------------------------------------------------------- 10.1 Thermo Electron Corporation 2001 Equity Incentive Plan. 10.2 Plan and Agreement of Distribution dated August 3, 2001, between Thermo Electron Corporation and Kadant Inc. (filed as Exhibit 99.3 to the Registrant's Current Report on Form 8-K dated August 6, 2001 [File No. 1-8002] and incorporated in this document by reference). 10.3 Tax Matters Agreement effective as of August 8, 2001, by and among Thermo Electron Corporation and Kadant Inc. (filed as Exhibit 99.4 to the Registrant's Current Report on Form 8-K dated August 6, 2001 [File No. 1-8002] and incorporated in this document by reference). 10.4 Transition Services Agreement dated August 3, 2001, between Thermo Electron Corporation and Kadant Inc. (filed as Exhibit 99.5 to the Registrant's Current Report on Form 8-K dated August 6, 2001 [File No. 1-8002] and incorporated in this document by reference). EX-10.1 2 tmoexhibit10-1.txt THERMO ELECTRON CORPORATION 2001 EQUITY INCENTIVE PLAN 1. Purpose The purpose of this 2001 Equity Incentive Plan (the "Plan") is to secure for Thermo Electron Corporation (the "Company") and its Stockholders the benefits arising from capital stock ownership by employees and Directors of, and consultants to, the Company and its subsidiaries or other persons who are expected to make significant contributions to the future growth and success of the Company and its subsidiaries. The Plan is intended to accomplish these goals by enabling the Company to offer such persons equity-based interests, equity-based incentives or performance-based stock incentives in the Company, or any combination thereof ("Awards"). 2. Administration The Plan will be administered by the Board of Directors of the Company (the "Board"). The Board shall have full power to interpret and administer the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan and Awards, and full authority to select the persons to whom Awards will be granted ("Participants"), determine the type and amount of Awards to be granted to Participants (including any combination of Awards), determine the terms and conditions of Awards granted under the Plan (including terms and conditions relating to events of merger, consolidation, dissolution and liquidation, change of control, vesting, forfeiture, restrictions, dividends and interest, if any, on deferred amounts), waive compliance by a participant with any obligation to be performed by him or her under an Award, waive any term or condition of an Award, cancel an existing Award in whole or in part with the consent of a Participant, grant replacement Awards, accelerate the vesting or lapse of any restrictions of any Award and adopt the form of instruments evidencing Awards under the Plan and change such forms from time to time. Any interpretation by the Board of the terms and provisions of the Plan or any Award thereunder and the administration thereof, and all action taken by the Board, shall be final, binding and conclusive on all parties and any person claiming under or through any party. No Director shall be liable for any action or determination made in good faith. The Board may, to the full extent permitted by law, delegate any or all of its responsibilities under the Plan to a committee (the "Committee") appointed by the Board and consisting of members of the Board. 3. Effective Date The Plan shall be effective as of the date first approved by the Board of Directors, subject to the approval of the Plan by the Corporation's Stockholders. Grants of Awards under the Plan made prior to such approval shall be effective when made (unless otherwise specified by the Board at the time of grant), but shall be conditioned on and subject to such approval of the Plan. 4. Shares Subject to the Plan Subject to adjustment as provided in Section 10.6, the total number of shares of Common Stock reserved and available for distribution under the Plan shall be five million shares. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any Award of shares of Common Stock requiring exercise by the Participant for delivery of such shares terminates without having been exercised in full, is forfeited or is otherwise terminated without a payment being made to the Participant in the form of Common Stock, or if any shares of Common Stock subject to restrictions are repurchased by the Company pursuant to the terms of any Award or are otherwise reacquired by the Company to satisfy obligations arising by virtue of any Award, such shares shall be available for distribution in connection with future Awards under the Plan. 5. Eligibility Employees and Directors of, and consultants to, the Company and its subsidiaries, or other persons who are expected to make significant contributions to the future growth and success of the Company and its subsidiaries shall be eligible to receive Awards under the Plan. The Board, or other appropriate committee or person to the extent permitted pursuant to the last sentence of Section 2, shall from time to time select from among such eligible persons those who will receive Awards under the Plan. 6. Types of Awards The Board may offer Awards under the Plan in any form of equity-based interest, equity-based incentive or performance-based stock incentive in Common Stock of the Company or any combination thereof. The type, terms and conditions and restrictions of an Award shall be determined by the Board at the time such Award is made to a Participant; provided however that the maximum number of shares permitted to be granted under any Award or combination of Awards to any Participant during any one calendar year may not exceed 1,500,000 shares of Common Stock. In addition, the maximum number of shares of Common Stock that may be issued pursuant to all Awards that are not stock options, including without limitation restricted stock Awards, may not exceed 500,000 shares of Common Stock in any calendar year. Further, the number of restricted stock awards or other non-option awards granted under the Plan that are not subject to a restriction on resale that lapses in equal annual installments over three years (or such longer period as the Board may specify) shall not exceed 10% of the number of shares authorized to be issued under the Plan. An Award shall be made at the time specified by the Board and shall be subject to such conditions or restrictions as may be imposed by the Board and shall conform to the general rules applicable under the Plan as well as any special rules then applicable under federal tax laws or regulations or the federal securities laws relating to the type of Award granted. Without limiting the foregoing, Awards may take the following forms and shall be subject to the following rules and conditions: 6.1 Options An option is an Award that entitles the holder on exercise thereof to purchase Common Stock at a specified exercise price. Options granted under the Plan may be either incentive stock options ("incentive stock options") that meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options that are not intended to meet the requirements of Section 422 ("non-statutory options"). 6.1.1 Option Price. The price at which Common Stock may be purchased upon exercise of an option shall be determined by the Board, provided however, the exercise price shall not be less than 100% of the fair market value per share of Common Stock as of the date of grant. The Board shall not have the authority to adjust the exercise price of any outstanding stock options granted under this plan to an exercise price that is lower than the original exercise price (a "repricing"), except to the extent permitted under Section 10.6 of the Plan in connection with adjustments in the event of certain transactions. 6.1.2 Option Grants. The granting of an option shall take place at the time specified by the Board. Options shall be evidenced by option agreements. Such agreements shall conform to the requirements of the Plan, and may contain such other provisions (including but not limited to vesting and forfeiture provisions, acceleration, change of control, protection in the event of merger, consolidations, dissolutions and liquidations) as the Board shall deem advisable. Option agreements shall expressly state whether an option grant is intended to qualify as an incentive stock option or non-statutory option. 6.1.3 Option Period. An option will become exercisable at such time or times (which may be immediately or in such installments as the Board shall determine) and on such terms and conditions as the Board shall specify; provided however that the term of an option during which it may be exercisable may not exceed ten years. The option agreements shall specify the terms and conditions applicable in the event of an option holder's termination of employment during the option's term. Any exercise of an option must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (1) any additional documents required by the Board and (2) payment in full in accordance with Section 6.1.4 for the number of shares for which the option is exercised. 6.1.4 Payment of Exercise Price. Stock purchased on exercise of an option shall be paid for as follows: (1) in cash or by check (subject to such guidelines as the Company may establish for this purpose), bank draft or money order payable to the order of the Company or (2) if so permitted by the instrument evidencing the option (or in the case of a non-statutory option, by the Board at or after grant of the option), (i) through the delivery of shares of Common Stock that have been outstanding for at least six months (unless the Board expressly approves a shorter period) and that have a fair market value (determined in accordance with procedures prescribed by the Board) equal to the exercise price, (ii) by delivery of a promissory note of the option holder to the Company, payable on such terms as are specified by the Board, (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price, or (iv) by any combination of the permissible forms of payment. 6.1.5 Buyout Provision. The Board may at any time offer to buy out for a payment in cash, shares of Common Stock, deferred stock or restricted stock, an option previously granted, based on such terms and conditions as the Board shall establish and communicate to the option holder at the time that such offer is made. 6.1.6 Special Rules for Incentive Stock Options. Each provision of the Plan and each option agreement evidencing an incentive stock option shall be construed so that each incentive stock option shall be an incentive stock option as defined in Section 422 of the Code or any statutory provision that may replace such Section, and any provisions thereof that cannot be so construed shall be disregarded. Instruments evidencing incentive stock options must contain such provisions as are required under applicable provisions of the Code. Incentive stock options may be granted only to employees of the Company and its subsidiaries. The exercise price of an incentive stock option shall not be less than 100% (110% in the case of an incentive stock option granted to a more than ten percent Stockholder of the Company) of the fair market value of the Common Stock on the date of grant, as determined by the Board. An incentive stock option may not be granted after the tenth anniversary of the date on which the Plan was adopted by the Board and the latest date on which an incentive stock option may be exercised shall be the tenth anniversary (fifth anniversary, in the case of any incentive stock option granted to a more than ten percent Stockholder of the Company) of the date of grant, as determined by the Board. 6.2 Restricted Stock An Award of restricted stock entitles the recipient thereof to acquire shares of Common Stock upon payment of the purchase price subject to restrictions specified in the instrument evidencing the Award. 6.2.1 Restricted Stock Awards. Awards of restricted stock shall be evidenced by restricted stock agreements. Such agreements shall conform to the requirements of the Plan, and may contain such other provisions (including restriction and forfeiture provisions, change of control, protection in the event of mergers, consolidations, dissolutions and liquidations) as the Board shall deem advisable. 6.2.2 Restrictions. Until the restrictions specified in a restricted stock agreement shall lapse, restricted stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of, and upon certain conditions specified in the restricted stock agreement, must be resold to the Company for the price, if any, specified in such agreement. The restrictions shall lapse in equal annual installments over three years, unless the Board specifies a longer restriction period, provided however, that the Board may grant a restricted stock Award that does not conform to the restriction period stated herein, provided that the aggregate number of shares underlying all such non-conforming Award granted under the Plan may not exceed 10% of the number of shares authorized to be issued under the Plan. The Board may at any time accelerate the time at which the restrictions on all or any part of the shares shall lapse. 6.2.3 Rights as a Stockholder. A Participant who acquires shares of restricted stock will have all of the rights of a Stockholder with respect to such shares including the right to receive dividends and to vote such shares. Unless the Board otherwise determines, certificates evidencing shares of restricted stock will remain in the possession of the Company until such shares are free of all restrictions under the Plan. 6.2.4 Purchase Price. The purchase price of shares of restricted stock shall be determined by the Board, in its sole discretion. 6.2.5 Other Awards Settled With Restricted Stock. The Board may provide that any or all the Common Stock delivered pursuant to an Award will be restricted stock. 6.3 Deferred Stock 6.3.1 Deferred Stock Award. A deferred stock Award entitles the recipient to receive shares of deferred stock, which is Common Stock to be delivered in the future. Delivery of the Common Stock will take place at such time or times, and on such conditions, as the Board may specify. The Board may at any time accelerate the time at which delivery of all or any part of the Common Stock will take place. 6.3.2 Other Awards Settled with Deferred Stock. The Board may, at the time any Award described in this Section 6 is granted, provide that, at the time Common Stock would otherwise be delivered pursuant to the Award, the Participant will instead receive an instrument evidencing the right to future delivery of deferred stock. 6.4 Performance Awards 6.4.1 Performance Awards. A performance Award entitles the recipient to receive, without payment, an amount, in cash or Common Stock or a combination thereof (such form to be determined by the Board), following the attainment of performance goals. Performance goals may be related to personal performance, corporate performance, departmental performance or any other category of performance deemed by the Board to be important to the success of the Company. The Board will determine the performance goals, the period or periods during which performance is to be measured and all other terms and conditions applicable to the Award. 6.4.2 Other Awards Subject to Performance Conditions. The Board may, at the time any Award described in this Section 6 is granted, impose the condition (in addition to any conditions specified or authorized in this Section 6 of the Plan) that performance goals be met prior to the Participant's realization of any payment or benefit under the Award. 7. Purchase Price and Payment Except as otherwise provided in the Plan, the purchase price of Common Stock to be acquired pursuant to an Award shall be the price determined by the Board, provided that such price shall not be less than the par value of the Common Stock. Except as otherwise provided in the Plan, the Board may determine the method of payment of the exercise price or purchase price of an Award granted under the Plan and the form of payment. The Board may determine that all or any part of the purchase price of Common Stock pursuant to an Award has been satisfied by past services rendered by the Participant. The Board may agree at any time, upon request of the Participant, to defer the date on which any payment under an Award will be made. 8. Loans and Supplemental Grants The Company may make a loan to a Participant, either on or after the grant to the Participant of any Award, in connection with the purchase of Common Stock under the Award or with the payment of any obligation incurred or recognized as a result of the Award. The Board will have full authority to decide whether the loan is to be secured or unsecured or with or without recourse against the borrower, the terms on which the loan is to be repaid and the conditions, if any, under which it may be forgiven. In connection with any Award, the Board may at the time such Award is made or at a later date, provide for and make a cash payment to the participant not to exceed an amount equal to (a) the amount of any federal, state and local income tax or ordinary income for which the Participant will be liable with respect to the Award, plus (b) an additional amount on a grossed-up basis necessary to make him or her whole after tax, discharging all the participant's income tax liabilities arising from all payments under the Plan. 9. Change in Control 9.1 Impact of Event In the event of a "Change in Control" as defined in Section 9.2, the following provisions shall apply, unless the agreement evidencing the Award otherwise provides (by specific explicit reference to Section 9.2 below). If a Change in Control occurs while any Awards are outstanding, then, effective upon the Change in Control, (i) each outstanding stock option or other stock-based Award awarded under the Plan that was not previously exercisable and vested shall become immediately exercisable in full and will no longer be subject to a right of repurchase by the Company, (ii) each outstanding restricted stock award or other stock-based Award subject to restrictions and to the extent not fully vested, shall be deemed to be fully vested, free of restrictions and no longer subject to a right of repurchase by the Company, and (iii) deferral limitations and conditions that relate solely to the passage of time, continued employment or affiliation will be waived and removed as to deferred stock Awards and performance Awards; performance of other conditions (other than conditions relating solely to the passage of time, continued employment or affiliation) will continue to apply unless otherwise provided in the agreement evidencing the Award or in any other agreement between the Participant and the Company or unless otherwise agreed by the Board. 9.2 Definition of "Change in Control" "Change in Control" means an event or occurrence set forth in any one or more of subsections (a) through (d) below (including an event or occurrence that constitutes a Change in Control under one of such subsections but is specifically exempted from another such subsection): (a) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership of any capital stock of Thermo Electron Corporation ("Thermo Electron") if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) 40% or more of either (i) the then-outstanding shares of common stock of Thermo Electron (the "Outstanding TMO Common Stock") or (ii) the combined voting power of the then-outstanding securities of Thermo Electron entitled to vote generally in the election of directors (the "Outstanding TMO Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change in Control: (i) any acquisition by Thermo Electron, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Thermo Electron or any corporation controlled by Thermo Electron, or (iii) any acquisition by any corporation pursuant to a transaction which complies with clauses (i) and (ii) of subsection (c) of this definition; or (b) such time as the Continuing Directors (as defined below) do not constitute a majority of the Board of Directors of Thermo Electron (the "Thermo Board") (or, if applicable, the Board of Directors of a successor corporation to Thermo Electron), where the term "Continuing Director" means at any date a member of the Thermo Board (i) who was a member of the Thermo Board as of July 1, 1999 or (ii) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Thermo Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided, however, that there shall be excluded from this clause (ii) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Thermo Board; or (c) the consummation of a merger, consolidation, reorganization, recapitalization or statutory share exchange involving Thermo Electron or a sale or other disposition of all or substantially all of the assets of Thermo Electron in one or a series of transactions (a "Business Combination"), unless, immediately following such Business Combination, each of the following two conditions is satisfied: (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding TMO Common Stock and Outstanding TMO Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation in such Business Combination (which shall include, without limitation, a corporation which as a result of such transaction owns Thermo Electron or substantially all of Thermo Electron's assets either directly or through one or more subsidiaries) (such resulting or acquiring corporation is referred to herein as the "Acquiring Corporation") in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding TMO Common Stock and Outstanding TMO Voting Securities, respectively; and (ii) no Person (excluding the Acquiring Corporation or any employee benefit plan (or related trust) maintained or sponsored by Thermo Electron or by the Acquiring Corporation) beneficially owns, directly or indirectly, 40% or more of the then outstanding shares of common stock of the Acquiring Corporation, or of the combined voting power of the then-outstanding securities of such corporation entitled to vote generally in the election of directors; or (d) approval by the stockholders of Thermo Electron of a complete liquidation or dissolution of Thermo Electron. 10. General Provisions 10.1 Documentation of Awards Awards will be evidenced by written instruments, which may differ among Participants, prescribed by the Board from time to time. Such instruments may be in the form of agreements to be executed by both the Participant and the Company or certificates, letters or similar instruments which need not be executed by the participant but acceptance of which will evidence agreement to the terms thereof. Such instruments shall conform to the requirements of the Plan and may contain such other provisions (including provisions relating to events of merger, consolidation, dissolution and liquidations, change of control and restrictions affecting either the agreement or the Common Stock issued thereunder), as the Board deems advisable. 10.2 Rights as a Stockholder Except as specifically provided by the Plan or the instrument evidencing the Award, the receipt of an Award will not give a Participant rights as a Stockholder with respect to any shares covered by an Award until the date of issue of a stock certificate to the participant for such shares. 10.3 Conditions on Delivery of Stock The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove any restriction from shares previously delivered under the Plan (a) until all conditions of the Award have been satisfied or removed, (b) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, (c) if the outstanding Common Stock is at the time listed on any stock exchange, until the shares have been listed or authorized to be listed on such exchange upon official notice of issuance, and (d) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Common Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such act and may require that the certificates evidencing such Common Stock bear an appropriate legend restricting transfer. If an Award is exercised by the participant's legal representative, the Company will be under no obligation to deliver Common Stock pursuant to such exercise until the Company is satisfied as to the authority of such representative. 10.4 Tax Withholding The Company will withhold from any cash payment made pursuant to an Award an amount sufficient to satisfy all federal, state and local withholding tax requirements (the "withholding requirements"). In the case of an Award pursuant to which Common Stock may be delivered, the Board will have the right to require that the participant or other appropriate person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements satisfactory to the Board with regard to such requirements, prior to the delivery of any Common Stock. If and to the extent that such withholding is required, the Board may permit the participant or such other person to elect at such time and in such manner as the Board provides to have the Company hold back from the shares to be delivered, or to deliver to the Company, Common Stock having a value calculated to satisfy the withholding requirement. 10.5 Transferability of Awards Except as may be authorized by the Board, in its sole discretion, no Award (other than an Award in the form of an outright transfer of cash or Common Stock not subject to any restrictions) may be transferred other than by will or the laws of descent and distribution, and during a Participant's lifetime an Award requiring exercise may be exercised only by him or her (or in the event of incapacity, the person or persons properly appointed to act on his or her behalf). The Board may, in its discretion, determine the extent to which Awards granted to a Participant shall be transferable, and such provisions permitting or acknowledging transfer shall be set forth in the written agreement evidencing the Award executed and delivered by or on behalf of the Company and the Participant. 10.6 Adjustments in the Event of Certain Transactions (a) In the event of a stock dividend, stock split or combination of shares, or other distribution with respect to holders of Common Stock other than normal cash dividends, the Board will make (i) appropriate adjustments to the maximum number of shares that may be delivered under the Plan under Section 4 above and the participant limits set forth in Section 6 above, and (ii) appropriate adjustments to the number and kind of shares of stock or securities subject to Awards then outstanding or subsequently granted, any exercise prices relating to Awards and any other provisions of Awards affected by such change. (b) In the event of any recapitalization, merger or consolidation involving the Company, any transaction in which the Company becomes a subsidiary of another entity, any sale or other disposition of all or a substantial portion of the assets of the Company or any similar transaction, as determined by the Board, the Board in its discretion may make appropriate adjustments to outstanding Awards to avoid distortion in the operation of the Plan. 10.7 Employment Rights Neither the adoption of the Plan nor the grant of Awards will confer upon any person any right to continued employment with the Company or any subsidiary or interfere in any way with the right of the Company or subsidiary to terminate any employment relationship at any time or to increase or decrease the compensation of such person. Except as specifically provided by the Board in any particular case, the loss of existing or potential profit in Awards granted under the Plan will not constitute an element of damages in the event of termination of an employment relationship even if the termination is in violation of an obligation of the Company to the employee. Whether an authorized leave of absence, or absence in military or government service, shall constitute termination of employment shall be determined by the Board at the time. For purposes of this Plan, transfer of employment between the Company and its subsidiaries shall not be deemed termination of employment. 10.8 Other Employee Benefits The value of an Award granted to a Participant who is an employee, and the amount of any compensation deemed to be received by an employee as a result of any exercise or purchase of Common Stock pursuant to an Award or sale of shares received under the Plan, will not constitute "earnings" or "compensation" with respect to which any other employee benefits of such employee are determined, including without limitation benefits under any pension, stock ownership, stock purchase, life insurance, medical, health, disability or salary continuation plan. 10.9 Legal Holidays If any day on or before which action under the Plan must be taken falls on a Saturday, Sunday or legal holiday, such action may be taken on the next succeeding day not a Saturday, Sunday or legal holiday. 10.10 Foreign Nationals Without amending the Plan, Awards may be granted to persons who are foreign nationals or employed outside the United States or both, on such terms and conditions different from those specified in the Plan, as may, in the judgment of the Board, be necessary or desirable to further the purpose of the Plan. 11. Termination and Amendment The Plan shall remain in full force and effect until terminated by the Board. Subject to the last sentence of this Section 11, the Board may at any time or times amend the Plan or any outstanding Award for any purpose that may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of Awards; provided that, to the extent required by law or deemed necessary by the Board, any amendment that would (i) materially increase the benefits accruing to participants under the Plan, (ii) materially increase the number of shares under the Plan or (iii) materially modify the requirements for eligibility under the Plan, shall be subject to Stockholder approval. No amendment of the Plan or any agreement evidencing Awards under the Plan may adversely affect the rights of any participant under any Award previously granted without such participant's consent. TMO 2001 EQUITY INCENTIVE PLAN -----END PRIVACY-ENHANCED MESSAGE-----