-----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, Mea3SndMn5/01pljmGJoNpoFnTRWcLQNZnADIT2r+A22H3eq3O6G7KbTTnWc0Vy2 E81kb+r1//uYWkvViQj/EA== 0000102138-98-000002.txt : 19980317 0000102138-98-000002.hdr.sgml : 19980317 ACCESSION NUMBER: 0000102138-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980316 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERMEDICS DETECTION INC CENTRAL INDEX KEY: 0001012555 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 043106698 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12745 FILM NUMBER: 98566693 BUSINESS ADDRESS: STREET 1: 220 MILL RD CITY: CHELMSFORD STATE: MA ZIP: 01824 BUSINESS PHONE: 5082512000 MAIL ADDRESS: STREET 1: 81 WYMAN STREET STREET 2: P.O. BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02254-9046 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ___________________________________________ FORM 10-K (mark one) [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 3, 1998 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-12745 THERMEDICS DETECTION INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-3106698 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 220 Mill Road Chelmsford, Massachusetts 01824-4178 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 622-1000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ---------------------------- ----------------------------------------- Common Stock, $.10 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of January 30, 1998, was approximately $27,427,000. As of January 30, 1998, the Registrant had 13,355,459 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended January 3, 1998, are incorporated by reference into Parts I and II. Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 1, 1998, are incorporated by reference into Part III. PAGE PART I Item 1. Business -------- (a) General Development of Business ------------------------------- Thermedics Detection Inc. (the Company or the Registrant) was established as a subsidiary of Thermedics Inc. to develop, manufacture, and market high-speed detection and measurement systems used in on-line industrial process applications, security applications, and laboratory analysis. The Company's industrial process systems use ultratrace chemical detectors, high-speed gas chromatography, X-ray imaging, near-infrared spectroscopy, and other technologies for quality assurance of in-process and finished products, primarily in the food, beverage, pharmaceutical, forest products, chemical, and other consumer products industries. The Company's security instruments use simultaneous trace particle- and vapor-detection techniques based on its proprietary chemiluminescence and high-speed gas chromatography technologies. Customers use the Company's security instruments to detect plastic and other explosives at airports and border crossings, for other high-security screening applications, and for forensics and search applications. Historically, the Company's principal product lines were process detection systems, including Alexus(R) systems used to assure the quality of refillable plastic containers, and EGIS(R) explosives detectors. The Company expanded its product lines to include moisture analysis equipment through its acquisition of Moisture Systems Corporation and Rutter & Co. B.V. (collectively, Moisture Systems) in January 1996, and also introduced its InScan(TM) high-speed X-ray imaging systems (InScan systems) and Flash-GC(TM) gas chromatography systems (Flash-GC systems) in 1996. The Company has also recently introduced Rampart(TM), the latest portable trace-detection system, which incorporates the advanced Flash-GC technology in tandem with a highly sensitive chemiluminescence detector. In addition, the Company performs contract research and development services for government and industry customers and earns service revenues through long-term contracts. In March and November 1996, the Company issued a total of 683,500 shares of its common stock in private placements for net proceeds of $7.0 million. In March 1997, the Company sold 2,671,292 shares of common stock in an initial public offering for net proceeds of $28.1 million. The Company operated as a division of Thermedics until its incorporation as a Massachusetts corporation in December 1990. In connection with the Company's incorporation, Thermedics transferred to the Company its TEA Analyzer and certain other trace detection technologies in exchange for 10,000,000 shares of the Company's common stock. A publicly traded subsidiary of Thermo Electron, Thermedics develops, manufactures, and markets precision-weighing and inspection equipment, electrochemistry and microweighing products, product quality assurance systems, a range of power electronics and electronic test instruments, and security instruments, as well as implantable 2PAGE heart-assist systems, whole-blood coagulation-testing equipment, skin-incision devices, and other biomedical products. As of January 3, 1998, Thermedics owned 76% of the Company's outstanding common stock. As of January 3, 1998, Thermedics is a 58%-owned subsidiary of Thermo Electron Corporation. Thermo Electron provides analytical and monitoring instruments, biomedical products including heart-assist devices, respiratory-care equipment, and mammography systems; paper recycling and papermaking equipment; alternative-energy systems; industrial process equipment; and other specialized products. Thermo Electron also provides industrial outsourcing, particularly in environmental-liability management and laboratory analysis, and metallurgical services, and conducts advanced-technology research and development. Thermedics and Thermo Electron may, from time to time, purchase shares of the Company's common stock either on the open market or directly from the Company. See Note 3 to Consolidated Financial Statements in the Company's 1997* Annual Report to Shareholders for a description of outstanding stock options. Forward-looking Statements Forward-looking statements, within the meaning of Section 21E of the Securities and Exchange Act of 1934, are made throughout this Annual Report on Form 10-K. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words, "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Forward-looking Statements" in the Registrant's 1997 Annual Report to Shareholders, which statements are incorporated herein by reference. (b) Financial Information About Industry Segments --------------------------------------------- The Company is engaged in one business segment: the development, manufacture, and sale of high-speed detection and measurement systems used in on-line industrial process applications, security applications, and laboratory analysis. (c) Description of Business ----------------------- (i) Principal Products and Services ------------------------------- Process Detection Systems The Company designs, manufactures, and markets high-speed on-line trace (parts-per-trillion) measurement, detection, and rejection equipment that uses particle- and vapor-detection, and other technologies for product quality and productivity applications. * References to 1997, 1996, and 1995 herein are for the fiscal years ended January 3, 1998, December 28, 1996, and December 30, 1995, respectively. 3PAGE Alexus. The Company's Alexus systems detect trace amounts of constituents that affect product quality in refillable plastic soft drink, water and other beverage containers. The Company's Alexus systems, introduced in 1992, have been installed on almost 300 bottling lines in more than 30 countries throughout the world, primarily in Europe and Latin America by The Coca-Cola Company, Perrier, and other major beverage producers. During 1997, 1996, and 1995, the Company derived revenues of $19.2 million, $14.9 million, and $18.5 million, respectively, from Alexus systems. InScan. The Company's InScan system uses high-speed X-ray imaging technology to determine accurate fill volume, net volume, and package integrity of containers for the beverage, food, and other industries. InScan uses a low-power X-ray to capture data both vertically and horizontally. This data produces an instant, detailed image of each container, which InScan's proprietary software automatically compares to a predetermined profile used to generate mathematical algorithms to determine whether the container is acceptable. InScan incorporates a sophisticated, high-speed rejection system that automatically removes unacceptable containers from the line. The Company shipped its first InScan units in 1996. The Company's InScan systems are currently used by major beer and soft drink companies in the U.S. and overseas, including Miller, Molson, Coors, Guinness Brewing Company, and The Coca-Cola Company. The Company also made its first sales in 1997 to the household product industry, through Clorox, and to the cosmetics industry, through Estee Lauder. Moisture Systems. The Company's Moisture Systems division, acquired in 1996, designs, manufactures, and markets equipment that uses near-infrared (NIR) spectroscopy to measure moisture and other product constituents, including fats, proteins, oils, flavorings, solvents, adhesives, and coatings, in a variety of manufacturing processes. The Company's systems are used across the food, pharmaceutical, chemical, petrochemical, tobacco, forest products, paper converting, plastics, textiles, corrugating, and other industries. In 1997, the Company introduced the Quadra Beam 6600T, a system that combines an NIR sensor with a processor that displays ingredient information to offer customers a less expensive, easy-to-install, and space-saving on-line analyzer. During 1997 and 1996, the Company derived revenues of $15.4 million and $18.0 million, respectively, from Moisture Systems. Flash-GC Gas Chromatography Systems. The Company designs, manufactures, and markets high-speed gas chromatography systems that can analyze chemical samples at speeds 20 to 50 times faster than conventional gas chromatography. The Company currently markets its systems under the trade name "Flash-GC" to analytical services and quality laboratories and for near on-line process and quality-control applications that require high-speed results. The Company also intends to target certain other segments of the conventional gas chromatography market in which access to high-speed analysis would be advantageous. The 4PAGE Flash-GC has applications in the food, flavors, fragrance, chemical, pharmaceutical, forensics, and automotive industries, as well as in medical and environmental laboratories. The Company intends to target only those sectors of the laboratory and process gas chromatography market that are expected to place a premium on near-instant analysis. The Company is continuing to develop the Flash-GC to configure it with additional detectors and to introduce a process-oriented version for additional on-line applications. Security Instruments The Company designs, manufactures, and markets security instruments that use trace particle- and vapor-detection techniques for forensics, search and screening applications under the direction of police, border police, transportation authorities, and carriers. EGIS Systems. The Company's principal security instrument is the EGIS system, a highly sensitive particle- and vapor-detection system for screening people, baggage, packages, freight, and electronic equipment such as personal computers for the presence of a wide range of explosives, including plastic explosives that have proven difficult to detect using conventional methods. The EGIS system is designed for stand-alone use in the detection of explosives in carry-on items and on personnel, and can be used in conjunction with enhanced X-ray and other advanced imaging systems to provide a comprehensive explosives-detection system for checked luggage. The Company believes that EGIS is the most accurate and most sensitive high-speed trace explosives-detection system available today. EGIS utilizes the same high-speed gas chromatography technology used in the Flash-GC, combined with chemiluminescent detection techniques to detect ultratrace quantities of certain explosives and taggants, and to indicate the concentration and type of explosive detected. Because EGIS' chemiluminescent detector responds only to compounds of certain structures in the sample, rather than to the thousands of compounds that may be contained in the sample, EGIS is more selective than competing trace-detection systems, with fewer false-positive readings. A processor in EGIS compares the chemical profile of the sample to the known profiles of various explosives, including TNT, nitroglycerin, PETN, Semtex, and C-4. Within seconds of the introduction of the sample into EGIS, the system determines whether explosives are present, and, if so, identifies the type and amount. Initially developed with internal funds and contract funding from the Federal Aviation Administration (FAA) and the U.S. Department of State, more than 200 EGIS units have been deployed to date. The EGIS system is currently operational in 24 countries and is in use in carry-on and checked-luggage screening at more than 45 international airports. EGIS is also used in government buildings and embassies, and at border crossings and other locations where there is a high degree of concern for security. The EGIS system has assisted in identifying explosives used in terrorist bombings, including those in the Federal Building in Oklahoma City and the World Trade Center in New York, as well as in Israel, Buenos Aires, 5PAGE and the United Kingdom. In March 1996, the Company supplied the U.S. government with eight EGIS systems to provide counter-terrorism support in Israel. Most recently, the Bureau of Alcohol, Tobacco and Firearms and the Federal Bureau of Investigation used EGIS systems in their attempt to identify the cause of the crash of TWA Flight 800. During 1997, 1996, and 1995, the Company derived revenues of $10.3 million, $7.1 million, and $4.6 million, respectively, from EGIS systems. In September 1996, the Company entered into a development contract with the FAA to develop EGIS II, a lower-cost EGIS unit for use in more portable applications such as remote security checkpoints and counter-terrorism activities. In November 1996, the Company introduced its new SecurScan, a prototype of a walk-through trace detector designed to screen 10 passengers per minute, and introduced its Rampart system, a lower-cost unit for airport applications, in 1997. In addition, in 1997, the Company entered into a development contract with the British Ministry of Defense (MOD) to develop an explosive-detection system that is even more sensitive than the EGIS system. (ii) and (xi) New Products; and Research and Development ------------------------------------------ The Company maintains active programs for the development and introduction of new products and improvements to existing products. The Company also seeks to develop new applications for its existing products and technology. The Company is currently devoting significant resources toward the enhancement of its existing products and the development of new products and technologies, including: enhancing InScan with a wider and higher tunnel, which will allow larger containers to be examined, and make possible the detection of foreign objects and, in some applications, product defects in packaged goods for the food, consumer products, and other industries; developing an advanced generation of moisture-detection products to address recently identified customers needs; and enhancing the Flash-GC to broaden its applications. The Company also is continuing to develop Rampart, a lower-cost unit for use in airport screening of carry-on baggage. In addition, the British MOD is sponsoring the MOD Explosion Particle Dilution Program. The contract is a sole-source contract presented to the Company based upon the well-known performance of the EGIS System. The Company also performs contract engineering and/or development on behalf of its customers. Recent contracts have included funding by the FAA of the development of the SecurScan walk-through explosives-detection system as well as feasibility studies and initial development work for EGIS II. The Company believes that its reputation for being able to apply its core technologies to solve the problems of its customers provides the Company with a significant competitive advantage. Company-funded research and development expenses were $5,051,000, $4,688,000, and $2,741,000 in 1997, 1996, and 1995, respectively. Contract research and development revenues were $1,376,000, 1,758,000, and $3,987,000 in 1997, 1996, and 1995, respectively. 6PAGE (iii) Raw Materials ------------- Supplies purchased by the Company are available either from a number of different suppliers or from alternative sources that could be developed without a material adverse effect on the Company's business. To date, the Company has experienced no difficulties in obtaining these materials. (iv) Patents, Licenses, and Trademarks --------------------------------- The Company's policy is to protect its intellectual property rights by appropriate means, including applying for patents. The Company also enters into licensing agreements with other companies in which it grants or receives rights to specific patents and technical know-how. The Company owns 38 U.S. patents, and has filed applications for four additional United States patents. The Company's U.S. patents, more than 60% of which were issued after 1990, have expiration dates ranging from 1998 through 2014. The Company also owns corresponding patents, or has filed corresponding applications, in a number of jurisdictions throughout the world. In addition, the Company has an exclusive, perpetual, royalty-free license under ten patents covering the use of near-infrared and very near-infrared emitting diodes for on-line spectral measurements. The Company owns several patents covering certain aspects of its chemiluminescent analysis technology and high-speed gas chromatography technology. The Company believes that these patents provide the Company with competitive advantages in the markets for certain of its products. The Company also considers technical know-how, trade secrets, and trademarks to be important to its business. (v) Seasonal Influences ------------------- There are no significant seasonal influences on the Company's sales of its products. (vi) Working Capital Requirements ---------------------------- There are no special inventory requirements or credit terms extended to customers that would have a material adverse effect on the Company's working capital. (vii) Dependency on a Single Customer ------------------------------- Sales to The Coca-Cola Company accounted for 26%, 24%, and 36% of the Company's total revenues in 1997, 1996, and 1995, respectively. (viii) Backlog ------- The Company's backlog of firm orders was $6,922,000 and $11,955,000 as of January 3, 1998 and December 28, 1996, respectively. Certain of these orders are cancellable by the customer upon payment of a cancellation charge. The Company believes that substantially all of the backlog at January 3, 1998, will be shipped or completed during the next 7PAGE twelve months. The Company does not believe that the size of its backlog is necessarily indicative of intermediate or long-term trends in its business. (ix) Government Contracts -------------------- The security instruments manufactured and marketed by the Company for use in airports are subject to regulation by the FAA, corresponding foreign governmental authorities, The International Civil Aviation Organization, and the United Nations organization and are responsible for establishing standard practices for the aviation industry on a worldwide basis. Sales of the Company's security instruments for use in airports have been and will continue to be dependent upon governmental initiatives to require or support the screening of baggage, carry-on items, and people with advanced explosives-detection equipment. Substantially all of such systems have been installed at airports in countries in which the applicable government or regulatory authority overseeing the operations of the airport has mandated such screening. Such mandates are influenced by many factors outside of the control of the Company, including political and budgetary concerns of governments, airlines, and airports. To date, the FAA has not mandated the use of any explosives-detection system. (x) Competition ----------- The markets for the Company's products are highly competitive. Competitors may develop superior products or products of similar quality for sale at the same or lower prices. Moreover, there can be no assurance that the Company's products will not be rendered obsolete by new industry standards or changing technology. There can be no assurance that the Company will be able to compete successfully with existing or new competitors. The Company employs a variety of sales methods for its products and services that are designed to fit the needs of particular customer groups. Process Detection Systems The Company's product quality assurance systems compete with detection systems manufactured by numerous companies. The Company believes, however, that these companies are generally focused on particular niches in the process detection systems market, only in some of which the Company competes. The Alexus system encounters competition throughout the world, but primarily in the German-speaking areas of Europe, with products offered by Walter Grassle GmbH of Germany and Sudtronics S.A. of Switzerland. InScan competes with gamma-based beverage fill-height detectors offered by a number of companies, including Industrial Dynamics Company, based in California, and Heuft Systemtechnik GmbH, based in Germany. Alexus systems are also sold through Krones GmbH, a large German turnkey plant contractor for new bottling lines. Competition in the moisture-detection market is highly fragmented. The Company's principal competitor in this market is Infrared Engineering Limited, based in England. The Company sells and services both its InScan and moisture systems equipment through a mix of direct sales, 8PAGE manufacturers' representatives, and original equipment manufacturer relationships around the world. The Company also operates factory service centers for these products. The Flash-GC is a new technology competing in the developing high-speed gas chromatography market segment. The Company's Flash-GC competes principally against high-speed gas chromatographs offered by ChromFast, based in Michigan. The Company's Flash-GC systems are sold through a direct sales and services organization. The Company is currently attempting to recruit additional direct sales representatives for certain regions of the United States. Competition in the markets for each of the Company's process detection systems is based primarily on performance, durability, service and, to a lesser extent, price. The Company believes that its systems' performance and speed, as well as the Company's reputation for developing superior new technologies and for the innovative application of existing technologies to a variety of high-speed production environments and product quality assurance problems, are competitive advantages. Security Instruments In the security instrument market, the Company competes with a small number of companies, including other makers of chemical trace detection instruments, and, to a lesser degree, makers of enhanced X-ray detectors. Competition in this market is based primarily on performance, including speed, accuracy, and the range of explosives that can be detected; ease of use; service; and price. The Company's principal competitor in the trace detection market is Barringer Technologies Inc., a Canadian firm that has placed several trace detectors in airport applications.The Company's security instruments are sold to a few key decision-makers around the world, primarily government agencies or private companies fulfilling government regulations. Accordingly, sales are made by a small, specialized direct sales force, supported by a broader service organization, from offices shared with Alexus sales and service organizations. (xii) Environmental Protection Regulations ------------------------------------ The Company believes that compliance by the Company with federal, state, and local environmental protection regulations will not have a material adverse effect on its capital expenditures, earnings, or competitive position. (xiii) Number of Employees ------------------- As of January 3, 1998, the Company had 218 full-time employees. (d) Financial Information About Exports by Domestic Operations and About -------------------------------------------------------------------- Foreign Operations ------------------ Financial information about exports by domestic operations and about foreign operations is summarized in Note 8 to Consolidated Financial Statements in the Registrant's 1997 Annual Report to Shareholders and is incorporated herein by reference. 9PAGE (e) Executive Officers of the Registrant ------------------------------------ Present Title (Year First Became Name Age Executive Officer) -------------------- --- -------------------------------------- James Barbookles 49 Chief Executive Officer and President (1997) David H. Fine 55 Senior Vice President (1992) John N. Hatsopoulos 63 Chief Financial Officer and Senior Vice President (1990) Paul F. Kelleher 55 Chief Accounting Officer (1990) Each executive officer serves until his successor is chosen or appointed by the Board of Directors and qualified, or until his earlier resignation, death, or removal. Messrs. Hatsopoulos and Kelleher have held comparable positions for at least five years with Thermedics or Thermo Electron. Mr. Barbookles has been President and Chief Executive Officer of the Company since November 1997. Mr. Barbookles is also currently President and Chief Executive Officer of Orion Research, Inc. (Orion), a wholly owned subsidiary of Thermedics, and has been since 1995. Mr. Barbookles joined Orion in 1989 as Vice President of Research, Development, and Engineering and was promoted to President and Chief Operating Officer in 1993. Dr. Fine has been Senior Vice President of the Company from 1992 and was a Vice President of the Company since its inception in 1990 until 1992. Messrs. Hatsopoulos and Kelleher are full-time employees of Thermo Electron, but devote such portions of their time to the Company's affairs as the Company's needs reasonably require from time to time. Item 2. Properties ---------- The Company operates from two principal facilities: an 85,000-square foot office, research and development, and manufacturing facility in Chelmsford, Massachusetts occupied under a lease expiring in 2006, subject to one five-year renewal option at the election of the Company; and a 35,000-square foot office and manufacturing facility in Hopkinton, Massachusetts, occupied under a lease expiring in 1999. The Company also leases approximately 10,000 square feet in Enschede, Holland, occupied under a lease expiring in 2000. In addition, the Company leases approximately 8,500 square feet of office space throughout the world for its sales and service operations. The Company believes that these facilities are adequate for its present operations. Item 3. Legal Proceedings ----------------- Not applicable. Item 4. Submission of Matters to a Vote of the Security Holders ------------------------------------------------------- Not applicable. 10PAGE PART II Item 5. Market for Registrant's Common Equity and Related Stockholder ------------------------------------------------------------- Matters ------- (a) Information concerning the market and market price for the Registrant's common stock, $.10 par value, and dividend policy is included under the sections labeled "Common Stock Market Information" and "Dividend Policy" in the Registrant's 1997 Annual Report to Shareholders and is incorporated herein by reference. (b) The Company sold 2,671,292 shares of common stock, par value $.01 per share, pursuant to a Registration Statement on Form S-1 (File No. 333-19199), which was declared effective by the Securities and Exchange Commission on February 21, 1997. The managing underwriters of the offering were NatWest Securities Limited and Lehman Brothers. The aggregate gross proceeds of the offering were $30,720,000. The Company's net proceeds from the offering were $28,078,000. As of January 3, 1998, the Company had expended $644,000 of such net proceeds for the purchase of property, plant, and equipment, $3,980,000 for research and development, and $8,470,000 for working capital needs. As of January 3, 1998, the Company had expended an aggregate of $13,094,000 of such net proceeds. The Company invested, from time to time, the balance of such net proceeds primarily in investment-grade interest- or dividend-bearing instruments. As of January 3, 1998, $14,984,000 was invested pursuant to a repurchase agreement with Thermo Electron Corporation. As of January 3, 1998, the Company had $44,735,000 of cash and cash equivalents. Item 6. Selected Financial Data ----------------------- The information required under this item is included under the sections labeled "Selected Financial Information" and "Dividend Policy" in the Registrant's 1997 Annual Report to Shareholders and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- The information required under this item is included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1997 Annual Report to Shareholders and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data ------------------------------------------- The Registrant's Consolidated Financial Statements as of January 3, 1998, and Supplementary Data are included in the Registrant's 1997 Annual Report to Shareholders and are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure -------------------- Not applicable. 11PAGE PART III Item 10. Directors and Executive Officers of the Registrant -------------------------------------------------- The information concerning directors required under this item is incorporated herein by reference from the material contained under the caption "Election of Directors" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. The information concerning delinquent filers pursuant to Item 405 of Regulation S-K is incorporated herein by reference from the material contained under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" under the caption "Stock Ownership" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 11. Executive Compensation ---------------------- The information required under this item is incorporated herein by reference from the material contained under the caption "Executive Compensation" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The information required under this item is incorporated herein by reference from the material contained under the caption "Stock Ownership" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 13. Certain Relationships and Related Transactions ---------------------------------------------- The information required under this item is incorporated herein by reference from the material contained under the caption "Relationship with Affiliates" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. 12PAGE PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form ------------------------------------------------------------ 8-K --- (a,d) Financial Statements and Schedules ---------------------------------- (1) The consolidated financial statements set forth in the list below are filed as part of this Report. (2) The consolidated financial statement schedule set forth in the list below is filed as part of this Report. (3) Exhibits filed herewith or incorporated herein by reference are set forth in Item 14(c) below. List of Financial Statements and Schedules Referenced in this ------------------------------------------------------------- Item 14 ------- Information incorporated by reference from Exhibit 13 filed herewith: Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Shareholders' Equity Notes to Consolidated Financial Statements Reports of Independent Public Accountants Financial Statement Schedule filed herewith: Schedule II: Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or not required, or because the required information is shown either in the financial statements or in the notes thereto. (b) Reports on Form 8-K ------------------- None. (c) Exhibits -------- See Exhibit Index on the page immediately preceding exhibits. 13PAGE SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 16, 1998 THERMEDICS DETECTION INC. By: James Barbookles --------------------------- James Barbookles President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, as of March 16, 1998. Signature Title --------- ----- By: James Barbookles Chief Executive Officer, President ---------------------- and Director James Barbookles By: John N. Hatsopoulos Chief Financial Officer, Senior Vice ---------------------- President and Director John N. Hatsopoulos By: Paul F. Kelleher Chief Accounting Officer ---------------------- Paul F. Kelleher By: Morton Collins Director ---------------------- Morton Collins By: Matthew C. Weisman Director ---------------------- Matthew C. Weisman By: John W. Wood Jr. Chairman of the Board and Director ---------------------- John W. Wood Jr. 14PAGE Report of Independent Public Accountants ---------------------------------------- To the Shareholders and Board of Directors of Thermedics Detection Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Thermedics Detection Inc.'s Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 12, 1998. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 on page 13 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the consolidated financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Boston, Massachusetts February 12, 1998 15PAGE SCHEDULE II THERMEDICS DETECTION INC. Valuation And Qualifying Accounts (In thousands) Balance at Provision Accounts Balance Beginning Charged to Accounts Written at End Description of Year Expense Recovered Off Other(a) of Year ------------------------------------------------------------------------------ Allowance for Doubtful Accounts Year Ended Jan. 3, 1998 $1,215 $ 116 $ 7 $ (522) $ (6) $ 810 Year Ended Dec. 28, 1996 $ 516 $ 582 $ 167 $ (172) $ 122 $1,215 Year Ended Dec. 30, 1995 $ 547 $ 98 $ - $ (129) $ - $ 516 (a)Allowance of business acquired during the year as described in Note 2 to Consolidated Financial Statements in the Registrant's 1997 Annual Report to Shareholders and the effect of foreign currency translation. 16PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ------------------------------------------------------------------------ 2.1* Asset Purchase Agreement dated as of January 25, 1996, among the Registrant, Moisture Systems Corporation, and certain Affiliates of Moisture Systems Corporation. Pursuant to Item 601(b)(2) of Regulation S-K, schedules to this Agreement have been omitted. The Registrant hereby undertakes to furnish supplementally a copy of such schedules to the Commission upon request. 2.2* Share Purchase Agreement dated as of January 25, 1996, among the Registrant, Rutter Holding B.V., and certain Affiliates of Rutter Holding B.V. Pursuant to Item 601(b)(2) of Regulation S-K, schedules to this Agreement have been omitted. The Registrant hereby undertakes to furnish supplementally a copy of such schedules to the Commission upon request. 3.1* Articles of Organization of the Registrant, as amended. 3.2* By-Laws of the Registrant. 4.1* Specimen Common Stock Certificate. 4.2* Specimen Rights Certificate. 10.1* Corporate Services Agreement dated as of March 20, 1996, between Thermo Electron Corporation and the Registrant. 10.2 Thermo Electron Corporate Charter, as amended and restated effective January 3, 1993 (incorporated by reference herein from Exhibit 10.1 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-8002]). 10.3* Tax Allocation Agreement dated as of March 20, 1996, between Thermedics Inc. and the Registrant. 10.4* Master Repurchase Agreement dated as of March 20, 1996, between Thermo Electron and the Registrant. 10.5 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 10, 1997, between Thermo Electron and the Registrant. 10.6 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 10, 1997, between Thermedics and the Registrant. 17PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ------------------------------------------------------------------------ 10.7* Equity Incentive Plan of the Registrant. 10.8* Deferred Compensation Plan for Directors of the Registrant. In addition to the stock-based compensation plans of the Registrant, the executive officers of the Registrant may be granted awards under stock-based compensation plans of Thermo Electron and Thermedics for services rendered to the Registrant or to such affiliated corporations. The terms of such plans are substantially the same as those of the Registrant's Equity Incentive Plan. 10.9* $21.2 Million Principal Amount Promissory Note due March 1998, issued by the Registrant to Thermedics. 10.10* Form of Indemnification Agreement for Officers and Directors. 10.11* Stock Purchase Agreement dated as of March 25, 1996, between David H. Fine and the Registrant. 10.12 Stock Holdings Assistance Plan and Form of Promissory Note. 13 Annual Report to Shareholders for the year ended January 3, 1998 (only those portions incorporated herein by reference). 21 Subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Deloitte & Touche Registeraccountants. 27 Financial Data Schedule. Each exhibit above that is marked with an asterisk (*) is incorporated by reference to the correspondingly numbered exhibit to the Company's Registration Statement on Form S-1 [File No. 333-31987]. EX-10.5 2 EXHIBT 10.5 AMENDED AND RESTATED MASTER GUARANTEE REIMBURSEMENT AND LOAN AGREEMENT This AGREEMENT is entered into as of the 16th day of December, 1997, by and among Thermo Electron Corporation (the "Parent") and those of its subsidiaries that join in this Agreement by executing the signature page hereto (the "Majority Owned Subsidiaries"). WITNESSETH: WHEREAS, the Majority Owned Subsidiaries and their wholly-owned subsidiaries wish to enter into various financial transactions, such as convertible or nonconvertible debt, loans, and equity offerings, and other contractual arrangements with third parties (the "Underlying Obligations") and may provide credit support to, on behalf of or for the benefit of, other subsidiaries of the Parent ("Credit Support Obligations"); WHEREAS, the Majority Owned Subsidiaries and the Parent acknowledge that the Majority Owned Subsidiaries and their wholly-owned subsidiaries may be unable to enter into many kinds of Underlying Obligations without a guarantee of their performance thereunder from the Parent (a "Parent Guarantee") or without obtaining Credit Support Obligations from other Majority Owned Subsidiaries; WHEREAS, the Majority Owned Subsidiaries and their wholly-owned subsidiaries may borrow funds from the Parent, and the Parent may loan funds or provide credit to the Majority Owned Subsidiaries and their wholly-owned subsidiaries, on a short-term and unsecured basis; WHEREAS, certain Majority Owned Subsidiaries ("Second Tier Majority Owned Subsidiaries ") may themselves be majority owned subsidiaries of other Majority Owned Subsidiaries ("First Tier Majority Owned Subsidiaries"); WHEREAS, for various reasons, Parent Guarantees of a Second Tier Majority Owned Subsidiary's Underlying Obligations may be demanded and given without the respective First Tier Majority Owned Subsidiary also issuing a guarantee of such Underlying Obligation; WHEREAS, the Parent may itself make a loan or provide other credit to a Second Tier Majority Owned Subsidiary or its wholly-owned subsidiaries under circumstances where the applicable First Tier Majority Owned Subsidiary does not provide such credit; and WHEREAS, the Parent is willing to consider continuing to issue Parent Guarantees and providing credit, and the Majority Owned Subsidiaries are willing to consider continuing to provide PAGE Credit Support Obligations and to borrow funds, on the terms and conditions set forth below; NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each party hereto, the parties agree as follows: 1. If the Parent provides a Parent Guarantee of an Underlying Obligation, and the beneficiary(ies) of the Parent Guarantee enforce the Parent Guarantee, or the Parent performs under the Parent Guarantee for any other reason, then the Majority Owned Subsidiary that is obligated, either directly or indirectly through a wholly-owned subsidiary, under such Underlying Obligation shall indemnify and save harmless the Parent from any liability, cost, expense or damage (including reasonable attorneys' fees) suffered by the Parent as a result of the Parent Guarantee. If the Underlying Obligation is issued by a Second Tier Majority Owned Subsidiary or a wholly-owned subsidiary thereof, and such Second Tier Majority Owned Subsidiary is unable to fully indemnify the Parent (because of the poor financial condition of such Second Tier Majority Owned Subsidiary, or for any other reason), then the First Tier Majority Owned Subsidiary that owns the majority of the stock of such Second Tier Majority Owned Subsidiary shall indemnify and save harmless the Parent from any remaining liability, cost, expense or damage (including reasonable attorneys' fees) suffered by the Parent as a result of the Parent Guarantee. If a Majority Owned Subsidiary or a wholly-owned subsidiary thereof provides a Credit Support Obligation for any subsidiary of the Parent, other than a subsidiary of such Majority Owned Subsidiary, and the beneficiary(ies) of the Credit Support Obligation enforce the Credit Support Obligation, or the Majority Owned Subsidiary or its wholly-owned subsidiary performs under the Credit Support Obligation for any other reason, then the Parent shall indemnify and save harmless the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, from any liability, cost, expense or damage (including reasonable attorneys' fees) suffered by the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, as a result of the Credit Support Obligation. Without limiting the foregoing, Credit Support Obligations include the deposit of funds by a Majority Owned Subsidiary or a wholly-owned subsidiary thereof in a credit arrangement with a banking facility whereby such funds are available to the banking facility as collateral for overdraft obligations of other Majority Owned Subsidiaries or their subsidiaries also participating in the credit arrangement with such banking facility. 2. For purposes of this Agreement, the term "guarantee" shall include not only a formal guarantee of an obligation, but PAGE also any other arrangement where the Parent is liable for the obligations of a Majority Owned Subsidiary or its wholly-owned subsidiaries. Such other arrangements include (a) representations, warranties and/or covenants or other obligations joined in by the Parent, whether on a joint or joint and several basis, for the benefit of the Majority Owned Subsidiary or its wholly-owned subsidiaries and (b) responsibility of the Parent by operation of law for the acts and omissions of the Majority Owned Subsidiary or its wholly-owned subsidiaries, including controlling person liability under securities and other laws. 3. Promptly after the Parent receives notice that a beneficiary of a Parent Guarantee is seeking to enforce such Parent Guarantee, the Parent shall notify the Majority Owned Subsidiary(s) obligated, either directly or indirectly through a wholly-owned subsidiary, under the relevant Underlying Obligation. Such Majority Owned Subsidiary(s) or wholly-owned subsidiary thereof, as applicable, shall have the right, at its own expense, to contest the claim of such beneficiary. If a Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, is contesting the claim of such beneficiary, the Parent will not perform under the relevant Parent Guarantee unless and until, in the Parent's reasonable judgment, the Parent is obligated under the terms of such Parent Guarantee to perform. Subject to the foregoing, any dispute between a Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, and a beneficiary of a Parent Guarantee shall not affect such Majority Owned Subsidiary's obligation to promptly indemnify the Parent hereunder. Promptly after a Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, receives notice that a beneficiary of a Credit Support Obligation is seeking to enforce such Credit Support Obligation, the Majority Owned Subsidiary shall notify the Parent. The Parent shall have the right, at its own expense, to contest the claim of such beneficiary. If the Parent or the subsidiary of the Parent on whose behalf the Credit Support Obligation is given is contesting the claim of such beneficiary, the Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, will not perform under the relevant Credit Support Obligation unless and until, in the Majority Owned Subsidiary's reasonable judgment, the Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, is obligated under the terms of such Credit Support Obligation to perform. Subject to the foregoing, any dispute between the Parent or the subsidiary of the Parent on whose behalf the Credit Support Obligation was given, on the one hand, and a beneficiary of a Credit Support Obligation, on the other, shall not affect the Parent's obligation to promptly indemnify the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, hereunder. PAGE 4. Upon the request of a Majority Owned Subsidiary, the Parent may make loans and advances to the Majority Owned Subsidiary or its wholly-owned subsidiaries on a short-term, revolving credit basis, from time to time in such amounts as mutually determined by the Parent and the Majority Owned Subsidiary. The aggregate principal amount of such loans and advances shall be reflected on the books and records of the Majority Owned Subsidiary (or wholly-owned subsidiary, as applicable) and the Parent. All such loans and advances shall be on an unsecured basis unless specifically provided otherwise in loan documents executed at that time. The Majority Owned Subsidiary or its wholly-owned subsidiaries, as applicable, shall pay interest on the aggregate unpaid principal amount of such loans from time to time outstanding at a rate ("Interest Rate") equal to the rate of the Commercial Paper Composite Rate for 90-day maturities as reported by Merrill Lynch Capital Markets, as an average of the last five business days of such Majority Owned Subsidiary's latest fiscal quarter then ended, plus twenty-five (25) basis points. The Interest Rate shall be adjusted on the first business day of each fiscal quarter of such Majority Owned Subsidiary pursuant to the Interest Rate formula contained in the preceding sentence and shall be in effect for the entirety of such fiscal quarter. Interest shall be computed on a 360-day basis. The aggregate principal amount outstanding and accrued interest thereon shall be payable on demand. The principal and accrued interest may be paid by the Majority Owned Subsidiaries or their wholly-owned subsidiaries, as applicable, at any time or from time to time, in whole or in part, without premium or penalty. All payments shall be applied first to accrued interest and then to principal. Principal and interest shall be payable in lawful money of the United States of America, in immediately available funds, at the principal office of the Parent or at such other place as the Parent may designate from time to time in writing to the Majority Owned Subsidiary. The unpaid principal amount of any such borrowings, and accrued interest thereon, shall become immediately due and payable, without demand, upon the failure of the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, to pay its debts as they become due, the insolvency of the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, the filing by or against the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, of any petition under the U.S. Bankruptcy Code (or the filing of any similar petition under the insolvency law of any jurisdiction), or the making by the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, of an assignment or trust mortgage for the benefit of creditors or the appointment of a receiver, custodian or similar agent with respect to, or the taking by any such person of possession of, any property of the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable. In case any payments of principal and interest shall not be paid when PAGE due, the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, further promises to pay all cost of collection, including reasonable attorneys' fees. 5. If the Parent makes a loan or provides other credit ("Credit Extension") to a Second Tier Majority Owned Subsidiary, the First Tier Majority Owned Subsidiary that owns the majority of the stock of such Second Tier Majority Owned Subsidiary hereby guarantees the Second Tier Majority Owned Subsidiary's obligations to the Parent thereunder. Such guaranty shall be enforced only after the Parent, in its reasonable judgment, determines that the Second Tier Majority Owned Subsidiary is unable to fully perform its obligations under the Credit Extension. If the Parent provides Credit Extension to a wholly-owned subsidiary of a Second Tier Majority Owned Subsidiary, the Second Tier Majority Owned Subsidiary hereby guarantees it wholly-owned subsidiary's obligations to the Parent thereunder and the First Tier Majority Owned Subsidiary that owns the majority of the stock of such Second Tier Majority Owned Subsidiary hereby guarantees the Second Tier Majority Owned Subsidiary's obligations to the Parent hereunder. Such guaranty by the First Tier Majority Owned Subsidiary shall be enforced only after the Parent, in its reasonable judgment, determines that the Second Tier Majority Owned Subsidiary is unable to fully perform its guaranty obligation hereunder. 6. All payments required to be made by a Majority Owned Subsidiary or its wholly-owned subsidiaries, as applicable, shall be made within two days after receipt of notice from the Parent. All payments required to be made by the Parent shall be made within two days after receipt of notice from the Majority Owned Subsidiary. 7. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts applicable to contracts made and performed therein. PAGE IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the date first above written. THERMO ELECTRON CORPORATION By: /s/ Melissa F. Riordan ------------------------------ Title: Treasurer THERMEDICS DETECTION INC. By: /s/ James C. Barbookles ------------------------------ Title: President EX-10.6 3 EXHIBIT 10.6 AMENDED AND RESTATED MASTER GUARANTEE REIMBURSEMENT AND LOAN AGREEMENT This AGREEMENT is entered into as of the 16th day of December, 1997, by and among Thermedics Inc. (the "Parent") and those of its subsidiaries that join in this Agreement by executing the signature page hereto (the "Majority Owned Subsidiaries"). WITNESSETH: WHEREAS, the Majority Owned Subsidiaries and their wholly-owned subsidiaries wish to enter into various financial transactions, such as convertible or nonconvertible debt, loans, and equity offerings, and other contractual arrangements with third parties (the "Underlying Obligations") and may provide credit support to, on behalf of or for the benefit of, other subsidiaries of the Parent ("Credit Support Obligations"); WHEREAS, the Majority Owned Subsidiaries and the Parent acknowledge that the Majority Owned Subsidiaries and their wholly-owned subsidiaries may be unable to enter into many kinds of Underlying Obligations without a guarantee of their performance thereunder from the Parent (a "Parent Guarantee") or without obtaining Credit Support Obligations from other Majority Owned Subsidiaries; WHEREAS, the Majority Owned Subsidiaries and their wholly-owned subsidiaries may borrow funds from the Parent, and the Parent may loan funds or provide credit to the Majority Owned Subsidiaries and their wholly-owned subsidiaries, on a short-term and unsecured basis; and WHEREAS, the Parent is willing to consider continuing to issue Parent Guarantees and providing credit, and the Majority Owned Subsidiaries are willing to consider continuing to provide Credit Support Obligations and to borrow funds, on the terms and conditions set forth below; NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each party hereto, the parties agree as follows: 1. If the Parent provides a Parent Guarantee of an Underlying Obligation, and the beneficiary(ies) of the Parent Guarantee enforce the Parent Guarantee, or the Parent performs under the Parent Guarantee for any other reason, then the Majority Owned Subsidiary that is obligated, either directly or indirectly through a wholly-owned subsidiary, under such Underlying Obligation shall indemnify and save harmless the Parent from any liability, cost, expense or damage (including reasonable attorneys' fees) suffered by the PAGE Parent as a result of the Parent Guarantee. If a Majority Owned Subsidiary or a wholly-owned subsidiary thereof provides a Credit Support Obligation for any subsidiary of the Parent, other than a subsidiary of such Majority Owned Subsidiary, and the beneficiary(ies) of the Credit Support Obligation enforce the Credit Support Obligation, or the Majority Owned Subsidiary or its wholly-owned subsidiary performs under the Credit Support Obligation for any other reason, then the Parent shall indemnify and save harmless the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, from any liability, cost, expense or damage (including reasonable attorneys' fees) suffered by the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, as a result of the Credit Support Obligation. Without limiting the foregoing, Credit Support Obligations include the deposit of funds by a Majority Owned Subsidiary or a wholly-owned subsidiary thereof in a credit arrangement with a banking facility whereby such funds are available to the banking facility as collateral for overdraft obligations of other Majority Owned Subsidiaries or their subsidiaries also participating in the credit arrangement with such banking facility. 2. For purposes of this Agreement, the term "guarantee" shall include not only a formal guarantee of an obligation, but also any other arrangement where the Parent is liable for the obligations of a Majority Owned Subsidiary or its wholly-owned subsidiaries. Such other arrangements include (a) representations, warranties and/or covenants or other obligations joined in by the Parent, whether on a joint or joint and several basis, for the benefit of the Majority Owned Subsidiary or its wholly-owned subsidiaries and (b) responsibility of the Parent by operation of law for the acts and omissions of the Majority Owned Subsidiary or its wholly-owned subsidiaries, including controlling person liability under securities and other laws. 3. Promptly after the Parent receives notice that a beneficiary of a Parent Guarantee is seeking to enforce such Parent Guarantee, the Parent shall notify the Majority Owned Subsidiary(s) obligated, either directly or indirectly through a wholly-owned subsidiary, under the relevant Underlying Obligation. Such Majority Owned Subsidiary(s) or wholly-owned subsidiary thereof, as applicable, shall have the right, at its own expense, to contest the claim of such beneficiary. If a Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, is contesting the claim of such beneficiary, the Parent will not perform under the relevant Parent Guarantee unless and until, in the Parent's reasonable judgment, the Parent is obligated under the terms of such Parent Guarantee to perform. Subject to the foregoing, any dispute between a Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, and a beneficiary of a Parent Guarantee shall not affect such PAGE Majority Owned Subsidiary's obligation to promptly indemnify the Parent hereunder. Promptly after a Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, receives notice that a beneficiary of a Credit Support Obligation is seeking to enforce such Credit Support Obligation, the Majority Owned Subsidiary shall notify the Parent. The Parent shall have the right, at its own expense, to contest the claim of such beneficiary. If the Parent or the subsidiary of the Parent on whose behalf the Credit Support Obligation is given is contesting the claim of such beneficiary, the Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, will not perform under the relevant Credit Support Obligation unless and until, in the Majority Owned Subsidiary's reasonable judgment, the Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, is obligated under the terms of such Credit Support Obligation to perform. Subject to the foregoing, any dispute between the Parent or the subsidiary of the Parent on whose behalf the Credit Support Obligation was given, on the one hand, and a beneficiary of a Credit Support Obligation, on the other, shall not affect the Parent's obligation to promptly indemnify the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, hereunder. 4. Upon the request of a Majority Owned Subsidiary, the Parent may make loans and advances to the Majority Owned Subsidiary or its wholly-owned subsidiaries on a short-term, revolving credit basis, from time to time in such amounts as mutually determined by the Parent and the Majority Owned Subsidiary. The aggregate principal amount of such loans and advances shall be reflected on the books and records of the Majority Owned Subsidiary (or wholly-owned subsidiary, as applicable) and the Parent. All such loans and advances shall be on an unsecured basis unless specifically provided otherwise in loan documents executed at that time. The Majority Owned Subsidiary or its wholly-owned subsidiaries, as applicable, shall pay interest on the aggregate unpaid principal amount of such loans from time to time outstanding at a rate ("Interest Rate") equal to the rate of the Commercial Paper Composite Rate for 90-day maturities as reported by Merrill Lynch Capital Markets, as an average of the last five business days of such Majority Owned Subsidiary's latest fiscal quarter then ended, plus twenty-five (25) basis points. The Interest Rate shall be adjusted on the first business day of each fiscal quarter of such Majority Owned Subsidiary pursuant to the Interest Rate formula contained in the preceding sentence and shall be in effect for the entirety of such fiscal quarter. Interest shall be computed on a 360-day basis. The aggregate principal amount outstanding and accrued interest thereon shall be payable on demand. The principal and accrued interest may be paid by the Majority Owned Subsidiaries or their wholly-owned subsidiaries, as applicable, at any time or from time to PAGE time, in whole or in part, without premium or penalty. All payments shall be applied first to accrued interest and then to principal. Principal and interest shall be payable in lawful money of the United States of America, in immediately available funds, at the principal office of the Parent or at such other place as the Parent may designate from time to time in writing to the Majority Owned Subsidiary. The unpaid principal amount of any such borrowings, and accrued interest thereon, shall become immediately due and payable, without demand, upon the failure of the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, to pay its debts as they become due, the insolvency of the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, the filing by or against the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, of any petition under the U.S. Bankruptcy Code (or the filing of any similar petition under the insolvency law of any jurisdiction), or the making by the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, of an assignment or trust mortgage for the benefit of creditors or the appointment of a receiver, custodian or similar agent with respect to, or the taking by any such person of possession of, any property of the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable. In case any payments of principal and interest shall not be paid when due, the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, further promises to pay all cost of collection, including reasonable attorneys' fees. 5. All payments required to be made by a Majority Owned Subsidiary or its wholly-owned subsidiaries, as applicable, shall be made within two days after receipt of notice from the Parent. All payments required to be made by the Parent shall be made within two days after receipt of notice from the Majority Owned Subsidiary. 6. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts applicable to contracts made and performed therein. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the date first above written. THERMEDICS INC. By: /s/ John W. Wood, Jr. ------------------------------ Title: President THERMEDICS DETECTION INC. By: /s/ James C. Barbookles ------------------------------ Title: President EX-10.12 4 EXHIBIT 10.12 THERMEDICS DETECTION INC. RESTATED STOCK HOLDING ASSISTANCE PLAN SECTION 1. Purpose. The purpose of this Plan is to benefit Thermedics Detection Inc. (the "Company") and its stockholders by encouraging Key Employees to acquire and maintain share ownership in the Company, by increasing such employees' proprietary interest in promoting the growth and performance of the Company and its subsidiaries and by providing for the implementation of the Stock Holding Policy. SECTION 2. Definitions. The following terms, when used in the Plan, shall have the meanings set forth below: Committee: The Human Resources Committee of the Board of Directors of the Company as appointed from time to time. Common Stock: The common stock of the Company and any successor thereto. Company: Thermedics Detection Inc., a Massachusetts corporation. Stock Holding Policy: The Stock Holding Policy of the Company, as adopted by the Committee and as in effect from time to time. Key Employee: Any employee of the Company or any of its subsidiaries, including any officer or member of the Board of Directors who is also an employee, as designated by the Committee, and who, in the judgment of the Committee, will be in a position to contribute significantly to the attainment of the Company's strategic goals and long-term growth and prosperity. Loans: Loans extended to Key Employees by the Company pursuant to this Plan. Plan: The Thermedics Detection Inc. Stock Holding Assistance Plan, as amended from time to time. SECTION 3. Administration. The Plan and the Stock Holding Policy shall be administered by the Committee, which shall have authority to interpret the Plan and the Stock Holding Policy and, subject to their provisions, to prescribe, amend and rescind any rules and regulations and to make all other determinations necessary or desirable for the administration thereof. The Committee's PAGE interpretations and decisions with regard to the Plan and the Stock Holding Policy and such rules and regulations as may be established thereunder shall be final and conclusive. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or the Stock Holding Policy, or in any Loan in the manner and to the extent the Committee deems desirable to carry it into effect. No member of the Committee shall be liable for any action or omission in connection with the Plan or the Stock Holding Policy that is made in good faith. SECTION 4. Loans and Loan Limits. The Committee has determined that the provision of Loans from time to time to Key Employees in such amounts as to cause such Key Employees to comply with the Stock Holding Policy is, in the judgment of the Committee, reasonably expected to benefit the Company and authorizes the Company to extend Loans from time to time to Key Employees in such amounts as may be requested by such Key Employees in order to comply with the Stock Holding Policy. Such Loans may be used solely for the purpose of acquiring Common Stock (other than upon the exercise of stock options or under employee stock purchase plans) in open market transactions or from the Company. Each Loan shall be full recourse and evidenced by a non-interest bearing promissory note substantially in the form attached hereto as Exhibit A (the "Note") and maturing in accordance with the provisions of Section 6 hereof, and containing such other terms and conditions, which are not inconsistent with the provisions of the Plan and the Stock Holding Policy, as the Committee shall determine in its sole and absolute discretion. SECTION 5. Federal Income Tax Treatment of Loans. For federal income tax purposes, interest on Loans shall be imputed on any interest free Loan extended under the Plan. A Key Employee shall be deemed to have paid the imputed interest to the Company and the Company shall be deemed to have paid said imputed interest back to the Key Employee as additional compensation. The deemed interest payment shall be taxable to the Company as income, and may be deductible to the Key Employee to the extent allowable under the rules relating to investment interest. The deemed compensation payment to the Key Employee shall be taxable to the employee and deductible to the Company, but shall also be subject to employment taxes such as FICA and FUTA. SECTION 6. Maturity of Loans. Each Loan to a Key Employee hereunder shall be due and payable on demand by the Company. If no such demand is made, then each Loan shall mature and the principal thereof shall become due and payable on the fifth anniversary of the date of PAGE the Loan, provided that the Committee may, in its sole and absolute discretion, authorize such other maturity and repayment schedule as the Committee may determine. Each Loan shall also become immediately due and payable in full, without demand, upon the occurrence of any of the events set forth in the Note; provided that the Committee may, in its sole and absolute discretion, authorize an extension of the time for repayment of a Loan upon such terms and conditions as the Committee may determine. SECTION 7. Amendment and Termination of the Plan. The Committee may from time to time alter or amend the Plan or the Stock Holding Policy in any respect, or terminate the Plan or the Stock Holding Policy at any time. No such amendment or termination, however, shall alter or otherwise affect the terms and conditions of any Loan then outstanding to Key Employee without such Key Employee's written consent, except as otherwise provided herein or in the promissory note evidencing such Loan. SECTION 8. Miscellaneous Provisions. (a) No employee or other person shall have any claim or right to receive a Loan under the Plan, and no employee shall have any right to be retained in the employ of the Company due to his or her participation in the Plan. (b) No Loan shall be made hereunder unless counsel for the Company shall be satisfied that such Loan will be in compliance with applicable federal, state and local laws. (c) The expenses of the Plan shall be borne by the Company. (d) The Plan shall be unfunded, and the Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the making of any Loan under the Plan. (e) Except as otherwise provided in Section 7 hereof, by accepting any Loan under the Plan, each Key Employee shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under the Plan or the Stock Holding Policy by the Company, the Board of Directors of the Company or the Committee. (f) The appropriate officers of the Company shall cause to be filed any reports, returns or other information regarding Loans hereunder, as may be required by any applicable statute, rule or regulation. SECTION 9. Effective Date. The Plan and the Stock Holding Policy shall become effective upon approval and adoption by the Committee. PAGE EXHIBIT A TO STOCK HOLDING ASSISTANCE PLAN THERMEDICS DETECTION INC. Promissory Note $_________ Dated:____________ For value received, ________________, an individual whose residence is located at _______________________ (the "Employee"), hereby promises to pay to Thermedics Detection Inc. (the "Company"), or assigns, ON DEMAND, but in any case on or before [insert date which is the fifth anniversary of date of issuance] (the "Maturity Date"), the principal sum of [loan amount in words] ($_______), or such part thereof as then remains unpaid, without interest. Principal shall be payable in lawful money of the United States of America, in immediately available funds, at the principal office of the Company or at such other place as the Company may designate from time to time in writing to the Employee. Unless the Company has already made a demand for payment in full of this Note, the Employee agrees to repay to the Company from the Employee's annual cash incentive compensation (referred to as bonus), beginning with the first such bonus payment to occur after the date of this Note and on each of the next four bonus payment dates occurring prior to the Maturity Date, such amount as may be designated by the Company. Any amount remaining unpaid under this Note shall be due and payable on the Maturity Date. This Note may be prepaid at any time or from time to time, in whole or in part, without any premium or penalty. The Employee acknowledges and agrees that the Company has advanced to the Employee the principal amount of this Note pursuant to the Company's Stock Holding Assistance Plan, and that all terms and conditions of such Plan are incorporated herein by reference. The unpaid principal amount of this Note shall be and become immediately due and payable without notice or demand, at the option of the Company, upon the occurrence of any of the following events: (a) the termination of the Employee's employment with the Company, with or without cause, for any reason or for no reason; (b) the death or disability of the Employee; PAGE (c) the failure of the Employee to pay his or her debts as they become due, the insolvency of the Employee, the filing by or against the Employee of any petition under the United States Bankruptcy Code (or the filing of any similar petition under the insolvency law of any jurisdiction), or the making by the Employee of an assignment or trust mortgage for the benefit of creditors or the appointment of a receiver, custodian or similar agent with respect to, or the taking by any such person of possession of, any property of the Employee; or (d) the issuance of any writ of attachment, by trustee process or otherwise, or any restraining order or injunction not removed, repealed or dismissed within thirty (30) days of issuance, against or affecting the person or property of the Employee or any liability or obligation of the Employee to the Company. In case any payment herein provided for shall not be paid when due, the Employee further promises to pay all costs of collection, including all reasonable attorneys' fees. No delay or omission on the part of the Company in exercising any right hereunder shall operate as a waiver of such right or of any other right of the Company, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. The Employee hereby waives presentment, demand, notice of prepayment, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note. The undersigned hereby assents to any indulgence and any extension of time for payment of any indebtedness evidenced hereby granted or permitted by the Company. This Note has been made pursuant to the Company's Stock Holding Assistance Plan and shall be governed by and construed in accordance with, such Plan and the laws of the State of Massachusetts and shall have the effect of a sealed instrument. _______________________________ Employee Name: _________________ ________________________ Witness EX-13 5 Exhibit 13 THERMEDICS DETECTION INC. Consolidated Financial Statements 1997 PAGE Thermedics Detection Inc. 1997 Financial Statements Consolidated Statement of Income (In thousands except per share amounts) 1997 1996 1995 ----------------------------------------------------------------------- Revenues (Notes 6 and 8): Product revenues $37,754 $31,255 $18,457 Service revenues 13,566 12,495 9,497 ------- ------- ------- 51,320 43,750 27,954 ------- ------- ------- Costs and Operating Expenses: Cost of product revenues (Note 6) 17,243 15,490 9,895 Cost of service revenues 7,288 7,013 5,341 Selling, general, and administrative expenses (Note 6) 12,644 15,092 7,487 Research and development expenses 5,051 4,688 2,741 ------- ------- ------- 42,226 42,283 25,464 ------- ------- ------- Operating Income 9,094 1,467 2,490 Interest Income 2,072 229 - Interest Expense, Related Party (Note 2) (1,239) (1,119) - Other Income (Expense), Net 23 12 (72) ------- ------- ------- Income Before Provision for Income Taxes 9,950 589 2,418 Provision for Income Taxes (Note 4) 3,880 227 910 ------- ------- ------- Net Income $ 6,070 $ 362 $ 1,508 ======= ======= ======= Basic and Diluted Earnings per Share (Note 9) $ .48 $ .04 $ .15 ======= ======= ======= Weighted Average Shares (Note 9): Basic 12,760 10,275 10,000 ======= ======= ======= Diluted 12,771 10,292 10,003 ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 2PAGE Thermedics Detection Inc. 1997 Financial Statements Consolidated Balance Sheet (In thousands) 1997 1996 ------------------------------------------------------------------------ Assets Current Assets: Cash and cash equivalents $44,735 $13,484 Accounts receivable, less allowances of $810 and $1,215 11,126 9,387 Inventories 10,249 8,793 Unbilled contract costs and fees 836 307 Prepaid and refundable income taxes (Note 4) 1,835 2,173 Prepaid expenses 901 547 ------- ------- 69,682 34,691 ------- ------- Machinery, Equipment, and Leasehold Improvements, at Cost 6,264 5,683 Less: Accumulated depreciation and amortization 4,846 3,899 ------- ------- 1,418 1,784 ------- ------- Cost in Excess of Net Assets of Acquired Companies (Note 2) 15,121 16,694 ------- ------- Other Assets 474 314 ------- ------- $86,695 $53,483 ======= ======= 3PAGE Thermedics Detection Inc. 1997 Financial Statements Consolidated Balance Sheet (continued) (In thousands except share amounts) 1997 1996 ----------------------------------------------------------------------- Liabilities and Shareholders' Investment Current Liabilities: Promissory note to parent company (Note 2) $21,200 $ - Accounts payable 1,893 3,030 Accrued income taxes 1,555 334 Deferred revenue 1,689 1,281 Accrued payroll and employee benefits 1,426 1,375 Accrued installation and warranty expenses 828 1,413 Customer deposits 782 637 Other accrued expenses 1,796 3,102 Due to parent company and affiliated companies 1,294 161 ------- ------- 32,463 11,333 ------- ------- Deferred Income Taxes (Note 4) - 40 ------- ------- Promissory Note to Parent Company (Note 2) - 21,200 ------- ------- Commitments (Note 5) Shareholders' Investment (Notes 3 and 7): Common stock, $.10 par value, 50,000,000 shares authorized; 13,355,459 and 10,683,500 shares issued and outstanding 1,336 1,068 Capital in excess of par value 41,251 13,130 Retained earnings 13,206 7,136 Cumulative translation adjustment (1,561) (424) ------- ------- 54,232 20,910 ------- ------- $86,695 $53,483 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 4PAGE Thermedics Detection Inc. 1997 Financial Statements Consolidated Statement of Cash Flows (In thousands) 1997 1996 1995 ------------------------------------------------------------------------ Operating Activities: Net income $ 6,070 $ 362 $ 1,508 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,522 2,364 1,159 Provision for losses on accounts receivable 116 582 98 Other noncash expense 284 1,804 727 Decrease in deferred income taxes (40) - (40) Changes in current accounts, excluding the effects of acquisitions: Accounts receivable (2,153) (1,776) 1,051 Unbilled contract costs and fees (549) 845 (931) Inventories (1,960) 1,254 (3,213) Other current assets 68 (599) (116) Accounts payable (1,101) 758 182 Other current liabilities 1,681 1,045 (2,392) -------- -------- -------- Net cash provided by (used in) operating activities 3,938 6,639 (1,967) -------- -------- -------- Investing Activities: Acquisitions (Note 2) - (21,668) - Acquisition of product line (Note 2) - (300) - Purchases of machinery, equipment, and leasehold improvements (775) (766) (608) Proceeds from sale of machinery, equipment, and leasehold improvements 28 113 19 Other 82 - - -------- -------- -------- Net cash used in investing activities (665) (22,621) (589) -------- -------- -------- Financing Activities: Net proceeds from issuance of Company common stock (Note 7) 28,078 6,964 - Proceeds from issuance of promissory note to parent company (Note 2) - 21,200 - Additional capital contributions and transfers to parent company, net - 120 3,170 Other (61) (15) - -------- -------- -------- Net cash provided by financing activities $ 28,017 $ 28,269 $ 3,170 -------- -------- -------- 5PAGE Thermedics Detection Inc. 1997 Financial Statements Consolidated Statement of Cash Flows (continued) (In thousands) 1997 1996 1995 ------------------------------------------------------------------------ Exchange Rate Effect on Cash $ (39) $ (85) $ (138) -------- -------- -------- Increase in Cash and Cash Equivalents 31,251 12,202 476 Cash and Cash Equivalents at Beginning of Year 13,484 1,282 806 -------- -------- -------- Cash and Cash Equivalents at End of Year $ 44,735 $ 13,484 $ 1,282 ======== ======== ======== Cash Paid For: Interest $ 609 $ 596 $ - Income taxes $ 2,180 $ 618 $ 152 Noncash Activities: Fair value of assets of acquired companies $ - $ 24,328 $ - Cash paid for acquired companies - (21,668) - -------- -------- -------- Liabilities assumed of acquired companies $ - $ 2,660 $ - ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 6PAGE Thermedics Detection Inc. 1997 Financial Statements Consolidated Statement Shareholders' Investment (In thousands) 1997 1996 1995 ----------------------------------------------------------------------- Common Stock, $.10 Par Value Balance at beginning of year $ 1,068 $ 1,000 $ 1,000 Net proceeds from issuance of Company common stock (Note 7) 268 68 - ------- ------- ------- Balance at end of year 1,336 1,068 1,000 ------- ------- ------- Capital in Excess of Par Value Balance at beginning of year 13,130 6,114 2,814 Issuance of stock under employees' and directors' stock plans 6 - - Tax benefit related to employees' and directors' stock plans 305 - - Net proceeds from issuance of Company common stock (Note 7) 27,810 6,896 - Additional capital contributions - 120 3,300 ------- ------- ------- Balance at end of year 41,251 13,130 6,114 ------- ------- ------- Retained Earnings Balance at beginning of year 7,136 6,774 5,396 Net income 6,070 362 1,508 Transfer to parent company, net - - (130) ------- ------- ------- Balance at end of year 13,206 7,136 6,774 ------- ------- ------- Cumulative Translation Adjustment Balance at beginning of year (424) (115) (2) Translation adjustment (1,137) (309) (113) ------- ------- ------- Balance at end of year (1,561) (424) (115) ------- ------- ------- Total Shareholders' Investment $54,232 $20,910 $13,773 ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 7PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Thermedics Detection Inc. (the Company) develops, manufactures, and markets high-speed detection and measurement systems used in on-line industrial process applications, security applications, and laboratory analysis. The Company's industrial process systems use ultratrace chemical detectors, high-speed gas chromatography, X-ray imaging, near-infrared spectroscopy, and other technologies for quality assurance of in-process and finished products, primarily in the food, beverage, pharmaceutical, forest products, chemical, and other consumer products industries. The Company's security instruments use simultaneous trace particle- and vapor-detection techniques based on its proprietary chemiluminesence and high-speed gas chromatography technologies. Customers use the Company's security instruments to detect plastic and other explosives at airports and border crossings, for other high-security screening applications, and for forensics and search applications. Relationship with Thermedics Inc. and Thermo Electron Corporation The Company operated as a division of Thermedics Inc. until its incorporation as a Massachusetts corporation in December 1990. In connection with the Company's incorporation, Thermedics transferred to the Company its TEA Analyzer and certain other trace detection technologies in exchange for 10,000,000 shares of the Company's common stock. As of January 3, 1998, Thermedics owned 10,127,675 shares of the Company's outstanding common stock, representing 76% of such stock outstanding. As of January 3, 1998, Thermedics is a 58%-owned subsidiary of Thermo Electron Corporation. Principles of Consolidation The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Certain amounts in fiscal 1996 have been reclassified to conform to the fiscal 1997 financial statement presentation. Fiscal Year The Company has adopted a fiscal year ending the Saturday nearest December 31. References to 1997, 1996, and 1995 are for the fiscal years ended January 3, 1998, December 28, 1996, and December 30, 1995, respectively. Fiscal year 1997 included 53 weeks; 1996 and 1995 each included 52 weeks. Revenue Recognition The Company recognizes product revenues upon shipment of its products. The Company provides a reserve for its estimate of warranty and installation costs at the time of shipment. The Company recognizes service revenues over the term of the contract. Deferred revenue in the accompanying balance sheet consists of unearned revenue on service contracts which is recognized over the life of the service contract. Revenues and profits on long-term contracts are recognized using the percentage-of-completion method. Revenues recorded under the percentage- 8PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies (continued) of-completion method, including revenues from long-term research and development contracts, were $1,376,000, $1,758,000, and $3,987,000 in 1997, 1996, and 1995, respectively. The percentage of completion is determined by relating the actual costs incurred to date to management's estimate of total costs to be incurred on each contract. If a loss is indicated on any contract in process, a provision is made currently for the entire loss. Contracts generally provide for the billing of customers on a cost-plus-fixed-fee basis as costs are incurred. Revenues earned on contracts in process in excess of billings are classified as unbilled contract costs and fees in the accompanying balance sheet. There are no significant amounts included in the accompanying balance sheet that are not expected to be recovered from existing contracts at current contract values, or that are not expected to be collected within one year, including amounts that are billed but not paid under retainage provisions. Stock-based Compensation Plans The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its stock-based compensation plans (Note 3). Accordingly, no accounting recognition is given to stock options granted at fair market value until they are exercised. Upon exercise, net proceeds, including tax benefits realized, are credited to equity. Income Taxes In the periods prior to its initial public offering, the Company was included in Thermedics' consolidated federal and certain state income tax returns. Subsequent to the Company's initial public offering in March 1997, Thermedics' equity ownership of the Company was reduced below 80% and, as a result, the Company is required to file its own federal income tax return. In accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. Earnings per Share During the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings per Share" (Note 9). As a result, all previously reported earnings per share have been restated; however, basic and diluted earnings per share equals the Company's previously reported earnings per share for 1996 and 1995. Basic earnings per share have been computed by dividing net income by the weighted average number of shares outstanding during the year. Diluted earnings per share have been computed assuming the exercise of stock options, as well as their related income tax effects. 9PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Stock Split In March 1996, the Company declared and effected a two-for-three reverse stock split. All share and per share information has been restated to reflect the reverse stock split. Cash and Cash Equivalents At year-end 1997 and 1996, $40,043,000 and $10,976,000, respectively, of the Company's cash equivalents were invested in a repurchase agreement with Thermo Electron. Under this agreement, the Company in effect lends excess cash to Thermo Electron, which Thermo Electron collateralizes with investments principally consisting of corporate notes, commercial paper, U.S. government-agency securities, money market funds, and other marketable securities, in the amount of at least 103% of such obligation. The Company's funds subject to the repurchase agreement are readily convertible into cash by the Company and have an original maturity of three months or less. The Company's repurchase agreement earns a rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. At year-end 1997 and 1996, the Company's cash equivalents also included investments in commercial paper and short-term certificates of deposits of the Company's foreign operations, which have an original maturity of three months or less. Cash equivalents are carried at cost, which approximates market value. Inventories Inventories are stated at the lower of cost (on a first-in, first-out basis) or market value and include materials, labor, and manufacturing overhead. The components of inventories are as follows: (In thousands) 1997 1996 ------------------------------------------------------------------------ Raw material and supplies $ 5,423 $ 6,135 Work in process 1,251 871 Finished goods 3,575 1,787 ------- ------- $10,249 $ 8,793 ======= ======= Machinery, Equipment, and Leasehold Improvements The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the property as follows: machinery and equipment, three to ten years and leasehold improvements, the lesser of the term of the lease or the life of the asset. 10PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Cost in Excess of Net Assets of Acquired Companies The excess of cost over the fair value of net assets of acquired companies is amortized using the straight-line method over 40 years. Accumulated amortization was $805,000 and $403,000 at January 3, 1998, and December 28, 1996, respectively. The Company assesses the future useful life of this asset whenever events or changes in circumstances indicate that the current useful life has diminished. The Company considers the future undiscounted cash flows of the acquired companies in assessing the recoverability of this asset. If impairment has occurred, any excess of carrying value over fair value is recorded as a loss. Foreign Currency All assets and liabilities of the Company's foreign subsidiaries are translated at year-end exchange rates, and revenues and expenses are translated at average exchange rates for the year in accordance with SFAS No. 52, "Foreign Currency Translation." Resulting translation adjustments are reflected as a separate component of shareholders' investment titled "Cumulative translation adjustment." Foreign currency transaction gains and losses are included in the accompanying statement of income and are not material for the three years presented. Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, promissory note to parent company, accounts payable, and due to parent company and affiliated companies. Their respective carrying amounts in the accompanying balance sheet approximate fair value due to their short-term nature, except for the promissory note to parent company. The carrying amount of the promissory note to parent company approximates fair value due to its variable interest rate. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Acquisitions On January 25, 1996, the Company acquired the assets of Moisture Systems Corporation and certain affiliated companies (collectively, Moisture Systems), and the stock of Rutter & Co. B.V. (Rutter) for a total purchase price of $21,668,000 in cash, which included the repayment of $700,000 of debt. Moisture Systems and Rutter design, manufacture, and sell instruments that use near-infrared spectroscopy to measure moisture 11PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 2. Acquisitions (continued) and other product constituents, including fats, proteins, oils, flavorings, solvents, adhesives, and coatings, in a variety of manufacturing processes. These systems are used in the food, pharmaceutical, chemical, pulp and paper, and other industries. To finance these acquisitions, the Company borrowed $21,200,000 from Thermedics pursuant to a promissory note due March 1998, bearing interest at the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. As of January 3, 1998, and December 28, 1996, the interest rate on the promissory note was 5.76% and 5.77%, respectively. In December 1996, the Company acquired certain moisture measurement product lines for approximately $300,000 in cash. In addition, the Company has agreed to pay a licensing fee on sales of these products through December 2000. These acquisitions have been accounted for using the purchase method of accounting and their results of operations have been included in the accompanying financial statements from their respective dates of acquisition. The aggregate cost of Moisture Systems and Rutter exceeded the estimated fair value of the acquired net assets by $16,905,000, which is being amortized over 40 years. Allocation of the purchase price for these acquisitions was completed in 1997 and was based on estimates of the fair value of the net assets acquired. The following table presents selected financial information for the Company, Moisture Systems, and Rutter on a pro forma basis, assuming the companies had been combined since the beginning of 1995. (In thousands except per share amounts) 1996 1995 ----------------------------------------------------------------------- Revenues $45,297 $46,485 Net income 520 1,796 Basic and diluted earnings per share .05 .18 The pro forma results are not necessarily indicative of future operations or the actual results that would have occurred had the acquisitions of Moisture Systems and Rutter been made at the beginning of 1995. 3. Employee Benefit Plans Stock-based Compensation Plans Stock Option Plan ----------------- The Company has a stock-based compensation plan for its key employees, directors, and others, which permits the grant of a variety of stock and stock-based awards as determined by the human resources committee of the Company's Board of Directors (the Board Committee), including restricted stock, stock options, stock bonus shares, or performance-based shares. The option recipients and the terms of options granted under this plan are determined by the Board Committee. To date, only nonqualified stock options have been granted by the Board Committee under this plan. Options granted prior to the Company's initial public offering became exercisable in June 1997, but are subject to certain 12PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 3. Employee Benefit Plans (continued) transfer restrictions and the right of the Company to repurchase shares issued upon exercise of the options at the exercise price, upon certain events. The restrictions and repurchase rights generally lapse ratably over a five- to ten-year period, depending on the term of the option, which generally ranges from seven to twelve years. Nonqualified stock options may be granted at any price determined by the Board Committee, although incentive stock options must be granted at not less than the fair market value of the Company's common stock on the date of grant. To date, all options have been granted at fair market value. A summary of the Company's stock option activity is as follows: 1997 1996 1995 ---------------- ---------------- ----------------- Weighted Weighted Weighted Number Average Number Average Number Average (Shares in of Exercise of Exercise of Exercise thousands) Shares Price Shares Price Shares Price ----------------------------------------------------------------------- Options outstanding, beginning of year 218 $10.41 25 $ 9.75 26 $ 9.75 Granted 550 10.94 207 10.45 2 9.75 Exercised (1) 9.75 - - - - Forfeited (111) 11.09 (14) 9.79 (3) 9.75 ----- ------ ----- ------ ----- ------ Options outstanding, end of year 656 $10.74 218 $10.41 25 $ 9.75 ===== ====== ===== ====== ===== ====== Options exercisable 656 $10.74 - $ - - $ - ===== ====== ===== ====== ===== ====== Options available for grant 177 116 309 ===== ===== ===== As of January 3, 1998, the options outstanding were exercisable at prices ranging from $9.55 to $12.46 and had a weighted average remaining contractual life of 8.1 years. 13PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 3. Employee Benefit Plans (continued) Employee Stock Purchase Program ------------------------------- Substantially all of the Company's full-time U.S. employees are eligible to participate in an employee stock purchase program sponsored by Thermedics and Thermo Electron. Under this program, shares of Thermedics' and Thermo Electron's common stock may be purchased at the end of a 12-month period at 95% of the fair market value at the beginning of the period, and the shares purchased are subject to a six-month resale restriction. Prior to November 1, 1995, the applicable shares of common stock could be purchased at 85% of the fair market value at the beginning of the period, and the shares purchased were subject to a one-year resale restriction. Shares are purchased through payroll deductions of up to 10% of each participating employee's gross wages. Pro Forma Stock-based Compensation Plans Expense In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which sets forth a fair-value based method of recognizing stock-based compensation expense. As permitted by SFAS No. 123, the Company has elected to continue to apply APB 25 in accounting for its stock-based compensation plans. Had compensation cost for awards in 1997 and 1996 under the Company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method set forth under SFAS No. 123, the effect on the Company's net income and earnings per share would have been as follows: (In thousands except per share amounts) 1997 1996 ---------------------------------------------------------------------- Net income: As reported $6,070 $ 362 Pro forma 5,485 102 Basic and diluted earnings per share: As reported .48 .04 Pro forma .43 .01 Pro forma net income for 1995 was not materially different from historical net income in 1995. Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation expense may not be representative of the amount to be expected in future years. Pro forma compensation expense for options granted is reflected over the vesting period; therefore future pro forma compensation expense may be greater as additional options are granted. 14PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 3. Employee Benefit Plans (continued) The weighted average fair value per share of options granted was $4.44, $3.76, and $4.15 in 1997, 1996, and 1995, respectively. The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1997 1996 --------------------------------------------------------------------- Volatility 28% - Risk-free interest rate 6.1% 6.4% Expected life of options 5.9 years 7.0 years The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 401(k) Savings Plan Substantially all of the Company's full-time U.S. employees are eligible to participate in Thermo Electron's 401(k) savings plan. Contributions to the 401(k) savings plan are made by both the employee and the Company. Company contributions are based upon the level of employee contributions. For this plan, the Company contributed and charged to expense $302,000, $247,000, and $233,000 in 1997, 1996, and 1995, respectively. Defined Benefit Pension Plan The Company's Rutter subsidiary, acquired in January 1996, has a defined benefit pension plan covering substantially all of its full-time employees. The Company's funding policy is to make contributions within a range required by applicable regulations in The Netherlands. Net periodic pension costs included the following components: (In thousands) 1997 1996 --------------------------------------------------------------------- Service cost $ 23 $ 22 Interest cost on projected benefit obligation 53 45 Return on plan assets (62) (9) Amortization of unrecognized obligations 18 (26) ---- ---- $ 32 $ 32 ==== ==== 15PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 3. Employee Benefit Plans (continued) The funded status of the Company's defined benefit pension plan is as follows: (In thousands) 1997 1996 ----------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefits $316 $607 Nonvested benefits - - ---- ---- Accumulated benefit obligations 316 607 Effect of projected future salary increases 90 152 ---- ---- Projected benefit obligation 406 759 Less: Plan assets at fair value 662 965 ---- ---- Excess of plan assets over projected benefit obligation 256 206 Unrecognized net gain 181 196 Initial unrecognized net obligation (63) (69) ---- ---- Prepaid pension cost $374 $333 ==== ==== Significant actuarial assumptions used to determine the net periodic pension cost were as follows: discount rate - 7.5%; rate of increase in salary levels up to age 45 - 4.5%; rate of increase in salary levels after age 45 - 2.5%; and expected long-term rate of return on assets - 4.0%. 4. Income Taxes The components of income before provision for income taxes are as follows: (In thousands) 1997 1996 1995 ----------------------------------------------------------------------- Domestic $ 8,011 $(1,742) $ 2,197 Foreign 1,939 2,331 221 ------- ------- ------- $ 9,950 $ 589 $ 2,418 ======= ======= ======= 16PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 4. Income Taxes (continued) The components of the provision for income taxes are as follows: (In thousands) 1997 1996 1995 ---------------------------------------------------------------------- Currently payable (refundable): Federal $2,383 $ (350) $ 681 State 625 (90) 166 Foreign 625 692 94 ------ ------ ------ 3,633 252 941 ------ ------ ------ Net deferred (prepaid): Federal 105 (195) (25) State 26 (34) (6) Foreign 116 204 - ------ ------ ------ 247 (25) (31) ------ ------ ------ $3,880 $ 227 $ 910 ====== ====== ====== The Company receives a tax deduction upon exercise of nonqualified stock options by employees for the difference between the exercise price and the market price of the Company's common stock on the date of exercise. The provision for income taxes that is currently payable does not reflect $305,000 of such benefits that have been allocated to capital in excess of par value in 1997. The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate of 34% to income before provision for income taxes due to the following: (In thousands) 1997 1996 1995 ---------------------------------------------------------------------- Provision for income taxes at statutory rate $3,383 $ 200 $ 822 Increases (decreases) resulting from: State income taxes, net of federal tax 430 (81) 106 Foreign tax rate and tax law differential 82 103 19 Tax benefit of foreign sales corporation (175) - (133) Deemed dividend from foreign subsidiary - - 80 Other, net 160 5 16 ------ ------ ------ $3,880 $ 227 $ 910 ====== ====== ====== 17PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 4. Income Taxes (continued) Prepaid income taxes and deferred income taxes in the accompanying balance sheet consist of the following: (In thousands) 1997 1996 -------------------------------------------------------------- Prepaid (deferred) income taxes: Reserves and other accruals $ 959 $ 999 Inventory basis difference 820 643 Long-term assets 188 (40) Accrued compensation 56 130 Other, net - 30 ------ ------ $2,023 $1,762 ====== ====== A provision has not been made for U.S. or additional foreign taxes on $3,415,000 of undistributed earnings of foreign subsidiaries that could be subject to taxation if remitted to the U.S. because the Company currently plans to keep these amounts permanently reinvested overseas. 5. Commitments The Company leases portions of its office and operating facilities under various operating lease arrangements. The accompanying statement of income includes expenses from operating leases of $1,078,000, $1,335,000, and $542,000 in 1997, 1996, and 1995, respectively, net of third party sublease income of $181,000 in 1997. Total future minimum payments due under noncancelable operating leases at January 3, 1998, are $1,201,000 in 1998; $1,039,000 in 1999; $878,000 in 2000; $779,000 in 2001; $797,000 in 2002; and $2,918,000 in 2003 and thereafter. Total future minimum lease payments are $7,612,000 and have not been reduced by minimum sublease rental income of $1,160,000 due through 2002 under noncancelable operating subleases. See Note 6 for office and manufacturing space leased from a related party. 6. Related-party Transactions Corporate Services Agreement The Company and Thermo Electron have a corporate services agreement under which Thermo Electron's corporate staff provides certain administrative services, including certain legal advice and services, risk management, certain employee benefit administration, tax advice and preparation of tax returns, centralized cash management, and certain financial and other services, for which the Company paid Thermo Electron an annual fee equal to 1.0% of the Company's revenues in 1997 and 1996, and an amount equal to 1.20% of the Company's revenues in 1995. Beginning in fiscal 1998, the Company will pay an annual fee equal to 0.8% of the Company's revenues. The annual fee is reviewed and adjusted annually by mutual agreement of the parties. Management believes that the service fee 18PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 6. Related-party Transactions (continued) charged by Thermo Electron is reasonable and that such fees are representative of the expenses the Company would have incurred on a stand-alone basis. The corporate services agreement is renewed annually but can be terminated upon 30 days' prior notice by the Company or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron Corporate Charter defines the relationship among Thermo Electron and its majority-owned subsidiaries). In addition, the Company uses contract administration services of a majority-owned subsidiary of Thermo Electron and is charged based on actual usage. For these services, as well as the administrative services provided by Thermo Electron, the Company was charged $579,000, $438,000, and $335,000 in 1997, 1996, and 1995, respectively. For additional items such as employee benefit plans, insurance coverage, and other identifiable costs, Thermo Electron charges the Company based upon costs attributable to the Company. Research and Development Agreement Pursuant to a subcontract entered into in October 1993, the Company performs research and development services for Thermo Coleman Corporation, which is the prime contractor under a contract with the U.S. Department of Energy. Thermo Coleman is a wholly owned subsidiary of Thermo Electron. Thermo Coleman paid the Company $533,000, $619,000, and $829,000 for services rendered in 1997, 1996, and 1995, respectively. Distribution Agreement Pursuant to an international distributorship agreement, the Company appointed Arabian Business Machines Co. (ABM) as its exclusive distributor of the Company's security instruments in certain Middle Eastern countries. ABM is a member of The Olayan Group. Ms. Hutham S. Olayan, a director of Thermo Electron, is the president and a director of Olayan America Corporation and Competrol Real Estate Limited, two other members of The Olayan Group, which are indirectly controlled by Suliman S. Olayan, Ms. Olayan's father. Revenues recorded under this agreement totaled $480,000, $652,000, and $3,000, in 1997, 1996, and 1995, respectively. Other Related-party Transactions The Company purchases and sells products in the ordinary course of business with other companies affiliated with Thermo Electron. Sales of products to such affiliated companies totaled $147,000, $114,000, and $122,000 in 1997, 1996, and 1995, respectively. Purchases of products from such affiliated companies totaled $237,000, $253,000, and $330,000 in 1997, 1996, and 1995, respectively. 19PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 6. Related-party Transactions (continued) Sublease Agreement In 1997, the Company subleased approximately 8,000 square feet of space in its Chelmsford, Massachusetts, facility to Thermo Cardiosystems Inc., a publicly traded, majority-owned subsidiary of Thermedics, under a two-year sublease agreement. Under this sublease, Thermo Cardiosystems will pay the Company base rent of $40,000 in the first year and $44,000 in the second year, as well as approximately $33,000 per year, representing Thermo Cardiosystems' pro rata allocation of the facility's aggregate operating costs, real estate taxes, and utilities. The accompanying statement of income includes income from this sublease agreement of $73,000 in 1997. Repurchase Agreement The Company invests excess cash in a repurchase agreement with Thermo Electron as discussed in Note 1. 7. Common Stock Sale of Common Stock In March 1997, the Company sold 2,671,292 shares of common stock in an initial public offering at $11.50 per share, for net proceeds of $28,078,000. In November 1996, the Company sold 383,500 shares of its common stock in a private placement at $10.75 per share, for net proceeds of $3,964,000. In March 1996, the Company sold 300,000 shares of its common stock in a private placement at $10.00 per share, for net proceeds of $3,000,000. Reserved Shares At January 3, 1998, the Company had reserved 857,666 unissued shares of its common stock for possible issuance under the stock-based compensation plans. 8. Significant Customer, Product Lines, and Geographical Information Sales to one customer accounted for 27%, 24%, and 36% of the Company's total revenues in 1997, 1996, and 1995, respectively. The Company is engaged in one business segment: the development, manufacture, and sale of high-speed detection and measurement systems used in on-line industrial process applications, security applications, and laboratory analysis. Within the Company's process detection product line, the Company derived revenues of $19,198,000, $14,917,000, and $18,488,000 in 1997, 1996, and 1995, respectively, from Alexus(R) systems and $15,387,000 and $17,950,000 in 1997 and 1996, respectively, from moisture systems. Within the Company's security instrument product line, the Company derived revenues of $10,337,000, $7,149,000, and $4,642,000 in 1997, 1996, and 1995, respectively, from EGIS(R) systems. 20PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 8. Significant Customer, Product Lines, and Geographical Information (continued) The following table shows data for the Company by geographical area. (In thousands) 1997 1996 1995 ------------------------------------------------------------------------ Revenues: United States $41,576 $32,003 $22,571 The Netherlands 5,489 7,547 - Other Europe 6,427 5,893 4,057 Other 3,290 2,588 2,600 Transfers among geographical areas (a) (5,462) (4,281) (1,274) ------- ------- ------- $51,320 $43,750 $27,954 ======= ======= ======= Income before provision for income taxes: United States $ 7,862 $ (859) $ 2,933 The Netherlands 454 1,514 - Other Europe 746 394 (127) Other 716 412 348 Corporate and eliminations (b) (684) 6 (664) ------- ------- ------- Total operating income 9,094 1,467 2,490 Interest income (expense), net 833 (890) - Other income (expense), net 23 12 (72) ------- ------- ------- $ 9,950 $ 589 $ 2,418 ======= ======= ======= Identifiable assets: United States $29,995 $32,044 $15,806 The Netherlands 7,200 8,574 - Other Europe 5,257 3,523 2,850 Other 3,074 1,615 1,666 Corporate and eliminations (c) 41,169 7,727 - ------- ------- ------- $86,695 $53,483 $20,322 ======= ======= ======= Export revenues included in United States revenues above (d): Germany $ 5,386 $ 2,487 $ 3,914 Other Europe 6,535 4,420 3,995 Mexico 4,385 2,015 1,363 Other South America 6,089 3,998 3,271 Other 4,070 4,437 2,341 ------- ------- ------- $26,465 $17,357 $14,884 ======= ======= ======= -------------- (a)Transfers among geographical areas are accounted for at prices that are representative of transactions with unaffiliated parties. (b)Primarily general and administrative expenses. (c)Primarily cash and cash equivalents. (d)In general, export sales are denominated in U.S. dollars. 21PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 9. Earnings per Share Basic and diluted earnings per share were calculated as follows: (In thousands except per share amounts) 1997 1996 1995 ------------------------------------------------------------------------ Basic Net income $ 6,070 $ 362 $ 1,508 -------- -------- -------- Weighted average shares 12,760 10,275 10,000 -------- -------- -------- Basic earnings per share $ .48 $ .04 $ .15 ======== ======== ======== Diluted Net income $ 6,070 $ 362 $ 1,508 -------- -------- -------- Weighted average shares 12,760 10,275 10,000 Effect of stock options 11 17 3 -------- -------- -------- Weighted average shares, as adjusted 12,771 10,292 10,003 -------- -------- -------- Diluted earnings per share $ .48 $ .04 $ .15 ======== ======== ======== The computation of diluted earnings per share for 1997 excludes the effect of assuming the exercise of certain outstanding stock options because the effect would be antidilutive. As of January 3, 1998, there were 342,240 of such options outstanding, with exercise prices ranging from $10.75 to $12.46 per share. 22PAGE Thermedics Detection Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 10. Unaudited Quarterly Information (In thousands except per share amounts) 1997 First Second Third Fourth ----------------------------------------------------------------------- Revenues $12,429 $12,397 $12,632 $13,862 Gross profit 6,333 6,520 6,650 7,286 Net income 1,024 1,415 1,686 1,945 Basic and diluted earnings per share .09 .11 .13 .15 1996 First(a) Second Third Fourth ----------------------------------------------------------------------- Revenues $ 9,345 $10,104 $11,117 $13,184 Gross profit 4,163 4,028 5,547 7,509 Net income (loss) (524) (1,244) 705 1,425 Basic and diluted earnings (loss) per share (.05) (.12) .07 .14 (a) Reflects the January 1996 acquisitions of Moisture Systems and Rutter. 23PAGE Thermedics Detection Inc. 1997 Financial Statements Report of Independent Public Accountants To the Shareholders and Board of Directors of Thermedics Detection Inc.: We have audited the accompanying consolidated balance sheet of Thermedics Detection Inc. (a Massachusetts corporation and 76%-owned subsidiary of Thermedics Inc.) and subsidiaries as of January 3, 1998, and December 28, 1996, and the related consolidated statements of income, cash flows, and shareholders' investment for each of the three years in the period ended January 3, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of Rutter & Co. B.V. (a wholly owned subsidiary of Thermedics Detection Inc.), for the period from January 25, 1996 (the date of acquisition) through and as of December 28, 1996, and as of and for the year ended January 3, 1998, which statements reflect total assets and total revenues of 9% and 4% in 1997, and 16% and 17% in 1996, respectively, of the consolidated totals. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for that entity, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thermedics Detection Inc. and subsidiaries as of January 3, 1998, and December 28, 1996, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts February 12, 1998 24PAGE Thermedics Detection Inc. 1997 Financial Statements Independent Auditor's Report We have audited the consolidated balance sheet of the Rutter & Co. B.V. segment of Thermedics Detection Inc. as of January 3, 1998, and December 28, 1996, and the related consolidated statements of income, stockholder's equity, and cash flows for the year ended January 3, 1998, and the period from January 25, 1996 (acquisition date) to December 28, 1996 (all expressed in Netherlands Guilders) (not included herein). These financial statements are the responsibility of Thermedics Detection Inc.'s and Rutter & Co. B.V.'s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in the notes to the financial statements (not included herein), the consolidated balance sheet of the Rutter & Co. B.V. segment of Thermedics Detection Inc. includes the net assets acquired by Thermedics Detection Inc. in its purchase of Rutter & Co. B.V. on January 25, 1996, after giving effect to the allocation of Thermedics Detection Inc.'s purchase price to the consolidated net assets of Rutter & Co. B.V., and to the changes in the consolidated net assets of Rutter & Co. B.V. subsequent to the acquisition; the related consolidated statements of income, stockholder's equity, and cash flows reflect the results of operations and cash flows of Rutter & Co. B.V. subsequent to such acquisition after giving effect to the allocation of Thermedics Detection Inc.'s purchase price to Rutter & Co. B.V.'s consolidated net assets. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Rutter & Co. B.V. segment of Thermedics Detection Inc. at January 3, 1998, and December 28, 1996, and the results of their operations and their cash flows for the year ended January 3, 1998, and the period from January 25, 1996 to December 28, 1996, in conformity with generally accepted accounting principles in the United States of America. Deloitte & Touche Registeraccountants Almelo, The Netherlands Febraury 6, 1998 25PAGE Thermedics Detection Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed immediately after this Management's Discussion and Analysis of Financial Condition and Results of Operation under the heading "Forward-looking Statements." Overview The Company develops, manufactures, and markets high-speed detection and measurement systems used in on-line industrial process and security applications, and laboratory analysis. The Company's industrial process systems use ultratrace chemical detectors, high-speed gas chromatography, X-ray imaging, near-infrared spectroscopy, and other technologies for quality assurance of in-process and finished products, primarily in the food, beverage, pharmaceutical, forest products, chemical, and other consumer products industries. The Company's security instruments use simultaneous trace particle- and vapor-detection techniques based on its proprietary chemiluminesence and high-speed gas chromatography technologies. Customers use the Company's security instruments to detect plastic and other explosives at airports and border crossings, for other high-security screening applications, and for forensics and search applications. Historically, the Company's principal product lines were process detection systems, including Alexus(R) systems used to assure the quality of refillable plastic containers, and EGIS(R) explosives detectors. The Company expanded its product lines to include moisture analysis equipment through its acquisitions of Moisture Systems Corporation and Rutter & Co. B.V. in January 1996, and also introduced its InScan(TM) high-speed X-ray imaging systems (InScan systems) and Flash-GC(TM) gas chromatography systems (Flash-GC systems) in 1996. The Company has also recently introduced Rampart(TM), the latest portable trace-detection system that incorporates the advanced Flash-GC technology in tandem with a highly sensitive chemiluminesence detector. The Company also performs contract research and development services for government and industry customers and earns service revenues through long-term contracts. A substantial portion of the Company's sales are derived from sales of products outside the United States, through export sales, and sales by the Company's foreign subsidiaries. Although the Company seeks to charge its customers in the same currency as its operating costs, the Company's financial performance and competitive position can be affected by currency exchange-rate fluctuations. 26PAGE Thermedics Detection Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations 1997 Compared With 1996 Revenues increased 17% to $51.3 million in 1997 from $43.8 million in 1996. Product revenues increased 21% to $37.8 million in 1997 from $31.3 million in 1996, while service revenues increased 9% to $13.6 million in 1997 from $12.5 million in 1996. Revenues from the Company's process detection instruments and related services increased to $22.4 million in 1997 from $16.0 million in 1996, primarily due to Alexus revenues of $6.6 million from the fulfillment of a mandated product-line upgrade from The Coca-Cola Company to its existing installed base and, to a lesser extent, increased shipments of the Company's InScan systems, which were introduced in 1996. The mandated product-line upgrade was completed in 1997. These increases were offset in part by a decrease in demand from The Coca-Cola Company for new installations in 1997. As a result of this decrease in demand and the completion of the product-line upgrade, the Company anticipates that sales of Alexus systems will slow in 1998, which is the primary reason for a $5.0 million decrease in the Company's backlog in 1997. Revenues from the Company's EGIS security systems and related services increased to $10.3 million in 1997 from $7.1 million in 1996, primarily due to $3.2 million of shipments under the Company's contract with the Federal Aviation Administration (FAA). Revenues from the Company's Moisture Systems and Rutter subsidiaries, acquired in January 1996, decreased to $15.4 million in 1997 from $18.0 million in 1996, primarily due to a slowdown in product demand in Europe in 1997, offset in part by the inclusion of revenues for the full year of 1997. The gross profit margin increased to 52% in 1997 from 49% in 1996. The gross profit margin on product revenues increased to 54% in 1997 from 50% in 1996, primarily due to a change in product mix to higher-margin revenues from The Coca-Cola Company's mandated product-line upgrade, as well as higher-margin revenues at Moisture Systems and Rutter. To a lesser extent, the increase also resulted from the inclusion of an $0.8 million charge in 1996 as a result of obsolescence created by planned product changes. The gross profit margin on service revenues increased to 46% in 1997 from 44% in 1996, primarily due to increased field service efficiencies and, to a lesser extent, the change in sales mix to higher-margin service revenues at Moisture Systems and Rutter. Selling, general, and administrative expenses as a percentage of revenues decreased to 25% in 1997 from 34% in 1996. The decline was primarily due to nonrecurring costs in 1996 related to a reduction in personnel and a reduction in leased space in response to a lower sales volume of process detection instruments and, to a lesser extent, an increase in revenues in 1997. This decrease was offset in part by increased selling expenses as the Company developed a sales force for its InScan and Flash-GC systems. Research and development expenses increased to $5.1 million in 1997 from $4.7 million in 1996, primarily due to costs related to the improvement and expansion of Moisture System's moisture analysis equipment product line. 27PAGE Thermedics Detection Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations 1997 Compared With 1996 (continued) Interest income increased to $2.1 million in 1997 from $0.2 million in 1996, primarily due to interest income earned on the invested proceeds from the Company's March 1997 initial public offering (Note 7). Interest expense, related party, of $1.2 million and $1.1 million in 1997 and 1996, respectively, reflects the issuance of a $21.2 million promissory note to Thermedics in connection with the January 1996 acquisitions of Moisture Systems and Rutter (Note 2). The effective tax rate was 39% in 1997 and 1996. The effective tax rates in both periods exceeded the statutory federal income tax rate primarily due to the impact of state income taxes. The Company is currently assessing the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems and on products sold as well as products purchased by the Company. The Company believes that its internal information systems and current products are either year 2000 compliant or will be so prior to the year 2000 without incurring material costs. There can be no assurance, however, that the Company will not experience unexpected costs and delays in achieving year 2000 compliance for its internal information systems and current products, which could result in a material adverse effect on the Company's future results of operations. The Company is presently assessing the effect that the year 2000 problem may have on its previously sold products. The Company is also assessing whether its key suppliers are adequately addressing this issue and the effect this might have on the Company. The Company has not completed its analysis and is unable to conclude at this time that the year 2000 problem as it relates to its previously sold products and products purchased from key suppliers is not reasonably likely to have a material adverse effect on the Company's future results of operations. 1996 Compared With 1995 Revenues increased 57% to $43.8 million in 1996 from $28.0 million in 1995. Product revenues increased 69% to $31.3 million in 1996 from $18.5 million in 1995, while service revenues increased 32% to $12.5 million in 1996 from $9.5 million in 1995. Revenues increased in 1996 due to the inclusion of $18.0 million in revenues from Moisture Systems and Rutter, which were acquired in January 1996. Revenues from the Company's process detection instruments and related services decreased to $16.0 million in 1996 from $18.5 million in 1995, primarily due to a decrease in demand from the Coca-Cola Company, which have substantially completed their initial deployment of Alexus systems. Revenues from the Company's security systems and related services increased to $7.1 million in 1996 from $4.6 million in 1995, primarily due to the sale of eight EGIS units to the U.S. government to provide counterterrorism support in Israel. Revenues from research and development contracts decreased by $2.2 million to $1.8 million in 1996 due to the completion of a commercial contract with the Miller Brewing Company for the InScan system and, to a lesser extent, the completion of various phases of government contracts, which have since been renewed. The gross profit margin increased to 49% in 1996 from 45% in 1995. The gross profit margin on product revenues increased to 50% in 1996 from 28PAGE Thermedics Detection Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations 1996 Compared With 1995 (continued) 46% in 1995, primarily due to higher-margin revenues from Moisture Systems and Rutter, offset in part by an inventory write-down of $0.8 million in 1996 due to obsolescence created by planned product changes. The gross profit margin on service revenues remained unchanged at 44% in 1996 and 1995. Selling, general, and administrative expenses as a percentage of revenues increased to 34% in 1996 from 27% in 1995, primarily due to higher expenses as a percentage of revenues at Moisture Systems and Rutter and, to a lesser extent, $0.4 million of costs incurred in 1996 related to reductions in personnel and a reduction in leased space in response to the lower sales volume of process detection instruments. Research and development expenses increased to $4.7 million in 1996 from $2.7 million in 1995, primarily due to research and development relating to the Company's Flash-GC and InScan systems. In addition, the Company recorded a nonrecurring charge of $0.2 million in 1996 for the write-off of certain research and development equipment no longer of use. Interest expense, related party, of $1.1 million in 1996 reflects the issuance of a $21.2 million promissory note to Thermedics in connection with the January 1996 acquisitions of Moisture Systems and Rutter. The effective tax rates were 39% and 38% in 1996 and 1995, respectively. The effective tax rates in both periods exceeded the statutory federal income tax rate primarily due to the impact of state income taxes. Liquidity and Capital Resources Consolidated working capital was $37.2 million at January 3, 1998, compared with $23.4 million at December 28, 1996. Included in working capital are cash and cash equivalents of $44.7 million at January 3, 1998, compared with $13.5 million at December 28, 1996. During 1997, $3.9 million of cash was provided by operating activities. During this period, cash of $2.2 million and $2.0 million was used to fund increases in accounts receivable and inventories, respectively, primarily relating to an order received from the FAA, which provides for extended payment terms and resulted in inventory purchases. This use of cash was offset in part by $1.7 million of cash provided by an increase in other current liabilities, including $0.9 million of accrued income taxes. During 1997, the Company's investing activities included the expenditure of $0.8 million for purchases of machinery, equipment, and leasehold improvements. During 1998, the Company expects to make capital expenditures of approximately $0.8 million. The Company's financing activities provided $28.0 million of cash in 1997. In March 1997, the Company sold 2,671,292 shares of its common stock in an initial public offering for net proceeds of $28.1 million. In the first quarter of 1998, the Company expects to repay its $21.2 million promissory note to Thermedics (Note 2). Although the Company expects to have positive cash flow from its existing operations, the Company anticipates it will require significant amounts of cash for the possible acquisition of complementary businesses 29PAGE Thermedics Detection Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources and technologies. While the Company currently has no agreement to make an acquisition, it expects that it would finance any acquisition through a combination of internal funds, additional debt or equity financing, and/or short-term borrowings from Thermedics or Thermo Electron, although it has no agreement with these companies to ensure that funds will be available on acceptable terms or at all. The Company believes that its existing resources are sufficient to meet the capital requirements of its existing businesses for the foreseeable future. 30PAGE Thermedics Detection Inc. 1997 Financial Statements Forward-looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause its actual results in 1998 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Uncertainty of Market Acceptance of New Products. Certain of the Company's products represent alternatives to traditional detection and analytical methods. As a result, such products may be slow to achieve, or may not achieve, market acceptance, as customers may seek further validation of the efficiency and efficacy of the Company's technology, particularly where the purchase of the product requires a significant capital commitment. The Company believes that, to a significant extent, its growth prospects depend on its ability to gain acceptance of the efficiency and efficacy of the Company's innovative technologies by a broader group of customers. The Company is currently devoting significant resources toward the enhancement of its existing products and the development of new products and technologies, including its derivative products of the Company's Flash-GC high-speed gas chromatography system; a more portable EGIS; and Rampart, a lower-cost EGIS unit for use in airport screening of carry-on baggage. There can be no assurance that the Company will be successful in obtaining such broad acceptance or that, if obtained, such acceptance will be sustained. The failure of the Company to obtain and sustain such broad acceptance could have a material adverse effect on the Company's business, financial condition and results of operations. Ongoing Product Development Efforts Required by Rapid Technological Change. The markets for the Company's products are characterized by changing technology, evolving industry standards and new product introductions. The Company's future success will depend in part upon its ability to enhance its existing products and to develop and introduce new products and technologies to meet changing customer requirements. There can be no assurance that the Company will successfully complete the enhancement and development of these products in a timely fashion or that the Company's current or future products will satisfy the needs of its markets. Dependence of Security Instruments Market on Government Regulation and Airline Industry. The Company's sales of its explosives-detection systems for use in airports has been and will continue to be dependent on governmental initiatives to require, or support, the screening of checked luggage, carry-on items and personnel with advanced explosives-detection equipment. Substantially all of such systems have been installed at airports in countries other than the United States, in which the applicable government or regulatory authority overseeing the operations of the airport has mandated such screening. Such mandates are influenced by many factors outside of the control of the Company, including political and budgetary concerns of governments, airlines, and airports. 31PAGE Thermedics Detection Inc. 1997 Financial Statements Forward-looking Statements Of the more than 600 commercial airports worldwide, more than 400 are located in the United States. Accordingly, the Company believes that the size of the market for explosives-detection equipment is, and will increasingly be, significantly influenced by United States government regulation. In the United States, the Aviation Security Act of 1990 directed the Federal Aviation Administration (FAA) to develop a standard for explosives-detection systems and required airports in the United States to deploy systems meeting this standard in 1993. To date, no system has demonstrated that it meets all FAA standards under realistic airport operating conditions. As a result, the FAA has not mandated the installation of automated explosives-detection systems, and only a limited number of these systems have been deployed in the United States. The FAA first certified a computed X-ray tomography system for checked luggage in December 1994. The Company's systems are trace detectors for which no FAA certification process for checked baggage, carry-on, or personal screening exists to date. Currently, the Company is seeking FAA approval for the Company's EGIS and Ramport systems for use by airlines in screening carry-on electronic items and luggage searches, however, there can be no assurance that such FAA approvals will be obtained. Each airline must seek this approval for each application. Although the FAA has provided significant funding to the Company in connection with the development of its explosives-detection technology, there can be no assurance that any of the Company's systems will ever meet this or any other United States certification standard. Any product utilizing a technology ultimately recommended or required by the FAA will have a significant competitive advantage in the market for explosives-detection devices. Unless the FAA takes action with respect to a particular explosives-detection product or technology, airlines will not be required to purchase or upgrade their security systems, including upgrading existing metal-detection equipment. Earnings of U.S. air carriers tends to fluctuate significantly from time to time. Any depression in the financial condition of such carriers would likely result in lower capital spending for discretionary items. Moreover, there can be no assurance that additional countries will mandate the implementation of effective explosives screening for airline baggage, carry-on items or personal, or that, if mandated, the Company's systems will meet the certification or other requirements of the applicable government authority. Even if the Company's systems were to meet the applicable requirements, there can be no assurance that the Company would be able to market its systems effectively. In October 1996, the United States enacted legislation which includes a $144.2 million allocation to purchase explosives-detection systems and other advanced security equipment, including trace detection equipment such as the systems manufactured by the Company, for carry-on and checked baggage screening. The FAA has made purchases of, or placed orders for the purchase of, security equipment under this legislation, including an order to purchase $5.8 million of the Company's EGIS systems. There can be no assurance, however, that this legislation will not be modified to reduce the funding for advanced explosives equipment, that the necessary appropriations will be made to fund further purchases of advanced explosives-detection equipment contemplated by the legislation, that trace-detection equipment such as the systems manufactured by the Company 32PAGE Thermedics Detection Inc. 1997 Financial Statements Forward-looking Statements will be mandated, or that, even if further appropriations are made and such equipment is mandated, any of the Company's explosives-detection systems will be purchased for installation at any airports in the United States. Further, there can be no assurance that the U.S. will mandate the widespread use of these systems after completion of the initial purchases. Significance of Certain Customers. Sales of process detection instruments and services to bottlers licensed by The Coca-Cola Company (Coca-Cola Bottlers) were $13,939,000, $10,641,000, and $9,974,000, in 1997, 1996, and 1995, respectively, or 27%, 24%, and 36% of the Company's revenues, respectively, during such periods. In 1997, the Company completed the fulfillment of a mandated product-line upgrade for The Coca-Cola Bottlers. Although the Company anticipates that it will continue to derive revenues from the sale of upgrades and new systems to new plants, as well as services to the Coca-Cola Bottlers, the Company does not expect that revenues derived from these customers will continue at a rate comparable to prior years. Further, the Company intends to continue to develop and introduce new process detection products for the food, beverage and other markets, however, there can be no assurance that the Company will be successful in the introduction of new process detection products or that any sales of these products will be sufficient to maintain a rate of growth equivalent to prior years. Competition; Technological Change. The Company encounters, and expects to continue to encounter, competition in the sale of its current and future products. Many of the Company's competitors and potential competitors have substantially greater resources, manufacturing and marketing capabilities, research and development staff and production facilities than those of the Company. Some of these competitors have large existing installed bases of products with substantial numbers of customers. In addition, other major corporations have recently announced their intention to enter certain of the Company's markets, including the security screening market. The Company believes that many of its products are successful because they are technologically superior to alternative products offered by some of the Company's competitors. In order to continue to be successful, the Company believes that it will be important to maintain this technological advantage. No assurance can be given that the Company will be able to maintain such an advantage or that competitors of the Company will not develop technological innovations that will render products of the Company obsolete. For example, the Company's EGIS system competes against other trace explosives detection systems as well as systems utilizing dual energy X-ray or computed X-ray tomography imaging technologies. There can be no assurance that such technologies will not be enhanced to a degree that would impair the Company's ability to market its explosives detection systems. Potential for Product Liability Claims. The Company's business involves the risk of product liability claims inherent to the explosives detection business, as well as the food, beverage and other industries. There are many factors beyond the control of the Company that could 33PAGE Thermedics Detection Inc. 1997 Financial Statements Forward-looking Statements result in the failure of the Company's products to detect explosives or contaminants in food or beverage containers, such as the reliability of a customer's operators, the ongoing training of such operators and the maintenance of the Company's products by its customers. For these and other reasons, there can be no assurance that the Company's products will detect all explosives or contaminants. The failure to detect explosives or contaminants could give rise to product liability claims and result in negative publicity that could have a material adverse effect on the Company's business, financial condition and results of operations. The Company currently maintains both aviation and general product liability insurance in amounts the Company believes to be commercially reasonable. There can be no assurance that this insurance will be sufficient to protect the Company from product liability claims, or that product liability insurance will continue to be available to the Company at a reasonable cost, if at all. Uncertainties Associated With International Operations. In 1997, 1996, and 1995, international sales accounted for 71%, 67%, and 73%, respectively, of the Company's revenues, and the Company anticipates that international sales will continue to account for a significant percentage of the Company's revenues. Sales to customers in The Netherlands accounted for approximately 17% and 11% of the Company's revenues in 1997 and 1996, respectively. See Note 8 of Notes to the Company's Consolidated Financial Statements. International revenues are subject to a number of uncertainties, including the following: agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; foreign customers may have longer payment cycles; foreign countries may impose additional withholding taxes or otherwise tax the Company's foreign income, impose tariffs or adopt other restrictions on foreign trade; fluctuations in exchange rates may affect product demand and adversely affect the profitability in U.S. dollars of products and services provided by the Company in foreign markets where payment for the Company's products and services is made in the local currency; U.S. export licenses may be difficult to obtain; and the protection of intellectual property in foreign countries may be more difficult to enforce. Moreover, many foreign countries have their own regulatory approval requirements for sales of the Company's products. As a result, the Company's introduction of new products into international markets can be costly and time-consuming, and there can be no assurance that the Company will be able to obtain the required regulatory approvals on a timely basis, if at all. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not attempt to minimize currency and exchange rate risks through material hedging activities. Limited Protection of Proprietary Technology and Risks of Third-Party Claims. Proprietary rights relating to the Company's products will be protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are maintained in confidence as trade secrets. There can be no assurance, however, that any patents now or hereafter owned by the Company will afford protection 34PAGE Thermedics Detection Inc. 1997 Financial Statements Forward-looking Statements against competitors, or as to the likelihood that patents will issue from pending patent applications. Proceedings initiated by the Company to protect its proprietary rights could result in substantial costs to the Company. Although the Company believes that its products and technology do not infringe any existing proprietary rights of others, there can be no assurance that third parties will not assert such claims against the Company in the future or that such future claims will not be successful. The Company could incur substantial costs and diversion of management resources in connection with the defense of any claims relating to proprietary rights, which could have a material adverse effect on the Company's business, financial condition, and results of operations. Furthermore, parties making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief, which could effectively block the Company's ability to make, use, sell, distribute or market its products and services in the U.S. or abroad. Such a judgment could have a material adverse effect on the Company's business, financial condition and results of operations. In the event that a claim relating to proprietary technology or information is asserted against the Company, the Company may seek licenses to such intellectual property. There can be no assurance, however, that such a license could be obtained on commercially reasonable terms, if at all, or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain the necessary licenses or other rights could preclude the sale, manufacture or distribution of the Company's products and, therefore, could have a material adverse effect on the Company's business, financial condition and results of operations. The cost of responding to any such claim may be material, whether or not the assertion of such claim is valid. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of its technology or independent development by others of similar technology. In addition, the laws of some jurisdictions do not protect the Company's proprietary rights to the same extent as the laws of the U.S. There can be no assurance that these protections will be adequate. Risks Associated with Acquisition Strategy. The Company's strategy includes the acquisition of businesses and technologies that complement or augment the Company's existing product lines. Promising acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers and the need for regulatory approvals, including antitrust approvals. Any acquisitions completed by the Company may be made at substantial premiums over the fair value of the net assets of the acquired companies. There can be no assurance that the Company will be able to complete future acquisitions or that the Company will be able to successfully integrate any acquired businesses. In order to finance such acquisitions, it may be necessary for the Company to raise additional funds through public or private financings. Any equity or debt financing, if available at all, may be on terms which are not favorable to the Company and, in the case of equity financing, may result in dilution to the Company's stockholders. 35PAGE Thermedics Detection Inc. 1997 Financial Statements Forward-looking Statements Difficulties in Managing Rapid Growth. Due to the level of technical and marketing expertise necessary to support its existing and new customers, the Company must attract and retain highly qualified and well-trained personnel. There are a limited number of persons with the requisite skills to serve in these positions, and it may become increasingly difficult for the Company to hire such personnel. Further rapid expansion may also significantly strain the Company's administrative, operational and financial personnel, management information systems, manufacturing operations, and other resources. There can be no assurance that the Company's systems, procedures, and controls will be adequate to support the Company's operations. Failure to manage growth properly could have a material adverse effect on the Company's business, financial condition, and results of operations. Potential Fluctuations in Quarterly Performance. Significant annual and quarterly fluctuations in the Company's results of operations may be caused by, among other factors, the overall demand for, and market acceptance of, the Company's products; the timing of regulatory approvals for certain of the Company's products; government initiatives to promote the use of explosives detection systems such as those manufactured and sold by the Company; the timing of the announcement, introduction and delivery of new products and product enhancements by the Company and its competitors; variations in the Company's product mix and component costs; timing of customer orders; adjustments of delivery schedules to accommodate customer's programs; the availability of components from suppliers; the timing and level of expenditures in anticipation of future sales; the mix of products sold by the Company; and pricing and other competitive conditions. Because certain of the Company's products require significant capital expenditures and other commitments by its customers, the Company has experienced extended sales cycles. Delays in anticipated purchase orders could have a material adverse effect on the Company's business, financial condition and results of operations. Customers may also cancel or reschedule shipments, and product difficulties could delay shipments. Because the Company's operating expenses are based on anticipated revenue levels and a high percentage of the Company's expenses are fixed for the short term, a small variation in the timing of recognition of revenue can cause significant variations in operating results from quarter to quarter. There can be no assurance that any of these factors will not have a material adverse impact on the Company's business and results of operations. Potential Impact of Year 2000 on Processing of Date-sensitive Information. The Company is currently assessing the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems and on products sold as well as products purchased by the Company. The Company believes that its internal information systems and current products are either year 2000 compliant or will be so prior to the year 2000 without incurring material costs. There can be no assurance, however, that the Company will not experience unexpected costs and delays in achieving year 2000 compliance for its internal information systems and current products, which could 36PAGE Thermedics Detection Inc. 1997 Financial Statements Forward-looking Statements result in a material adverse effect on the Company's future results of operations. The Company is presently assessing the effect that the year 2000 problem may have on its previously sold products. The Company is also assessing whether its key suppliers are adequately addressing this issue and the effect this might have on the Company. The Company has not completed its analysis and is unable to conclude at this time that the year 2000 problem as it relates to its previously sold products and products purchased from key suppliers is not reasonably likely to have a material adverse effect on the Company's future results of operations. 37PAGE Thermedics Detection Inc. 1997 Financial Statements Selected Financial Information (In thousands except per share amounts) 1997(a) 1996(b) 1995 1994 1993 ------------------------------------------------------------------------ Statement of Income Data: Revenues $51,320 $43,750 $27,954 $50,343 $42,031 Gross profit 26,789 21,247 12,718 25,437 18,272 Net income 6,070 362 1,508 6,380 5,803 Basic and diluted earnings per share .48 .04 .15 .63 .58 Balance Sheet Data: Working capital $37,219 $23,358 $11,273 $ 6,116 $ 447 Total assets 86,695 53,483 20,322 17,793 25,544 Long-term obligation - 21,200 - - - Shareholders' investment 54,232 20,910 13,773 9,208 3,822 ------------ (a)Reflects the March 1997 initial public offering of the Company's common stock for net proceeds of $28.1 million. (b)Reflects the January 1996 acquisition of Moisture Systems and Rutter and the March and November 1996 private placements of the Company's common stock for aggregate net proceeds of $7.0 million. 38PAGE Thermedics Detection Inc. 1997 Financial Statements Common Stock Market Information The Company's common stock is traded on the American Stock Exchange under the symbol TDX. The following table sets forth the high and low sale prices of the Company's common stock since February 24, 1997, the date the Company's common stock began trading on that exchange, as reported in the consolidated transaction reporting system: 1997 ------------------- Quarter High Low ---------------------------------------------------------------------- First $12 1/8 $10 7/8 Second 12 7/8 9 3/4 Third 12 3/8 9 3/16 Fourth 11 11/16 8 3/4 As of January 30, 1998, the Company had 325 holders of record of its common stock. This does not include holdings in street or nominee names. The closing market price on the American Stock Exchange for the Company's common stock on January 30, 1998, was $8 5/8 per share. Shareholder Services Shareholders of Thermedics Detection Inc. who desire information about the Company are invited to contact John N. Hatsopoulos, Chief Financial Officer, Thermedics Detection Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046, (781) 622-1111. A mailing list is maintained to enable shareholders whose stock is held in street name, and other interested individuals, to receive quarterly reports, annual reports, and press releases as quickly as possible. Distribution of printed quarterly reports is limited to the second quarter only. All material will be available through the Internet from Thermo Electron's Internet site (http://www.thermo.com/subsid/tdx1.html). Stock Transfer Agent American Stock Transfer & Trust Company is the stock transfer agent and maintains shareholder activity records. The agent will respond to questions on issuance of stock certificates, change of ownership, lost stock certificates, and change of address. For these and similar matters, please direct inquiries to: American Stock Transfer & Trust Company Shareholder Services Department 40 Wall Street, 46th Floor New York, New York 10005 (718) 921-8200 Dividend Policy The Company has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future because its policy has been to use earnings to finance expansion and growth. Payment of dividends will rest within the discretion of the Company's Board of Directors and will depend upon, among other factors, the Company's earnings, capital requirements, and financial condition. 39PAGE Thermedics Detection Inc. 1997 Financial Statements Form 10-K Report A copy of the Annual Report on Form 10-K for the fiscal year ended January 3, 1998, as filed with the Securities and Exchange Commission, may be obtained at no charge by writing to John N. Hatsopoulos, Chief Financial Officer, Thermedics Detection Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046. Annual Meeting The annual meeting of shareholders will be held on Monday, June 1, 1998, at 1:30 p.m. at the Hyatt Regency Hotel, Scottsdale, Arizona. 40 EX-21 6 Exhibit 21 THERMEDICS DETECTION INC. As of January 30, 1998, the Registrant owned the following subsidiaries: STATE OR JURISDICTION PERCENT NAME OF OF INCORPORATION OWNERSHIP Detection Securities Corporation Massachusetts 100 Moisture Systems Corporation Ltd. United 100 Kingdom Rutter & Co. Netherlands 100 Rutter Instrumentation S.A.R.L. France 90 Systech B.V. Netherlands 50 ThermedeTec Corporation Delaware 100 Thermedics Detection de Argentina S.A. Argentina 100 (1% of which shares are owned directly by Thermedics Detection Inc.) Thermedics Detection de Mexico, S.A. Mexico 100 de C.V. Thermedics Detection GmbH Germany 100 Thermedics Detection Limited United 100 Kingdom Thermedics Detection Scandinavia AS Norway 100 EX-23.1 7 Exhibit 23.1 Consent of Independent Public Accountants ----------------------------------------- As independent public accountants, we hereby consent to the incorporation by reference of our reports dated February 12, 1998, included in or made a part of this Form 10-K, into Thermedics Detection Inc.'s previously filed Registration Statement No. 333-28093 on Form S-8. Arthur Andersen LLP Boston, Massachusetts March 13, 1998 EX-23.2 8 Exhibit 23.2 Independent Auditors' Consent ----------------------------- We consent to the incorporation by reference of our report dated February 6, 1998, relating to the consolidated and parent company financial statements of Rutter & Co. B.V. (not included separately herein) included in or made a part of this Form 10-K, into the previously filed Registration Statement No. 333-28093 on Form S-8 of Thermedics Detection Inc. Deloitte & Touche Registeraccountants Almelo, The Netherlands March 16, 1998 EX-27 9
5 THIS SCHEDULE CONATAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS DETECTION INC.'S ANNUAL REPORT ON FORM 10-K ON FOR THE YEAR ENDED JANUARY 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-03-1998 JAN-03-1998 44,735 0 11,936 810 10,249 69,682 6,264 4,846 86,695 32,463 0 0 0 1,336 52,896 86,695 37,754 51,320 17,243 24,531 5,051 116 1,239 9,950 3,880 6,070 0 0 0 6,070 .48 .48
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