-----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, H8d51pmy9vgwaDP4awyHOCHv24ZFHLoJEcHtZv8/zprn+KXgs6GoeO7OEXz/wCEk JqMZSB8dlKjzQDNsRYNZTQ== 0001012555-00-000009.txt : 20000317 0001012555-00-000009.hdr.sgml : 20000317 ACCESSION NUMBER: 0001012555-00-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000316 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: 0102 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12745 FILM NUMBER: 571469 BUSINESS ADDRESS: STREET 1: 220 MILL RD CITY: CHELMSFORD STATE: MA ZIP: 01824 BUSINESS PHONE: 5082512000 MAIL ADDRESS: STREET 1: 220 MILL ROAD CITY: CHELMSFORD STATE: MA ZIP: 01824-4178 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------------------------------------------- FORM 10-K (mark one) [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 1, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-12745 THERMEDICS DETECTION INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-3106698 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 220 Mill Road Chelmsford, Massachusetts 01824-4178 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (781) 622-1000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.10 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of January 28, 2000, was approximately $16,185,000. As of January 28, 2000, the Registrant had 19,316,684 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended January 1, 2000, are incorporated by reference into Parts I and II. The information required by Part III of Form 10-K will be filed as part of an amendment to this Form 10-K no later than 120 days after January 1, 2000, and such information is incorporated by reference from such filing. PART I Item 1. Business (a) General Development of Business The businesses of Thermedics Detection Inc. (the Company or the Registrant) operate in two segments: Detection Instruments and Laboratory Products. The Company's Detection Instruments segment develops, manufactures, and markets high-speed detection and measurement systems used for quality assurance and security applications. The Company's quality-assurance systems use ultratrace chemical detectors, X-ray imaging, near-infrared spectroscopy, high-speed gas chromatography, and other technologies to ensure the quality and safety 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 forensic and search applications. The Company also performs contract research and development services for government and industry customers and earns service revenues through long-term contracts. Historically, principal product lines in the Company's Detection Instruments segment were quality-assurance and security systems, including ALEXUS(R) systems, which detect trace amounts of substances that would affect product quality in refillable plastic beverage containers, and EGIS(R) explosives detectors. The Company expanded its product lines to include near-infrared analyzers through its acquisition of Moisture Systems Corporation and Rutter & Co. B.V. (collectively, Moisture Systems) in January 1996. Also in 1996, the Company introduced its InScan(R) high-speed X-ray imaging system and Flash-GC(TM) high-speed gas chromatography system. In 1998*, the Company introduced a new line of benchtop explosives detectors based on its EGIS technology. Additionally, in 1998, the Company introduced an offshoot of its Flash-GC technology, called EZ Flash(TM). During 1999, the Company experienced a decline in revenues, primarily in the Detection Instruments segment. This decline was due in part to changes in the process of recycling plastic containers in Europe. Previously, such containers had been sanitized and reused, a process in which recyclers used the Company's ALEXUS systems. Recent recycling trends in Europe involve melting and reforming plastic returnables. In addition, the Company has not received approval of its upgraded EGIS explosive-detection system from the Federal Aviation Administration (FAA), which resulted in a decline in sales of this product line during 1999. Although the Company expects to receive approval for this system, there can be no assurance of such approval by any particular date, or at all. In 1998, the Company acquired Orion Research, Inc., a leading manufacturer of electrochemistry products, from its parent company, Thermedics Inc. Orion constitutes the Laboratory Products segment. Orion's products determine the quality of a wide variety of items, including food, water, and pharmaceuticals, by measuring their pH, conductivity, dissolved oxygen, and specific ion concentration. The Company operated as a division of Thermedics until its incorporation as a Massachusetts corporation in December 1990. A publicly traded subsidiary of Thermo Electron Corporation, Thermedics develops, manufactures, and markets diverse product lines, including implantable heart-assist devices and other biomedical products, electronic-test instruments, and equipment that assures the quality of a wide variety of consumer products and bulk materials. As of January 1, 2000, Thermedics owned 16,150,248 shares of the Company's outstanding common stock, representing 84% of such stock outstanding. Thermedics is a 76%-owned subsidiary of Thermo Electron. As of January 1, 2000, Thermo Electron owned 1,029,950 shares of the Company's outstanding common stock, representing 5% of such stock outstanding. During 1999, Thermo Electron purchased 147,500 shares of the Company's common stock for $1.3 million. Thermo Electron develops, manufactures, and sells measurement and detection instruments used in virtually every industry to monitor, collect, and analyze data that provide knowledge for the user. For - -------------------- * References to 1999, 1998, and 1997 herein are for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998, respectively. 2 example, Thermo Electron's powerful analysis technologies help researchers sift through data to unlock the mysteries of DNA or develop new drugs; allow manufacturers to fabricate ever-smaller components required to carry greater amounts of information, faster; or monitor and control industrial processes on-line to ensure that critical quality standards are met efficiently. On March 10, 2000, Thermedics commenced a cash tender offer for any and all of the outstanding shares of the Company's common stock at $8.00 per share. Thermedics has conditioned the tender offer on receiving acceptances from holders of enough shares so that, when combined with its and Thermo Electron's current share ownership, Thermedics' ownership of the Company will reach at least 90%. If Thermedics achieves this 90% ownership threshold, it will acquire all remaining outstanding shares of the Company's common stock through a "short form" merger in Massachusetts. The Company would thereby become a private subsidiary of Thermedics. The completion of this transaction is subject to certain conditions, as outlined in Note 11 to Consolidated Financial Statements in the Registrant's Fiscal 1999 Annual Report to Shareholders, which statements are incorporated herein by reference. 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 1999 Annual Report to Shareholders, which statements are incorporated herein by reference. (b) Financial Information About Segments Financial information concerning the Company's segments is summarized in Note 8 to Consolidated Financial Statements in the Registrant's 1999 Annual Report to Shareholders, which information is incorporated herein by reference. (c) Description of Business (i) Principal Products and Services Detection Instruments Quality-assurance Systems The Company designs, manufactures, and markets high-speed measurement, detection, and rejection equipment that uses ultratrace chemical detectors, X-ray imaging, near-infrared spectroscopy, high-speed gas chromatography, and other technologies for product quality and productivity applications. ALEXUS. The Company's ALEXUS systems detect trace amounts of constituents that would affect product quality in refillable plastic containers of soft drinks, water, and other beverages. The Company's ALEXUS systems, introduced in 1992, have been installed on more than 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 1999, 1998, and 1997, the Company derived revenues of $7.6 million, $11.1 million, and $19.2 million, respectively, from ALEXUS systems. 3 InScan. The Company's InScan system uses high-speed X-ray imaging technology to determine accurate fill volume, net volume, proper contents, and package integrity of containers for the beverage, food, and other industries. InScan uses a low-power X-ray to capture data. This data produces an instant, detailed image of each container. InScan's proprietary software then automatically compares the data 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'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 has also sold systems to the household products industry, the cosmetics industry, the personal-care products industry, and the food industry. During 1999, 1998, and 1997, the Company derived revenues of $2.7 million, $3.8 million, and $3.3 million, respectively, from InScan systems. Moisture Systems. The Company's Moisture Systems division 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 products as they move along manufacturing lines. 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. In 1998, the Company introduced the Quadra Beam 6600L, an explosion-proof analyzer designed specifically for the on-line monitoring of volatile liquids and gases. Also in 1998, the Company launched its most powerful and cost-effective analyzer to date, SPECTRA-QUAD, which can measure continuously up to three constituents in products moving along product lines. During 1999, 1998, and 1997, the Company derived revenues of $9.4 million, $12.2 million, and $15.4 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 for near on-line process and quality-control applications that require high-speed results. The Company is also targeting certain other segments of the conventional gas chromatography market in which access to high-speed analysis would be advantageous. The Flash-GC has applications in the food, flavors, fragrance, chemical, pharmaceutical, forensic, and automotive industries, as well as in medical and environmental laboratories. The Company is targeting only those sectors of the laboratory and process gas chromatography market that are expected to place a premium on near-instant analysis. In 1998, the Company introduced the EZ-Flash, which is an upgrade kit that can be added to virtually any conventional gas chromatograph to conduct chemical analyses up to 30 times faster. Environmental-analysis and chemical companies have been the primary buyers of this product. Security Instruments The Company designs, manufactures, and markets security instruments that use trace particle- and vapor-detection techniques for forensics and search and screening applications under the direction of police, border police, transportation authorities, and carriers. 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 detection of explosives, both 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 also has developed SecurScan(TM), a walk-through explosives detector. 4 The Company believes that the EGIS system is the most accurate and most sensitive high-speed trace explosives-detection system available today. EGIS employs 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 FAA and the U.S. Department of State, more than 275 EGIS units have been deployed to date. The EGIS system currently operates in 26 countries and is in use for carry-on and checked-luggage screening at more than 50 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, 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. 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 1999, 1998, and 1997, the Company derived revenues of $3.8 million, $8.3 million, and $10.3 million, respectively, from EGIS systems. Laboratory Products Electrochemistry Products Through its Orion Research subsidiary, the Company manufactures a wide range of electrochemistry products that determine the quality of many substances by measuring their pH, specific ion concentration, dissolved oxygen, and conductivity. These products include electrodes, which detect and communicate measurements to meters, also supplied by Orion, that display the measurement information in a convenient and useful format. Orion also provides a host of reagents and standards. These products are used in the food, beverage, pharmaceutical, chemical, environmental analysis, drinking water, wastewater treatment, agricultural, biomedical research, and many other industries. Titration Products Orion's titration products are also used to measure pH, specific ion concentration, conductivity, and dissolved oxygen, but in a more automated manner, as well as to measure the moisture content of raw, in-process, or finished products. Orion designs, manufactures and markets automated potentiometric and Karl Fischer volumetric and coulometric titrators for a variety of industries. The target markets include the food and beverage, petrochemical, pharmaceutical, chemical, water and wastewater, and paper industries. Orion titration systems are designed specifically to analyze samples in either quality control or research environments. Orion's potentiometric titrators have been used in a wide range of applications such as determining the amount of Vitamin C in beverages, hardness in water, fluoride in toothpaste, surfactants in shampoos, and total acid number in petrochemicals. Orion's Karl Fischer Titrators analyze moisture levels from the parts-per-million to percentage range. Orion's most innovative titration instrument is the Model TURBO2(R) with its built-in high-speed blender that homogenizes whole samples in a moisture-free environment. 5 Process Products Included in process products is a complete family of on-line water analyzers designed to monitor concentrations of various chemicals and contaminants. Targeted markets include the power, semiconductor, petrochemical, and paper industries. Orion's 1700 series on-line analyzers measure chlorine and fluoride in wastewater, while the 1800 series measures specific ions and dissolved oxygen analysis in pure and potable water. Orion's on-line water analyzers are used in the power industry, in order to read low levels of residual salts, ions, and dissolved oxygen in the ultrapure water used in the steam cycle. Lower detection levels and extended government regulations have made on-line measurements increasingly important. (ii) and (xi) New Products; Research and Development Detection Instruments 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. In 1998, the Company evolved the InScan system into three distinct products. The InScan 100 Fill Level/Net Content System assures the proper fill level and net content of containers. The InScan 200 Foreign Material Detection System detects metal, stones, glass, and other objects in packages. The InScan 300 Package Integrity Analysis System provides package integrity information for small packages, including verifying the presence and location of various components in packages. The Company also made progress in creating a wider and higher tunnel for all of its InScan systems, which will allow larger containers to be examined. In addition, the Company has been exploring a number of improvements to its security product line. In 1998, the Company introduced a new family of benchtop explosives detectors - the EGIS II, the more sensitive EGIS III, and EGIS IV, the Company's most sensitive explosives detector to date. With this family of products, the Company believes it can better meet various customers' analytical needs as well as budget. The Company also is working to extend the capabilities of its SecurScan walk-through detector to not only detect traces of explosives, but also illicit drugs and metal-based weapons. In addition, the Company plans to broaden its product line to include a chemical and biological warfare detection system. Laboratory Products New Orion laboratory products for 1999 included the SensorLink(R) system for dissolved oxygen and WineMaster(TM) Analysis System. SensorLink records dissolved oxygen measurements directly into custom computer software. WineMaster incorporates special chemical testing for the wine industry into turnkey measurements. Two process product introductions for on-line pH and on-line silica monitors will allow unattended continuous measurement of these critical parameters in ultrapure and other waters used in industrial facilities. Company-funded research and development expenses were $8.0 million in 1999, and $9.6 million in 1998 and 1997. Contract research and development revenues were $0.9 million, $3.0 million, and $1.4 million in 1999, 1998, and 1997, respectively. (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. 6 (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 34 U.S. patents, and has filed applications for five additional United States patents. The Company's U.S. patents, more than 60% of which were issued after 1990, have expiration dates ranging from 2000 through 2015. 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, included in the Detection Instruments segment, accounted for 5%, 7%, and 13% of the Company's total revenues in 1999, 1998, and 1997, respectively. Sales to Fisher Scientific and VWR Scientific, both included in the Laboratory Products segment, accounted for 13% and 12% of total revenues, respectively, in 1999, and 10% and 10% of total revenues, respectively, in 1998. (viii)Backlog The Company's backlog of firm orders was as follows:
(In thousands) 1999 1998 - ---------------------------------------------------------------------------------------- -------- -------- Detection Instruments $2,160 $ 4,494 Laboratory Products 2,441 1,571 ------ ------- $4,601 $ 6,065 ====== ======= Certain of these orders are cancelable by the customer upon payment of a cancellation charge. The Company believes that substantially all of the backlog at January 1, 2000, will be shipped or completed during 2000. The decrease in the backlog for the Detection Instruments segment primarily resulted from a decrease in sales of the Company's ALEXUS systems and EGIS explosive-detection systems. 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 Company's security instruments are subject to regulation by the FAA, corresponding foreign governmental authorities, The International Civil Aviation Organization, and the United Nations organization, which are responsible 7 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. Detection Instruments Quality-assurance Systems The Company's 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, manufacturers' representatives, and original equipment manufacturer relationships around the world. The Company also operates factory service centers for these products. The Flash-GC and EZ Flash systems are new technologies competing in the developing high-speed gas chromatography market segment. The Company's Flash-GC and EZ Flash compete principally against high-speed gas chromatographs offered by ChromFast, based in Michigan. The Company's gas chromatography 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 quality-assurance 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. 8 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 systems sales and service organizations. Laboratory Products The Company's Laboratory Products segment competes with several international companies. The Company competes on the basis of performance, service, technology, and price. Competitors include Corning, Fisher Scientific, Mettler-Toledo, and Beckman Coulter. The two major titration competitors are Metrohm, distributed by Brinkmann in the United States, and Mettler-Toledo. Other competitors in the market for titration products are Radiometer, Kyoto, ManTech, and Denver Instruments. Ninety-five percent of the process products market is the power industry in which Orion competes with manufacturers such as Hach, Waltron, and Swan. Other competitors of process products are Foxboro, Polymetron, and Honeywell. (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 1, 2000, the Company employed approximately 460 full-time employees. (d) Financial Information About Geographic Areas Financial information about geographic areas is summarized in Note 8 to Consolidated Financial Statements in the Registrant's 1999 Annual Report to Shareholders and is incorporated herein by reference.
(e) Executive Officers of the Registrant
Name Age Present Title (Fiscal Year First Became Executive Officer) ------------------ --- --------------------------------------------------------- James Barbookles 51 Chief Executive Officer and President (1997) Theo Melas-Kyriazi 40 Chief Financial Officer (1998) Paul F. Kelleher 57 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. Mr. Barbookles has been President and Chief Executive Officer of the Company since November 1997. 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. Mr. Melas-Kyriazi was appointed Chief Financial Officer of the Company and Thermo Electron on January 1, 1999. Mr. Melas-Kyriazi joined Thermo Electron in 1986 as Assistant Treasurer, and became Treasurer in 1988. In 1994, he was named President and Chief Executive Officer of ThermoSpectra Corporation, then a public subsidiary of Thermo Instrument Systems Inc. In 1998, he became Vice President of Corporate Strategy for Thermo Electron. Mr. Melas-Kyriazi remains a Vice President of Thermo Electron. Mr. Kelleher has held comparable positions for at least five years with Thermedics or Thermo Electron. Messrs. Melas-Kyriazi 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. 9 Item 2. Properties The location and general character of the Company's principal properties by segment as of January 1, 2000 are as follows. Detection Instruments The Detection Instruments segment operates from one principal facility, an 111,000-square foot office, engineering, laboratory, and manufacturing facility in Chelmsford, Massachusetts, under a lease expiring in 2006, subject to one five-year renewal option at the election of the Company. The Detection Instruments segment also leases approximately 9,000 square feet of office and manufacturing space in Enschede, Holland, under a lease expiring in 2001. In addition, the Detection Instruments segment leases approximately 12,000 square feet of office and engineering space throughout the world for its sales and service operations under leases expiring at various dates through 2002. Laboratory Products The Laboratory Products segment operates primarily from a 115,000-square foot office, engineering, laboratory, and manufacturing facility in Beverly, Massachusetts, under a lease expiring in 2006. In addition, the Laboratory Products segment leases approximately 12,000 square feet of office and manufacturing space in Puerto Rico under a lease expiring in 2009 and owns approximately 14,000 square feet of office, engineering, laboratory, and manufacturing space in the United Kingdom. The Company believes that these facilities are adequate for its present operations. The Company believes suitable alternate space is available for lease on acceptable terms in the event the Company does not renew leases expiring in the near future. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of the Security Holders Not applicable. 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information concerning the market and market price for the Registrant's common stock, $.10 par value, and dividend policy is included under the sections labeled "Common Stock Market Information" and "Dividend Policy" in the Registrant's 1999 Annual Report to Shareholders and is incorporated herein by reference. Item 6. Selected Financial Data The information required under this item is included under the sections labeled "Selected Financial Information" and "Dividend Policy" in the Registrant's 1999 Annual Report to Shareholders and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required under this item is included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1999 Annual Report to Shareholders and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required under this item is included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1999 Annual Report to Shareholders and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Registrant's Consolidated Financial Statements as of January 1, 2000, and Supplementary Data are included in the Registrant's 1999 Annual Report to Shareholders and are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III The information required by Items 10, 11, 12, and 13 of Form 10-K will be filed as part of an amendment to this Form 10-K no later than 120 days after January 1, 2000, the end of the Registrant's fiscal year covered by this Form 10-K. 11 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a,d) Financial Statements and Schedules (1)The consolidated financial statements set forth in the list below are filed as part of this Report. (2)The consolidated financial statement schedule set forth in the list below is filed as part of this Report. (3)Exhibits filed herewith or incorporated herein by reference are set forth in Item 14(c) below. List of Financial Statements and Schedules Referenced in this Item 14 Information incorporated by reference from Exhibit 13 filed herewith: Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Comprehensive Income and Shareholders' Investment Notes to Consolidated Financial Statements 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. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 16, 2000 THERMEDICS DETECTION INC. By: /s/ 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, 2000. Signature Title By: /s/ James Barbookles President, Chief Executive Officer, and James Barbookles Director By: /s/ Theo Melas-Kyriazi Chief Financial Officer Theo Melas-Kyriazi By: /s/ Paul F. Kelleher Chief Accounting Officer Paul F. Kelleher By: /s/ John T. Keiser Chairman of the Board and Director John T. Keiser By: /s/ Earl R. Lewis Director Earl R. Lewis 13 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 10, 2000 (except with respect to the matter discussed in Note 11, as to which the date is March 10, 2000). Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 on page 12 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the 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 10, 2000
14 SCHEDULE II
THERMEDICS DETECTION INC. Valuation and Qualifying Accounts (In thousands) Description Provision Accounts Accounts Other (a) Balance Balance at Charged to Recovered at End Beginning Expense Written of Year of Year Off - ----------------------------------- ----------- ----------- ----------- ----------- ----------- ---------- Allowance for Doubtful Accounts Year Ended January 1, 2000 $1,149 $ 728 $ - $ (148) $ (15) $1,714 Year Ended January 2, 1999 $1,127 $ 301 $ 1 $ (395) $ 115 $1,149 Year Ended January 3, 1998 $1,455 $ 201 $ 7 $ (530) $ (6) $1,127
Description Balance at Established Activity Other (c) Balance Beginning as Cost of Charged at End of Year Acquisitions to of Year Reserve - ------------------------------------------- ------------- ------------ ----------- ----------- ---------- Accrued Acquisition Expenses (b) Year Ended January 3, 1998 $ 580 $ - $ (476) $ (104) $ - (a) Includes the effect of foreign currency translation. (b) The nature of activity in this account is described in Note 2 to Consolidated Financial Statements in the Registrant's 1999 Annual Report to Shareholders. (c) Represents reduction of cost in excess of net assets of acquired companies for accrued acquisition expenses no longer necessary after finalization of restructuring plan. 15 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. 2.3 Agreement and Plan of Reorganization dated as of May 6, 1998, by and among the Registrant, Orion Acquisition Inc., Thermedics Inc., and Orion Research, Inc. (incorporated by reference herein from Exhibit 2.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 4, 1998 [File No. 1-12745]). 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 Amended and Restated By-Laws of the Registrant (incorporated by reference herein from Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-12745]). 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* Reserved. 10.5 Reserved. 10.6 Amended and Restated Master Guarantee Reimbursement and Loan Agreement dated as of December 10, 1997, between Thermedics and the Registrant (incorporated by reference herein from Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-12745]). 16 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* Reserved. 10.12 Stock Holdings Assistance Plan and Form of Promissory Note (incorporated by reference herein from Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-12745]). 10.13 Master Cash Management, Guarantee Reimbursement, and Loan Agreement dated as of June 1, 1999, between the Registrant and Thermo Electron Corporation (incorporated by reference herein from Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-12745]). 13 Annual Report to Shareholders for the year ended January 1, 2000 (only those portions incorporated herein by reference). 21 Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP. 27 Financial Data Schedule.
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-13 2 Exhibit 13 Thermedics Detection Inc. Consolidated Financial Statements 1999
Thermedics Detection Inc. 1999 Financial Statements Consolidated Statement of Income (In thousands except per share amounts) 1999 1998 1997 - ------------------------------------------------------------------------- ----------- ---------- --------- Revenues (Notes 6 and 8): Product revenues $ 60,624 $ 74,754 $89,264 Service revenues 12,960 16,821 15,110 -------- -------- ------- 73,584 91,575 104,374 -------- -------- ------- Costs and Operating Expenses: Cost of product revenues (Note 6) 28,623 30,610 38,694 Cost of service revenues 6,602 11,641 7,701 Selling, general, and administrative expenses (Note 6) 25,289 26,744 28,515 Research and development expenses 8,025 9,645 9,643 -------- -------- ------- 68,539 78,640 84,553 -------- -------- ------- Operating Income 5,045 12,935 19,821 Interest Income 1,550 1,536 2,072 Interest Expense, Related Party - (303) (1,239) Other Income (Expense), Net (15) (1) 23 -------- -------- ------- Income Before Provision for Income Taxes 6,580 14,167 20,677 Provision for Income Taxes (Note 4) 1,504 5,496 8,171 -------- -------- ------- Net Income $ 5,076 $ 8,671 $12,506 ======== ======== ======= Basic and Diluted Earnings per Share (Note 9) $ .26 $ .45 $ .67 ======== ======== ======= Weighted Average Shares (Note 9) Basic 19,317 19,317 18,721 ======== ======== ======= Diluted 19,355 19,321 18,732 ======== ======== ======= The accompanying notes are an integral part of these consolidated financial statements.
2
Thermedics Detection Inc. 1999 Financial Statements Consolidated Balance Sheet (In thousands except share amounts) 1999 1998 - -------------------------------------------------------------------------------------- ---------- -------- Assets Current Assets: Cash and cash equivalents (includes $24,682 under repurchase $ 9,453 $ 32,906 agreement with affiliated company in 1998) Advance to affiliate 33,633 - Accounts receivable, less allowances of $1,714 and $1,149 16,558 17,654 Inventories 13,413 17,167 Deferred tax asset (Note 4) 4,152 2,884 Prepaid expenses 1,353 1,496 -------- -------- 78,562 72,107 -------- -------- Property, Plant, and Equipment, Net 4,511 4,938 -------- -------- Other Assets 430 804 -------- -------- Cost in Excess of Net Assets of Acquired Companies (Note 2) 52,523 54,657 -------- -------- $136,026 $132,506 ======== ======== Liabilities and Shareholders' Investment Current Liabilities: Accounts payable $ 2,597 $ 3,719 Accrued payroll and employee benefits 3,079 3,412 Accrued commissions 1,260 787 Deferred revenue 574 972 Accrued installation and warranty expenses 948 1,075 Accrued and deferred income taxes 1,519 - Other accrued expenses 3,970 4,185 Due to parent company and affiliated companies 259 336 --------- -------- 14,206 14,486 --------- -------- Long-term Obligation 99 127 --------- -------- Commitments (Note 5) Shareholders' Investment (Notes 2, 3, and 7): Common stock, $.10 par value, 50,000,000 shares authorized; 1,932 1,932 19,316,684 shares issued and outstanding Capital in excess of par value 95,022 95,022 Retained earnings 26,953 21,877 Accumulated other comprehensive items (2,186) (938) --------- -------- 121,721 117,893 --------- -------- $ 136,026 $132,506 ========= ======== The accompanying notes are an integral part of these consolidated financial statements.
3
Thermedics Detection Inc. 1999 Financial Statements Consolidated Statement of Cash Flows (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ----------- --------- Operating Activities Net income $ 5,076 $ 8,671 $12,506 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,260 3,327 3,287 Provision for losses on accounts receivable 728 301 201 Other noncash expense 2,511 1,297 376 Deferred income tax expense (benefit) (1,020) 1,084 1,148 Changes in current accounts: Accounts receivable 110 1,041 (1,683) Inventories 780 (1,445) (3,298) Other current assets 115 (112) (52) Accounts payable (1,094) (134) (884) Other current liabilities 972 (5,339) 2,093 ------- -------- ------- Net cash provided by operating activities 11,438 8,691 13,694 ------- -------- ------- Investing Activities Advances to affiliate, net (33,633) - - Purchases of property, plant, and equipment (1,436) (2,774) (1,832) Proceeds from sale of property, plant, and equipment 354 196 28 Other 16 - 82 ------- -------- ------- Net cash used in investing activities (34,699) (2,578) (1,722) ------- -------- ------- Financing Activities Net proceeds from issuance of Company common stock (Note 7) - - 28,078 Payment of promissory note to parent company - (21,200) - Orion transfers (to) from Thermedics - 1,026 (7,845) Other (28) 127 (61) ------- -------- ------- Net cash provided by (used in) financing activities (28) (20,047) 20,172 ------- -------- ------- Exchange Rate Effect on Cash (164) 488 (56) ------- -------- ------- Increase (Decrease) in Cash and Cash Equivalents (23,453) (13,446) 32,088 Cash and Cash Equivalents at Beginning of Year 32,906 46,352 14,264 ------- -------- ------- Cash and Cash Equivalents at End of Year $ 9,453 $32,906 $46,352 ======= ======= ======= Cash Paid For Interest $ - $ 305 $ 609 Income taxes $ 1,038 $ 5,474 $ 2,909 The accompanying notes are an integral part of these consolidated financial statements. 4 Thermedics Detection Inc. 1999 Financial Statements Consolidated Statement of Comprehensive Income and Shareholders' Investment (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ----------- ---------- --------- Comprehensive Income Net Income $ 5,076 $ 8,671 $ 12,506 -------- -------- -------- Other Comprehensive Items: Foreign currency translation adjustment (1,248) 609 (1,158) -------- -------- ------- $ 3,828 $ 9,280 $ 11,348 ======== ======== ======== Shareholders' Investment Common Stock, $.10 Par Value: Balance at beginning of year $ 1,932 $ 1,932 $ 1,664 Net proceeds from issuance of Company common stock (Note 7) - - 268 -------- -------- -------- Balance at end of year 1,932 1,932 1,932 -------- -------- -------- Capital in Excess of Par Value: Balance at beginning of year 95,022 93,755 67,043 Issuance of stock under employees' and directors' stock plans - - 6 Tax benefit related to employees' and directors' stock plans - 241 305 Net proceeds from issuance of Company common stock (Note 7) - - 27,810 Orion transfers (to) from parent company - 1,026 (1,409) -------- -------- -------- Balance at end of year 95,022 95,022 93,755 -------- -------- -------- Retained Earnings: Balance at beginning of year 21,877 13,206 7,136 Net income 5,076 8,671 12,506 Orion transfers to parent company - - (6,436) -------- -------- -------- Balance at end of year 26,953 21,877 13,206 -------- -------- -------- Accumulated Other Comprehensive Items: Balance at beginning of year (938) (1,547) (389) Other comprehensive items (1,248) 609 (1,158) -------- -------- -------- Balance at end of year (2,186) (938) (1,547) -------- -------- -------- $121,721 $117,893 $107,346 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 5 Thermedics Detection Inc. 1999 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) is comprised of businesses that operate in two segments: Detection Instruments and Laboratory Products. The Company's Detection Instruments segment develops, manufactures, and markets high-speed detection and measurement systems that ensure the quality of a wide variety of in-process and finished products. The Detection Instruments segment also develops, manufactures, and markets security instruments for search, screening, and forensic applications under the direction of police, border police, transportation authorities, and carriers. The Company's Laboratory Products segment develops, manufactures, and markets electrochemistry systems that laboratories use to determine the quality of a broad range of substances by measuring their pH, specific ion concentration, dissolved oxygen, and conductivity. 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. As of January 1, 2000, Thermedics owned 16,150,248 shares of the Company's outstanding common stock, representing 84% of such stock outstanding. Thermedics is a 76%-owned subsidiary of Thermo Electron Corporation. As of January 1, 2000, Thermo Electron owned 1,029,950 shares of the Company's common stock, representing 5% of such stock outstanding. On January 31, 2000, the Company announced that Thermedics will make a cash tender offer for any and all of the outstanding shares of the Company's common stock. The tender offer commenced on March 10, 2000, and will expire at midnight on Thursday, April 6, 2000, unless the offer is extended. If the tender offer is successful, Thermedics will acquire all remaining outstanding shares of the Company's common stock through a "short-form" merger in Massachusetts. The Company would thereby become a private subsidiary of Thermedics (Note 11). Principles of Consolidation The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Fiscal Year The Company has adopted a fiscal year ending the Saturday nearest December 31. References to 1999, 1998, and 1997 are for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998, respectively. Fiscal years 1999 and 1998 each included 52 weeks; fiscal 1997 included 53 weeks. Revenue Recognition The Company generally recognizes product revenues upon shipment of its products. The Company provides a reserve for its estimate of warranty costs at the time of shipment. The Company recognizes service revenues as earned over the term of the contract. Deferred revenue in the accompanying balance sheet consists of unearned revenue on service contracts that 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-of-completion method, including revenues from long-term research and development contracts, were $632,000, $2,846,000, and $1,376,000 in 1999, 1998, and 1997, 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. 6 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Stock-based Compensation Plans The Company applies Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation plans (Note 3). Accordingly, no accounting recognition is given to stock options granted at fair market value until they are exercised. Upon exercise, net proceeds, including tax benefits realized, are credited to shareholders' investment. 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%. As a result, the Company was required to file its own tax returns until 1998, at which time Thermedics' ownership percentage again exceeded 80%. As a result, the Company is included in Thermedics' consolidated federal tax return, as provided for under a tax allocation agreement between the Company and Thermedics, effective as of the date Thermedics' ownership percentage exceeded 80%. The tax allocation agreement between the Company and Thermedics provides that, in years that the Company has taxable income, the Company will pay to Thermedics amounts comparable to the taxes the Company would have paid if it had filed separate tax returns. In accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. Earnings per Share Basic earnings per share have been computed by dividing net income by the weighted average number of shares outstanding during the year. Except where the effect would be antidilutive, diluted earnings per share have been computed assuming the exercise of stock options, as well as their related income tax effect. Cash and Cash Equivalents At year-end 1998, $24,682,000 of the Company's cash equivalents were invested in a repurchase agreement with Thermo Electron. Under this agreement, the Company in effect lent excess cash to Thermo Electron, which Thermo Electron collateralized with investments principally consisting of corporate notes, U.S. government-agency securities, commercial paper, money market funds, and other marketable securities, in the amount of at least 103% of such obligation. The Company's funds subject to the repurchase agreement were readily convertible into cash by the Company. The repurchase agreement earned a rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. Effective June 1999, the Company adopted a new cash management arrangement with Thermo Electron, described below, that replaced the repurchase arrangement. Cash equivalents are carried at cost, which approximates market value. At year-end 1999, the Company's cash equivalents also included cash held in foreign countries. Advance to Affiliate Effective June 1999, the Company and Thermo Electron commenced use of a new domestic cash management arrangement. Under the new arrangement, amounts advanced to Thermo Electron by the Company for domestic cash management purposes bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis points, set at the beginning of each month. Thermo Electron is contractually required to maintain cash, cash equivalents, and/or immediately available bank lines of credit equal to at least 50% of all funds invested under this cash management arrangement by all Thermo Electron subsidiaries other than wholly owned subsidiaries. The Company has the contractual right to withdraw its funds invested in the cash management arrangement upon 30 days' prior notice. 7 1. Nature of Operations and Summary of Significant Accounting Policies (continued) In addition, the Company's European-based subsidiary participates in a new cash management arrangement with a wholly owned subsidiary of Thermo Electron. Interest under this arrangement is based on Euro market rates. The other terms of this arrangement are similar to the domestic cash management arrangement.
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) 1999 1998 - ---------------------------------------------------------------------------------------- -------- -------- Raw Material and Supplies $ 6,554 $ 9,763 Work in Process 1,007 1,362 Finished Goods 5,852 6,042 ------- ------- $13,413 $17,167 ======= ======= The Company periodically reviews its quantities of inventories on hand and compares these amounts to expected usage of each particular product or product line. The Company records as a charge to cost of product revenues any amounts required to reduce the carrying value of inventories to net realizable value. Property, Plant, and Equipment The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the property as follows: buildings, 25 years; machinery and equipment, 2 to 10 years; and leasehold improvements, the lesser of the term of the lease or the life of the asset. Property, plant, and equipment consists of the following: (In thousands) 1999 1998 - ---------------------------------------------------------------------------------------- -------- -------- Land and Buildings $ 245 $ 253 Machinery, Equipment, and Leasehold Improvements 12,651 12,252 ------- -------- 12,896 12,505 Less: Accumulated Depreciation and Amortization 8,385 7,567 ------- -------- $ 4,511 $ 4,938 ======= ======== 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 $5,626,000 and $4,156,000 at year-end 1999 and 1998, respectively. The Company assesses the future useful life of this asset whenever events or changes in circumstances indicate that the current useful life has diminished. Such events or circumstances generally include the occurrence of operating losses or significant decline in earnings associated with the acquired business or asset. The Company considers the future undiscounted cash flows of the acquired companies in assessing the recoverability of this asset. The Company assesses cash flows before interest charges when impairment is indicated and writes the asset down to fair value. If quoted market values are not available, the Company estimates fair value by calculating the present value of future cash flows. If impairment has occurred, any excess of carrying value over fair value is recorded as a loss. 8 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Foreign Currency All assets and liabilities of the Company's foreign subsidiaries are translated at year-end exchange rates, and revenues and expenses are translated at average exchange rates for the year in accordance with SFAS No. 52, "Foreign Currency Translation." Resulting translation adjustments are reflected in the "Accumulated other comprehensive items" component of shareholders' investment. Foreign currency transaction gains and losses are included in the accompanying statement of income and are not material for the three years presented. Comprehensive Income Comprehensive income combines net income and "other comprehensive items," which represents foreign currency translation adjustments, reported as a component of shareholders' investment in the accompanying balance sheet. At year-end 1999 and 1998, the balance of accumulated other comprehensive items represents the Company's cumulative translation adjustment. Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash and cash equivalents, advance to affiliate, accounts receivable, accounts payable, and due to parent company and affiliated companies. The carrying amounts of these financial instruments approximate fair value due to their short-term nature. Recent Accounting Pronouncement In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." SAB 101 includes requirements for when shipments may be recorded as revenue when the terms of the sale include customer acceptance provisions or an obligation of the seller to install the product. In such instances, SAB 101 generally requires that revenue recognition occur at completion of installation and/or upon customer acceptance. SAB 101 requires that companies conform their revenue recognition practices to the requirements therein during the first quarter of calendar 2000 through recording a cumulative, net of tax, effect of the change in accounting. The Company has not completed the analysis to determine the effect that SAB 101 will have on its financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Presentation Certain amounts in 1998 and 1997 have been reclassified to conform to the presentation in the 1999 financial statements. 2. Acquisitions On April 14, 1998, the Company announced its intention to acquire Orion Research, Inc., a wholly owned subsidiary of Thermedics, in a merger in which 5,961,225 shares of the Company's common stock would be issued in exchange for all of the outstanding shares of Orion Research. On May 6, 1998, the transaction was completed, subject to shareholder approval of the issuance of the shares of Company common stock to Thermedics in the merger. On January 11, 1999, the Company's shareholders approved the issuance of the 5,961,225 shares of Company common stock and the shares were subsequently issued to Thermedics. The shares have been treated as outstanding for all 9 2. Acquisitions (continued) periods presented for purposes of computing earnings per share. Orion Research manufactures electrochemistry products that determine the quality of a wide variety of substances by measuring components, such as pH, specific ion concentration, dissolved oxygen, and conductivity. These products are used in the environmental, biomedical research, food, chemical, pharmaceutical, and many other industries. Because the Company and Orion Research were deemed for accounting purposes to be under control of their common majority owner, Thermedics, the transaction has been accounted for at historical cost in a manner similar to a pooling of interests. Accordingly, all historical financial information presented has been restated to include the acquisition of Orion Research. Revenues and net income as previously reported for the separate entities prior to the acquisition and as restated for the combined Company are as follows:
(In thousands) 1997 - -------------------------------------------------------------------------------------- ---------- -------- Revenues: Historical $ 51,320 Orion Research 53,054 -------- $104,374 ======== Net Income: Historical $ 6,070 Orion Research 6,436 -------- $ 12,506 ======== In connection with acquisitions made by the Company, the Company has undertaken restructuring activities at the acquired businesses. The Company's restructuring activities, which were accounted for in accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily have included a reduction in staffing levels of 28 employees and the abandonment of a manufacturing and office facility in Massachusetts. In connection with these restructuring activities, as part of the cost of the acquisitions, the Company established reserves as detailed below, primarily for severance and excess facilities. In accordance with EITF 95-3, the Company finalized its restructuring plans no later than one year from the respective dates of the acquisitions. A summary of the changes in accrued acquisition expenses for severance is as follows:
Moisture Orion (In thousands) Systems Research Total - --------------------------------------------------------------- -------------- ------------- ------------- Balance at December 28, 1996 $ 18 $490 $ 508 Usage (18) (386) (404) Decrease due to finalization of restructuring plan, - (104) (104) recorded as a decrease to cost in excess of net ----- ---- ----- assets of acquired companies Balance at January 3, 1998 $ - $ - $ - ===== ==== =====
10 2. Acquisitions (continued) A summary of the changes in accrued acquisition expenses for excess facilities is as follows:
(In thousands) Moisture Systems - -------------------------------------------------------------------------------------------- ------------- Balance at December 28, 1996 $ 72 Usage (72) ---- Balance at January 3, 1998 $ - ==== 3. Employee Benefit Plans Stock-based Compensation Plans Stock Option Plans The Company has stock-based compensation plans for its key employees, directors, and others, which permit the grant of a variety of stock and stock-based awards as determined by the human resources committee of the Company's Board of Directors (the Board Committee), including restricted stock, stock options, stock bonus shares, or performance-based shares. The option recipients and the terms of options granted under this plan are determined by the Board Committee. As of year-end 1999, only nonqualified stock options have been granted by the Board Committee under these plans. Generally, options granted to date are exercisable immediately, but are subject to certain transfer restrictions and the right of the Company to repurchase shares issued upon exercise of the options at the exercise price, upon certain events. The restrictions and repurchase rights generally lapse ratably over a one- to ten-year period, depending on the term of the option, which generally ranges from five to twelve years. Nonqualified stock options may be granted at any price determined by the Board Committee, although incentive stock options must be granted at not less than the fair market value of the Company's common stock on the date of grant. To date, all options have been granted at fair market value. In November 1998, the Company's employees, excluding its officers and directors, were offered the opportunity to exchange previously granted options to purchase shares of Company common stock for an amount of options equal to half of the number of options previously held, exercisable at a price equal to the fair market value at the time of the exchange offer. Holders of options to acquire 256,000 shares at a weighted average exercise price of $10.85 per share elected to participate in this exchange and, as a result, received options to purchase 128,000 shares of Company common stock at $7.88 per share, which are included in the 1998 grants in the table below. The other terms of the new options are the same as the exchanged options except that the holders could not sell shares purchased pursuant to such new options for six months from the exchange date. The options exchanged were canceled by the Company. 11
3. Employee Benefit Plans (continued)
A summary of the Company's stock option activity is as follows: 1999 1998 1997 ------------------ ------------------ ------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Price Price Price Number Number Number of of of (Shares in thousands) Shares Shares Shares - ---------------------------------------------- -------- ---------- --------- --------- --------- --------- Options Outstanding, Beginning of Year 1,137 $ 9.59 656 $10.74 218 $10.41 Granted 1 8.33 830 9.17 550 10.94 Exercised - - - - (1) 9.75 Forfeited (120) 9.73 (93) 10.38 (111) 11.09 Canceled due to exchange - - (256) 10.85 - - ----- ----- ------ Options Outstanding, End of Year 1,018 $ 9.58 1,137 $9.59 656 $10.74 ===== ====== ===== ====== ====== ====== Options Exercisable 1,018 $ 9.58 1,137 $9.59 656 $10.74 ===== ====== ===== ====== ====== ====== Options Available for Grant 415 296 177 ===== ===== ====== A summary of the status of the Company's stock options at January 1, 2000, is as follows:
Options Outstanding and Exercisable ----------------------------------------------------- Range of Exercise Prices Number Weighted Weighted of Average Average Shares Remaining Exercise (In thousands) Contractual Life Price - --------------------------------------------- -------------------- ------------------- ------------------- $ 7.56 - $8.67 432 4.1 years $ 7.77 8.68 - 9.79 173 5.0 years 9.78 9.80 - 10.91 68 6.9 years 10.60 10.92 - 12.03 345 6.3 years 11.54 ----- $ 7.56 - $12.03 1,018 5.2 years $ 9.58 ===== 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 85% of the lower of the fair market value at the beginning or end of the period, and the shares purchased are subject to a one year resale restriction. Prior to the 1998 program year, the applicable shares of common stock could be purchased at the end of a 12-month period at 95% of the fair market value at the beginning of the period, and the shares purchased were subject to a six-month resale restriction. Shares are purchased through payroll deductions of up to 10% of each participating employee's gross wages. 12 3. Employee Benefit Plans (continued) 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 granted after 1994 under the Company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method set forth under SFAS No. 123, the effect on the Company's net income and earnings per share would have been as follows: (In thousands except per share amounts) 1999 1998 1997 - ------------------------------------------------------------------------------ --------- -------- -------- Net Income: As reported $ 5,076 $ 8,671 $ 12,506 Pro forma 4,187 7,722 11,794 Basic and Diluted Earnings per Share: As reported .26 .45 .67 Pro forma .22 .40 .63 Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation expense may not be representative of the amount to be expected in future years. Pro forma compensation expense for options granted is reflected over the vesting period; therefore, future pro forma compensation expense may be greater as additional options are granted. The weighted average fair value per share of options granted was $1.77, $2.96, and $4.44 in 1999, 1998, and 1997, respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1999 1998 1997 - -------------------------------------------------------------------------- ---------- ---------- --------- Volatility 30% 29% 28% Risk-free Interest Rate 5.1% 4.9% 6.1% Expected Life of Options 2.0 years 4.3 years 5.9 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 $437,000, $302,000, and $611,000 in 1999, 1998, and 1997, respectively. Other Retirement Plans Certain of the Company's subsidiaries offer other benefit plans in lieu of participation in the Thermo Electron 401(k) savings plan. Company contributions to these plans are based on formulas determined by the Company. For these plans, the Company contributed and charged to expense $74,000 and $53,000 in 1999 and 1998, respectively. 13 4. Income Taxes The components of income before provision for income taxes are as follows: (In thousands) 1999 1998 1997 - ----------------------------------------------------------------------- ----------- ----------- ---------- Domestic $ 3,591 $ 8,166 $15,051 Foreign 2,989 6,001 5,626 ------- ------- ------- $ 6,580 $14,167 $20,677 ======= ======= ======= The components of the provision for income taxes are as follows: (In thousands) 1999 1998 1997 - ----------------------------------------------------------------------- ----------- ----------- ---------- Currently Payable: Federal $ 711 $ 2,037 $ 4,280 State 292 569 1,231 Foreign 1,521 1,806 1,512 ------- ------- ------- 2,524 4,412 7,023 ------- ------- ------- Net Deferred (Prepaid): Federal (1,007) 1,005 903 State (148) 143 129 Foreign 135 (64) 116 ------- ------- ------- (1,020) 1,084 1,148 ------- ------- ------- $ 1,504 $ 5,496 $ 8,171 ======= ======= ======= 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 $241,000 and $305,000 of such benefits that have been allocated to capital in excess of par value in 1998 and 1997, respectively. 14 4. Income Taxes (continued) The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate of 34% to income before provision for income taxes due to the following: (In thousands) 1999 1998 1997 - ----------------------------------------------------------------------- ----------- ----------- ---------- Provision for Income Taxes at Statutory Rate $ 2,237 $ 4,817 $ 7,030 Increases (Decreases) Resulting From: Federal research and development credit claim from prior years (1,102) - - State income taxes, net of federal tax 95 470 891 Amortization of cost in excess of net assets of acquired companies 365 366 432 Foreign tax rate and tax law differential (210) (298) (321) Tax benefit of foreign sales corporations (121) (120) (289) Other, net 240 261 428 ------- ------- ------- $ 1,504 $ 5,496 $ 8,171 ======= ======= =======
Deferred tax asset in the accompanying balance sheet consists of the following:
(In thousands) 1999 1998 - ----------------------------------------------------------------------------------- ----------- ---------- Reserves and other accruals $1,629 $1,233 Inventory basis difference 2,066 1,125 Accrued compensation 457 310 Depreciation and amortization 162 494 Other, net (96) 216 ------ ------ $4,218 $3,378 ====== ====== A provision has not been made for U.S. or additional foreign taxes on $6,471,000 of undistributed earnings of foreign subsidiaries that could be subject to taxation if remitted to the U.S. because the Company plans to keep these amounts permanently reinvested overseas. 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 $1,609,000, $2,376,000, and $1,984,000 in 1999, 1998, and 1997, respectively, net of third-party sublease income of $310,000, $307,000, and $181,000 in 1999, 1998, and 1997, respectively. Total future minimum payments due under noncancelable operating leases at January 1, 2000, are $1,092,000 in 2000, $1,107,000 in 2001, $1,005,000 in 2002, $737,000 in 2003, $714,000 in 2004, and $1,438,000 in 2005 and thereafter. Total future minimum lease payments are $6,093,000. The operating lease commitments above have not been reduced by minimum sublease rental income commitments of $520,000 in 2000 through 2001, and $130,000 in 2002. See Note 6 for office and research space leased to a related party. 15 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 pays Thermo Electron annually an amount equal to 0.8% of the Company's revenues. The Company paid an amount equal to 0.8% and 1.0% of the Company's revenues in 1998 and 1997, respectively. 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 $589,000, $733,000, and $1,044,000 in 1999, 1998, and 1997, respectively. The fee is reviewed and adjusted annually by mutual agreement of the parties. Management believes that the service fee charged by Thermo Electron is reasonable and that such fees are representative of the expenses the Company would have incurred on a stand-alone basis. The corporate services agreement is renewed annually but can be terminated upon 30 days' prior notice by the Company or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron Corporate Charter defines the relationship among Thermo Electron and its majority-owned subsidiaries). For additional items such as employee benefit plans, insurance coverage, and other identifiable costs, Thermo Electron charges the Company based upon costs attributable to the Company. Research and Development Agreement Pursuant to a subcontract entered into in October 1993, which has been completed, the Company performed 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 $2,000 and $533,000 for services rendered in 1998 and 1997, respectively. The Company purchases an X-ray source that is used as a component in its InScan(R) systems from Trex Medical Corporation, a publicly traded, majority-owned subsidiary of Thermo Electron. The Company paid Trex Medical $81,000, $406,000, and $285,000 for these products in 1999, 1998, and 1997, respectively. In December 1997, the Company entered into a funded research and development arrangement with ThermoLase Corporation, a publicly traded, majority-owned subsidiary of Thermo Electron, to develop a cryogenic cooling device for ThermoLase. ThermoLase agreed to purchase five prototype devices for an aggregate purchase price of $303,000. The Company shipped these devices in 1998. 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, another member of The Olayan Group, which is indirectly controlled by Suliman S. Olayan, Ms. Olayan's father. Revenues recorded under this agreement totaled $147,000, $248,000, and $480,000 in 1999, 1998, and 1997, respectively. Sublease Agreement The Company subleases a portion of an office and research facility to Thermo Cardiosystems Inc., a majority-owned subsidiary of Thermedics, under a sublease agreement expiring in December 2000. Under this sublease, Thermo Cardiosystems is charged for actual square footage occupied at approximately the same rent paid per square foot by the Company under its prime lease. Selling, general, and administrative expenses in the accompanying statement of income have been reduced by $65,000, $50,000, and $40,000 in 1999, 1998, and 1997, respectively, for sublease rental income recorded under this agreement. Total future minimum payments to be received by the Company under this sublease agreement are $86,000, which are due in 2000. 16 6. Related-party Transactions (continued) 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 $76,000, $77,000, and $147,000 in 1999, 1998, and 1997, respectively. Cash Management The Company invests excess cash in arrangements 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. Reserved Shares At January 1, 2000, the Company had reserved 1,508,000 unissued shares of its common stock for possible issuance under its stock-based compensation plans. 8. Significant Customers, Business Segments, and Geographical Information Significant Customers Sales to two customers accounted for 13% and 12% of the Company's total revenues in 1999 and each accounted for 10% of the Company's total revenues in 1998. Sales to another customer accounted for 13% of the Company's total revenues in 1997. Business Segment Information The Company organizes and manages its business by principal product type. The Company's principal businesses operate in two segments: Detection Instruments and Laboratory Products. In classifying operational entities into a particular segment, the Company aggregated businesses with similar economic characteristics, products and services, production processes, customers, and methods of distribution. The Company's Detection Instruments segment develops, manufactures, and markets high-speed detection and measurement systems that ensure the quality of a wide variety of in-process and finished products. The Detection Instruments segment also develops, manufactures, and markets security instruments for search, screening, and forensic applications under the direction of police, border police, transportation authorities, and carriers. The Company's Laboratory Products segment develops, manufactures, and markets electrochemistry systems that laboratories use to determine the quality of a broad range of substances by measuring their pH, specific ion concentration, dissolved oxygen, and conductivity. Within the Detection Instruments segment, the Company derived revenues of $7,601,000, $11,065,000, and $19,198,000 in 1999, 1998, and 1997, respectively, from ALEXUS(R) systems and $9,423,000, $12,245,000, and $15,387,000 in 1999, 1998, and 1997, respectively, from near-infrared analyzers. In addition, this segment derived revenues of $3,789,000, $8,258,000, and $10,337,000 in 1999, 1998, and 1997, respectively, from its EGIS(R) security systems.
17
8. Significant Customers, Business Segments, and Geographical Information (continued) (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ----------- --------- Business Segment Information Revenues: Detection Instruments $ 26,406 $ 40,273 $ 51,320 Laboratory Products 47,178 51,302 53,054 -------- --------- -------- $ 73,584 $ 91,575 $104,374 ======== ========= ======== Income Before Provision for Income Taxes: Detection Instruments (a) $ (3,475) $ 2,671 $ 9,623 Laboratory Products 9,290 11,080 11,257 Corporate (b) (770) (816) (1,059) -------- --------- -------- Total operating income 5,045 12,935 19,821 Interest and other income, net 1,535 1,232 856 -------- --------- -------- $ 6,580 $ 14,167 $ 20,677 ======== ========= ======== Total Assets: Detection Instruments $ 38,001 $ 44,785 $ 44,987 Laboratory Products 60,490 60,036 61,570 Corporate (c) 37,535 27,685 41,708 -------- --------- -------- $136,026 $ 132,506 $148,265 ======== ========= ======== Depreciation and Amortization: Detection Instruments $ 1,129 $ 1,402 $ 1,522 Laboratory Products 2,131 1,925 1,765 -------- --------- -------- $ 3,260 $ 3,327 $ 3,287 ======== ========= ======== Capital Expenditures: Detection Instruments $ 342 $ 1,655 $ 775 Laboratory Products 1,094 1,119 1,057 -------- --------- -------- $ 1,436 $ 2,774 $ 1,832 ======== ========= ======== 18 8. Significant Customers, Business Segments, and Geographical Information (continued) (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ----------- --------- Geographical Information Revenues (d): United States $ 63,004 $ 79,768 $ 93,251 Other 15,700 17,957 18,016 Transfers among geographical areas (e) (5,120) (6,150) (6,893) -------- --------- -------- $ 73,584 $ 91,575 $104,374 ======== ========= ======== Long-lived Assets (f): United States $ 4,106 $ 4,483 $ 3,433 Other 406 472 591 -------- --------- -------- $ 4,512 $ 4,955 $ 4,024 ======== ========= ======== Export Revenues Included in United States Revenues Above (g) $ 23,522 $ 31,637 $ 42,930 ======== ========= ======== (a) Includes inventory provisions of $1.9 million in 1999. (b) Primarily general and administrative expenses. (c) Primarily cash, cash equivalents, advance to affiliate, and deferred tax asset. (d) Revenues are attributed to countries based on selling location. (e) Transfers among geographical areas are accounted for at prices that are representative of transactions with unaffiliated parties. (f) Includes property, plant, and equipment, net and other long-term tangible assets. (g) In general, export revenues are denominated in U.S. dollars. 19 9. Earnings per Share Basic and diluted earnings per share were calculated as follows: (In thousands except per share amounts) 1999 1998 1997 - -------------------------------------------------------------------------- ---------- ---------- --------- Basic Net Income $ 5,076 $ 8,671 $12,506 ------- ------- ------- Weighted Average Shares 19,317 19,317 18,721 ------- ------- ------- Basic Earnings per Share $ .26 $ .45 $ .67 ======= ======= ======= Diluted Net Income $ 5,076 $ 8,671 $12,506 ------- ------- ------- Weighted Average Shares 19,317 19,317 18,721 Effect of Stock Options 38 4 11 ------- ------- ------- Weighted Average Shares, as Adjusted 19,355 19,321 18,732 ------- ------- ------- Diluted Earnings per Share $ .26 $ .45 $ .67 ======= ======= ======= Options to purchase 612,000, 845,000, and 228,000 shares of common stock were not included in the computation of diluted earnings per share for 1999, 1998, and 1997, respectively, because their effect would have been antidilutive due to the options' exercise prices exceeding the average market price for the common stock.
10. Unaudited Quarterly Information
(In thousands except per share amounts) 1999 First Second Third (a) Fourth - ---------------------------------------------------------------- --------- ---------- ---------- --------- Revenues $20,412 $18,187 $17,558 $17,427 Gross Profit 11,817 9,961 6,942 9,639 Net Income 1,832 1,467 29 1,748 Basic and Diluted Earnings per Share .09 .08 - .09 1998 First Second Third Fourth - ---------------------------------------------------------------- --------- ---------- ---------- --------- Revenues $23,707 $23,957 $23,569 $20,342 Gross Profit 12,708 13,217 13,061 10,338 Net Income 2,050 2,235 2,667 1,719 Basic and Diluted Earnings per Share .11 .12 .14 .09 (a) Includes inventory provisions of $1.9 million. 20 11. Subsequent Event On March 10, 2000, Thermedics commenced a cash tender offer for any and all of the outstanding shares of the Company's common stock at $8.00 per share. This action is part of a major reorganization plan under which Thermo Electron will spin in, spin off, and sell various businesses to focus solely on its core measurement and detection instruments business. Thermedics and Thermo Electron own approximately 84% and 5%, respectively, of the outstanding shares of the Company's common stock. Thermedics has conditioned the tender offer on receiving acceptances from holders of enough shares so that, when combined with its and Thermo Electron's current share ownership, Thermedics' ownership reaches at least 90%. If Thermedics achieves this 90-percent-ownership threshold, it will acquire all remaining outstanding shares of the Company's common stock through a "short-form" merger in Massachusetts. Shareholders who do not tender shares to Thermedics during the tender offer would also receive $8.00 per share in cash for their stock in the short-form merger. The tender offer and proposed subsequent short-form merger require review by the Securities and Exchange Commission of necessary filings; a short-form merger would not require the Company's board or shareholder approval. The Thermedics board of directors has approved pursuing this proposed tender offer and short-form merger in lieu of continuing negotiations over a merger price with the Company's special committee of its board of directors. If the tender offer is successful, the spin-in of the Company is expected to be completed by the end of the second quarter of 2000. 21 Thermedics Detection Inc. 1999 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 sheets of Thermedics Detection Inc. (a Massachusetts corporation and 84%-owned subsidiary of Thermedics Inc.) and subsidiaries as of January 1, 2000, and January 2, 1999, and the related consolidated statements of income, cash flows, and comprehensive income and shareholders' investment for each of the three years in the period ended January 1, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thermedics Detection Inc. and subsidiaries as of January 1, 2000, and January 2, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2000, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts February 10, 2000 (except with respect to the matter discussed in Note 11, as to which the date is March 10, 2000) 22 Thermedics Detection Inc. 1999 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed immediately after this Management's Discussion and Analysis of Financial Condition and Results of Operation under the heading "Forward-looking Statements." Overview The Company is comprised of businesses that operate in two segments: Detection Instruments and Laboratory Products. The Company's Detection Instruments segment designs, manufactures, and markets ultratrace chemical detectors, X-ray imaging, near-infrared spectroscopy, high-speed gas chromatography, and other technologies for quality assurance of in-process or finished products, primarily in the food, beverage, pharmaceutical, forest products, chemical, and other consumer products industries. The Company's ALEXUS(R) systems detect trace amounts of substances that would affect product quality in refillable plastic beverage containers. The Company's InScan(R) systems use high-speed X-ray imaging to determine accurate fill volume, net volume, package integrity, and other quality measures for a variety of products in cans, bottles, boxes, and other containers. The Company's Flash-GC(TM) and EZ Flash(TM) systems are designed to help customers conduct chemical analyses substantially faster than if they used conventional gas chromatography equipment. In addition, the Company's near-infrared analyzers measure moisture and other product constituents, such as fats, proteins, oils, flavorings, solvents, adhesives, and coatings, in a broad range of products as they move along manufacturing lines. The Company's Detection Instruments segment also includes the design and manufacture of explosives-detection equipment that uses simultaneous trace particle- and vapor-detection techniques based on its proprietary chemiluminescence and high-speed gas chromatography technologies. Customers use these explosives-detection systems to detect plastic and other explosives at airports and border crossings, for other high-security screening applications, and for forensic and search applications. The Company's Detection Instruments segment also performs contract research and development services for government and industry customers and earns service revenues through long-term contracts. Through its Laboratory Products segment, the Company designs, manufactures, and markets electrochemistry and other technologies for quality assurance and regulatory compliance, primarily in the environmental, food, beverage, chemical, pharmaceutical, and biomedical research industries. Through the Company's Orion Research, Inc. subsidiary, the Laboratory Products segment is a worldwide leading manufacturer of electrochemistry products that determine the quality of various substances, from food and pharmaceuticals to water and wastewater, by measuring their pH, specific ion concentration, dissolved oxygen, and conductivity. During 1999, the Company experienced a decline in revenues, primarily in the Detection Instruments segment. This decline was due in part to changes in the process of recycling plastic containers in Europe. Previously, such containers had been sanitized and reused, a process in which recyclers used the Company's ALEXUS systems. Recent recycling trends in Europe involve melting and reforming plastic returnables. In addition, the Company has not received approval of its upgraded EGIS explosive-detection system from the Federal Aviation Administration (FAA), which resulted in a decline in sales of this product line during 1999. Although the Company expects to receive approval for this system, there can be no assurance of such approval by any particular date, or at all. On January 31, 2000, the Company announced that Thermedics Inc. will make a cash tender offer for any and all of the outstanding shares of the Company's common stock. The tender offer commenced on March 10, 2000, and will expire at midnight on Thursday, April 6, 2000, unless the offer is extended. If the tender offer is successful, Thermedics will acquire all remaining outstanding shares of the Company's common stock through a "short-form" merger in Massachusetts. The Company would thereby become a private subsidiary of Thermedics (Note 11). 23 Results of Operations 1999 Compared With 1998 Revenues decreased to $73.6 million in 1999 from $91.6 million in 1998, primarily due to a decrease in revenues in the Detection Instruments segment. Revenues in the Detection Instruments segment decreased to $26.4 million in 1999 from $40.3 million in 1998, due in part to a $9.5 million decline in revenues from industrial process instruments, primarily due to lower sales of ALEXUS systems as discussed in the overview and, to a lesser extent, near-infrared analyzers. Revenues decreased due to a $4.5 million decline in revenues from EGIS explosives-detection systems and related services, primarily due to lower shipments of security systems as a result of a delay in FAA approval as discussed in the overview. During 1998, the Company completed shipments under a contract to provide security systems to the FAA. Revenues under the contract totaled $2.6 million during 1998. Revenues from the Laboratory Products segment decreased to $47.2 million in 1999 from $51.3 million in 1998. Revenues decreased $3.5 million due to the expiration of two private-label agreements and, to a lesser extent, due to lower worldwide demand for the Company's titration and electrochemistry products. The gross profit margin decreased to 52% in 1999 from 54% in 1998, primarily due to provisions of $1.9 million for inventories deemed in excess based on recent demand in the Detection Instruments segment. In addition, the Detection Instruments segment incurred a loss of $0.3 million relating to the manufacture of certain security equipment in 1999. Selling, general, and administrative expenses as a percentage of revenues increased to 34% in 1999 from 29% in 1998, primarily due to a decrease in revenues in both of the Company's segments. Selling, general, and administrative expenses decreased to $25.3 million in 1999 from $26.7 million in 1998, primarily due to a reduction in selling expenses in an effort to reduce costs. Research and development expenses decreased to $8.0 million in 1999 from $9.6 million in 1998, primarily as a result of efforts to reduce costs and focus on the development of near-term commercially viable products. Interest income increased to $1.6 million in 1999 from $1.5 million in 1998, primarily due to higher average invested balances offset in part by the repayment of a $21.2 million promissory note to Thermedics in March 1998. Interest expense, related party, of $0.3 million in 1998 relates to the promissory note to Thermedics, which was paid in March 1998. The effective tax rate was 23% and 39% in 1999 and 1998, respectively. The effective tax rate was below the statutory federal income tax rate in 1999 as a result of the favorable resolution of a Company claim for prior-year research and development tax credits. The effect of the tax credits decreased the tax provision recorded in 1999 by $1.1 million and decreased the effective tax rate by 17%. This credit was offset in part by the impact of state income taxes and nondeductible amortization of cost in excess of net assets of acquired companies. The effective tax rate exceeded the statutory federal income tax rate in 1998 primarily due to the impact of state income taxes and nondeductible amortization of cost in excess of net assets of acquired companies. 1998 Compared With 1997 Revenues decreased to $91.6 million in 1998 from $104.4 million in 1997, primarily due to a decrease in revenues in the Detection Instruments segment. Revenues in the Detection Instruments segment decreased to $40.3 million in 1998 from $51.3 million in 1997, primarily due to a $9.1 million decline in revenues from industrial process instruments. This decrease was primarily due to lower revenues from ALEXUS systems and near-infrared analyzers, offset in part by a $2.3 million increase in InScan product sales and $1.6 million of higher contract revenues. Revenues in 1997 included $6.6 million from a mandated ALEXUS product-line upgrade of The Coca-Cola Company's existing installed base. Revenues from EGIS explosives-detection systems and related services decreased $2.1 million, primarily due to lower shipments of security systems. During 1998, the Company completed shipments under a contract to provide security systems to the FAA. Revenues under the contract totaled $2.6 million during 1998. 24 1998 Compared With 1997 (continued) Revenues from the Laboratory Products segment decreased to $51.3 million in 1998 from $53.1 million in 1997, primarily due to lower worldwide demand for the Company's titration and electrochemistry products. The gross profit margin decreased to 54% in 1998 from 56% in 1997. The gross profit margin in the Detection Instruments segment decreased primarily due to lower sales volume and, to a lesser extent, changes in product mix. Selling, general, and administrative expenses as a percentage of revenues increased to 29% in 1998 from 27% in 1997, primarily due to a decrease in revenues in the Detection Instruments segment. Selling, general, and administrative expenses decreased to $26.7 million in 1998 from $28.5 million in 1997, primarily due to a reduction in selling expenses in the Company's Moisture Systems subsidiary in an effort to reduce costs. Research and development expenses remained unchanged at $9.6 million in 1998 and 1997. Interest income decreased to $1.5 million in 1998 from $2.1 million in 1997, primarily due to lower average invested balances as a result of the repayment of a $21.2 million promissory note to Thermedics in March 1998. Interest expense, related party, decreased to $0.3 million in 1998 from $1.2 million in 1997 due to the repayment of the promissory note to Thermedics. The effective tax rate was 39% in 1998 and 40% in 1997. The effective tax rates exceeded the statutory federal income tax rate primarily due to the impact of state income taxes and nondeductible amortization of cost in excess of net assets of acquired companies. Liquidity and Capital Resources Consolidated working capital was $64.4 million at January 1, 2000, compared with $57.6 million at January 2, 1999. Included in working capital are cash and cash equivalents of $9.5 million at January 1, 2000, compared with $32.9 million at January 2, 1999. In addition, at January 1, 2000, the Company had $33.6 million invested in an advance to affiliate. Prior to the use of new cash management arrangements between the Company and Thermo Electron Corporation, which became effective in June 1999, such amounts were included in cash and cash equivalents. During 1999, $11.4 million of cash was provided by operating activities. Cash of $0.8 million was provided by a decrease in inventories, primarily in response to decreased demand, as well as the timing of billings on long-term contracts. Cash of $1.1 million was used to reduce accounts payable, primarily due to the timing of payments. Excluding advance to affiliate activity, the Company's primary investing activity was the purchase of property, plant, and equipment for $1.4 million. The Company expects to spend $1.6 million on capital additions in 2000. The Company believes that its existing resources are sufficient to meet the capital requirements of its existing businesses for the foreseeable future. Market Risk The Company is exposed to market risk from changes in foreign currency exchange rates, which could affect its future results of operations and financial condition. The Company manages its exposure to these risks through its regular operating and financing activities. Foreign Currency Exchange Rates The Company views its investment in its foreign subsidiaries as long-term. The Company's investment in its foreign subsidiaries is sensitive to fluctuations in foreign currency exchange rates. The effect of a change in foreign exchange rates on the Company's net investment in its foreign subsidiaries is recorded as a separate component of shareholders' investment. A 10% depreciation in fiscal year-end 1999 and 1998 functional currencies, relative to the U.S. dollar, would result in a reduction of $1.5 million and $1.4 million, respectively, of the Company's shareholders' investment. 25 Year 2000 As of the date of this report, the Company has completed its year 2000 initiatives which included: (i) testing and upgrading significant information technology systems and facilities; (ii) assessing the year 2000 readiness of its key suppliers, vendors, and customers; and (iii) developing contingency plans. As a result of completing these initiatives, the Company believes that all of its material information technology systems and critical non-information technology systems are year 2000 compliant. In addition, the Company is not aware of any significant supplier or vendor that has experienced material disruption due to year 2000 issues. The Company has also developed a contingency plan to allow its primary business operations to continue despite disruptions due to year 2000 problems, if any, that might yet arise in the future. The costs incurred to date by the Company in connection with the year 2000 issue have not been material. While the Company to date has been successful in minimizing negative consequences arising from year 2000 issues, there can be no assurance that in the future the Company's business operations or financial condition may not be impacted by year 2000 problems, such as increased warranty claims, vendor and supplier disruptions, or litigation relating to year 2000 issues. 26 Thermedics Detection Inc. 1999 Financial Statements Forward-looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause its actual results in 2000 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Uncertainty of 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 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 EGIS II, 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 depend on government 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 that oversees airport operations 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. 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. The FAA has not yet mandated the installation of automated explosives-detection systems. The Company's systems are trace detectors for which no FAA certification process exists to date. The Company has received FAA approval for the Company's EGIS system for use by airlines in screening carry-on electronic items and luggage searches. The EGIS II system has passed FAA laboratory tests and is currently undergoing FAA operational testing before deployment in use at airports. There can be no assurance that the final step in the approval process for EGIS II will be successfully completed. Although the FAA has provided significant funding to the Company in connection with the development of its explosives-detection technology, the Company's systems may not ever meet all United States certification standards. Any product using 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 tend 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 require the 27 implementation of effective explosives screening for airline baggage, carry-on items, or people, or that, if required, 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, the Company may not be able to market its systems effectively. From time to time, the United States government enacts legislation which includes allocations 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 such legislation. There can be no assurance, however, that this legislation will not be modified to reduce the funding for advanced explosives equipment, that necessary appropriations will continue to be made to fund further purchases of advanced explosives-detection equipment, that trace-detection equipment such as the systems manufactured by the Company 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 $3,939,000, $6,199,000, and $13,939,000 in 1999, 1998, and 1997, respectively, or 5%, 7%, and 13% of the Company's revenues, respectively, during such periods. 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. In addition, sales to Fisher Scientific and VWR Scientific, both included in the Laboratory Products segment, accounted for 13% and 12% of total revenues, respectively, in 1999 and 10% and 10% of total revenues, respectively, in 1998. 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 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 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 28 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 1999, 1998, and 1997, international sales accounted for 46%, 47%, and 52%, 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. 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 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. 29 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. 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 customers' 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. Dependence Upon OEM Relationships. A portion of the Company's sales are through OEM arrangements. The Company's sales depend, in part, on the continuation of these OEM arrangements and the level of end-user sales by such OEMs. There can be no assurance that the Company will be able to maintain its existing, or establish new, OEM relationships. Risks Associated with Cash Management Arrangement with Thermo Electron. The Company participates in a cash management arrangement with Thermo Electron. Under this cash management arrangement, the Company lends its excess cash to Thermo Electron on an unsecured basis. The Company has the contractual right to withdraw its funds invested in the cash management arrangement upon 30 days' prior notice. Thermo Electron is contractually required to maintain cash, cash equivalents and/or immediately available bank lines of credit equal to at least 50% of all funds invested under the cash management arrangement by all Thermo Electron subsidiaries other than wholly owned subsidiaries. The funds are held on an unsecured basis and therefore are subject to the credit risk of Thermo Electron. The Company's ability to receive its cash upon notice of withdrawal could be adversely affected if participants in the cash management arrangement demand withdrawal of their funds in an aggregate amount in excess of the 50% reserve required to be maintained by Thermo Electron. In the event of a bankruptcy of Thermo Electron, the Company would be treated as an unsecured creditor and its right to receive funds from the bankruptcy estate would be subordinated to secured creditors and would be treated on a pari passu basis with all other unsecured creditors. Further, all cash withdrawn by the Company from the cash management arrangement within one year before the bankruptcy would be subject to rescission. The inability of Thermo Electron to return the Company's cash on a timely basis or at all could have a material adverse effect on the Company's results of operations and financial position.
30
Thermedics Detection Inc. 1999 Financial Statements Selected Financial Information (In thousands except per share amounts) 1999 (a) 1998 1997 (b) 1996 (c) 1995 - ------------------------------------------------------ --------- ---------- ---------- --------- --------- Statement of Income Data Revenues $ 73,584 $ 91,575 $ 104,374 $ 94,604 $ 32,943 Gross Profit 38,359 49,324 57,979 48,994 15,491 Net Income 5,076 8,671 12,506 5,299 2,173 Basic and Diluted Earnings per Share .26 .45 .67 .33 .21 Balance Sheet Data Working Capital $ 64,356 $ 57,621 $ 46,345 $ 32,315 $ 19,369 Total Assets 136,026 132,506 148,265 116,058 84,595 Long-term Obligations 99 127 - 21,200 - Shareholders' Investment 121,721 117,893 107,346 75,454 69,215 (a) Includes inventory provisions of $1.9 million. (b) Reflects the March 1997 initial public offering of the Company's common stock for net proceeds of $28.1 million. (c) 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.
31
Thermedics Detection Inc. 1999 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 for 1999 and 1998, as reported in the consolidated transaction reporting system. 1999 1998 ------------------- --------------------- Quarter High Low High Low - -------------------------------------------------------------- ---------- ---------- ----------- --------- First $ 9 1/4 $7 3/4 $11 11/16 $8 5/8 Second 10 7/8 7 7/8 11 7/16 7 7/8 Third 10 7/16 9 9 1/2 6 1/16 Fourth 9 5/8 6 3/4 8 3/16 6
As of January 28, 2000, the Company had 221 holders of record of its common stock. This does not include holdings in street or nominee names. The closing market price on the American Stock Exchange for the Company's common stock on January 28, 2000, was $7 15/16 per share. 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. EX-21 3 Exhibit 21 THERMEDICS DETECTION INC. Subsidiaries of the Registrant
At February 23, 2000, Thermedics Detection Inc. owned the following companies: STATE OR REGISTRANT'S JURISDICTION OF PERCENT OF OWNERSHIP NAME INCORPORATION - ------------------------------------------------------------------------------------------------------------- Detection Securities Corporation Massachusetts 100 Orion Research, Inc. Massachusetts 100 Advanced Sensor Technology Massachusetts 100 Orion Research Limited England 100 Orion Research Puerto Rico, Inc. Delaware 100 Russell pH Limited Scotland 100 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. de C.V. Mexico 100 (1% of which shares are owned directly by Thermedics Detection Inc.) Thermedics Detection GmbH Germany 100 Thermedics Detection Limited England 100 Thermedics Detection Scandinavia AS Norway 100
EX-23 4 Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation by reference of our reports dated February 10, 2000 (except with respect to the matter discussed in Note 11, as to which the date is March 10, 2000), included in or incorporated by reference into Thermedics Detection Inc.'s Annual Report on Form 10-K for the year ended January 1, 2000, into the Company's previously filed Registration Statement No. 333-28093 on Form S-8, Registration Statement No. 333-31987 on Form S-3, and Registration Statement No. 333-80463 on Form S-8. Arthur Andersen LLP Boston, Massachusetts March 10, 2000 EX-27 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS DETECTION INC.'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JANUARY 1,2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-01-2000 JAN-01-2000 9,453 0 18,272 1,714 13,413 78,562 12,896 8,385 136,026 14,206 99 0 0 1,932 119,789 136,026 60,624 73,584 28,623 35,225 8,025 728 0 6,580 1,504 5,076 0 0 0 5,076 0.26 0.26
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