-----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, IUpLaxnscyqiTGRWLYufqLbZIok7qIJhSGeWytRrPVtn2mvCQ8OwXQip0lwiFSII Ztyq2PYbt0kY0ZzZMCu3Fw== 0000721356-96-000004.txt : 19960314 0000721356-96-000004.hdr.sgml : 19960314 ACCESSION NUMBER: 0000721356-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951230 FILED AS OF DATE: 19960312 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERMEDICS INC CENTRAL INDEX KEY: 0000721356 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 042788806 STATE OF INCORPORATION: MA FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09567 FILM NUMBER: 96533704 BUSINESS ADDRESS: STREET 1: 470 WILDWOOD ST STREET 2: P O BOX 2999 CITY: WOBURN STATE: MA ZIP: 01888-1799 BUSINESS PHONE: 6176221000 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 December 30, 1995 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-9567 THERMEDICS INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-2788806 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 470 Wildwood Street, P.O. Box 2999 Woburn, Massachusetts 01888-1799 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 622-1000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ---------------------------- ----------------------------------------- Common Stock, $.10 par value American Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of January 26, 1996, was approximately $433,605,000. As of January 26, 1996, the Registrant had 35,746,162 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1995 Annual Report to Shareholders for the year ended December 30, 1995, are incorporated by reference into Parts I and II. Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 20, 1996, are incorporated by reference into Part III. PAGE PART I Item 1. Business (a) General Development of Business The businesses of Thermedics Inc. (the Company or the Registrant) are divided into two segments: Instruments and Other Equipment, and Biomedical Products. The Company's Instruments and Other Equipment segment includes Thermo Sentron Inc. (Thermo Sentron), a newly formed subsidiary of the Company. On January 2, 1996, the Company transferred to Thermo Sentron the assets, liabilities and business of Ramsey Technology, Inc., which was acquired in March 1994, for 7,000,000 shares of Thermo Sentron common stock. Thermo Sentron designs, develops, manufactures, and sells high-speed precision weighing and inspection equipment for industrial production and packaging lines. On February 1, 1996, Thermo Sentron filed a registration statement under the Securities Act of 1933 with the Securities Exchange Commission covering shares of common stock to be offered in its initial public offering. Also part of the Instruments and Other Equipment segment is the Orion laboratory products division (Orion) of Analytical Technology, Inc., which the Company acquired in December 1995 for approximately $52.7 million in cash, which included the repayment of $8.6 million of debt, subject to a post-closing adjustment. To partially finance this acquisition, the Company borrowed $38.0 million from Thermo Electron Corporation (Thermo Electron) pursuant to a promissory note due December 1996. The balance of the purchase price was funded from the Company's working capital. Orion is a manufacturer of electrochemistry, microweighing, process and other instruments used to analyze the chemical compositions of foods, beverages, and pharmaceuticals and detect contaminants in environmental and high-purity water samples. The Instruments and Other Equipment segment, through its Thermedics Detection Inc. (Thermedics Detection) subsidiary also develops, manufactures, and markets high-speed detection instruments, including the Alexus(R) system, a process detection instrument used in product quality assurance applications, and the EGIS(R) system, a security instrument used to detect explosives at airports and other locations. In January 1996, Thermedics Detection acquired the assets of Moisture Systems Corporation and certain affiliated companies (collectively, MSC), and the stock of Rutter & Co. (Rutter) for a total of $20.5 million in cash and the assumption of certain liabilities. MSC and Rutter design, manufacture, and sell instruments which use near infrared radiation to measure moisture for protein and other product components in the manufacturing process for the food, pharmaceutical, chemical, wood, pulp, paper, and other industries. Through the Company's Thermo Voltek Corp. (Thermo Voltek) subsidiary, the Instruments and Other Equipment segment manufactures a line of electronic test instruments and high-voltage power conversion systems. As part of its Biomedical Products segment, the Company's Thermo Cardiosystems Inc. (Thermo Cardiosystems) subsidiary has developed two implantable left ventricular-assist systems (LVAS): an implantable pneumatic, or air-driven system, and an electric version. In October 1994, the Company announced that the U.S. Food and Drug Administration (FDA) granted approval for the commercial sale of the air-driven LVAS for use as a bridge-to-transplant. With this approval, the air-driven system became available for sale to cardiac centers throughout the U.S. The Company also develops, manufactures, and markets enteral nutrition-delivery systems and a line of medical-grade polymers used in medical disposables and nonmedical, industrial applications, including safety glass and automotive coatings. 2PAGE The Company was incorporated in 1983 under the laws of Massachusetts as a wholly owned subsidiary of Thermo Electron. Prior to that time, the business of the Company was conducted by the R & D/New Business Center of Thermo Electron. As of December 30, 1995, Thermo Electron owned 17,315,326 shares of the Company's common stock, representing 51% of such stock outstanding. In January 1996, the Company issued 1,688,161 shares of its common stock to Thermo Electron in exchange for 315,199 shares of Thermo Voltek common stock and 529,965 shares of Thermo Cardiosystems common stock. The shares of common stock were exchanged at their respective fair market values on the date of the transaction. Thermo Electron is a world leader in environmental monitoring and analysis instruments and a manufacturer of biomedical products, including mammography systems, paper-recycling and papermaking equipment, alternative-energy systems, industrial process equipment, and other specialized products. Thermo Electron also provides environmental and metallurgical services and conducts advanced technology research and development. Thermo Electron intends, for the foreseeable future, to maintain at least 50% ownership of the Company. This may require the purchase by Thermo Electron of additional shares of common stock of the Company (or debentures convertible into common stock) from time to time as the number of outstanding shares issued by the Company increases. These or any other purchases may be made either in the open market or directly from the Company. See Notes 4 and 8 to Consolidated Financial Statements in the Company's 19951 Annual Report to Shareholders for a description of outstanding stock options and convertible debentures issued by the Company. During 1995, Thermo Electron purchased 484,300 shares of the Company's common stock in the open market at a total price of $8,632,000. As of December 30, 1995, the Company owned 52% and 50% of the outstanding common stock of Thermo Cardiosystems and Thermo Voltek, respectively. After the completion of Thermo Sentron's initial public offering, the Company is expected to own approximately 74% of Thermo Sentron's common stock. The Company intends, for the foreseeable future, to maintain at least 50% ownership of Thermo Cardiosystems, Thermo Voltek, and Thermo Sentron. This may require the purchase by the Company of additional shares of common stock or, if applicable, convertible debentures (which are then converted) of these companies from time to time, if the number of the companies' outstanding shares increases, whether as a result of conversion of convertible obligations or exercise of stock options issued by them, or otherwise. These or any other purchases by the Company may be made either in the open market or directly from Thermo Cardiosystems, Thermo Voltek, Thermo Sentron or Thermo Electron or pursuant to the conversion of all or part of the $7,500,000 principal amount 6 3/4% subordinated convertible note due 2002 and the $4,000,000 principal amount 5% subordinated convertible note due 2003 issued by Thermo Voltek to the Company, convertible into shares of Thermo Voltek's common stock at conversion prices of $6.40 and $5.67 per share, respectively. In addition, at December 30, 1995, Thermo Cardiosystems and Thermo Voltek had outstanding (i) stock options and warrants exercisable for 798,000 and 511,000 shares, respectively, at various prices and subject to various vesting schedules, and (ii) convertible debentures (other than those held by the Company) convertible into 535,511 shares and 2,148,085 shares, respectively. During 1995, the Company purchased 21,300 shares of Thermo Voltek common stock in the open market at a total price of $179,000. 1 References to 1995, 1994, and 1993 herein are for the fiscal years ended December 30, 1995, December 31, 1994, and January 1, 1994, respectively. 3PAGE (b) Financial Information About Industry Segments The Company's business is divided into two industry segments as follows: Instruments and Other Equipment The Company designs, develops, manufactures, and sells high-speed precision weighing and inspection equipment for industrial production and packaging lines. The Company also manufactures and markets electrochemistry, microweighing, process, and other instruments for analyzing the chemical compositions of foods, beverages and pharmaceuticals and detecting contaminants in environmental and high-purity water samples. The Company also develops, manufactures, and markets high-speed detection instruments, including the Alexus system, a process detection instrument used in product quality assurance applications, and the EGIS system, a security instrument used to detect explosives at airports and other locations. The Company also develops, manufactures and sells instruments which use near infrared radiation to measure moisture for protein and other product components in the manufacturing process. In addition, the Company develops, manufactures, and markets a line of electronic test instruments, and makes high-voltage power conversion systems. Biomedical Products The Company develops, manufactures, and markets left ventricular-assist systems; enteral feeding products; and a line of medical-grade polymers used in catheters and tubing, and for nonmedical applications, such as protective coatings for industrial products and safety glass. Financial information concerning the Company's industry segments is summarized in Note 14 to Consolidated Financial Statements in the Registrant's 1995 Annual Report to Shareholders and is incorporated herein by reference. (c) Description of Business (i) Principal Products and Services Instruments and Other Equipment Precision Weighing and Inspection Equipment. Through its Thermo Sentron subsidiary, the Company designs, develops, manufactures, and sells high-speed precision weighing and inspection equipment for industrial production and packaging lines. Thermo Sentron serves two principal markets: packaged goods and bulk materials. Thermo Sentron's products for the packaged goods market include a wide range of checkweighing equipment and metal detectors that can be integrated at various stages in production lines for process control and quality assurance. These products are sold primarily to customers in the food processing and pharmaceutical industries. Products in Thermo Sentron's bulk-material line include conveyor belts, scales, solids level measurement and conveyor monitoring devices, and sampling systems. These products are sold primarily to customers in the mining and material processing industries, as well as electric utilities, chemical, and other manufacturing companies. During 1995 and 1994, the Company derived revenues of $67.5 million and $50.1 million, respectively, from its precision weighing and inspection equipment. 4PAGE Laboratory Products. To expand its product quality assurance offerings, the Company acquired Orion in December 1995. Through Orion, the Company manufactures and markets electrochemistry, microweighing, process, and other instruments used to analyze the chemical composition in foods, beverages, and pharmaceuticals and detect contaminants in environmental and high-purity water samples. Orion's laboratory products include ion and moisture analysis and precision weighing systems. Orion's laboratory pH/ion-selective products, marketed under the Orion brand name, identify chemical substances found in various types of solutions, including foods, pharmaceuticals, soils, and water. Pure water monitors, also marketed under the Orion name, use ion-selective technology to monitor parameters required for the control of high-purity water systems in power generation and other industrial applications. Other products include Cahn microweighing and moisture balances, Russell pH products, and Lear/Fischer filtration/moisture analysis products, all marketed under the Orion brand name. Orion also markets consumable products for its earlier instruments line. Orion had revenues of $46.3 million in fiscal 1994. Process Detection Instruments. In 1992, Thermedics Detection introduced Alexus, a high-speed product quality assurance system based on the Company's vapor-detection technology, for use in bottling lines in the carbonated beverage industry. The Company continues to develop new product quality assurance technologies to address the need for product quality in the beverage market. In 1994, the Company upgraded its Alexus systems to offer higher selectivity and operating efficiency and introduced the Alexus W10, which provides the bottled water industry with a device to help ensure product quality in returned water containers. In 1995, the Company developed a high-speed X-ray imaging system, currently being evaluated by several major beer companies in the U.S. and overseas, to detect liquid fill-levels for the beverage industry. The Company is also developing a high-speed gas chromatography instrument to provide laboratory-quality analysis in the field for process control applications. The Company, through its newly acquired MSC and Rutter businesses, has a leading position in the market for near infrared radiation technology to measure moisture for protein and other product components in the manufacturing process for the food, pharmaceutical, chemical, wood, pulp, paper, and other industries. MSC and Rutter had combined revenues of $20.0 million in 1994. During 1995, 1994, and 1993, the Company derived revenues from its process detection instrument business of approximately $16.2 million, $38.0 million, and $34.4 million, respectively. Security Instruments. Also through Thermedics Detection, the Company has developed a line of security instruments. The Company's TEA Analyzer(R), introduced in 1975, uses vapor-detection technology to analyze substances for nitrogen-based carcinogens. From this technology, Thermedics Detection developed the EGIS system, a highly sensitive vapor-detection instrument for screening people, baggage, packages, freight, and electronic equipment such as personal computers for the presence of a wide range of explosives, including the plastic explosives that have proven difficult to detect using conventional methods. The EGIS system detects ultratrace quantities of certain explosives and indicates the concentration and type of explosive detected. The EGIS system is in use in 21 countries and operational in 40 international airports, and is also used in government buildings, embassies, 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 Oklahoma City 5PAGE and at the World Trade Center in New York, as well as in Israel, Buenos Aires, and the United Kingdom. Electronic Test Instruments. Through Thermo Voltek's KeyTek Instrument (KeyTek) division, the Company designs, develops, and manufactures electronic test instruments that simulate different types of pulsed electromagnetic interference (pulsed EMI) in order to test electronic and electrical systems and components for electromagnetic compatibility (EMC). Pulsed EMI, which is caused by natural and man-made phenomena such as lightning, static electricity, and electrical power disturbances, can damage or disrupt the operation of any product that uses digital circuits. Consequently, manufacturers of electronic systems and integrated circuits must engineer their products for immunity to pulsed EMI. The Company's products are used by these customers primarily for product development, design verification, and quality assurance, enabling them to meet higher levels of product performance, reliability, and safety, and to meet increasingly stringent regulatory requirements, including a European Union (EU) directive that took effect on January 1, 1996. Thermo Voltek instruments that test products for immunity to pulsed EMI fall into two main categories: (1) equipment to test electronic products such as computers and (2) equipment to test individual electronic components such as integrated circuits. This subsidiary's products also test for immunity to certain types of power quality failure, which include voltage swells, dips, and interruptions on power lines. On March 1, 1995, as part of its strategy to address additional segments of the EMC testing market, Thermo Voltek acquired substantially all of the assets, subject to certain liabilities, of Kalmus Engineering Incorporated (Kalmus), a manufacturer of radio frequency (RF) power amplifiers. RF power amplifiers are used to test products for immunity to conducted and radiated RF interference, another form of electromagnetic interference, and are purchased by many of the same customers that purchase Thermo Voltek's pulsed EMI testing products. In addition, RF power amplifiers are used in a variety of laboratory and test applications where precise control over power level and frequency are required; in medical imaging applications; and in wireless communications applications, such as in cellular telephone systems, wireless wide area networks (WANs) and local area networks (LANs), and mobile data communications. Through Thermo Voltek's Comtest subsidiary, the Company provides EMC-consulting and systems-integration services, acts as distributor of a broad range of EMC-testing products, and manufactures specialized power supplies for use in telecommunications equipment. During 1995, 1994, and 1993, the Company derived revenues of $31.6 million, $19.0 million, and $13.2 million, respectively, from electronic test instruments. High-voltage Systems. Through Thermo Voltek's Universal Voltronics division, the Company designs, manufactures, and markets high-voltage power conversion systems, modulators, fast-response protection systems, and related high-voltage equipment for industrial, medical, and environmental processes, and defense and scientific research applications. These systems transform utility-supplied voltage and current into the high voltage or current required by the user and allow precise control over the performance level desired for each application. The Company's systems produce power ranging from 1,000 to 1,000,000 volts, and range in size from small systems 6PAGE used in benchtop instruments to room-sized systems used in scientific research applications. The Company currently sells products on an OEM (original equipment manufacturer) basis for use in commercial applications, which include electrostatic coating and separation, industrial and medical lasers, and electron-beam applications. In addition, the Company has developed high-voltage power supplies for microwave-driven light sources used to test projection televisions during the manufacturing process. Biomedical Products Left Ventricular-assist Systems. The Company, through its Thermo Cardiosystems subsidiary, has developed two versions of its LVAS: an implantable pneumatic (IP), or air-driven system that can be controlled by either a bedside or portable console and an electric system that features an internal electric motor powered by an external battery pack worn by the patient. These devices are designed to perform substantially all or part of the pumping function of the left ventricle of the natural heart for patients suffering from cardiovascular disease. Both of the Company's systems employ the Company's HeartMate(R) blood pump and are designed for long-term use. This pump incorporates proprietary technological advances in biological compatibility that distinguish it from other competitive devices, including proprietary textured linings that can significantly reduce the likelihood of blood clots that can lead to strokes. Unlike a total artificial heart system, which requires removal of the natural heart, the LVAS allows the natural heart to remain in place and assists the heart when it is unable to provide sufficient cardiac function to maintain life. This approach provides the advantage of leaving in place certain biological control mechanisms and also provides the important psychological advantage of not removing the organ. IP LVAS. The Company announced in October 1994, that the IP LVAS system had been approved by the FDA for commercial sale for use as a bridge-to-transplant. This approval allows the Company to sell the IP LVAS to any of the nearly 900 cardiac surgery centers in the United States. In April 1994, the Company received the European Conformity Mark (CE Mark), which allows commercial sale of the air-driven LVAS in all European Community countries. The IP LVAS is intended as a bridge-to-transplant for patients awaiting heart transplantation. In the IP LVAS, the HeartMate blood pump is coupled to an external console connected to the body by a tube. The Company has also developed the HeartPak(TM), a lightweight portable console that can be carried over the shoulder. The portable console received the CE Mark for commercial sale in European Community countries in February 1995. In July 1995, the FDA approved the beginning of Phase I clinical trials of the HeartPak portable pneumatic driver. Phase I of the study will evaluate the safety of the system in the hospital; Phase II will evaluate the system in the home environment. To date, more than 500 patients have been supported by the IP LVAS prior to transplantation, including one patient who was supported for 390 days. There are currently approximately 60 cardiac surgery centers in the United States that offer the Company's IP LVAS to patients. In addition, Thermo Cardiosystems is working with nearly 30 cardiac sites in such countries as the United Kingdom, Germany, Sweden, Japan, the Netherlands, France, Italy, and Belgium. In November 1995, the U.S. Health Care Finance Administration (HCFA) issued a decision that extends Medicare coverage to 7PAGE Thermo Cardiosystems' IP LVAS. Several major nongovernment insurers, including Blue Cross/Blue Shield of Connecticut, Aetna Life & Casualty Company (Aetna) and the health maintenance organization (HMO) U.S. Healthcare, have already agreed to offer coverage for the IP LVAS. Additional insurers are reviewing the clinical results with the device, and additional coverage decisions will be forthcoming. Electric LVAS. The Company has also developed an electric LVAS that uses the HeartMate blood pump driven by an internal electric motor mounted in the blood pump housing. The system is connected to an external battery pack by wires that exit the body, allowing the patient complete mobility. In early 1991, the Company received an investigational device exemption (IDE) from the FDA allowing the Company to begin clinical studies of the electric LVAS. This IDE is being restructured as a two-phase study to evaluate the electric system for safety in the hospital and home environment. The efficacy of the HeartMate blood-contacting components, common to both the air-driven and electric devices, has already been established, thereby reducing the complexity level for testing of the Company's electric LVAS. To date, 18 clinical sites have been approved by the FDA and more than 70 implants have been performed, including one implant that supported a patient for 416 days prior to transplant. In April 1993, the FDA granted approval to allow patients with an electric LVAS to be discharged from the hospital with their physician's approval, improving quality of life and reducing substantial costs associated with extended hospital stays. The electric LVAS may not be sold commercially in the U.S. until it has received approval from the FDA. In December 1995, the FDA approved the protocol for conducting clinical trials of the electric LVAS as an alternative to heart transplant. The trial is expected to compare the results of approved patients using the device to a similar number using drug therapy. In August 1995, the electric LVAS was awarded the CE Mark, allowing commercial sale of this system in all European Community countries. The electric system is used as a bridge-to-transplant in the U.S. and Europe, and is also implanted as an alternative to heart transplant in Europe. Medical Grade Polymers and Enteral Nutrition-Delivery Systems. The Company's research relating principally to the development of its LVAS has resulted in the development of proprietary medical-grade plastics marketed under the names Tecoflex(R) and Tecothane(R). Tecoflex and Tecothane are thermoplastic polyurethanes used in medical disposables and industrial products. The Company sells Tecoflex and Tecothane in bulk form for fabrication by the customer, and the Company also extrudes precision tubing to customer specifications. Tecoflex and Tecothane can be custom-fabricated to a variety of shape, size, hardness, color, and opacity specifications. Tecoflex and Tecothane are used by medical-products companies to fabricate products such as catheters and tubing for drug-delivery systems, enteral nutrition-delivery systems, fluid transfer systems, and diagnostic devices. In addition, due to the strength, weather resistance, and optical clarity of these polyurethanes, they are used by industrial customers for aerospace and safety glass applications. The Company introduced Scent Seal fragrance samplers, which were developed from the Company's polymer technology, in 1993. Scent Seal fragrance samplers are used to hermetically seal a fragrance rendition in perfume advertisements for magazines, and are an alternative to commonly used fragrance strips. 8PAGE In June 1995, Thermedics entered into an agreement granting Arcade, Inc., the leading manufacturer of scent-sampling products, an exclusive, worldwide license to manufacture and distribute the Company's fragrance samplers under Thermedics' patents and know-how. The license arrangement follows the termination of Thermedics' exclusive marketing agreement with Scent Seal, Inc., and the acquisition of Scent Seal, Inc. by Arcade. Under the license agreement, Arcade pays royalties to Thermedics on licensed fragrance samplers sold by Arcade, and Thermedics continues to provide the polymer gels needed to produce the fragrance samplers. Arcade pays Thermedics royalties of approximately five percent of revenues from the licensed samplers, with minimum annual royalty payments required to maintain an exclusive license. The Company's Corpak Inc. (Corpak) subsidiary designs, manufactures, and markets enteral feeding systems that introduce special nutritional solutions into the stomach or the small intestine through tubes entering the nose or stomach. Enteral therapy is used for patients who are unable to feed themselves but who do not require parenteral (intravenous) feeding. Corpak's products include bags for nutritional fluids, delivery pumps, associated pump sets that hook up to the pumps, and feeding tubes. In addition, Corpak markets a range of enteral feeding supplements. (ii) New Products The Company's business includes the development and introduction of new products in the following categories: precision measurement and inspection equipment, process detection instruments, security instruments, electronic test instruments, high-voltage systems, left ventricular-assist systems, and biomaterials. The Company also develops electrochemistry, microweighing, and other laboratory instruments through its recently acquired Orion subsidiary. (iii) Raw Materials The Company has a number of sole-source suppliers. A number of the components of the Company's EMC-testing products are supplied by sole-source vendors. The Company also relies upon one supplier as a sole source of one of the chemical components used in the manufacture of one of its polyurethanes. To date, the Company has experienced no difficulties in obtaining these materials and components. The Company relies on a number of custom-designed components and materials supplied by other companies to manufacture its LVAS, most of which are available from a large number of suppliers. These suppliers, in turn, rely on one or two basic raw materials. In 1992, two major manufacturers, E.& M. DuPont de Nemours & Co. (DuPont) and Dow Corning (Dow), decided to phase out or eliminate their supply of raw materials for implantable medical devices. These withdrawals have affected the availability of several components and materials the Company uses in its products. The Company has developed and received FDA approval for the use of one alternative material, and is in the process of qualifying certain other alternative materials or developing alternative sources for the materials no longer supplied by Dow and Dupont. While the Company believes that it has adequate supplies of materials to meet demand for the LVAS for the foreseeable future, no assurance can be given that the Company will not experience shortages of certain materials in the future that could delay shipments of the LVAS. 9PAGE The Company currently expects to spend approximately $2,000,000 on research, development, and the equipment necessary to test and obtain FDA approval for new alternative materials, approximately $1,390,000 of which has been spent to date. However, the cost to the Company to evaluate and test alternative materials and the time necessary to obtain FDA approval for these materials are inherently difficult to determine because both time and cost are dependent on at least two factors: the similarity of the alternative material to the original material, and the amount of third-party testing that may have already been completed on alternative materials. The Company does not expect that the introduction of alternative materials will adversely affect clinical trials of the electric LVAS. There can be no assurance, however, that the substitution of these materials will not cause delays in the Company's LVAS development program. (iv) Patents, Licenses and Trademarks The Company considers its intellectual property important in the operation and growth of its business, and its policy is to protect this property through patents, license and confidentiality agreements, trademarks, and trade secret protection. The Company applies for and maintains patents in the U.S. and in foreign countries, particularly in the areas of biomedical materials, medical products, and analytical instruments. Although some of these patent rights may provide the Company with a competitive advantage, the Company primarily relies on its know-how and trade secrets. In April 1995, Thermo Cardiosystems received correspondence from a third party alleging that the textured surface of the LVAS housing infringed certain patent rights of such third party. Thermo Cardiosystems had previously received similar correspondence from this third party but had not received any communication for more than three years. In its April 1995 communication, the third party offered Thermo Cardiosystems a license, which Thermo Cardiosystems has elected not to accept. Although Thermo Cardiosystems has not received any communication since April 1995 and believes that it has adequate defenses to the claims of the third party, due to the inherent uncertainty of litigation, no assurance can be made that Thermo Cardiosystems would be successful were any litigation to be commenced. The Company also has certain licenses to the technology resulting from its customer-sponsored development of a high-speed detection system for product quality assurance. The patents and agreements of the Company have varying lives ranging from one year to approximately 20 years, and the Company does not believe that the expiration or termination of any one of these patents or agreements would materially affect the Company's business. (v) Seasonal Influences There are no significant seasonal influences on the Company's sales of products and services. (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. 10PAGE (vii) Dependency on a Single Customer No customer represented 10% or more of the Company's total revenues in 1995. The Company derived 21% and 43% of its total revenues in 1994 and 1993, respectively, from The Coca-Cola Company and its affiliates. The Company derived 5% of its total revenues in 1994 from Scent Seal Inc., which represented 23% of the Biomedical Products segment revenues. (viii) Backlog The Company's backlog of firm orders at year-end 1995 and 1994 was as follows: (In thousands) 1995 1994 ------------------------------------------------------------------------ Instruments and Other Equipment $31,800 $26,200 Biomedical Products 2,200 3,700 ------- ------- $34,000 $29,900 ======= ======= The Company anticipates that substantially all of the backlog at the end of 1995 will be shipped or completed during fiscal 1996. (ix) Government Contracts Not applicable. (x) Competition In general, the Company competes with other entities on the basis of technological advances, particularly with respect to the Company's work in analytical instruments and biomedical devices. Instruments and Other Equipment Precision Weighing and Inspection Equipment. The Company's Thermo Sentron subsidiary competes with several international and regional companies in the market for its products. Thermo Sentron's competitors in the packaged goods market differ from those in the bulk materials market. The principal competitive factors in both markets are customer service and support, quality, reliability, and price. Laboratory Products. The Company's Orion division competes with several international companies. In the markets for the products made by its Orion division, the Company competes on the basis of performance, service, technology, and price. Process Detection Instruments. The Company's product quality assurance systems compete with chemical-detection systems manufactured by several companies using similar technology as well as other technologies and processes for product quality assurance. Competition in the markets for all of the Company's detection products is based primarily on performance, service, and price. 11PAGE Security Instruments. In the security instruments market, the Company competes with a small number of companies that include makers of other chemical-detection instruments as well as enhanced X-ray detectors. Since the Federal Aviation Administration (FAA) has not required that U.S. airports and airlines buy advanced explosives-detection equipment, the Company has not sold any EGIS systems to U.S. airlines. The Company believes that the companies, if any, whose devices are required by the FAA will have a substantial competitive advantage in the United States. In December 1994, the FAA approved the use of an X-ray imaging system developed by InVision Technologies in Foster City, California, indicating that the FAA is currently focusing its attention on X-ray technology. Electronic Test Instruments. The Company is a leading supplier of pulsed EMI testing equipment. The Company estimates that there are approximately 15 companies worldwide that independently manufacture and market pulsed EMI test equipment for electronic products and approximately 10 companies that independently manufacture and market component- reliability test equipment. The Company competes in this market primarily on the basis of performance, technical expertise, and reputation. In the market for RF power amplifiers, the Company competes with approximately five companies worldwide. Competition in this market is based primarily on the basis of technical expertise, reputation, and price. High-voltage Systems. The Company estimates that there are approximately 20 companies that independently manufacture and market high-voltage power supply systems of the general type manufactured and marketed by Thermo Voltek. Thermo Voltek competes for both contract and commercial sales primarily on the basis of technical expertise, product performance, and reputation. Substantially all of Thermo Voltek's contract and commercial revenues are subject to intense competitive bidding. Biomedical Products Left Ventricular-assist Systems. The Company is aware of one other company that has submitted a PMA application with the FDA for an implantable LVAS. The Company is unaware whether this PMA application has been accepted for filing by the FDA. Also, the Company is aware of one other company that has received approval by the FDA Advisory Panel on Circulatory System Devices and subsequent commercial approval for its cardiac-assist device. This is an external device that is positioned on the outside of the patient's chest and is intended for short-term use in the hospital environment. In addition, the Company is aware that a total artificial heart is currently undergoing clinical trials. The requirement of obtaining FDA approval for commercial sale of an LVAS is a significant barrier to entry into the U.S. market for these devices. There can be no assurance, however, that FDA regulations will not change in the future, reducing the time and testing required for others to obtain FDA approval for commercial sale. In addition, other research groups and companies, some of which have significantly greater resources than those of the Company, are developing cardiac systems using alternative technologies or concepts, one or more of which might prove functionally equivalent to or more suitable than the Company's systems. Among products that have been approved for commercial sale, the Company competes primarily on the basis of performance, service capability, and price. Competition in the market for medical devices is also significantly affected by the reimbursement policies of government and private insurers. Any product for which 12PAGE reimbursement is not available from such third party payors will be at a significant competitive disadvantage. In November 1995, the HCFA issued a decision that extends Medicare Coverage to the IP LVAS. Several major health insurers, including Aetna and U.S. Healthcare, have agreed to offer coverage for the IP LVAS, while many others are reimbursing on a case-by-case basis. Medical Grade Polymers and Enteral Nutrition-Delivery Systems. In the market for medical-grade polymers and enteral nutrition-delivery systems, the Company competes primarily with large pharmaceutical, medical device, and chemical companies, many of which have substantially greater financial, technical, and human resources than those of the Company. Competition within these markets is intense, and is based primarily on price, efficacy, and technological advances. (xi) Research and Development The Company maintains a research and development capability to support its existing products and to develop new products. A number of programs are under way, funded by the Company solely or jointly with an outside company. These programs include development of new products to perform substantially all or part of the pumping function of the left ventricle of the natural heart, process detection and security instruments, electronic test instruments, and high-voltage power supply products. The Company also develops new grades of polymers to meet specific customer requirements for industrial and medical applications. During 1995, 1994, and 1993, the Company expended $11,087,000, $10,445,000, and $6,434,000, respectively, on internally sponsored research and development programs, and $3,125,000, $1,702,000, and $2,702,000, respectively, on research and development programs sponsored by others. At December 30, 1995, 169 professional employees were engaged full-time in research and development activities. (xii) Environmental Protection Regulations The Company believes that compliance by the Company with federal, state, and local environmental regulations will not have a material adverse effect on its capital expenditures, earnings, or competitive position. (xiii) Number of Employees As of December 30, 1995, the Company's Instruments and Other Equipment and Biomedical Products segments employed 1,095 and 277 people, respectively. (d) Financial Information about Exports by Domestic Operations and about Foreign Operations Financial information about exports by domestic operations and about foreign operations is summarized in Note 14 to Consolidated Financial Statements in the Registrant's 1995 Annual Report to Shareholders and is incorporated herein by reference. 13PAGE (e) Executive Officers of the Registrant Present Title Name Age (Year First Became Executive Officer) -------------------- --- ------------------------------------ John W. Wood Jr. 52 President and Chief Executive Officer (1984) Victor L. Poirier 54 Senior Vice President (1983) John T. Keiser 60 Senior Vice President (1994) John N. Hatsopoulos* 61 Vice President and Chief Financial Officer (1983) David H. Fine 53 Vice President (1993) Paul F. Kelleher 53 Chief Accounting Officer (1985) * John N. Hatsopoulos, Chairman of the Company, and George N. Hatsopoulos, a director of the Company, are brothers. Each executive officer serves until his successor is chosen or appointed and qualified or until earlier resignation, death, or removal. All executive officers have held comparable positions for at least five years either with the Company or with its parent company, Thermo Electron. Mr. Keiser was appointed senior vice president of the Company in 1994, at the same time he was named president of Thermo Biomedical, a newly created subsidiary of Thermo Electron. From 1985 and until 1994, Mr. Keiser was president of the Eberline Instrument division of Thermo Instrument Systems Inc., a majority-owned public subsidiary of Thermo Electron. Messrs. Wood and Fine are full-time employees of the Company. Messrs. Hatsopoulos and Kelleher are full-time employees of Thermo Electron and Mr. Poirier is a full-time employee of Thermo Cardiosystems, but they devote such time to the affairs of the Company as the Company's needs reasonably require. Item 2. Properties The location and general character of the Company's properties by industry segment as of December 30, 1995, are as follows: Instruments and Other Equipment The Company owns approximately 45,000, 9,500, and 13,800 square feet of office, engineering, laboratory, and production space in New York, Canada, and Scotland, respectively, and leases approximately 560,000 square feet of office, engineering, laboratory, and production space principally in Minnesota, Massachusetts, Italy, the Netherlands, and the United Kingdom under leases expiring from 1996 to 2001. Biomedical Products The Company leases approximately 146,000 square feet of office, engineering, laboratory, and production space in Illinois and Massachusetts under leases expiring in 1996 and 2003, respectively. The Company believes that its facilities are in good condition and are adequate to meet its current needs and that other suitable space is readily available if any of such leases are not extended. 14PAGE Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 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 are included under the sections labeled "Common Stock Market Information" and "Dividend Policy" in the Registrant's 1995 Annual Report to Shareholders and is incorporated herein by reference. Item 6. Selected Financial Data Information concerning the Registrant's selected financial data is included under the sections labeled "Selected Financial Information" and "Dividend Policy" in the Registrant's 1995 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 1995 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 December 30, 1995, are included in the Registrant's 1995 Annual Report to Shareholders and are incorporated herein by reference. Item 9. Changes in and Disagreements with Public Accountants on Accounting and Financial Disclosure Not applicable. 15PAGE PART III Item 10. Directors and Executive Officers of the Registrant The information concerning directors required under this item is incorporated herein by reference from the material contained under the caption "Election of Directors" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. The information concerning delinquent filers pursuant to Item 405 of Regulation S-K is incorporated herein by reference from the material contained under the heading "Disclosure of Certain Late Filings" under the caption "Stock Ownership" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 11. Executive Compensation The information required under this item is incorporated herein by reference from the material contained under the caption "Executive Compensation" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required under this item is incorporated herein by reference from the material contained under the caption "Stock Ownership" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 13. Certain Relationships and Related Transactions The information required under this item is incorporated herein by reference from the material contained under the caption "Relationship with Affiliates" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. 16PAGE PART IV Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a,d) Financial Statements and Schedules. (1) The consolidated financial statements set forth in the list below are filed as part of this Report. (2) The consolidated financial statement schedule set forth in the list below is filed as part of this Report. (3) Exhibits filed herewith or incorporated herein by reference are set forth in Item 14(c) below. List of Financial Statements and Schedules Referenced in this Item 14. Information incorporated by reference from Exhibit 13 filed herewith: Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Shareholders' Investment Notes to Consolidated Financial Statements Report of Independent Public Accountants Certain Financial Statement Schedules filed herewith: Schedule II: Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or not required, or because the required information is shown either in the financial statements or in the notes thereto. (b) Reports on Form 8-K. On December 12, 1995, the Company filed a Current Report on Form 8-K pertaining to the acquisition of the Orion laboratory products division of Analytical Technology, Inc. On February 14, 1996, the Company filed an amendment on Form 8-K/A, the purpose of which was to file the financial information required by Form 8-K concerning this acquisition. (c) Exhibits. See Exhibit Index on the page immediately preceding exhibits. 17PAGE 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 by the undersigned, thereunto duly authorized. Date: March 8, 1996 THERMEDICS INC. By: John W. Wood Jr. ---------------- John W. Wood Jr. 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 8, 1996. Signature Title --------- ----- By: John W. Wood Jr. President, Chief Executive Officer --------------------- and Director John W. Wood Jr. By: John N. Hatsopoulos Chairman of the Board, Vice President, --------------------- Chief Financial Officer and Director John N. Hatsopoulos By: Paul F. Kelleher Chief Accounting Officer --------------------- Paul F. Kelleher By: Peter O. Crisp Director --------------------- Peter O. Crisp By: Paul F. Ferrari Director --------------------- Paul F. Ferrari By: George N. Hatsopoulos Director --------------------- George N. Hatsopoulos By: Robert C. Howard Director --------------------- Robert C. Howard By: Arvin H. Smith Director --------------------- Arvin H. Smith By: Nicholas T. Zervas Director --------------------- Nicholas T. Zervas 18PAGE Report of Independent Public Accountants ---------------------------------------- To the Shareholders and Board of Directors of Thermedics Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Thermedics Inc.'s Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 7, 1996 (except with respect to the matters discussed in Note 15 as to which the date is February 9, 1996). 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 17 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. The 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 7, 1996 19PAGE SCHEDULE II THERMEDICS INC. VALUATION AND QUALIFYING ACCOUNTS (In thousands) Additions Deductions ----------------------------- ---------- Balance at Charged to Accounts Balance Beginning Costs and Accounts Written at End Description of Year Expenses Other(a) Recovered Off of Year - ------------------- ---------- ---------- ------- --------- -------- -------- Year Ended December 30, 1995 Allowance for Doubtful Accounts $ 3,640 $ 689 $ 365 $ 2 $ (714) $ 3,982 Year Ended December 31, 1994 Allowance for Doubtful Accounts $ 944 $ 1,190 $ 2,717 $ 60 $(1,271) $ 3,640 Year Ended January 1, 1994 Allowance for Doubtful Accounts $ 769 $ 92 $ 141 $ 133 $ (191) $ 944 (a) Includes allowance of businesses acquired during the year as described in Note 3 to Consolidated Financial Statements in the Registrant's 1995 Annual Report to Shareholders and foreign currency translation adjustment. 20PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 2.1 Asset and Stock Purchase Agreement dated as of January 28, 1994 between Thermo Electron Corporation and Baker Hughes Incorporated (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K relating to events occurring on March 16, 1994 [File No. 1-9567] and incorporated herein by reference). 2.2 Assignment and Assumption Agreement dated March 16, 1994 among Thermo Electron Corporation, the Registrant, and Thermo Instrument Systems Inc. (filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K relating to events occurring on March 16, 1994 [File No. 1-9567] and incorporated herein by reference). 2.3 Agreement and Plan of Merger dated as of November 29, 1995, by and among the Registrant, ATI Merger Corp., Analytical Technology, Inc., and, for certain limited purposes, Thermo Instrument Systems Inc. (filed as Exhibit 2 to the Registrant's Current Report on Form 8-K relating to events occurring on November 29, 1995 [File No. 1-9567] and incorporated herein by reference). 2.4 Asset and Share Purchase Agreement dated as of November 29, 1995, by and among Thermo Instrument Systems Inc., ATI Acquisition Corp., Analytical Technology, Inc., and, for certain limited purposes, the Registrant (filed as Exhibit 10(a) to the Registrant's Current Report on Form 8-K relating to events occurring on November 29, 1995 [File No. 1-9567] and incorporated herein by reference). 2.5 Asset Purchase Agreement dated as of January 25, 1996 among Thermedics Detection Limited, Moisture Systems Corporation, Moisture Systems Limited and Anacon Corporation. Schedules to this Agreement have been omitted pursuant to Rule 601(b) (2) of Regulation S-K. The Registrant hereby undertakes to furnish supplementally a copy of any omitted schedule to the Commission upon request. 3.1 Articles of Organization (filed as Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 [File No. 1-9567] and incorporated herein by reference). 3.2 Amendment to Articles of Organization dated October 25, 1993 (filed as Exhibit 3(c) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 1993 [File No. 1-9567] and incorporated herein by reference). 3.3 Amended and Restated By-laws of the Registrant (filed as Exhibit 3(c) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 28, 1992 [File No. 1-9567] and incorporated herein by reference). 21PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 4.1 Fiscal Agency Agreement dated as of July 16, 1990, among the Registrant, Thermo Electron Corporation, and Chemical Bank as fiscal agent (filed as Exhibit B to the Registrant's Current Report on Form 8-K relating to events occurring on July 16, 1990 [File No. 1-9567] and incorporated herein by reference). 4.2 Fiscal Agency Agreement dated January 5, 1994 among Thermo Cardiosystems, Thermo Electron Corporation and Chemical Bank (filed as Exhibit 4.11 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-10114] and incorporated herein by reference). 4.3 Fiscal Agency Agreement dated November 19, 1993 among Thermo Voltek, Thermo Electron Corporation and Chemical Bank (filed as Exhibit 4.3 to Thermo Voltek's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-10574] and incorporated herein by reference). 4.4 Guarantee Reimbursement Agreement dated February 7, 1994 among Thermo Cardiosystems Inc., Thermo Voltek Corp., the Registrant and Thermo Electron Corporation (filed as Exhibit 4.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-9567] and incorporated herein by reference). The Registrant hereby agrees, pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, to furnish to the Commission upon request, a copy of each other instrument with respect to other long-term debt of the Company or its subsidiaries. 10.1 Amended and Restated Corporate Services Agreement between Thermo Electron Corporation and the Registrant dated as of January 3, 1993 (filed as Exhibit 10(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-9567] and incorporated herein by reference). 10.2 Lease dated November 1983, between WGO Limited Partnership, as Lessor, and the Registrant, as Lessee (filed as Exhibit 10(l) to the Registrant's Registration Statement on Form S-1 [Reg. No. 2-96962] and incorporated herein by reference; amendments thereto filed as Exhibit 10(l) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 [File No. 1-9567] and incorporated herein by reference). 10.3 Thermo Electron Corporate Charter as amended and restated effective January 3, 1993 (filed as Exhibit 10(h) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-9567] and incorporated herein by reference). 22PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 10.4 Lease dated August 25, 1978 between National Boulevard Bank of Chicago and Walpak Company (filed as Exhibit 10(p) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 [File No. 1-9567] and incorporated herein by reference). 10.5 Exclusive Base Technology License Agreement between Thermo Electron and the Registrant dated January 8, 1988 (filed as Exhibit 10(q) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 1988 [File No. 1-9567] and incorporated herein by reference). 10.6 Research and Development Contract between Thermo Electron and the Registrant dated January 8, 1988 (filed as Exhibit 10(r) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 1988 [File No. 1-9567] and incorporated herein by reference). 10.7 Exclusive License and Marketing Agreement between Thermo Electron and the Registrant dated January 8, 1988 (filed as Exhibit 10(s) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 1988 [File No. 1-9567] and incorporated herein by reference). 10.8 Intellectual Property Cross-license Agreement between the Registrant and Thermo Cardiosystems Inc. (filed as Exhibit 10(i) to Thermo Cardiosystems' Registration Statement on Form S-1 [Reg. No. 33-25144] and incorporated herein by reference). 10.9 Amendment No. 1 dated March 29, 1991 to Exclusive License and Marketing Agreement between the Registrant and Thermo Electron Corporation (filed as Exhibit 10(r) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 1991 [File No. 1-9567] and incorporated herein by reference). 10.10 Management Agreement by and between Thermo Electron and the Registrant dated November 15, 1991 (filed as Exhibit 10(t) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 [File No. 1-9567] and incorporated herein by reference). 10.11 Sublease dated June 1, 1993, between Apollo Computer, Inc., as Sublessor, Thermedics Detection Inc., as Subleasee, and Trustees of 220 Mill Road Trust, as Master Lessor (filed as Exhibit 10(ll) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 1993 [File No. 1-9567] and incorporated herein by reference). 23PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 10.12 Agreement dated May 26, 1993 between Thermo Cardiosystems Inc. and The Polymer Technology Group, Incorporated (filed as Exhibit 10(nn) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 1993 [File No. 1-9567] and incorporated herein by reference). 10.13 Lease Agreement dated August 2, 1993 between Comtest Invest B.V. and Comtest Instrumentation B.V. (filed as Exhibit 10.6 to Thermo Voltek's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-10576] and incorporated herein by reference). 10.14 Master Repurchase Agreement dated January 1, 1994 between the Registrant and Thermo Electron Corporation (filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-9567] and incorporated herein by reference). 10.15 $38,000,000 Promissory Note dated as of December 11, 1995 issued by the Registrant to Thermo Electron Corporation (filed as Exhibit 10(b) to the Registrant's Current Report on Form 8-K relating to events occurring on November 29, 1995 [File No. 1-9567] and incorporated herein by reference). 10.16-17 Reserved. 10.18 Incentive Stock Option Plan of the Registrant (filed as Exhibit 10(d) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-84380] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Registrant's Nonqualified Stock Option Plan is 1,931,923 shares, after adjustment to reflect share increases approved in 1986 and 1992, 5-for-4 stock split effected in January 1985, 4-for-3 stock split effected in September 1985 and 3-for-2 stock splits effected in October 1986 and November 1993). 10.19 Nonqualified Stock Option Plan of the Registrant (filed as Exhibit 10(e) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-84380] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Registrant's Incentive Stock Option Plan is 1,931,923 shares, after adjustment to reflect share increases approved in 1986 and 1992, 5-for-4 stock split effected in January 1985, 4-for-3 stock split effected in September 1985 and 3-for-2 stock splits effected in October 1986 and November 1993). 10.20 Directors Stock Option Plan of the Registrant (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 [File No. 1-9567] and incorporated herein by reference). 24PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 10.21 Deferred Compensation Plan for Directors of the Registrant (filed as Exhibit 10(g) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-96962] and incorporated herein by reference). 10.22 Equity Incentive Plan of the Registrant (filed as Appendix A to the Proxy Statement dated May 10, 1993 of the Registrant [File No. 1-9567] and incorporated herein by reference). (Maximum number of shares issuable is 1,500,000 shares, after adjustment to reflect 3-for-2 stock split effected in November 1993). 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 the Registrant's parent, Thermo Electron Corporation, and its subsidiaries, for services rendered to the Registrant or to such affiliated corporations. Such plans are listed under Exhibits 10.23 - 10.90. 10.23 Thermo Electron Corporation Incentive Stock Option Plan (filed as Exhibit 4(d) to Thermo Electron's Registration Statement on Form S-8 [Reg. No. 33-8993] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Thermo Electron Nonqualified Stock Option Plan is 9,035,156 shares, after adjustment to reflect share increases approved in 1984 and 1986, share decrease approved in 1989, and 3-for-2 stock splits effected in October 1986, October 1993 and May 1995). 10.24 Thermo Electron Corporation Nonqualified Stock Option Plan (filed as Exhibit 4(e) to Thermo Electron's Registration Statement on Form S-8 [Reg. No. 33-8993] and incorporated herein by reference). (Plan amended in 1984 to extend expiration date to December 14, 1994; maximum number of shares issuable in the aggregate under this plan and the Thermo Electron Incentive Stock Option Plan is 9,035,156 shares, after adjustment to reflect share increases approved in 1984 and 1986, share decrease approved in 1989, and 3-for-2 stock splits effected in October 1986, October 1993 and May 1995). 10.25 Thermo Electron Corporation Equity Incentive Plan (filed as Exhibit 10.1 to Thermo Electron's Quarterly Report on Form 10-Q for the quarter ended July 2, 1994 [File No. 1-8002] and incorporated herein by reference). (Plan amended in 1989 to restrict exercise price for SEC reporting persons to not less than 50% of fair market value or par value; maximum number of shares issuable is 7,050,000 shares, after adjustment to reflect 3-for-2 stock splits effected in October 1993 and May 1995 and share increase approved in 1994). 25PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 10.26 Thermo Electron Corporation - Thermedics Inc. Nonqualified Stock Option Plan (filed as Exhibit 4 to a Registration Statement on Form S-8 of Thermedics Inc. [Reg. No. 2-93747] and incorporated herein by reference). (Maximum number of shares issuable is 450,000 shares, after adjustment to reflect share increase approved in 1988, 5-for-4 stock split effected in January 1985, 4-for-3 stock split effected in September 1985, and 3-for-2 stock splits effected in October 1986 and November 1993). 10.27 Thermo Electron Corporation - Thermo Instrument Systems Inc. (formerly Thermo Environmental Corporation) Nonqualified Stock Option Plan (filed as Exhibit 4(c) to a Registration Statement on Form S-8 of Thermo Instrument [Reg. No. 33-8034] and incorporated herein by reference). (Maximum number of shares issuable is 421,875 shares, after adjustment to reflect 3-for-2 stock splits effected in July 1993 and April 1995 and 5-for-4 stock splits effected in December 1995). 10.28 Thermo Electron Corporation - Thermo Instrument Systems Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.12 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended January 3, 1987 [File No. 1-8002] and incorporated herein by reference). (Maximum number of shares issuable is 600,285 shares, after adjustment to reflect share increase approved in 1988, 3-for-2 stock splits effected in January 1988, July 1993 and April 1995 and 5-for-4 stock split effected in December 1995). 10.29 Thermo Electron Corporation - Thermo TerraTech Inc. (formerly Thermo Process Systems Inc.) Nonqualified Stock Option Plan (filed as Exhibit 10.13 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended January 3, 1987 [File No. 1-8002] and incorporated herein by reference). (Maximum number of shares issuable is 108,000 shares, after adjustment to reflect 6-for-5 stock splits effected in July 1988 and March 1989 and 3-for-2 stock split effected in September 1989). 10.30 Thermo Electron Corporation - Thermo Power Corporation (formerly Tecogen Inc.) Nonqualified Stock Option Plan (filed as Exhibit 10.14 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended January 3, 1987 [File No. 1-8002] and incorporated herein by reference). (Amended in September 1995 to extend the plan expiration date to December 31, 2005). 26PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 10.31 Thermo Electron Corporation - Thermo Cardiosystems Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.11 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 [File No. 1-8002] and incorporated herein by reference). (Maximum number of shares issuable is 130,500 shares, after adjustment to reflect share increases approved in 1990 and 1992, 3-for-2 stock split effected in January 1990, 5-for-4 stock split effected in May 1990 and 2-for-1 stock split effected in November 1993). 10.32 Thermo Electron Corporation - Thermo Ecotek Corporation (formerly Thermo Energy Systems Corporation) Nonqualified Stock Option Plan (filed as Exhibit 10.12 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 [File No. 1-8002] and incorporated herein by reference). 10.33 Thermo Electron Corporation - ThermoTrex Corporation (formerly Thermo Electron Technologies Corporation) Nonqualified Stock Option Plan (filed as Exhibit 10.13 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 [File No. 1-8002] and incorporated herein by reference). (Maximum number of shares issuable is 180,000 shares, after adjustment to reflect 3-for-2 stock split effected in October 1993). 10.34 Thermo Electron Corporation - Thermo Fibertek Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.14 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 [File No. 1-8002] and incorporated herein by reference). (Maximum number of shares issuable is 600,000 shares, after adjustment to reflect 2-for-1 stock split effected in September 1992 and 3-for-2 stock split effected in September 1995). 10.35 Thermo Electron Corporation - Thermo Voltek Corp. (formerly Universal Voltronics Corp.) Nonqualified Stock Option Plan (filed as Exhibit 10.17 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-8002] and incorporated herein by reference). (Maximum number of shares issuable is 57,500 shares, after adjustment to reflect 3-for-2 stock split effected in November 1993 and share increase approved in September 1995). 10.36 Thermo Electron Corporation - Thermo BioAnalysis Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.31 to Thermo Power's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 [File No. 1-10573] and incorporated herein by reference). 27PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 10.37 Thermo Electron Corporation - ThermoLyte Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.32 to Thermo Power's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 [File No. 1-10573] and incorporated herein by reference). 10.38 Thermo Electron Corporation - Thermo Remediation Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.33 to Thermo Power's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 [File No. 1-10573] and incorporated herein by reference). 10.39 Thermo Electron Corporation - ThermoSpectra Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.34 to Thermo Power's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 [File No. 1-10573] and incorporated herein by reference). 10.40 Thermo Electron Corporation - ThermoLase Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.35 to Thermo Power's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 [File No. 1-10573] and incorporated herein by reference). 10.41 Thermo Electron Corporation - ThermoQuest Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.41 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.42 Thermo Electron Corporation - Thermo Optek Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.42 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.43 Thermo Electron Corporation - Thermo Sentron Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.43 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.44 Thermo Electron Corporation - Trex Medical Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.44 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 28PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 10.45 Thermo Ecotek Corporation (formerly Thermo Energy Systems Corporation) Incentive Stock Option Plan (filed as Exhibit 10.18 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-8002] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Thermo Ecotek Nonqualified Stock Option Plan is 900,000 shares, after adjustment to reflect share increase approved in December 1993). 10.46 Thermo Ecotek Corporation (formerly Thermo Energy Systems Corporation) Nonqualified Stock Option Plan (filed as Exhibit 10.19 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-8002] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Thermo Ecotek Incentive Stock Option Plan is 900,000 shares, after adjustment to reflect share increase approved in December 1993). 10.47 Thermo Ecotek Corporation (formerly Thermo Energy Systems Corporation) Equity Incentive Plan (filed as Exhibit 10.46 to Thermo TerraTech's (formerly Thermo Process') Annual Report on Form 10-K for the fiscal year ended April 2, 1994 [File No. 1-9549] and incorporated herein by reference). 10.48 Thermedics Inc. - Thermedics Detection Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.20 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-8002] and incorporated herein by reference). 10.49 Thermedics Inc. - Thermo Sentron Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.51 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.50 Thermedics Detection Inc. Equity Incentive Plan (filed as Exhibit 10.69 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 [File No. 1-9567] and incorporated herein by reference). 10.51 Thermo Cardiosystems Inc. Incentive Stock Option Plan (filed as Exhibit 10(f) to Thermo Cardiosystems' Registration Statement on Form S-1 [Reg. No. 33-25144] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Thermo Cardiosystems Nonqualified Stock Option Plan is 1,143,750 shares, after adjustment to reflect share increase approved in 1992, 3-for-2 stock split effected in January 1990, 5-for-4 stock split effected in May 1990 and 2-for-1 stock split effected in November 1993). 29PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 10.52 Thermo Cardiosystems Inc. Nonqualified Stock Option Plan (filed as Exhibit 10(g) to Thermo Cardiosystems' Registration Statement on Form S-1 [Reg. No. 33-25144] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Thermo Cardiosystems Incentive Stock Option Plan is 1,143,750 shares, after adjustment to reflect share increase approved in 1992, 3-for-2 stock split effected in January 1990, 5-for-4 stock split effected in May 1990 and 2-for-1 stock split effected in November 1993). 10.53 Thermo Cardiosystems Inc. Equity Incentive Plan (filed as Attachment A to the Proxy Statement dated May 5, 1994 of Thermo Cardiosystems [File No. 1-10114] and incorporated herein by reference). 10.54 Thermo Voltek Corp. (formerly Universal Voltronics Corp.) 1985 Stock Option Plan (filed as Exhibit 10.14 to Thermo Voltek's Annual Report on Form 10-K for the fiscal year ended June 30, 1985 [File No. 0-8245] and incorporated herein by reference). (Maximum number of shares issuable is 200,000 shares, after adjustment to reflect 1-for-3 reverse stock split effected in November 1992 and 3-for-2 stock split effected in November 1993). 10.55 Thermo Voltek Corp. (formerly Universal Voltronics Corp.) 1990 Stock Option Plan (filed as exhibit 10.2 to Thermo Voltek's Annual Report on Form 10-K for the fiscal year ended June 30, 1990 [File No. 1-10574] and incorporated herein by reference). (Maximum number of shares issuable is 400,000 shares, after adjustment to reflect share increases in 1993 and 1994, 1-for-3 reverse stock split effected in November 1992 and 3-for-2 stock split effected in November 1993). 10.56 Thermo Voltek Corp. Equity Incentive Plan (filed as Exhibit 10.21 to Thermo Voltek's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 [File No. 1-10574] and incorporated herein by reference). 10.57 Thermo Sentron Inc. Equity Incentive Plan (filed as Exhibit 10.57 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.58 Thermo Instrument Systems Inc. Incentive Stock Option Plan (filed as Exhibit 10(c) to Thermo Instrument's Registration Statement on Form S-1 [Reg. No. 33-6762] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Thermo Instrument Nonqualified Stock Option Plan is 2,812,500 shares, after adjustment to reflect share increase approved in 1990, 3-for-2 stock splits effected in January 1988, July 1993 and April 1995 and 5-for-4 stock effected in December 1995). 30PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 10.59 Thermo Instrument Systems Inc. Nonqualified Stock Option Plan (filed as Exhibit 10(d) to Thermo Instrument's Registration Statement on Form S-1 [Reg. No. 33-6762] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Thermo Instrument Incentive Stock Option Plan is 2,812,500 shares, after adjustment to reflect share increase approved in 1990, 3-for-2 stock splits effected in January 1988, July 1993 and April 1995 and 5-for-4 stock split effected in December 1995). 10.60 Thermo Instrument Systems Inc. Equity Incentive Plan (filed as Appendix A to the Proxy Statement dated April 27, 1993 of Thermo Instrument [File No. 1-9786] and incorporated herein by reference). (Maximum number of shares issuable is 4,031,250 shares, after adjustment to reflect share increase approved in December 1993, 3-for-2 stock splits effected in July 1993 and April 1995 and 5-for-4 stock split effected in December 1995). 10.61 Thermo Instrument Systems Inc. (formerly Thermo Environmental Corporation) Incentive Stock Option Plan (filed as Exhibit 10(d) to Thermo Environmental's Registration Statement on Form S-1 [Reg. No. 33-329] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Thermo Instrument (formerly Thermo Environmental) Nonqualified Stock Option Plan is 1,160,156 shares, after adjustment to reflect share increase approved in 1987, 3-for-2 stock splits effected in July 1993 and April 1995 and 5-for-4 stock split effected in December 1995). 10.62 Thermo Instrument Systems Inc. (formerly Thermo Environmental Corporation) Nonqualified Stock Option Plan (filed as Exhibit 10(e) to Thermo Environmental's Registration Statement on Form S-1 [Reg. No. 33-329] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Thermo Instrument (formerly Thermo Environmental) Incentive Stock Option Plan is 1,160,156 shares, after adjustment to reflect share increase approved in 1987, 3-for-2 stock splits effected in July 1993 and April 1995 and 5-for-4 stock split effected in December 1995). 10.63 Thermo Instrument Systems Inc. - ThermoSpectra Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.45 to Thermo Power's Annual Report on Form 10-K for the fiscal year ended October 1, 1994 [File No. 1-10573] and incorporated herein by reference). 31PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 10.64 Thermo Instrument Systems Inc. - Thermo BioAnalysis Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.64 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.65 Thermo Instrument Systems Inc. - ThermoQuest Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.65 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.66 ThermoSpectra Corporation Equity Incentive Plan (filed as Exhibit 10.59 to Thermo Power's Annual Report on Form 10-K for the fiscal year ended October 1, 1994 [File No. 1-10573] and incorporated herein by reference). 10.67 Thermo BioAnalysis Corporation Equity Incentive Plan (filed as Exhibit 10.67 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.68 Thermo Optek Corporation Equity Incentive Plan (filed as Exhibit 10.68 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.69 ThermoQuest Corporation Equity Incentive Plan (filed as Exhibit 10.69 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.70 ThermoTrex Corporation (formerly Thermo Electron Technologies Corporation) Incentive Stock Option Plan (filed as Exhibit 10(h) to ThermoTrex's Registration Statement on Form S-1 [Reg. 33-40972] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the ThermoTrex Nonqualified Stock Option Plan is 1,945,000 shares, after adjustment to reflect share increases approved in 1992 and 1993 and 3-for-2 stock split effected in October 1993). 10.71 ThermoTrex Corporation (formerly Thermo Electron Technologies Corporation) Nonqualified Stock Option Plan (filed as Exhibit 10(i) to ThermoTrex's Registration Statement on Form S-1 [Reg. No. 33-40972] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the ThermoTrex Incentive Stock Option Plan is 1,945,000 shares, after adjustment to reflect share increases approved in 1992 and 1993 and 3-for-2 stock split effected in October 1993). 32PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 10.72 ThermoTrex Corporation - ThermoLase Corporation (formerly ThermoLase Inc.) Nonqualified Stock Option Plan (filed as Exhibit 10.53 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-9567] and incorporated herein by reference). 10.73 ThermoTrex Corporation - Trex Medical Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.73 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.74 ThermoLase Corporation (formerly ThermoLase Inc.) Incentive Stock Option Plan (filed as Exhibit 10.55 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-9567] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the ThermoLase Nonqualified Stock Option Plan is 2,800,000 shares, after adjustment to reflect share increase approved in 1993 and 2-for-1 stock splits effected in March 1994 and June 1995.) 10.75 ThermoLase Corporation (formerly ThermoLase Inc.) Nonqualified Stock Option Plan (filed as Exhibit 10.54 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-9567] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the ThermoLase Incentive Stock Option Plan is 2,800,000 shares, after adjustment to reflect share increase approved in 1993 and 2-for-1 stock splits effected in March 1994 and June 1995). 10.76 ThermoLase Corporation Equity Incentive Plan (filed as Exhibit 10.81 to Thermo TerraTech's (formerly Thermo Process') Annual Report on Form 10-K for the fiscal year ended April 1, 1995 [File No. 1-9549] and incorporated herein by reference). 10.77 Trex Medical Corporation Equity Incentive Plan (filed as Exhibit 10.77 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.78 Thermo Fibertek Inc. Incentive Stock Option Plan (filed as Exhibit 10(k) to Thermo Fibertek's Registration Statement on Form S-1 [Reg. No. 33-51172] and incorporated herein by reference). 10.79 Thermo Fibertek Inc. Nonqualified Stock Option Plan (filed as Exhibit 10(l) to Thermo Fibertek's Registration Statement on Form S-1 [Reg. No. 33-51172] and incorporated herein by reference). 33PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 10.80 Thermo Fibertek Inc. Equity Incentive Plan (filed as Attachment A to the Proxy Statement dated May 3, 1994 of Thermo Fibertek [File No. 1-11406] and incorporated herein by reference). 10.81 Thermo Power Corporation (formerly Tecogen Inc.) Incentive Stock Option Plan, as amended (filed as Exhibit 10(h) to Thermo Power's Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 1993 [File No. 1-10573] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Thermo Power Nonqualified Stock Option Plan is 950,000 shares, after adjustment to reflect share increases approved in 1990, 1992 and 1993). 10.82 Thermo Power Corporation (formerly Tecogen Inc.) Nonqualified Stock Option Plan, as amended (filed as Exhibit 10(i) to Thermo Power's Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 1993 [File No. 1-10573] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Thermo Power Incentive Stock Option Plan is 950,000 shares, after adjustment to reflect share increases approved in 1990, 1992 and 1993). 10.83 Thermo Power Corporation Equity Incentive Plan (filed as Exhibit 10.60 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-9567] and incorporated herein by reference). 10.84 Thermo Power Corporation - ThermoLyte Corporation Nonqualified Stock Option Plan (filed as Exhibit 10.84 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.85 ThermoLyte Corporation Equity Incentive Plan (filed as Exhibit 10.71 to Thermo Power's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 [File No. 1-10573] and incorporated herein by reference). 10.86 Thermo TerraTech Inc. (formerly Thermo Process Systems Inc.) Incentive Stock Option Plan (filed as Exhibit 10(h) to Thermo TerraTech's Registration Statement on Form S-1 [Reg. No. 33-6763] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Thermo TerraTech Nonqualified Stock Option Plan is 1,850,000 shares, after adjustment to reflect share increases approved in 1987, 1989 and 1992, 6-for-5 stock splits effected in July 1988 and March 1989 and 3-for-2 stock split effected in September 1989). 34PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit Page -------------------------------------------------------------------------- 10.87 Thermo TerraTech Inc. (formerly Thermo Process Systems Inc.) Nonqualified Stock Option Plan (filed as Exhibit 10(i) to Thermo TerraTech's Registration Statement on Form S-1 [Reg. No. 33-6763] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Thermo TerraTech Incentive Stock Option Plan is 1,850,000 shares, after adjustment to reflect share increases approved in 1987, 1989 and 1992, 6-for-5 stock splits effected in July 1988 and March 1989 and 3-for-2 stock split effected in September 1989). 10.88 Thermo TerraTech Inc. (formerly Thermo Process Systems Inc.) Equity Incentive Plan (filed as Exhibit 10.63 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-9567] and incorporated herein by reference). (Maximum number of shares issuable is 1,750,000 shares, after adjustment to reflect share increase approved in 1994). 10.89 Thermo TerraTech Inc. (formerly Thermo Process Systems Inc.) - Thermo Remediation Nonqualified Stock Option Plan (filed as Exhibit 10(l) to Thermo TerraTech's Quarterly Report on Form 10-Q for the fiscal quarter ended January 1, 1994 [File No. 1-9549] and incorporated herein by reference). 10.90 Thermo Remediation Inc. Equity Incentive Plan (filed as Exhibit 10.7 to Thermo Remediation's Registration Statement on Form S-1 [Reg. No. 33-70544] and incorporated herein by reference). 13 Annual Report to Shareholders for the year ended December 30, 1995 (only those portions incorporated herein by reference). 21 Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. EX-2.5 2 EXHIBIT 2.5 Execution Copy -------------- ASSET PURCHASE AGREEMENT This Asset Purchase Agreement is made and entered into as of the 25th day of January, 1996, by and among Thermedics Detection Inc., a corporation organized under the laws of Massachusetts (the "Buyer"), Moisture Systems Corporation, a Massachusetts corporation ("MSC"), Moisture Systems Limited, a limited company organized under the laws of England ("MSC-UK"), Anacon Corporation, a Massachusetts corporation ("Anacon"), and the principals of MSC, MSC-UK and Anacon whose names appear on the signature pages hereto (the "Principals"). MSC, MSC-UK and Anacon are referred to herein individually as the Seller and collectively as the Sellers. The Buyer desires to purchase, and the Sellers desire to sell substantially all of their assets, subject to the assumption by the Buyer of certain liabilities. NOW THEREFORE, in consideration of the premises and the mutual covenants, agreements and provisions herein contained, the parties hereto agree as follows: AGREEMENT The parties, intending to be legally bound, agree as follows: 1. DEFINITIONS For purposes of this Agreement, the following terms have the meanings specified or referred to in this Section 1: "Accounts Receivable" -- as defined in Section 3.7. "Assets" -- as defined in Section 2.1. "Applicable Contract"-- any Contract (a) under which any of the Sellers has any rights, (b) under which any of the Sellers has subject to any obligation or liability, or (c) by which any of the Sellers or any of the assets owned or used by any of the Sellers is bound. "Assumed Liabilities" -- as defined in Section 2.4. "Balance Sheet Date" -- as defined in Section 2.4. "Best Efforts"-- the efforts that a prudent Person desirous of achieving a result would use in similar circumstances to ensure that such result is achieved as expeditiously as possible; provided, however, that a Person required to use his Best Efforts under this Agreement will not be required to take actions that would result in a materially adverse change in the benefits PAGE to such Person of this Agreement and the Contemplated Transactions. "Breach"--a "Breach" of a representation, warranty, covenant, obligation, or other provision of this Agreement or any instrument delivered pursuant to this Agreement will be deemed to have occurred if there is or has been any inaccuracy in or breach of, or any failure to perform or comply with, such representation, warranty, covenant, obligation, or other provision, and the term "Breach" means any such inaccuracy, breach, or failure. "Buyer"-- as defined in the first paragraph of this Agreement. "Closing"-- as defined in Section 2.7. "Closing Balance Sheet" -- as defined in Section 2.5. "Closing Date" -- as defined in Section 2.7. "Code"-- the Internal Revenue Code of 1986 or any successor law, and regulations issued by the IRS pursuant to the Internal Revenue Code or any successor law. "Competitive Business" -- as defined in Section 6.17. "Consent"-- any approval, consent, ratification, waiver, or other authorization (including any Governmental Authorization ). "Contemplated Transactions"-- all of the transactions contemplated by this Agreement, including: (a) the sale of the Assets by the Sellers to Buyer; (b) the performance by Buyer and the Sellers of their respective covenants and obligations under this Agreement; and (c) Buyer's acquisition and ownership of the Assets and exercise of control over the Assets. "Contract"-- any agreement, contract, obligation, promise, or undertaking (whether written or oral and whether express or implied) that is legally binding. "Damages"-- as defined in Section 5.2. "Disclosure Letter"-- the disclosure letter delivered by the Sellers to the Buyer concurrently with the execution and delivery of this Agreement and attached hereto as Exhibit A and incorporated into this Agreement as a part hereof. "Draft Closing Balance Sheet" -- as defined in Section 2.5. 2PAGE "Encumbrance"-- any charge, claim, community property interest, condition, equitable interest, lien, option, pledge, security interest, right of first refusal, or restriction of any kind, including any restriction on use, voting (in the case of any security), transfer, receipt of income, or exercise of any other attribute of ownership. "Environment"-- soil, land, surface or subsurface strata, surface waters (including navigable waters and ocean waters), groundwater, drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life, and any other environmental medium or natural resource. "Environmental, Health and Safety Liabilities"-- any cost, damages, expense, liability, obligation, or other responsibility arising from or under Environmental Law, Occupational Safety and Health Law, a contract or other obligation relating to: (a) any environmental, health, or safety matters or conditions (including on-site or off-site contamination, occupational safety and health, and regulation of chemical substances or products); (b) fines, penalties, judgments, awards, settlements, legal or administrative proceedings, damages, losses, claims, demands and response, remedial, or inspection costs and expenses arising under Environmental Law or Occupational Safety and Health Law; (c) financial responsibility under Environmental Law or Occupational Safety and Health Law for cleanup costs or corrective action, including any cleanup, removal, containment, or other remediation or response actions ("Cleanup") required by applicable Environmental Law or Occupational Safety and Health Law (whether or not such Cleanup has been required or requested by any Governmental Body or any other Person) and for any natural resource damages; or (d) any other compliance, corrective, or remedial measures required under Environmental Law or Occupational Safety and Health Law. The terms "removal," "remedial," and "response action" include the types of activities covered by the United States Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Sec. 9601 et seq., as amended ("CERCLA"). "Environmental Law"-- any Legal Requirement designed: (a) to advise appropriate authorities, employees, and the public of intended or actual releases of pollutants or hazardous substances or materials, violations or discharge limits, or other prohibitions and of the commencements of 3PAGE activities, such as resource extraction or construction, that could have an adverse impact on the Environment; (b) to permit or license, or to prevent or acceptably minimize the release of pollutants or hazardous substances or materials into the Environment; (c) to reduce the quantities, prevent the release, and minimize the hazardous characteristics of wastes that are generated; (d) to protect resources, species, or ecological amenities; (e) to acceptably minimize the risks inherent in transportation of hazardous substances, pollutants, oil, or other potentially harmful substances; (f) to clean up pollutants that have been released, prevent the threat of release, or pay the costs of such clean up or prevention; or (g) to make responsible parties pay private parties, or groups of them, for damages done to their health or Environment, or to permit self-appointed representatives of the public interest to recover for injuries done to public assets. "ERISA"-- the Employee Retirement Income Security Act of 1974 or any successor law, and regulations and rules issued pursuant to that Act or any successor law. "ERISA Affiliate" -- as defined in Section 3.9. "Exchange Act" -- the Securities Exchange Act of 1934 or any successor law, and regulations and rules issued pursuant to that Act or any successor law. "Excluded Assets"-- as defined in Section 2.2. "Excluded Liabilities" --as defined in Section 2.4. "Facilities"-- any real property, leaseholds, or other interests currently or formerly owned or operated by any of the Sellers (or any predecessor Person) and any buildings, plants, structures, or equipment currently or formerly owned, leased, or operated by any of the Sellers (or any predecessor Person). "FERC" -- Federal Energy Regulatory Commission "Financial Statements -- as defined in Section 3.4. "GAAP"-- generally accepted United States accounting principles, applied on a basis consistent with the basis on which 4PAGE the Balance Sheet and the other financial statements referred to in Section 3.4 were prepared. "Governmental Authorization"-- any approval, consent, license, permit, waiver, exemption or variance, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement. "Governmental Body"-- any: (a) nation, state, county, city, town, village, district, or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign, or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); (d) multi-national organization or body; or (e) body exercising, or entitled or purporting to exercise, any administrative, executive, judicial (including court), legislative, police, regulatory, or taxing authority or power of any nature. "Hazardous Activity"-- the distribution, generation, handling, importing, management, manufacturing, processing, production, refinement, Release, storage, transfer, transportation, treatment, or use (including any withdrawal or other use of groundwater) of Hazardous Materials in, on, under, about, or from the Facilities or any part thereof into the Environment, and any other act, business, operation, or thing that increases the danger, or risk of danger, or poses an unreasonable risk of harm to persons or property on or off the Facilities. "Hazardous Materials"-- any substance that is listed, deemed, designated, or classified as, or otherwise determined to be, hazardous, radioactive, or toxic or a pollutant or a contaminant under or pursuant to any Environmental Law, including any admixture or solution thereof, and specifically including petroleum and all derivatives thereof or synthetic substitutes therefor and asbestos or asbestos containing materials. "Indemnified Persons"-- as defined in Section 5.2. "IRS"-- the United States Internal Revenue Service or any successor agency, and, to the extent relevant, the United States Department of the Treasury. 5PAGE "Knowledge"-- an individual will be deemed to have "Knowledge" of a particular fact or other matter if: (a) such individual is actually aware of such fact or other matter; or (b) a prudent individual could be expected to discover or otherwise become aware of such fact or other matter in the Ordinary Course of Business or in the course of a reasonable investigation made in connection with making representations and warranties concerning the sale of a business. A Person (other than an individual) will be deemed to have "Knowledge" of a particular fact or other matter if any individual who is serving, or who has at any time served, as a director, officer, employee, partner, executor, or trustee of such Person (or in any similar capacity) has, or at any time had, Knowledge of such fact or other matter; provided that, the Sellers will be deemed to have "Knowledge" of a particular fact or other matter only if any of Dennis Carlson, Roger Carlson, John Fordham or Phillippa Higgs has, or at any time had, Knowledge of such fact or other matter. "Lease" -- a lease of MSC-UK's premises at the Old School, Station Road, Cogenhoe, Northampton England to be entered into at the Closing by MSC-UK (as lessor) and the Buyer or the Buyer's designee (as lessee). "Legal Requirement"-- any federal, state, local, municipal, foreign, international, multinational, or other constitution, law, ordinance, order, principle of common law, regulation, statute, or treaty. "Material Adverse Effect" -- any loss to the Sellers or, after the Closing, to the Buyer that, taken as a whole, is in excess of $100,000 . "Net Asset Benchmark" -- as defined in Section 2.5. "Occupational Safety and Health Law"-- any Legal Requirement designed to provide safe and healthful working conditions and to reduce occupational safety and health hazards. "Order"-- any award, decision, injunction, judgment, order, ruling, subpoena, or verdict entered, issued, made, or rendered by any court, administrative agency, or other Governmental Body or by any arbitrator. "Ordinary Course of Business"-- an action taken by a Person will be deemed to have been taken in the "Ordinary Course of Business" only if: 6PAGE (a) such action is consistent with the past practices of such Person and is taken in the ordinary course of the normal day-to-day operations of such Person; (b) such action is not required to be authorized by the board of directors of such Person (or by any Person or group of Persons exercising similar authority), is not required to be specifically authorized by the parent company (if any) of such Person, and does not require any other separate or special authorization of any nature; and (c) such action is similar in nature and magnitude to actions customarily taken, without any separate or special authorization, in the ordinary course of the normal day-to-day operations of other Persons that are in the same line of business as such Person. "Organizational Documents"-- (a) the articles or certificate of incorporation and the bylaws of a corporation; (b) the partnership agreement and any statement of partnership of a general partnership; (c) the limited partnership agreement and the certificate of limited partnership of a limited partnership; (d) any charter or similar document adopted or filed in connection with the creation, formation, or organization of a Person; (e) the memorandum and articles of association of an English company; and (f) any amendment to any of the foregoing. "Person"-- any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, or other entity or Governmental Body. "Plan"-- as defined in Section 3.9. "Principals" -- as defined in the first paragraph of this Agreement. "Proceeding"-- any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator. "Purchase Price" -- as defined in Section 2.3. "Related Person"-- with respect to a particular individual: (a) each other member of such individual's Family; (b) any Person that is directly or indirectly controlled by any one or more members of such individual's Family; 7PAGE (c) any Person in which members of such individual's Family hold (individually or in the aggregate) a Material Interest; and (d) any Person with respect to which one or more members of such individual's Family serves as a director, officer, partner, executor, or trustee (or in a similar capacity). With respect to a specified Person other than an individual: (a) any Person that directly or indirectly controls, is directly or indirectly controlled by, or is directly or indirectly under common control with such specified Person; (b) any Person that holds a Material Interest in such specified Person; (c) each Person that serves as a director, officer, partner, executor, or trustee of such specified Person (or in a similar capacity); (d) any Person in which such specified Person holds a Material Interest; and (e) any Person with respect to which such specified Person serves as a general partner or a trustee (or in a similar capacity). For purposes of this definition, (a) the "Family" of an individual includes (i) the individual, (ii) the individual's spouse and former spouses, (iii) the brother, sister or child of the individual or the individual's spouse, and (iv) any other natural person who resides with such individual, and (b) "Material Interest" means direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of voting securities or other voting interests representing at least 5% of the outstanding voting power of a Person or equity securities or other equity interests representing at least 5% of the outstanding equity securities or equity interests in a Person. "Release"-- any spilling, leaking, emitting, discharging, depositing, escaping, leaching, dumping, or other releasing into the Environment. "Representative"-- MSC, as representative of all of the Sellers and the Principals. "Restricted Employee" -- as defined in Section 6.16. "Securities Act"-- the Securities Act of 1933 or any successor law, and regulations and rules issued pursuant to that Act or any successor law. 8PAGE "Seller" and "Sellers"-- as defined in the first paragraph of this Agreement. "Subsidiary"-- with respect to any Person (the "Owner"), any corporation or other Person of which securities or other interests having the power to elect a majority of that corporation's or other Person's board of directors or similar governing body, or otherwise having the power to direct the business and policies of that corporation or other Person (other than securities or other interests having such power only upon the happening of a contingency that has not occurred) are held by the Owner or one or more of its Subsidiaries. "Tax"-- any tax (including without limitation any income, capital gains, gross receipts, license, payroll, employment, excise severance, stamp, occupation, premium, windfall profits, environmental (including without limitation taxes under Code Section 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax or other fiscal charges of any kind whatsoever, including any fine, interest, penalty, or addition thereto, whether disputed or not), imposed, assessed, or collected by or under the authority of any Governmental Body or payable pursuant to any tax-sharing agreement or any other Contract relating to the sharing or payment of any such tax. "Tax Return"-- any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including without limitation any schedule or attachment thereto, and any amendment thereof. "Threat of Release"-- a substantial likelihood of a Release that may require action in order to prevent or mitigate damage to the Environment that may result from such Release. "Threatened"--a claim, Proceeding, dispute, action, or other matter will be deemed to have been "Threatened" if any demand or statement has been made (orally or in writing) or any notice has been given (orally or in writing), or if any other event has occurred or any other circumstances exists, that would lead a prudent Person to conclude that such a claim, Proceeding, action or other matter is likely to be asserted, commenced, taken, or otherwise pursued in the future. "UK Employees" -- all employees of MSC-UK, as listed in Exhibit G attached hereto. 2. SALE AND TRANSFER OF ASSETS; CLOSING 2.1 Sale of Assets. Subject to Section 2.2, at the Closing, the Buyer shall purchase, acquire and accept, and the Sellers shall assign, transfer, convey and deliver all of the 9PAGE Sellers' right, title and interest in and to, the assets, properties and rights (contractual or otherwise) of every kind, nature and description owned by the Sellers (collectively, the "Assets"). The Assets shall include, without limitation, the following: (a) Inventories. All inventories of raw materials, work in process, finished products and resale merchandise, scrap inventory, and expendable manufacturing supplies. (b) Machinery and Equipment. All machinery and equipment used in the research and development, manufacture, production, assembly, test, handling, distribution, demonstration and sale of products, together with the spare-parts inventories and all manufacturing or production tools and maintenance supplies pertaining thereto. (c) Intellectual Property Rights and Trademarks. All patents, trademarks, service marks, copyrights, trade names and applications therefor. (d) Technical Information and Intangibles. All inventions, discoveries (whether patentable or unpatentable), processes, designs, know-how, trade secrets, proprietary data, software programs and intellectual property of all kinds, including drawings, plans, specifications, processes, patents, dies, designs, blue prints, records, data, product development records, production outlines, diskettes, source code, object code, flow charts, information, media or knowledge and procedures, and customer and supplier lists. (e) Contracts. All real and personal property leases, licenses, sales, secrecy, confidentiality, distribution, supply and other Contracts, purchase contracts, sales orders, prepaid items, warranties and all causes of action and claims related thereto. (f) Motor Vehicles. All cars, trucks and other motor vehicles, automotive equipment and other rolling stock. (g) Books and Records. All books, records and accounts, correspondence, production records, technical, accounting, manufacturing and procedural manuals, and customer lists; employment records, studies, reports or summaries relating to any environmental conditions or consequences of any operation, as well as all studies, reports or summaries relating directly to the general condition of the Sellers; and any confidential information which has been reduced to writing relating to or arising out of the business of the Sellers. (h) Permits and Approvals. To the extent transferable, all Governmental Authorizations. 10PAGE (i) Claims. All claims, prepayments, refunds, causes of action, choses in action, rights of recovery, rights of setoff, rights of recoupment, rights under warranties and other similar assets. (j) Furniture and Fixtures. All office furniture, office equipment and supplies and computer hardware. (k) Accounts Receivable. All trade and other accounts and notes receivable and any rights of recovery or setoff of every type and character. (l) Miscellaneous Supplies. All catalogs, brochures, product literature, product-related application notes, manuals, technical papers, other printed materials, shipping and packaging materials and labels, cartons and shipping containers, palettes, shipping equipment, graphics, artwork, photographic film, slides, negatives, color separations, printer's and photographer's plates and so-called "camera-ready materials" and sales and advertising materials. (m) Cash and Securities. All cash, bank accounts, money market accounts, certificates of deposit, treasury bills, bonds, notes, securities and similar assets. (n) Stock in Subsidiaries. All of the Sellers' stock in any Subsidiaries. 2.2 Excluded Assets. Notwithstanding anything to the contrary herein, the Assets shall not include the following assets of the Sellers (the "Excluded Assets"): (a) The buildings and real property located at The Old School, Station Road, Cogenhoe, Northampton, England owned by MSC-UK. (b) The assets described on Exhibit B attached hereto. 2.3 Purchase Price for the Assets. Subject to Section 2.5, the aggregate purchase price for the Assets shall be $13,500,000 (the "Purchase Price") payable as follows: (a) $12,225,000 to MSC, (b) $475,000 to MSC-UK and (c) $800,000 to Anacon. 2.4 Assumption of Liabilities. At the Closing, the Buyer shall assume only the following liabilities of the Sellers (the "Assumed Liabilities"): (i) liabilities reflected on the September Balance Sheets, except for any such liabilities discharged since the date of the September Balance Sheets (the "Balance Sheet Date") and except for liabilities excluded from the Draft Closing Balance Sheet pursuant to Section 2.5(a), (ii) liabilities incurred by the Sellers in the Ordinary Course of Business since the Balance Sheet Date, (iii) liabilities under bona fide warranty obligations of the Sellers outstanding as of the Closing Date, and (iv) liabilities and obligations under any 11PAGE Contract assigned to the Buyer pursuant hereto, except for any such liabilities or obligations resulting from the actual or alleged breach by any of the Sellers of any such Contracts. In furtherance of, but without limiting, the foregoing, except to the extent reflected on the September Balance Sheets, the Assumed Liabilities will not include any liabilities or obligations of the Sellers (a) for any Environmental Health and Safety Liabilities resulting from the ownership, operation or condition of the Facilities, or for any liabilities or obligations resulting from any Hazardous Activity conducted on or prior to the Closing Date, (b) for any Taxes resulting from the conduct of the business of the Sellers prior to the Closing Date, (c) to any retired or other former employees of any of the Sellers for salaries or benefits accrued prior to the Closing Date, (d) under any agreements with any employees providing for severance payments in the event such employees are terminated by Buyer after the Closing, (e) under any employee benefit plan maintained by any of the Sellers, including, without limitation, the defined benefit plan maintained by MSC-UK or (f) payables relating to the dust monitor business. The Sellers and the Buyer anticipate that the United Kingdom Transfer of Undertakings (Protection of Employment) Regulations 1981 (the "Transfer Regulations") will apply to the sale and purchase under this Agreement in respect of the UK Employees. The Sellers and the Buyer acknowledge and agree that under the Transfer Regulations the contracts of employment between MSC-UK and the UK Employees will have effect after the Closing Date as if originally made between Buyer and the UK Employees. This shall not, however, diminish the Sellers' obligations pursuant to Section 5.2 to indemnify the Buyer against the liabilities specified in clauses (c), (d) and (e) of the preceding sentence or any other liabilities not specifically assumed by the Buyer under this Section 2.4, in relation to the UK Employees or any other past or present employees of MSC-UK or any predecessor of MSC-UK. Notwithstanding the foregoing, the Buyer acknowledges and agrees that it will be responsible for any severance payments imposed by statute incurred when any UK Employee is terminated by Buyer after the Closing. Any liabilities or obligations of the Sellers that are not Assumed Liabilities are referred to herein as "Excluded Liabilities." 2.5 Post-Closing Adjustments. The Purchase Price set forth in Section 2.2 shall be subject to adjustment after the Closing Date as follows: (a) Within 60 days after the Closing Date, the Buyer shall prepare and deliver to the Representative balance sheets reflecting the net tangible assets of each Seller (each, a "Draft Closing Balance Sheet"). The Buyer shall prepare the Draft Closing Balance Sheets in accordance with GAAP. For purposes of this Agreement, "net tangible assets" shall mean tangible Assets minus Assumed Liabilities. Notwithstanding anything to the contrary herein, the Draft Closing Balance Sheets shall not include any liabilities for vacation time for employees of the Sellers accrued between June 1, 1995 and the Closing Date or any 12PAGE of the following liabilities: (i) as described in the September Balance Sheet of MSC, (A) notes payable-officers, (B) accrued royalties payable, (C) accrued salaries-officers and (D) accrued dividends, (ii) as described in the September Balance Sheet of Anacon, (A) notes payable-officers, (B) accrued rent-related, (C) accrued expenses-related and (D) accrued dividends, and (iii) any payables from MSC-UK to Moisture Systems Consolidated Corporation In addition, the Draft Closing Balance Sheets shall not include any of the following assets as described on the September Balance Sheet of MSC: (i) notes receivable, (ii) interest receivable and (iii) rents receivable. It is agreed that the valuation for all inventory on the Draft Closing Balance Sheet for Anacon shall be no greater than $150,000. (b) The Representative shall deliver to the Buyer within 60 days after receiving the Draft Closing Balance Sheets a detailed statement describing its objections (if any) thereto. Failure of the Representative so to object to any Draft Closing Balance Sheet shall constitute acceptance thereof, whereupon such Draft Closing Balance Sheet shall be deemed to be a "Closing Balance Sheet". The Buyer and the Representative shall use reasonable efforts to resolve any such objections, but if they do not reach a final resolution within 30 days after the Buyer has received the statement of objections, the Buyer and Representative shall select an internationally recognized accounting firm mutually acceptable to them (the "Neutral Auditors") to resolve any remaining objections. If the Buyer and Representative are unable to agree on the choice of Neutral Auditors, they shall select as Neutral Auditors an internationally recognized accounting firm by lot (after excluding their respective regular independent accounting firms). The Neutral Auditors shall determine whether the objections raised by the Representative are valid. Each Draft Closing Balance Sheet that is the subject of objections by the Representative shall be adjusted in accordance with the Neutral Auditor's determination and, as so adjusted, shall be a Closing Balance Sheet. Such determination by the Neutral Auditors shall be conclusive and binding upon the Buyer and Representative. The Buyer, on one hand, and the Sellers, on the other, shall share equally the fees and expenses of the Neutral Auditors. (c) If the net tangible assets as shown on the Closing Balance Sheet applicable to any Seller is less than the Net Asset Benchmark for such Seller, such Seller shall pay to the Buyer, by wire transfer in immediately available funds, within ten business days after the date on which the Closing Balance Sheet is finally determined pursuant to this Section 2.5, an amount equal to such deficiency (plus interest thereon from the Closing Date at the interest rate equal to the base rate of the Bank of Boston as announced from time to time). (d) If the net tangible assets as shown on the Closing Balance Sheet applicable to any Seller is more than the Net Asset Benchmark for such Seller, the Buyer shall pay to such Seller, by 13PAGE wire transfer in immediately available funds, within ten business days after the date on which the Closing Balance Sheet is finally determined pursuant to this Section 2.5, an amount equal to such excess (plus interest thereon from the Closing Date at the interest rate equal to the base rate of Bank of Boston as announced from time to time). (e) As used in this Section 2.5, "Net Asset Benchmark" means (i) with respect to MSC, $2,415,000, (ii) with respect to MSC-UK, $313,500 and (iii) with respect to Anacon, $250,000. 2.6 Allocation of Purchase Price. The final allocation of the Purchase Price among the Assets shall reflect the book value of the Assets as shown on the Closing Balance Sheets. The Buyer and the Sellers each shall report the federal, state, provincial, foreign and local income and other tax consequences of the transaction contemplated hereby in a manner consistent with such allocation. 2.7 The Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall occur at the offices of Thermo Electron Corporation, 81 Wyman Street, Waltham, Massachusetts, at 10:00 a.m. on the date set forth in the first paragraph of this Agreement (the "Closing Date"). 2.8 Deliveries by the Sellers to the Buyer. At the Closing, the Sellers shall deliver, or cause to be delivered, to the Buyer, or any Subsidiary of the Buyer designated by the Buyer for this purpose: (a) such executed assignments, patent assignments, trademark assignments, bills of sale, certificates of title, or other documents, each dated the Closing Date, as shall be necessary, in the reasonable opinion of Buyer and its counsel to transfer to the Buyer all of the Sellers' right, title and interest in and to the Assets; and (b) an opinion of Bingham, Dana & Gould, counsel to the Sellers, in the form attached hereto as Exhibit C; (c) consents to the assignment of the Contracts listed on Exhibit D; and (d) the Lease. 2.9 Deliveries by the Buyer to the Sellers. At the Closing, the Buyer shall deliver to the Sellers: (a) the Purchase Price less the retention described in Section 2.10 by wire transfer to the account(s) designated by the Sellers; and (b) an executed assumption agreement and such other documents, each dated as of the Closing Date, as shall be 14PAGE necessary, in the reasonable opinion of the Sellers and their counsel, for the assumption by the Buyer of all of the Assumed Liabilities. (c) an opinion of Seth H. Hoogasian, general counsel of the Buyer, in the form attached hereto as Exhibit E. 2.10 Escrow. For the purpose of providing security for the obligations of the Sellers and the Principals under section 5.2, $1,350,000 (the "Escrow Amount") shall be withheld from the Purchase Price delivered at Closing and shall be placed in an escrow account with an escrow agent (the "Agent") satisfactory to the parties. On the first anniversary of the Closing Date, the Representative may withdraw for distribution to the Sellers, as their interests appear, 50% of the Escrow Amount, together with interest earned on such portion, less the amount of any unsatisfied claims for indemnification made by the Buyer prior to such first anniversary. On the second anniversary of the Closing, the Representative may withdraw the remainder of the Escrow Amount, together with any interest thereon, for distribution to the Sellers, as their interests appear, less the amount of any unsatisfied claims for indemnification made by the Buyer on or prior to such second anniversary. Any portion of the Escrow Amount that cannot be withdrawn from the escrow account due to pending claims by the Buyer for indemnification, shall remain in the escrow account until the resolution of such claims by judgment of a court from which no appeal can be made, decision of an arbitrator or agreement of the Buyer and the Representative. 3. REPRESENTATIONS AND WARRANTIES OF THE SELLERS The Sellers represent and warrant to Buyer as follows: 3.1 Organization and Good Standing. (a) Each of the Sellers is a corporation duly organized, validly existing, and in good standing under the laws of the state or other jurisdiction of its incorporation or organization, with full corporate power and authority to conduct its business as it is now being conducted, to own or use the properties and assets that it purports to own or use, and to perform all its obligations under Applicable Contracts. Each of the Sellers is duly qualified to do business as a foreign corporation and is in good standing under the laws of each state or other jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it, requires such qualification, except where the failure to so qualify, individually or in the aggregate, would not have a Material Adverse Effect. (b) Each of the Sellers has delivered to Buyer copies of its Organizational Documents, as currently in effect. 15PAGE 3.2 Authority; No Conflict. (a) This Agreement constitutes the legal, valid, and binding obligations of the Sellers, enforceable against them in accordance with its terms. (b) Except as set forth in Part 3.2 of the Disclosure Letter, neither the execution and delivery of this Agreement nor the consummation or performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time): (i) contravene, conflict with, or result in a violation of (A) any provision of the Organizational Documents of any of the Sellers, or (B) any resolution adopted by the board of directors or the stockholders of any of the Sellers; (ii) contravene, conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the Contemplated Transactions or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which any of the Sellers, or any of the assets owned or used by any of the Sellers, may be subject; (iii) contravene, conflict with, or result in a violation or breach of any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Applicable Contract; (iv) result in the imposition or creation of any Encumbrance upon or with respect to any of the assets owned or used by any of the Sellers; or (v) entitle any employee or other person to severance or other payments by any of the Sellers or create any other obligation to an employee or other person, including any increase in benefits. (c) Except as set forth in Part 3.2 of the Disclosure Letter, none of the Sellers will be required to give any notice to or obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions. 3.3 Subsidiaries. Set forth in Part 3.3 of the Disclosure Letter is a list of all Subsidiaries of the Sellers, including, with respect to each Subsidiary, its jurisdiction of incorporation. All of the outstanding capital stock of each Subsidiary has been duly authorized and validly issued, is fully paid, nonassessable and free of preemptive rights, and is owned beneficially and of record by the respective Seller or by another Subsidiary of a Seller free and clear of any Encumbrance or restriction of any nature, including, without limitation, any restriction on transfer or voting. No shares of any Subsidiary's capital stock are reserved for issuance, and there are no options, warrants, convertible instruments or other rights, agreements or commitments, contingent or otherwise, obligating a Subsidiary to issue, sell or purchase shares of capital stock. None of the Sellers is a partner or joint venturer with any other person. None of the Sellers is subject to any obligation, contingent or otherwise, to provide funds to or make an 16PAGE investment (in the form of a loan, capital contribution or otherwise) in any entity. None of the Sellers has any equity interest in any corporation, partnership or other business entity other than the Subsidiaries listed on the Disclosure Letter. Each Subsidiary is in good standing under the laws of its jurisdiction of incorporation and has all requisite power and authority to own, operate and lease its properties and to carry on its business as it is now being conducted. The Sellers have delivered to Buyer complete and correct copies of the Organizational Documents of each Subsidiary, as amended. Each Subsidiary is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction in which the character of the properties owned, operated or leased by it or the nature of its activities is such that qualification is required by applicable laws, except where the failure to so qualify would not, individually or in the aggregate, have a Material Adverse Effect. All jurisdictions where the Subsidiaries are qualified as foreign corporations or are required to be so qualified are listed on Part 3.3 of the Disclosure Letter. 3.4 Financial Statements. Each Seller has delivered to Buyer: (a) an unaudited consolidated balance sheet of such Seller as at December 31, 1994 (each a "1994 Balance Sheet"), and the related unaudited statement of income and cash flows for the fiscal year then ended (each a "1994 Income Statement") and (b) an unaudited balance sheet of such Seller as at September 31, 1995 (each a "September Balance Sheet") and the related unaudited statement of income and cash flows for the nine months then ended (each a "September Income Statement"). The 1994 Balance Sheets, September Balance Sheets, 1994 Income Statements and September Income Statements are referred to collectively as the "Financial Statements". The Financial Statements fairly present the financial condition and the results of operations and cash flows of the Sellers as at the respective dates of and for the periods referred to therein all in accordance with GAAP, except that the September Balance Sheets are subject to normal year-end adjustments. The Financial Statements reflect the consistent application of such accounting principles throughout the periods involved. 3.5 Books and Records. The books of account, minute books, and other records of the Sellers, all of which have been made available to Buyer, are complete and correct in all material respects. 3.6 Title to Properties; Encumbrances. Except as set forth in part 3.6 of the Disclosure Letter, the Sellers have valid and legally enforceable title to all of the Assets free and clear of any Encumbrances whatsoever, and the consummation of the Contemplated Transactions will vest in Buyer all of the Sellers' right, title and interest in and to the Assets. 17PAGE 3.7 Accounts Receivable. All accounts receivable of the Sellers that are reflected on the September Balance Sheets (except for those collected in full prior to the Closing Date) or on the accounting records of the Sellers as of the Closing Date (collectively, the "Accounts Receivable") represent or will represent valid obligations arising from sales actually made or services actually performed in the Ordinary Course of Business. Unless paid prior to the Closing Date and except as set forth on Part 3.7 of the Disclosure Letter, to the Knowledge of the Sellers, the Accounts Receivable are or will be as of the Closing Date current and collectible net of the respective reserves shown on the September Balance Sheets or on the accounting records of the Sellers as of the Closing Date. Except as set forth on Part 3.7 of the Disclosure Letter, none of the Sellers has received notice that there is any contest, claim, or right of set-off with any maker of an Account Receivable relating to the amount or validity of such Account Receivable. The Sellers do not have any accounts receivable from Moisture Systems Consolidated Corporation and MSC does not have any accounts receivable from MSC-UK which were assigned to MSC from Moisture Systems Consolidated Corporation. 3.8 Taxes. Except as set forth in Part 3.8 of the Disclosure Letter: Each of the Sellers has accurately prepared and duly and timely filed all Tax Returns that it was required to file. All such Tax Returns were correct and complete in all material respects. All Taxes owed by the Sellers have been paid when due, other than those being contested in good faith and where adequate reserves (determined in accordance with GAAP) have been established therefor. All Taxes of any of the Sellers attributable to Tax periods or portions thereof ending on or prior to the Closing Date, including Taxes that may become payable by any of the Sellers in future periods in respect of any transactions or sales occurring on or prior to the Closing Date, that have not yet been paid have, in the aggregate, been adequately reflected as a liability on the books of the Sellers in accordance with GAAP. None of the Sellers is currently being audited or examined by any Governmental Body, nor have any deficiencies for any Tax been asserted against any of the Sellers. No claim or inquiry with respect to any material amount of Taxes has been made within the past seven years by an authority in a jurisdiction where any of the Sellers did not file Tax Returns that it is or may be subject to any Tax by that jurisdiction. Without limiting the generality of the foregoing, each of the Sellers has withheld or collected and duly paid all Taxes required to have been withheld or collected and paid in connection with payments to foreign persons, sales and use Tax or Value Added Tax obligations, and amounts paid or owing to any employee, independent contractor, creditor, stockholder or other person. 18PAGE 3.9 Employee Benefits. Part 3.9 of the Disclosure Letter contains a true, correct and complete list of all benefit plans (as defined in Section 3(3) of ERISA) and all pension, benefit, profit sharing, retirement, deferred compensation, welfare, insurance, disability, bonus, vacation pay, severance pay and other similar plans, programs and agreements, whether reduced to writing or not, relating to any of the employees of any of the Sellers (the "Plans") and, except as set forth in Part 3.9 of the Disclosure Letter, none of the Sellers has any obligations, contingent or otherwise, past or present, under applicable law or the terms of any Plan. With respect to all Plans, each of the Sellers is in compliance with all applicable Legal Requirements, including ERISA. Each of the Sellers has performed all material obligations required to be performed by it under, and is not in material violation of, and there has been no material default or violation by any other party with respect to, any of the Plans. There are no pending or, to the Knowledge of the Sellers, Threatened Proceedings by employees or former employees of any of the Sellers, or beneficiaries or spouses of any of the above, involving any Plan (other than routine, undisputed claims for benefits). The Sellers have provided the Buyer with copies of each Plan that is in writing and with a written summary of each oral Plan. Except for MSC's 401(k) plan, no Plan is an "employee pension benefit plan" as such term is defined in Section 3(2) of ERISA. None of the Sellers nor any ERISA Affiliate (as defined below) contributes to or has an obligation to contribute to or has contributed to or had an obligation to contribute to within the past six years, a "multiemployer" plan as defined in Section 4001(a)(3) of ERISA. None of the Sellers nor any ERISA Affiliate has withdrawn from a multi-employer plan in a complete or partial withdrawal that resulted in any unsatisfied employer liability. None of the Sellers contributes to an employee pension benefit plan that is subject to Section 412 of the Code or Title IV of ERISA. "ERISA Affiliate" means an entity which is a member of (i) a controlled group of corporations (as defined in Section 414(b) of the Code), (ii) a group of trades or businesses under common control (as defined in Section 414(c) of the Code), or (iii) an affiliated service group (as defined in Section 414(m) of the Code or the regulations under Section 414(o) of the Code), any of which includes any of the Sellers. 3.10 Compliance with Legal Requirements; (a) Except as set forth in Part 3.10 of the Disclosure Letter: (i) each of the Sellers is, and at all times since January 1, 1991 has been, in compliance with each Legal Requirement that is or was applicable to it or to the conduct or operation of its business or the ownership or use of any of its assets; (ii) no event has occurred or circumstance exists that (with or without notice or lapse of time) may constitute or result in a violation by any of the Sellers of, or a failure on the part of any of the Sellers to comply with, any Legal Requirement; (iii) none of the Sellers has received, at any time since January 1, 1991, any notice or other communication (whether 19PAGE oral or written) from any Governmental Body or any other Person regarding any actual, alleged, possible, or potential violation of, or failure to comply with, any Legal Requirement. Notwithstanding anything herein to the contrary, the Sellers make no representation or warranty with respect to the applicability of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, to the Contemplated Transactions. (b) The Sellers have obtained all Governmental Authorizations necessary for the conduct of their respective businesses as currently conducted. Except as set forth in Part 3.10 of the Disclosure Letter: (i) each of the Sellers is, and at all times since January 1, 1991 has been, in compliance in all material respects with each such Governmental Authorization, (ii) no event has occurred or circumstance exists that may (with or without notice or lapse of time) constitute or result directly or indirectly in a violation of or a failure to comply with any term or requirement of any such Governmental Authorization; (iii) none of the Sellers has received, at any time since January 1, 1991, any notice or other communication (whether oral or written) from any such Governmental Body or any other Person regarding (A) any actual, alleged, possible, or potential violation of or failure to comply with any term or requirement of any such Governmental Authorization, or (B) any actual, proposed, possible, or potential revocation, withdrawal, suspension, cancellation, termination of, or modification to any such Governmental Authorization; and (iv) the rights of the Sellers under such Governmental Authorizations shall not be affected by the consummation of the Contemplated Transactions. Notwithstanding anything herein to the contrary, the Sellers make no representation or warranty with respect to the applicability of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, to the Contemplated Transactions. 3.11 Legal Proceedings; Orders. (a) Except as set forth in Part 3.11 of the Disclosure Letter, there is no pending Proceeding: (i) that has been commenced by or against any of the Sellers or that otherwise relates to or may affect the business of, or any of the assets owned or used by, any of the Sellers, or (ii) that challenges, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions. To the Knowledge of the Sellers, (A) no such Proceeding has been Threatened, and (B) no event has occurred or circumstance exists that may give rise to or serve as a basis for the commencement of any such Proceeding. (b) Except as set forth in Part 3.11 of the Disclosure Letter there is no Order to which any of the Sellers, or any of the assets owned or used by any of the Sellers is subject. Each of the Sellers is in full compliance with all of the terms and requirements of each Order to which it, or any assets owned or used by it, is subject. 20PAGE 3.12 Absence of Certain Changes and Events. Except as set forth in Part 3.12 of the Disclosure Letter, since the Balance Sheet Date, each of the Sellers has conducted its business only in the Ordinary Course of Business and there has not been any: (a) except in the Ordinary Course of Business, payment or increase by any of the Sellers of any bonuses, salaries, commissions or other compensation to any stockholder, director, officer, or employee or entry into any employment, severance, or similar Contract with any director, officer, or employee; (b) adoption of, or, except in the Ordinary Course of Business, increase in the payments to or benefits under, any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, or other employee benefit plan for or with any employees of any of the Sellers; (c) damage to or destruction or loss of any asset or property of any of the Sellers, whether or not covered by insurance, having a Material Adverse Effect; (d) except in the Ordinary Course of Business, sale (other than sales of inventory in the Ordinary Course of Business), lease, or other disposition of any asset or property of any of the Sellers or mortgage, pledge, or imposition of any Encumbrance on any asset or property of any of the Sellers; (e) cancellation or waiver of any claims or rights with a value to any of the Sellers in excess of $25,000; (f) material change in the accounting methods used by any of the Sellers; (g) material adverse change in the financial condition, assets, liabilities, earnings, business or prospects of the Sellers, taken as a whole; (h) indebtedness or other liability or obligation (whether absolute, accrued, contingent or otherwise) incurred, or other transaction (except that reflected in this Agreement) engaged in, by any of the Sellers, except those in the Ordinary Course of Business which are, individually and in the aggregate to one group of related parties, less than $25,000 in amount; (i) acquisition of any assets other than in the Ordinary Course of Business; (j) any material reduction in the rate of, or gross margins associated with, bookings or orders for the products or services of the Sellers, taken as a whole; or (k) agreement, whether oral or written, by any of the Sellers to do any of the foregoing. 21PAGE 3.13 Contracts; No Defaults. (a) Part 3.13(a) of the Disclosure Letter contains a complete and accurate list, and the Sellers have delivered to Buyer true and complete copies of, each of the following Applicable Contracts: (i) each agreement that involves aggregate future payments by any of the Sellers of more than $25,000; (ii) each distributorship, sales agency, franchise, joint venture or partnership agreement; (iii) each agreement not made in the ordinary course of business which is to be performed after the Closing; (iv) each outstanding commitment to make a capital expenditure, capital addition or capital improvement involving an amount in excess of $20,000; (v) each real or personal property lease; (vi) each agreement relating to the loan of money or availability of credit to or from any of the Sellers; (vii) each agreement limiting the freedom of any of the Sellers to compete in any line of business or with any Person; (viii) each written agreement, contract, arrangement or understanding between any of the Sellers and any present or former employee; (ix) each license agreement relating to patents, trademarks, know-how or other intellectual property, whether as licensee or licensor; (x) each collective bargaining agreement or other contract or commitment to or with any labor union or other group of employees; (xi) each mortgage, pledge, security, title retention, or similar agreement encumbering any of the Assets; (xii) each agreement providing for payments to or by any Person based on sales, purchases, revenues, profits or assets; (xiii) each guaranty or similar undertaking with respect to the obligations of any other Person; (xiv) each agreement relating to the acquisition or disposition of significant assets, businesses or companies within the past five years; and (xv) each other agreement which cannot be terminated by the Sellers within one year after the date hereof without penalty or under which the consequences of a default or termination would have a Material Adverse Effect. (b) Except as set forth in Part 3.13(b) of the Disclosure Letter, to the Knowledge of the Sellers, each Contract identified or required to be identified in Part 3.13(a) of the Disclosure Letter is in full force and effect and is valid and enforceable in accordance with its terms. Except as set forth in Part 3.13(b) of the Disclosure Letter and except where non-compliance would not result in a Material Adverse Effect: (i) each of the Sellers is, and at all times since January 1, 1991 has been, in compliance with all applicable terms and requirements of each Applicable Contract; (ii) each other Person that has any obligation or liability under any Applicable Contract is, and at all times since January 1, 1991 has been, in compliance with all applicable terms and requirements of such Applicable Contract; and (iii) none of the Sellers has given to or received from any other Person, at any time since January 1, 1991, any notice or other communication (whether oral or written) regarding any actual, alleged, possible, or potential violation or breach of, or default under, any Applicable Contract. 22PAGE (c) There are no renegotiations of, attempts to renegotiate, or outstanding rights to renegotiate any material amounts paid or payable to any of the Sellers under Applicable Contracts with any Person having the contractual or statutory right to demand or require such renegotiation and no such Person has made written demand for such renegotiation. 3.14 Insurance. Part 3.14 of the Disclosure Letter sets forth a list (including the name of the insurer, the name of the policyholder, the name of each insured, the policy number and periods of coverage, and the scope of coverage) of all policies of fire, theft, casualty, liability, burglary, fidelity, workers compensation, business interruption, environmental, product liability, automobile and other forms of insurance under which any of the Sellers is the beneficiary. None of the Sellers has received notice from any insurer under any such policy disclaiming coverage or canceling or materially amending any such policy. Such policies or extensions or renewals thereof in such amounts will be outstanding and in full force without interruption until the Closing Date. The Sellers have paid all premiums due, and have otherwise performed all of their respective obligations under, each such policy. The Sellers have given proper and timely notice to the insurer of all claims that may be insured under such policies. 3.15 Environmental Matters. Except as set forth in Part 3.15 of the Disclosure Letter: (a) To the knowledge of the Sellers, the Sellers are in full compliance with all Environmental Laws. None of the Sellers has any basis to expect, nor has any of them or any other Person for whose conduct they are or may be held to be responsible received, any actual or Threatened order, notice, or other communication from (i) any Governmental Body or private citizen acting in the public interest, (ii) the current or prior owner or operator of any Facilities, or (iii) any other Person, of any actual or potential violation or failure to comply with any Environmental Law, or of any actual or Threatened obligation to undertake or bear the cost of any Environmental, Health, and Safety Liabilities with respect to any of the Facilities or any other properties or assets (whether real, personal, or mixed) in which any of the Sellers has had an interest, or with respect to any property or Facility at or to which Hazardous Materials were generated, manufactured, refined, transferred, imported, used, transported or processed by any of the Sellers, or any other Person for whose conduct they are or may be held responsible, or from which Hazardous Materials have been transported, treated, stored, handled, transferred, disposed, recycled, or received. (b) There are no pending or, to the Knowledge of any of the Sellers, Threatened claims, Encumbrances, or other restrictions of any nature, resulting from any Environmental, Health, and Safety Liabilities or arising under or pursuant to 23PAGE any Environmental Law, with respect to or affecting any of the Facilities or any other properties and assets (whether real, personal, or mixed) in which any of the Sellers has or had an interest. (c) To the knowledge of the Sellers, none of the Sellers nor any other Person for whose conduct they are or may be held responsible, has any Environmental, Health, and Safety Liabilities with respect to the Facilities or any other properties and assets (whether real, personal, or mixed) in which any of the Sellers (or any predecessor) has or had an interest, or at any property geologically or hydrologically adjoining the Facilities or any such other property or assets. (d) To the knowledge of the Sellers, there has been no Release or, to the Knowledge of any of the Sellers, Threat of Release, of any Hazardous Materials at or from the Facilities or at any other locations where any Hazardous Materials were generated, manufactured, refined, transferred, transported, produced, imported, used, or processed from or by the Facilities, or from or by any other properties and assets (whether real, personal, or mixed) in which any of the Sellers has or had an interest, or to the Knowledge of any of the Sellers any geologically or hydrologically adjoining property, whether by the Sellers or any other Person. (e) The Sellers have delivered to Buyer true and complete copies and results of any reports, studies, analyses, tests, or monitoring possessed or initiated by any of the Sellers pertaining to Hazardous Materials or Hazardous Activities in, on, or under the Facilities, or concerning compliance by any of the Sellers, or any other Person for whose conduct they are or may be held responsible, with Environmental Laws or Occupational Safety and Health Laws. (f) Part 3.15 of the Disclosure Letter sets forth or describes in reasonable detail: (i) all landfills, surface impoundments, pits, underground injections wells, waste piles, incinerators and any other units used by any of the Sellers for the handling, treatment, recycling, storage or disposal of Hazardous Materials at any Facility and (ii) all underground or above-ground storage tanks at the Facilities or on any property owned or operated at any time by any of the Sellers. 3.16 Labor Disputes; Compliance . Since January 1, 1991, none of the Sellers has been a party to any collective bargaining Contract or other labor Contract. Since January 1, 1991, there has not been, there is not presently pending or existing, and to the Knowledge of the Sellers or the Principals there is not Threatened any strike, slowdown, picketing, work stoppage, labor arbitration or proceeding in respect of the grievance of any employee, application or complaint filed by an employee or union with the National Labor Relations Board or any comparable Governmental Body, organizational activity, or other labor 24PAGE dispute against or affecting any of the Sellers or their premises, and no application for certification of a collective bargaining agent is pending or to the Knowledge of the Sellers is Threatened. There is no lockout of any employees by any of the Sellers, and no such action is contemplated by any of the Sellers. There is no recognized trade union in respect of the UK Employees. 3.17 Intellectual Property. The Sellers own or have adequate license to use, free and clear of any Encumbrance or obligation of payment, all patents, trademarks, trade names, service marks, branch names and copyrights, and applications therefor, used in the conduct of the business or the use of which is necessary for the conduct of the business of the Sellers as presently conducted (the "Intangibles"). Set forth in Part 3.17 of the Disclosure Letter is a complete list and summary description of all Intangibles and licenses or sublicenses entered into or granted by or to the Sellers with respect thereto and the countries of registration. The Sellers own or possess adequate rights to use, free and clear of any Encumbrance or obligation of payment, all inventions, technology, technical know-how, processes, designs, trade secrets, vendor and customer lists and other confidential information required for or used in the business of the Sellers as presently conducted ("Trade Secrets"). No person has made any claim or demand upon any of the Sellers pertaining to, and no proceedings are pending or to the Knowledge of the Sellers Threatened, which challenge the rights of any of the Sellers in respect of any Intangibles or Trade Secrets. No Intangible owned or used by any of the Sellers is subject to any Order. To the Knowledge of the Sellers, none of the Sellers has infringed or engaged in the unauthorized use of, or violated any confidentiality agreement that pertains to, any patent, trademark, trade name, service mark, brand name or copyright, or any invention, technology, technical know-how, process, design, trade secret or other intellectual property of another Person. To the Knowledge of the Sellers no third party is engaged in the infringement or unauthorized use of any Intangible or Trade Secret. 3.18 Relationships with Related Persons. Except as set forth in Part 3.18 of the Disclosure Letter, no Related Person of any of the Sellers has any interest in any property (whether real, personal, or mixed and whether tangible or intangible) used in or pertaining to the business of any of the Sellers. Except as set forth in Part 3.18 of the Disclosure Letter, no Related Person of any of the Sellers owns of record or as beneficial owner, an equity interest or any other financial or profit interest in any Person that (i) has business dealings or a financial interest in any transaction with any of the Sellers, or (ii) engages in a Competing Business except for ownership of less than one percent of the outstanding capital stock of any Competing Business that is publicly traded on any recognized exchange or in the over-the-counter market. Except as set forth in Part 3.18 of the Disclosure Letter, none of the Sellers nor 25PAGE any Related Person of any of the Sellers is a party to any Contract with, or has any claim or right against, any of the Sellers. 3.19 Brokers or Finders. None of the Sellers or the Principals or their respective agents have incurred any obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with the Contemplated Transactions. 3.20 No Termination of Relationship. To the Knowledge of the Sellers no relationship between any of the Sellers and a distributor, customer, supplier, lender, employee or other person will be terminated or adversely affected as a result of the execution of this Agreement or the performance of the Contemplated Transactions. 3.21 Customers and Suppliers. No material supplier of the Sellers has indicated within the past year that it will stop, or materially decrease the rate of, supplying materials, products, or services to the Sellers and no material customer of the Sellers has indicated within the past year that it will stop, or materially decrease the rate of, buying materials, products or services from the Sellers. Part 3.21 of the Disclosure Letter sets forth a list of (a) each customer that accounted for more than 5% of the combined revenues of the Sellers during the last fiscal year and (b) each supplier that is the sole supplier of any significant product or component to the Sellers. 3.22 Recalls. No products of any of the Sellers have been recalled since January 1, 1991 and, to the Knowledge of the Sellers there is no basis for any such recall. 3.23 Backlog. The backlog of MSC as of the Closing Date is greater than or equal to $1,750,000. For purposes of this Section 3.23, "backlog" means all firm orders and commitments for MSC's products and services which orders and commitments contain terms and conditions that are consistent with MSC's practices over the past year. 3.24 Inventories. All Inventories (as defined below) are of a quality and quantity usable and salable in the Ordinary Course of Business. Items included in such Inventories are carried on the books of the Sellers at the lower of cost or market and, with respect to Inventories existing as of the Balance Sheet Date, are reflected on the September Balance Sheets net of applicable reserves for excess and obsolete items. Such reserves have been determined in accordance with past practices and conform to generally accepted accounting principles consistently applied. The term "Inventories" includes all stock of raw materials, work-in-process and finished goods held by the Sellers, for manufacturing, assembly, processing, finishing, and sale or resale to others. 26PAGE 3.25 Product and Service Warranties. The Sellers have provided the Buyer with copies of the current standard warranty used for each of the products and services of the Sellers. Part 3.25 of the Disclosure Letter also describes any and all other product or service warranties made by or on behalf of the Sellers that deviate materially from the current standard warranties and which remain in effect on the date hereof, or pursuant to which any of the Sellers have any remaining obligations. 3.26 Authority of Representative. The Representative has all necessary legal power and authority to act on behalf of the Sellers and the Principals as provided herein. 3.27 No Additional Representations and Warranties. Except as specifically set forth in this Agreement (including the Disclosure Letter), the Sellers and Principals disclaim all representations and warranties, whether express or implied, written or oral. 3.28 Sufficiency of Assets. Except as set forth in Part 3.28 of the Disclosure Letter, the assets owned by the Sellers are the only assets necessary for the continued conduct of the businesses of the Sellers after the Closing in substantially the same manner as conducted prior to the Closing. 4. REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to the Sellers as follows: 4.1 Organization and Good Standing. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the Commonwealth of Massachusetts. 4.2 Authority; No Conflict. (a) This Agreement constitutes the legal, valid, and binding obligation of Buyer, enforceable against Buyer in accordance with its terms. Buyer has the absolute and unrestricted right, power, and authority to execute and deliver this Agreement and to perform its obligations under this Agreement. (b) Except as set forth in Exhibit D, neither the execution and delivery of this Agreement by Buyer nor the consummation or performance of any of the Contemplated Transactions by Buyer will give any Person the right to prevent, delay, or otherwise interfere with any of the Contemplated Transactions pursuant to: (i) any provision of Buyer's Organizational Documents; (ii) any resolution adopted by the board of directors or the stockholders of Buyer; (iii) any Legal Requirement or Order to which Buyer may be subject; or (iv) any Contract to which Buyer is a party or by which Buyer may be bound. 27PAGE Except as set forth in Exhibit D, Buyer is not and will not be required to obtain any Consent from any Person in connection with the execution and delivery of this Agreement by Buyer or the consummation or performance of any of the Contemplated Transactions by Buyer. 4.3 Certain Proceedings. There is no pending Proceeding that has been commenced against Buyer and that challenges, or may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions. To Buyer's Knowledge, no such Proceeding has been Threatened. 4.4 Brokers and Finders. Buyer and its officers and agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement and will indemnify and hold the Sellers and the Principals harmless from any such payment alleged to be due by or through Buyer as a result of the action of Buyer or its officers or agents. 5. INDEMNIFICATION; REMEDIES 5.1 Survival. Subject to Section 5.4, all representations, warranties, covenants, and obligations in this Agreement, the Disclosure Letter and any other certificate or document delivered pursuant to this Agreement will survive the Closing; the right to indemnification, reimbursement, or other remedy based on such representations, warranties, covenants, and obligations will not be affected by any investigation conducted with respect to, or any Knowledge acquired (or capable of being acquired) about the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation. 5.2 Indemnification and Reimbursement By the Sellers and the Principals. The Sellers and the Principals will indemnify and hold harmless Buyer, its representatives, stockholders, controlling persons, and affiliates (collectively, the "Indemnified Persons"), and will reimburse the Indemnified Persons, for any loss, liability, claim, damage, expense (including costs of investigation and defense and reasonable attorneys' fees) or diminution of value, whether or not involving a third-party claim (collectively, "Damages"), arising from or in connection with: (a) any Breach of any representation or warranty made by any of the Sellers in this Agreement, the Disclosure Letter, or any other certificate or document delivered at and in connection with the Closing of the Contemplated Transactions by any of the Sellers pursuant to this Agreement; (b) any Breach by any of the Sellers of any covenant or obligation of any of the Sellers in this Agreement; (c) any Excluded Liability; 28PAGE (d) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by any such Person with any of the Sellers or the Principals; or (e) any product liability claim relating to products sold by any of the Sellers prior to the Closing Date; provided that such claim is not caused by Buyer's intervening negligence in the service, maintenance or repair of such product. 5.3 Indemnification and Reimbursement by Buyer. Buyer will indemnify and hold harmless the Sellers and the Principals, and will reimburse the Sellers and the Principals, for any Damages arising from or in connection with (a) any Breach of any representation or warranty made by Buyer in this Agreement or in any certificate delivered by Buyer pursuant to this Agreement, (b) any Breach by Buyer of any covenant or obligation of Buyer in this Agreement, (c) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Buyer (or any Person acting on its behalf) in connection with any of the Contemplated Transactions or (d) any Assumed Liabilities. 5.4 Time Limitations. None of the Sellers or the Principals will have any liability for indemnification under section 5.2(a) with respect to any representation or warranty in Sections 3.4, 3.5, 3.7, 3.9, 3.12, 3.14, 3.16, 3.19, 3.20, 3.21, 3.22, 3.23, 3.24 unless on or before March 31, 1997 the Representative is given notice of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by Buyer. None of the Sellers or the Principals will have any liability for indemnification under section 5.2(a) with respect to any representation or warranty in Sections 3.8, 3.10, 3.11, 3.13, 3.15, 3.17, 3.18, 3.25, 3.26, unless on or before the second anniversary of the Closing Date the Representative is given notice of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by Buyer. The Sellers and the Principals will have no liability for indemnification under Section 5.2(a) with respect to Section 3.1, 3.2, 3.3, or 3.6, unless on or before the expiration of the applicable statute of limitations the Representative is given notice of a claim specifying the factual basis of that claim in reasonable detail to the extent known by Buyer. A claim for indemnification or reimbursement under Sections 5.2 (b), (c) or (d) may be made at any time. 5.5 Limitations on Amount -- Sellers and Principals. (a) None of the Sellers or the Principals will have any liability for indemnification pursuant to Section 5.2(a), (i) at any time with respect to any claim by the Buyer for less than $5,000 and (ii) until the total of all Damages with respect to 29PAGE such matters (including claims under $5,000) exceeds $100,000, and then such liability shall only be for Damages in excess of $100,000. Notwithstanding any provision herein to the contrary, except for liability for indemnification with respect to breaches of Sections 3.1, 3.2, 3.3 or 3.6, the maximum aggregate liability of the Sellers and the Principals under Section 5.2 shall not exceed $6,750,000. (b) Notwithstanding any provision herein to the contrary, except for liability for indemnification with respect to breaches of Sections 3.1, 3.2, 3.3 or 3.6, no Principal shall have any liability under section 5.2 in excess of the amount set forth opposite such Principal's name on Exhibit F attached hereto. In addition, with respect to any single claim (and subject to the overall limitation set forth in the preceding sentence) for indemnification, Dennis Carlson shall not have any liability which is greater than the product of (i) the amount set forth opposite Dennis Carlson's name on Exhibit F attached hereto divided by $6,750,000 and (ii) the total amount of the claim for which Buyer is then seeking indemnification. 5.6 Procedures for Indemnification -- Third Party Claims. (a) Promptly after receipt by an indemnified party under Section 5.2 or Section 5.3 of notice of the commencement of any Proceeding against it, such indemnified party will, if a claim is to be made against an indemnifying party under such Section, give notice to the indemnifying party of the commencement of such claim, but the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified party, except to the extent that the indemnifying party demonstrates that the defense of such action is prejudiced by the indemnifying party's failure to give such notice. (b) If any Proceeding referred to in Section 5.6(a) is brought against an indemnified party and it gives notice to the indemnifying party of the commencement of such Proceeding, the indemnifying party will, unless the claim involves Taxes, be entitled to participate in such Proceeding and, to the extent that it wishes (unless (i) the indemnifying party is also a party to such Proceeding and the indemnified party determines in good faith that joint representation would be inappropriate, or (ii) the indemnifying party fails to provide reasonable assurance to the indemnified party of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume the defense of such Proceeding with counsel satisfactory to the indemnified party and, after notice from the indemnifying party to the indemnified party of its election to assume the defense of such Proceeding, the indemnifying party will not, as long as it diligently conducts such defense, be liable to the indemnified party under this Section 5 for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case 30PAGE subsequently incurred by the indemnified party in connection with the defense of such Proceeding, other than reasonable costs of investigation. If the indemnifying party assumes the defense of a Proceeding, (i) no compromise or settlement of such claims may be effected by the indemnifying party without the indemnified party's consent unless (A) there is no finding or admission of any violation of Legal Requirements or any violation of the rights of any Person and no effect on any other claims that may be made against the indemnified party, and (B) the sole relief provided is monetary damages that are paid in full by the indemnifying party; and (ii) the indemnifying party will have no liability with respect to any compromise or settlement of such claims effected without its consent. If notice is given to an indemnifying party of the commencement of any Proceeding and the indemnifying party does not, within ten days after the indemnified party's notice is given, give notice to the indemnified party of its election to assume the defense of such Proceeding, the indemnifying party will be bound by any determination made in such Proceeding or any compromise or settlement effected by the indemnified party. Notwithstanding the foregoing, if a customer or a supplier any of the Sellers asserts that the Buyer is liable to such customer or supplier for a monetary obligation which may constitute or result in Damages for which the Buyer may be entitled to indemnification pursuant to this Section 5 and the Buyer reasonably determines that it has a valid business reason to fulfill such obligations, then (i) the Buyer shall be entitled to satisfy such obligation without prior notice to or consent from the Sellers, (ii) the Buyer may make a claim for indemnification pursuant to this Section 5 and (iii) the Buyer shall be reimbursed, in accordance with the provisions of this Section 5, for any such Damages for which it is entitled to indemnification pursuant to the provisions of this Section 5; provided, however, that if the Buyer makes a claim for indemnification in accordance with this sentence the Sellers and the Principals shall not be deemed to have waived any defense to such claim by the Buyer, notwithstanding the Buyer's prior satisfaction of the obligation for which indemnification is sought, and it shall not be a defense to the Buyer's claim for indemnification that the Buyer has satisfied the obligation for which indemnification is sought. (c) Notwithstanding the foregoing, if an indemnified party determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise, or settle such Proceeding, but the indemnifying party will not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its consent. (d) For purposes of providing any notice required under this Section 5, the Buyer may treat the Representative as 31PAGE the authorized representative of all of the Sellers and Principals any notice given to the Representative shall be deemed given to each Seller and each Principal. 5.7 Procedure for Indemnification -- Other Claims. A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought. 6. GENERAL PROVISIONS 6.1 Expenses. Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the Contemplated Transactions, including all fees and expenses of agents, representatives, counsel, and accountants. In the event of termination of this Agreement, the obligation of each party to pay its own expenses will be subject to any rights of such party arising from a breach of this Agreement by another party. 6.2 Public Announcements. Any public announcement or similar publicity with respect to this Agreement or the Contemplated Transactions will be issued, if at all, by the Buyer only with the consent of the Representative, and by any of the Sellers or the Principals, only with the consent of the Buyer, none of which consents will unreasonably be withheld. The content of any public announcement by the Buyer will be subject to review and approval by the Representative, and the content of any public announcement by any of the Sellers or the Principals will be subject to review and approval by the Buyer, none of which approvals will unreasonably be withheld. Sellers and Buyer will consult with each other concerning the means by which the Sellers' employees, customers, and suppliers and others having dealings with the Sellers will be informed of the Contemplated Transactions, and Buyer will have the right to be present for any such communication. 6.3 Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when actually received or if earlier, one day after deposit with a nationally recognized overnight delivery service, charges prepaid, or three days after deposit in the U.S. mail by certified mail, return receipt requested, postage prepaid, in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers a party may designate by notice to the other parties): any Seller or the Representative: Moisture Systems Corporation 117 South Street Hopkinton, MA 01748-2273 32PAGE Attention: President Fax No.: (508) 435-6677 with a copy to: John J. Concannon III, Esq. Bingham, Dana & Gould 150 Federal Street Boston, MA 02110-1726 Fax No.: (617) 951-8736 Buyer: Thermedics Detection Inc. 220 Mill Road Chelmsford, MA 01824 Attention: President Fax No.: (508) 251-2024 with a copy to: Thermo Electron Corporation 81 Wyman Street Waltham, MA 02254-9046 Attention: General Counsel Fax No. (617) 622-1283 6.4 Jurisdiction; Service of Process. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against any of the parties in the courts of the Commonwealth of Massachusetts, County of Middlesex, or, if it has or can acquire jurisdiction, in the United States District Court for the District of Massachusetts and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. With respect to MSC-UK and the Principals, any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against any of the parties in the courts of England and each of MSC-UK, the Principals and Buyer consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in this Section 6.4 may be served on any party anywhere in the world. 6.5 Further Assurances. The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement. 33PAGE 6.6 Waiver. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. 6.7 Entire Agreement and Modification. This Agreement supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment. 6.8 Disclosure Letter. In the event of any inconsistency between the statements in the body of this Agreement and those in the Disclosure Letter (other than an exception expressly set forth as such in the Disclosure Letter with respect to a specifically identified representation or warranty), the statements in the body of this Agreement will control. 6.9 Assignments, Successors, and Third-Party Rights. No party hereto may assign any of its, his or her rights under this Agreement without the prior consent of the other parties except that Buyer may assign any of its rights under this Agreement to any Subsidiary of Buyer, provided that Buyer shall remain jointly and severally liable with such Subsidiary for any of Buyer's obligations hereunder. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and their successors and assigns. 34PAGE 6.10 Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 6.11 Section Headings; Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Sections" refer to the corresponding Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms. 6.12 Time of Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence. 6.13 Governing Law. This Agreement will be governed by and construed under the laws of the Commonwealth of Massachusetts without regard to conflicts of laws principles. 6.14 Relief. In the event of a breach of the provisions of this Agreement by a Seller, in addition to any other rights and remedies that Buyer may have under law or in equity, Buyer shall have the right to specific performance and injunctive relief, it being acknowledged and agreed that money damages will not provide an adequate remedy. 6.15 Access to Information. The Sellers shall make available, and direct and authorize their respective independent public accountants to make available, to the Buyer and to the independent public accountants representing the Buyer (at no cost to the Buyer), all working papers pertaining to the examination by the Sellers' accountants of the accounting records of the Sellers, and shall provide such cooperation as Buyer shall reasonably request in connection with Buyer's preparation of any financial statements relating to the businesses of the Sellers required to be included in any filing made by Buyer or any affiliate of Buyer with the Securities and Exchange Commission pursuant to the Securities Act or the Exchange Act. For a period of time as may be reasonably requested, upon written request of a Seller or Principal, Buyer or its successor shall make or cause to be made available to such Seller or Principal, as the case may be, all books and records included in the Assets that are needed by such Seller or Principal for a valid business or financial purpose, and permit such Seller or Principal to inspect and copy such books and records upon reasonable notice and at such reasonable times as may be mutually agreed upon by such Seller or Principal and Buyer and shall be at such Seller's or Principal's sole cost and expense. 35PAGE 6.16 Solicitation. For a period of two years after the Closing Date, none of the Sellers or the Principals shall, either directly or indirectly as a stockholder, investor, partner, director, officer, employee or in any other capacity, solicit or attempt to induce any Restricted Employee to terminate his or her employment with Buyer or any affiliate of the Buyer; provided, however, that it shall not be a breach of this Section 6.16 for any Seller or Principal to solicit Restricted Employees by means of general public advertisements. For purposes of this agreement, a "Restricted Employee" shall mean any person, other than employees terminated involuntarily by the Buyer, who (i) either (A) hold or have access to trade secrets or other confidential information relating to the business of the Sellers or (B) had annual base salary in 1994 of at least $50,000, and (ii) either (X) was an employee of the Buyer or any affiliate of the Buyer on either the date of this Agreement or the Closing Date or (Y) was an employee of any of the Sellers on either the date of this Agreement or the Closing Date and who is employed by the Buyer immediately after the Closing. 6.17 Non-Competition. (a) For a period of five years after the Closing Date, none of the Sellers or the Principals shall, either directly or indirectly as a stockholder, investor, partner, director, officer, employee, consultant or otherwise, engage in a Competitive Business in any territory. For purposes of this Agreement, a "Competitive Business" means (i) the development, manufacture, marketing or sale of any product utilizing near infrared technology which is competitive with any product manufactured, sold or developed (or under development) by a Seller on or prior to the Closing Date or (ii) the rendering or marketing of any service which is competitive with any service rendered or marketed (or proposed to be rendered or marketed) by a Seller on or prior to the Closing Date. Buyer acknowledges and agrees that the Principals are and will be passive investors in Sensortech Systems Inc. (b) The Sellers and the Principals agree that the duration and geographic scope of the non-competition provision set forth in this Section 6.17 are reasonable. In the event that any court determines that the duration or the geographic scope, or both, are unreasonable and that such provision is to that extent unenforceable, the parties agree that the provision shall remain in full force and effect for the greatest time period and in the greatest area that would not render it unenforceable. The parties intend that this non-competition provision shall be deemed to be a series of separate covenants, one for each and every county of each and every state of the U.S. and each and every political subdivision of each and every country outside the U.S. where this provision is intended to be effective. 36PAGE 6.18 Seniority of Employees. To the extent that length of service is relevant for vesting or benefit calculations or allowances under retirement or other benefit plans made available to Buyer's employees, any of the Seller's employees that accept employment with the Buyer shall receive credit for their years of service with the Sellers. 6.19 United Kingdom Value Added Tax. The Sellers and Buyer intend that article 5 of the United Kingdom Value Added Tax (Special Provisions) Order 1992 shall apply to the sale of Assets located in the United Kingdom under this Agreement, so that the sale is treated as neither a supply of goods nor a supply of services. 6.20 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 37PAGE IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. THERMEDICS DETECTION INC. By: John W. Wood, Jr. -------------------------- Name: John W. Wood, Jr. -------------------------- Title: Chairman ------------------------- SELLERS: MOISTURE SYSTEMS CORPORATION By: Roger E. Carlson ----------------------------- Name: Roger E. Carlson --------------------------- Title: President -------------------------- MOISTURE SYSTEMS LIMITED By: John Fordham ----------------------------- Name: John Fordham --------------------------- Title: Director -------------------------- ANACON CORPORATION By: Roger E. Carlson ----------------------------- Name: Roger E. Carlson --------------------------- Title: President -------------------------- PRINCIPALS: Dennis Carlson ------------------------------ Dennis Carlson Roger Carlson ------------------------------ Roger Carlson John Fordham ------------------------------ John Fordham EX-13 3 Exhibit 13 Thermedics Inc. Consolidated Financial Statements as of December 30, 1995 PAGE Thermedics Inc. Consolidated Statement of Income (In thousands except per share amounts) 1995 1994 1993 ------------------------------------------------------------------------- Revenues (Note 14) $175,754 $155,111 $ 80,220 -------- -------- -------- Costs and Operating Expenses: Cost of revenues 97,290 87,597 45,965 Selling, general and administrative expenses (Note 9) 47,933 42,734 20,757 Expenses for research and development 11,087 10,445 6,434 -------- -------- -------- 156,310 140,776 73,156 -------- -------- ------- Operating Income 19,444 14,335 7,064 Interest Income 9,073 7,273 6,065 Interest Expense (3,677) (3,206) (2,383) Gain on Issuance of Stock by Subsidiary (Note 12) 3,455 - - Gain on Sale of Investments 421 203 409 Other Income 14 719 491 -------- -------- ------ Income Before Provision for Income Taxes and Minority Interest 28,730 19,324 11,646 Provision for Income Taxes (Note 6) 9,154 7,334 4,623 Minority Interest Expense 4,455 1,153 353 -------- -------- -------- Net Income $ 15,121 $ 10,837 $ 6,670 ======== ======== ======== Earnings per Share $ .45 $ .33 $ .22 ======== ======== ======== Weighted Average Shares 33,660 32,878 30,291 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 2PAGE Thermedics Inc. Consolidated Balance Sheet (In thousands) 1995 1994 -------------------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents $ 37,370 $ 37,043 Short-term available-for-sale investments, at quoted market value (amortized cost of $76,682 and $72,731) (Notes 2 and 9) 77,916 71,680 Accounts receivable, less allowances of $3,982 and $3,640 41,327 33,645 Unbilled contract costs and fees 1,582 497 Inventories 42,679 26,801 Prepaid income taxes and expenses (Note 6) 8,645 4,676 -------- -------- 209,519 174,342 -------- -------- Property, Plant and Equipment, at Cost, Net 12,933 10,727 -------- -------- Long-term Available-for-sale Investments, at Quoted Market Value (amortized cost of $39,795 and $46,863) (Note 2) 39,953 45,426 -------- -------- Other Assets 4,171 5,582 -------- -------- Cost in Excess of Net Assets of Acquired Companies (Notes 3 and 6) 101,574 55,490 -------- -------- $368,150 $291,567 ======== ======== 3PAGE Thermedics Inc. Consolidated Balance Sheet (continued) (In thousands except share amounts) 1995 1994 ------------------------------------------------------------------------- Liabilities and Shareholders' Investment Current Liabilities: Notes payable and current maturities of long-term obligations (includes $38,000 due to parent company in 1995) (Notes 3 and 8) $ 47,420 $ 10,576 Accounts payable 16,336 9,481 Accrued payroll and employee benefits 8,893 7,369 Deferred revenue 1,705 2,463 Customer deposits 2,162 2,546 Accrued income taxes 2,340 582 Accrued warranty costs 3,637 3,380 Other accrued expenses (Note 3) 15,307 7,675 Due to parent company 1,606 1,940 -------- -------- 99,406 46,012 -------- -------- Deferred Income Taxes and Other Deferred Items (Note 6) 2,173 1,565 -------- -------- Long-term Obligations (Note 8) 45,201 82,551 -------- -------- Minority Interest 54,360 29,674 -------- -------- Commitments and Contingency (Notes 7 and 10) Shareholders' Investment (Notes 4 and 11): Common stock, $.10 par value, 50,000,000 shares authorized; 33,986,050 and 33,303,135 shares issued 3,399 3,330 Capital in excess of par value 120,665 102,975 Retained earnings 42,187 27,066 Treasury stock at cost, 2,146 and 14,671 shares (42) (310) Cumulative translation adjustment (88) 326 Net unrealized gain (loss) on available-for-sale investments (Note 2) 889 (1,622) -------- -------- 167,010 131,765 -------- -------- $368,150 $291,567 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 4PAGE Thermedics Inc. Consolidated Statement of Cash Flows (In thousands) 1995 1994 1993 -------------------------------------------------------------------------- Operating Activities: Net income $ 15,121 $ 10,837 $ 6,670 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,678 4,208 2,434 Gain on issuance of stock by subsidiary (Note 12) (3,455) - - Provision for losses on accounts receivable 689 1,190 92 Gain on sale of investments (421) (203) (409) Minority interest expense 4,455 1,153 353 Other noncash expenses 962 1,382 816 Changes in current accounts, excluding the effects of acquisitions: Accounts receivable 221 (1,750) (4,730) Inventories and unbilled contract costs and fees (10,304) 7,090 (9,478) Prepaid income taxes and expenses (1,957) 112 (1,601) Accounts payable 3,468 (7,362) 1,771 Other current liabilities (5) 2,430 13,242 Other 461 (129) (63) --------- --------- --------- Net cash provided by operating activities 14,913 18,958 9,097 --------- --------- --------- Investing Activities: Acquisitions, net of cash acquired (Note 3) (56,560) (44,657) (1,069) Purchases of property, plant and equipment (4,407) (3,220) (3,444) Purchases of available-for-sale investments (101,246) (78,303) - Proceeds from sale and maturities of available-for-sale investments 104,786 77,677 - Increase in short-term investments - - (51,304) Purchases of long-term investments - - (9,960) Proceeds from sale of long-term investments - - 10,982 Other 399 266 (498) --------- --------- --------- Net cash used in investing activities $ (57,028) $ (48,237) $ (55,293) --------- --------- --------- 5PAGE Thermedics Inc. Consolidated Statement of Cash Flows (continued) (In thousands) 1995 1994 1993 ------------------------------------------------------------------------- Financing Activities: Net proceeds from issuance of Company and subsidiary common stock $ 4,515 $ 2,020 $ 31,766 Purchases of Company and subsidiary common stock (179) (8,064) - Proceeds from issuance of note payable to parent company (Note 3) 38,000 - - Net proceeds from issuance of long-term obligations (Note 8) - 31,968 33,483 Other 608 134 - --------- --------- --------- Net cash provided by financing activities 42,944 26,058 65,249 --------- --------- --------- Exchange Rate Effect on Cash (502) 85 (37) --------- --------- --------- Increase (Decrease) in Cash and Cash Equivalents 327 (3,136) 19,016 Cash and Cash Equivalents at Beginning of Year 37,043 40,179 21,163 --------- --------- --------- Cash and Cash Equivalents at End of Year $ 37,370 $ 37,043 $ 40,179 ========= ========= ========= Cash Paid For: Interest $ 3,328 $ 2,884 $ 2,241 Income taxes $ 6,489 $ 4,980 $ 5,624 Noncash Activities: Fair value of assets of acquired companies $ 67,394 $ 65,493 $ 4,725 Cash paid for acquired companies (56,879) (44,743) (1,085) --------- --------- --------- Liabilities assumed of acquired companies $ 10,515 $ 20,750 $ 3,640 ========= ========= ========= Issuance of Company common stock to parent company in exchange for subsidiary common stock $ - $ 936 $ - Conversions of Company and subsidiaries' convertible obligations (Note 8) $ 37,317 $ 9,745 $ 9,190 The accompanying notes are an integral part of these consolidated financial statements. 6PAGE Thermedics Inc. Consolidated Statement of Shareholders' Investment Common Stock, Capital in $.10 Par Excess of Retained (In thousands) Value Par Value Earnings ------------------------------------------------------------------------- Balance January 2, 1993 $ 1,866 $ 58,188 $ 9,559 Net income - - 6,670 Public offering of Company common stock 215 29,765 - Issuance of stock under employees' and directors' stock plans 17 1,604 - Tax benefit related to employees' and directors' stock plans - 300 - Conversions of subordinated convertible debentures 47 7,061 - Effect of three-for-two stock split 1,072 (1,072) - Effect of majority-owned subsidiaries' equity transactions - (510) - Expiration of subsidiary's redemption rights - 2,943 - Translation adjustment - - - ------- -------- -------- Balance January 1, 1994 3,217 98,279 16,229 Net income - - 10,837 Issuance of stock under employees' and directors' stock plans 14 1,079 - Tax benefit related to employees' and directors' stock plans - 668 - Conversions of subordinated convertible debentures 92 9,316 - Issuance of stock to parent company (Note 11) 7 929 - Effect of majority-owned subsidiaries' equity transactions - (7,296) - Effect of change in accounting principle (Note 2) - - - Change in net unrealized gain (loss) on available-for-sale investments (Note 2) - - - Translation adjustment - - - -------- -------- -------- Balance December 31, 1994 $ 3,330 $102,975 $ 27,066 7PAGE Thermedics Inc. Consolidated Statement of Shareholders' Investment (continued) Common Stock, Capital in $.10 Par Excess of Retained (In thousands) Value Par Value Earnings ------------------------------------------------------------------------- Net income $ - $ - $ 15,121 Issuance of stock under employees' and directors' stock plans 7 378 - Tax benefit related to employees' and directors' stock plans - 434 - Conversions of subordinated convertible debentures 62 6,259 - Effect of majority-owned subsidiaries' equity transactions - 9,858 - Capital contribution from parent company - 761 - Change in net unrealized gain (loss) on available-for-sale investments (Note 2) - - - Translation adjustment - - - -------- -------- -------- Balance December 30, 1995 $ 3,399 $120,665 $ 42,187 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 8PAGE Thermedics Inc. Consolidated Statement of Shareholders' Investment (continued) Net Unrealized Gain (Loss) Cumulative on Available- Treasury Translation for-sale (In thousands) Stock Adjustment Investments -------------------------------------------------------------------------- Balance January 2, 1993 $ (290) $ - $ - Net income - - - Public offering of Company common stock - - - Issuance of stock under employees' and directors' stock plans 18 - - Tax benefit related to employees' and directors' stock plans - - - Conversions of subordinated convertible debentures - - - Effect of three-for-two stock split - - - Effect of majority-owned subsidiaries' equity transactions - - - Expiration of subsidiary's redemption rights - - - Translation adjustment - (2) - -------- --------- -------- Balance January 1, 1994 (272) (2) - Net income - - - Issuance of stock under employees' and directors' stock plans (38) - - Tax benefit related to employees' and directors' stock plans - - - Conversions of subordinated convertible debentures - - - Issuance of stock to parent company (Note 11) - - - Effect of majority-owned subsidiaries' equity transactions - - - Effect of change in accounting principle (Note 2) - - 1,185 Change in net unrealized gain (loss) on available-for-sale investments (Note 2) - - (2,807) Translation adjustment - 328 - -------- -------- -------- Balance December 31, 1994 $ (310) $ 326 $ (1,622) 9PAGE Thermedics Inc. Consolidated Statement of Shareholders' Investment (continued) Net Unrealized Gain (Loss) Cumulative on Available- Treasury Translation for-sale (In thousands) Stock Adjustment Investments -------------------------------------------------------------------------- Net income $ - $ - $ - Issuance of stock under employees' and directors' stock plans 268 - - Tax benefit related to employees' and directors' stock plans - - - Conversions of subordinated convertible debentures - - - Effect of majority-owned subsidiaries' equity transactions - - - Capital contribution from parent company - - - Change in net unrealized gain (loss) on available-for-sale investments (Note 2) - - 2,511 Translation adjustment - (414) - -------- -------- -------- Balance December 30, 1995 $ (42) $ (88) $ 889 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 10PAGE Thermedics Inc. Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Thermedics Inc. (the Company) develops, manufactures, and markets precision weighing and inspection equipment, electrochemistry and microweighing products, product quality assurance systems, electronic test instruments and explosives-detection devices, as well as implantable heart-assist systems and other biomedical products. Relationship with Thermo Electron Corporation The Company was incorporated in 1983 as a wholly owned subsidiary of Thermo Electron Corporation (Thermo Electron). As of December 30, 1995, Thermo Electron owned 17,315,326 shares of the Company's common stock, representing 51% of such stock outstanding (Note 15). Principles of Consolidation The accompanying financial statements include the accounts of the Company, its wholly owned subsidiaries, and its majority-owned public subsidiaries, Thermo Cardiosystems Inc. (Thermo Cardiosystems) and Thermo Voltek Corp. (Thermo Voltek). All material intercompany accounts and transactions have been eliminated. The Company's percentage ownership of its majority-owned public subsidiaries at year-end was as follows: 1995 1994 1993 ---- ---- ---- Thermo Cardiosystems 52% 55% 54% Thermo Voltek 50% 60% 53% Fiscal Year The Company has adopted a fiscal year ending the Saturday nearest December 31. References to 1995, 1994, and 1993 are for the fiscal years ended December 30, 1995, December 31, 1994, and January 1, 1994, respectively. Cash and Cash Equivalents As of December 30, 1995, $25,685,000 of the Company's cash equivalents were invested in a repurchase agreement with Thermo Electron. Under this agreement, the Company in effect lends excess cash to Thermo Electron, which Thermo Electron collateralizes with investments principally consisting of U.S. government agency securities, corporate notes, commercial paper, money market funds, and other marketable securities, in the amount of at least 103% of such obligation. The Company's funds subject to the repurchase agreement are readily convertible into cash by the Company and have an original maturity of three months or less. The repurchase agreement earns a rate based on the Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. As of December 30, 1995, the Company's cash equivalents were also invested in U.S. government agency discount notes and money market preferred stock, which have an original maturity of three months or less. Cash equivalents are carried at cost, which approximates market value. 11PAGE Thermedics Inc. Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Available-for-sale Investments Pursuant to Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective January 2, 1994, the Company's short- and long-term debt and marketable equity securities are accounted for at market value (Note 2). Prior to 1994, these investments were carried at the lower of cost or market value. Inventories Inventories are stated at the lower of cost (on a first-in, first-out basis) or market value and include materials, labor, and manufacturing overhead. The components of inventories are as follows: (In thousands) 1995 1994 ------------------------------------------------------------------------ Raw materials and supplies $21,517 $13,223 Work in process and finished goods 21,162 13,578 ------- ------- $42,679 $26,801 ======= ======= Property, Plant and Equipment The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the property as follows: buildings and improvements -- 5 to 25 years, machinery and equipment -- 3 to 10 years, and leasehold improvements -- the shorter of the term of the lease or the life of the asset. Property, plant and equipment consist of the following: (In thousands) 1995 1994 ------------------------------------------------------------------------ Land and building $ 2,944 $ 2,686 Machinery, equipment and leasehold improvements 27,358 21,681 ------- ------- 30,302 24,367 Less: Accumulated depreciation and amortization 17,369 13,640 ------- ------- $12,933 $10,727 ======= ======= Other Assets Other assets in the accompanying balance sheet includes the cost of acquired patents, trademarks, and other specifically identifiable intangible assets. These assets are being amortized using the straight-line method over their estimated useful lives, which range from 2 to 40 years. These assets were $2,916,000 and $3,037,000, net of accumulated amortization of $2,245,000 and $1,762,000, at year-end 1995 and 1994, respectively. 12PAGE Thermedics Inc. Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Cost in Excess of Net Assets of Acquired Companies The excess of cost over the fair value of net assets of acquired companies is amortized using the straight-line method over periods not exceeding 40 years. Accumulated amortization was $6,343,000 and $4,634,000 at year-end 1995 and 1994, respectively. The Company assesses the future useful life of this asset whenever events or changes in circumstances indicate that the current useful life has diminished. The Company considers the future undiscounted cash flows of the acquired companies in assessing the recoverability of this asset. Foreign Currency All assets and liabilities of the Company's foreign subsidiaries are translated at year-end exchange rates, and revenues and expenses are translated at average exchange rates for the year in accordance with SFAS No. 52, "Foreign Currency Translation." Resulting translation adjustments are reflected as a separate component of shareholders' investment, titled "Cumulative translation adjustment." In 1994, the Company recorded foreign currency transaction gains of $635,000 on the repayment of intercompany borrowings, denominated in U.S. dollars, by several of the Company's foreign subsidiaries. The borrowings resulted from the acquisition of Ramsey Technology, Inc. by the Company. Foreign currency transaction gains are included in other income in the accompanying 1994 statement of income. There were no foreign currency transaction gains and losses in 1995, and the foreign currency transactions gains and losses included in the accompanying 1993 statement of income were immaterial. Revenue Recognition In general, the Company recognizes revenues upon shipment of its products. The Company provides a reserve for its estimate of warranty costs at the time of shipment. Revenues and profits on substantially all contracts are recognized using the percentage-of-completion method. Revenues recorded under the percentage-of-completion method were $8,521,000 in 1995, $2,253,000 in 1994, and $5,087,000 in 1993. The percentage of completion is determined by relating either the actual costs or actual labor incurred to date to management's estimate of total costs or total labor, respectively, 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. The Company's contracts generally provide for billing of customers upon the attainment of certain milestones specified in each contract or for billing customers monthly as costs are incurred on a cost-plus-fixed-fee basis. 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. Gain on Issuance of Stock by Subsidiary At the time a subsidiary sells its stock to unrelated parties at a price in excess of its book value, the Company's net investment in that subsidiary increases. If at that time the subsidiary is an operating entity and not engaged principally in research and development, the Company records the increase as a gain. 13PAGE Thermedics Inc. Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies (continued) If gains have been recognized on issuances of a subsidiary's stock and shares of the subsidiary are subsequently repurchased by the subsidiary, the Company, or Thermo Electron, gain recognition does not occur on issuances subsequent to the date of a repurchase until such time as shares have been issued in an amount equivalent to the number of repurchased shares. Such transactions are reflected as equity transactions and the net effect of these transactions is reflected in the accompanying statement of shareholders' investment as "Effect of majority-owned subsidiaries' equity transactions." Income Taxes In accordance with 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 Earnings per share have been computed based on the weighted average number of shares outstanding during the year. Because the effect of the assumed exercise of stock options would be immaterial, they have been excluded from the earnings per share calculation. Fully diluted earnings per share have not been presented because the effect of the assumed exercise of stock options and the assumed conversion of the Company's subordinated convertible debentures would be immaterial. 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 and disclosure of contingent assets and liablilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Available-for-sale Investments Effective January 2, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In accordance with SFAS No. 115, the Company's debt and marketable equity securities are considered available-for-sale investments in the accompanying balance sheet and are carried at market value, with the difference between cost and market value, net of related tax effects, recorded currently as a component of shareholders' investment titled "Net unrealized gain (loss) on available-for-sale investments." Effect of change in accounting principle in the accompanying 1994 statement of shareholders' investment represents the unrealized gain, net of related tax effects, pertaining to available-for-sale investments held by the Company on January 2, 1994. 14PAGE Thermedics Inc. Notes to Consolidated Financial Statements 2. Available-for-sale Investments (continued) The aggregate market value, cost basis, and gross unrealized gains and losses of short- and long-term available-for-sale investments by major security type, as of December 30, 1995 and December 31, 1994, are as follows: 1995 Gross Gross Unrealized Unrealized (In thousands) Market Value Cost Basis Gains Losses -------------------------------------------------------------------------- Government agency securities $ 99,373 $ 98,434 $ 1,020 $ (81) Corporate bonds 10,612 10,169 454 (11) Money market preferred stock 6,297 6,287 28 (18) Other 1,587 1,587 - - -------- -------- -------- -------- $117,869 $116,477 $ 1,052 $ (110) ======== ======== ======== ======== 1994 Gross Gross Unrealized Unrealized (In thousands) Market Value Cost Basis Gains Losses -------------------------------------------------------------------------- Government agency securities $ 92,316 $ 94,148 $ 2 $ (1,834) Corporate bonds 12,100 12,491 9 (400) Money market preferred stock 7,194 7,455 - (261) Other 5,496 5,500 - (4) -------- -------- -------- -------- $117,106 $119,594 $ 11 $ (2,499) ======== ======== ======== ======== Short- and long-term available-for-sale investments in the accompanying 1995 balance sheet include $59,595,000 with contractual maturities of one year or less, $51,005,000 with contractual maturities of more than one year through five years, and $7,269,000 with contractual maturities of more than five years. Actual maturities may differ from contractual maturities as a result of the Company's intent to sell these securities prior to maturity and as a result of put and call options that enable either the Company and/or the issuer to redeem these securities at an earlier date. The cost of available-for-sale investments that were sold was based on specific identification in determining realized gains recorded in the accompanying statement of income. Gain on sale of investments in 1995 resulted from gross realized gains of $439,000 and gross realized losses of $18,000 relating to the sale of available-for-sale investments. Gain on sale of investments in 1994 resulted from gross realized gains of $241,000 and gross realized losses of $38,000 relating to the sale of available-for-sale investments. 15PAGE Thermedics Inc. Notes to Consolidated Financial Statements 3. Acquisitions In December 1995, the Company acquired the Orion laboratory products division (Orion) of Analytical Technology, Inc. for approximately $52.7 million in cash, which included the repayment of $8.6 million of debt, subject to a post-closing adjustment. To partially finance this acquisition, the Company borrowed $38.0 million from Thermo Electron pursuant to a promissory note due December 1996, and bearing interest at the Commercial Paper Composite Rate plus 25 basis points. The balance of the purchase price was funded from the Company's working capital. Orion manufactures electrochemistry, microweighing, process, and other instruments used to analyze the chemical composition of foods, beverages, and pharmaceuticals and detect contaminants in environmental and high-purity water samples. Additionally, in 1995, one of the Company's majority-owned subsidiaries made an acquisition for $3.8 million in cash. In March 1994, the Company acquired substantially all of the assets, subject to certain liabilities, of Ramsey Technology, Inc. (Ramsey), a business of Baker Hughes Incorporated, for a cash purchase price of $41.9 million. In January 1996, Ramsey was contributed by the Company to its newly formed Thermo Sentron Inc. (Thermo Sentron) subsidiary in exchange for shares of Thermo Sentron common stock. Thermo Sentron designs, develops, manufactures, and sells high-speed precision weighing and inspection equipment for industrial production and packaging lines. Additionally, in 1994, the Company and one of its majority-owned subsidiaries made two other acquisitions for an aggregate of $2.8 million in cash. In August 1993, Thermo Voltek acquired Comtest Instrumentation B.V., a Netherlands-based company, and Comtest Limited, a U.K. operation (collectively, Comtest), for $831,000 in cash and the repayment of $238,000 of Comtest's debt. Comtest distributes products used to test electronic equipment for electromagnetic compatibility (EMC), provides EMC-related consulting services, and manufactures specialized power supplies for telecommunications equipment. These acquisitions have been accounted for using the purchase method of accounting, and their results of operations have been included in the accompanying financial statements from their respective dates of acquisition. The aggregate cost of the acquisitions in 1995, 1994, and 1993, exceeded the estimated fair value of the acquired net assets by $86.4 million, which is being amortized over periods not exceeding 40 years. Allocation of the purchase price for these acquisitions was based on estimates of the fair value of the net assets acquired and, for acquisitions completed in 1995, is subject to adjustment upon finalization of the purchase price allocation. Based on unaudited data, the following table presents selected financial information for the Company, Orion, Thermo Sentron, and Comtest on a pro forma basis, assuming the Company and Orion had been combined since the beginning of 1994 and the Company, Thermo Sentron and Comtest had been combined since the beginning of 1993. The effect on the Company's financial statements of the acquisitions not included in the pro forma data was not material to the Company's results of operations and financial position. (In thousands except per share amounts) 1995 1994 1993 ------------------------------------------------------------------------- Revenues $218,920 $212,392 $142,307 Net income 17,186 12,821 5,943 Earnings per share .51 .39 .20 16PAGE Thermedics Inc. Notes to Consolidated Financial Statements 3. Acquisitions (continued) The pro forma results are not necessarily indicative of future operations or the actual results that would have occurred had the acquisitions been made at the beginning of 1994 or 1993, as applicable. Other accrued expenses in the accompanying balance sheet include $2,454,000 and $3,080,000 at year-end 1995 and 1994, respectively, for estimated severance, relocation, and other reserves associated with acquisitions. 4. Stock-based Compensation Plans The Company has stock-based compensation plans for its key employees, directors, and others. Two of these plans, adopted in 1983, permitted the grant of nonqualified and incentive stock options. These plans expired during 1993. A third plan, adopted in 1993, permits the grant of a variety of stock and stock-based awards as determined by the human resources committee of the Company's Board of Directors (the Board Committee), including restricted stock, stock options, stock bonus shares, or performance-based shares. To date, only nonqualified stock options have been awarded under this plan. The option recipients and the terms of options granted under this plan are determined by the Board Committee. Generally, options granted to date are exercisable immediately, but are subject to certain transfer restrictions and the right of the Company to repurchase shares issued upon exercise of the options at the exercise price, upon certain events. The restrictions and repurchase rights generally lapse ratably over periods ranging from four to ten years after the first anniversary of the grant date, depending on the term of the option, which may range from seven to twelve years. Nonqualified stock options may be granted at any price determined by the Board Committee, although incentive stock options must be granted at not less than the fair market value of the Company's stock on the date of grant. To date, all options have been granted at fair market value. The Company also has a directors' stock option plan, adopted in 1991, that provides for the grant of stock options to outside directors pursuant to a formula approved by the Company's shareholders. Options awarded under this plan are exercisable six months after the date of grant and expire three or seven years after the date of grant. In addition to the Company's stock-based compensation plans, certain officers and key employees may also participate in stock-based compensation plans of Thermo Electron or its majority-owned subsidiaries. 17PAGE Thermedics Inc. Notes to Consolidated Financial Statements 4. Stock-based Compensation Plans (continued) No accounting recognition is given to options granted at fair market value until they are exercised. Upon exercise, net proceeds, including tax benefits realized, are credited to equity. A summary of the Company's stock option information is as follows: 1995 1994 1993 ----------------- ----------------- ----------------- Range of Range of Range of (In thousands Number Option Number Option Number Option except per of Prices of Prices of Prices share amounts) Shares per Share Shares per Share Shares per share -------------------------------------------------------------------------- Options outstanding, $ 4.70- $ 4.70- $ 4.70- beginning of year 1,773 $16.45 1,669 $16.45 936 $10.65 13.00- 12.43- 8.47- Granted 27 21.40 366 14.53 1,035 16.45 4.70- 4.70- 4.70- Exercised (74) 16.28 (195) 10.65 (261) 10.65 Lapsed or 5.00- 5.00- 5.00- cancelled (169) 16.28 (67) 16.28 (41) 10.00 ----- ----- ----- Options outstanding, $ 4.70- $ 4.70- $ 4.70- end of year 1,557 $21.40 1,773 $16.45 1,669 $16.45 ===== ===== ===== $ 4.70- $ 4.70- $ 4.70- Options exercisable 1,557 $21.40 1,771 $16.45 1,665 $16.28 ===== ===== ===== Options available for grant 545 457 770 ===== ===== ===== 5. Employee Benefit Plans Employee Stock Purchase Plan Substantially all of the Company's full-time U.S. employees are eligible to participate in an employee stock purchase plan sponsored by the Company or its majority-owned public subsidiaries. Prior to the November 1995 plan year, shares of the Company's or its majority-owned public subsidiaries', and shares of Thermo Electron's common stock could be purchased at the end of a 12-month plan year at 85% of the fair market value at the beginning of the plan year, and the shares purchased were subject to a one-year resale restriction. Effective November 1, 1995, the applicable shares of common stock may be purchased at 95% of the fair market value at the beginning of the plan year, and the shares purchased are subject to a six-month resale restriction. Shares are purchased through payroll deductions of up to 10% of each participating employee's gross wages. During 1995, 1994, and 1993, the Company issued 14,552 shares, 13,711 shares, and 36,080 shares, respectively, of its common stock under this plan. 18PAGE Thermedics Inc. 5. Employee Benefit Plans (continued) 401(k) Savings Plan and Employee Stock Ownership Plan The majority of the Company's full-time U.S. employees are eligible to participate in Thermo Electron's 401(k) savings plan and, prior to 1995, in Thermo Electron's employee stock ownership plan (ESOP). 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 these plans, the Company contributed and charged to expense $1,011,000, $942,000, and $412,000 in 1995, 1994, and 1993, respectively. Effective December 31, 1994, the ESOP was split into two plans: ESOP I, covering employees of Thermo Electron's corporate office and its wholly owned subsidiaries and ESOP II, covering employees of certain of Thermo Electron's majority-owned subsidiaries, including the Company. Also, effective December 31, 1994, the ESOP II plan was terminated and as a result, the Company's employees are no longer eligible to participate in an ESOP. 6. Income Taxes The components of income before provision for income taxes and minority interest are as follows: (In thousands) 1995 1994 1993 -------------------------------------------------------------------------- Domestic $25,020 $17,761 $10,244 Foreign 3,710 1,563 1,402 ------- ------- ------- $28,730 $19,324 $11,646 ======= ======= ======= The components of the provision for income taxes are as follows: (In thousands) 1995 1994 1993 -------------------------------------------------------------------------- Currently payable: Federal $ 7,541 $ 5,390 $ 3,417 State 1,546 1,335 1,169 Foreign 1,783 998 111 ------- ------- ------- 10,870 7,723 4,697 ------- ------- ------- Prepaid: Federal (1,373) (331) (35) State (343) (58) (13) Foreign - - (26) ------- ------- ------- (1,716) (389) (74) ------- ------- ------- $ 9,154 $ 7,334 $ 4,623 ======= ======= ======= The provision for income taxes that is currently payable does not reflect $3,935,000, $668,000, and $300,000 of tax benefits of the Company and its majority-owned subsidiaries allocated to capital in excess of par value, directly or through the effect of majority-owned subsidiaries' equity transactions, in 1995, 1994, and 1993, respectively, or $89,000 of tax benefits used to reduce cost in excess of net assets of acquired companies in 1993. 19PAGE Thermedics Inc. Notes to Consolidated Financial Statements 6. 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 rates of 35% in 1995 and 1994 and 34% in 1993 to income before provision for income taxes and minority interest due to the following: (In thousands) 1995 1994 1993 -------------------------------------------------------------------------- Provision for income taxes at statutory rate $10,056 $ 6,763 $ 3,960 Increases (decreases) resulting from: State income taxes, net of federal tax 782 830 763 Reduction in valuation allowance (854) - - Gain on issuance of stock by subsidiary (1,206) - - Tax-exempt investment income (115) (113) (215) Tax benefit of foreign sales corporation (323) (833) - Amortization of cost in excess of net assets of acquired companies 232 296 199 Current losses of subsidiaries not benefited and foreign tax rate differential 485 363 1 Nondeductible expenses 137 88 54 Other, net (40) (60) (139) ------- ------- ------- $ 9,154 $ 7,334 $ 4,623 ======= ======= ======= Prepaid income taxes and deferred income taxes in the accompanying balance sheet consist of the following: (In thousands) 1995 1994 ---------------------------------------------------------------- Prepaid income taxes: Inventory reserves $ 1,926 $ 1,328 Reserves and accruals 1,042 1,242 Warranty reserves 1,142 1,100 Federal tax loss carryforwards 1,016 964 State tax loss carryforwards 829 774 General business credit carryforward 260 132 Accrued compensation 1,013 881 Allowance for doubtful accounts 684 451 Available-for-sale investments (116) 364 Other, net 207 446 ------- ------- 8,003 7,682 Less: Valuation allowance 1,516 3,951 ------- ------- $ 6,487 $ 3,731 ======= ======= Deferred income taxes, net: Trademarks and other intangible assets $ 1,627 $ 1,249 Available-for-sale investments - (502) Difference in book and tax basis of fixed assets 348 585 ------- ------- $ 1,975 $ 1,332 ======= ======= 20PAGE Thermedics Inc. Notes to Consolidated Financial Statements 6. Income Taxes (continued) The valuation allowance relates primarily to the uncertainty surrounding the realizability of net operating loss and credit carryforwards, and other tax assets of certain subsidiaries. The decrease in the valuation allowance is due primarily to reduced uncertainty surrounding the realizability of such future tax benefits and was recorded in part as a reduction of the 1995 provision for income taxes and as an increase to capital in excess of par value. As of December 30, 1995, federal and state tax attributes existed at Thermo Voltek, which are not consolidated for federal tax purposes. Thermo Voltek had federal and state tax net operating loss carryforwards of approximately $3,000,000 expiring in 1998 through 2006 and general business credits of approximately $132,000 expiring in 1996 through 2004. These tax assets and the related valuation allowance are included above. The carryforwards of Thermo Voltek are limited to a tax benefit of approximately $240,000 per year under Sections 382 and 383 of the U.S. Internal Revenue Code. The Company has not recognized a deferred tax liability for the difference between the book basis and tax basis of the common stock of its domestic subsidiaries (such difference relates primarily to unremitted earnings and gains on issuance of stock by subsidiaries) because the Company does not expect this basis difference to become subject to tax at the parent level. The Company believes it can implement certain tax strategies to recover its investment in its domestic subsidiaries tax-free. A provision has not been made for U.S. or additional foreign taxes on $3,371,000 of undistributed earnings of foreign subsidiaries that could be subject to taxation if remitted to the U.S. because the Company currently plans to keep these amounts permanently reinvested overseas. The Company believes that any additional U.S. tax liability due upon remittance of such earnings would be immaterial due to available U.S. foreign tax credits. 7. Commitments The Company leases various office and manufacturing facilities under noncancellable operating lease arrangements expiring between 1996 and 2003. The accompanying statement of income includes expenses from operating leases of $3,403,000, $2,081,000, and $882,000 in 1995, 1994, and 1993, respectively. Future minimum payments due under noncancellable operating leases as of December 30, 1995, are $3,291,000 in 1996; $2,326,000 in 1997; $1,959,000 in 1998; $1,341,000 in 1999; $731,000 in 2000; and $419,000 in 2001 and thereafter. Total future minimum lease payments are $10,067,000. 21PAGE Thermedics Inc. Notes to Consolidated Financial Statements 8. Short- and Long-term Obligations and Other Financing Arrangements Long-term obligations of the Company are as follows: (In thousands except per share amounts) 1995 1994 -------------------------------------------------------------------------- 6 1/2% Subordinated convertible debentures, due 1998, convertible at $10.42 per share $ 8,037 $14,435 3 3/4% Subordinated convertible debentures, due 2000, convertible into shares of Thermo Voltek at $11.75 per share 25,240 34,500 Noninterest-bearing subordinated convertible debentures, due 1997, convertible into shares of Thermo Cardiosystems at $21.74 per share 11,642 33,000 5 1/2% Subordinated convertible notes, due 2002, convertible into shares of Thermo Cardiosystems at $9.88 per share - 450 Other 282 166 ------- ------- $45,201 $82,551 ======= ======= The Company's convertible obligations are guaranteed on a subordinated basis by Thermo Electron. The Company has agreed to reimburse Thermo Electron in the event Thermo Electron is required to make a payment under its guarantee of Thermo Voltek's or Thermo Cardiosystems' obligations. In lieu of issuing shares of Thermo Voltek common stock upon the conversion of the 3 3/4% subordinated convertible debentures due 2000, Thermo Voltek has the option to pay holders of the debentures cash equal to the weighted average market price of Thermo Voltek's common stock on the trading date prior to conversion. During 1995, 1994, and 1993, convertible obligations of $37,317,000, 9,745,000, and 9,190,000, respectively, were converted into common stock of the Company. See Note 13 for the fair value of the Company's long-term obligations. The Company borrowed $38,000,000 from Thermo Electron pursuant to a promissory note due December 1996, to partially finance the acquisition of Orion in December 1995 (Note 3). Several of the Company's foreign subsidiaries have lines of credit under which an aggregate of approximately $13,800,000 may be borrowed at a current rate as determined by each country's local market. The lines of credit are denominated in local currency. Amounts borrowed under these agreements are included in notes payable and current maturities of long-term obligations in the accompanying balance sheet and are guaranteed by either the Company or Thermo Electron. The weighted average interest rate on these borrowings was 8.5% and 7.7% at year-end 1995 and 1994, respectively. 9. 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 22PAGE Thermedics Inc. Notes to Consolidated Financial Statements 9. Related Party Transactions (continued) returns, centralized cash management, and certain financial and other services, for which the Company paid Thermo Electron annually an amount equal to 1.20% of the Company's revenues in fiscal 1995 and 1.25% of the Company's revenues in fiscal 1994 and 1993. Beginning in fiscal 1996, the Company will pay an annual fee equal to 1.0% of the Company's revenues. The annual fee is reviewed and adjusted annually by mutual agreement of the parties. 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 relationships among Thermo Electron and its majority-owned subsidiaries). In addition, the Company utilizes data processing and contract administration services of two majority-owned subsidiaries of Thermo Electron, which are charged based on actual usage. For these services, as well as the administrative services provided by Thermo Electron, the Company was charged $2,142,000, $1,964,000, and $1,086,000 in 1995, 1994, and 1993, respectively. Management believes that the service fees charged by Thermo Electron and its subsidiaries are reasonable and that such fees are representative of the expenses the Company would have incurred on a stand-alone basis. 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. Distribution Agreements Pursuant to international distributorship agreements, the Company appointed Arabian Business Machines Co. (ABM) and Olayan Financing Company (OFC) as its exclusive distributors of the Company's security instruments in certain Middle Eastern countries. ABM and OFC are members of The Olayan Group. Ms. Hutham S. Olayan, a Director of Thermo Electron, is the President and a Director of Olayan America Corporation and Competrol Real Estate Limited, two other members of The Olayan Group, which are indirectly controlled by Suliman S. Olayan, Ms. Olayan's father. Revenues recorded under this agreement totaled $3,000, $42,000, and $33,000 in 1995, 1994, and 1993, respectively. In addition, during 1994 the Company sold $1,240,000 of security instruments directly to a customer in the Middle East and paid a commission of $409,000 pursuant to the ABM distributor agreement. Management Contract Prior to 1994, the Company performed supervisory management services with respect to International Technidyne Corporation (ITC), a wholly owned subsidiary of Thermo Electron, in exchange for a fixed fee of $150,000 per year, plus an incentive fee based on objective financial performance criteria established on an annual basis by Thermo Electron and the Company. Effective January 2, 1994, in lieu of the management fee, two executive employees of the Company allocate a portion of their salary and bonus for the time they devote to Thermo Electron in connection with certain management responsibilities relating to ITC and Thermo Electron's other biomedical businesses. In 1995, 1994, and 1993, the Company was reimbursed $402,000, $84,000, and $266,000, respectively, under these arrangements. Repurchase Agreement The Company invests excess cash in a repurchase agreement with Thermo Electron as discussed in Note 1. 23PAGE Thermedics Inc. Notes to Consolidated Financial Statements 9. Related Party Transactions (continued) Short-term Available-for-sale Investments At December 30, 1995, the Company's short-term available-for-sale investments included $2,052,000 of 6 1/2% subordinated convertible debentures due 1997, which were purchased on the open market for $1,795,000. The debentures have a par value of $1,800,000 and were issued by Thermo TerraTech Inc., a majority-owned subsidiary of Thermo Electron. 10. Contingency Thermo Cardiosystems has received correspondence alleging that the textured surface of its left ventricular-assist system's housing infringes the intellectual property rights of another party. In general, an owner of intellectual property can prevent others from using such property without a license and is entitled to damages for unauthorized past usage. The Company has investigated the bases of the allegation and, based on the opinion of its counsel, believes that if Thermo Cardiosystems were sued on these bases, it would have meritorious defenses. 11. Common Stock At December 30, 1995, the Company had reserved 2,977,154 unissued shares of its common stock for possible issuance under stock-based compensation plans and possible issuance upon conversion of the 6 1/2% subordinated convertible debentures (Note 15). During 1994, the Company issued 66,265 shares of its common stock to Thermo Electron in exchange for 124,800 shares of Thermo Voltek common stock. 12. Transactions in Stock of Subsidiaries During 1995, $9,111,000 principal amount of Thermo Voltek's subordinated convertible debentures were converted into 775,399 shares of Thermo Voltek common stock, resulting in gains of $3,455,000 from the issuance of stock by subsidiary. During 1995, $21,808,000 principal amount of Thermo Cardiosystems' subordinated convertible obligations were converted into 1,027,984 shares of Thermo Cardiosystems common stock. No gains were recorded on the conversions of these convertible obligations as Thermo Cardiosystems was principally engaged in research and development at the time the convertible obligations were issued. 24PAGE Thermedics Inc. Notes to Consolidated Financial Statements 13. Fair Value of Financial Instruments The Company's financial instruments consist mainly of cash and cash equivalents, available-for-sale investments, accounts receivable, notes payable and current maturities of long-term obligations, accounts payable, due to parent company, and long-term obligations. The carrying amounts of these financial instruments, with the exception of available-for-sale investments and long-term obligations, approximates fair value due to their short-term nature. Available-for-sale investments are carried at fair value in the accompanying balance sheet. The fair values were determined based on quoted market prices. See Note 2 for fair value information pertaining to these financial instruments. The fair value of long-term obligations was determined based on quoted market prices. The fair value of convertible obligations at year-end 1995 exceeds the carrying amount primarily due to the market price of the Company's or subsidiaries' common stock exceeding the conversion price of the convertible obligations. The carrying amount and fair value of the Company's long-term obligations are as follows: 1995 1994 --------------------- ----------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value ------------------------------------------------------------------------- Long-term obligations: Convertible obligations $44,919 $95,589 $82,385 $78,284 Other long-term obligations 282 282 166 166 ------- ------- ------- ------- $45,201 $95,871 $82,551 $78,450 ======= ======= ======= ======= 25PAGE Thermedics Inc. Notes to Consolidated Financial Statements 14. Business Segments, Geographical Information and Concentrations of Risk The Company's principal businesses can be divided into two segments. The Company's Instruments and Other Equipment segment develops, manufactures, sells, and distributes precision equipment that weighs and inspects bulk materials and packaged goods; electrochemistry, microweighing, and other laboratory instruments; process detection instruments; explosives-detection instruments; instruments that test electronic and electrical systems and components for immunity to electromagnetic interference; high-voltage power-conversion systems; and provides related consulting services. The Company's Biomedical Products segment develops, manufactures, and sells left ventricular-assist systems (LVAS) and other biomedical products. The Company's Instruments and Other Equipment segment derived revenues from precision weighing and inspection equipment of $67.5 million and $50.1 million in 1995 and 1994, respectively. In addition, this segment derived revenues from process detection instruments of $16.2 million, $38.0 million, and $34.4 million and from electronic test instruments of $31.6 million, $19.0 million, and $13.2 million in 1995, 1994, and 1993, respectively. The Company's Biomedical Products segment derived revenues from LVAS devices of $20.6 million, $10.4 million, and $3.5 million in 1995, 1994, and 1993, respectively. Certain raw materials used in the manufacture of Thermo Cardiosystems' LVAS are available from only one supplier. While the Company believes that it has adequate supplies of materials to meet demand for the LVAS for the foreseeable future, no assurance can be given that the Company will not experience shortages of certain materials in the future that could delay shipments of the LVAS. No customer represented 10% or more of the Company's total revenues in 1995. During 1994 and 1993, revenues derived from one customer represented 21% and 43% of the Company's total revenues, respectively. 26PAGE Thermedics Inc. Notes to Consolidated Financial Statements 14. Business Segments, Geographical Information and Concentrations of Risk (continued) Information for 1995, 1994, and 1993, with respect to the Company's two business segments, is shown in the following table. (In thousands) 1995 1994 1993 ------------------------------------------------------------------------- Segment Information Revenues: Instruments and Other Equipment $136,742 $124,100 $ 60,120 Biomedical Products 39,012 31,011 20,100 -------- -------- -------- $175,754 $155,111 $ 80,220 ======== ======== ======== Income before provision for income taxes and minority interest: Instruments and Other Equipment $ 14,778 $ 16,054 $ 10,733 Biomedical Products 7,128 1,337 (1,820) Corporate (a) (2,462) (3,056) (1,849) -------- -------- -------- Total operating income 19,444 14,335 7,064 Interest and other income, net 9,286 4,989 4,582 -------- -------- -------- $ 28,730 $ 19,324 $ 11,646 ======== ======== ======== Identifiable assets: Instruments and Other Equipment $213,755 $141,763 $ 84,302 Biomedical Products 128,170 117,475 82,209 Corporate and eliminations (b) 26,225 32,329 70,976 -------- -------- -------- $368,150 $291,567 $237,487 ======== ======== ======== Depreciation and amortization: Instruments and Other Equipment $ 4,040 $ 2,923 $ 1,235 Biomedical Products 1,609 1,256 1,132 Corporate 29 29 67 -------- -------- -------- $ 5,678 $ 4,208 $ 2,434 ======== ======== ======== Capital expenditures: Instruments and Other Equipment $ 2,669 $ 1,919 $ 2,389 Biomedical Products 1,715 1,278 1,039 Corporate 23 23 16 -------- -------- -------- $ 4,407 $ 3,220 $ 3,444 ======== ======== ======== (a) Primarily general and administrative expenses. (b) Primarily cash, cash equivalents, and short- and long-term investments. 27PAGE Thermedics Inc. Notes to Consolidated Financial Statements 14. Business Segments, Geographical Information and Concentrations of Risk (continued) (In thousands) 1995 1994 1993 ------------------------------------------------------------------------- Geographical Information Revenues: United States $127,729 $121,351 $ 79,001 Europe 43,018 31,640 6,918 Other 13,084 12,594 2,225 Transfer among geographical areas (c) (8,077) (10,474) (7,924) -------- -------- -------- $175,754 $155,111 $ 80,220 ======== ======== ======== Income before provision for income taxes and minority interest: United States $ 17,124 $ 15,292 $ 7,494 Europe 3,170 1,040 536 Other 1,612 1,059 883 Corporate (d) (2,462) (3,056) (1,849) -------- -------- -------- Total operating income 19,444 14,335 7,064 Interest and other income, net 9,286 4,989 4,582 -------- -------- -------- $ 28,730 $ 19,324 $ 11,646 ======== ======== ======== Identifiable assets: United States $301,613 $225,569 $158,342 Europe 33,259 27,361 7,020 Other 7,053 6,308 1,149 Corporate and eliminations (e) 26,225 32,329 70,976 -------- -------- -------- $368,150 $291,567 $237,487 ======== ======== ======== Export revenues included in United States revenues above (f): Europe $ 17,748 $ 21,455 $ 14,310 South America 5,357 9,011 14,728 Mexico 1,923 10,726 11,466 Other 15,098 14,412 3,686 -------- -------- -------- $ 40,126 $ 55,604 $ 44,190 ======== ======== ======== (c) Transfers among geographical areas are accounted for at prices that are representative of transactions with unaffiliated parties. (d) Primarily general and administrative expenses. (e) Primarily cash, cash equivalents, and short- and long-term investments. (f) In general, export sales are denominated in U.S. dollars. 28PAGE Thermedics Inc. Notes to Consolidated Financial Statements 15. Subsequent Events Transfer of Common Stock On January 22, 1996, the Company issued 1,688,161 shares of its common stock to Thermo Electron in exchange for 315,199 shares of Thermo Voltek common stock and 529,965 shares of Thermo Cardiosystems common stock. The shares of common stock were exchanged at their respective fair market values on the date of the transaction. Redemption of Convertible Debentures On February 9, 1996, the Company called for redemption on March 11, 1996 all of the outstanding principal amount of its 6 1/2% subordinated convertible debentures due 1998. The value of the securities into which the debentures are convertible exceeded the redemption amount as of the notice date of the redemption. 29PAGE Report Of Independent Public Accountants To the Shareholders and Board of Directors of Thermedics Inc.: We have audited the accompanying consolidated balance sheets of Thermedics Inc. (a Massachusetts corporation and 51%-owned subsidiary of Thermo Electron Corporation) and subsidiaries as of December 30, 1995 and December 31, 1994, and the related consolidated statements of income, shareholders' investment, and cash flows for each of the three years in the period ended December 30, 1995. 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 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 Inc. and subsidiaries as of December 30, 1995 and December 31, 1994 and the results of their operations and their cash flows for each of the three years in the period ended December 30, 1995, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, effective January 2, 1994, the Company changed its method of accounting for investments in debt and marketable equity securities. Arthur Andersen LLP Boston, Massachusetts February 7, 1996 (except with respect to the matters discussed in Note 15 as to which the date is February 9, 1996) 30PAGE Thermedics Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company's business can be divided into two segments: Instruments and Other Equipment, and Biomedical Products. The Instruments and Other Equipment segment includes Ramsey Technology, Inc., which was acquired in March 1994 and was contributed by the Company in January 1996 to its newly formed Thermo Sentron Inc. (Thermo Sentron) subsidiary in exchange for shares of Thermo Sentron common stock. Thermo Sentron designs, develops, manufactures, and sells high-speed precision weighing and inspection equipment for industrial production and packaging lines. The Instruments and Other Equipment segment also includes the Orion laboratory products division (Orion) of Analytical Technology, Inc., which was acquired in December 1995. Orion is a manufacturer of electrochemistry, microweighing, process, and other instruments used to analyze the chemical compositions of foods, beverages, and pharmaceuticals and detect contaminants in environmental and high-purity water samples. The Instruments and Other Equipment segment, through the Company's Thermedics Detection Inc. (Thermedics Detection) subsidiary, also develops, manufactures, and markets high-speed detection instruments, including the Alexus(R) system, a process detection instrument used in product quality assurance applications, and the EGIS(R) system, a security instrument used to detect explosives at airports and other locations. Through the Company's Thermo Voltek Corp. (Thermo Voltek) subsidiary, the Instruments and Other Equipment segment also manufactures a line of electronic test instruments and high-voltage power conversion systems. As part of its Biomedical Products segment, the Company's Thermo Cardiosystems Inc. (Thermo Cardiosystems) subsidiary has developed two implantable left ventricular-assist systems (LVAS): a pneumatic, or air-driven system, and an electric version. In October 1994, the Company announced that the U.S. Food and Drug Administration (FDA) granted approval for the commercial sale of the air-driven LVAS for use as a bridge-to-transplant. With this approval, the air-driven system became available for sale to cardiac centers throughout the United States. Thermo Cardiosystems received the European Conformity Mark (CE Mark) for commercial sale of the air-driven LVAS in all European Community countries in April 1994, and, in August 1995, received the same approval for the electric system. The electric version of the LVAS is currently being used in the U.S. in clinical trials for patients awaiting heart transplants and, late in 1995, the FDA approved the protocol for conducting clinical trials of the electric LVAS as an alternative to heart transplant. Thermo Cardiosystems' electric LVAS is being used in Europe as a bridge-to-transplant and as an alternative to heart transplant. According to terms set by the FDA, no profit can be earned from the sale of an LVAS until the FDA has approved the device for commercial sale. With FDA approval, the Company began earning a profit on the sale of its air-driven LVAS in the fourth quarter of 1994. In October 1994, Thermo Cardiosystems announced a price increase in the U.S. for its air-driven LVAS that was phased in during a six-month period that more than doubled the average price of the air-driven LVAS. The Company also develops and manufactures enteral nutrition delivery systems and a line of medical-grade polymers, used in medical disposables and nonmedical, industrial applications, including safety glass and automotive coatings. Approximately 27% of the Company's revenues originate outside of the U.S. Although the Company seeks to charge its customers in the same currency as its operating costs, the Company's financial performance and 31PAGE Thermedics Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Overview (continued) competitive position can be affected by currency exchange rate fluctuations affecting the relationship between the U.S. dollar and foreign currencies. Where appropriate, the Company uses forward contracts to reduce its exposure to currency fluctuations. In October 1995, the Financial Accounting Standards Board (FASB) issued an exposure draft of a Proposed Statement of Financial Accounting Standards, "Consolidated Financial Statements: Policy and Procedures" (Proposed Statement). The Proposed Statement would establish new rules for how consolidated financial statements should be prepared. If the Proposed Statement is adopted, there could be significant changes in the way the Company records certain transactions of its controlled subsidiaries, including the following: (i) any sale of the stock of a subsidiary that does not result in a loss of control would be accounted for as a transaction in equity of the consolidated entity with no gain or loss being recorded and (ii) under certain circumstances acquisitions could be structured to significantly reduce the goodwill that is recorded and consequently reduce the Company's future goodwill amortization associated with the acquisition. The Company typically acquires technology companies which are often characterized by significant amounts of goodwill. In addition, under the Proposed Statement, a company that has made certain equity investments of generally less than 20% ownership would record a gain (or loss) upon increasing its investment level to the point of exerting "significant influence," generally 20% or higher. The FASB conducted a hearing concerning the Proposed Statement in February 1996, at which Thermo Electron, along with other major companies and many of the major accounting firms and accounting associations, expressed their disagreement with various parts of the Proposed Statement. The FASB expects to issue a final Statement by June 30, 1996, which could become effective for fiscal years beginning after December 15, 1996. Results of Operations 1995 Compared With 1994 Total revenues in 1995 were $175.8 million, compared with $155.1 million in 1994. Instruments and Other Equipment segment revenues increased 10% to $136.7 million in 1995 from $124.1 million in 1994. Revenues increased $17.4 million due to the inclusion of sales for a full year from Thermo Sentron, which was acquired in March 1994. Revenues from Thermo Voltek increased $12.7 million, due to the inclusion of an additional $7.2 million in revenues from businesses acquired in 1994 and 1995, an increase of $3.1 million in revenues from Comtest due primarily to the introduction of a new product line in 1995, and an increase of $2.3 million in revenues from Keytek due to greater demand. Revenues at Thermedics Detection were $28.0 million in 1995, compared with $50.3 million in 1994. Revenues from Thermedics Detection's process detection instruments declined to $16.2 million in 1995 from $38.0 million in 1994. This decline is due to a decrease in demand from Thermedics Detection's principal customer, which has substantially completed its deployment of Alexus product quality assurance systems. While the Company has expanded its customer base and continues to develop Alexus upgrades and new applications for its process detection technology in the food and beverage market, no assurance can be 32PAGE Thermedics Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 1995 Compared With 1994 (continued) given that the Company will be able to significantly broaden the market for its process detection systems. Revenues from Thermedics Detection's EGIS explosives-detection system declined to $8.0 million in 1995 from $10.1 million in 1994. The Company's sales of the EGIS system have been made primarily to government entities outside of the U.S. During 1993 and 1994, large orders from the U.K. and German governments accounted for a significant portion of EGIS sales. These orders have now been filled. Demand for this highly specialized product will vary widely over time in a particular country, and among different countries, due to many factors beyond the control of the Company, such as budgetary constraints and social and political concerns about security. Due to the nature of demand for the EGIS system, future sales levels will depend, to a significant extent, upon the Company's ability to obtain large orders from one or more government entities. Biomedical Products segment revenues increased 26% to $39.0 million in 1995 from $31.0 million in 1994. Revenues from Thermo Cardiosystems increased by $10.2 million to $20.6 million due in part to an increase in the price of the LVAS. Revenues also increased due to a 43% increase in the number of air-driven and electric LVAS units shipped during 1995 compared with 1994. The increase in revenues from Thermo Cardiosystems was partially offset by a decline of $2.8 million in revenues from Scent Seal fragrance samplers. In June 1995, the Company entered into an agreement granting an exclusive license to all of its patents and know-how relating to the Scent Seal fragrance samplers to a third party in consideration for royalty payments on future sales by the licensee. The Company recorded royalty income of $197,000 in 1995. The gross profit margin was 45% in 1995, compared with 44% in 1994. The gross profit margin for the Instruments and Other Equipment segment was 43% in 1995, compared with 44% in 1994. This decline was due primarily to lower gross margins at Thermedics Detection as a result of a lower sales volume and, to a lesser extent, the inclusion of lower-margin research and development contract revenues. In addition, Thermo Voltek's gross profit margin decreased to 48% in 1995 from 49% in 1994 due primarily to higher European sales in one product line, which has lower margins due to competitive pricing pressures. These decreases were offset in part by improved gross profit margins at Thermo Sentron due to a reduction in operating expenses. The gross profit margin for the Biomedical Products segment was 49% in 1995, compared with 42% in 1994, reflecting higher margins at Thermo Cardiosystems resulting from the LVAS price increase and, to a lesser extent, the increase in sales volume and improvements in manufacturing efficiencies. Selling, general and administrative expenses as a percentage of revenues decreased to 27% in 1995 from 28% in 1994. This decline results primarily from lower expenses as a percentage of revenues at Thermo Cardiosystems as a result of a higher sales volume in 1995 and, to a lesser extent, a reduction in operating expenses at Thermo Sentron. These improvements were partially offset by higher expenses as a percentage of revenues at Thermedics Detection due to a lower sales volume in 1995. Research and development expenses as a percentage of revenues decreased to 6.3% in 1995 from 6.7% in 1994 due primarily to lower expenses as a percentage of revenues at Thermo Cardiosystems as a result of an increase in total revenues. 33PAGE Thermedics Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 1995 Compared With 1994 (continued) Interest income increased to $9.1 million in 1995 from $7.3 million in 1994 due to higher prevailing interest rates in 1995. Interest expense increased to $3.7 million in 1995 from $3.2 million in 1994 as a result of borrowings by Thermo Sentron's and Thermo Voltek's foreign subsidiaries, offset in part by a decrease in interest expense due to conversions of subordinated convertible obligations. Gain on issuance of stock by subsidiary of $3.5 million in 1995 resulted from the conversion of $9.1 million principal amount of Thermo Voltek's 3 3/4% subordinated convertible debentures. The effective tax rate was 32% in 1995, compared with 38% in 1994. The effective tax rate in 1995 was below the statutory federal income tax rate due primarily to the nontaxable gain on issuance of stock by subsidiary and the reduction of the valuation allowance no longer required, offset in part by state income taxes (Note 6). The effective tax rate in 1994 was higher than the statutory federal income tax rate due primarily to state income taxes. Minority interest expense increased to $4.5 million in 1995 from $1.2 million in 1994 due to higher net income at the Company's 52%-owned Thermo Cardiosystems subsidiary and, to a lesser extent, the Company's 50%-owned Thermo Voltek subsidiary. 1994 Compared With 1993 Total revenues in 1994 were $155.1 million, compared with $80.2 million in 1993, an increase of 93%. Instruments and Other Equipment segment revenues more than doubled in 1994 to $124.1 million from $60.1 million in 1993. This increase reflects the inclusion of $50.1 million in revenues from Thermo Sentron, which was acquired in March 1994, $4.6 million in additional revenues from Comtest, which was acquired by Thermo Voltek in August 1993, and an increase of $4.1 million in revenues from the Company's EGIS explosives-detection systems. Process detection instrument sales, principally to one customer, were $38.0 million in 1994, compared with $34.4 million in 1993. Biomedical Products segment revenues increased 54% to $31.0 million in 1994 from $20.1 million in 1993. The improvement is primarily the result of a $6.9 million increase in sales of Thermo Cardiosystems' LVAS to $10.4 million and additional revenues of $3.0 million from Scent Seal fragrance samplers, which were introduced in the first quarter of 1993. The Company's gross profit margin remained relatively unchanged at 44% in 1994 and 43% in 1993. The gross profit margin for the Instruments and Other Equipment segment remained unchanged at 44% in both 1994 and 1993. Improved efficiencies in the worldwide service organization for process detection instruments and, to a lesser extent, improved margins at Universal Voltronics as a result of increased commercial sales relative to lower-margin government contract revenues were offset by the inclusion of lower-margin Thermo Sentron revenues. The gross profit margin for the Biomedical Products segment was 42% in 1994, compared with 38% in 1993, reflecting higher margins derived from Thermo Cardiosystems' LVAS due to higher sales, manufacturing efficiencies, and the initial impact of the price increase for the air-driven system which took effect in the fourth quarter of 1994. Operating income, before the inclusion of Thermo Cardiosystems' results, was $15.3 million in 1994, compared with $10.2 million in 1993. 34PAGE Thermedics Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 1994 Compared With 1993 (continued) This improvement results primarily from higher sales, which resulted in higher gross profit. Including Thermo Cardiosystems' operating losses of $0.9 million in 1994 and $3.2 million in 1993, the Company reported operating income of $14.3 million in 1994, compared with $7.1 million in 1993. Thermo Cardiosystems' lower operating loss resulted primarily from an increased gross profit margin on higher revenues, partially offset by increased expenses to develop and market its LVAS. Interest income increased to $7.3 million in 1994 from $6.1 million in 1993. This increase is due to higher average invested amounts derived from the issuance of $34.5 million principal amount of 3 3/4% subordinated convertible debentures by Thermo Voltek in November 1993, and the issuance of $33.0 million principal amount of noninterest-bearing subordinated convertible debentures by Thermo Cardiosystems in January 1994. This increase was offset in part by cash expended for the acquisition of Thermo Sentron in March 1994. Interest expense increased to $3.2 million in 1994 from $2.4 million in 1993 due to the issuance of the 3 3/4% subordinated convertible debentures by Thermo Voltek, partially offset by conversions of the Company's 6 1/2% subordinated convertible debentures. Other income includes $635,000 in 1994 relating to foreign currency transaction gains. The effective tax rate was 38% in 1994 and 40% in 1993. These rates exceed the statutory federal income tax rate due primarily to state income taxes (Note 6). Liquidity and Capital Resources Working capital, including cash, cash equivalents, and short-term available-for-sale investments, was $110.1 million at December 30, 1995, compared with $128.3 million at December 31, 1994. Cash, cash equivalents, and short- and long-term available-for-sale investments were $155.2 million at December 30, 1995, compared with $154.1 million at December 31, 1994. Of the $155.2 million balance at December 30, 1995, $90.5 million was held by Thermo Cardiosystems, $34.7 million by Thermo Voltek, and the remainder by the Company and its wholly owned subsidiaries. During 1995, $14.9 million of cash was provided by operating activities and the Company expended $4.4 million on purchases of property, plant and equipment. In December 1995, the Company acquired Orion for approximately $52.7 million in cash, which included the repayment of $8.6 million of debt, subject to a post-closing adjustment. To partially finance this acquisition, the Company borrowed $38.0 million from Thermo Electron pursuant to a promissory note due December 1996, and bearing interest at the Commercial Paper Composite Rate plus 25 basis points. The balance of the purchase price was funded from the Company's working capital. In January 1996, the Company acquired the assets of Moisture Systems Corporation, based in Hopkinton, Massachusetts, and certain affiliated companies, as well as Netherlands-based Rutter & Co., for a total purchase price of $20.5 million in cash and the assumption of certain liabilities. In connection with these acquisitions, the Company borrowed $15.0 million from Thermo Electron pursuant to a promissory note due February 1997, and bearing interest at the Commercial Paper Composite Rate plus 25 basis points. Thermo Electron has indicated its intention to require the Company's indebtedness to Thermo Electron be repaid to the extent the Company's liquidity and cash flow permit. On February 1, 1996, Thermo 35PAGE Thermedics Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) Sentron filed a registration statement under the Securities Act of 1933 with the Securities and Exchange Commission covering shares of common stock to be offered in its initial public offering. The Company intends, for the foreseeable future, to maintain at least 50% ownership of Thermo Cardiosystems, Thermo Voltek and Thermo Sentron. This may require the purchase by the Company of additional shares of common stock or, if applicable, convertible debentures (which are then converted) of these companies from time to time, if the number of the companies' outstanding shares increases, whether as a result of conversion of convertible notes or exercise of stock options issued by them, or otherwise. These or any other purchases may be made either in the open market or directly from Thermo Cardiosystems, Thermo Voltek or Thermo Sentron, or pursuant to the conversion of all or part of Thermo Voltek's subordinated convertible notes held by Thermedics. During 1995, the Company expended $179,000 to purchase shares of Thermo Voltek common stock on the open market. In 1996, the Company expects to make capital expenditures of approximately $6.6 million. The Company expects to continue to pursue its strategy of expanding its business both through the continued development, manufacture, and sale of new products, and through the possible acquisition of companies that will provide additional marketing or manufacturing capabilities and new products. The Company expects that it will finance these acquisitions through a combination of internal funds, additional debt or equity financing from the capital markets, or short-term borrowings from Thermo Electron. The Company believes its existing resources are sufficient to meet the capital requirements of its existing operations for the foreseeable future. 36PAGE Thermedics Inc. Selected Financial Information (In thousands except per share amounts) 1995(a) 1994(b) 1993(c) 1992(d) 1991 - ------------------------------------------------------------------------------ Statement of Income Data: Revenues $175,754 $155,111 $ 80,220 $ 45,778 $ 32,295 Net income 15,121 10,837 6,670 2,467 1,613 Earnings per share .45 .33 .22 .09 .06 Balance Sheet Data: Working capital $110,113 $128,330 $133,003 $ 63,205 $ 78,359 Total assets 368,150 291,567 237,487 146,663 128,880 Long-term obligations 45,201 82,551 59,130 33,820 34,315 Common stock of subsidiary subject to redemption - - - 5,468 5,486 Shareholders' investment 167,010 131,765 117,451 69,323 73,510 Quarterly Information (Unaudited) (In thousands except per share amounts) 1995 First Second Third Fourth(a) - ------------------------------------------------------------------------------- Revenues $ 43,858 $ 43,268 $ 41,224 $ 47,404 Gross profit 19,572 19,553 17,595 21,744 Net income 3,262 3,666 4,017 4,176 Earnings per share .10 .11 .12 .12 1994 First(b) Second Third Fourth - ------------------------------------------------------------------------------- Revenues $ 27,293 $ 42,403 $ 41,578 $ 43,837 Gross profit 11,637 17,593 18,479 19,805 Net income 2,152 2,510 2,886 3,289 Earnings per share .07 .08 .09 .10 (a) Reflects the December 1995 acquisition of the Orion laboratory products division of Analytical Technology, Inc. (b) Reflects the January 1994 issuance of $33.0 million principal amount of noninterest-bearing subordinated convertible debentures by Thermo Cardiosystems Inc. and the March 1994 acquisition of Ramsey Technology, Inc. (c) Reflects the May 1993 public offering of the Company's common stock for net proceeds of $30.0 million, the August 1993 acquisition of Comtest Instrumentation B.V. and Comtest Limited, and the November 1993 issuance of $34.5 million principal amount of 3 3/4% subordinated convertible debentures by Thermo Voltek Corp. (d) Reflects the June 1992 acquisition of KeyTek Instrument. 37PAGE Thermedics Inc. Common Stock Market Information The following table shows the market range for the Company's common stock based on reported sales prices on the American Stock Exchange (symbol TMD) for 1995 and 1994. 1995 1994 ----------------- ---------------- Quarter High Low High Low ----------------------------------------------------------------------- First $17 1/2 $12 1/2 $15 $11 7/8 Second 20 1/2 15 1/2 15 7/8 12 Third 21 3/4 17 3/4 15 7/8 12 7/8 Fourth 28 17 1/2 16 1/8 12 3/8 As of January 26, 1996, the Company had 2,328 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 26, 1996 was $26 1/4 per share. Common stock of the following majority-owned public subsidiaries is traded on the American Stock Exchange: Thermo Cardiosystems Inc. (symbol TCA) and Thermo Voltek Corp. (symbol TVL). Stock Transfer Agent The Bank of Boston is the stock transfer agent and maintains shareholder activity records. The agent will respond to questions on issuances of stock certificates, changes of ownership, lost stock certificates, and changes of address. For these and similar matters, please direct inquiries to: The Bank of Boston P.O. Box 644 Mail Stop: 45-02-09 Boston, Massachusetts 02102-0644 (617) 575-3120 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. 38PAGE Thermedics Inc. Shareholder Services Shareholders of Thermedics Inc. who desire information about the Company are invited to contact John N. Hatsopoulos, Chief Financial Officer, Thermedics Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046, (617) 622-1111. A mailing list is maintained to enable shareholders whose stock is held in street name, and other interested individuals, to receive quarterly reports, annual reports, and press releases as quickly as possible. Quarterly reports and press releases will also be available through the Internet at Thermo Electron's home page on the World Wide Web (http://www.thermo.com). Form 10-K Report A copy of the Annual Report on Form 10-K for the fiscal year ended December 30, 1995, as filed with the Securities and Exchange Commission, may be obtained at no charge by writing to John N. Hatsopoulos, Chief Financial Officer, Thermedics Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046. Annual Meeting The annual meeting of shareholders will be held on Monday, May 20, 1996, at 1:15 p.m. at the Turnberry Isle Resort & Club, Aventura, Florida. EX-21 4 Exhibit 21 THERMEDICS INC. Subsidiaries of the Registrant At March 6, 1996, Thermedics Inc. owned the following companies: State or Jurisdiction Registrant's Name of Incorporation % of Ownership - ------------------------------------------------------------------------------- Analytical Technology, Inc. Delaware 100% Orion Foreign Sales Corp. U.S. Virgin Islands 100% Orion Research Limited United Kingdom 100% Orion Research Puerto Rico, Inc. Puerto Rico 100% Corpak Inc. Massachusetts 100% Walpak Company Illinois 100% Orion Research, Inc. Massachusetts 100% Russell pH Limited Scotland 100% Thermedics Detection Inc. Massachusetts 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% Thermedics Detection de Mexico, S.A. de C.V. Mexico 100% Thermedics Detection GmbH Germany 100% Thermedics Detection Limited United Kingdom 100% Thermedics Detection Scandinavia AS Norway 100% Thermedics F.S.C. Inc. U.S. Virgin Islands 100% Thermo Sentron Inc. Delaware 100% Ramsey France S.A.R.L. France 100% Ramsey Ingenieros S.A. Spain 100% Ramsey Italia S.R.L. Italy 100% Tecno Europa Elettromeccanica S.R.L. Italy 100% Ramsey Technology Inc. Massachusetts 100% Xuzhou Ramsey Technology Co., Limited China 50% Thermedics Australia Pty. Ltd. Australia 100% Thermo Sentron B.V. Netherlands 100% Thermo Sentron Canada Inc. Canada 100% Thermo Sentron GmbH Germany 100% Thermo Sentron Limited United Kingdom 100% Hitech Electrocontrols Limited United Kingdom 100% Hitech Licenses Ltd. United Kingdom 100% Hitech Metal Detectors Ltd. United Kingdom 100% Thermo Sentron SEC Corporation Massachusetts 100% Thermo Sentron (South Africa) Pty. Ltd. South Africa 100% TMD Securities Corporation Massachusetts 100% Thermo Cardiosystems Inc. Massachusetts 52% TCA Securities Corporation Massachusetts 100% Thermo Voltek Corp. Delaware 50% Comtest Europe B.V. Netherlands 100% Comtest Instrumentation, B.V. Netherlands 100% Comtest Limited United Kingdom 100% KeyTek FSC, Ltd. U.S. Virgin Islands 100% TVL Securities Corporation Delaware 100% UVC Realty Corp. New York 100% EX-23 5 Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation by reference of our reports dated February 7, 1996 (except with respect to the matters discussed in Note 15 as to which the date is February 9, 1996), included in or incorporated by reference into Thermedics Inc.'s Annual Report on Form 10-K for the year ended December 30, 1995, and into the Company's previously filed Registration Statement No. 2-93746 on Form S-8, Registration Statement No. 33-00183 on Form S-8, Registration Statement No. 2-93747 on Form S-8, Registration Statement No. 33-8992 on Form S-8, Registration Statement No. 33-31621 on Form S-8, Registration Statement No. 33-9215 on Form S-8, Registration Statement No. 33-43707 on Form S-3, Registration Statement No. 33-40866 on Form S-3, Registration Statement No. 33-64070 on Form S-8, Registration Statement No. 33-86972 on Form S-8, Registration Statement No. 33-86974 on Form S-8 and Registration Statement No. 033-65279 on Form S-8. Arthur Andersen LLP Boston, Massachusetts March 8, 1996 EX-27 6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-30-1995 DEC-30-1995 37,370 77,916 45,309 3,982 42,679 209,519 30,302 17,369 368,150 99,406 45,201 3,399 0 0 163,611 368,150 175,754 175,754 97,290 97,290 11,087 689 3,677 28,730 9,154 15,121 0 0 0 15,121 .45 0
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