-----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, G3AAisLEQlErj1YrpKpHiFbHty7mSvdn+jwfGWD4wocGliXpBCi7yvZ605+ANSed DGeIVjMVlLPWHpqUJKQRew== 0000721356-00-000009.txt : 20000324 0000721356-00-000009.hdr.sgml : 20000324 ACCESSION NUMBER: 0000721356-00-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERMEDICS INC CENTRAL INDEX KEY: 0000721356 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 042788806 STATE OF INCORPORATION: MA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09567 FILM NUMBER: 576912 BUSINESS ADDRESS: STREET 1: 470 WILDWOOD ST STREET 2: P O BOX 2697 CITY: WOBURN STATE: MA ZIP: 01888-1799 BUSINESS PHONE: 7819383786 MAIL ADDRESS: STREET 1: 81 WYMAN STREET STREET 2: P.O. BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02254 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------------------------------------------- FORM 10-K (mark one) [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 1, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-9567 THERMEDICS INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-2788806 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer 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: (781) 622-1000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.10 par value American Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of January 28, 2000, was approximately $61,227,000. As of January 28, 2000, the Registrant had 41,945,661 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of Form 10-K will be filed as part of an amendment to this Form 10-K no later than 120 days after January 1, 2000, and such information is incorporated by reference from such filing. PART I Item 1. Business (a) General Development of Business The continuing operations of Thermedics Inc. (the Company or the Registrant) operate in three reportable segments: Quality Assurance and Security Products, Precision Weighing and Inspection Equipment, and Respiratory Care Products. The Quality Assurance and Security Products segment consists of the Company's Thermedics Detection Inc. subsidiary, which develops, manufactures, and markets high-speed detection and measurement instruments used in a variety of on-line industrial process applications, security applications, and laboratory analyses. The Company's Precision Weighing and Inspection Equipment segment includes the Company's Thermo Sentron Inc. subsidiary, which develops, manufactures, and markets high-speed precision-weighing and inspection equipment for industrial production and packaging lines. The Respiratory Care Products segment consists of Erich Jaeger GmbH, which was acquired by the Company in July 1999. Jaeger, based in Germany, develops and manufactures equipment for lung-function, cardio respiratory, and sleep disorder diagnosis and monitoring. In addition, the Company develops and manufactures enteral nutrition-delivery systems and a line of medical-grade polymers used in medical disposables and in nonmedical, industrial applications, including safety glass and automotive coatings. In May 1999, the Company announced its intention to sell its Thermo Voltek Corp. subsidiary, which represents its former Power Electronics and Test Equipment segment. In January 2000, Thermo Electron Corporation announced a reorganization plan under which the Company intends to sell its Thermo Cardiosystems Inc. subsidiary, which represents its former Heart Assist and Blood Testing Devices segment. The Company expects to complete the sale of the Power Electronics and Test Equipment businesses in the first half of 2000 and expects to complete the sale of Thermo Cardiosystems during 2000. The results of these businesses have been presented as discontinued operations in the accompanying financial statements. Except where indicated, the information presented in this Form 10-K pertains to the Company's continuing operations. The Company was incorporated in 1983 under the laws of Massachusetts as a wholly owned subsidiary of Thermo Electron. Thermo Electron has announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. Under this plan, the Company has made cash tender offers of $15.50 per share for Thermo Sentron and $8.00 per share for Thermedics Detection in order to bring its equity ownership in each of these companies, when combined with Thermo Electron's equity interest in each, to at least 90%. As of January 1, 2000, the Company owned approximately 74.2% of Thermo Sentron and 83.6% of Thermedics Detection, respectively, and Thermo Electron owned approximately 12.4% of Thermo Sentron and 5.3% of Thermedics Detection, respectively. If these tender offers are successful, each of these companies would then be taken private by the Company through a short-form merger at the same cash prices as the tender offers. Thermo Electron also intends to take the Company private. Thermo Electron has announced that it will conduct an exchange offer for any and all of the outstanding shares of Company common stock held by public shareholders. In the exchange offer, holders of Company common stock would receive shares of Thermo Electron common stock in exchange for each of their shares of the Company. On March 8, 2000, Thermo Electron announced the proposed exchange ratio of 0.45 shares of Thermo Electron common stock for each share of Company common stock. Thermo Electron will condition the exchange offer on receiving acceptances from holders of enough shares so that, when combined with its current share ownership, Thermo Electron's ownership reaches at least 90%. If Thermo Electron achieves this 90% ownership threshold, it would acquire all remaining outstanding shares of the Company through a short-form merger. In the short-form merger, minority shareholders who do not participate in the exchange offer would also receive shares of Thermo Electron common stock in exchange for their Company common stock at the same ratio. As of January 1, 2 2000, Thermo Electron owned 31,759,424 shares of the Company's common stock, representing 76% of such stock outstanding. The proposed transactions are subject to a number of conditions, as outlined in Note 16 to Consolidated Financial Statements in the Registrant's 1999* Annual Report to Shareholders, which information is incorporated herein by reference. Thermo Electron develops, manufactures, and sells measurement and detection instruments used in virtually every industry to monitor, collect, and analyze data that provide knowledge for the user. For example, Thermo Electron's powerful analysis technologies help researchers sift through data to make the discoveries that will fight disease or prolong life; allow manufacturers to fabricate ever-smaller components required to increase the speed and quality of communications; or monitor and control industrial processes on-line to ensure that critical quality standards are met efficiently and safely. During 1999, Thermo Electron purchased 919,700 shares of the Company's common stock in the open market for $5.9 million. Additionally, during 1999, Thermo Electron purchased in the open market 147,500 shares of common stock of Thermedics Detection for $1.3 million and 41,700 shares of common stock of Thermo Sentron for $0.4 million. Forward-looking Statements Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Annual Report on Form 10-K. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Forward-looking Statements" in the Registrant's 1999 Annual Report to Shareholders, which statements are incorporated herein by reference. (b) Financial Information About Segments Financial information concerning the Company's segments is summarized in Note 12 to Consolidated Financial Statements in the Registrant's 1999 Annual Report to Shareholders, which information is incorporated herein by reference. (c) Description of Business (i) Principal Products and Services Quality Assurance and Security Products Detection Instruments Thermedics Detection supplies high-speed detection and measurement systems to examine a variety of products and substances either on-line or in a laboratory to ensure their quality. The ALEXUS(R) systems detect trace amounts of constituents that would affect product quality in refillable plastic containers of soft drinks, water, and other beverages. The InScan(R) high-speed X-ray imaging system uses high-speed X-ray imaging technology to determine accurate fill volume, net volume, proper contents, and package integrity of containers for the beverage, food, and other industries. Through its Moisture Systems division, Thermedics Detection designs, manufactures, and markets - -------------------- * References to 1999, 1998, and 1997 herein are for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998, respectively. 3 equipment that uses near-infrared spectroscopy to measure moisture and other product constituents, including fats, proteins, oils, flavorings, solvents, adhesives, and coatings, in a variety of products as they move along manufacturing lines. These systems are used across the food, pharmaceutical, chemical, petrochemical, tobacco, forest products, paper converting, plastics, textiles, corrugating, and other industries. Thermedics Detection's high-speed gas chromatograph, called Flash-GC(TM), provides information on the composition of a wide range of substances, such as pharmaceuticals, food, and water, at speeds 20 to 50 times faster than conventional gas chromatography, while its EZ-Flash(TM) system is an upgrade kit that can be added to virtually any conventional gas chromatograph to conduct chemical analyses up to 30 times faster. Also through Thermedics Detection, the Company produces security instruments that use trace particle- and vapor-detection techniques for forensics and search and screening applications under the direction of police, border police, transportation authorities, and carriers. Thermedics Detection's principal security instrument is the EGIS(R) system, a highly sensitive particle- and vapor-detection system for screening baggage, packages, freight, and electronic equipment, such as personal computers, for the presence of a wide range of explosives, including plastic explosives that have proven difficult to detect using conventional methods. Currently, more than 275 EGIS units are deployed at airports, border crossings, and other checkpoints. In addition, EGIS units have been used in highly visible forensic investigations, including the crash of TWA Flight 800, as well as the bombings in Oklahoma City, at New York's World Trade Center, and at locations in Israel, Buenos Aries, and the United Kingdom. In 1998, Thermedics Detection introduced a new line of benchtop explosives-detection systems based on its EGIS technology. This family of products includes the EGIS II, the more sensitive EGIS III, and the EGIS IV, Thermedics Detection's most sensitive explosives detector to date. Thermedics Detection also has developed SecurScan(TM), a walk-through explosives detector. During 1999, 1998, and 1997, the Company derived revenues of $26.4 million, $40.3 million, and $51.3 million, respectively, from its detection instruments. Laboratory Products Through its Orion subsidiary, Thermedics Detection manufactures a wide range of electrochemistry products that determine the quality of many substances by measuring their pH, specific ion concentration, dissolved oxygen, and conductivity. Orion's products are used in the food, beverage, pharmaceutical, chemical, environmental analysis, drinking water, wastewater treatment, agricultural, biomedical research, and many other industries. Pure water monitors, also marketed under the Orion name, use ion-selective technology to evaluate water quality in the power, semiconductor, petrochemical, and paper industries. Other products include microweighing equipment and titration systems. During 1999, 1998, and 1997, the Company derived revenues of $47.2 million, $51.3 million, and $53.1 million, respectively, from its laboratory products. Precision Weighing and Inspection Equipment Thermo Sentron serves two principal markets: packaged goods and bulk materials. Thermo Sentron's products for the packaged-goods market include a broad line of checkweighing equipment and metal detectors that can be integrated at various points in production lines for process control and quality assurance. Thermo Sentron also produces hot foil and thermal printers and X-ray inspection equipment. Thermo Sentron's packaged-goods customers include companies in the food-processing, pharmaceutical, mail-order, and other diverse industries. Products in Thermo Sentron's bulk-materials line include conveyor-belt scales, solid level-measurement and conveyor-monitoring systems, sampling systems, and small-capacity feeders. These products are sold primarily to customers in the mining and material-processing industries, as well as electric utilities and chemical and other manufacturing companies. In June 1998, Thermo Sentron acquired the three businesses that constituted the product-monitoring group of Graseby 4 Limited (the product-monitoring businesses), a subsidiary of Smiths Industries plc. The product-monitoring businesses design, manufacture, and distribute specialized packaged-goods equipment, including checkweighers and metal detectors, for the food and pharmaceutical industries. Respiratory Care Products Jaeger develops and manufactures state-of-the-art diagnostic and monitoring tools for specialized use in pulmonology, as well as cardiology, sleep, and neurology. Jaeger is a worldwide leader in the pulmonary diagnostic market and offers a full line of PC-based diagnostic products to perform fully automated testing of spirometry, lung volume, lung diffusing capacity, and airways resistance in both adults and children. These products are used at hospitals, clinics, and private medical practices. In addition, Jaeger offers pulmonary function labs - sophisticated, hospital-based systems that are used to measure complete lung function. Jaeger's cardiorespiratory diagnostic systems, which include treadmills and electrocardiograph systems, help measure a patient's metabolic function to assist in the diagnosis of cardiopulmonary disease and aid in the rehabilitation of patients who are suffering from heart or lung disease. Jaeger's electrophysiology products are used in hospitals and physicians offices to monitor and diagnose neurological function. Jaeger's sleep diagnostic and monitoring equipment is typically used in sleep labs. Sleep disorders include sleep apnea, insomnia, parasomnia, and narcolepsy. Jaeger has also introduced a product for the growing home-based testing market. In addition, Jaeger has expanded the use of computer technology as part of a patient's disease management process. Jaeger is building on its current product software platform, LAB, which offers physicians, throughout all levels of care, the tools necessary to decrease the time it takes to perform tests and provide therapy. Other 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 also extrudes precision tubing to customer specifications. The Company's CORPAK MedSystems 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 catheters for peritoneal dialysis. Discontinued Operations The Company's discontinued operations consist of the Company's former Power Electronics and Test Equipment and Heart Assist and Blood Testing Devices segments. The Power Electronics and Test Equipment segment, through Thermo Voltek, designs, manufactures, and markets a range of products related to power amplification, conversion, and quality and electronics-test instruments. The Heart Assist and Blood Testing Devices segment consists of Thermo Cardiosystems, which has developed two implantable left ventricular-assist systems (LVAS): a pneumatic, or air-driven, system and an electric version. Thermo Cardiosystems' International Technidyne Corporation subsidiary is a leading manufacturer of near-patient, whole-blood coagulation testing equipment and related disposables and also manufactures premium-quality, single-use skin-incision devices. 5 (ii) and (xi) New Products; 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 underway, funded by the Company solely or jointly with an outside source. These programs include development of new products, quality assurance and security instruments; and respiratory, diagnostic, and monitoring instruments. The Company also develops new grades of polymers to meet specific customer requirements for industrial and medical applications. During 1999, 1998, and 1997, the Company expended $14.3 million, $12.9 million, and $12.0 million, respectively, on internally sponsored research and development programs, and $1.8 million, $2.3 million, and $1.1 million, respectively, on research and development programs sponsored by others. As of January 1, 2000, 165 professional employees were engaged full-time in research and development activities. (iii) Raw Materials Continuing Operations Supplies purchased by the Company are available from a number of different suppliers or from alternative sources that could be developed without a material adverse effect on the Company's business. To date, the Company has experienced no difficulties in obtaining these materials. Discontinued Operations Certain raw materials used in the manufacture of Thermo Cardiosystems' LVAS are available from only one or two suppliers. Thermo Cardiosystems is making efforts to minimize the risks associated with sole sources and ensure long-term availability, including qualifying alternative materials and components or developing alternative sources for materials and components supplied by a single source. Although Thermo Cardiosystems believes that it has adequate supplies of materials and components to meet demand for the LVAS for the foreseeable future, no assurance can be given that Thermo Cardiosystems will not experience shortages of certain materials or components in the future that could delay shipments of the LVAS. The cost to Thermo Cardiosystems to evaluate and test alternative materials and components and the time necessary to obtain FDA approval for these materials and components are inherently difficult to determine because both time and cost are dependent on at least two factors: the similarity of alternative materials or components to the original materials or components, and the amount of third-party testing that may have already been completed on alternative materials or components. There can be no assurance that the substitution of alternative materials or components will not cause delays in Thermo Cardiosystems' LVAS development program or adversely affect Thermo Cardiosystems' ability to manufacture and ship LVAS to meet demand. (iv) Patents, Licenses, and Trademarks Continuing Operations 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 addition, there can be no assurance that third parties will not assert claims against the Company that the Company infringes the intellectual property rights of such parties. The Company could incur substantial costs and diversion of management resources with respect to the defense of any such claims, which could have a material adverse effect on 6 the Company's business, financial condition, and results of operations. Furthermore, parties making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief, which could effectively block the Company's ability to make, use, sell, distribute, or market its products and services in the U.S. or abroad. In the event that a claim relating to intellectual property is asserted against the Company, the Company may seek licenses to such intellectual property. There can be no assurance, however, that such licenses could be obtained on commercially reasonable terms, if at all. The failure to obtain the necessary licenses or other rights could preclude the sale, manufacture, or distribution of the Company's products and, therefore, could have a material adverse effect on the Company's business, financial condition, and results of operations. The Company has certain licenses to the technology resulting from its customer-sponsored development of the ALEXUS system. The Company's patents and agreements 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. Discontinued Operations Thermo Cardiosystems has received correspondence from a third party alleging that the textured surface of the LVAS housing infringes certain patent rights of such third 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 usage. Thermo Cardiosystems has investigated the bases of the allegation and, based on the opinion of its counsel and the Company's assessment of the proceedings in the United States Patent and Trademark Office to date, it believes that if it were sued on these bases, it would have meritorious defenses. Given the inherent uncertainties in dispute resolution, however, if Thermo Cardiosystems were sued and the outcome were unfavorable, Thermo Cardiosystems' results of operations or financial condition could be materially adversely affected in amounts Thermo Cardiosystems cannot reasonably estimate. In August 1998, Thermo Cardiosystems obtained an exclusive license to incorporate technology developed by Sulzer Electronics Ltd. into an advanced version of Thermo Cardiosystems' LVAS, HeartMate III. Sulzer Electronics Ltd., based in Switzerland, is a company within the Sulzer Corporation. HeartMate III is a miniature centrifugal pump featuring a magnetically controlled system that has been developed by Sulzer Electronics' Magnetics Group. (v) Seasonal Influences There are no significant seasonal influences on the Company's sales of its products. (vi) Working Capital Requirements There are no special inventory requirements or credit terms extended to customers that would have a material adverse effect on the Company's working capital. (vii) Dependency on a Single Customer No single customer accounted for more than 10% of the Company's total revenues in any of the past three years. 7 (viii) Backlog The Company's backlog of firm orders was as follows:
(In thousands) 1999 1998 - ---------------------------------------------------------------------------------------- ------- ------- Quality Assurance and Security Products $ 4,601 $ 6,065 Precision Weighing and Inspection Equipment 10,505 14,683 Respiratory Care Products 5,192 - Other 1,776 1,843 ------- ------- $22,074 $22,591 ======= ======= Certain of these orders are cancelable by the customer upon payment of a cancellation charge. The Company anticipates that substantially all of the backlog at January 1, 2000, will be shipped or completed during the next twelve months. The decrease in backlog from existing businesses primarily resulted from a decrease in demand at the Company's Quality Assurance and Security Products and Precision Weighing and Inspection Equipment segments. (ix) Government Contracts Not applicable. (x) Competition Quality Assurance and Security Products The Company's quality assurance products compete with systems manufactured by numerous companies. The Company believes, however, that these companies are generally focused on particular niches in the process detection systems market, only in some of which the Company competes. Competition in the markets for each of the Company's quality assurance systems is based primarily on performance, durability, service and, to a lesser extent, price. The Company believes that its systems' performance and speed, as well as the Company's reputation for developing superior new technologies and for the innovative application of existing technologies to a variety of high-speed production environments and product quality-assurance problems, are competitive advantages. In the security instrument market, the Company competes with a small number of companies, including other makers of chemical trace detection instruments, and, to a lesser degree, makers of enhanced X-ray detectors. Competition in this market is based primarily on performance, including speed, accuracy, and the range of explosives that can be detected; ease of use; service; and price. The Company's principal competitor in the trace detection market is Barringer Technologies Inc., a Canadian firm that has placed several trace detectors in airports. In the laboratory products market, the Company competes with several international companies. The Company competes on the basis of performance, service, technology, and price. Competitors include Corning, Fisher Scientific, Mettler-Toledo AG, and Beckman Coulter. 8 Precision Weighing and Inspection Equipment The Company's Thermo Sentron subsidiary encounters and expects to continue to encounter intense competition in the sale of its products. Thermo Sentron's principal competitors in the packaged-goods market are Ishida Scales Mfg. Co., Ltd. and Mettler-Toledo AG. In the more fragmented bulk-materials market, Thermo Sentron competes on a worldwide basis primarily with Carl Schenck AG and Milltronics Corporation. Thermo Sentron believes that the principal competitive pressures affecting the market for precision-weighing and inspection equipment include customer service and support, quality and reliability, price, accuracy, ease of use, distribution channels, technical features, compatibility with customers' manufacturing processes, and regulatory approvals. Respiratory Care Products The Company is a leading supplier of respiratory-care and other products. Numerous companies compete in this market worldwide. In the market for lung function diagnostic products, Jaeger competes with Medical Graphics, Collins/Ferraris, and CosMed, among others. The cardiorespiratory diagnostic products compete with products offered by companies such as Dantec/Medtronic, Medelec, and Nihon Kohden. In the sleep diagnostic market, Jaeger competes with Respironcs, ResMed, and NPB, among others. Competition in all of these markets is based primarily upon product features, reliability, services, product reputation, and price. Other 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. (xii) Environmental Protection Regulations The Company believes that compliance by the Company with federal, state, and local environmental protection regulations will not have a material adverse effect on its capital expenditures, earnings, or competitive position. (xiii) Number of Employees As of January 1, 2000, the Company's continuing operations employed 1,613 people and its discontinued operations employed 687 people. (d) Financial Information About Geographic Areas Financial information about geographic areas is summarized in Note 12 to Consolidated Financial Statements in the Registrant's 1999 Annual Report to Shareholders, which information is incorporated herein by reference.
(e) Executive Officers of the Registrant
Name Age Present Title (Fiscal Year First Became Executive Officer) ------------------ --- --------------------------------------------------------- John T. Keiser 64 President and Chief Executive Officer (1998) Victor L. Poirier 58 Senior Vice President (1983) Theo Melas-Kyriazi 40 Chief Financial Officer (1998) Paul F. Kelleher 57 Chief Accounting Officer (1985) 9 Each executive officer serves until his successor is chosen or appointed and qualified, or until earlier resignation, death, or removal. All executive officers, except Messrs. Keiser and Melas-Kyriazi, have held comparable positions for at least five years, either with the Company or with its parent company, Thermo Electron. Mr. Melas-Kyriazi was appointed Chief Financial Officer of the Company and Thermo Electron on January 1, 1999. He joined Thermo Electron in 1986 as Assistant Treasurer, and became Treasurer in 1988. In 1994, he was named President and Chief Executive Officer of Thermo Spectra Corporation, a public subsidiary of Thermo Instrument. In 1998, he became Vice President of Corporate Strategy for Thermo Electron. He remains a Vice President of 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. He was named President and Chief Executive Officer of the Company in March and December 1998, respectively. Mr. Keiser was appointed Chief Operating Officer, Biomedical and Advanced Technology, of Thermo Electron in September 1998 and his title was changed to Chief Operating Officer, Biomedical, in March 1999. From 1985 until 1994, he was President of the Eberline Instrument division of Thermo Instrument Systems Inc., a majority-owned public subsidiary of Thermo Electron. Messrs. Keiser, Melas-Kyriazi, 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 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 leases are not extended. The location and general character of the Company's properties by industry segment as of January 1, 2000, are as follows: Quality Assurance and Security Products The Quality Assurance and Security Products segment operates from two principal facilities: an 111,000-square foot office, research and development, and manufacturing facility in Massachusetts occupied under a lease expiring in 2006, subject to one five-year renewal option at the election of the Company; and a 115,000-square foot office and manufacturing facility in Massachusetts, occupied under a lease expiring in 2006. The Company also leases approximately 9,000 square feet in Enschede, Holland, occupied under a lease expiring in 2001. In addition, the Company leases approximately 33,200 square feet of office space throughout the world for its sales and service operations, and owns approximately 14,300 square feet of manufacturing, office, and storage facilities in Scotland. Precision Weighing and Inspection Equipment The Precision Weighing and Inspection Equipment segment leases approximately 314,300 square feet of office, engineering, and manufacturing space principally in Minnesota, the United Kingdom, Australia, and Germany under leases expiring at various dates through 2068. Respiratory Care Products The Respiratory Care Products segment leases approximately 124,900 square feet of office, engineering, and manufacturing space, principally in Germany, under leases expiring at various dates through 2004. Other The Company also leases approximately 131,000 square feet of office, engineering, laboratory, and manufacturing space in Massachusetts and Illinois, under leases expiring at various dates through 2004. 10 Discontinued Operations The Company's discontinued operations own approximately 62,000 square feet of office, engineering, laboratory, and manufacturing space in New Jersey and lease approximately 185,000 square feet of office, engineering, laboratory, and manufacturing space in Massachusetts, New Jersey, Washington, California, and the United Kingdom. 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 is included under the sections labeled "Common Stock Market Information" and "Dividend Policy" in the Registrant's 1999 Annual Report to Shareholders and is incorporated herein by reference. Item 6. Selected Financial Data The information required under this item is included under the sections labeled "Selected Financial Information" and "Dividend Policy" in the Registrant's 1999 Annual Report to Shareholders and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required under this item is included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1999 Annual Report to Shareholders and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required under this item is included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1999 Annual Report to Shareholders and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Registrant's Consolidated Financial Statements as of January 1, 2000, and Supplementary Data are included in the Registrant's 1999 Annual Report to Shareholders and are incorporated herein by reference. Item 9. Changes in and Disagreements with Public Accountants on Accounting and Financial Disclosure Not applicable. PART III The information required under Items 10, 11, 12, and 13 of Form 10-K will be filed as part of an amendment to this Form 10-K no later than 120 days after January 1, 2000, the end of the Registrant's fiscal year covered by this Form 10-K. 11 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a,d) Financial Statements and Schedules. (1)The consolidated financial statements set forth in the list below are filed as part of this Report. (2)The consolidated financial statement schedule set forth in the list below is filed as part of this Report. (3)Exhibits filed herewith or incorporated herein by reference are set forth in Item 14(c) below. List of Financial Statements and Schedules Referenced in this Item 14 Information incorporated by reference from Exhibit 13 filed herewith: Consolidated Statement of Operations Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Comprehensive Income and Shareholders' Investment Notes to Consolidated Financial Statements Report of Independent Public Accountants Financial Statement Schedules filed herewith: Schedule II: Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or not required, or because the required information is shown either in the financial statements or in the notes thereto. (b) Reports on Form 8-K None. (c) Exhibits See Exhibit Index on the page immediately preceding exhibits. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized. Date: March 23, 2000 THERMEDICS INC. By: /s/ John T. Keiser John T. Keiser 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 23, 2000. Signature Title By: /s/ John T. Keiser President, Chief Executive Officer, and Director John T. Keiser By: /s/ Theo Melas-Kyriazi Chief Financial Officer Theo Melas-Kyriazi By: /s/ Paul F. Kelleher Chief Accounting Officer Paul F. Kelleher By: /s/ T. Anthony Brooks Director T. Anthony Brooks By: /s/ Peter O. Crisp Director Peter O. Crisp By: /s/ Paul F. Ferrari Director Paul F. Ferrari By: /s/ George N. Hatsopoulos Director George N. Hatsopoulos By: /s/ John W. Wood Jr. Chairman of the Board and Director John W. Wood Jr. By: /s/ Nicholas T. Zervas Director Nicholas T. Zervas 13 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 10, 2000 (except with respect to the matters discussed in Note 16, as to which the date is March 8, 2000). Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 on page 12 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. 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 10, 2000
14 SCHEDULE II THERMEDICS INC. Valuation and Qualifying Accounts (In thousands)
Provision Accounts Balance Balance at Charged to Written at End Beginning Expense Off of Year Description of Year Other (a) - ------------------------------- ---------- ---------- -------- --------- ------- Allowance for Doubtful Accounts Year Ended January 1, 2000 $2,850 $ 1,795 $ (511) $ 775 $ 4,909 Year Ended January 2, 1999 $2,574 $ 610 $(1,267) $ 933 $ 2,850 Year Ended January 3, 1998 $3,580 $ 369 $(1,257) $ (118) $ 2,574 Amount Balance Balance at Capitalized at End Beginning as Cost of of Year Description of Year Acquisition Expenditures Other (d) - -------------------------------- ---------- ----------- ------------ --------- ------- Accrued Acquisition Reserves (b) Year Ended January 1, 2000 (c) $ 965 $ 5,137 $(1,140) $ (623) $ 4,339 Year Ended January 2, 1999 $ 259 $ 1,309 $ (592) $ (11) $ 965 Year Ended January 3, 1998 $ 896 $ 299 $ (832) $ (104) $ 259 (a) Includes allowance of businesses acquired during the year as described in Note 3 to Consolidated Financial Statements in the Registrant's 1999 Annual Report to Shareholders and the effect of foreign currency translation. (b) The nature of the activity in this account is described in Note 3 to Consolidated Financial Statements in the Registrant's 1999 Annual Report to Shareholders. (c) Includes reserves established related to an acquisition completed in 1998. (d) Represents reversal of accrued acquisition expenses and corresponding reduction of cost in excess of net assets of acquired companies resulting from finalization of restructuring plans and the effect of foreign currency translation. 15 EXHIBIT INDEX Exhibit Number Description of Exhibit 2.1 Asset and Stock Purchase Agreement dated as of January 28, 1994, between Thermo Electron 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, 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 (filed as Exhibit 2.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-9567] and incorporated herein by reference). 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. 2.6 Agreement and Plan of Reorganization among Thermo Cardiosystems Inc., ITC Acquisition Corp., Thermo Electron Corporation, ITC Holdings Inc., and International Technidyne Corporation dated as of May 2, 1997 (filed as Exhibit 2.1 to Thermo Cardiosystems' Quarterly Report on Form 10-Q for the quarter ended March 29, 1997 [File No. 1-10114] and incorporated herein by reference). 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 Articles of Amendment to Articles of Organization of the Registrant (filed as Exhibit 3(i) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 1996 [File No. 1-9567] and incorporated herein by reference). 3.4 Amended and Restated By-laws of the Registrant (filed as Exhibit 10.14 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 1999 [File No. 1-9567] and incorporated herein by reference). 16 Exhibit Number Description of Exhibit 4.1 Fiscal Agency Agreement dated January 5, 1994, among Thermo Cardiosystems, Thermo Electron, 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). 4.2 Reserved. 4.3 Fiscal Agency Agreement dated as of June 3, 1996, among Thermedics, Thermo Electron, and Chemical Bank, as fiscal agent (filed as Exhibit 4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 1996 [File No. 1-9567] and incorporated herein by reference). 4.4 Guarantee Reimbursement Agreement dated February 7, 1994, among Thermo Cardiosystems, Thermo Voltek, the Registrant, and Thermo Electron (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). 4.5 Fiscal Agency Agreement dated as of May 14, 1997, among Thermo Cardiosystems Inc., Thermo Electron Corporation, and Bankers Trust Company as fiscal agent relating to $70 million principal amount of 4 3/4% Convertible Subordinated Debentures due 2004 (filed as Exhibit 4 to Thermo Cardiosystems' Quarterly Report on Form 10-Q for the quarter ended June 28, 1997 [File No. 1-10114] 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 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). 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). 17 Exhibit Number Description of Exhibit 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 (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 (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 Agreement dated May 26, 1993, between Thermo Cardiosystems 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). 10.12 Reserved. 10.13 $38,000,000 Promissory Note dated as of December 11, 1995, issued by the Registrant to Thermo Electron (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). 10.14 $15,000,000 Promissory Note dated as of February 13, 1996, issued by the Company to Thermo Electron (filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 1996 [File No. 1-9567] and incorporated herein by reference). 10.15-17 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.) 18 Exhibit Number Description of Exhibit 10.19 Amended and Restated Nonqualified Stock Option Plan of the Registrant (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 1999 [File No. 1-9567] 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 Amended and Restated Equity Incentive Plan of the Registrant (filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 1999 [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 Thermo Electron for services rendered to the Registrant or to such affiliated corporations. The terms of such plans are substantially the same as those of the Registrant's Equity Incentive 10.21 Amended and Restated Directors Stock Option Plan of the Registrant (filed as Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 1999 [File No. 1-9567] and incorporated herein by reference). 10.22 Amended and Restated Deferred Compensation Plan for Directors of the Registrant (filed as Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 1999 [File No. 1-9567] and incorporated herein by reference). 10.23 Amended and Restated Thermedics Inc. - Thermo Cardiosystems Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 1999 [File No. 1-9567] and incorporated herein by reference). 10.24 Amended and Restated Thermedics Inc. - Thermedics Detection Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 1999 [File No. 1-9567] and incorporated herein by reference). 10.25 Amended and Restated Thermedics Inc. - Thermo Sentron Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 1999 [File No. 1-9567] and incorporated herein by reference). 10.26 Amended and Restated Thermedics Inc. - Thermo Voltek Corp. Nonqualified Stock Option Plan (filed as Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 1999 [File No. 1-9567] and incorporated herein by reference). 10.27 Restated Stock Holdings Assistance Plan and Form of Promissory Note (filed as Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9567] and incorporated herein by reference). 19 Exhibit Number Description of Exhibit 10.28 Reserved. 10.29 Master Cash Management, Guarantee Reimbursement, and Loan Agreement dated as of June 1, 1999, between the Registrant and Thermo Electron Corporation (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 1999 [File No. 1-9567] and incorporated herein by reference). 10.30 Master Cash Management, Guarantee Reimbursement, and Loan Agreement dated as of June 1, 1999, between Thermo Cardiosystems Inc. and Thermo Electron Corporation (filed as Exhibit 10.1 to Thermo Cardiosystems Inc.'s Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-10114] and incorporated herein by reference). 10.31 Master Cash Management, Guarantee Reimbursement, and Loan Agreement dated as of June 1, 1999, between Thermedics Detection Inc. and Thermo Electron Corporation (filed as Exhibit 10.1 to Thermedics Detection Inc.'s Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-12745] and incorporated herein by reference). 10.32 Master Cash Management, Guarantee Reimbursement, and Loan Agreement dated as of June 1, 1999, between Thermo Sentron Inc. and Thermo Electron Corporation (filed as Exhibit 10.1 to Thermo Sentron Inc.'s Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-14254] and incorporated herein by reference). 10.33 Amended and Restated $13,000,000 Promissory Note dated as of June 30, 1999, issued by Thermo Sentron Inc. to Thermo Electron Corporation (filed as Exhibit 10.2 to Thermo Sentron Inc.'s Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 [File No. 1-14254] and incorporated herein by reference). 13 Annual Report to Shareholders for the year ended January 1, 2000 (only those portions incorporated herein by reference). 21 Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP. 27.1 Financial Data Schedule for the year ended January 1, 2000 (restated for discontinued operations). 27.2 Financial Data Schedule for the year ended January 2, 1999 (restated for discontinued operations). 27.3 Financial Data Schedule for the year ended January 3, 1998 (restated for discontinued operations).
EX-13 2 Exhibit 13 Thermedics Inc. Consolidated Financial Statements 1999
Thermedics Inc. 1999 Financial Statements Consolidated Statement of Operations (In thousands except per share amounts) 1999 1998 1997 - --------------------------------------------------------------------------- -------- -------- -------- Revenues (Note 12) $223,503 $208,644 $200,184 -------- -------- -------- Costs and Operating Expenses: Cost of revenues 123,746 114,222 103,677 Selling, general, and administrative expenses (Note 8) 66,529 57,182 53,817 Research and development expenses 14,284 12,902 11,968 Unusual costs (Note 16) 831 - - -------- -------- -------- 205,390 184,306 169,462 -------- -------- -------- Operating Income 18,113 24,338 30,722 Interest Income (includes $605 from related 3,860 5,584 6,208 parties in 1999, 1998, and 1997; Note 8) Interest Expense (includes $1,309 and $663 to (2,581) (1,777) (597) related parties in 1999 and 1998, respectively; Note 3) Gain on Issuance of Stock by Subsidiary (Note 10) - - 17,075 Gain on Sale of Investments (includes gain on sale of - 11 247 related-party investments of $247 in 1997; Notes 2 and 8) Equity in Earnings of Unconsolidated Subsidiaries 456 136 170 Other Income 548 - - -------- -------- -------- Income from Continuing Operations Before Provision 20,396 28,292 53,825 for Income Taxes, Minority Interest, and Extraordinary Item Provision for Income Taxes (Note 5) 7,343 10,688 13,781 Minority Interest Expense 2,475 2,665 3,183 -------- -------- -------- Income from Continuing Operations Before Extraordinary Item 10,578 14,939 36,861 Income from Discontinued Operations (net of provision for 3,723 4,074 4,631 income taxes and minority interest of $6,824, $7,733, and $10,441; Note 16) Provision for Loss on Disposal of Discontinued (27,522) - - Operations (net of income tax benefit of $2,583; Note 16) -------- -------- -------- Income (Loss) Before Extraordinary Item (13,221) 19,013 41,492 Extraordinary Item (net of provision for income - 4,597 - taxes of $3,078; Note 7) -------- -------- -------- Net Income (Loss) $(13,221) $ 23,610 $ 41,492 ======== ======== ======== Earnings per Share from Continuing Operations Before Extraordinary Item (Note 14) Basic $ .25 $ .36 $ 1.00 ======== ======== ======== Diluted $ .25 $ .35 $ .95 ======== ======== ======== 2 Thermedics Inc. 1999 Financial Statements Consolidated Statement of Operations (continued) (In thousands except per share amounts) 1999 1998 1997 - --------------------------------------------------------------------------- ---------- --------- ------- Earnings (Loss) per Share (Note 14) Basic $ (.32) $ .57 $ 1.13 ======== ======== ======= Diluted $ (.31) $ .55 $ 1.07 ======== ======== ======= Weighted Average Shares (Notes 8 and 14) Basic 41,836 41,221 36,700 ========= ======== ======= Diluted 42,855 43,242 38,911 ========= ======== ======= The accompanying notes are an integral part of these consolidated financial statements.
3
Thermedics Inc. 1999 Financial Statements Consolidated Balance Sheet (In thousands) 1999 1998 - ------------------------------------------------------------------------------------ ---------- ---------- Assets Current Assets: Cash and cash equivalents (includes $35,256 under repurchase $ 22,337 $ 81,950 agreements with parent company in 1998) Advance to affiliate 46,285 - Short-term available-for-sale investments, at quoted 12,160 - market value (amortized cost of $12,160; Note 2) Accounts receivable, less allowances of $4,909 and $2,850 58,208 44,883 Inventories 42,992 40,958 Deferred tax asset and prepaid expenses (Note 5) 12,401 9,478 Net assets of discontinued operations (Note 16) 74,311 77,169 -------- --------- 268,694 254,438 -------- --------- Property, Plant, and Equipment, at Cost, Net 13,049 11,354 -------- --------- Due from Affiliate (Note 8) - 10,000 -------- --------- Other Assets 9,755 5,834 -------- --------- Cost in Excess of Net Assets of Acquired Companies (Note 3) 150,311 126,857 -------- --------- $441,809 $ 408,483 ======== ========= 4 Thermedics Inc. 1999 Financial Statements Consolidated Balance Sheet (continued) (In thousands except share amounts) 1999 1998 - ------------------------------------------------------------------------------------ ---------- ---------- Liabilities and Shareholders' Investment Current Liabilities: Note payable to parent company (Note 3) $ 11,000 $ 19,000 Short-term obligations and current portion of long-term 41,509 3,077 obligations (includes advance from affiliate of $34,600 in 1999; Notes 3 and 7) Accounts payable 15,729 14,449 Accrued payroll and employee benefits 11,084 8,817 Accrued income taxes 7,121 6,691 Other accrued expenses 25,711 17,574 Due to parent company and affiliated companies 3,121 998 -------- --------- 115,275 70,606 -------- --------- Deferred Income Taxes and Other Deferred Items 1,260 191 -------- --------- Long-term Obligations (Note 7) 47,599 47,552 -------- --------- Minority Interest 44,273 42,007 -------- --------- Commitments and Contingency (Notes 6 and 13) Shareholders' Investment (Notes 4, 8, and 9): Common stock, $.10 par value, 100,000,000 shares authorized; 4,200 4,174 41,996,564 and 41,739,308 shares issued Capital in excess of par value 108,930 106,846 Retained earnings 126,423 139,644 Treasury stock at cost, 50,903 and 47,348 shares (695) (1,026) Deferred compensation (1,009) - Accumulated other comprehensive items (4,447) (1,511) -------- --------- 233,402 248,127 -------- --------- $441,809 $ 408,483 ======== ========= The accompanying notes are an integral part of these consolidated financial statements.
5
Thermedics Inc. 1999 Financial Statements Consolidated Statement of Cash Flows (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ----------- --------- Operating Activities Net income (loss) $(13,221) $ 23,610 $ 41,492 Adjustments to reconcile net income (loss) to income from continuing operations: Income from discontinued operations (Note 16) (3,723) (4,074) (4,631) Provision for loss on disposal of discontinued operations (Note 16) 27,522 - - Income from continuing operations 10,578 19,536 36,861 Adjustments to reconcile income from continuing operations to net cash provided by operating activities of continuing operations: Depreciation and amortization 9,130 7,177 6,203 Gain on repurchase and exchange of subordinated - (7,661) - convertible debentures (Note 7) Minority interest expense 2,475 2,665 3,183 Gain on issuance of stock by subsidiary (Note 10) - - (17,075) Provision for losses on accounts receivable 1,795 610 369 Gain on sale of investments, net (Note 2) - (11) (247) Other noncash expenses 2,039 218 257 Changes in current accounts, excluding the effects of acquisitions: Accounts receivable (6,503) 1,553 (3,106) Inventories 1,637 (859) (4,746) Other current assets (1,117) (471) (555) Accounts payable (515) (916) (207) Other current liabilities (3,608) (3,342) 4,593 Other 806 136 23 -------- --------- -------- Net cash provided by continuing operations 16,717 18,635 25,553 Net cash provided by discontinued operations 8,509 18,367 13,306 -------- --------- -------- Net cash provided by operating activities $ 25,226 $ 37,002 $ 38,859 -------- --------- -------- 6 Thermedics Inc. 1999 Financial Statements Consolidated Statement of Cash Flows (continued) (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ----------- --------- Investing Activities Acquisition of Thermo Voltek common stock (Note 13) $(20,482) $ - $ - Advances to affiliate, net (46,285) - - Acquisitions, net of cash acquired (Note 3) (28,395) (43,976) (2,837) Purchases of available-for-sale investments (12,190) - (8,000) Proceeds from sale of available-for-sale investments - 8,011 6,800 Proceeds from maturities of available-for-sale investments - 1,500 247 Proceeds from repayment of note receivable from affiliate (Note 8) 10,000 - - Purchases of property, plant, and equipment (4,846) (5,040) (3,818) Proceeds from sale of property, plant, and equipment 1,634 207 192 Other (235) (1,004) (108) -------- --------- -------- Net cash used in continuing operations (100,799) (40,302) (7,524) Net cash provided by (used in) discontinued operations (48,827) (29,199) 23,567 -------- --------- -------- Net cash provided by (used in) investing activities (149,626) (69,501) 16,043 -------- --------- -------- Financing Activities Proceeds from issuance of short-term obligations to affiliated 40,171 - - companies (Note 3) Purchases of Company and subsidiaries' common stock - (5,521) (1,804) Proceeds from issuance of note payable to parent company (Note 3) - 21,000 - Repayment of note payable to parent company (8,000) (2,000) - Repayment of notes payable (Note 3) (9,692) - - Net increase (decrease) in short-term borrowings 1,106 (2,140) 1,684 Repayment and repurchase of long-term obligations (Note 7) - (8,951) - Net proceeds from issuance of Company and subsidiaries' common 528 540 28,457 stock (Note 10) Other 47 108 7 -------- --------- -------- Net cash provided by continuing operations 24,160 3,036 28,344 Net cash provided by (used in) discontinued operations (18,499) (15,891) 20,064 --------- --------- -------- Net cash provided by (used in) financing activities $ 5,661 $ (12,855) $ 48,408 --------- --------- -------- 7 (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ----------- --------- Exchange Rate Effect on Cash in Continuing Operations $ 605 $ 259 $ (1,532) Exchange Rate Effect on Cash in Discontinued Operations (421) 191 2,434 --------- --------- --------- Increase (Decrease) in Cash and Cash Equivalents (118,555) (44,904) 104,212 Cash and Cash Equivalents at Beginning of Year 142,108 187,012 82,800 --------- --------- --------- 23,553 142,108 187,012 Cash of Discontinued Operations at End of Year (1,216) (60,158) (85,766) --------- --------- --------- Cash and Cash Equivalents at End of Year $ 22,337 $ 81,950 $ 101,246 ========= ========= ========= Cash Paid For Interest $ 2,142 $ 1,849 $ 535 Income taxes $ 7,835 $ 12,691 $ 10,292 Noncash Activities Fair value of assets of acquired companies $ 57,059 $ 54,390 $ 4,544 Cash paid for acquired companies (30,479) (43,976) (3,043) --------- --------- --------- Liabilities assumed of acquired companies $ 26,580 $ 10,414 $ 1,501 ========= ========= ========= Issuance of subordinated convertible debentures in $ - $ 15,859 $ - connection with exchange offer ========= ========= ========= Issuance of Company common stock to parent company in $ - $ 8,040 $ - exchange for common stock of subsidiary ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 8 Thermedics Inc. 1999 Financial Statements Consolidated Statement of Comprehensive Income and Shareholders' Investment (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------ ---------- ----------- ---------- Comprehensive Income Net Income (Loss) $(13,221) $ 23,610 $41,492 -------- -------- ------- Other Comprehensive Items, Net: Foreign currency translation adjustment (2,936) 838 (1,996) Net unrealized losses on available-for-sale investments - (17) (49) -------- -------- ------- (2,936) 821 (2,045) Minority interest (expense) income 561 (151) 144 -------- -------- ------- $(15,596) $ 24,280 $39,591 ======== ======== ======= Shareholders' Investment Common Stock, $.10 Par Value: Balance at beginning of period $ 4,174 $ 3,685 $ 3,684 Activity under employees' and directors' stock plans 26 1 1 Issuance of Company common stock to parent company in - 488 - exchange for common stock of subsidiary (Note 8) -------- -------- ------- Balance at end of period 4,200 4,174 3,685 -------- -------- ------- Capital in Excess of Par Value: Balance at beginning of period 106,846 113,913 138,433 Activity under employees' and directors' stock plans 1,289 (1,966) (1,239) Tax benefit related to employees' and directors' stock plans - 280 55 Issuance of Company common stock to parent company in - 7,552 - exchange for common stock of subsidiary (Note 8) Effect of majority-owned subsidiaries' equity transactions 795 (12,933) (23,336) -------- -------- ------- Balance at end of period 108,930 106,846 113,913 -------- -------- ------- Retained Earnings: Balance at beginning of period 139,644 116,034 74,542 Net income (loss) (13,221) 23,610 41,492 -------- -------- ------- Balance at end of period 126,423 139,644 116,034 -------- -------- ------- Treasury Stock: Balance at beginning of period (1,026) (3,449) (4,729) Activity under employees' and directors' stock plans 331 2,423 1,572 Purchases of Company common stock - - (292) -------- -------- ------- Balance at end of period $ (695) $ (1,026) $(3,449) -------- -------- ------- 9 Thermedics Inc. 1999 Financial Statements Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued) (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------ ---------- ----------- ---------- Deferred Compensation (Note 4): Balance at beginning of period $ - $ - $ - Issuance of restricted stock under employees' stock plans (1,216) - - Amortization of deferred compensation 207 - - -------- -------- -------- Balance at end of period (1,009) - - -------- -------- -------- Accumulated Other Comprehensive Items: Balance at beginning of period (1,511) (2,332) (287) Other comprehensive items (2,936) 821 (2,045) -------- -------- -------- Balance at end of period (4,447) (1,511) (2,332) -------- -------- -------- $233,402 $248,127 $227,851 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 10 Thermedics Inc. 1999 Financial Statements 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 on-line product quality assurance systems, security devices, and laboratory products including electrochemistry and microweighing systems; precision weighing and inspection equipment; and respiratory care products, as well as other medical products. Relationship with Thermo Electron Corporation The Company was incorporated in 1983 as a wholly owned subsidiary of Thermo Electron Corporation. As of January 1, 2000, Thermo Electron owned 31,759,424 shares of the Company's common stock, representing 76% of such stock outstanding. In January 2000, Thermo Electron updated its proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. As a part of this reorganization, the Company has made cash tender offers for all outstanding shares of its Thermedics Detection Inc. and Thermo Sentron Inc. subsidiaries. Also, the Company announced that it plans to seek a buyer for its Thermo Cardiosystems Inc. subsidiary, in addition to the previously announced plan to sell the Company's Power Electronics and Test Equipment business. Thermo Electron also intends to take the Company private (Note 16). Principles of Consolidation The accompanying financial statements include the accounts of the Company, its wholly owned subsidiaries, and its majority-owned public subsidiaries, Thermo Sentron and Thermedics Detection. All material intercompany accounts and transactions have been eliminated. Basis of Presentation The results of operations of the Company's Thermo Cardiosystems and Thermo Voltek subsidiaries, which represent the Heart Assist and Blood Testing Devices segment and Power Electronics and Test Equipment segment, respectively, have been classified as discontinued operations as a result of the Company's decision to divest these businesses (Note 16). In addition, certain amounts in 1998 and 1997 have been reclassified to conform to the presentation in the 1999 financial statements. Fiscal Year The Company has adopted a fiscal year ending the Saturday nearest December 31. References to 1999, 1998, and 1997 are for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998, respectively. Fiscal 1999 and 1998 each included 52 weeks; fiscal 1997 included 53 weeks. Revenue Recognition The Company recognizes the majority of its revenues upon shipment of its products. The Company provides a reserve for its estimate of warranty and installation costs at the time of shipment. 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. If gains have been recognized on issuances of a subsidiary's stock and shares of the subsidiary are subsequently repurchased by the subsidiary, the Company, or Thermo Electron, gain recognition does not occur on issuances subsequent to the date of a repurchase until such time as shares have been issued in an amount equivalent to the number of repurchased shares. Such transactions are reflected as equity transactions, and the net effect of these transactions is reflected in the accompanying statement of comprehensive income and shareholders' investment as "Effect of majority-owned subsidiaries' equity transactions." 11 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Stock-based Compensation Plans The Company applies Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation plans (Note 4). Accordingly, no accounting recognition is given to stock options granted at fair market value until they are exercised. Upon exercise, net proceeds, including tax benefits realized, are credited to shareholders' investment. Income Taxes In accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. Earnings (Loss) per Share Basic earnings (loss) per share have been computed by dividing net income (loss) by the weighted average number of shares outstanding during the year. Except where the effect would be antidilutive, diluted earnings (loss) per share have been computed assuming the conversion of convertible obligations and the elimination of the related interest expense, and the exercise of stock options, as well as their related income tax effects (Note 14). Cash and Cash Equivalents The Company, along with certain European-based subsidiaries of Thermo Electron, participates in a notional pool arrangement with Barclays Bank. Under this arrangement, Barclays notionally combines the positive and negative cash balances held by the participants to calculate the net interest yield/expense for the group. The benefit derived from this arrangement is then allocated based on balances attributable to the respective participants. The Company has access to a $6,040,000 line of credit under this arrangement. Thermo Electron guarantees all of the obligations of each participant in this arrangement. At year-end 1999, the Company had invested and borrowed $1,131,000 and $2,654,000, respectively, under this arrangement. At year-end 1998, the Company had borrowed $2,238,000 under this arrangement (Note 8). The interest rate for these borrowings was 5.77% at year-end 1999. At year-end 1998, $35,256,000 of the Company's cash equivalents were invested in a repurchase agreement with Thermo Electron. Under this agreement, the Company in effect lent excess cash to Thermo Electron, which Thermo Electron collateralized with investments principally consisting of corporate notes, U.S. government-agency securities, commercial paper, money market funds, and other marketable securities, in the amount of at least 103% of such obligation. The Company's funds subject to the repurchase agreement were readily convertible into cash by the Company. The repurchase agreement earned a rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. At year-end 1998, the Company's cash and cash equivalents also included investments in commercial paper and short-term certificates of deposit of the Company's foreign operations which had an original maturity of three months or less. Effective June 1999, the Company adopted a new cash management arrangement with Thermo Electron, described below, that replaces the repurchase arrangement. In addition, at year-end 1999 and 1998, the Company's cash and cash equivalents also included cash of the Company's foreign subsidiaries invested in interest bearing accounts, which have original maturities of three months or less. 12 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Advance to/from Affiliate Effective June 1999, the Company and Thermo Electron commenced use of a new domestic cash management arrangement. Under the new arrangement, amounts advanced to Thermo Electron by the Company for domestic cash management purposes bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis points, set at the beginning of each month. Thermo Electron is contractually required to maintain cash, cash equivalents, and/or immediately available bank lines of credit equal to at least 50% of all funds invested under this cash management arrangement by all Thermo Electron subsidiaries other than wholly owned subsidiaries. The Company has the contractual right to withdraw its funds invested in the cash management arrangement upon 30 days' prior notice. In addition, certain of the Company's European-based subsidiaries participate in a new arrangement with a wholly owned subsidiary of Thermo Electron. Interest under this arrangement is based on Euro market rates. The other terms of this arrangement are similar to the domestic cash management arrangement.
Inventories Inventories are stated at the lower of cost (on a first-in, first-out basis) or net realizable value and include materials, labor, and manufacturing overhead. The components of inventories are as follows:
(In thousands) 1999 1998 - ---------------------------------------------------------------------------------- ----------- ---------- Raw Material and Supplies $16,308 $17,249 Work in Process 7,132 6,686 Finished Goods 19,552 17,023 ------- ------- $42,992 $40,958 ======= ======= The Company periodically reviews its quantities of inventories on hand and compares these amounts to expected usage of each particular product or product line. The Company records as a charge to cost of revenues any amounts required to reduce the carrying value of inventories to net realizable value. 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, 25 years; machinery and equipment, 3 to 12 years; and leasehold improvements, the shorter of the term of the lease or the life of the asset. Property, plant, and equipment consists of the following: (In thousands) 1999 1998 - ---------------------------------------------------------------------------------- ----------- ---------- Land and Buildings $ 245 $ 918 Machinery, Equipment, and Leasehold Improvements 38,535 32,920 ------- ------- 38,780 33,838 Less: Accumulated Depreciation and Amortization 25,731 22,484 ------- ------- $13,049 $11,354 ======= ======= 13 Thermedics Inc. 1999 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Other Assets Other assets in the accompanying balance sheet includes the cost of acquired patents, trademarks, acquired technology, and deferred debt expenses relating to the Company's issuance of subordinated convertible debentures. These assets are amortized using the straight-line method over their estimated useful lives, which range from 7 to 40 years. These assets were $6,669,000 and $4,988,000, net of accumulated amortization of $2,103,000 and $1,128,000, at year-end 1999 and 1998, respectively. Cost in Excess of Net Assets of Acquired Companies The excess of cost over the fair value of net assets of acquired companies is amortized using the straight-line method over 40 years. Accumulated amortization was $12,925,000 and $9,172,000 at year-end 1999 and 1998, respectively. The Company assesses the future useful life of this asset whenever events or changes in circumstances indicate that the current useful life has diminished. Such events or circumstances generally include the occurrence of operating losses or a significant decline in earnings associated with the acquired business or asset. The Company considers the future undiscounted cash flows of the acquired businesses in assessing the recoverability of this asset. The Company assesses cash flows before interest charges and, when impairment is indicated, writes the asset down to fair value. If quoted market values are not available, the Company estimates fair value by calculating the present value of future cash flows. If impairment has occurred, any excess of carrying value over fair value is recorded as a loss. 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, net of minority interest, are reflected in the "Accumulated other comprehensive items" component of shareholders' investment. Foreign currency transaction gains or losses are included in the accompanying statement of operations and are not material for the three years presented. Comprehensive Income Comprehensive income combines net income (loss) and "other comprehensive items," which represents foreign currency translation adjustments and unrealized net of tax gains and losses on available-for-sale investments, reported as a component of shareholders' investment in the accompanying balance sheet. At year-end 1999 and 1998, the balance of accumulated other comprehensive items represents the Company's cumulative translation adjustment. Recent Accounting Pronouncement In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." SAB 101 includes requirements for when shipments may be recorded as revenue when the terms of the sale include customer acceptance provisions or an obligation of the seller to install the product. In such instances, SAB 101 generally requires that revenue recognition occur at completion of installation and/or upon customer acceptance. SAB 101 requires that companies conform their revenue recognition practices to the requirements therein during the first quarter of calendar 2000 through recording a cumulative net of tax effect of the change in accounting. The Company has not completed the analysis to determine the effect that SAB 101 will have on its financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 14 2. Available-for-sale Investments The Company's debt 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 and minority interest, recorded in the "Accumulated other comprehensive items" component of shareholders' investment (Note 15). At January 1, 2000, the Company had short-term available-for-sale investments consisting of government-agency securities with a market value and cost basis of $12,160,000. The cost of available-for-sale investments that were sold was based on specific identification in determining realized gains and losses recorded in the accompanying statement of operations. Gain on sale of investments resulted from gross realized gains of $11,000 and $247,000 in 1998 and 1997, respectively. 3. Acquisitions In July 1999, the Company acquired Erich Jaeger, GmbH, a medical products company based in Germany, for $30,479,000 in cash, net of cash acquired, including the repayment of certain of Jaeger's indebtedness, and the assumption of $13,401,000 of Jaeger's indebtedness. Jaeger develops and manufactures equipment for lung-function, cardio-respiratory, and sleep-disorder diagnosis and monitoring. The Company financed this acquisition with $30,479,000 of short-term borrowings from a wholly owned subsidiary of Thermo Electron, which are due on demand and bear interest at prevailing German market rates, set at the beginning of each month. The interest rate at January 1, 2000, was 3.95%. Of the indebtedness assumed, the Company refinanced $9,692,000 with additional borrowings from the wholly owned subsidiary of Thermo Electron, and expects to repay the balance upon maturity in May 2000. Of the total borrowings from Thermo Electron of $40,171,000 for the acquisition of Jaeger and payment of its indebtedness, $34,600,000 is included in short-term obligations and current portion of long-term obligations and $3,853,000 is included in due to parent company and affiliated companies, net of currency effects, in the accompanying 1999 balance sheet. In June 1998, Thermo Sentron acquired the three businesses that constituted the product-monitoring group of Graseby Limited (the product-monitoring businesses), a subsidiary of Smiths Industries plc, for $43,976,000 in cash, net of cash acquired, and the assumption of certain liabilities. The U.K.-based product-monitoring businesses design, manufacture, and distribute specialized packaged-goods equipment, including checkweighers and metal detectors, for the food and pharmaceutical industries. To partially finance this acquisition, the Company borrowed $21,000,000 from Thermo Electron pursuant to a promissory note due December 1998, bearing interest at the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. The due date of this note has been extended to March 2000 and it now bears interest at the 30-day Dealer Commercial Paper Rate plus 150 basis points, set on the second business day of each fiscal month of Thermo Sentron. As of year-end 1999, Thermo Sentron had repaid $10,000,000 principal amount of the note. As of January 1, 2000, the interest rate on this promissory note was 7%. In July 1997, Thermo Sentron acquired Westerland Engineering Ltd. for $1,961,000 in cash. To finance this acquisition, Thermo Sentron borrowed $1,961,000, denominated in British pounds sterling, from a bank, pursuant to a promissory note, which was repaid in January 1998 and bore interest at 7.94%. Westerland is a U.K.-based manufacturer of process-weighing and control equipment. In February 1997, Thermo Sentron acquired substantially all of the assets of RCC Industrial Electronics Pty. Limited (RCCI) for $1,082,000 in cash and the assumption of certain liabilities. RCCI is an Australian-based manufacturer of in-motion checkweighers for the food and pharmaceutical industries. 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 these acquisitions exceeded the estimated fair value of the acquired net assets by $69,226,000, which is being amortized over 40 years. Allocation of the purchase price was based on an estimate of the fair value of the net assets acquired. 15 3. Acquisitions (continued) In connection with these acquisitions, the Company has undertaken restructuring activities at the acquired businesses. The Company's restructuring activities, which were accounted for in accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing levels and the abandonment of excess facilities. In connection with these restructuring activities, as part of the cost of the acquisitions, the Company established reserves as detailed below, primarily for severance and excess facilities. In accordance with EITF 95-3, the Company finalized and, for the acquisition completed in 1999, intends to finalize, its restructuring plans no later than one year from the respective dates of the acquisitions. Accrued acquisition expenses are included in other accrued expenses in the accompanying balance sheet. A summary of the changes in accrued acquisition expenses for acquisitions completed before and during 1997 is as follows:
1997 Acquisitions ----------------------- Abandonment of Excess Pre-1997 (In thousands) Severance Facilities Acquisitions Total - ----------------------------------------------- -------------- -------------- -------------- ------------- Balance at December 28, 1996 $ - $ - $ 896 $ 896 Reserves established 237 62 - 299 Usage (40) - (792) (832) Currency translation - - (104) (104) -------- -------- -------- -------- Balance at January 3, 1998 197 62 - 259 Usage (162) (25) - (187) -------- -------- -------- -------- Balance at January 2, 1999 35 37 - 72 Usage (35) (37) - (72) -------- -------- -------- -------- Balance at January 1, 2000 $ - $ - $ - $ - ======== ======== ======== ======== The principal acquisition expenses for 1997 acquisitions were for severance for 17 employees across all functions. The Company finalized its restructuring plans for the 1997 acquisitions in 1998. A summary of accrued acquisition expenses for the product-monitoring businesses is as follows: Abandonment of Excess (In thousands) Severance Facilities Other Total - ----------------------------------------------- -------------- -------------- -------------- ------------- Balance at January 3, 1998 $ - $ - $ - $ - Reserves established 537 772 - 1,309 Usage (390) (15) - (405) Currency translation (5) (6) - (11) ------- ------- ------- ------- Balance at January 2, 1999 142 751 - 893 Reserves established 478 1,151 62 1,691 Usage (400) (646) (22) (1,068) Decrease due to finalization of restructuring (228) (211) - (439) plans, recorded as a decrease in cost in excess of net assets of acquired companies Currency translation 8 23 - 31 ------- ------- ------- ------- Balance at January 1, 2000 $ - $ 1,068 $ 40 $ 1,108 ======= ======= ======= ======= 16 3. Acquisitions (continued) The principal acquisition expenses for the product-monitoring businesses were for severance for 56 employees across all functions and for abandoned operating facilities in North America with lease terms through 2001. A buyout agreement has been finalized for one of the leases, effective June 2000. All remaining obligations related to the lease have been accrued at year-end. The Company finalized its restructuring plans for the product-monitoring businesses in 1999. The amount established in 1999 at the product-monitoring businesses for abandoned facilities represents leases for two operating facilities in England with lease terms through 2009. A summary of accrued acquisition expenses for Jaeger is as follows: Abandonment of Excess (In thousands) Severance Facilities Other Total - ----------------------------------------------- -------------- -------------- -------------- ------------- Balance at January 2, 1999 $ - $ - $ - $ - Reserves established 2,335 680 431 3,446 Usage - - - - Currency translation (146) (42) (27) (215) ------ ------ ------ ------ Balance at January 1, 2000 $2,189 $ 638 $ 404 $3,231 ====== ====== ====== ====== The principal acquisition expenses for Jaeger were for severance for 29 employees across all functions and for the abandonment of operating facilities in Germany and the Netherlands with lease terms through 2003. The amounts captioned as other primarily represent employee relocation costs. Unresolved matters at January 1, 2000, primarily included completion of planned severances and abandonment of excess facilities. 4. Employee Benefit Plans Stock-based Compensation Plans Stock Option Plans The Company has stock-based compensation plans for its key employees, directors, and others. These plans permit the grant of a variety of stock and stock-based awards as determined by the human resources committee of the Company's Board of Directors (the Board Committee), including restricted stock, nonqualified and incentive stock options, stock bonus shares, or performance-based shares. The option recipients and the terms of options granted under these plans are determined by the Board Committee. Generally, options granted to date are exercisable immediately, but are subject to certain transfer restrictions and the right of the Company to repurchase shares issued upon exercise of the options at the exercise price, upon certain events. The restrictions and repurchase rights generally lapse ratably over a five- to ten-year period, 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 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 immediately and expire three to seven years after the date of grant. In addition to the Company's stock-based compensation plans, certain officers and key employees may also participate in stock-based compensation plans of Thermo Electron. In November 1998, the Company's employees, excluding its officers and directors, were offered the opportunity to exchange previously granted options to purchase shares of Company common stock for an amount of options equal to half of the number of options previously held, exercisable at a price equal to the fair market value at the time of the exchange offer. Holders of options to acquire 388,000 shares at a weighted average exercise price of $19.39 per share 17 4. Employee Benefit Plans (continued) elected to participate in this exchange and, as a result, received options to purchase 194,000 shares of Company common stock at $10.81 per share, which are included in the 1999 grants in the table below. The other terms of the new options are the same as the exchanged options except that the holders may not sell shares purchased pursuant to such new options for six months from the exchange date. The options exchanged were canceled by the Company. In 1999, the Company awarded 140,000 shares of restricted common stock to certain key employees. The shares had an aggregate value of $1,216,000 and vest three years from the date of the award, assuming continued employment, with certain exceptions. The Company has recorded the fair value of the restricted stock as deferred compensation in the accompanying balance sheet and is amortizing such amount over the vesting period. A summary of the Company's stock option activity is as follows:
1999 1998 1997 ------------------ ------------------- ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Price Price Price Number Number Number of of of (Shares in thousands) Shares Shares Shares - ---------------------------------------------- --------- --------- --------- ---------- -------- --------- Options Outstanding, Beginning of Year 1,548 $13.46 1,584 $14.93 1,664 $14.99 Granted 153 9.54 628 13.52 111 19.00 Assumed in merger with Thermo Voltek 620 6.66 - - - - (Note 13) Exercised (266) 4.33 (139) 7.91 (63) 7.92 Forfeited (223) 13.64 (137) 19.53 (128) 22.75 Canceled due to exchange - - (388) 19.39 - - ----- ----- ----- ---- Options Outstanding, End of Year 1,832 $12.13 1,548 $13.46 1,584 $14.93 ===== ====== ===== ====== ===== ====== Options Exercisable 1,832 $12.13 1,545 $13.46 1,584 $14.93 ===== ====== ===== ====== ===== ====== Options Available for Grant 756 490 296 ===== ===== =====
A summary of the status of the Company's stock options at January 1, 2000, is as follows:
Options Outstanding and Exercisable ----------------------------------------------------- Range of Exercise Prices Number Weighted Weighted of Average Average Shares Remaining Exercise (In thousands) Contractual Life Price - ---------------------------------------------- ------------------- -------------------- ------------------ $ 5.00 - $11.02 989 4.0 years $ 8.93 11.03 - 17.05 642 5.8 years 15.36 17.06 - 23.08 170 6.1 years 18.33 23.09 - 29.11 31 7.2 years 28.15 ---- $ 5.00 - $29.11 1,832 4.9 years $12.13 ===== 18 4. Employee Benefit Plans (continued) Employee Stock Purchase Program Substantially all of the Company's full-time U.S. employees are eligible to participate in an employee stock purchase program sponsored by the Company and Thermo Electron. Under this program, shares of the Company's and Thermo Electron's common stock may be purchased at 85% of the lower of the fair market value at the beginning or end of the period, and the shares purchased are subject to a one-year resale restriction. Prior to the 1998 program year, the applicable shares of common stock could be purchased at the end of a 12-month period at 95% of the fair market value at the beginning of the period, and shares purchased were subject to a six-month resale restriction. Shares are purchased through payroll deductions of up to 10% of each participating employee's gross wages. During 1999 and 1997, the Company issued 8,000 and 9,000 shares, respectively, of its common stock under this program. No shares were issued under this program during 1998. Pro Forma Stock-based Compensation Expense In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-based Compensation," which sets forth a fair-value based method of recognizing stock-based compensation expense. As permitted by SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account for its stock-based compensation plans. Had compensation cost for awards granted after 1994 under the Company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method set forth under SFAS No. 123, the effect on certain financial information of the Company would have been as follows: (In thousands except per share amounts) 1999 1998 1997 - -------------------------------------------------------------------------- ---------- ---------- --------- Income from Continuing Operations Before Extraordinary Item: As reported $ 10,578 $ 14,939 $ 36,861 Pro forma 9,225 13,562 35,683 Basic Earnings per Share from Continuing Operations Before Extraordinary Item: As reported .25 .36 1.00 Pro forma .22 .33 .97 Diluted Earnings per Share from Continuing Operations Before Extraordinary Item: As reported .25 .35 .95 Pro forma .21 .32 .92 Net Income (Loss): As reported $(13,221) $ 23,610 $ 41,492 Pro forma (16,001) 20,886 39,454 Basic Earnings (Loss) per Share: As reported (.32) .57 1.13 Pro forma (.38) .51 1.08 Diluted Earnings (Loss) per Share: As reported (.31) .55 1.07 Pro forma (.37) .49 1.01 Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation expense may not be representative of the amount to be expected in future years. Pro forma compensation expense for options granted is reflected over the vesting period; therefore, future pro forma compensation expense may be greater as additional options are granted. 19 4. Employee Benefit Plans (continued) The weighted average fair value per share of options granted was $3.74, $4.15, and $8.81 in 1999, 1998, and 1997, respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1999 1998 1997 - -------------------------------------------------------------------------- ---------- ---------- --------- Volatility 38% 38% 39% Risk-free Interest Rate 5.3% 4.8% 6.2% Expected Life of Options 4.5 years 4.1 years 5.6 years The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 401(k) Savings Plan The majority of the Company's full-time U.S. employees are eligible to participate in Thermo Electron's 401(k) savings plan. Contributions to the 401(k) savings plan are made by both the employee and the Company. Company contributions to the 401(k) plan are based upon the level of employee contributions. For these plans, the Company contributed and charged to expense $1,002,000, $788,000, and $1,090,000 in 1999, 1998, and 1997, respectively. 5. Income Taxes The components of income from continuing operations before provision for income taxes, minority interest, and extraordinary item are as follows: (In thousands) 1999 1998 1997 - -------------------------------------------------------------------------- ---------- ---------- --------- Domestic $ 9,994 $18,227 $43,640 Foreign 10,402 10,065 10,185 ------- ------- ------- $20,396 $28,292 $53,825 ======= ======= ======= 20 5. Income Taxes (continued) The components of the provision for income taxes for continuing operations are as follows: (In thousands) 1999 1998 1997 - -------------------------------------------------------------------------- ---------- ---------- --------- Currently Payable: Federal $ 4,380 $ 4,184 $ 7,603 State 1,085 1,795 1,905 Foreign 3,241 3,779 2,589 ------- ------- ------- 8,706 9,758 12,097 ------- ------- ------- Net Deferred (Prepaid): Federal (1,718) 1,066 763 State (279) 160 199 Foreign 634 (296) 722 ------- ------- ------- (1,363) 930 1,684 ------- ------- ------- $ 7,343 $10,688 $13,781 ======= ======= ======= The total provision for income taxes included in the accompanying statement of operations was as follows: (In thousands) 1999 1998 1997 - -------------------------------------------------------------------------- ---------- ---------- --------- Continuing Operations $ 7,343 $10,688 $13,781 Discontinued Operations 3,900 4,624 5,894 Loss on Disposal of Discontinued Operations (2,583) - - ------- ------- ------- $ 8,660 $15,312 $19,675 ======= ======= ======= The Company and its majority-owned subsidiaries receive a tax deduction upon exercise of nonqualified stock options by employees for the difference between the exercise price and the market price of the underlying common stock on the date of exercise. The provision for income taxes that is currently payable does not reflect $521,000 and $360,000 of such benefits of the Company and its majority-owned subsidiaries that have been allocated to capital in excess of par value, directly or through the effect of majority-owned subsidiaries' equity transactions, in 1998, and 1997, respectively. 21 5. Income Taxes (continued) The provision for income taxes for continuing operations in the accompanying statement of operations differs from the provision calculated by applying the statutory federal income tax rate of 35% to income from continuing operations before provision for income taxes, minority interest, and extraordinary item due to the following: (In thousands) 1999 1998 1997 - --------------------------------------------------------------------------- ---------- --------- ---------- Provision for Income Taxes at Statutory Rate $ 7,139 $9,902 $18,839 Increases (Decreases) Resulting From: Gain on issuance of stock by subsidiaries - - (5,976) State income taxes, net of federal tax 524 1,271 1,368 Amortization and write-off of cost in excess 636 408 424 of net assets of acquired companies Federal research and development tax credit (1,198) - - Tax benefit of foreign sales corporation (209) (303) (457) Foreign tax rate and regulation differential 234 (39) (127) Other, net 217 (551) (290) ------- ------ ------- $ 7,343 $10,688 $13,781 ======= ======= =======
Deferred tax asset and deferred income taxes in the accompanying balance sheet consist of the following:
(In thousands) 1999 1998 - -------------------------------------------------------------------------------------- --------- ---------- Deferred Tax Asset (Liability): Reserves and accruals $4,208 $4,409 Inventory basis difference 3,085 1,631 Depreciation and amortization 572 786 Accrued compensation 1,194 741 Trademarks and other intangible assets (1,020) (924) Other, net 110 39 ------ ------ $8,149 $6,682 ====== ====== The Company has not recognized a deferred tax liability for the difference between the book basis and tax basis of its investment in the common stock of its domestic subsidiaries (such difference relates primarily to unremitted earnings and gains on issuance of stock by subsidiaries) because the Company does not expect this basis difference to become subject to tax at the parent level. The Company believes it can implement certain tax strategies to recover its investment in its domestic subsidiaries tax-free. A provision has not been made for U.S. or additional foreign taxes on $20,990,000 of undistributed earnings of foreign subsidiaries that could be subject to taxation if remitted to the U.S. because the Company plans to keep these amounts permanently reinvested overseas. 22 6. Commitments and Contingency Operating Leases In addition to the related-party operating lease discussed in Note 8, the Company and its subsidiaries lease various office and manufacturing facilities under operating lease arrangements expiring from 2000 through 2068. The accompanying statement of operations includes expenses from operating leases of $4,270,000, $4,593,000, and $4,033,000 in 1999, 1998, and 1997, respectively. Future minimum payments due under these leases as of January 1, 2000, are $4,572,000 in 2000, $4,110,000 in 2001, $3,242,000 in 2002, $2,368,000 in 2003, $1,879,000 in 2004, and $16,087,000 in 2005 and thereafter. Total future minimum lease payments are $32,258,000. Contingency See Note 13 for a discussion of litigation concerning the Company's merger with Thermo Voltek. 7. Short- and Long-term Obligations and Other Financing Arrangements Long-term Obligations (In thousands except per share amounts) 1999 1998 - ------------------------------------------------------------------------------------- ---------- --------- Noninterest-bearing Subordinated Convertible $31,565 $31,565 Debentures, due 2003, Convertible at $32.68 per Share 2 7/8% Subordinated Convertible Debentures, due 2003, 15,859 15,859 Convertible at $14.928 per Share Other 254 176 ------- ------- 47,678 47,600 Less: Current Maturity of Long-term Obligations 79 48 ------- ------- $47,599 $47,552 ======= ======= Thermo Cardiosystems has $58,011,000 and $70,000,000 principal amount of 4 3/4% subordinated convertible debentures outstanding at year-end 1999 and 1998, respectively. These obligations will be assumed by a buyer or paid from existing cash balances at Thermo Cardiosystems upon the sale of the business and are included in net assets of discontinued operations. The interest cost of this debt is included in the results of discontinued operations in the accompanying statement of operations. No allocation of interest expense of debt of the Company's continuing operations has been made to discontinued operations. In June 1998, the Company offered holders of its noninterest-bearing subordinated convertible debentures due 2003, convertible at $32.68 per share, the opportunity to exchange such debentures for newly issued 2 7/8% subordinated convertible debentures due 2003, convertible at $14.928 per share. Holders of $21,724,000 principal amount of outstanding debentures exchanged such debentures for $15,859,000 principal amount of newly issued debentures. This transaction resulted in an extraordinary gain of $3,076,000, net of taxes of $2,071,000, in accordance with the provisions of EITF No. 96-19. In addition, during 1998, the Company repurchased $11,711,000 principal amount of subordinated convertible debentures for $8,951,000 in cash, resulting in an extraordinary gain of $1,521,000, net of taxes of $1,007,000. 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 the Company's obligations. See Note 11 for fair value information pertaining to the Company's long-term obligations. 23 7. Short- and Long-term Obligations and Other Financing Arrangements (continued) Short-term Obligations and Other Financing Arrangements The Company, along with certain European-based subsidiaries of Thermo Electron, participates in a cash management arrangement in the Netherlands with a wholly owned subsidiary of Thermo Electron. Under this arrangement, participants' balances are pooled for interest calculation purposes. Interest under this arrangement is based on Euro market rates. The Company has access to a $2,280,000 line of credit under this arrangement. Thermo Electron guarantees all of the obligations of each participant in this arrangement. At year-end 1999 and 1998, the Company had borrowed $698,000 and $791,000, respectively, under this arrangement. The interest rate for this borrowing was 3.95% at year-end 1999. See Notes 1 and 3 for additional short-term obligations of the Company. Unused lines of credit, including amounts discussed in Note 1, were $11,042,000 as of year-end 1999. 8. Related-party Transactions Corporate Services Agreement The Company and Thermo Electron have a corporate services agreement under which Thermo Electron's corporate staff provides certain administrative services, including certain legal advice and services, risk management, certain employee benefit administration, tax advice and preparation of tax returns, centralized cash management, and certain financial and other services, for which the Company pays Thermo Electron annually an amount equal to 0.8% of the Company's revenues. The Company paid an amount equal to 0.8% and 1.0% of the Company's revenues in 1998 and 1997, respectively. The 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). For these services the Company was charged $1,788,000, $1,669,000, and $2,002,000 in 1999, 1998, and 1997, 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. Research and Development Agreements Pursuant to a subcontract entered into in October 1993, which has been completed, Thermedics Detection performed research and development services for Thermo Coleman Corporation, which is the prime contractor under a contract with the U.S. Department of Energy. Thermo Coleman is a private subsidiary of Thermo Electron. Thermo Coleman paid Thermedics Detection $2,000 and $533,000 for services rendered in 1998 and 1997, respectively. In December 1997, Thermedics Detection entered into a funded research and development arrangement with ThermoLase Corporation, a publicly traded, majority-owned subsidiary of Thermo Electron, to develop a cryogenic cooling device for ThermoLase. ThermoLase agreed to purchase five prototype devices for an aggregate purchase price of $303,000. The Company shipped these devices in 1998. Distribution Agreement Pursuant to an international distributorship agreement, Thermedics Detection appointed Arabian Business Machines Co. (ABM) as its exclusive distributor of its security instruments in certain Middle Eastern countries. ABM is a member of The Olayan Group. Ms. Hutham S. Olayan, a director of Thermo Electron, is the president and a director of Olayan America Corporation, another member of The Olayan Group, which is indirectly controlled by Suliman S. Olayan, Ms. Olayan's father. Revenues recorded under this agreement totaled $147,000, $248,000, and $480,000 in 1999, 1998, and 1997, respectively. 24 8. Related-party Transactions (continued) Other Related-party Transactions Thermedics Detection purchases an X-ray source that is used as a component in its InScan(R) systems from Trex Medical Corporation, a publicly traded, majority-owned subsidiary of Thermo Electron. Thermedics Detection paid Trex Medical $81,000, $406,000, and $285,000 for these products in 1999, 1998, and 1997, respectively. Operating Lease In January 2000, Thermo Sentron began negotiating an operating lease arrangement for office facilities with an affiliate of Thermo Electron that is expected to expire in 2015. Future minimum lease payments under this lease are expected to be $600,000 in each of the years 2000 through 2004, and $6,900,000 in 2005 and thereafter. Total minimum lease payments are expected to be $9,900,000. Management Contract In 1998 and 1997, one of the Company's executive employees allocated a portion of his salary, bonus, and travel expenses for the time he devoted to Thermo Electron and Thermo Instrument. The Company was reimbursed $270,000 and $194,000 in 1998 and 1997, respectively, under this arrangement. Cash Management The Company invests excess cash and borrows short-term funds under arrangements with Thermo Electron as discussed in Notes 1 and 3. Short-term Available-for-sale Investments As of December 28, 1996, the Company's short-term available-for-sale investments included $1,937,000 (amortized cost of $1,846,000) of 6 1/2% subordinated convertible debentures due 1997, which were purchased on the open market. The debentures had a par value of $1,800,000 and were issued by Thermo TerraTech Inc., a majority-owned subsidiary of Thermo Electron. The debentures were sold in 1997, resulting in a gain of $247,000, included in gain on sale of investments, net, in the accompanying statement of operations. Due from Affiliate Due from affiliate in the accompanying 1998 balance sheet represents subordinated convertible notes due to the Company from Thermo Voltek. The first note is a $6,000,000 principal amount note bearing interest at 6.75%, due 2002 and convertible into shares of Thermo Voltek at $4.27 per share. The second note is a $4,000,000 principal amount note bearing interest at 5.0%, due 2003 and convertible into shares of Thermo Voltek at $3.78 per share. Thermo Voltek repaid these amounts to the Company in December 1999. Common Stock On February 5, 1998, the Company's Board of Directors voted to issue 4,880,533 shares of its common stock to Thermo Electron in exchange for 3,355,705 shares of common stock of Thermo Cardiosystems. At a meeting of the Company's shareholders on March 31, 1999, the shareholders approved the issuance of the 4,880,533 shares. For purposes of computing weighted average shares, the shares are considered to be outstanding as of February 5, 1998. The shares of common stock were exchanged at their respective fair market values as of February 5, 1998. 9. Common Stock At January 1, 2000, the Company had reserved 4,286,000 unissued shares of its common stock for possible issuance under stock-based compensation plans and possible issuance upon conversion of its subordinated convertible debentures. 25 10. Transactions in Stock of Subsidiary In March 1997, Thermedics Detection sold 2,671,292 shares of its common stock in an initial public offering at $11.50 per share, for net proceeds of $28,078,000, resulting in a gain of $17,075,000. The Company owned 94% of Thermedics Detection's common stock prior to the offering and 83% of Thermedics Detection's common stock subsequently. 11. Fair Value of Financial Instruments The Company's financial instruments consist mainly of cash and cash equivalents, advance to affiliate, available-for-sale investments, accounts receivable, due from affiliate, note payable to parent company, short-term obligations and current portion of long-term obligations, accounts payable, due to parent company and affiliated companies, and long-term obligations. The carrying amount of these financial instruments, with the exception of available-for-sale investments, due from affiliate, 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 (Note 2). The fair value of the Company's due from affiliate, based on quoted market prices, was $16,938,000 in 1998. The fair value of long-term obligations was determined based on quoted market prices. The carrying amount and fair value of the Company's long-term obligations are:
1999 1998 ------------------- -------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value - -------------------------------------------------------------- ---------- ---------- ---------- ---------- Convertible Obligations $47,424 $33,990 $47,424 $ 38,271 Other Long-term Obligations 175 175 128 128 ------- ------- ------- -------- $47,599 $34,165 $47,552 $ 38,399 ======= ======= ======= ======== The fair value of convertible obligations at year-end 1999 and 1998 is below the carrying amount primarily due to the conversion price of the convertible obligations exceeding the market price of the Company's common stock. 12. Business Segments and Geographical Information The Company's continuing operations conduct business in three reportable segments. The Quality Assurance and Security Products segment develops, manufactures, and markets high-speed detection and measurement instruments, security products, and laboratory products. The Precision Weighing and Inspection Equipment segment develops, manufactures, and markets high-speed precision weighing and inspection equipment. The Respiratory Care Products segment develops and manufactures equipment for lung-function, cardio-respiratory, and sleep disorder diagnosis and monitoring and represents Jaeger, acquired in July 1999. The Company also develops, manufactures, and markets enteral nutrition-delivery systems and a line of medical-grade polymers used in medical disposables and in nonmedical, industrial applications, including safety glass and automotive coatings. The Company's Quality Assurance and Security Products segment derived revenues from laboratory products of $47,178,000, $51,302,000, and $53,054,000 in 1999, 1998, and 1997, respectively, and revenues from detection instruments of $26,406,000, $40,273,000, and $51,320,000 in 1999, 1998, and 1997, respectively.
26 12. Business Segments and Geographical Information (continued) The results of the Heart Assist and Blood Testing Devices and Power Electronics and Test Equipment segments have been classified as discontinued operations as a result of the Company's decision to divest these businesses (Note 15).
(In thousands) 1999 1998 1997 - ------------------------------------------------------ --------------- ----------- ------------ ---------- Business Segment Information Revenues: Quality Assurance and Security Products $ 73,584 $ 91,575 $104,374 Precision Weighing and Inspection Equipment 107,786 98,763 78,695 Respiratory Care Products 22,015 - - Other 20,118 18,306 17,115 -------- --------- -------- $223,503 $ 208,644 $200,184 ======== ========= ======== Income from Continuing Operations Before Provision for Income Taxes, Minority Interest, and Extraordinary Item: Quality Assurance and Security Products $ 5,045 $ 12,935 $ 20,436 Precision Weighing and Inspection Equipment 10,703 8,881 8,711 Respiratory Care Products 543 - - Other 4,142 4,043 3,679 Corporate (a) (2,320) (1,521) (2,104) -------- --------- -------- Total operating income 18,113 24,338 30,722 Interest and other income, net 2,283 3,954 23,103 -------- --------- -------- $ 20,396 $ 28,292 $ 53,825 ======== ========= ======== Total Assets: Quality Assurance and Security Products $136,026 $132,971 $146,224 Precision Weighing and Inspection Equipment 136,002 140,164 115,101 Respiratory Care Products 57,016 - - Other 13,257 12,893 10,525 Corporate (b) 25,197 45,286 37,161 Discontinued operations (c) 74,311 77,169 71,168 -------- -------- -------- $441,809 $408,483 $380,179 ======== ======== ======== Depreciation and Amortization: Quality Assurance and Security Products $ 3,260 $ 3,326 $ 3,325 Precision Weighing and Inspection Equipment 3,490 2,894 1,905 Respiratory Care Products 1,474 - - Other 906 957 973 -------- -------- -------- $ 9,130 $ 7,177 $ 6,203 ======== ======== ======== 27 12. Business Segments and Geographical Information (continued) (In thousands) 1999 1998 1997 - ------------------------------------------------------ --------------- ----------- ------------ ---------- Capital Expenditures: Quality Assurance and Security Products $ 1,436 $ 2,775 $ 1,887 Precision Weighing and Inspection Equipment 1,536 1,043 708 Respiratory Care Products 1,185 - - Other 689 1,222 1,223 -------- --------- -------- $ 4,846 $ 5,040 $ 3,818 ======== ========= ======== Geographical Information Revenues (d): United States $143,767 $148,976 $151,994 England 36,393 27,533 13,783 Germany 23,434 7,418 6,698 Other 35,653 39,666 40,488 Transfers among geographical areas (e) (15,744) (14,949) (12,779) -------- -------- -------- $223,503 $208,644 $200,184 ======== ======== ======== Long-lived Assets (f): United States $ 9,368 $ 9,231 $ 7,180 England 1,729 1,828 944 Germany 2,572 154 104 Other 1,417 1,121 1,193 -------- -------- -------- $ 15,086 $ 12,334 $ 9,421 ======== ======== ======== Export Revenues Included in United States Revenues Above (g): $ 35,774 $ 50,005 $ 56,974 ======== ======== ======== (a) Primarily general and administrative expenses and, in 1999, unusual costs of $0.8 million. (b) Primarily cash, cash equivalents, and short-term available-for-sale investments. (c) Represents assets of discontinued operations, net of liabilities. (d) Revenues are attributed to countries based on selling location. (e) Transfers among geographical areas are accounted for at prices that are representative of transactions with unaffiliated parties. (f) Includes property, plant, and equipment, net, and other long-term tangible assets. (g) In general, export revenues are denominated in U.S. dollars. 13. Merger with Thermo Voltek In March 1999, the Company acquired, through a merger, all of the outstanding shares of Thermo Voltek that it did not previously own, other than the shares owned by Thermo Electron Corporation. The total cost of the acquisition is expected to be $25,732,000, including related expenses and the repayment of Thermo Voltek's $5,250,000 principal amount of 3 3/4% subordinated convertible debentures, which became due and payable at the election of the holder following the merger, and Thermo Voltek's outstanding stock options. As of January 1, 2000, the Company had 28 13. Merger with Thermo Voltek (continued) repaid $5,080,000 principal amount of Thermo Voltek's debentures. The Thermo Voltek stock options were converted into stock options that are exercisable into 619,819 shares of Company common stock at a weighted average price of $6.33 per share, with an aggregate value of $703,000 as of the date of the acquisition. Subsequent to this transaction, the Company and Thermo Electron owned approximately 97% and 3%, respectively, of the outstanding common stock of Thermo Voltek. The cost of the acquisition exceeded the estimated fair value of the incremental net assets by $10,050,000. Pro forma data is not presented since the acquisition of the minority interest of Thermo Voltek was not material to the Company's results of operations. In late March and early April 1998, four putative class actions were filed in the Court of Chancery of the State of Delaware in and for New Castle County by shareholders of Thermo Voltek, which were consolidated under the caption In re Thermo Voltek Corp. Shareholders Litigation, Consolidated C.A. 16287 (the Action) in October 1998. The complaint in the Action names the Company, Thermo Voltek, Thermo Electron, and directors of Thermo Voltek as defendants and alleges, among other things, that Thermo Voltek's directors violated the fiduciary duties of loyalty, good faith, and fair dealing that they owed to all shareholders of Thermo Voltek other than the named defendants and the affiliates of the named defendants because the proposed price of $7.00 per share to be paid to Thermo Voltek's shareholders under the terms of the proposed Merger Agreement was allegedly unfair and grossly inadequate. The complaints further allege that the Company, Thermo Voltek, and Thermo Electron have violated their alleged fiduciary duty of fair dealing by proposing the merger transaction at the time. The parties are currently conducting discovery. Due to the inherent uncertainty of litigation, the outcome of this matter cannot be estimated. The Company expects, however, that any resolution will not materially affect its future results of operations or financial position. 14. Earnings (Loss) per Share Basic and diluted earnings (loss) per share were calculated as follows: (In thousands except per share amounts) 1999 1998 1997 - ---------------------------------------------------------------- -------- ---------- ----------- --------- Basic Income from Continuing Operations $ 10,578 $ 14,939 $36,861 Income from Discontinued Operations 3,723 4,074 4,631 Provision for Loss on Disposal of Discontinued (27,522) - - Operations Extraordinary Item - 4,597 - -------- -------- ------- Net Income (Loss) $(13,221) $ 23,610 $41,492 -------- -------- ------- Weighted Average Shares 41,836 41,221 36,700 -------- -------- ------- Basic Earnings (Loss) per Share: Continuing operations $ .25 $ .36 $ 1.00 Discontinued operations (.57) .10 .13 Extraordinary item - .11 - -------- -------- -------- $ (.32) $ .57 $ 1.13 ======== ======== ======= 29 14. Earnings (Loss) per Share (continued) (In thousands except per share amounts) 1999 1998 1997 - ---------------------------------------------------------------- -------- ---------- ----------- --------- Diluted Income from Continuing Operations $ 10,578 $ 14,939 $36,861 Income from Discontinued Operations 3,723 4,074 4,631 Provision for Loss on Disposal of Discontinued (27,522) - - Operations Extraordinary Item - 4,597 - -------- -------- ------- Net Income (Loss) (13,221) 23,610 41,492 Effect of: Convertible obligations - 138 - Majority-owned subsidiaries' dilutive securities - (30) (2) (5) continuing operations Majority-owned subsidiaries' dilutive securities - (5) (21) (34) discontinued operations -------- -------- ------- Income (Loss) Available to Common Shareholders, as Adjusted $(13,256) $ 23,725 $41,453 -------- -------- ------- Weighted Average Shares 41,836 41,221 36,700 Effect of: Convertible obligations 966 1,928 1,989 Stock options 53 93 222 -------- -------- ------- Weighted Average Shares, as Adjusted 42,855 43,242 38,911 -------- -------- ------- Diluted Earnings (Loss) per Share: Continuing operations $ .25 $ .35 $ .95 Discontinued operations (.56) .10 .12 Extraordinary item - .10 - -------- -------- ------- $ (.31) $ .55 $ 1.07 ======== ======== ======= Options to purchase 1,710,000, 1,175,000, and 422,000 shares of common stock were not included in the computation of diluted earnings (loss) per share for 1999, 1998, and 1997, respectively, because their effect would have been antidilutive due to the options' exercise prices exceeding the average market price for the common stock. In addition, the computation of diluted earnings per share for 1999 excludes the effect of assuming the conversion of the Company's $15,859,000 principal amount of 2.875% subordinated convertible debentures, convertible at $14.93 per share, because the effect would be antidilutive.
30 15. Unaudited Quarterly Information (In thousands except per share amounts)
1999 First Second (a) Third (b) Fourth - ----------------------------------------------------------- ----------- ----------- ----------- --------- Revenues $ 51,960 $ 51,459 $ 55,876 $64,208 Gross Profit 23,942 23,287 23,134 29,394 Income from Continuing Operations Before Extraordinary 1,692 2,930 930 5,026 Item Net Income (Loss) 2,582 (25,297) 2,614 6,880 Earnings per Share from Continuing Operations Before Extraordinary Item: Basic .04 .07 .02 .12 Diluted .04 .07 .02 .12 Earnings (Loss) per Share: Basic .06 (.61) .06 .16 Diluted .06 (.58) .06 .16 1998 First Second (c) Third Fourth - ----------------------------------------------------------- ----------- ----------- ----------- --------- Revenues $ 47,765 $ 49,937 $ 57,113 $53,829 Gross Profit 22,202 23,750 25,282 23,188 Income from Continuing Operations Before Extraordinary 3,795 3,875 3,711 3,558 Item Income Before Extraordinary Item 5,409 5,274 4,278 4,052 Net Income (d) 6,573 8,707 4,278 4,052 Earnings per Share from Continuing Operations Before Extraordinary Item: Basic .10 .09 .09 .09 Diluted .09 .09 .09 .08 Earnings per Share: Basic .16 .21 .10 .10 Diluted .16 .20 .10 .09 (a) Reflects $0.3 million and $32.5 million of restructuring and related costs from continuing operations and discontinued operations, respectively. (b) Reflects the July 1999 acquisition of Jaeger. (c) Reflects the June 1998 acquisition of the product-monitoring businesses. (d) Reflects the effect of net of tax extraordinary gains of $1,164,000 and $3,433,000 in the first and second quarters, respectively, which increased basic earnings per share by $.03 and $.08 in the first and second quarters, respectively, and diluted earnings per share by $.03 and $.07 in the first and second quarters, respectively. 31 16. Subsequent Events Proposed Reorganization Thermo Electron has announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. Under this plan, the Company would take its Thermo Sentron and Thermedics Detection subsidiaries private and seek a buyer for its Thermo Cardiosystems subsidiary. In addition, the Company would will also be taken private by Thermo Electron. The Company has commenced cash tender offers of $15.50 per share for Thermo Sentron and $8.00 for Thermedics Detection in order to bring its equity ownership in each of these companies, when combined with Thermo Electron's equity interest in each, to at least 90%. If these tender offers are successful, each of these companies would then be taken private by the Company through a short-form merger at the same cash prices as the tender offers. As of January 1, 2000, the Company owned approximately 74.2% of Thermo Sentron and 83.6% of Thermedics Detection, respectively, and Thermo Electron owned approximately 12.4% of Thermo Sentron and 5.3% of Thermedics Detection, respectively. If the Company and Thermo Electron successfully obtain ownership of at least 90% of the outstanding Thermo Sentron and Thermedics Detection shares, the Company expects to complete these transactions by the end of the second quarter of 2000. Thermo Electron has announced that it will conduct an exchange offer for any and all of the outstanding shares of Company common stock held by public shareholders. In the exchange offer, holders of Company common stock will receive shares of Thermo Electron common stock in exchange for their shares of the Company. On March 8, 2000, Thermo Electron announced the proposed exchange ratio of 0.45 shares of Thermo Electron common stock for each share of Company common stock. Thermo Electron, which owned approximately 75.7% of the outstanding shares of Company common stock at January 1, 2000, will condition the exchange offer on receiving acceptances from holders of enough shares so that, when combined with its current share ownership, Thermo Electron's ownership reaches at least 90%. If Thermo Electron achieves this 90% ownership threshold, it would acquire all remaining outstanding shares of the Company through a short-form merger. In the short-form merger, minority shareholders who do not participate in the exchange offer would also receive shares of Thermo Electron common stock in exchange for their Company common stock at the same ratio. Thermo Electron plans to conduct the exchange offer for Company common stock during the second quarter of 2000. If Thermo Electron successfully obtains at least 90% of the outstanding Company shares, it expects to complete the spin-in of the Company by the end of the second quarter of 2000. In addition, obligations under the Company's 2.875% subordinated convertible debentures due June 1, 2003, and its noninterest-bearing subordinated convertible debentures due June 1, 2003, would be assumed by Thermo Electron in the short-form merger, and the debentures would be convertible into Thermo Electron common stock. The tender offers and exchange offer will require review by the Securities and Exchange Commission of necessary filings. The exchange offer and short-form merger involving the Company would not require Company board or shareholder approval. The Company incurred $0.8 million of unusual costs in 1999 in connection with reorganization transactions, primarily investment banking fees. 32 16. Subsequent Events (continued) Discontinued Operations In May 1999, the Company announced its intention to sell Thermo Voltek, which represents its Power Electronics and Test Equipment segment. In January 2000, Thermo Electron announced a reorganization plan under which it intends to sell Thermo Cardiosystems, which represents the Company's Heart Assist and Blood Testing Devices segment. In accordance with the provisions of APB No. 30 concerning reporting the effects of disposal of a segment of a business, the Company classified the results of the Heart Assist and Blood Testing Devices and Power Electronics and Test Equipment segments as discontinued in the accompanying statement of operations. In addition, the net assets of the Heart Assist and Blood Testing Devices and Power Electronics and Test Equipment segments were classified as net assets of discontinued operations in the accompanying balance sheet, and primarily consisted of inventories, accounts receivable, and machinery and equipment, net of certain liabilities, principally subordinated convertible debentures. Summary operating results of the Heart Assist and Blood Testing Devices and Power Electronics and Test Equipment segments were as follows:
(In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- ---------- ----------- --------- Revenues $107,329 $ 104,788 $107,482 Costs and Expenses 96,782 92,981 92,410 -------- --------- -------- Income from Discontinued Operations Before Income 10,547 11,807 15,072 Taxes and Minority Interest Provision for Income Taxes 3,900 4,624 5,894 Minority Interest Expense 2,924 3,109 4,547 -------- --------- -------- Income from Discontinued Operations $ 3,723 $ 4,074 $ 4,631 ======== ========= ======== In 1999, the Company provided $27,522,000, net of a tax benefit of $2,583,000, for the estimated loss on disposal of the Power Electronics and Test Equipment segment. The Company expects the sale of the Heart Assist and Blood Testing Devices segment to result in a gain. The Company expects to complete the sale of the Power Electronics and Test Equipment segment in the first half of 2000 and the Heart Assist and Blood Testing Devices segment by the end of 2000. 33 Thermedics Inc. 1999 Financial Statements Report of Independent Public Accountants To the Shareholders and Board of Directors of Thermedics Inc.: We have audited the accompanying consolidated balance sheet of Thermedics Inc. (a Massachusetts corporation and 76%-owned subsidiary of Thermo Electron Corporation) and subsidiaries as of January 1, 2000, and January 2, 1999, the related consolidated statements of operations, cash flows, and comprehensive income and shareholders' investment for each of the three years in the period ended January 1, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thermedics Inc. and subsidiaries as of January 1, 2000, and January 2, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2000, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts February 10, 2000 (except with respect to the matters discussed in Note 16, as to which the date is March 8, 2000) 34 Thermedics Inc. 1999 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed immediately after this Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading "Forward-looking Statements." Overview The Company's continuing operations conduct business in three reportable segments: Quality Assurance and Security Products (Quality Assurance), Precision Weighing and Inspection Equipment (Inspection Equipment), and Respiratory Care Products. The Quality Assurance segment consists of the Company's Thermedics Detection Inc. subsidiary, which develops, manufactures, and markets high-speed detection and measurement instruments used in a variety of on-line industrial process applications, security applications, and laboratory analyses. The Inspection Equipment segment includes the Company's Thermo Sentron Inc. subsidiary, which develops, manufactures, and markets high-speed precision-weighing and inspection equipment for industrial production and packaging lines. In June 1998, Thermo Sentron acquired the three businesses that constituted the product-monitoring group of Graseby Limited (the product-monitoring businesses), a subsidiary of Smiths Industries plc (Note 3). The Respiratory Care Products segment consists of Erich Jaeger GmbH, which was acquired by the Company in July 1999 (Note 3). Jaeger, based in Germany, develops and manufactures equipment for lung-function, cardio-respiratory, and sleep disorder diagnosis and monitoring. The Company also develops and manufactures enteral nutrition-delivery systems and a line of medical-grade polymers used in medical disposables and in nonmedical, industrial applications, including safety glass and automotive coatings. A significant amount of the Company's revenues is derived from sales of products outside of the United States, through export sales and sales by the Company's foreign subsidiaries. The Company expects an increase in the percentage of revenues derived from international operations. During 1999, the Company had exports from its U.S. and foreign operations to Asia of approximately 6% of total revenues. Exports to Asia in 1999 were primarily to Japan, South Korea, and China. Asia experienced a severe economic crisis, which was characterized by sharply reduced economic activity and liquidity, highly volatile foreign-currency-exchange and interest rates, and unstable stock markets. The Company's export sales were adversely affected by the unstable economic conditions in Asia in 1998 and early 1999. Although the Company seeks to charge its customers in the same currency as its operating costs, the Company's financial performance and competitive position can be affected by currency exchange rate fluctuations between the U.S. dollar and foreign currencies. Where appropriate, the Company uses forward contracts to reduce its exposure to currency fluctuations. Thermo Electron Corporation has announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company (Note 16). Under this plan, the Company would take its Thermo Sentron and Thermedics Detection subsidiaries private, and in turn would be taken private and become a wholly owned subsidiary of Thermo Electron. In addition, Thermo Electron has announced that the Company will divest of its Thermo Cardiosystems Inc. and Thermo Voltek Corp. subsidiaries, which represent its Heart Assist and Blood Testing Devices and Power Electronics and Test Equipment subsidiaries, respectively. 35 Results of Operations 1999 Compared With 1998 Total revenues were $223.5 million in 1999, compared with $208.6 million in 1998. Revenues increased by $22.0 million due to the inclusion of revenues from Jaeger, acquired in July 1999, which represents the Respiratory Care Products segment. Revenues from the Inspection Equipment segment increased to $107.8 million in 1999 from $98.8 million in 1998. Revenues increased by $15.9 million as a result of the acquisition of the product-monitoring businesses by Thermo Sentron in June 1998. This increase was offset in part by decreases in revenues of $5.2 million from existing businesses, primarily due to lower demand in Europe, and $1.7 million due to the unfavorable effects of currency translation as a result of the strengthening in value of the U.S. dollar relative to currencies in foreign countries in which Thermo Sentron operates. Revenues from the Quality Assurance segment decreased to $73.6 million in 1999 from $91.6 million in 1998. Thermedics Detection's industrial process instruments revenues decreased by $9.5 million, primarily due to lower revenues from ALEXUS(R) systems and near-infrared analyzers. This decline was due in part to changes in the process of recycling plastic containers in Europe. Previously, such containers had been sanitized and reused, a process in which recyclers used Thermedics Detection's ALEXUS systems. Recent recycling trends there involve melting and reforming plastic returnables. Revenues from EGIS(R) explosives-detection systems and related services decreased $4.5 million, primarily due to lower shipments of security systems. During the first quarter of 1998, Thermedics Detection completed shipments under a contract to provide security systems to the FAA. Revenues under the contract totaled $2.6 million during 1998. In addition, revenues from Thermedics Detection's laboratory products decreased $4.1 million, primarily due to lower worldwide demand for titration and electrochemistry products and the expiration of two private label agreements. The Company's backlog, excluding acquisitions, decreased to $16.9 million at year-end 1999 from $22.6 million at year-end 1998, primarily due to lower demand at Thermo Sentron and Thermedics Detection. The gross profit margin was 45% in 1999 and 1998. The gross profit margin in the Quality Assurance segment decreased to 52% in 1999 from 54% in 1998, primarily due to provisions of $1.9 million for inventories deemed in excess based on recent demand. To a lesser extent, the gross profit margin decreased due to a charge to expense of $0.9 million related to the sale of inventory revalued at the time Jaeger was acquired. These decreases were offset by an increase in the gross profit margin in the Inspection Equipment segment to 40% in 1999 from 38% in 1998, primarily due to manufacturing efficiencies achieved as a result of cost-reduction measures at the product-monitoring businesses and, to a lesser extent, improved margins from sales of Thermo Sentron's packaged-goods products in North America. Selling, general, and administrative expenses increased to $66.5 million in 1999 from $57.2 million in 1998, primarily due to the inclusion of $6.6 million of expenses from Jaeger. Selling, general, and administrative expenses as a percentage of revenues increased to 30% in 1999 from 27% in 1998, primarily due to decreased revenues in the Quality Assurance segment and, to a lesser extent, the inclusion of higher selling, general, and administrative expenses as a percentage of revenues at Jaeger. Research and development expenses increased to $14.3 million in 1999 from $12.9 million in 1998, primarily due to the inclusion of $2.5 million of expenses at Jaeger, offset in part by a $1.6 million decrease in expenses at Thermedics Detection. This decrease was a result of efforts to reduce costs and focus on the development of near-term commercially viable products. The Company recorded $0.8 million of unusual costs in 1999, representing cash costs incurred in connection with reorganization transactions, primarily investment banking fees. Interest income decreased to $3.9 million in 1999 from $5.6 million in 1998, primarily due to lower average invested balances as a result of cash expended for the acquisition of the product-monitoring business in June 1998, the repurchase of securities of the Company and certain of its majority-owned subsidiaries in 1998, and the repayment of short- and long-term obligations. Interest expense increased to $2.6 million in 1999 from $1.8 million in 1998, 36 1999 Compared With 1998 (continued) primarily as a result of interest expense on borrowings used to partially finance the acquisition of Jaeger and, to a lesser extent, the Company's issuance of $15.9 million principal amount of 2.875% subordinated convertible debentures in exchange for $21.7 million principal amount of noninterest-bearing subordinated convertible debentures in July 1998. Equity in earnings of unconsolidated subsidiaries in the accompanying statement of operations represents the Company's proportionate share of earnings from joint ventures. Other income in 1999 represents foreign currency translation gains arising from transactions denominated in German marks. The effective tax rate was 36% and 38% in 1999 and 1998, respectively. The effective tax rate decreased in 1999 primarily due to an income tax credit of $1.2 million recorded by the Company as a result of a favorable resolution of a claim for prior-year research and development tax credits. The effective tax rate exceeded the statutory federal income tax rate in 1998 primarily due to the impact of state income taxes and nondeductible amortization of cost in excess of net assets of acquired companies. Minority interest expense was relatively unchanged at $2.5 million in 1999 and $2.7 million in 1998. In accordance with Accounting Principles Board Opinion No. 30 concerning reporting the effect of disposal of a segment of a business, the results of the Company's Heart Assist and Blood Testing Devices and Power Electronics and Test Equipment segments have been classified as discontinued operations in the accompanying statement of operations (Note 16). Income from discontinued operations was $3.7 million and $4.1 million in 1999 and 1998, respectively. In addition, the Company provided $27.5 million, net of tax, for the estimated loss on disposal of the Power Electronics and Test Equipment segment. The Company is not currently aware of any known trends, events, or uncertainties involving discontinued operations that it expects will materially affect its results of operations, financial condition, or liquidity through the date that such operations are disposed. In 1998, the Company recorded a gain of $4.6 million, net of related income taxes of $3.1 million, on the repurchase and exchange of subordinated convertible debentures (Note 7). 1998 Compared With 1997 Total revenues increased to $208.6 million in 1998 from $200.2 million in 1997. Revenues from the Inspection Equipment segment increased to $98.8 million in 1998 from $78.7 million in 1997. Revenues increased $24.6 million as a result of acquisitions made by Thermo Sentron in 1998 and 1997. This increase was offset in part by decreases in revenues of $2.3 million primarily due to lower demand in the United Kingdom and $2.2 million due to the impact of a stronger U.S. dollar relative to currencies in foreign countries in which Thermo Sentron operates. Revenues from the Quality Assurance segment decreased to $91.6 million in 1998 from $104.4 million in 1997. Revenues from Thermedics Detection's industrial process instruments and related services decreased by $9.1 million, primarily due to lower revenues from ALEXUS and near-infrared analyzers, offset in part by an increase in revenues from Thermedics Detection's InScan(R) product line. Revenues in 1997 included $6.6 million from a mandated ALEXUS product-line upgrade of The Coca-Cola Company's existing installed base. Revenues from EGIS explosives-detection systems and related services decreased to $8.2 million in 1998 from $10.3 million in 1997, primarily due to lower shipments of security systems. Thermedics Detection completed shipments under a contract with the FAA during 1998, which contributed $2.6 million of revenues in 1998. The gross profit margin decreased to 45% in 1998 from 48% in 1997. The gross profit margin at the Quality Assurance segment decreased to 54% in 1998 from 56% in 1997, primarily due to lower revenues and, to a lesser extent, changes in product mix. The gross profit margin at the Inspection Equipment segment decreased to 38% in 1998 from 40% in 1997, primarily due to the inclusion of lower-margin revenues from the product-monitoring businesses. Selling, general, and administrative expenses increased to $57.2 million in 1998 from $53.8 million in 1997, primarily due to the inclusion of $6.3 million of expenses from the product-monitoring businesses. This increase was offset in part by a $1.8 million decrease in selling, general, and administrative expenses at Thermedics Detection, primarily due to a reduction in selling expenses in an effort to reduce costs. Selling, general, and administrative expenses as a percentage of revenues were 27% in 1998 and 1997. 37 1998 Compared With 1997 (continued) Research and development expenses increased to $12.9 million in 1998 from $12.0 million in 1997, primarily due to the inclusion of expenses from the product-monitoring businesses. Interest income decreased to $5.6 million in 1998 from $6.2 million in 1997, primarily due to lower average invested balances as a result of cash expended for the acquisition of the product-monitoring businesses and repurchase of securities of the Company and certain of its majority-owned subsidiaries. Interest expense increased to $1.8 million in 1998 from $0.6 million in 1997, primarily as a result of interest expense on borrowings from Thermo Electron Corporation used to partially finance the acquisition of the product-monitoring businesses. As a result of the sale of stock by Thermedics Detection, the Company recorded a gain of approximately $17.1 million in 1997 (Note 10). This gain represents an increase in the Company's proportionate share of the subsidiary's equity and is classified as gain on issuance of stock by subsidiary in the accompanying statement of operations. The effective tax rates were 38% and 26% in 1998 and 1997, respectively. The effective tax rate in 1998 exceeded the statutory federal income tax rate primarily due to the impact of state income taxes and nondeductible amortization of cost in excess of net assets of acquired companies. The effective tax rate in 1997 was below the statutory federal income tax rate primarily due to the nontaxable gain on issuance of stock by subsidiary, offset in part by the impact of state income taxes and nondeductible amortization of cost in excess of net assets of acquired companies. Excluding the nontaxable gain in 1997, the effective tax rate was 37%. Minority interest expense decreased to $2.7 million in 1998 from $3.2 million in 1997, primarily due to lower earnings at Thermo Sentron and Thermedics Detection, offset in part by the Company's decreased ownership of Thermedics Detection as a result of its offering of common stock. Income from discontinued operations decreased to $4.1 million in 1998 from $4.6 million in 1997, primarily due to lower revenues at Thermo Voltek. In 1998, the Company recorded a gain of $4.6 million, net of related income taxes of $3.1 million, on the repurchase and exchange of subordinated convertible debentures. Liquidity and Capital Resources Consolidated working capital was $153.4 million at January 1, 2000, compared with $183.8 million at January 2, 1999. Cash, cash equivalents, and short-term available-for-sale investments were $34.5 million at January 1, 2000, compared with $82.0 million at January 2, 1999. Of the $34.5 million balance at January 1, 2000, $20.3 million was held by the Company's majority-owned subsidiaries, and the remainder by the Company and its wholly owned subsidiaries. Also, at January 1, 2000, the Company had $46.3 million invested in an advance to affiliate. Of the $46.3 million balance at January 1, 2000, $34.2 million was advanced by the Company's majority-owned subsidiaries and the remainder by the Company and its wholly owned subsidiaries. Prior to the use of new cash management arrangements between the Company and Thermo Electron Corporation, which became effective in 1999, such amounts were included in cash and cash equivalents. During 1999, $25.2 million of cash was provided by operating activities, including $16.7 million by the Company's continuing operations. Cash provided by the Company's continuing operations was offset in part by $6.5 million of cash used to fund an increase in accounts receivable, primarily due to the timing of shipments at Jaeger, and $3.6 million of cash used to fund a decrease in other current liabilities, primarily accrued payroll and employee benefits and accrued interest. Excluding available-for-sale investments and advance to affiliate activity, the Company's continuing operations' primary investing activity in 1999 was the acquisition of Jaeger (Note 3) for $28.4 million in cash, net of cash acquired, and the assumption of debt. In addition, the Company acquired, through a merger, all of the outstanding shares of Thermo Voltek that the Company did not previously own, other than the shares owned by Thermo Electron, for approximately $20.5 million in cash. The Company also expended $4.8 million for purchases of property, plant, and equipment during 1999. Cash of $10.0 million was provided by the repayment to the Company of borrowings by Thermo Voltek. During 2000, the Company expects to make capital expenditures of approximately $5.3 million. 38 Liquidity and Capital Resources (continued) During 1999, the Company's financing activities of continuing operations provided cash of $24.2 million. The Company borrowed $40.2 million from wholly owned subsidiaries of Thermo Electron to finance the acquisition of Jaeger and refinance $9.7 million of Jaeger's third-party borrowings. Cash of $8.0 million was used to partially repay a short-term obligation to Thermo Electron. Thermo Electron and its wholly owned subsidiary have indicated their willingness to require payment of the Company's short-term obligations of $11.0 million and $30.5 million, respectively, only to the extent that the Company's cash flows permit. The Company and Thermo Electron have entered into an agreement under which Thermo Electron has agreed to provide the Company with a $20 million short-term line of credit to partially fund the spin-ins of Thermo Sentron and Thermedics Detection. The Company believes that its existing resources, in addition to its credit line from Thermo Electron, are sufficient to meet the capital requirements of its existing operations for the foreseeable future. Market Risk The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, and equity prices, which could affect its future results of operations and financial condition. The Company manages its exposure to these risks through its regular operating and financing activities. Foreign Currency Exchange Rates The Company generally views its investment in foreign subsidiaries with a functional currency other than the Company's reporting currency as long-term. The Company's investment in foreign subsidiaries is sensitive to fluctuations in foreign currency exchange rates. The functional currencies of the Company's foreign subsidiaries are principally denominated in British pounds sterling and German deutsche marks. The effect of a change in foreign exchange rates on the Company's net investment in foreign subsidiaries is reflected in the "Accumulated other comprehensive items" component of shareholders' investment. A 10% depreciation in year-end 1999 and 1998 functional currencies, relative to the U.S. dollar, would result in a $8.8 million and $8.0 million reduction of shareholders' investment, respectively. Interest Rates Certain of the Company's short- and long-term available-for-sale investments and subordinated convertible debentures are sensitive to changes in interest rates. Interest rate changes would result in a change in the fair value of these financial instruments due to the difference between the market interest rate and the rate at the date of purchase or issuance of the financial instrument. A 10% decrease in year-end 1999 and 1998 market interest rates would result in a negative impact of $0.9 million and $1.6 million on the net fair value of the Company's interest-sensitive financial instruments. Equity Prices The Company's subordinated convertible debentures are sensitive to fluctuations in the price of Company or subsidiary common stock into which the obligations are convertible. Changes in equity prices would result in changes in the fair value of the subordinated convertible debentures due to the difference between the current market price and the market price at the date of issuance of the financial instrument. A 10% increase in the year-end 1999 and 1998 market equity prices would result in a negative impact of $0.9 million and $1.5 million, respectively, on the fair value of the Company's subordinated convertible debentures. 39 Year 2000 As of the date of this report, the Company has completed its year 2000 initiatives, which included: (i) testing and upgrading significant information technology systems and facilities; (ii) testing and developing upgrades, where necessary, for the Company's current products and certain discontinued products; (iii) assessing the year 2000 readiness of its key suppliers, vendors, and customers; and (iv) developing contingency plans. As a result of completing these initiatives, the Company believes that all of its material information technology systems, critical non-information technology systems, and its material products are year 2000 compliant. The Company believes that all of the material products that it currently manufactures and sells are year 2000 compliant or are not date sensitive. In addition, the Company is not aware of any significant supplier or vendor that has experienced material disruption due to year 2000 issues. The Company has also developed a contingency plan to allow its primary business operations to continue despite disruptions due to year 2000 problems, if any, that might yet arise in the future. The costs incurred to date by the Company in connection with the year 2000 issue have not been material. While the Company to date has been successful in minimizing negative consequences arising from year 2000 issues, there can be no assurance that in the future the Company's business operations or financial condition may not be impacted by year 2000 problems, such as increased warranty claims, vendor and supplier disruptions, or litigation relating to year 2000 issues. 40 Thermedics Inc. 1999 Financial Statements Forward-looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause its actual results in 1999 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Risks Associated with Acquisition Strategy. The Company's strategy includes the acquisition of businesses and technologies that complement or augment its existing product lines. Promising acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers and the need for regulatory approval, including antitrust approvals. There can be no assurance that the Company will be able to complete future acquisitions or that it will be able to successfully integrate any acquired business. In order to finance such acquisitions, it may be necessary for the Company to raise additional funds through public or private financings. Financing, if available at all, may be on terms which are not favorable to the Company. International Operations. Sales outside the U.S. have accounted for a significant percentage of the Company's total revenues. The Company intends to continue to expand its presence in international markets. International sales are subject to a number of risks, including the following: agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; foreign customers may have longer payment cycles; foreign countries may impose additional withholding taxes or otherwise tax the Company's foreign income, impose tariffs, or adopt other restrictions on foreign trade; fluctuations in exchange rates may affect product demand and adversely affect the profitability in U.S. dollars of products and services provided by the Company in foreign markets where payment for the Company's products and services is made in the local currency; U.S. export licenses may be difficult to obtain; and the protection of intellectual property in foreign countries may be more difficult to enforce. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business and results of operations. During 1999, the Company had exports from its U.S. and foreign operations to Asia of approximately 6% of total revenues. Exports to Asia in 1999 were primarily to Japan, South Korea, and China. Asia experienced a severe economic crisis in the late 1990's, which was characterized by sharply reduced economic activity and liquidity, highly volatile foreign-currency-exchange and interest rates, and unstable stock markets. The Company's export sales have been adversely affected by the unstable economic conditions in Asia in 1998 and early 1999. Technological Change and Competition. The market for many of the Company's products is characterized by changing technology, evolving industry standards, and new product introductions. The Company's future success will depend, in part, upon its ability to enhance its existing products and to develop and introduce new products and technologies to meet changing customer requirements. The Company is currently devoting significant resources toward the enhancement of its existing products and the development of new products and technologies. There can be no assurance that the Company will successfully complete the enhancement and development of these products in a timely fashion, or that these products will compete successfully with those of the Company's competitors. Certain of the Company's competitors have greater resources, manufacturing and marketing capabilities, technical staff, and production facilities than those of the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than can the Company. Competition could increase if new companies enter the market, or if existing competitors expand their product lines. Intellectual Property Rights. The Company relies upon trade secret protection and patents to protect its proprietary rights. There can be no assurance that patents will issue from any pending or future patent applications owned by or licensed to the Company, or that the claims allowed under any issued patents will be sufficiently broad to protect the Company's technology. In the absence of patent protection, the Company may be vulnerable to competitors who attempt to copy the Company's products or gain access to its trade secrets and know-how. Proceedings initiated by the Company to protect its proprietary rights could result in substantial costs to the Company. 41 There can be no assurance that competitors of the Company will not initiate litigation to challenge the validity of the Company's patents, or that they will not use their resources to design comparable products that do not infringe the Company's patents. There may also be pending or issued patents held by parties not affiliated with the Company that relate to the Company's products or technologies. The Company may need to acquire licenses to, or contest the validity of, any such patents. There can be no assurance that any license required under any such patent would be made available on acceptable terms, or that the Company would prevail in any such contest. The Company could incur substantial costs in defending itself in suits brought against it, or in suits in which the Company may assert its patent rights against others. If the outcome of any such litigation is unfavorable to the Company, the Company's business and results of operations could be materially adversely affected. In addition, the Company relies on trade secrets and proprietary know-how which it seeks to protect, in part, by confidentiality agreements with its collaborators, employees, and consultants. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. Product Liability. Thermedics Detection faces an inherent business risk of exposure to product liability claims relating to the use of their products. Although Thermedics Detection currently maintains product liability insurance against this risk, there can be no assurance that they will continue to be able to obtain such coverage at economically feasible rates, if at all, or that such coverage will be adequate in terms and scope to protect Thermedics Detection completely in the event of a successful product liability claim. Effect of Government Regulations and Approvals on Market for Thermo Sentron's Products. The market for certain of Thermo Sentron's products, both in the United States and abroad, is subject to or influenced by various domestic and foreign clean air and consumer protection laws. Thermo Sentron designs, develops, and markets its products to meet customer needs created by existing and anticipated regulations, and any changes in these regulations may adversely affect consumer demand for Thermo Sentron's products. In addition, the marketing of certain of Thermo Sentron's products is dependent upon the receipt of regulatory and other approvals, including industry association approvals of the design, construction, and accuracy of Thermo Sentron's products. Delays in obtaining, or the failure to obtain, any such approvals could have a material adverse effect on Thermo Sentron's business and results of operations. Dependence of Security Instruments Market on Government Regulation and Airline Industry. Thermedics Detection's sales of its explosives-detection systems for use in airports has been and will continue to depend on government initiatives to require, or support, the screening of baggage, carry-on items, and people with advanced explosives-detection equipment. Substantially all of such systems have been installed at airports in countries in which the applicable government or regulatory authority that oversees airport operations has mandated such screening. Such mandates are influenced by many factors outside of the control of the Company, including political and budgetary concerns of governments, airlines, and airports. Of the more than 600 commercial airports worldwide, more than 400 are located in the United States. Accordingly, Thermedics Detection believes that the size of the market for explosives-detection equipment is, and will increasingly be, significantly influenced by United States government regulation. The FAA has not yet mandated the installation of automated explosives-detection systems. Thermedics Detection's systems are trace detectors for which no FAA certification process exists to date. Thermedics Detection has received FAA approval for the Company's EGIS system for use by airlines in screening carry-on electronic items and luggage searches. The EGIS II system has passed FAA laboratory tests and is currently undergoing FAA operational testing before deployment in use at airports. There can be no assurance that the final step in the approval process for EGIS II will be successfully completed. 42 Although the FAA has provided significant funding to Thermedics Detection in connection with the development of its explosives-detection technology, Thermedics Detection's systems may not ever meet all United States certification standards. Any product using a technology ultimately recommended or required by the FAA will have a significant competitive advantage in the market for explosives-detection devices. Unless the FAA takes action with respect to a particular explosives-detection product or technology, airlines will not be required to purchase or upgrade their security systems, including upgrading existing metal-detection equipment. Earnings of U.S. air carriers tend to fluctuate significantly from time to time. Any depression in the financial condition of such carriers would likely result in lower capital spending for discretionary items. Moreover, there can be no assurance that additional countries will require the implementation of effective explosives screening for airline baggage, carry-on items, or people, or that, if required, Thermedics Detection's systems will meet the certification or other requirements of the applicable government authority. Even if Thermedics Detection's systems were to meet the applicable requirements, Thermedics Detection may not be able to market its systems effectively. From time to time, the United States government enacts legislation which includes allocations to purchase explosives-detection systems and other advanced security equipment, including trace detection equipment such as the systems manufactured by Thermedics Detection, for carry-on and checked baggage screening. The FAA has made purchases of, or placed orders for the purchase of, security equipment under such legislation. There can be no assurance, however, that this legislation will not be modified to reduce the funding for advanced explosives equipment, that necessary appropriations will continue to be made to fund further purchases of advanced explosives-detection equipment, that trace-detection equipment such as the systems manufactured by Thermedics Detection will be mandated, or that, even if further appropriations are made and such equipment is mandated, any of Thermedics Detection's explosives-detection systems will be purchased for installation at any airports in the United States. Further, there can be no assurance that the U.S. will mandate the widespread use of these systems after completion of the initial purchases. Significance of Certain Customers to Thermedics Detection. Sales of industrial process instruments and related services to bottlers licensed by The Coca-Cola Company (Coca-Cola Bottlers) were $3,939,000, $6,199,000, and $13,194,000 in 1999, 1998, and 1997, respectively. Although the Company anticipates that Thermedics Detection will continue to derive revenues from the sale of upgrades and new systems to new plants, as well as services to The Coca-Cola Bottlers, Thermedics Detection does not expect that revenues derived from these customers will continue at a rate comparable to prior years. In addition, sales to Fisher Scientific and VWR Scientific accounted for 13% and 12% of Thermedics Detection's total revenues, respectively, in 1999, and 10% and 10% of its total revenues, respectively, in 1998. Further, Thermedics Detection intends to continue to develop and introduce new industrial process products for the food, beverage, and other markets; however, there can be no assurance that Thermedics Detection will be successful in the introduction of new industrial process products or that any sales of these products will be sufficient to maintain a rate of growth equivalent to prior years. Dependence Upon OEM Relationships. A portion of the Company's sales are through Original Equipment Manufacturers (OEM) arrangements. The Company's sales depend, in part, on the continuation of these OEM arrangements and the level of end-user sales by such OEMs. There can be no assurance that the Company will be able to maintain its existing, or establish new, OEM relationships. 43 Risks Associated with Cash Management Arrangement with Thermo Electron. The Company participates in a cash management arrangement with Thermo Electron. Under this cash management arrangement, the Company lends its excess cash to Thermo Electron on an unsecured basis. The Company has the contractual right to withdraw its funds invested in the cash management arrangement upon 30 days' prior notice. Thermo Electron is contractually required to maintain cash, cash equivalents and/or immediately available bank lines of credit equal to at least 50% of all funds invested under the cash management arrangement by all Thermo Electron subsidiaries other than wholly owned subsidiaries. The funds are held on an unsecured basis and therefore are subject to the credit risk of Thermo Electron. The Company's ability to receive its cash upon notice of withdrawal could be adversely affected if participants in the cash management arrangement demand withdrawal of their funds in an aggregate amount in excess of the 50% reserve required to be maintained by Thermo Electron. In the event of a bankruptcy of Thermo Electron, the Company would be treated as an unsecured creditor and its right to receive funds from the bankruptcy estate would be subordinated to secured creditors and would be treated on a pari passu basis with all other unsecured creditors. Further, all cash withdrawn by the Company from the cash management arrangement within one year before the bankruptcy would be subject to rescission. The inability of Thermo Electron to return the Company's cash on a timely basis or at all could have a material adverse effect on the Company's results of operations and financial position.
44
Thermedics Inc. 1999 Financial Statements Selected Financial Information (In thousands except per share amounts) 1999 (a) 1998 (b) 1997 (c) 1996 (d) 1995 - -------------------------------------------------- ---------- ----------- ---------- ---------- --------- Statement of Operations Data Revenues $223,503 $ 208,644 $200,184 $179,608 $118,835 Income from Continuing Operations Before 10,578 14,939 36,861 21,808 6,644 Extraordinary Item Income (Loss) Before Extraordinary Item (13,221) 19,013 41,492 29,138 17,174 Net Income (Loss) (13,221) 23,610 41,492 29,138 17,174 Earnings per Share from Continuing Operations Before Extraordinary Item: Basic .25 .36 1.00 .60 .20 Diluted .25 .35 .95 .57 .20 Earnings (Loss) per Share: Basic (.32) .57 1.13 .80 .51 Diluted (.31) .55 1.07 .75 .49 Balance Sheet Data Working Capital $153,419 $ 183,832 $213,866 $184,051 $ 71,833 Total Assets 441,809 408,483 380,179 349,086 267,445 Long-term Obligations 47,599 47,552 65,021 65,014 8,319 Shareholders' Investment 223,402 248,127 227,851 211,643 171,799 (a) Reflects the July 1999 acquisition of Jaeger. (b) Reflects an extraordinary gain of $4.6 million, net of taxes, and the June 1998 acquisition of the product-monitoring business. (c) Reflects a nontaxable gain of $17.1 million from the issuance of stock by subsidiary. (d) Reflects the January 1996 acquisition of Moisture Systems and Rutter, the May 1996 issuance of $65.0 million principal amount of noninterest-bearing subordinated convertible debentures, and nontaxable gains of $23.7 million from the issuance of stock by subsidiaries. 45 Thermedics Inc. 1999 Financial Statements
Common Stock Market Information The Company's common stock is traded on the American Stock Exchange under the symbol TMD. The following table sets forth the high and low sale prices of the Company's common stock for 1999 and 1998, as reported in the consolidated transaction reporting system.
1999 1998 ------------------- -------------------- Quarter High Low High Low - -------------------------------------------------------------- ---------- ---------- ---------- ---------- First $11 3/8 $ 6 1/2 $17 13/16 $14 5/8 Second 9 5/16 6 1/8 17 15/16 12 3/8 Third 9 5/8 5 5/8 13 9/16 7 1/2 Fourth 6 3/8 4 7/8 11 1/4 6 5/8 As of January 28, 2000, the Company had 1,959 holders of record of its common stock. This does not include holdings in street or nominee names. The closing market price on the American Stock Exchange for the Company's common stock on January 28, 2000 was $6 1/8 per share. Common stock of the Company's majority-owned public subsidiaries is traded on the American Stock Exchange: Thermo Sentron Inc. (symbol TSR) and Thermedics Detection Inc. (symbol TDX). Shareholder Services Shareholders of Thermedics Inc. who desire information about the Company are invited to contact the Investor Relations Department, Thermedics Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046, (781) 622-1111. A mailing list is maintained to enable shareholders whose stock is held in street name, and other interested individuals, to receive Company information as quickly as possible. Company information is available from Thermo Electron's Internet site (http://www.thermo.com/subsid/tmd1.html). Stock Transfer Agent BankBoston N.A. is the stock transfer agent and maintains shareholder activity records. The agent will respond to questions on issuance of stock certificates, change of ownership, lost stock certificates, and change of address. For these and similar matters, please direct inquiries to: BankBoston N.A. c/o Boston EquiServe Limited Partnership P.O. Box 8040 Boston, Massachusetts 02266-8040 (781) 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. Form 10-K Report A copy of the Annual Report on Form 10-K for the fiscal year ended January 1, 2000, as filed with the Securities and Exchange Commission, may be obtained at no charge by writing to the Investor Relations Department, Thermedics Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.
EX-21 3 Exhibit 21 THERMEDICS INC. Subsidiaries of the Registrant As of February 23, 2000, Thermedics Inc. owned the following companies:
STATE OR PERCENT OF JURISDICTION OF OWNERSHIP NAME INCORPORATION - ------------------------------------------------------------------------------------------------------------ MWW Dreiundzwanzigste Vermogensverwaltungs GmbH Germany 100 Erich Jaeger GmbH Germany 100 HMS Health Management Systems GmbH Germany 100 Erich Jaeger Gesellschaft m.b.H. Austria 100 Erich Jaeger (U.K.) Ltd. England 100 Erich Jaeger S.A.R.L. France 100 Erich Jaeger B.V. Netherlands 100 Erich Jaeger Benelux B.V. Netherlands 100 Erich Jaeger, Inc. Delaware 100 TMO TCA Holdings, Inc. Delaware 100 Corpak Inc. Massachusetts 100 Walpak Company Illinois 100 Thermedics Detection Inc. Massachusetts 83.61 (additionally, 5.33% of the shares are owned directly by Thermo Electron Corporation) Detection Securities Corporation Massachusetts 100 Orion Research, Inc. Massachusetts 100 Advanced Sensor Technology Massachusetts 100 Orion Research Limited England 100 Orion Research Puerto Rico, Inc. Delaware 100 Russell pH Limited Scotland 100 Rutter & Co. Netherlands 100 Rutter Instrumentation S.A.R.L. France 90 Systech B.V. Netherlands 50 ThermedeTec Corporation Delaware 100 Thermedics Detection de Argentina S.A. Argentina 100 (1% of which shares are owned directly by Thermedics Detection Inc.) Thermedics Detection de Mexico, S.A. de C.V. Mexico 100 (1% of which shares are owned directly by Thermedics Detection Inc.) Thermedics Detection GmbH Germany 100 Thermedics Detection Limited England 100 Thermedics Detection Scandinavia AS Norway 100 NAME STATE OR PERCENT OF JURISDICTION OF OWNERSHIP INCORPORATION - ------------------------------------------------------------------------------------------------------------ Thermo Sentron Inc. Delaware 74.15 (additionally, 12.42% of the shares are owned directly by Thermo Electron Corporation) Allen Coding Systems Limited England 100 Allen Coding Corporation Delaware 100 Goring Kerr Limited England 100 Best Checkweighers Limited England 100 Intertest (UK) Limited England 100 Goring Kerr Detection Limited England 100 Goring Kerr (NZ) Limited New Zealand 100 Graseby Product Monitoring GmbH Germany 100 Goring Kerr Inc. New York 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 Development Co., Limited China 50* Thermo Sentron 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 England 100 Hitech Electrocontrols Limited England 100 Hitech Licenses Ltd. England 100 Hitech Metal Detectors Ltd. England 100 Westerland Engineering Ltd. England 100 Thermo Sentron SEC Corporation Massachusetts 100 Thermo Sentron (South Africa) Pty. Ltd. South Africa 100 Thermo Voltek Corp. Delaware 97.00 (additionally, 3% of the shares are owned directly by Thermo Electron Corporation) Thermo Voltek Europe B.V. Netherlands 100 Comtest Instrumentation, B.V. Netherlands 100 Comtest Italia S.R.L. Italy 95 (additionally 5% of the shares are owned directly by Thermo Voltek Corp.) Comtest Limited England 100 Milmega Limited England 100 TVL Securities Corporation Delaware 100 UVC Realty Corp. New York 100 NAME STATE OR PERCENT OF JURISDICTION OF OWNERSHIP INCORPORATION - ------------------------------------------------------------------------------------------------------------ Thermo Cardiosystems Inc. Massachusetts 60.07 (additionally, 0.04% of the shares are owned directly by Thermo Electron Corporation) International Technidyne Corporation Delaware 100 International Technidyne Corporation Limited England 100 Nimbus Inc. Massachusetts 100 TCA Securities Corporation Massachusetts 100 Thermo Administrative Services Corporation Delaware 100 Thermo Amex Management Company Inc. Delaware 100 Thermo Amex Finance, L.P. Delaware 99* Thermo Amex Convertible Growth Fund I., L.P. Delaware 99* *Joint Venture/Partnership
EX-23 4 Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation by reference of our report for Thermedics Inc. dated February 10, 2000 (except with respect to the matters discussed in Note 16, as to which the date is March 8, 2000), included in or made a part of this Form 10-K, 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, Registration Statement No. 033-65279 on Form S-8, Registration Statement No. 033-61435 on Form S-8, Registration No. 333-02149 on Form S-3, Registration No. 333-32035 on Form S-3, and Registration Statement No. 333-77487 on Form S-8. Arthur Andersen LLP Boston, Massachusetts March 21, 2000 EX-27.1 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JANUARY 1,2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-01-2000 JAN-01-2000 22,337 12,160 63,117 4,909 42,992 268,694 38,780 25,731 441,809 115,275 47,599 0 0 4,200 229,202 441,809 223,503 223,503 123,746 123,746 15,115 1,795 2,581 20,396 7,343 10,578 (23,799) 0 0 (13,221) (0.32) (0.31)
EX-27.2 6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JANUARY 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-02-1999 JAN-02-1999 81,950 0 47,733 2,850 40,958 254,438 33,838 22,484 408,483 70,606 47,552 0 0 4,174 243,953 408,483 208,644 208,644 114,222 114,222 12,902 610 1,777 28,292 10,688 14,939 4,074 4,597 0 23,610 0.57 0.55
EX-27.3 7
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JANUARY 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-03-1998 JAN-03-1998 101,246 9,687 42,297 2,574 33,873 262,364 27,808 18,960 380,179 48,498 65,021 0 0 3,685 224,166 380,179 200,184 200,184 103,677 103,677 11,968 369 597 53,825 13,781 36,861 4,631 0 0 41,492 1.13 1.07
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