-----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, K9vXwHr7ilJ81+OSFou6k7pZexxOMod+KpK0yoCsh73st5XZ4YUlwta/uZeip+HM d8AeArgm0M/Dh8kQmRdTZQ== 0000721356-97-000008.txt : 19970318 0000721356-97-000008.hdr.sgml : 19970318 ACCESSION NUMBER: 0000721356-97-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970317 SROS: AMEX 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: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09567 FILM NUMBER: 97557245 BUSINESS ADDRESS: STREET 1: 470 WILDWOOD ST STREET 2: P O BOX 2999 CITY: WOBURN STATE: MA ZIP: 01888-1799 BUSINESS PHONE: 6176221000 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 December 28, 1996 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-9567 THERMEDICS INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-2788806 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 470 Wildwood Street, P.O. Box 2999 Woburn, Massachusetts 01888-1799 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 622-1000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ---------------------------- ----------------------------------------- Common Stock, $.10 par value American Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of January 24, 1997, was approximately $295,395,000. As of January 24, 1997, the Registrant had 36,677,656 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1996 Annual Report to Shareholders for the year ended December 28, 1996, are incorporated by reference into Parts I and II. Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 2, 1997, are incorporated by reference into Part III. PAGE PART I Item 1. Business (a) General Development of Business The businesses of Thermedics Inc. (the Company or the Registrant) are divided into two segments: Instruments and Other Equipment, and Biomedical Products. The Company's Instruments and Other Equipment segment includes Thermo Sentron Inc. (Thermo Sentron), which designs, develops, manufactures, and sells high-speed precision-weighing and inspection equipment for industrial production and packaging lines. On January 2, 1996, the Company transferred to Thermo Sentron the assets, liabilities, and business of Ramsey Technology, Inc., acquired in March 1994, for 7,000,000 shares of Thermo Sentron common stock. In April 1996, Thermo Sentron completed the sale of shares of common stock in its initial public offering for net proceeds of approximately $42.3 million. Also part of the Instruments and Other Equipment segment is the Company's Orion laboratory products division (Orion), acquired in December 1995. Orion is a manufacturer of electrode-based chemical measurement and other instruments used to analyze the composition of foods, beverages, pharmaceuticals, and other products and detect contaminants in high-purity water. Through the Company's Thermedics Detection Inc. (Thermedics Detection) subsidiary, the Instruments and Other Equipment segment also develops, manufactures, and markets high-speed, on-line detection instruments used in a variety of industrial process applications, explosives detection, and laboratory analysis. In January 1996, Thermedics Detection acquired the assets and certain liabilities of Moisture Systems Corporation and certain affiliated companies (collectively, Moisture Systems) and the stock of Rutter & Co. B.V. (Rutter) for a total of $21.7 million in cash, which included the repayment of $0.7 million of debt. Moisture Systems and Rutter design, manufacture, and sell instruments that use near-infrared spectroscopy to measure moisture and other product components. In March and November 1996, Thermedics Detection issued shares of its common stock in private placements for net proceeds of $7.0 million. In February 1997, a registration statement, under the Securities Act of 1933, covering shares of common stock to be sold in Thermedics Detection's initial public offering was declared effective by the Securities and Exchange Commission. The Instruments and Other Equipment segment, through the Company's Thermo Voltek Corp. (Thermo Voltek) subsidiary, also manufactures a line of electromagnetic compatibility testing instruments, high-voltage power conversion systems, and programmable power amplifiers. As part of its Biomedical Products segment, the Company's Thermo Cardiosystems Inc. (Thermo Cardiosystems) subsidiary has developed two implantable left ventricular-assist systems (LVAS): a pneumatic, or air-driven, system and an electric version. The Company also develops, manufactures, and markets enteral nutrition-delivery systems and a line of medical-grade polymers used in medical disposables and nonmedical, industrial applications, including safety glass and automotive coatings. 2PAGE The Company was incorporated in 1983 under the laws of Massachusetts as a wholly owned subsidiary of Thermo Electron Corporation (Thermo Electron). Prior to that time, the business of the Company was conducted by the R & D/New Business Center of Thermo Electron. As of December 28, 1996, Thermo Electron owned 20,293,310 shares of the Company's common stock, representing 55% of such stock outstanding. Thermo Electron is a world leader in environmental monitoring and analysis instruments, biomedical products such as heart-assist devices and mammography systems, papermaking and recycling equipment, biomass electric power generation, and other specialized products and technologies. Thermo Electron also provides a range of services related to environmental quality. Thermo Electron intends, for the foreseeable future, to maintain at least 50% ownership of the Company. This may require Thermo Electron to purchase additional shares of the Company's common stock (or debentures convertible into common stock) from time to time, as the number of the Company's outstanding shares increases. These or any other purchases may be made either in the open market or directly from the Company. See Notes 4 and 7 to Consolidated Financial Statements in the Company's 1996* Annual Report to Shareholders for a description of the Company's outstanding stock options and convertible debentures. In January and April 1996, the Company issued an aggregate of 1,987,273 shares of its common stock to Thermo Electron in exchange for 634,049 shares of Thermo Voltek common stock and 929,947 shares of Thermo Cardiosystems common stock. The shares of common stock were exchanged at their respective fair market values on the dates of the transactions. Share information for Thermo Cardiosystems and Thermo Voltek has been restated to reflect three-for-two stock splits effected in the form of 50% stock dividends, distributed in May 1996 and August 1996, respectively. During 1996, Thermo Electron purchased 995,800 shares of the Company's common stock in the open market for $19,489,000. Additionally, during 1996, Thermo Electron purchased in the open market 51,700 shares and 250,000 shares of the common stock of Thermo Voltek and Thermo Sentron, respectively, for $569,000 and $4,006,000, respectively. As of December 28, 1996, the Company owned 54%, 51%, 71%, and 94% of the outstanding common stock of Thermo Cardiosystems, Thermo Voltek, Thermo Sentron, and Thermedics Detection, respectively. The Company intends, for the foreseeable future, to maintain at least 50% ownership of these subsidiaries. This may require the Company to purchase additional shares of these companies' common stock or, if applicable, convertible debentures (which are then converted) from time to time, if the number of these companies' outstanding shares increase as a result of conversion of convertible obligations, the exercise of stock options issued, or otherwise. These or any other purchases by the Company may be made either in the open market or directly from Thermo Cardiosystems, Thermo Voltek, Thermo Sentron, Thermedics Detection, or Thermo Electron, or pursuant to the conversion of all or part of the convertible notes issued by Thermo Voltek to the Company. During 1996, the Company purchased in the open market 40,000 shares and 291,450 shares of the * References to 1996, 1995, and 1994 herein are for the fiscal years ended December 28, 1996, December 30, 1995, and December 31, 1994, respectively. 3PAGE common stock of Thermo Cardiosystems and Thermo Voltek, respectively, for $1,219,000 and $4,169,000, respectively. Forward-looking Statements Forward-looking statements, within the meaning of Section 21E of the Securities and Exchange Act of 1934, are made throughout this Annual Report on Form 10-K. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words, "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the caption "Forward-looking Statements" in the Registrant's 1996 Annual Report to Shareholders incorporated herein by reference. (b) Information About Industry Segments Financial information concerning the Company's industry segments is summarized in Note 14 to Consolidated Financial Statements in the Registrant's 1996 Annual Report to Shareholders and is incorporated herein by reference. (c) Description of Business Instruments and Other Equipment 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 wide range of checkweighing equipment and metal detectors that can be integrated at various stages in production lines for process control and quality assurance. These products are sold primarily to customers in the food-processing, pharmaceutical, mail-order, and other industries. Products in Thermo Sentron's bulk-material line include conveyor belts, scales, solids level-measurement and conveyor-monitoring devices, and sampling systems. These products are sold primarily to customers in the mining and material-processing industries, as well as electric utilities, chemical, and other manufacturing companies. During 1996, 1995, and 1994, the Company derived revenues of $70.0 million, $67.5 million, and $50.1 million, respectively, from its precision-weighing and inspection equipment. Laboratory Products. To expand its product quality assurance offerings, the Company acquired Orion in December 1995. Orion's laboratory pH/ion-selective products identify chemical substances found in various types of solutions, including foods, pharmaceuticals, soils, and water. Pure water monitors, also marketed under the Orion name, use ion-selective technology to monitor parameters required for the control of high-purity water systems in power generation and other industrial applications. Other products include Cahn microweighing and moisture 4PAGE balances and Lear/Fischer filtration/moisture analysis products, all marketed under the Orion brand name. Orion also markets consumable products for its earlier instruments line. During 1996, the Company derived revenues from laboratory products of approximately $50.9 million. Process Detection Instruments. Thermedics Detection's Alexus system, a high-speed product quality assurance system, based on the Company's vapor-detection technology, is currently used in bottling lines in the beverage industry. In 1996, the Company began selling its high-speed X-ray imaging system, marketed under the brand name InScan(TM), to detect liquid fill-levels and other parameters for the beverage industry. In 1996, the Company also introduced a high-speed gas chromatography instrument, marketed under the brand name Flash-GC(TM), to provide ultra- high-speed, laboratory-quality analysis for near on-line process-control applications. Thermedics Detection's Moisture Systems and Rutter divisions manufacture and sell instruments that use near-infrared spectroscopy to measure moisture and other product components, including fat, protein, oil, flavorings, solvents, adhesives, and coatings in the manufacturing process for the food, pharmaceutical, chemical, wood, pulp, paper, textile, and other industries. During 1996, 1995, and 1994, the Company derived revenues from its process detection instrument business of approximately $34.0 million, $18.5 million, and $38.0 million, respectively. Explosives-detection Instruments. Also through Thermedics Detection, the Company has developed a line of explosives-detection equipment that uses trace-particle and vapor-detection techniques. EGIS is a highly sensitive trace-detection instrument used for screening people, baggage, packages, freight, and electronic equipment, such as personal computers, for the presence of a wide range of explosives, including the plastic explosives that have proven difficult to detect using conventional methods. EGIS detects ultratrace quantities of certain explosives and indicates the concentration and type of explosive detected. EGIS is used in 21 countries and operational in 42 international airports. It is also used in government buildings, embassies, and other locations where there is a high degree of concern for security. The EGIS system has assisted in identifying explosives used in terrorist bombings, including those in Oklahoma City and at the World Trade Center in New York, as well as in Israel, Buenos Aires, and the United Kingdom. Most recently, the Bureau of Alcohol, Tobacco, and Firearms and the Federal Bureau of Investigation used EGIS systems in their attempt to identify the cause of the crash of TWA Flight 800. Thermedics Detection has also developed Rampart(TM), a lower-cost product designed for use in conjunction with trace explosives detectors such as EGIS, and SecurScan(TM), an automated system that can detect traces of explosives on people. Electromagnetic Compatibility Testing Instruments. Through its Thermo Voltek subsidiary, the Company designs, develops, manufactures, and markets electromagnetic compatibility (EMC) testing instruments. Through the KeyTek Instrument (KeyTek) division of Thermo Voltek, the Company 5PAGE manufactures instruments that simulate pulsed electromagnetic interference (pulsed EMI). Pulsed EMI, caused by natural and man-made phenomena such as lightning, static electricity, and electrical power disturbances, can damage or disrupt the operation of any product that uses digital circuits. Consequently, manufacturers of electronic systems and integrated circuits must engineer their products for immunity to pulsed EMI. The Company's products are used by these customers primarily for product development, design verification, and quality assurance, enabling them to meet higher levels of product performance, reliability, and safety, and to meet increasingly stringent regulatory requirements, including a European Union (EU) directive that took effect on January 1, 1996. Thermo Voltek's Kalmus division manufactures radio frequency (RF) power amplifiers. RF power amplifiers are used to test products for immunity to conducted and radiated RF interference, another form of electromagnetic interference, and are purchased by many of the same customers that purchase Thermo Voltek's pulsed EMI testing products. Through Thermo Voltek's Comtest subsidiary, the Company provides EMC-consulting and systems-integration services, acts as distributor of a broad range of EMC-testing products, and manufactures specialized power supplies for use in telecommunications equipment. In July 1996, Thermo Voltek acquired Pacific Power Source Corporation, a manufacturer of programmable power amplifiers that can be incorporated into EMC test equipment to assess how well electronics tolerate normal variations in the quality and quantity of AC voltage. These amplifiers are also used in other kinds of test equipment and in application-specific power supplies. During 1996, 1995, and 1994, the Company derived revenues of $44.1 million, $31.6 million, and $19.0 million, respectively, from electromagnetic compatibility testing instruments. High-voltage Systems. Through Thermo Voltek's Universal Voltronics division, the Company designs, manufactures, and markets high-voltage power conversion systems, modulators, and related high-voltage equipment for industrial, medical, and security processes, as well as for defense and scientific research applications. These systems transform utility-supplied AC power into the DC voltages and currents required by the user and allow precise control over the performance level desired for each application. Biomedical Products Left Ventricular-assist Systems. The Company, through its Thermo Cardiosystems subsidiary, has developed two versions of its implantable left ventricular-assist system (LVAS): a pneumatic, or air-driven, system that can be controlled by an external console and an electric system that features an internal electric motor powered by an external battery pack worn by the patient. These devices are designed to perform substantially all or part of the pumping function of the left ventricle of the natural heart for patients suffering from cardiovascular disease. Both of the 6PAGE Company's systems employ the Company's HeartMate(R) blood pump and are designed for long-term use. Air-driven LVAS. In October 1994, the air-driven LVAS system was approved by the FDA for commercial sale in the U.S. for use as a bridge to transplant for patients awaiting heart transplantation. This approval allows the Company to sell the air-driven LVAS to any of the nearly 900 cardiac surgery centers in the U.S. In April 1994, the Company received the European Conformity Mark (CE Mark), which allows commercial sale of the air-driven LVAS in all European Community countries. Clinical trials also are under way in the U.S. for the HeartPak portable driver for the air-driven HeartMate device. Electric LVAS. The Company has also developed an electric LVAS that uses the HeartMate blood pump driven by an internal electric motor mounted in the blood-pump housing. The system is connected to an external battery pack by wires that exit the body, allowing the patient complete mobility. The electric LVAS may not be sold commercially in the U.S. until it receives approval from the FDA. Clinical trials for the electric LVAS as a bridge to transplant are nearing completion and, in December 1995, the FDA approved the protocol for conducting clinical trials of the electric LVAS as an alternative to medical therapy. The trial is expected to compare the results of approved patients using the device to a similar number using drug therapy. In August 1995, the electric LVAS was awarded the CE Mark, allowing commercial sale of this system in all European Community countries. In Europe, the electric system is used as a bridge to transplant and is also implanted as an alternative to heart transplant. During 1996, 1995, and 1994, the Company derived revenues of $30.0 million, $20.6 million, and $10.5 million, respectively, from LVAS. In December 1996, Thermo Cardiosystems acquired substantially all of the assets, subject to certain liabilities, of Nimbus Medical, Inc. (Nimbus), a research and development organization, for $5.0 million in cash. Nimbus has been involved in artificial heart technology for more than 20 years and has carried out research in two primary fields: ventricular-assist devices and total artificial hearts. Nimbus was instrumental in developing the basic technology for high-speed rotary blood pumps. Because of their smaller size, rotary blood pumps may potentially be used to provide cardiac support in smaller adults and in children. Medical-grade Polymers and Enteral Nutrition-delivery Systems. The Company's research relating principally to the development of its LVAS has resulted in the development of proprietary medical-grade plastics marketed under the names Tecoflex(R) and Tecothane(R). Tecoflex and Tecothane are thermoplastic polyurethanes used in medical disposables and industrial products. The Company sells Tecoflex and Tecothane in bulk form for fabrication by the customer, and the Company also extrudes precision tubing to customer specifications. In 1993, the Company introduced Scent Seal fragrance samplers, which were developed from the Company's polymer technology. Scent Seal fragrance samplers are used to hermetically seal a fragrance rendition in 7PAGE perfume advertisements for magazines, and are an alternative to commonly used fragrance strips. In June 1995, Thermedics entered into an agreement granting Arcade, Inc., the leading manufacturer of scent-sampling products, an exclusive, worldwide license to manufacture and distribute the Company's fragrance samplers under Thermedics' patents and know-how. Under the license agreement, Arcade pays royalties to Thermedics on licensed fragrance samplers sold by Arcade, and Thermedics continues to provide the polymer gels needed to produce the fragrance samplers. The Company's Corpak Inc. (Corpak) subsidiary designs, manufactures, and markets enteral feeding systems that introduce special nutritional solutions into the stomach or the small intestine through tubes entering the nose or stomach. Enteral therapy is used for patients who are unable to feed themselves but who do not require parenteral (intravenous) feeding. Corpak's products include bags for nutritional fluids, delivery pumps, associated pump sets that hook up to the pumps, and feeding tubes. In addition, Corpak markets a range of enteral feeding supplements. Raw Materials Certain raw materials used in the manufacture of the Company's LVAS are available from only one or two suppliers. The Company is making efforts to minimize the risks associated with sole sources and ensure long-term availability, including qualifying certain alternative materials and components or developing alternative sources for the materials and components supplied by a single source. Although the Company 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 the Company will not experience shortages of certain materials or components in the future that could delay shipments of the LVAS. The cost to the Company 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 the alternative material or component to the original material or component, 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 the Company's LVAS development program or adversely affect the Company's ability to manufacture and ship LVAS to meet demand. Proprietary Rights 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 8PAGE 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 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. 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. The third party has offered Thermo Cardiosystems a license, which Thermo Cardiosystems has elected not to accept. Although Thermo Cardiosystems believes that it has meritorious defenses to the claims of the third party, due to the inherent uncertainty of litigation, no assurance can be made that Thermo Cardiosystems would be successful if any litigation were to begin. The Company also 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 twenty 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. Dependency on a Single Customer No customer represented 10% or more of the Company's total revenues in 1996 and 1995. In 1994, the Company derived 21% of its total revenues from The Coca-Cola Company and its affiliates. The Company derived 5% of its total revenues in 1994 from Scent Seal Inc., which represented 23% of the Biomedical Products segment revenues. Backlog The Company's backlog of firm orders at year-end 1996 and 1995 was as follows: (In thousands) 1996 1995 ------------------------------------------------------------------------ Instruments and Other Equipment $39,000 $31,800 Biomedical Products 2,600 2,200 ------- ------- $41,600 $34,000 ======= ======= 9PAGE The Company anticipates that substantially all of the backlog at the end of 1996 will be shipped or completed during 1997. Competition Instruments and Other Equipment Precision-weighing and Inspection Equipment. The Company's Thermo Sentron subsidiary competes with several international and regional companies in the markets for its products. Thermo Sentron's competitors in the packaged-goods market differ from those in the bulk-materials market. The principal competitive factors in both markets are customer service and support, quality, reliability, and price. Laboratory Products. The Company's Orion division competes with several international companies. The Company competes on the basis of performance, service, technology, and price. Process Detection Instruments. The Company's process detection instruments compete with systems manufactured by numerous companies. The Company believes that these companies are generally focused on particular niches in the process detection systems market, only in some of which does the Company compete. Competition in the markets for all of the Company's detection products is based primarily on performance, service, and price. Explosives-detection Instruments. In the explosives-detection market, the Company competes with a small number of companies, including other markets of chemical trace-detection instruments, and, to a lesser degree, makers of enhanced X-ray detectors. Competition in this market is based primarily on performance, including speed, accuracy, and the range of explosives that can be detected; ease of use; service; and price. The Company's principal competitor in the trace detection market is Barringer Technologies Inc., a Canadian firm that has placed several trace detectors in airport applications. To date, no other manufacturers have placed trace detection systems in airports, but the Company expects that the Federal Aviation Administration (FAA) will purchase trace systems from Barringer and such other manufacturers as part of the initial deployment of explosives-detection systems in the U.S. The Company believes that the companies, if any, whose devices are ultimately required by the FAA will have a substantial competitive advantage in the United States. Electromagnetic Compatibility Testing Instruments. There are numerous companies worldwide that independently manufacture and market pulsed EMI test equipment for electronic products and several more that independently manufacture and market component-reliability test equipment. The Company competes in this market primarily on the basis of performance, technical expertise, reputation, and price. In the market for RF power amplifiers, competition is based primarily on the basis of technical expertise, reputation, and price. High-voltage Systems. In the market for high-voltage power supply systems of the general type manufactured and marketed by Thermo Voltek, the Company competes for both contract and commercial sales primarily on 10PAGE the basis of technical expertise, product performance, reputation, and price. Substantially all of the Company's contract and commercial revenues are subject to intense competitive bidding. Some of the Company's competitors have substantially greater financial resources than those of the Company. Biomedical Products Left Ventricular-assist Systems. The Company is aware of one other company that has submitted a PMA application with the FDA for an implantable LVAS. The Company is unaware whether this PMA application has been accepted for filing by the FDA. Also, the Company is aware of one other company that has received approval by the FDA Advisory Panel on Circulatory System Devices and subsequent commercial approval for its cardiac-assist device. This is a device positioned on the outside of the patient's chest and intended for short-term use in the hospital environment. In addition, the Company is aware that a total artificial heart is currently undergoing clinical trials. The requirement of obtaining FDA approval for commercial sale of an LVAS is a significant barrier to entry into the U.S. market for these devices. There can be no assurance, however, that FDA regulations will not change in the future, reducing the time and testing required for others to obtain FDA approval for commercial sale. In addition, other research groups and companies, some of which have significantly greater resources than those of the Company, are developing cardiac systems using alternative technologies or concepts, one or more of which might prove functionally equivalent to or more suitable than the Company's systems. Among products that have been approved for commercial sale, the Company competes primarily on the basis of performance, service capability, and price. Competition in the market for medical devices is also significantly affected by the reimbursement policies of government and private insurers. Any product for which reimbursement is not available from third-party payors will be at a significant competitive disadvantage. Medical-grade Polymers and Enteral Nutrition-delivery Systems. In the market for medical-grade polymers and enteral nutrition-delivery systems, the Company competes primarily with large pharmaceutical, medical-device, and chemical companies, many of which have substantially greater financial, technical, and human resources than those of the Company. Competition within these markets is intense, and is based primarily on price, efficacy, and technological advances. Research and Development During 1996, 1995, and 1994, the Company expended $17,704,000, $11,087,000, and $10,445,000, respectively, on internally sponsored research and development programs, and $1,410,000, $3,125,000, and $1,702,000, respectively, on research and development programs sponsored by others. As of December 28, 1996, 167 professional employees were engaged full-time in research and development activities. Environmental Protection Regulations The Company believes that compliance by the Company with federal, state, and local environmental protection regulations will not have a 11PAGE material adverse effect on its capital expenditures, earnings, or competitive position. Number of Employees As of December 28, 1996, the Company's Instruments and Other Equipment and Biomedical Products segments employed 1,259 and 305 people, respectively. (d) Financial Information about Exports by Domestic Operations and about Foreign Operations Financial information about exports by domestic operations and about foreign operations is summarized in Note 14 to Consolidated Financial Statements in the Registrant's 1996 Annual Report to Shareholders and is incorporated herein by reference. (e) Executive Officers of the Registrant Present Title (Year First Became Executive Name Age Officer) -------------------- --- ------------------------------------------ John W. Wood Jr. 53 President and Chief Executive Officer (1984) Victor L. Poirier 55 Senior Vice President (1983) John T. Keiser 61 Senior Vice President (1994) John N. Hatsopoulos* 62 Vice President and Chief Financial Officer (1983) David H. Fine 54 Vice President (1993) Jeffrey J. Langan 51 Vice President (1996) Paul F. Kelleher 54 Chief Accounting Officer (1985) * John N. Hatsopoulos and George N. Hatsopoulos, a director of the Company, are brothers. Each executive officer serves until his successor is chosen or appointed and qualified, or until earlier resignation, death, or removal. All executive officers, except Mr. Langan, have held comparable positions for at least five years, either with the Company or with its parent company, Thermo Electron. Mr. Keiser was appointed senior vice president of the Company in 1994, at the same time he was named president of Thermo Biomedical, a newly created subsidiary of Thermo Electron. From 1985 until 1994, Mr. Keiser was president of the Eberline Instrument division of Thermo Instrument Systems Inc., a majority-owned public subsidiary of Thermo Electron. Mr. Langan was appointed vice president of the Company in September 1996, and has been president of Thermedics Detection since April 1996 and chief executive officer of Thermedics Detection since December 1996. Prior to joining the Company, Mr. Langan held a number of positions at the Hewlett-Packard Co., including general manager of the Healthcare Information Management Division and Clinical Systems Business Division. Messrs. Wood and Fine are full-time employees of the Company. Messrs. Hatsopoulos and Kelleher are full-time employees of Thermo Electron, and Mr. Poirier is a full-time employee of Thermo Cardiosystems, but they devote such time to the affairs of the Company as the Company's needs reasonably require. 12PAGE Item 2. Properties The location and general character of the Company's properties by industry segment as of December 28, 1996, are as follows: Instruments and Other Equipment The Company owns approximately 45,000, 9,500, and 14,300 square feet of office, engineering, laboratory, and production space in New York, Canada, and Scotland, respectively, and leases approximately 601,000 square feet of office, engineering, laboratory, and production space principally in Minnesota, Massachusetts, California, Washington, Florida, Puerto Rico, Mexico, Italy, The Netherlands, Australia, Germany, Spain, South Africa, and the United Kingdom, under leases expiring from 1997 through 2001. Biomedical Products The Company leases approximately 165,000 square feet of office, engineering, laboratory, and production space in Illinois and Massachusetts under leases expiring in 1997 through 2013. The Company believes that its facilities are in good condition and are adequate to meet its current needs and that other suitable space is readily available if any of such leases are not extended. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information concerning the market and market price for the Registrant's Common Stock, $.10 par value, and dividend policy are included under the sections labeled "Common Stock Market Information" and "Dividend Policy" in the Registrant's 1996 Annual Report to Shareholders and is incorporated herein by reference. 13PAGE Item 6. Selected Financial Data Information concerning the Registrant's selected financial data is included under the sections labeled "Selected Financial Information" and "Dividend Policy" in the Registrant's 1996 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 1996 Annual Report to Shareholders and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Registrant's Consolidated Financial Statements as of December 28, 1996, are included in the Registrant's 1996 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 Item 10. Directors and Executive Officers of the Registrant The information concerning directors required under this item is incorporated herein by reference from the material contained under the caption "Election of Directors" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. The information concerning delinquent filers pursuant to Item 405 of Regulation S-K is incorporated herein by reference from the material contained under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" under the caption "Stock Ownership" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 11. Executive Compensation The information required under this item is incorporated herein by reference from the material contained under the caption "Executive Compensation" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. 14PAGE Item 12. Security Ownership of Certain Beneficial Owners and Management The information required under this item is incorporated herein by reference from the material contained under the caption "Stock Ownership" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 13. Certain Relationships and Related Transactions The information required under this item is incorporated herein by reference from the material contained under the caption "Relationship with Affiliates" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. PART IV Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a,d) Financial Statements and Schedules. (1) The consolidated financial statements set forth in the list below are filed as part of this Report. (2) The consolidated financial statement schedule set forth in the list below is filed as part of this Report. (3) Exhibits filed herewith or incorporated herein by reference are set forth in Item 14(c) below. List of Financial Statements and Schedules Referenced in this Item 14. Information incorporated by reference from Exhibit 13 filed herewith: Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Shareholders' Investment Notes to Consolidated Financial Statements Report of Independent Public Accountants 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. 15PAGE (b) Reports on Form 8-K. None. (c) Exhibits. See Exhibit Index on the page immediately preceding exhibits. 16PAGE 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 14, 1997 THERMEDICS INC. By: John W. Wood Jr. ---------------- John W. Wood Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, as of March 14, 1997. Signature Title --------- ----- By: John W. Wood Jr. President, Chief Executive Officer, --------------------- John W. Wood Jr. and Director By: John N. Hatsopoulos Chairman of the Board, Vice President, --------------------- John N. Hatsopoulos Chief Financial Officer, and Director By: Paul F. Kelleher Chief Accounting Officer --------------------- Paul F. Kelleher By: Peter O. Crisp Director --------------------- Peter O. Crisp By: Paul F. Ferrari Director --------------------- Paul F. Ferrari By: George N. Hatsopoulos Director --------------------- George N. Hatsopoulos By: Robert C. Howard Director --------------------- Robert C. Howard By: Arvin H. Smith Director --------------------- Arvin H. Smith By: Nicholas T. Zervas Director --------------------- Nicholas T. Zervas 17PAGE 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 6, 1997. 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 15 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 6, 1997 18PAGE SCHEDULE II THERMEDICS INC. Valuation and Qualifying Accounts (In thousands) Balance at Provision Accounts Balance Beginning Charged Accounts Written at End Description of Year to Expense Recovered Off Other (a) of Year - ------------------- ---------- ---------- --------- -------- -------- -------- Year Ended December 28, 1996 Allowance for Doubtful Accounts $ 3,982 $ 1,352 $ 206 $(1,048) $ 149 $ 4,641 Year Ended December 30, 1995 Allowance for Doubtful Accounts $ 3,640 $ 689 $ 2 $ (714) $ 365 $ 3,982 Year Ended December 31, 1994 Allowance for Doubtful Accounts $ 944 $ 1,190 $ 60 $(1,271) $ 2,717 $ 3,640 (a) Includes allowance of businesses acquired during the year as described in Note 3 to Consolidated Financial Statements in the Registrant's 1996 Annual Report to Shareholders and the effect of foreign currency translation. 19PAGE 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. 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). 20PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ----------------------------------------------------------------------- 3.3 Amended and Restated Articles of Incorporation 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 3(c) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 28, 1992 [File No. 1-9567] and incorporated herein by reference). 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 Fiscal Agency Agreement dated November 19, 1993, among Thermo Voltek, Thermo Electron, and Chemical Bank (filed as Exhibit 4.3 to Thermo Voltek's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-10574] and incorporated herein by reference). 4.3 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). 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). 21PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ----------------------------------------------------------------------- 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). 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). 22PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ----------------------------------------------------------------------- 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 Amended and Restated Master Repurchase Agreement dated as of July 2, 1996, between the Registrant and Thermo Electron. 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.) 10.19 Nonqualified Stock Option Plan of the Registrant (filed as Exhibit 10(e) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-84380] and incorporated herein by reference). (Maximum number of shares issuable in the aggregate under this plan and the Registrant's Incentive Stock Option Plan is 1,931,923 shares, after adjustment to reflect share increases approved in 1986 and 1992, 5-for-4 stock split effected in January 1985, 4-for-3 stock split effected in September 1985, and 3-for-2 stock splits effected in October 1986 and November 1993.) 23PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ----------------------------------------------------------------------- 10.20 Equity Incentive Plan of the Registrant (filed as Appendix A to the Proxy Statement dated May 10, 1993, of the Registrant [File No. 1-9567] and incorporated herein by reference). (Maximum number of shares issuable is 1,500,000 shares, after adjustment to reflect 3-for-2 stock split effected in November 1993.) 10.21 Thermedics Inc. - Thermedics Detection Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.20 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-8002] and incorporated herein by reference). 10.22 Thermedics Inc. - Thermo Sentron Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.51 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.23 Thermedics Inc. - Thermo Cardiosystems Inc. Nonqualified Stock Option Plan (filed as Exhibit 4(b) to Thermo Cardiosystems' Registration Statement on Form S-8 [Reg. No. 33-45282] and incorporated herein by reference). 10.24 Directors Stock Option Plan of the Registrant (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 [File No. 1-9567] and incorporated herein by reference). 10.25 Deferred Compensation Plan for Directors of the Registrant (filed as Exhibit 10(g) to the Registrant's Registration Statement on Form S-1 [Reg. No. 33-96962] and incorporated herein by reference). 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. Thermo Electron's plans were filed as Exhibits 10.21 through 10.44 to the Annual Report on Form 10-K of Thermo Electron for the year ended December 30, 1995 [File No. 1-8002] and as Exhibit 10.19 to the Annual Report on Form 10-K of Trex Medical Corporation for the fiscal year ended September 28, 1996, [File No. 1-11827] and are incorporated herein by reference. 10.26 Restated Stock Holdings Assistance Plan and Form of Promissory Note. 24PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ----------------------------------------------------------------------- 11 Statement re: Computation of Earnings per Share. 13 Annual Report to Shareholders for the year ended December 28, 1996 (only those portions incorporated herein by reference). 21 Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. EX-10.12 2 Exhibit 10.12 AMENDED AND RESTATED MASTER REPURCHASE AGREEMENT The Master Repurchase Agreement dated as of July 2, 1996 between Thermo Electron Corporation, a Delaware corporation ("Seller"), and Thermedics Inc., a Delaware corporation (the "Buyer"), is hereby amended and restated in its entirety as follows on and as of December 28, 1996. 1. Applicability From time to time Buyer and Seller may enter into transactions in which Seller agrees to transfer to Buyer certain securities and/or financial instruments ("Securities") against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Securities on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and shall be governed by this Agreement, unless otherwise agreed in writing. 2. Definitions (a) "Act of Insolvency", with respect to either party (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law, or such party seeking the appointment of a receiver, trustee, custodian or similar official for such party or any substantial part of its property; or (ii) the commencement of any such case or proceeding against such party, or another seeking such an appointment, which (A) is consented to or not timely contested by such party, (B) results in the entry of an order for relief, such an appointment or the entry of an order having a similar effect, or (C) is not dismissed within 15 days; or (iii) the making by a party of a general assignment for the benefit of creditors; or (iv) the admission in writing by a party of such party's inability to pay such party's debts as they become due; (b) "Additional Purchased Securities", Securities provided by Seller to Buyer pursuant to Paragraph 4(a) hereof; (c) "Income", with respect to any Security at any time, any principal thereof then payable and all interest, dividends or other distributions thereon; (d) "Market Value", with respect to any Securities as of any date, the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source, plus accrued Income to the extent not included therein (other than any Income transferred to Seller pursuant to Paragraph 6 hereof) as of such date (unless contrary to market practice for such Securities); PAGE (e) "Other Buyers", third parties that have entered into an agreement with Seller that is substantially similar to this Agreement; (f) "Pricing Rate", a rate equal to the Commercial Paper Composite rate for 90-day maturities provided by Merrill Lynch, Pierce, Fenner & Smith Incorporated (or, if such rate is not available, a substantially equivalent rate agreed to by Buyer and Seller) plus 25 basis points, which rate shall be adjusted on the first business day of each fiscal quarter and shall be in effect for the entirety such fiscal quarter; (g) "Purchase Price", the price at which Purchased Securities are transferred by Seller to Buyer; (h) "Purchased Securities", the Securities transferred by Seller to Buyer in a Transaction hereunder, and any Securities substituted therefor in accordance with Paragraph 9 hereof. The term "Purchased Securities" with respect to any Transaction at any time also shall include Additional Purchase Securities transferred pursuant to Paragraph 4(a) and shall exclude Securities returned pursuant to Paragraph 4(b); (i) "Repurchase Collateral Account", a book account maintained by Seller containing, among other Securities, the Purchased Securities; and (j) "Repurchase Price", for any Purchased Security, an amount equal to the Purchase Price paid by Buyer to Seller for such Purchased Security. 3. Transactions (a) A Transaction may be initiated by Buyer upon the transfer of the Purchase Price to Seller's account. Upon such transfer, Seller shall transfer to Buyer Purchased Securities having a Market Value equal to 103% of the Purchase Price. (b) Purchased Securities shall be held in custody for Buyer by Seller in the Repurchase Collateral Account. Seller shall indicate on its books for such account Buyer's ownership of the Purchased Securities. Upon reasonable request from Buyer, Seller shall provide Buyer with a complete list of Purchased Securities owned by Buyer. (c) Upon demand by Buyer or Seller, Seller shall repurchase from Buyer, and Buyer shall sell to Seller, for the Repurchase Price all or any part of the Purchased Securities then owned by Buyer. 4. Margin Maintenance (a) If at any time the aggregate Market Value of all Purchased Securities then owned by Buyer is less than 103% of the 2PAGE aggregate Repurchase Price for such Purchased Securities, then Seller shall transfer to Buyer additional Securities ("Additional Purchased Securities"), so that the aggregate Market Value of such Purchased Securities, including any such Additional Purchased Securities, will thereupon equal or exceed 103% of such aggregate Repurchase Price. (b) If at any time the aggregate Market Value of all Purchased Securities then owned by Buyer exceeds 103% of the aggregate Repurchase Price for such Purchased Securities, then Seller may transfer Purchased Securities to Seller, so that the aggregate Market Value of such Purchased Securities will thereupon not exceed 103% of such aggregate Repurchase Price. 5. Interest Payments If during any fiscal month Buyer owned Purchased Securities, then on the first day of the next following fiscal month Seller shall pay to Buyer an amount equal to the sum of the aggregate Repurchase Prices of the Purchased Securities owned by Buyer at the close of each day during the preceding fiscal month divided by the number of days in such month and the product multiplied by the Pricing Rate times the number of days in such month divided by 360. 6. Income Payments and Voting Rights Where a particular Transaction's term extends over an Income payment date on the Purchased Securities subject to that Transaction, Buyer shall, on the date such Income is payable, transfer to Seller an amount equal to such Income payment or payments with respect to any Purchased Securities subject to such Transaction. Seller shall retain all voting rights with respect to Purchased Securities sold to Buyer under this Agreement. 7. Security Interest Although the parties intend that all Transactions hereunder be sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction and this Agreement, and shall be deemed to have granted to Buyer a security interest in, all of the Purchased Securities with respect to all Transactions hereunder and all proceeds thereof. 8. Payment and Transfer Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. As used herein with respect to Securities, "transfer" is intended to have 3PAGE the same meaning as when used in Section 8-313 of the Massachusetts Uniform Commercial Code or, where applicable, in any federal regulation governing transfers of the Securities. 9. Substitution Buyer hereby grants Seller the authority to manage, in Seller's sole discretion, the Purchased Securities held in custody for Buyer by Seller in the Repurchase Collateral Account. Buyer expressly agrees that Seller may (i) substitute other Securities for any Purchased Securities and (ii) commingle Purchased Securities with other Securities held in the Repurchase Collateral Account. Substitutions shall be made by transfer to Buyer of such other Securities and transfer to Seller of the Purchased Securities for which substitution is being made. After substitution, the substituted Securities shall be deemed to be Purchased Securities. Securities which are substituted for Purchased Securities shall have a Market Value at the time of substitution equal to or greater than the Market Value of the Purchase Securities for which such Securities were substituted. 10. Representations Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to execute and deliver this Agreement, to enter into the Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance, (ii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf, (iii) it has obtained all authorizations of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect and (iv) the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected. On the date for any Transaction Buyer and Seller shall each be deemed to repeat all the foregoing representations made by it. 11. Events of Default In the event that (i) Seller fails to repurchase or Buyer fails to transfer Purchased Securities upon demand for repurchase from either Buyer or Seller, (ii) Seller or Buyer fails, after one business day's notice, to comply with Paragraph 4 hereof, (iii) Buyer fails to make payment to Seller pursuant to Paragraph 6 hereof, (iv) Seller fails to comply with Paragraph 5 hereof, (v) an Act of Insolvency occurs with respect to Seller or Buyer, (vi) any representation made by Seller or Buyer shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, or (vii) Seller or Buyer shall admit to the other its inability to, or its intention not 4PAGE to, perform any of its obligations hereunder (each an "Event of Default"): (a) At the option of the nondefaulting party, exercised by written notice to the defaulting party (which option shall be deemed to have been exercised, even if no notice is given, immediately upon the occurrence of any Act of Insolvency), Seller shall become obligated to repurchase, and Buyer shall become obligated to sell, all Purchased Securities then owned by Buyer for the Repurchase Price of such Purchased Securities. (b) If Seller is the defaulting party and Buyer exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, (i) the Seller's obligations hereunder to repurchase all Purchased Securities in such Transactions shall thereupon become immediately due and payable, (ii) all Income paid after such exercise or deemed exercise shall be retained by Buyer and applied to the aggregate unpaid Repurchase Prices owed by Seller, and (iii) Seller shall immediately deliver to Buyer any Purchased Securities subject to such Transactions then in Seller's possession. (c) In all Transactions in which Buyer is the defaulting party, upon tender by Seller of payment of the aggregate Repurchase Prices for all such Transactions, Buyer's right, title and interest in all Purchased Securities subject to such Transactions shall be deemed transferred to Seller, and Buyer shall deliver all such Purchased Securities to Seller. (d) After one business day's notice to the defaulting party (which notice need not be given if an Act of Insolvency shall have occurred, and which may be the notice given under subparagraph (a) of this Paragraph or the notice referred to in clause (ii) of the first sentence of this Paragraph), the nondefaulting party may: (i) as to Transactions in which Seller is the defaulting party, (A) immediately sell, in a recognized market at such price or prices as Buyer may reasonably deem satisfactory, any or all Purchased Securities subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by Seller hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Securities, to give Seller credit for such Purchased Securities in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source, against the aggregate unpaid Repurchase Prices and any other amounts owing by Seller hereunder; and (ii) as to Transactions in which Buyer is the defaulting party, (A) purchase securities ("Replacement Securities") of the same class and amount as any Purchased Securities that are not delivered by Buyer to Seller as required 5PAGE hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Securities, to be deemed to have purchased Replacement Securities at the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source. (e) As to Transactions in which Buyer is the defaulting party, Buyer shall be liable to Seller (i) with respect to Purchased Securities (other than Additional Purchased Securities), for any excess of the price paid (or deemed paid) by Seller for Replacement Securities therefor over the Repurchase Price for such Purchased Securities and (ii) with respect to Additional Purchased Securities, for the price paid (or deemed paid) by Seller for the Replacement Securities therefor. (g) The defaulting party shall be liable to the nondefaulting party for the amount of all reasonable legal or other expenses incurred by the nondefaulting party in connection with or as a consequence of an Event of Default. (h) The nondefaulting party shall have, in addition to its rights hereunder, any rights otherwise available to it under any other agreement or applicable law. 12. Single Agreement Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted. 13. Entire Agreement; Severability This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions. Each provision and agreement and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be 6PAGE enforceable notwithstanding the unenforceability of any such other provision or agreement. 14. Non-assignability; Termination The rights and obligations of the parties under this Agreement and under any Transactions shall not be assigned by either party without the prior written consent of the other party. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. This Agreement may be canceled by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding. 15. Governing Law This Agreement shall be governed by the laws of the Commonwealth of Massachusetts without giving effect to the conflict of law principles thereof. 16. No Waivers, Etc. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a wavier of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. 17. Intent (a) The parties recognize that each Transaction is a "repurchase agreement" as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Securities subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended. (b) It is understood that either party's right to liquidate Securities delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof, is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended. 7PAGE IN WITNESS WHEREOF, the parties have executed this Agreement as of December 28, 1996. THERMO ELECTRON CORPORATION THERMEDICS INC. By: ________________________ By:_______________________ Name: Jonathan W. Painter Name: John Wood Title: Treasurer Title: Chief Executive Officer EX-10.26 3 Exhibit 10.26 THERMEDICS INC. RESTATED STOCK HOLDING ASSISTANCE PLAN SECTION 1. Purpose. The purpose of this Plan is to benefit Thermedics Inc. (the "Company") and its stockholders by encouraging Key Employees to acquire and maintain share ownership in the Company, by increasing such employees' proprietary interest in promoting the growth and performance of the Company and its subsidiaries and by providing for the implementation of the Stock Holding Policy. SECTION 2. Definitions. The following terms, when used in the Plan, shall have the meanings set forth below: Committee: The Human Resources Committee of the Board of Directors of the Company as appointed from time to time. Common Stock: The common stock of the Company and any successor thereto. Company: Thermedics Inc., a Massachusetts corporation. Stock Holding Policy: The Stock Holding Policy of the Company, as adopted by the Committee and as in effect from time to time. Key Employee: Any employee of the Company or any of its subsidiaries, including any officer or member of the Board of Directors who is also an employee, as designated by the Committee, and who, in the judgment of the Committee, will be in a position to contribute significantly to the attainment of the Company's strategic goals and long-term growth and prosperity. Loans: Loans extended to Key Employees by the Company pursuant to this Plan. Plan: The Thermedics Inc. Stock Holding Assistance Plan, as amended from time to time. SECTION 3. Administration. The Plan and the Stock Holding Policy shall be administered by the Committee, which shall have authority to interpret the Plan and the Stock Holding Policy and, subject to their provisions, to prescribe, amend and rescind any rules and regulations and to make all other determinations necessary or desirable for the administration thereof. The Committee's interpretations and decisions with regard to the Plan and the Stock Holding Policy and such rules and regulations as may be PAGE established thereunder shall be final and conclusive. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or the Stock Holding Policy, or in any Loan in the manner and to the extent the Committee deems desirable to carry it into effect. No member of the Committee shall be liable for any action or omission in connection with the Plan or the Stock Holding Policy that is made in good faith. SECTION 4. Loans and Loan Limits. The Committee has determined that the provision of Loans from time to time to Key Employees in such amounts as to cause such Key Employees to comply with the Stock Holding Policy is, in the judgment of the Committee, reasonably expected to benefit the Company and authorizes the Company to extend Loans from time to time to Key Employees in such amounts as may be requested by such Key Employees in order to comply with the Stock Holding Policy. Such Loans may be used solely for the purpose of acquiring Common Stock (other than upon the exercise of stock options or under employee stock purchase plans) in open market transactions or from the Company. Each Loan shall be full recourse and evidenced by a non-interest bearing promissory note substantially in the form attached hereto as Exhibit A (the "Note") and maturing in accordance with the provisions of Section 6 hereof, and containing such other terms and conditions, which are not inconsistent with the provisions of the Plan and the Stock Holding Policy, as the Committee shall determine in its sole and absolute discretion. SECTION 5. Federal Income Tax Treatment of Loans. For federal income tax purposes, interest on Loans shall be imputed on any interest free Loan extended under the Plan. A Key Employee shall be deemed to have paid the imputed interest to the Company and the Company shall be deemed to have paid said imputed interest back to the Key Employee as additional compensation. The deemed interest payment shall be taxable to the Company as income, and may be deductible to the Key Employee to the extent allowable under the rules relating to investment interest. The deemed compensation payment to the Key Employee shall be taxable to the employee and deductible to the Company, but shall also be subject to employment taxes such as FICA and FUTA. SECTION 6. Maturity of Loans. Each Loan to a Key Employee hereunder shall be due and payable on demand by the Company. If no such demand is made, then each Loan shall mature and the principal thereof shall become due and payable in five equal annual installments from the payment of annual cash incentive compensation (referred to as bonus) to the Key Employee by the Company, beginning with the 2PAGE first such bonus payment to occur after the date of the Note evidencing the Loan, and on each of the next four bonus payment dates, provided that the Committee may, in its sole and absolute discretion, authorize such other maturity and repayment schedule as the Committee may determine. Each Loan shall also become immediately due and payable in full, without demand, upon the occurrence of any of the events set forth in the Note; provided that the Committee may, in its sole and absolute discretion, authorize an extension of the time for repayment of a Loan upon such terms and conditions as the Committee may determine. SECTION 7. Amendment and Termination of the Plan. The Committee may from time to time alter or amend the Plan or the Stock Holding Policy in any respect, or terminate the Plan or the Stock Holding Policy at any time. No such amendment or termination, however, shall alter or otherwise affect the terms and conditions of any Loan then outstanding to Key Employee without such Key Employee's written consent, except as otherwise provided herein or in the promissory note evidencing such Loan. SECTION 8. Miscellaneous Provisions. (a) No employee or other person shall have any claim or right to receive a Loan under the Plan, and no employee shall have any right to be retained in the employ of the Company due to his or her participation in the Plan. (b) No Loan shall be made hereunder unless counsel for the Company shall be satisfied that such Loan will be in compliance with applicable federal, state and local laws. (c) The expenses of the Plan shall be borne by the Company. (d) The Plan shall be unfunded, and the Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the making of any Loan under the Plan. (e) Except as otherwise provided in Section 7 hereof, by accepting any Loan under the Plan, each Key Employee shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under the Plan or the Stock Holding Policy by the Company, the Board of Directors of the Company or the Committee. (f) The appropriate officers of the Company shall cause to be filed any reports, returns or other information regarding Loans hereunder, as may be required by any applicable statute, rule or regulation. SECTION 9. Effective Date. 3PAGE The Plan and the Stock Holding Policy shall become effective upon approval and adoption by the Committee. 4PAGE EXHIBIT A TO STOCK HOLDING ASSISTANCE PLAN THERMEDICS INC. Promissory Note $_________ Dated:____________ For value received, ________________, an individual whose residence is located at _______________________ (the "Employee"), hereby promises to pay to Thermedics Inc. (the "Company"), or assigns, ON DEMAND, but in any case on or before [insert date which is the fifth anniversary of date of issuance] (the "Maturity Date"), the principal sum of [loan amount in words] ($_______), or such part thereof as then remains unpaid, without interest. Principal shall be payable in lawful money of the United States of America, in immediately available funds, at the principal office of the Company or at such other place as the Company may designate from time to time in writing to the Employee. Unless the Company has already made a demand for payment in full of this Note, the Employee agrees to repay the Company an amount equal to 20% of the initial principal amount of the Note from the payment of annual cash incentive compensation (referred to as bonus) to the Employee by the Company, beginning with the first such bonus payment to occur after the date of this Note, and on each of the next four bonus payment dates. Any amount remaining unpaid under this Note, if no demand has been made by the Company, shall be due and payable on the Maturity Date. This Note may be prepaid at any time or from time to time, in whole or in part, without any premium or penalty. The Employee acknowledges and agrees that the Company has advanced to the Employee the principal amount of this Note pursuant to the Company's Stock Holding Assistance Plan, and that all terms and conditions of such Plan are incorporated herein by reference. The unpaid principal amount of this Note shall be and become immediately due and payable without notice or demand, at the option of the Company, upon the occurrence of any of the following events: (a) the termination of the Employee's employment with the Company, with or without cause, for any reason or for no reason; (b) the death or disability of the Employee; 5PAGE (c) the failure of the Employee to pay his or her debts as they become due, the insolvency of the Employee, the filing by or against the Employee of any petition under the United States Bankruptcy Code (or the filing of any similar petition under the insolvency law of any jurisdiction), or the making by the Employee of an assignment or trust mortgage for the benefit of creditors or the appointment of a receiver, custodian or similar agent with respect to, or the taking by any such person of possession of, any property of the Employee; or (d) the issuance of any writ of attachment, by trustee process or otherwise, or any restraining order or injunction not removed, repealed or dismissed within thirty (30) days of issuance, against or affecting the person or property of the Employee or any liability or obligation of the Employee to the Company. In case any payment herein provided for shall not be paid when due, the Employee further promises to pay all costs of collection, including all reasonable attorneys' fees. No delay or omission on the part of the Company in exercising any right hereunder shall operate as a waiver of such right or of any other right of the Company, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. The Employee hereby waives presentment, demand, notice of prepayment, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note. The undersigned hereby assents to any indulgence and any extension of time for payment of any indebtedness evidenced hereby granted or permitted by the Company. This Note has been made pursuant to the Company's Stock Holding Assistance Plan and shall be governed by and construed in accordance with, such Plan and the laws of the Commonwealth of Massachusetts and shall have the effect of a sealed instrument. _______________________________ Employee Name: _________________ ________________________ Witness EX-11 4 Exhibit 11 THERMEDICS INC. Computation of Earnings per Share 1996 1995 1994 ----------- ----------- ----------- Computation of Primary Earnings per Share: Net Income (a) $26,831,000 $15,121,000 $10,837,000 ----------- ----------- ----------- Shares: Weighted average shares outstanding 36,417,486 33,659,709 32,877,578 Add: Shares issuable from assumed conversion of subordinated convertible debentures 1,223,990 - - Shares issuable from assumed exercise of options (as determined by the application of the treasury stock method) 438,401 - - ----------- ----------- ----------- Weighted average shares outstanding, as adjusted (b) 38,079,877 33,659,709 32,877,578 ----------- ----------- ----------- Primary Earnings per Share (a) / (b) $ .70 $ .45 $ .33 =========== =========== =========== EX-13 5 Exhibit 13 THERMEDICS INC. Consolidated Financial Statements 1996 PAGE Thermedics Inc. 1996 Financial Statements Consolidated Statement of Income (In thousands except per share amounts) 1996 1995 1994 ------------------------------------------------------------------------ Revenues (Note 14) $258,085 $175,754 $155,111 -------- -------- -------- Costs and Operating Expenses: Cost of revenues 132,896 97,290 87,597 Selling, general, and administrative expenses (Note 8) 77,539 47,933 42,734 Research and development expenses 17,704 11,087 10,445 Nonrecurring costs (Notes 3 and 13) 17,637 - - -------- -------- -------- 245,776 156,310 140,776 -------- -------- -------- Operating Income 12,309 19,444 14,335 Interest Income 10,765 9,073 7,273 Interest Expense (3,770) (3,677) (3,206) Gain on Issuance of Stock by Subsidiaries (Note 11) 23,651 3,455 - Gain on Sale of Investments, Net (Note 2) 956 421 203 Other Income - 14 719 -------- -------- -------- Income Before Provision for Income Taxes and Minority Interest 43,911 28,730 19,324 Provision for Income Taxes (Note 5) 11,055 9,154 7,334 Minority Interest Expense 6,025 4,455 1,153 -------- -------- -------- Net Income $ 26,831 $ 15,121 $ 10,837 ======== ======== ======== Earnings per Share $ .70 $ .45 $ .33 ======== ======== ======== Weighted Average Shares 38,080 33,660 32,878 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 2PAGE Thermedics Inc. 1996 Financial Statements Consolidated Balance Sheet (In thousands) 1996 1995 ------------------------------------------------------------------------ Assets Current Assets: Cash and cash equivalents $ 82,673 $ 37,370 Short-term available-for-sale investments, at quoted market value (amortized cost of $64,950 and $76,682; includes $1,937 and $2,100 of related party investments; Notes 2 and 8) 65,054 77,916 Accounts receivable, less allowances of $4,641 and $3,982 58,736 41,327 Inventories 50,604 44,261 Prepaid income taxes and expenses (Note 5) 12,798 8,645 -------- -------- 269,865 209,519 -------- -------- Property, Plant, and Equipment, at Cost, Net 14,730 12,933 -------- -------- Long-term Available-for-sale Investments, at Quoted Market Value (amortized cost of $33,929 and $39,795; Note 2) 33,920 39,953 -------- -------- Other Assets 6,563 4,171 -------- -------- Cost in Excess of Net Assets of Acquired Companies (Notes 3, 5, and 13) 113,764 101,574 -------- -------- $438,842 $368,150 ======== ======== 3PAGE Thermedics Inc. 1996 Financial Statements Consolidated Balance Sheet (continued) (In thousands except share amounts) 1996 1995 ------------------------------------------------------------------------ Liabilities and Shareholders' Investment Current Liabilities: Notes payable and current maturity of long-term obligation (includes $38,000 due to parent company in 1995; Notes 3 and 7) $ 9,017 $ 47,420 Accounts payable 17,960 16,336 Accrued payroll and employee benefits 9,988 8,893 Deferred revenue 1,397 1,705 Accrued income taxes 5,438 2,340 Accrued warranty costs 3,271 3,637 Other accrued expenses 16,064 17,469 Due to parent company 1,600 1,606 -------- -------- 64,735 99,406 -------- -------- Deferred Income Taxes and Other Deferred Items (Note 5) 1,382 2,173 -------- -------- Long-term Obligations (Note 7) 74,359 45,201 -------- -------- Minority Interest 92,308 54,360 -------- -------- Commitments and Contingency (Notes 6 and 9) Shareholders' Investment (Notes 4, 8, and 10): Common stock, $.10 par value, 100,000,000 shares authorized; 36,842,500 and 33,986,050 shares issued 3,684 3,399 Capital in excess of par value 138,433 120,665 Retained earnings 69,018 42,187 Treasury stock at cost, 166,144 and 2,146 shares (4,729) (42) Cumulative translation adjustment (409) (88) Net unrealized gain on available-for-sale investments (Note 2) 61 889 -------- -------- 206,058 167,010 -------- -------- $438,842 $368,150 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 4PAGE Thermedics Inc. 1996 Financial Statements Consolidated Statement of Cash Flows (In thousands) 1996 1995 1994 ----------------------------------------------------------------------- Operating Activities: Net income $ 26,831 $ 15,121 $ 10,837 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,124 5,678 4,208 Gain on issuance of stock by subsidiaries (Note 11) (23,651) (3,455) - Nonrecurring costs (Notes 3 and 13) 17,637 - - Provision for losses on accounts receivable 1,352 689 1,190 Gain on sale of investments, net (Note 2) (956) (421) (203) Minority interest expense 6,025 4,455 1,153 Increase (decrease) in deferred income taxes (725) 643 (67) Other noncash expenses 1,038 962 1,382 Changes in current accounts, excluding the effects of acquisitions: Accounts receivable (14,471) 221 (1,750) Inventories (899) (10,304) 7,090 Prepaid income taxes and expenses 23 (1,957) 112 Accounts payable 611 3,468 (7,362) Other current liabilities (1,534) 1,956 2,430 Other (270) (182) (62) --------- --------- --------- Net cash provided by operating activities 20,135 16,874 18,958 --------- --------- --------- Investing Activities: Acquisitions, net of cash acquired (Note 3) (37,044) (56,560) (44,657) Acquisition of product lines (4,737) - - Purchases of property, plant, and equipment (6,972) (4,407) (3,220) Purchases of available-for-sale investments (99,800) (101,246) (78,303) Proceeds from sale and maturities of available-for-sale investments 118,356 104,786 77,677 Other (780) 399 266 --------- --------- --------- Net cash used in investing activities $ (30,977) $ (57,028) $ (48,237) --------- --------- --------- 5PAGE Thermedics Inc. 1996 Financial Statements Consolidated Statement of Cash Flows (continued) (In thousands) 1996 1995 1994 ----------------------------------------------------------------------- Financing Activities: Net proceeds from issuance of Company and subsidiaries' common stock (Note 10) $ 49,780 $ 4,515 $ 2,020 Purchases of Company and subsidiaries' common stock (15,665) (179) (8,064) Proceeds from issuance of note payable to parent company (Note 3) 15,000 38,000 - Repayments of notes payable to parent company (Notes 3 and 7) (53,000) - - Net proceeds from issuance of subordinated convertible obligations (Note 7) 63,249 - 31,968 Repayment and repurchase of long- term obligations (2,432) (132) - Net decrease in short-term borrowings (1,944) (1,961) - Other (146) 740 134 --------- --------- --------- Net cash provided by financing activities 54,842 40,983 26,058 --------- --------- --------- Exchange Rate Effect on Cash 1,303 (502) 85 --------- --------- --------- Increase (Decrease) in Cash and Cash Equivalents 45,303 327 (3,136) Cash and Cash Equivalents at Beginning of Year 37,370 37,043 40,179 --------- --------- --------- Cash and Cash Equivalents at End of Year $ 82,673 $ 37,370 $ 37,043 ========= ========= ========= Cash Paid For: Interest $ 5,333 $ 3,328 $ 2,884 Income taxes $ 7,108 $ 6,489 $ 4,980 Noncash Activities: Fair value of assets of acquired companies $ 42,955 $ 67,394 $ 65,493 Cash paid for acquired companies (37,445) (56,879) (44,743) --------- --------- --------- Liabilities assumed of acquired companies $ 5,510 $ 10,515 $ 20,750 ========= ========= ========= Issuance of Company common stock to parent company in exchange for subsidiary common stock (Note 8) $ 4,236 $ - $ 936 Conversions of Company and subsidiaries' convertible obligations (Note 7) $ 31,562 $ 37,317 $ 9,745 The accompanying notes are an integral part of these consolidated financial statements. 6PAGE Thermedics Inc. 1996 Financial Statements Consolidated Statement of Shareholders' Investment (In thousands) 1996 1995 1994 ----------------------------------------------------------------------- Common Stock, $.10 Par Value Balance at beginning of year $ 3,399 $ 3,330 $ 3,217 Issuance of stock under employees' and directors' stock plans 12 7 14 Conversions of subordinated convertible debentures 74 62 92 Issuance of Company common stock to parent company in exchange for common stock of subsidiaries (Note 8) 199 - 7 -------- -------- -------- Balance at end of year 3,684 3,399 3,330 -------- -------- -------- Capital in Excess of Par Value Balance at beginning of year 120,665 102,975 98,279 Issuance of stock under employees' and directors' stock plans 737 378 1,079 Tax benefit related to employees' and directors' stock plans 1,218 434 668 Conversions of subordinated convertible debentures (Note 7) 7,631 6,259 9,316 Issuance of Company common stock to parent company in exchange for common stock of subsidiaries (Note 8) 4,037 - 929 Effect of majority-owned subsidiaries' equity transactions 4,145 9,858 (7,296) Capital contribution from parent company - 761 - -------- -------- -------- Balance at end of year 138,433 120,665 102,975 -------- -------- -------- Retained Earnings Balance at beginning of year 42,187 27,066 16,229 Net income 26,831 15,121 10,837 -------- -------- -------- Balance at end of year 69,018 42,187 27,066 -------- -------- -------- Treasury Stock Balance at beginning of year (42) (310) (272) Issuance of stock under employees' and directors' stock plans 58 268 (38) Purchase of Company common stock (4,745) - - -------- -------- -------- Balance at end of year (4,729) (42) (310) -------- -------- ------- Cumulative Translation Adjustment Balance at beginning of year (88) 326 (2) Translation adjustment (321) (414) 328 -------- -------- -------- Balance at end of year $ (409) $ (88) $ 326 -------- -------- -------- 7PAGE Thermedics Inc. 1996 Financial Statements Consolidated Statement of Shareholders' Investment (continued) (In thousands) 1996 1995 1994 ------------------------------------------------------------------------ Net Unrealized Gain (Loss) on Available- for-sale Investments Balance at beginning of year $ 889 $ (1,622) $ - Effect of change in accounting principle (Note 2) - - 1,185 Change in net unrealized gain (loss) on available-for-sale investments (Note 2) (828) 2,511 (2,807) -------- -------- -------- Balance at end of year 61 889 (1,622) -------- -------- -------- Total Shareholders' Investment $206,058 $167,010 $131,765 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 8PAGE Thermedics Inc. 1996 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 precision weighing and inspection equipment, electrochemistry and microweighing products, product quality assurance systems, electronic test instruments, and explosives-detection devices, as well as implantable heart-assist systems and other biomedical products. Relationship with Thermo Electron Corporation The Company was incorporated in 1983 as a wholly owned subsidiary of Thermo Electron Corporation (Thermo Electron). As of December 28, 1996, Thermo Electron owned 20,293,310 shares of the Company's common stock, representing 55% of such stock outstanding. Principles of Consolidation The accompanying financial statements include the accounts of the Company; its wholly owned subsidiaries; its majority-owned public subsidiaries, Thermo Cardiosystems Inc. (Thermo Cardiosystems), Thermo Voltek Corp. (Thermo Voltek), and Thermo Sentron Inc. (Thermo Sentron); and its majority-owned privately-held subsidiary, Thermedics Detection Inc. (Thermedics Detection). All material intercompany accounts and transactions have been eliminated. The Company's percentage ownership of its majority-owned subsidiaries at year end was as follows: 1996 1995 1994 Thermo Cardiosystems 54% 52% 55% Thermo Voltek 51% 50% 60% Thermo Sentron 71% 100% 100% Thermedics Detection 94% 100% 100% Fiscal Year The Company has adopted a fiscal year ending the Saturday nearest December 31. References to 1996, 1995, and 1994 are for the fiscal years ended December 28, 1996, December 30, 1995, and December 31, 1994, respectively. Cash and Cash Equivalents As of December 28, 1996, $74,625,000 of the Company's cash equivalents were invested in a repurchase agreement with Thermo Electron. Under this agreement, the Company in effect lends excess cash to Thermo Electron, which Thermo Electron collateralizes with investments principally consisting of U.S. government agency securities, corporate notes, commercial paper, money market funds, and other marketable securities, in the amount of at least 103% of such obligation. The Company's funds subject to the repurchase agreement are readily convertible into cash by the Company and have an original maturity of three months or less. The repurchase agreement earns a rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. As of December 28, 1996, the Company's cash equivalents were also invested in U.S. government agency discount notes 9PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies (continued) and money market preferred stock. Cash equivalents are carried at cost, which approximates market value. Inventories Inventories are stated at the lower of cost (on a first-in, first-out basis) or market value and include materials, labor, and manufacturing overhead. The components of inventories are as follows: (In thousands) 1996 1995 ------------------------------------------------------------------------ Raw materials and supplies $26,448 $21,517 Work in process and finished goods 24,156 22,744 ------- ------- $50,604 $44,261 ======= ======= Property, Plant, and Equipment The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the property as follows: buildings and improvements, 5 to 30 years; machinery and equipment, 2 to 10 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) 1996 1995 ------------------------------------------------------------------------ Land and building $ 2,992 $ 2,944 Machinery, equipment, and leasehold improvements 33,828 27,358 ------- ------- 36,820 30,302 Less: Accumulated depreciation and amortization 22,090 17,369 ------- ------- $14,730 $12,933 ======= ======= Other Assets Other assets in the accompanying balance sheet includes the cost of acquired patents, trademarks, acquired technology, and other specifically identifiable intangible assets. These assets are amortized using the straight-line method over their estimated useful lives, which range from 4 to 15 years. These assets were $3,815,000 and $2,916,000, net of accumulated amortization of $2,668,000 and $2,245,000, at year-end 1996 and 1995, 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 periods not exceeding 40 years. Accumulated amortization was $9,343,000 and 10PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies (continued) $6,343,000 at year-end 1996 and 1995, respectively. The Company assesses the future useful life of this asset whenever events or changes in circumstances indicate that the current useful life has diminished. The Company considers the future undiscounted cash flows of the acquired companies in assessing the recoverability of this asset. If impairment has occurred, any excess of carrying value over fair value is recorded as a loss. Foreign Currency All assets and liabilities of the Company's foreign subsidiaries are translated at year-end exchange rates, and revenues and expenses are translated at average exchange rates for the year in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation." Resulting translation adjustments are reflected as a separate component of shareholders' investment, titled "Cumulative translation adjustment." In 1994, the Company recorded foreign currency transaction gains of $635,000 on the repayment of intercompany borrowings, denominated in U.S. dollars, by several of the Company's foreign subsidiaries. The borrowings resulted from the acquisition of Ramsey Technology, Inc. by the Company. Foreign currency transaction gains are included in other income in the accompanying 1994 statement of income. There were no material foreign currency transaction gains or losses in 1996 and 1995. Revenue Recognition In general, the Company recognizes revenues upon shipment of its products. The Company provides a reserve for its estimate of warranty costs at the time of shipment. Revenues and profits on substantially all contracts are recognized using the percentage-of-completion method. Revenues recorded under the percentage-of-completion method were $6,564,000 in 1996, $8,521,000 in 1995, and $2,253,000 in 1994. The percentage of completion is determined by relating either the actual costs or actual labor incurred to date to management's estimate of total costs or total labor, respectively, to be incurred on each contract. If a loss is indicated on any contract in process, a provision is made currently for the entire loss. The Company's contracts generally provide for customer billing on a cost-plus-fixed-fee basis when certain milestones are attained, or monthly, as costs are incurred. Revenues earned on contracts in process in excess of billings are included in inventories in the accompanying balance sheet and were not material at year-end 1996 and 1995. There are no significant amounts included in the accompanying balance sheet that are not expected to be recovered from existing contracts at current contract values, or that are not expected to be collected within one year, including amounts that are billed but not paid under retainage provisions. Gain on Issuance of Stock by Subsidiaries 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 11PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies (continued) 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 shareholders' investment as "Effect of majority-owned subsidiaries' equity transactions." 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 equity. Income Taxes In accordance with SFAS No. 109, "Accounting for Income Taxes," the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. Earnings per Share Earnings per share has been computed based on the weighted average number of shares outstanding during the year. Weighted average shares in 1996 includes the effect of common stock equivalents, which represent the assumed conversion of the Company's noninterest-bearing subordinated convertible debentures and the assumed exercise of stock options that were computed using the treasury stock method. Because the effect of the assumed exercise of stock options would be immaterial in 1995 and 1994, they have been excluded from the earnings per share calculation. Fully diluted earnings per share has not been presented because the effect of the assumed exercise of stock options and the assumed conversion of the Company's interest-bearing subordinated convertible debentures would be immaterial. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. 12PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 2. Available-for-sale Investments Effective January 2, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In accordance with SFAS No. 115, the Company's debt securities are considered available-for-sale investments in the accompanying balance sheet and are carried at market value, with the difference between cost and market value, net of related tax effects, recorded currently as a component of shareholders' investment titled "Net unrealized gain (loss) on available-for-sale investments." Effect of change in accounting principle in the accompanying 1994 statement of shareholders' investment represents the unrealized gain, net of related tax effects, pertaining to available-for-sale investments held by the Company on January 2, 1994. The aggregate market value, cost basis, and gross unrealized gains and losses of short- and long-term available-for-sale investments by major security type, as of December 28, 1996, and December 30, 1995, are as follows: Gross Gross Market Cost Unrealized Unrealized (In thousands) Value Basis Gains Losses -------------------------------------------------------------------------- 1996 Government agency securities $ 86,403 $ 86,412 $ 7 $ (16) Corporate bonds 6,806 6,634 172 - Money market preferred stock 1,060 1,071 - (11) Other 4,705 4,762 - (57) -------- -------- -------- -------- $ 98,974 $ 98,879 $ 179 $ (84) ======== ======== ======== ======== 1995 Government agency securities $ 99,373 $ 98,434 $ 1,020 $ (81) Corporate bonds 10,612 10,169 454 (11) Money market preferred stock 6,297 6,287 28 (18) Other 1,587 1,587 - - -------- -------- -------- -------- $117,869 $116,477 $ 1,502 $ (110) ======== ======== ======== ======== Short- and long-term available-for-sale investments in the accompanying 1996 balance sheet include $59,457,000 with contractual maturities of one year or less, $38,667,000 with contractual maturities of more than one year through five years, and $850,000 with contractual maturities of more than five years. Actual maturities may differ from contractual maturities as a result of the Company's intent to sell these securities prior to maturity and as a result of put and call options that enable either the Company, the issuer, or both to redeem these securities at an earlier date. 13PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 2. Available-for-sale Investments (continued) The cost of available-for-sale investments that were sold was based on specific identification in determining realized gains recorded in the accompanying statement of income. Gain on sale of investments, net, resulted from gross realized gains of $1,086,000, $439,000, and $241,000 and gross realized losses of $130,000, $18,000, and $38,000 in 1996, 1995, and 1994, respectively, relating to the sale of available-for-sale investments. 3. Acquisitions In December 1996, Thermo Cardiosystems acquired substantially all of the assets, subject to certain liabilities, of Nimbus Medical, Inc. (Nimbus), a research and development organization specializing in ventricular-assist devices and total artificial hearts, for $5,013,000 in cash. Nimbus is engaged strictly in research and development activities and, through its acquisition date, had not completed development of any commercial products for which it retains ownership rights. Nimbus' assets acquired by Thermo Cardiosystems included certain technology in development. The feasibility of the technology in development had not been conclusively established at the acquisition date and such technology had no future use other than in potential future generations of heart-assist devices or in total artificial hearts. In connection with the acquisition of Nimbus, Thermo Cardiosystems wrote off $4,909,000, which represents the portion of the purchase price allocated to technology in development based on estimated replacement cost. In January 1996, Thermedics Detection acquired the assets and certain liabilities of Moisture Systems Corporation and certain affiliated companies (collectively, Moisture Systems), and the stock of Rutter & Co. B.V. (Rutter) for a total purchase price of $21,668,000 in cash, which included the repayment of $700,000 of debt. In connection with these acquisitions, the Company borrowed $15,000,000 from Thermo Electron pursuant to a promissory note due March 1997, and bearing interest at the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. The Company repaid the $15,000,000 promissory note to Thermo Electron in September 1996 (Note 7). Moisture Systems and Rutter design, manufacture, and sell instruments that use near-infrared spectroscopy to measure moisture and other product components. During 1996, the Company's majority-owned subsidiaries made other acquisitions for $15,501,000 in cash, subject to post-closing adjustments, as applicable. In December 1995, the Company acquired the Orion laboratory products division (Orion) of Analytical Technology, Inc. for $52,724,000 in cash, which included the repayment of $8,585,000 of debt. To partially finance this acquisition, the Company borrowed $38,000,000 from Thermo Electron pursuant to a promissory note due December 1996, and bearing interest at the 90-day Commercial Paper Composite Rate plus 25 basis points. The balance of the purchase price was funded from the Company's working capital. The Company repaid the $38,000,000 promissory note to Thermo Electron in September 1996 (Note 7). Orion manufactures 14PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 3. Acquisitions (continued) electrochemistry, microweighing, process, and other instruments used to analyze the chemical composition of food, beverage, and pharmaceutical products and detect contaminants in high-purity water. In 1995, one of the Company's majority-owned subsidiaries made an acquisition for $3,755,000 in cash. In March 1994, the Company acquired substantially all of the assets, subject to certain liabilities, of Ramsey Technology, Inc. (Ramsey), a business of Baker Hughes Incorporated, for a cash purchase price of $41,872,000. In January 1996, Ramsey was contributed by the Company to its newly formed Thermo Sentron subsidiary in exchange for shares of Thermo Sentron common stock. Thermo Sentron designs, develops, manufactures, and sells high-speed precision weighing and inspection equipment for industrial production and packaging lines. In 1994, the Company and one of its majority-owned subsidiaries made other acquisitions for an aggregate of $2,871,000 in cash. 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 $111,826,000, which is being amortized over periods not exceeding 40 years. Allocation of the purchase price for these acquisitions was based on estimates of the fair value of the net assets acquired and, for acquisitions completed in 1996, is subject to adjustment upon finalization of the purchase price allocation. Based on unaudited data, the following table presents selected financial information on a pro forma basis, assuming the Company, Thermo Sentron, and Orion had been combined since the beginning of 1994. The effect of the acquisitions not included in the pro forma data was not material to the Company's results of operations. (In thousands except per share amounts) 1995 1994 ------------------------------------------------------------------------- Revenues $218,920 $212,392 Net income 17,186 12,821 Earnings per share .51 .39 The pro forma results are not necessarily indicative of future operations or the actual results that would have occurred had the acquisitions been made at the beginning of 1994. 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. Two of these plans, adopted in 1983, permitted the grant of nonqualified and incentive stock options. These plans expired during 1993. A third plan, adopted in 1993, permits the grant of a 15PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 4. Employee Benefit Plans (continued) variety of stock and stock-based awards as determined by the human resources committee of the Company's Board of Directors (the Board Committee), including restricted stock, stock options, stock bonus shares, or performance-based shares. To date, only nonqualified stock options have been awarded under this plan. The option recipients and the terms of options granted under this plan are determined by the Board Committee. Generally, options granted to date are exercisable immediately, but are subject to certain transfer restrictions and the right of the Company to repurchase shares issued upon exercise of the options at the exercise price, upon certain events. The restrictions and repurchase rights generally lapse ratably over 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, adopted in 1991, that provides for the grant of stock options to outside directors pursuant to a formula approved by the Company's shareholders. Options awarded under this plan are exercisable six months after the date of grant and expire three or seven years after the date of grant. In addition to the Company's stock-based compensation plans, certain officers and key employees may also participate in stock-based compensation plans of Thermo Electron. 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 or its majority-owned public subsidiaries and Thermo Electron. Under this program, shares of the Company's or its majority-owned public subsidiaries', and shares of Thermo Electron's, common stock can be purchased at 95% of the fair market value at the beginning of the period, and the shares purchased are subject to a six-month resale restriction. Prior to November 1, 1995, the applicable shares of common stock could be purchased at the end of a 12-month period at 85% of the fair market value at the beginning of the period, and the shares purchased were subject to a one-year resale restriction. Shares are purchased through payroll deductions of up to 10% of each participating employee's gross wages. During 1996, 1995, and 1994, the Company issued 9,503 shares, 14,552 shares, and 13,711 shares, respectively, of its common stock under this program. 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 in 1996 and 1995 under the Company's stock-based compensation plans been determined based on the fair value at 16PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 4. Employee Benefit Plans (continued) the grant dates consistent with the method set forth under SFAS No. 123, the effect on the Company's net income and earnings per share would have been as follows: (In thousands except per share amounts) 1996 1995 ----------------------------------------------------------------------- Net income: As reported $26,831 $15,121 Pro forma 25,653 14,951 Earnings per share: As reported .70 .45 Pro forma .67 .44 Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation expense may not be representative of the amount to be expected in future years. Pro forma compensation expense for options granted is reflected over the vesting period; therefore, future pro forma compensation expense may be greater as additional options are granted. The 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: 1996 1995 ----------------------------------------------------------------------- Volatility 39% 39% Risk-free interest rate 5.70% 6.05% Expected life of options 5.03 years 3.72 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. 17PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 4. Employee Benefit Plans (continued) Stock Option Activity A summary of the Company's stock option activity is as follows: 1996 1995 1994 ---------------- ---------------- ----------------- Weighted Weighted Range of Number Average Number Average Number Option (Shares in of Exercise of Exercise of Prices thousands) Shares Price Shares Price Shares per Share -------------------------------------------------------------------------- Options outstanding, $ 4.70- beginning of year 1,557 $12.38 1,773 $12.14 1,669 16.45 12.43- Granted 303 27.17 27 17.65 366 14.53 4.70- Exercised (137) 9.12 (74) 8.16 (195) 10.65 5.00- Forfeited (59) 22.42 (169) 12.57 (67) 16.28 ----- ----- ----- Options outstanding, $ 4.70- end of year 1,664 $14.99 1,557 $12.38 1,773 16.45 ===== ====== ===== ====== ===== ====== $ 4.70- Options exercisable 1,664 $14.99 1,557 $12.38 1,771 16.45 ===== ====== ===== ====== ===== ====== Options available for grant 284 545 457 ===== ===== ===== Weighted average fair value per share of options granted during year $11.49 $ 6.50 ====== ====== A summary of the status of the Company's stock options at December 28, 1996, is as follows: Options Outstanding and Exercisable ----------------------------------- Weighted Weighted Average Average Number Remaining Exercise Range of Exercise Prices of Shares Contractual Life Price -------------------------------------------------------------------------- (Shares in thousands) $ 4.70 - $ 9.03 458 2.4 years $ 7.16 9.04 - 15.93 319 8.3 years 13.20 15.94 - 22.83 642 8.9 years 16.46 22.84 - 29.73 245 6.5 years 28.11 ----- $ 4.70 - $29.73 1,664 6.6 years $14.99 ===== 18PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 4. Employee Benefit Plans (continued) 401(k) Savings Plan and Employee Stock Ownership Plan The majority of the Company's full-time U.S. employees are eligible to participate in Thermo Electron's 401(k) savings plan and, prior to 1995, in Thermo Electron's employee stock ownership plan (ESOP). Contributions to the 401(k) savings plan are made by both the employee and the Company. Company contributions to the 401(k) plan are based upon the level of employee contributions. For these plans, the Company contributed and charged to expense $1,193,000, $1,011,000, and $942,000 in 1996, 1995, and 1994, respectively. Effective December 31, 1994, the ESOP was split into two plans: ESOP I, covering employees of Thermo Electron's corporate office and its wholly owned subsidiaries, and ESOP II, covering employees of certain of Thermo Electron's majority-owned subsidiaries, including the Company. Also, effective December 31, 1994, the ESOP II plan was terminated and as a result, the Company's employees are no longer eligible to participate in an ESOP. 5. Income Taxes The components of income before provision for income taxes and minority interest are as follows: (In thousands) 1996 1995 1994 ----------------------------------------------------------------------- Domestic $35,861 $25,020 $17,761 Foreign 8,050 3,710 1,563 ------- ------- ------- $43,911 $28,730 $19,324 ======= ======= ======= The components of the provision for income taxes are as follows: (In thousands) 1996 1995 1994 ----------------------------------------------------------------------- Currently payable: Federal $ 9,837 $ 7,541 $ 5,390 State 1,725 1,546 1,335 Foreign 3,618 1,783 998 ------- ------- ------- 15,180 10,870 7,723 ------- ------- ------- Net deferred (prepaid): Federal (3,913) (1,373) (331) State 3 (343) (58) Foreign (215) - - ------- ------- ------- (4,125) (1,716) (389) ------- ------- ------- $11,055 $ 9,154 $ 7,334 ======= ======= ======= 19PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 5. Income Taxes (continued) The Company receives a tax deduction upon exercise of nonqualified stock options by employees for the difference between the exercise price and the market price of the Company's common stock on the date of exercise. The provision for income taxes that is currently payable does not reflect $3,520,000, $3,935,000, and $668,000 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 1996, 1995, and 1994, respectively. The provision for income taxes that is currently payable also does not reflect $1,800,000 of tax benefits used to reduce cost in excess of net assets of acquired companies in 1996. The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate of 35% to income before provision for income taxes and minority interest due to the following: (In thousands) 1996 1995 1994 ----------------------------------------------------------------------- Provision for income taxes at statutory rate $15,369 $10,056 $ 6,763 Increases (decreases) resulting from: Gain on issuance of stock by subsidiaries (8,278) (1,206) - Amortization and write-off of cost in excess of net assets of acquired companies 3,256 232 296 State income taxes, net of federal tax 1,123 782 830 Reduction in valuation allowance (684) (854) - Tax-exempt investment income (11) (115) (113) Tax benefit of foreign sales corporation (326) (323) (833) Foreign tax rate and regulation differential (132) 485 363 Nondeductible expenses 228 137 88 Other, net 510 (40) (60) ------- ------- ------- $11,055 $ 9,154 $ 7,334 ======= ======= ======= 20PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 5. Income Taxes (continued) Prepaid income taxes and deferred income taxes in the accompanying balance sheet consist of the following: (In thousands) 1996 1995 ---------------------------------------------------------------- Prepaid income taxes: Inventory reserves $ 1,403 $ 1,926 Reserves and accruals 3,433 1,042 Warranty reserves 934 1,142 Tax loss and credit carryforwards 652 2,105 Accrued compensation 1,380 1,013 Allowance for doubtful accounts 1,079 684 Available-for-sale investments 308 (116) Write-off of acquired technology (Note 3) 1,865 - Other, net 225 207 ------- ------- 11,279 8,003 Less: Valuation allowance - 1,516 ------- ------- $11,279 $ 6,487 ======= ======= Deferred income taxes: Trademarks and other intangible assets $ 962 $ 1,627 Difference in book and tax basis of fixed assets 288 348 ------- ------- $ 1,250 $ 1,975 ======= ======= The 1995 valuation allowance primarily related to uncertainty surrounding the realization of tax loss and credit carryforwards and other tax assets of certain subsidiaries. The elimination of the valuation allowance in 1996 is primarily due to reduced uncertainty surrounding the realizability of such future tax benefits and was recorded in part as a reduction of $684,000 in the 1996 provision for income taxes. The remaining decrease in the valuation allowance primarily relates to the elimination of related tax loss and credit carryforwards due to the inability to obtain a benefit prior to the expiration thereof. The provision for income taxes in 1995 was reduced by $854,000 due to a decrease in the valuation allowance as a result of reduced uncertainty surrounding the realizability of tax assets of certain subsidiaries. As of December 28, 1996, federal and state tax assets existed at Thermo Voltek that are not consolidated for federal tax purposes. Thermo Voltek had federal and state tax net operating loss carryforwards of approximately $2,500,000 expiring in 1998 through 2006. The carryforwards of Thermo Voltek are limited to a tax benefit of approximately $240,000 per year under Sections 382 and 383 of the U.S. Internal Revenue Code. The Company has not recognized a deferred tax liability for the difference between the book basis and tax basis of its investment in the 21PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 5. Income Taxes (continued) 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 $8,041,000 of undistributed earnings of foreign subsidiaries that could be subject to taxation if remitted to the U.S. because the Company currently plans to keep these amounts permanently reinvested overseas. The Company believes that any additional U.S. tax liability due upon remittance of such earnings would be immaterial due to available U.S. foreign tax credits. 6. Commitments The Company and its subsidiaries lease various office and manufacturing facilities under noncancellable operating lease arrangements expiring from 1997 through 2003. The accompanying statement of income includes expenses from operating leases of $5,501,000, $3,403,000, and $2,081,000 in 1996, 1995, and 1994, respectively. Future minimum payments due under noncancellable operating leases as of December 28, 1996, are $4,221,000 in 1997; $3,806,000 in 1998; $2,918,000 in 1999; $2,433,000 in 2000; $1,892,000 in 2001; and $7,542,000 in 2002 and thereafter. Total future minimum lease payments are $22,812,000. 7. Short- and Long-term Obligations and Other Financing Arrangements Long-term Obligations Long-term obligations of the Company are as follows: (In thousands except per share amounts) 1996 1995 ------------------------------------------------------------------------ Noninterest-bearing subordinated convertible notes, due 2003, convertible at $32.68 per share $65,000 $ - 6 1/2% Subordinated convertible debentures, due 1998, convertible at $10.42 per share - 8,037 3 3/4% Subordinated convertible debentures, due 2000, convertible into shares of Thermo Voltek at $7.83 per share 9,345 25,240 Noninterest-bearing subordinated convertible debentures, due 1997, convertible into shares of Thermo Cardiosystems at $14.49 per share 3,755 11,642 Other 14 282 ------- ------- 78,114 45,201 Less: Current maturity of long-term obligation 3,755 - ------- ------- $74,359 $45,201 ======= ======= 22PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 7. Short- and Long-term Obligations and Other Financing Arrangements (continued) In February 1996, the Company called for redemption on March 11, 1996, all of the outstanding principal amount of its 6 1/2% subordinated convertible debentures due 1998. Approximately $7,780,000 of the outstanding principal amount of the debentures was converted into the Company's common stock. The Company's convertible obligations are guaranteed on a subordinated basis by Thermo Electron. The Company has agreed to reimburse Thermo Electron in the event Thermo Electron is required to make a payment under its guarantee of Thermo Voltek's or Thermo Cardiosystems' obligations. In lieu of issuing shares of Thermo Voltek common stock upon the conversion of the 3 3/4% subordinated convertible debentures due 2000, Thermo Voltek has the option to pay holders of the debentures cash equal to the weighted average market price of its common stock on the trading date prior to conversion. During 1996, 1995, and 1994, convertible obligations of $31,562,000, $37,317,000, and $9,745,000, respectively, were converted into common stock of the Company or its subsidiaries. See Note 12 for fair value information pertaining to the Company's long-term obligations. Short-term Obligations and Other Financing Arrangements In September 1996, the Company repaid its $15,000,000 and $38,000,000 million promissory notes to Thermo Electron with proceeds from its 1996 issuance of $65,000,000 principal amount of noninterest-bearing subordinated convertible debentures. Several of the Company's foreign subsidiaries have lines of credit under which an aggregate of $17,344,000 may be borrowed at a current rate as determined by each country's local market. The lines of credit are denominated in local currency. Unused lines of credit were $12,178,000 as of December 28, 1996. Amounts borrowed under these agreements are included in notes payable and current maturity of long-term obligation in the accompanying balance sheet and are guaranteed by either the Company or Thermo Electron. The weighted average interest rate on these borrowings was 6.3% and 8.5% at year-end 1996 and 1995, respectively. 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 1.0% of the Company's revenues. The Company paid Thermo Electron an amount equal to 1.20% and 1.25% of the Company's revenues in 1995 and 1994, respectively. The annual fee is reviewed and adjusted annually by mutual agreement of the parties. The corporate 23PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 8. Related Party Transactions (continued) services agreement is renewed annually but can be terminated upon 30 days' prior notice by the Company or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron Corporate Charter defines the relationships among Thermo Electron and its majority-owned subsidiaries). In addition, the Company uses data processing and contract administration services of two majority-owned subsidiaries of Thermo Electron, and is charged based on actual usage. For these services, as well as the administrative services provided by Thermo Electron, the Company was charged $2,613,000, $2,142,000, and $1,964,000 in 1996, 1995, and 1994, respectively. Management believes that the service fees charged by Thermo Electron and its subsidiaries are reasonable and that such fees are representative of the expenses the Company would have incurred on a stand-alone basis. For additional items such as employee benefit plans, insurance coverage, and other identifiable costs, Thermo Electron charges the Company based upon costs attributable to the Company. Distribution Agreements Pursuant to an international distributorship agreement, Thermedics Detection appointed Arabian Business Machines Co. (ABM) as its exclusive distributor of the Company's security instruments in certain Middle Eastern countries. ABM is a member of The Olayan Group. Ms. Hutham S. Olayan, a director of Thermo Electron, is the president and a director of Olayan America Corporation and Competrol Real Estate Limited, two other members of The Olayan Group, which are indirectly controlled by Suliman S. Olayan, Ms. Olayan's father. Revenues recorded under this agreement totaled $652,000, $3,000, and $42,000 in 1996, 1995, and 1994, respectively. In addition, during 1994, the Company sold $1,240,000 of security instruments directly to a customer in the Middle East and paid a commission of $409,000 pursuant to the ABM distributor agreement. Management Contract Two executive employees of the Company allocate a portion of their salary, bonus, and travel expenses for the time they devote to Thermo Electron in connection with certain management responsibilities relating to International Technidyne Corporation (ITC), a wholly owned subsidiary of Thermo Electron, as well as Thermo Electron's other biomedical businesses. In 1996, 1995, and 1994, the Company was reimbursed $707,000, $402,000, and $84,000, respectively, under this arrangement. Repurchase Agreement The Company invests excess cash in a repurchase agreement with Thermo Electron as discussed in Note 1. Short-term Available-for-sale Investments As of December 28, 1996, and December 30, 1995, the Company's short-term available-for-sale investments included $1,937,000 and $2,100,000 (amortized cost of $1,846,000 and $1,844,000), respectively, of 6 1/2% subordinated convertible debentures due 1997, which were purchased on the open market. The debentures have a par value of $1,800,000 and were issued by Thermo TerraTech Inc., a majority-owned subsidiary of Thermo Electron. 24PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 8. Related Party Transactions (continued) Common Stock In January and April 1996, the Company issued an aggregate of 1,987,273 shares of its common stock to Thermo Electron in exchange for 634,049 shares of common stock of Thermo Voltek and 929,947 shares of common stock of Thermo Cardiosystems. The shares of common stock were exchanged at their respective fair market values on the dates of the transactions. During 1994, the Company issued 66,265 shares of its common stock to Thermo Electron in exchange for 187,200 shares of Thermo Voltek common stock. Share information for Thermo Cardiosystems and Thermo Voltek has been restated to reflect three-for-two stock splits, effected in the form of 50% stock dividends, distributed in May 1996 and August 1996, respectively. 9. Contingency Thermo Cardiosystems has received correspondence alleging that the textured surface of the left ventricular-assist system's (LVAS) housing infringed the intellectual property rights of another party. In general, an owner of intellectual property can prevent others from using such property without a license and is entitled to damages for unauthorized past usage. The Company has investigated the bases of the allegation and, based on the opinion of its counsel, believes that if Thermo Cardiosystems were sued on these bases, it would have meritorious defenses. 10. Common Stock At December 28, 1996, the Company had reserved 4,030,200 unissued shares of its common stock for possible issuance under stock-based compensation plans and possible issuance upon conversion of the noninterest-bearing subordinated convertible debentures. 11. Transactions in Stock of Subsidiaries In March 1996, Thermedics Detection issued 300,000 shares of its common stock, at $10.00 per share, in a private placement for net proceeds of $3,000,000, resulting in a gain of $2,516,000. In November 1996, Thermedics Detection issued 383,500 shares of its common stock, at $10.75 per share, in a private placement for net proceeds of $3,964,000, resulting in a gain of $3,165,000. In April 1996, the Company's Thermo Sentron subsidiary issued 2,875,000 shares of its common stock, at $16.00 per share, in an initial public offering for net proceeds of $42,335,000, resulting in a gain of $17,970,000. During 1995, $9,111,000 principal amount of Thermo Voltek's subordinated convertible debentures was converted into 1,163,098 shares of Thermo Voltek common stock, resulting in a gain of $3,455,000. 25PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 11. Transactions in Stock of Subsidiaries (continued) During 1996 and 1995, a large portion of Thermo Cardiosystems' subordinated convertible obligations was converted into shares of Thermo Cardiosystems common stock. No gains were recorded on the conversions of these convertible obligations as Thermo Cardiosystems was principally engaged in research and development at the time the convertible obligations were issued. 12. Fair Value of Financial Instruments The Company's financial instruments consist mainly of cash and cash equivalents, available-for-sale investments, accounts receivable, notes payable and current maturity of long-term obligation, accounts payable, due to parent company, and long-term obligations. The carrying amounts of these financial instruments, with the exception of available-for-sale investments, current maturity of long-term obligation, and long-term obligations, approximates fair value due to their short-term nature. Available-for-sale investments are carried at fair value in the accompanying balance sheet. The fair values were determined based on quoted market prices. See Note 2 for fair value information pertaining to these financial instruments. The fair value of short- and long-term obligations was determined based on quoted market prices. The fair value of convertible obligations at year-end 1995 exceeds the carrying amount primarily due to the market price of the Company's or subsidiaries' common stock exceeding the conversion price of the convertible obligations. The carrying amount and fair value of the Company's short- and long-term obligations are as follows: 1996 1995 -------------------- -------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value ----------------------------------------------------------------------- Current maturity of long-term obligation $ 3,755 $ 7,435 $ - $ - ======= ======= ======= ======= Convertible obligations $74,345 $62,666 $44,919 $95,589 Other long-term obligations 14 14 282 282 ------- ------- ------- ------- $74,359 $62,680 $45,201 $95,871 ======= ======= ======= ======= 13. Nonrecurring Costs The Company recorded nonrecurring costs of $12,728,000 in 1996 for the write-off of cost in excess of net assets of acquired company and certain other intangible assets associated with its Corpak subsidiary. The primary growth focus of the Company's biomedical products segment has become technology for improved product quality and implantable left ventricular-assist systems. The Company no longer expects to reinvest in its enteral nutrition-delivery business. The Company's analysis indicates 26PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 13. Nonrecurring Costs (continued) that the expected future undiscounted cash flow from this business would be insufficient to recover the Company's investment. In 1996, the Company wrote off $4,909,000 of acquired technology associated with the acquisition of Nimbus by Thermo Cardiosystems (Note 3). 14. Business Segments, Geographical Information, and Concentrations of Risk The Company's principal businesses can be divided into two segments. The Company's Instruments and Other Equipment segment develops, manufactures, sells, and distributes precision equipment that weighs and inspects bulk materials and packaged goods; electrochemistry, microweighing, and other laboratory instruments; process detection instruments; explosives-detection instruments; instruments that test electronic and electrical systems and components for immunity to electromagnetic interference; high-voltage power-conversion systems; and programmable power amplifiers. The Company's Biomedical Products segment develops, manufactures, and sells LVAS and other biomedical products. The Company's Instruments and Other Equipment segment derived revenues from precision weighing and inspection equipment of $70,027,000, $67,474,000 and $50,116,000 in 1996, 1995, and 1994, respectively, and from laboratory products of $50,854,000 in 1996. In addition, this segment derived revenues from process detection instruments of $16,032,000, $18,488,000, and $38,001,000, and from electronic test instruments of $44,081,000, $31,580,000, and $19,009,000 in 1996, 1995, and 1994, respectively. The Company's Biomedical Products segment derived revenues from LVAS devices of $29,970,000, $20,593,000, and $10,409,000 in 1996, 1995, and 1994, respectively. 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 certain other alternative materials and components or developing alternative sources for materials or components supplied by a single source. Although the Company 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 the Company will not experience shortages of certain materials or components in the future that could delay shipments of the LVAS. 27PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 14. Business Segments, Geographical Information, and Concentrations of Risk (continued) No customer accounted for 10% or more of the Company's total revenues in 1996 and 1995. During 1994, revenues derived from one customer accounted for 21% of the Company's total revenues. (In thousands) 1996 1995 1994 ------------------------------------------------------------------------ Business Segment Information Revenues: Instruments and Other Equipment $213,138 $136,742 $124,100 Biomedical Products 44,947 39,012 31,011 -------- -------- -------- $258,085 $175,754 $155,111 ======== ======== ======== Income before provision for income taxes and minority interest: Instruments and Other Equipment $ 22,725 $ 14,778 $ 16,054 Biomedical Products (8,304) 7,128 1,337 Corporate (a) (2,112) (2,462) (3,056) -------- -------- -------- Total operating income 12,309 19,444 14,335 Interest and other income, net 31,602 9,286 4,989 -------- -------- -------- $ 43,911 $ 28,730 $ 19,324 ======== ======== ======== Identifiable assets: Instruments and Other Equipment $297,141 $213,755 $141,763 Biomedical Products 115,191 128,170 117,475 Corporate (b) 26,510 26,225 32,329 -------- -------- -------- $438,842 $368,150 $291,567 ======== ======== ======== Depreciation and amortization: Instruments and Other Equipment $ 7,304 $ 4,040 $ 2,923 Biomedical Products 1,808 1,609 1,256 Corporate 12 29 29 -------- -------- -------- $ 9,124 $ 5,678 $ 4,208 ======== ======== ======== Capital expenditures: Instruments and Other Equipment $ 5,185 $ 2,669 $ 1,919 Biomedical Products 1,787 1,715 1,278 Corporate - 23 23 -------- -------- -------- $ 6,972 $ 4,407 $ 3,220 ======== ======== ======== 28PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 14. Business Segments, Geographical Information, and Concentrations of Risk (continued) (In thousands) 1996 1995 1994 ------------------------------------------------------------------------ Geographical Information Revenues: United States $193,458 $127,729 $121,351 Europe 62,955 43,018 31,640 Other 14,420 13,084 12,594 Transfers among geographical areas (c) (12,748) (8,077) (10,474) -------- -------- -------- $258,085 $175,754 $155,111 ======== ======== ======== Income before provision for income taxes and minority interest: United States $ 5,552 $ 17,124 $ 15,292 Europe 7,091 3,170 1,040 Other 1,778 1,612 1,059 Corporate (a) (2,112) (2,462) (3,056) -------- -------- -------- Total operating income 12,309 19,444 14,335 Interest and other income, net 31,602 9,286 4,989 -------- -------- -------- $ 43,911 $ 28,730 $ 19,324 ======== ======== ======== Identifiable assets: United States $354,083 $301,613 $225,569 Europe 50,762 33,259 27,361 Other 7,487 7,053 6,308 Corporate (b) 26,510 26,225 32,329 -------- -------- -------- $438,842 $368,150 $291,567 ======== ======== ======== Export revenues included in United States revenues above (d): Europe $ 21,700 $ 17,748 $ 21,455 Other 38,497 22,378 34,149 -------- -------- -------- $ 60,197 $ 40,126 $ 55,604 ======== ======== ======== (a) Primarily general and administrative expenses. (b) Primarily cash, cash equivalents, and short- and long-term available-for-sale investments. (c) Transfers among geographical areas are accounted for at prices that are representative of transactions with unaffiliated parties. (d) In general, export sales are denominated in U.S. dollars. 29PAGE Thermedics Inc. 1996 Financial Statements Notes to Consolidated Financial Statements 15. Unaudited Quarterly Information (In thousands except per share amounts) 1996(a) First(b) Second Third Fourth ---------------------------------------------------------------------- Revenues $60,282 $62,630 $65,712 $69,461 Gross profit 28,563 29,653 32,885 34,088 Net income 4,753 9,174 5,767 7,137 Earnings per share .13 .24 .15 .18 1995 First Second Third Fourth(c) Revenues $43,858 $43,268 $41,224 $47,404 Gross profit 19,572 19,553 17,595 21,744 Net income 3,262 3,666 4,017 4,176 Earnings per share .10 .11 .12 .12 (a) Results include nontaxable gains of $2,516,000, $17,970,000, and $3,165,000 in the first, second, and fourth quarters, respectively, from the issuance of stock by subsidiaries. (b) Reflects the January 1996 acquisition of Moisture Systems and Rutter. (c) Reflects the December 1995 acquisition of Orion. 30PAGE Thermedics Inc. 1996 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 55%-owned subsidiary of Thermo Electron Corporation) and subsidiaries as of December 28, 1996, and December 30, 1995, and the related consolidated statements of income, shareholders' investment, and cash flows for each of the three years in the period ended December 28, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thermedics Inc. and subsidiaries as of December 28, 1996, and December 30, 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts February 6, 1997 31PAGE Thermedics Inc. 1996 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 caption "Forward-looking Statements." Overview The Company's business can be divided into two segments: Instruments and Other Equipment, and Biomedical Products. The Instruments and Other Equipment segment includes the Company's Thermo Sentron Inc. (Thermo Sentron) subsidiary, which designs, develops, manufactures, and sells high-speed precision weighing and inspection equipment for industrial production and packaging lines; its Orion laboratory products division (Orion), which manufactures electrochemistry, microweighing, process, and other instruments used to analyze the chemical compositions of foods, beverages, and pharmaceuticals and to detect contaminants in high-purity water; its Thermedics Detection Inc. (Thermedics Detection) subsidiary, which develops, manufactures, and markets high-speed, on-line detection instruments used in a variety of industrial process applications, explosives detection, and laboratory analysis; and its Thermo Voltek Corp. (Thermo Voltek) subsidiary, which manufactures electromagnetic compatibility testing instruments, high-voltage power-conversion systems, and programmable power amplifiers. As part of its Biomedical Products segment, the Company's Thermo Cardiosystems Inc. (Thermo Cardiosystems) subsidiary manufactures implantable left ventricular-assist systems (LVAS). Thermo Cardiosystems' electric LVAS is being used in Europe as a bridge to transplant and as an alternative to medical therapy. According to terms set by the U.S. Food and Drug Administration (FDA), no profit can be earned from the sale of an LVAS in the U.S. until the FDA has approved the device for commercial sale. With the FDA's approval, the Company began earning a profit on the sale of its air-driven LVAS in the fourth quarter of 1994. Until FDA approval has been obtained, the Company may not earn a profit on the sale in the U.S. of other products, such as the electric LVAS, currently used in clinical studies. The Company also develops and manufactures enteral nutrition delivery systems and a line of medical-grade polymers used in medical disposables and nonmedical, industrial applications, including safety glass and automotive coatings. Approximately 48% of the Company's revenues in 1996 were derived from sales of products outside of the U.S., 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. Although the Company seeks to charge its customers in the same currency as its operating costs, the Company's financial performance and 32PAGE Thermedics Inc. 1996 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Overview (continued) 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. Results of Operations 1996 Compared With 1995 Total revenues increased 47% to $258.1 million in 1996 from $175.8 million in 1995. Instruments and Other Equipment segment revenues increased to $213.1 million in 1996 from $136.7 million in 1995, primarily due to the inclusion of $73.5 million in revenues from acquired businesses (Note 3), principally Orion, acquired in December 1995, Moisture Systems Corporation (Moisture Systems) and Rutter & Co. B.V. (Rutter), acquired by Thermedics Detection in January 1996 and, to a lesser extent, acquisitions by Thermo Sentron and Thermo Voltek. Thermedics Detection's process detection instrument sales to the beverage industry declined to $16.0 million in 1996 from $18.5 million in 1995, primarily due to a decrease in product demand from Thermedics Detection's principal customer, which has substantially completed its initial deployment of Alexus systems. Revenues from Thermedics Detection's explosives-detection systems increased to $7.1 million in 1996 from $4.6 million in 1995, primarily due to the sale of eight EGIS units to the U.S. government to provide counter-terrorism support in Israel. Revenues from Thermo Voltek increased $12.2 million to $48.5 million in 1996 due in part to an increase in revenues at its Comtest subsidiary from sales of electrostatic-discharge test equipment and its introduction of a new product line in 1995. In addition, Thermo Voltek's revenues increased due to the inclusion of $3.0 million in revenues from Pacific Power Source Corporation, acquired in July 1996, and increased demand for electromagnetic compatibility test equipment at its Keytek division. Biomedical Products segment revenues increased to $44.9 million in 1996 from $39.0 million in 1995. Revenues from Thermo Cardiosystems increased $9.4 million to $30.0 million in 1996, primarily due to a 61% increase in the number of air-driven and electric LVAS units shipped for subsequent implant and a 30% increase in the number of LVAS implementation programs sold during 1996. This increase was offset in part by a decline of $4.3 million in revenues from Scent Seal fragrance samplers. In June 1995, the Company entered into an agreement with a third party granting an exclusive license to all of its patents and know-how relating to the Scent Seal fragrance samplers to a third party in consideration for royalty payments on future sales by the licensee. The Company recorded royalty income of $426,000 in 1996 and $197,000 in 1995 related to this agreement. The Company expects that shipments of LVAS will stabilize at current levels until the electric LVAS is approved for commercial sale in the U.S. and for use outside the hospital. The Company believes that this approval could occur during 1997, however, there can be no assurance that the Company will receive this approval within the expected time period or at all. 33PAGE Thermedics Inc. 1996 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations 1996 Compared With 1995 (continued) The gross profit margin was 49% in 1996, compared with 45% in 1995. The gross profit margin for the Instruments and Other Equipment segment increased to 48% in 1996 from 43% in 1995, primarily due to the inclusion of higher-margin revenues at Orion, Moisture Systems, and Rutter. The gross profit margin for the Biomedical Products segment increased to 52% in 1996 from 49% in 1995, primarily due to an increase in revenues at Thermo Cardiosystems from higher-margin implementation programs, an increase in sales volume and, to a lesser extent, improvements in manufacturing efficiencies. These increases were offset in part by inventory write-offs at the Company's Corpak subsidiary associated with discontinued product lines. In addition, 1995 included lower-margin revenues from the sale of Scent Seal fragrance samplers. Selling, general, and administrative expenses as a percentage of revenues increased to 30% in 1996 from 27% in 1995, primarily due to higher expenses as a percentage of revenues at Orion, Moisture Systems, and Rutter and, to a lesser extent, costs incurred by Thermedics Detection related to a reduction in personnel and leased space in response to the lower sales volume of process detection instruments to the beverage industry. Research and development expenses as a percentage of revenues increased to 6.9% in 1996 from 6.3% in 1995, primarily due to increased research and development expenses at Thermedics Detection. The Company does not expect research and development expenses to increase as a result of Thermo Cardiosystems' acquisition of Nimbus Medical, Inc. (Nimbus) (Note 3), as most of Nimbus' research and development costs have historically been externally funded through government contracts. The primary growth focus of the Company's Biomedical Products segment has become technology for improved product quality and implantable LVAS. The Company no longer expects to reinvest in its enteral nutrition-delivery business. The Company's analysis indicates that the expected future undiscounted cash flow from this business will be insufficient to recover the Company's investment. Accordingly, in 1996, the Company recorded nonrecurring costs of $12.7 million for the write-off of cost in excess of net assets of acquired company and certain other intangible assets associated with its Corpak subsidiary. In addition, in connection with the December 1996 acquisition of Nimbus, the Company wrote off $4.9 million, which represents the portion of the purchase price allocated to technology in development based on estimated replacement cost (Note 3). Interest income increased to $10.8 million in 1996 from $9.1 million in 1995, primarily due to interest income earned on invested proceeds from the Company's May 1996 issuance of $65.0 million principal amount of noninterest-bearing subordinated convertible debentures and Thermo Sentron's April 1996 initial public offering of common stock. These increases were offset in part by cash used for the repayment of an aggregate of $53.0 million of promissory notes to Thermo Electron Corporation (Thermo Electron) (Note 3). Interest expense increased to $3.8 million in 1996 from $3.7 million in 1995, as a result of additional borrowings by the Company to fund acquisitions, largely offset by a decrease in interest expense due to conversions of the Company's and its subsidiaries' subordinated convertible obligations. 34PAGE Thermedics Inc. 1996 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations 1996 Compared With 1995 (continued) The Company has adopted a strategy of spinning out certain of its businesses into separate subsidiaries and having these subsidiaries sell a minority interest to outside investors. The Company believes that this strategy provides additional motivation and incentives for the management of the subsidiary through the establishment of subsidiary-level stock option incentive programs, as well as capital to support the subsidiaries' growth. As a result of Thermo Sentron's April 1996 initial public offering of its common stock and Thermedics Detection's March 1996 and November 1996 private placements of its common stock, the Company recorded gains of $23.7 million in 1996. These gains represent an increase in the Company's proportionate share of the subsidiary's equity and are classified as "Gain on issuance of stock by subsidiaries" in the accompanying statement of income. The size and timing of these transactions are dependent on market and other conditions that are beyond the Company's control. In addition, in October 1995, the Financial Accounting Standards Board (FASB) issued an exposure draft of a Proposed Statement of Financial Accounting Standards, "Consolidated Financial Statements: Policy and Procedures" (the Proposed Statement). The Proposed Statement would establish new rules for how consolidated financial statements should be prepared. If the Proposed Statement is adopted, there could be significant changes in the way the Company records certain transactions of its controlled subsidiaries. Among those changes, any sale of the stock of a subsidiary that does not result in a loss of control would be accounted for as a transaction in equity of the consolidated entity with no gain or loss being recorded. The FASB expects to issue a final statement or a revised exposure draft in 1997. The effective tax rate was 25% in 1996, compared with 32% in 1995. The effective tax rate in 1996 was below the statutory federal income tax rate primarily due to the nontaxable gain on issuance of stock by subsidiaries and the elimination of the valuation allowance no longer required (Note 5), offset in part by the nondeductible write-off of certain intangible assets at the Company's Corpak subsidiary (Note 13), the impact of state income taxes, and nondeductible amortization of cost in excess of net assets of acquired companies. The effective tax rate in 1995 was below the statutory federal income tax rate primarily due to nontaxable gain on issuance of stock by subsidiaries and the reduction of the valuation allowance no longer required (Note 5), offset in part by the impact of state income taxes. Minority interest expense increased to $6.0 million in 1996 from $4.5 million in 1995 due to higher profits at the Company's Thermo Voltek subsidiary, and to a lesser extent, the minority interest associated with the Company's newly public Thermo Sentron subsidiary. 1995 Compared With 1994 Total revenues increased 13% to $175.8 million in 1995 from $155.1 million in 1994. Instruments and Other Equipment segment revenues increased 10% to $136.7 million in 1995 from $124.1 million in 1994. Revenues increased $17.4 million due to the inclusion of sales for a full year from Thermo Sentron, acquired in March 1994. Revenues from Thermo Voltek increased $12.7 million, due to the inclusion of an additional $7.2 million in revenues from businesses acquired in 1994 and 1995, an increase of $3.1 million in revenues from Comtest primarily due to the 35PAGE Thermedics Inc. 1996 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations 1995 Compared With 1994 (continued) introduction of a new product line in 1995, and an increase of $2.3 million in revenues from Keytek due to greater demand. Revenues at Thermedics Detection were $28.0 million in 1995, compared with $50.3 million in 1994. Revenues from Thermedics Detection's process detection instruments declined to $18.5 million in 1995 from $38.0 million in 1994. This decline was due to a decrease in product demand from Thermedics Detection's principal customer, which has substantially completed its initial deployment of Alexus systems. Revenues from Thermedics Detection's EGIS explosives-detection system declined to $4.6 million in 1995 from $10.1 million in 1994. The Company's sales of the EGIS system have been made primarily to government entities outside of the U.S. During 1993 and 1994, large orders from the U.K. and German governments accounted for a significant portion of EGIS sales. These orders were substantially filled by the end of 1994. Biomedical Products segment revenues increased 26% to $39.0 million in 1995 from $31.0 million in 1994. Revenues from Thermo Cardiosystems increased by $10.2 million to $20.6 million due in part to an increase in the price of the LVAS. Revenues also increased due to a 43% increase in the number of air-driven and electric LVAS units shipped during 1995 compared with 1994. The increase in revenues from Thermo Cardiosystems was partially offset by a decline of $2.8 million in revenues from Scent Seal fragrance samplers. In June 1995, the Company entered into an agreement granting an exclusive license to all of its patents and know-how relating to the Scent Seal fragrance samplers to a third party in consideration for royalty payments on future sales by the licensee. The Company recorded royalty income of $197,000 in 1995. The gross profit margin was 45% in 1995, compared with 44% in 1994. The gross profit margin for the Instruments and Other Equipment segment was 43% in 1995, compared with 44% in 1994. This decline was primarily due to lower gross margins at Thermedics Detection as a result of a lower sales volume and, to a lesser extent, the inclusion of lower-margin research and development contract revenues. In addition, Thermo Voltek's gross profit margin decreased to 48% in 1995 from 49% in 1994 primarily due to higher European sales in one product line, which has lower margins due to competitive pricing pressures. These decreases were offset in part by improved gross profit margins at Thermo Sentron due to a reduction in operating expenses. The gross profit margin for the Biomedical Products segment was 49% in 1995, compared with 42% in 1994, reflecting higher margins at Thermo Cardiosystems resulting from the LVAS price increase and, to a lesser extent, the increase in sales volume and improvements in manufacturing efficiencies. Selling, general, and administrative expenses as a percentage of revenues decreased to 27% in 1995 from 28% in 1994. This decline results primarily from lower expenses as a percentage of revenues at Thermo Cardiosystems as a result of a higher sales volume in 1995 and, to a lesser extent, a reduction in operating expenses at Thermo Sentron. These improvements were partially offset by higher expenses as a percentage of revenues at Thermedics Detection due to a lower sales volume in 1995. 36PAGE Thermedics Inc. 1996 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations 1995 Compared With 1994 (continued) Research and development expenses as a percentage of revenues decreased to 6.3% in 1995 from 6.7% in 1994, primarily due to lower expenses as a percentage of revenues at Thermo Cardiosystems as a result of an increase in total revenues. Interest income increased to $9.1 million in 1995 from $7.3 million in 1994 due to higher prevailing interest rates in 1995. Interest expense increased to $3.7 million in 1995 from $3.2 million in 1994 as a result of borrowings by Thermo Sentron's and Thermo Voltek's foreign subsidiaries, offset in part by a decrease in interest expense due to conversions of the Company's and its subsidiaries' subordinated convertible obligations. Gain on issuance of stock by subsidiaries of $3.5 million in 1995 resulted from the conversion of $9.1 million principal amount of Thermo Voltek's 3 3/4% subordinated convertible debentures. The effective tax rate was 32% in 1995, compared with 38% in 1994. The effective tax rate in 1995 was below the statutory federal income tax rate primarily due to the nontaxable gain on issuance of stock by subsidiaries and the reduction of the valuation allowance no longer required, offset in part by the impact of state income taxes (Note 5). The effective tax rate in 1994 was higher than the statutory federal income tax rate primarily due to the impact of state income taxes. Minority interest expense increased to $4.5 million in 1995 from $1.2 million in 1994 due to higher net income at the Company's Thermo Cardiosystems subsidiary and, to a lesser extent, the Company's Thermo Voltek subsidiary. Liquidity and Capital Resources Consolidated working capital was $205.1 million at December 28, 1996, compared with $110.1 million at December 30, 1995. Cash, cash equivalents, and short- and long-term available-for-sale investments were $181.6 million at December 28, 1996, compared with $155.2 million at December 30, 1995. Of the $181.6 million balance at December 28, 1996, $81.4 million was held by Thermo Cardiosystems, $34.8 million by Thermo Sentron, $27.9 million by Thermo Voltek, $13.5 million by Thermedics Detection, and the remainder by the Company and its wholly owned subsidiaries. During 1996, $20.1 million of cash was provided by operating activities. Cash provided by operations was offset in part by cash of $14.5 million used to fund an increase in accounts receivable primarily due to increased sales at Thermo Voltek and Thermo Cardiosystems and, to a lesser extent, due to a high level of sales in December 1996 at Thermo Sentron. During 1996, the Company's primary investing activities, excluding purchases, sales, and maturities of available-for-sale investments, included acquisitions and capital expenditures. In January 1996, the Company acquired the assets and certain liabilities of Moisture Systems and the stock of Rutter, for a total purchase price of $21.7 million in cash, which included the repayment of $0.7 million of debt. In connection with these acquisitions, the Company borrowed $15.0 million from Thermo Electron pursuant to a promissory note due February 1997 (Note 3). In September 1996, the Company repaid the promissory note with proceeds from 37PAGE Thermedics Inc. 1996 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources (continued) the sale of subordinated convertible debentures (Note 7). During 1996, the Company, through its majority-owned subsidiaries, made other acquisitions of businesses and product lines for approximately $20.5 million in cash. During 1996, the Company expended $7.0 million on purchases of property, plant, and equipment and expects to make capital expenditures of approximately $8.0 million in 1997. During 1996, the Company expended approximately $54.8 million for financing activities. In March and November 1996, Thermedics Detection issued shares of its common stock in private placements for aggregate net proceeds of $7.0 million. In April 1996, Thermo Sentron issued shares of its common stock in an initial public offering for net proceeds of $42.3 million (Note 11). In May 1996, the Company issued and sold $65.0 million principal amount of noninterest-bearing subordinated convertible debentures due 2003, for net proceeds of $63.2 million (Note 7). In September 1996, the Company repaid its $15.0 million and $38.0 million promissory notes to Thermo Electron with proceeds from the debenture offering. The Company intends, for the foreseeable future, to maintain at least 50% ownership of Thermo Cardiosystems, Thermo Voltek, Thermo Sentron, and Thermedics Detection. This may require the Company's purchase of additional shares of common stock or, if applicable, convertible debentures (which are then converted) of these companies from time to time, as the number of the companies' outstanding shares increases, whether as a result of conversion of convertible notes or exercise of stock options issued by them, or otherwise. These or any other purchases may be made in the open market; directly from the applicable subsidiary, or Thermo Electron; or pursuant to the conversion of all or part of Thermo Voltek's subordinated convertible notes held by the Company. The Company's and Thermo Cardiosystems' Boards of Directors each authorized the repurchase, through June 1, 1997, and August 12, 1997, respectively, of up to $10.0 million of their own securities. The Company's authorization also includes the repurchase of securities of Thermo Cardiosystems, Thermo Voltek, and Thermo Sentron. Any such purchases would be funded from working capital. Through December 28, 1996, the Company and Thermo Cardiosystems had expended $10.0 million and $5.7 million, respectively, under their authorizations. In February 1997, the Securities and Exchange Commission declared effective a registration statement filed by Thermedics Detection covering shares of common stock to be offered in its initial public offering. The Company anticipates that the offering will be completed in March 1997. In January and April 1996, the Company issued an aggregate of 1,987,273 shares of its common stock to Thermo Electron in exchange for 634,049 shares of Thermo Voltek common stock and 929,947 shares of Thermo Cardiosystems common stock. The shares of common stock were exchanged at their respective fair market values on the dates of the transactions. 38PAGE Thermedics Inc. 1996 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources (continued) The Company expects to continue to pursue its strategy of expanding its business both through the continued development, manufacture, and sale of new products, and through the possible acquisition of companies that will provide additional marketing or manufacturing capabilities and new products. The Company expects that it will finance these acquisitions through a combination of internal funds, additional debt or equity financing from the capital markets, or short-term borrowings from Thermo Electron. The Company believes its existing resources are sufficient to meet the capital requirements of its existing operations for the foreseeable future. 39PAGE Thermedics Inc. 1996 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 1997 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. Any equity or debt financing, if available at all, may be on terms which are not favorable to the Company and, in the case of equity financing, may result in dilution to the Company's stockholders. Risks Associated with Spin-Out of Subsidiaries. The Company has adopted a strategy of spinning out certain of its businesses into separate subsidiaries and having these subsidiaries sell a minority interest to outside investors. As a result of the sale of stock by subsidiaries, the issuance of stock by subsidiaries upon conversion of convertible debentures and similar transactions, the Company records gains that represent the increase in the Company's net investment in the subsidiaries. These gains have represented a substantial portion of the net income reported by the Company in certain periods. The size and timing of these transactions are dependent on market and other conditions that are beyond the Company's control. Accordingly, there can be no assurance that the Company will be able to generate gains from such transactions in the future. In addition, in October 1995, the Financial Accounting Standards Board (FASB) issued an exposure draft of a Proposed Statement of Financial Accounting Standards, "Consolidated Financial Statements: Policy and Procedures" (the Proposed Statement). The Proposed Statement would establish new rules for how consolidated financial statements should be prepared. If the Proposed Statement is adopted, there could be significant changes in the way the Company records certain transactions of its controlled subsidiaries. Among those changes, any sale of the stock of a subsidiary that does not result in a loss of control would be accounted for as a transaction in equity of the consolidated entity with no gain or loss being recorded. The FASB expects to issue a final statement or a revised exposure draft in 1997. 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 40PAGE Thermedics Inc. 1996 Financial Statements Forward-looking Statements 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. 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. The Company has received correspondence from a third party alleging that the textured surface of the LVAS infringes certain patent rights of such third party. The Company believes that it has meritorious defenses to the claims of the third party. However, no assurance can be given that the Company would be successful if litigation was commenced or that others will not claim that the Company infringes their intellectual property rights. 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 41PAGE Thermedics Inc. 1996 Financial Statements Forward-looking Statements 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. Uncertainty of Regulatory Approval for Biomedical Devices. Thermo Cardiosystems' LVAS are subject to approval by the FDA before they may be sold for profit in the United States. Thermo Cardiosystems is also subject to regulatory requirements in foreign countries in which it markets its devices. The process of obtaining regulatory approvals is lengthy, expensive, and inherently uncertain. Even after FDA approval has been obtained, such approval can be suspended or revoked if the FDA does not continue to be satisfied with the safety and efficacy of a product. Failure to comply with applicable regulatory requirements can result in, among other things, fines, suspensions of approvals, recalls of products, operating restrictions, and criminal prosecutions. In October 1994, Thermo Cardiosystems received FDA approval for the commercial sale of its pneumatic LVAS. In April 1994, Thermo Cardiosystems received the CE Mark for commercial sale of the pneumatic LVAS in all European Union countries. Thermo Cardiosystems has developed the HeartPak(TM), a lightweight, portable console that can be carried over the shoulder and which can be used as an alternative to the larger external console approved for use with the pneumatic LVAS. The HeartPak received the CE Mark in February 1995 and is currently in Phase I clinical trials in the U.S. Thermo Cardiosystems' electric LVAS is currently in use in clinical trials in the U.S. These trials are testing the safety and efficacy of the device as both a bridge to transplant and as an alternative to transplant. The electric LVAS received the CE Mark in August 1995. No assurance can be given that Thermo Cardiosystems will file a supplement to its pre-market approval (PMA) application with the FDA with respect to the electric LVAS on a timely basis, or at all, or that the PMA supplement, if filed, will ultimately be approved by the FDA. In addition, any design changes to Thermo Cardiosystems' LVAS, including use of the portable console for the pneumatic LVAS, must be approved pursuant to a supplement to an approved PMA application. Failure of Thermo Cardiosystems to obtain FDA approval for the commercial sale of the electric LVAS, either as a bridge to transplant or as an alternative to transplant, would have a material adverse effect on Thermo Cardiosystems' long-term growth prospects. In addition, failure of Thermo Cardiosystems to obtain approval for the HeartPak portable console would require patients supported by the pneumatic LVAS to remain hospitalized. This could materially decrease the market for the pneumatic LVAS. Uncertainty of Patient Reimbursement. The cost of implanting a cardiac support system is substantial. Without the financial support of 42PAGE Thermedics Inc. 1996 Financial Statements Forward-looking Statements the government or third-party insurers, the market for Thermo Cardiosystems' devices will be limited. Medicare and Medicaid limit the reimbursement that U.S. hospitals receive for treating certain medical conditions by setting maximum fees that can be charged to their patients. Under these systems, hospitals are paid a fixed amount for treating each patient with a particular diagnosis. Private insurers also have initiated reimbursement systems designed to slow the escalation of health care costs. In addition, the federal government is considering, and certain state governments are considering or have adopted, new health care policies intended to curb rising health care costs. Such policies include rationing of government-funded reimbursement for health care services and imposing price controls upon providers of medical products and services. These policies could have the effect of limiting the availability of reimbursement for procedures, such as the implantation of an LVAS, that involve prolonged treatment of critically ill patients. In November 1995, the U.S. Health Care Finance Administration (HCFA) issued a decision that extends Medicare coverage to Thermo Cardiosystems' HeartMate pneumatic LVAS. Several major nongovernment insurers have already agreed to offer coverage for the pneumatic LVAS. Even though reimbursement has been established by HCFA and by certain nongovernment insurers, the amount of available reimbursement may change, and reimbursement may be denied by an insurer under certain circumstances, including if it is determined that a procedure was not the most cost-effective treatment method, was experimental, or was used for an unapproved indication. No assurance can be given that additional third-party reimbursement for the pneumatic LVAS will be granted within a reasonable period of time, or at all. The unavailability of third-party reimbursement for procedures involving Thermo Cardiosystems' systems would have a material adverse effect on Thermo Cardiosystems' business. Uncertainty of Opinion Leader Acceptance and Support for LVAS. A limited number of cardiac surgeons and cardiologists influences medical device selection and purchase decisions for a large portion of the target patient population. Thermo Cardiosystems will achieve its business objectives only if its LVAS are recommended for use by such opinion leaders. Thermo Cardiosystems has developed working relationships with a number of leading medical centers, and its existing and proposed LVAS have been well received by opinion leaders in cardiac surgery and cardiology. Moreover, since the inception of its work on cardiac support systems in 1966, Thermo Cardiosystems has relied upon surgical teams at medical institutions to perform clinical trials that are necessary to obtain FDA approvals. A continuing working relationship with those and other institutions will be important to the success of Thermo Cardiosystems. No assurance can be given that existing relationships and arrangements can be maintained or that new relationships will be established. Furthermore, economic, psychological, ethical, and other concerns may limit acceptance of heart assist devices in general, and there can be no assurance that markets of sufficient size will develop for Thermo Cardiosystems' LVAS. Availability of Components and Raw Materials Used in LVAS. Thermo Cardiosystems relies on a number of custom-designed components and materials supplied by other companies to manufacture its LVAS. 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 43PAGE Thermedics Inc. 1996 Financial Statements Forward-looking Statements for the 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 its products for the foreseeable future, no assurance can be given that Thermo Cardiosystems will not experience in the future shortages of certain materials or components that could delay shipments of its products. The cost to Thermo Cardiosystems to evaluate and test alternative materials and components and the time necessary to obtain FDA approval for these materials are inherently difficult to determine because both time and cost are dependent on at least two factors: the similarity of the alternative material or component to the original material or component, 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 would not cause delays in Thermo Cardiosystems' LVAS development programs or adversely affect Thermo Cardiosystems' ability to manufacture and ship LVAS to meet demand. Limited Manufacturing and Marketing Experience of Thermo Cardiosystems. Prior to FDA approval of commercial sale of the pneumatic LVAS, Thermo Cardiosystems was engaged only in the research and development of its LVAS. Since that time, Thermo Cardiosystems has been building its manufacturing, marketing, and sales capabilities. While Thermo Cardiosystems has not experienced difficulties in manufacturing its LVAS at volumes, cost, and quality levels, sufficient to satisfy the increased demand resulting from commercial approval, no assurance can be given that Thermo Cardiosystems will not encounter difficulties as sales volumes increase or new products or components are approved for commercial sale. Thermo Cardiosystems does not have experience in the large-scale commercialization of medical devices. While Thermo Cardiosystems has added sales and marketing staff and is expanding its distribution capabilities worldwide, no assurance can be given that Thermo Cardiosystems will be able to market and sell its products successfully in high volumes. Product Liability. Thermo Cardiosystems faces an inherent business risk of exposure to product liability claims relating to the use of its products. Although Thermo Cardiosystems currently maintains product liability insurance against this risk, there can be no assurance that it 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 completely protect Thermo Cardiosystems 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 44PAGE Thermedics Inc. 1996 Financial Statements Forward-looking Statements material adverse effect on Thermo Sentron's business and results of operations. Effect of Electrical Standards on Demand for Thermo Voltek's Products. Demand for Thermo Voltek's EMC testing products and services is driven to a large extent by mandatory government standards and voluntary industry standards relating to electromagnetic compatibility. In particular, demand for Thermo Voltek's products results from efforts by manufacturers to comply with IEC 801, an EU directive that became effective on January 1, 1996. Although many manufacturers have not yet complied with IEC 801, as the number of non-complying manufacturers is reduced over time, demand for Thermo Voltek's products could be adversely affected. In addition, if new EMC standards requiring new testing capabilities are enacted less frequently or if EMC standards become less strict, demand for Thermo Voltek's products could be adversely affected. Dependence of Explosives-Detection Market on Government Regulation and Airline Industry. Sales of Thermedics Detection's explosives- detection systems for use in airports has been and will continue to be dependent on governmental initiatives to require, or support, the screening of checked luggage, carry-on items, and personnel with advanced explosives-detection equipment. Substantially all of such systems have been installed at airports in countries other than the United States in which the applicable government or regulatory authority overseeing the operations of the airport has mandated such screening. Such mandates are influenced by many factors outside of the control of Thermedics Detection, 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. In the United States, the Aviation Security Act of 1990 directed the Federal Aviation Administration (FAA) to develop a standard for explosives-detection systems and required airports in the United States to deploy systems meeting this standard in 1993. The standard adopted by the FAA is more comprehensive than standards adopted in most other countries. To date, no system has demonstrated that it meets the FAA standard under realistic airport operating conditions. As a result, the FAA has not mandated the installation of automated explosives-detection systems, and only a limited number of these systems have been deployed, primarily on a test basis, in the United States. The FAA first certified a computed X-ray tomography system for checked luggage in December 1994. However, the FAA has recognized that this system must undergo further testing to resolve whether it can operate under realistic airport operating conditions. Thermedics Detection's systems are trace detectors for which no FAA certification process for checked baggage, carry-on, or personal screening exists to date. In 1992, the FAA approved Thermedics Detection's EGIS system for use by airlines in screening carry-on electronic items and luggage searches. Each airline must seek this approval for each application. Although the FAA has provided significant funding to Thermedics Detection in connection with the development of its explosives-detection technology, there can be no assurance that any of Thermedics Detection' systems will ever meet this or any other United States certification standard. Any product utilizing a technology ultimately recommended or required by the FAA will have a significant 45PAGE Thermedics Inc. 1996 Financial Statements Forward-looking Statements 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 upgrade 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 mandate the implementation of effective explosives screening for airline baggage, carry-on items or personnel, or that, if mandated, 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, there can be no assurance that Thermedics Detection would be able to market its systems effectively. In October 1996, the United States enacted legislation which includes a $144.2 million allocation to purchase explosives-detection systems and other advanced security equipment, including trace detection equipment such as the systems manufactured by Thermedics Detection, for carry-on and checked baggage screening. There can be no assurance that this legislation will not be modified to reduce the funding for advanced explosives equipment; that the necessary appropriations will be made to fund the purchases of advanced explosives-detection equipment contemplated by the legislation; that trace-detection equipment such as the systems manufactured by Thermedics Detection will be mandated; or that, even if such appropriation is made and such equipment is mandated, any of the 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 process detection instruments and related services to bottlers licensed by The Coca-Cola Company (Coca-Cola Bottlers) were $32,184,000, $9,974,000 and $10,641,000 in 1994, 1995, and 1996, respectively. Sales to Coca-Cola Bottlers have decreased as these customers have substantially completed full deployment of Thermedics Detection's Alexus system in existing plant locations. 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, the Company does not expect that revenues derived from these customers will continue at a rate comparable to prior years. While the Company believes that the introduction of new process detection products for the food, beverage, and other markets will continue to reduce the significance of the Coca-Cola Bottlers to Thermedics Detection's results of operations, there can be no assurance that Thermedics Detection will be successful in the introduction of new process detection products or that any sales of these products will be sufficient to maintain a rate of growth equivalent to prior years. 46PAGE Thermedics Inc. 1996 Financial Statements Selected Financial Information (In thousands except per share amounts) 1996(a) 1995(b) 1994(c) 1993(d) 1992 ------------------------------------------------------------------------ Statement of Income Data: Revenues $258,085 $175,754 $155,111 $ 80,220 $ 45,778 Net income 26,831 15,121 10,837 6,670 2,467 Earnings per share .70 .45 .33 .22 .09 Balance Sheet Data: Working capital $205,130 $110,113 $128,330 $133,003 $ 63,205 Total assets 438,842 368,150 291,567 237,487 146,663 Long-term obligations 74,359 45,201 82,551 59,130 33,820 Common stock of subsidiary subject to redemption - - - - 5,468 Shareholders' investment 206,058 167,010 131,765 117,451 69,323 (a)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. (b)Reflects the December 1995 acquisition of Orion. (c)Reflects the January 1994 issuance of $33.0 million principal amount of noninterest-bearing subordinated convertible debentures by Thermo Cardiosystems and the March 1994 acquisition of Ramsey. (d)Reflects the May 1993 public offering of the Company's common stock for net proceeds of $30.0 million, the August 1993 acquisition of Comtest Instrumentation B.V. and Comtest Limited, and the November 1993 issuance of $34.5 million principal amount of 3 3/4% subordinated convertible debentures by Thermo Voltek. 47PAGE Thermedics Inc. 1996 Financial Statements Common Stock Market Information The following table shows the market range for the Company's common stock based on reported sales prices on the American Stock Exchange (symbol TMD) for 1996 and 1995: 1996 1995 ------------------ ---------------- Quarter High Low High Low ------------------------------------------------------------------- First $30 1/2 $23 3/8 $17 1/2 $12 1/2 Second 31 7/8 24 5/8 20 1/2 15 1/2 Third 31 1/8 20 1/4 21 3/4 17 3/4 Fourth 33 3/8 17 5/8 28 17 1/2 As of January 24, 1997, the Company had 2,297 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 24, 1997, was $18 3/8 per share. Common stock of the Company's majority-owned public subsidiaries is traded on the American Stock Exchange: Thermo Cardiosystems Inc. (symbol TCA), Thermo Voltek Corp. (symbol TVL), Thermo Sentron Inc. (symbol TSR), and Thermedics Detection Inc. (TDX). Shareholder Services Shareholders of Thermedics Inc. who desire information about the Company are invited to contact John N. Hatsopoulos, Chief Financial Officer, Thermedics Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046, (617) 622-1111. A mailing list is maintained to enable shareholders whose stock is held in street name, and other interested individuals, to receive quarterly reports, annual reports, and press releases as quickly as possible. Beginning in 1997, quarterly distribution will be limited to the second quarter report only. All quarterly reports and press releases will be available through the Internet from Thermo Electron's home page on the World Wide Web (http://www.thermo.com/subsid/tmd.html). Stock Transfer Agent Bank of Boston 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: Bank of Boston c/o Boston EquiServe Limited Partnership P.O. Box 8040 Boston, Massachusetts 02266-8040 (617) 575-3120 48PAGE Thermedics Inc. 1996 Financial Statements 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 December 28, 1996, as filed with the Securities and Exchange Commission, may be obtained at no charge by writing to John N. Hatsopoulos, Chief Financial Officer, Thermedics Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046. Annual Meeting The annual meeting of shareholders will be held on Monday, June 2, 1997, at 1:30 p.m. at the Hyatt Regency Hotel, Hilton Head, South Carolina. EX-21 6 Exhibit 21 THERMEDICS INC. Subsidiaries of the Registrant As of February 28, 1997, the Registrant owned the following subsidiaries: STATE OR JURISDICTION PERCENT NAME OF OF INCORPORATION OWNERSHIP -------------------------------------------------------------------------- Orion Foreign Sales Corp. U.S. Virgin 100 Islands Orion Research Limited United Kingdom 100 Orion Research Puerto Rico, Inc. Delaware 100 Corpak Inc. Massachusetts 100 Walpak Company Illinois 100 Orion Research, Inc. Massachusetts 100 Russell pH Limited Scotland 100 Thermedics Detection Inc. Massachusetts 93.60 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 Argentina 100 S.A. (1% of which shares are owned directly by Thermedics Detection Inc.) Thermedics Detection de Mexico, Mexico 100 S.A. de C.V. Thermedics Detection GmbH Germany 100 Thermedics Detection Limited United Kingdom 100 Thermedics Detection Scandinavia Norway 100 AS Thermo Sentron Inc. Delaware 73.42 (additionally, 2.53% of the shares are owned directly by The Thermo Electron Companies Inc.) Ramsey France S.A.R.L. France 100 Ramsey Ingenieros S.A. Spain 100 Ramsey Italia S.R.L. Italy 100 Tecno Europa Elettromeccanica Italy 100 S.R.L. Ramsey Technology Inc. Massachusetts 100 Xuzhou Ramsey Technology Co., China 50* Limited 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 United Kingdom 100 Hitech Electrocontrols Limited United Kingdom 100 Hitech Licenses Ltd. United Kingdom 100 Hitech Metal Detectors Ltd. United Kingdom 100 Thermo Sentron SEC Corporation Massachusetts l00 PAGE THERMEDICS INC. Subsidiaries of the Registrant STATE OR JURISDICTION PERCENT NAME OF OF INCORPORATION OWNERSHIP --------------------------------------------------------------------------- Thermo Sentron (South Africa) Pty. South Africa 100 Ltd. TMD Securities Corporation Massachusetts 100 Thermo Cardiosystems Inc. Massachusetts 53.66 (additionally, .13% of the shares are owned directly by The Thermo Electron Companies Inc.) Nimbus Inc. Massachusetts 100 TCA Securities Corporation Massachusetts 100 Thermo Voltek Corp. Delaware 52.47 (additionally, .53% of the shares are owned directly by The Thermo Electron Companies Inc.) Comtest Europe B.V. Netherlands 100 Comtest Instrumentation, B.V. Netherlands 100 Comtest Italia S.R.L. Italy 100 Comtest Limited United Kingdom 100 TVL Securities Corporation Delaware 100 UVC Realty Corp. New York 100 * Joint Venture/Partnership EX-23 7 Exhibit 23 Consent of Independent Public Accountants ----------------------------------------- As independent public accountants, we hereby consent to the incorporation by reference of our reports dated February 6, 1997, included in or incorporated by reference into Thermedics Inc.'s Annual Report on Form 10-K for the year ended December 28, 1996, 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, and Registration Statement No. 033-61435 on Form S-8. Arthur Andersen LLP Boston, Massachusetts March 14, 1997 EX-27 8
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-28-1996 DEC-28-1996 82,673 65,054 63,377 4,641 50,604 269,865 36,820 22,090 438,842 64,735 74,359 0 0 3,684 202,374 438,842 258,085 258,085 132,896 132,896 35,341 1,352 3,770 37,886 11,055 26,831 0 0 0 26,831 .70 0
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