-----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, Ml6WNhr0uPFgK7M2ozo7KN2YgrTcJkmo3B87qIgQf/7JKKT22zfOl8m2r4P/LiVf opRyth5UNY2vWpCGvcBdMQ== 0000721356-98-000001.txt : 19980319 0000721356-98-000001.hdr.sgml : 19980319 ACCESSION NUMBER: 0000721356-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980318 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: SEC FILE NUMBER: 001-09567 FILM NUMBER: 98568377 BUSINESS ADDRESS: STREET 1: 470 WILDWOOD ST STREET 2: P O BOX 2697 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 January 3, 1998 [ ] 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 30, 1998, was approximately $234,966,000. As of January 30, 1998, the Registrant had 36,725,953 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1997 Annual Report to Shareholders for the year ended January 3, 1998, are incorporated by reference into Parts I and II. Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 1, 1998, are incorporated by reference into Part III. PAGE PART I Item 1. Business (a) General Development of Business 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., which designs, develops, manufactures, and sells high-speed precision-weighing and inspection equipment for industrial production and packaging lines. Also part of the Instruments and Other Equipment segment is the Company's Orion laboratory products division, which manufactures electrode-based chemical-measurement products that determine the quality of a wide variety of substances by measuring components, such as pH, ion, dissolved oxygen, and conductivity levels and are used in the agricultural, biomedical research, food-processing, pharmaceutical, and many other industries. Through the Company's Thermedics Detection Inc. 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, security applications, and laboratory analysis. In March and November 1996, Thermedics Detection issued shares of its common stock in private placements for net proceeds of $7.0 million, and in March 1997, Thermedics Detection completed the sale of shares of common stock in its initial public offering for net proceeds of $28.1 million. The Instruments and Other Equipment segment, through the Company's Thermo Voltek Corp. subsidiary, also designs, manufactures, and markets electronic-test instruments, and a range of products related to power amplification, conversion, and quality. As part of its Biomedical Products segment, the Company's Thermo Cardiosystems Inc. subsidiary has developed two implantable left ventricular-assist systems (LVAS): a pneumatic, or air-driven, system and an electric version. Thermo Cardiosystems' Nimbus Medical Inc. subsidiary, the business of which was acquired in December 1996, 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. On May 2, 1997, Thermo Cardiosystems acquired International Technidyne Corporation from Thermo Electron Corporation in exchange for the right to receive 3,355,705 shares of Thermo Cardiosystems' common stock. International Technidyne is a leading manufacturer of near-patient, whole-blood coagulation testing equipment and related disposables and also manufacturers premium-quality, single-use skin-incision devices. The 3,355,705 shares of Thermo Cardiosystems' common stock issuable in the merger will not be issued until the listing of such shares for trading upon the American Stock Exchange has been approved by Thermo Cardiosystems' shareholders. Because the Company is the majority shareholder and intends to vote its shares in favor of such listing, the approval is assured. In addition, as part of its Biomedical Products segment, the Company also develops, manufactures, and markets enteral nutrition-delivery systems and a line of medical-grade polymers used in medical disposables and nonmedical, industrial applications, including safety glass and automotive coatings. 2PAGE The Company was incorporated in 1983 under the laws of Massachusetts as a wholly owned subsidiary of Thermo Electron. Prior to that time, the business of the Company was conducted by the R & D/New Business Center of Thermo Electron. As of January 3, 1998, Thermo Electron owned 21,141,471 shares of the Company's common stock, representing 58% of such stock outstanding. Thermo Electron provides analytical and monitoring instruments; biomedical products including heart-assist devices, respiratory-care equipment, and mammography systems; paper recycling and papermaking equipment; alternative-energy systems; industrial process equipment; and other specialized products. Thermo Electron also provides industrial outsourcing, particularly in environmental-liability management, laboratory analysis, and metallurgical processing, and conducts advanced-technology research and development. Thermo Electron intends, for the foreseeable future, to maintain at least 50% ownership of the Company. This may require 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 1997* Annual Report to Shareholders for a description of the Company's outstanding stock options and convertible debentures. During 1997, Thermo Electron purchased 852,264 shares of the Company's common stock in the open market for $17.4 million. Additionally, during 1997, Thermo Electron purchased in the open market 50,400 shares, 186,500 shares, and 426,900 shares of the common stock of Thermo Cardiosystems, Thermo Voltek, and Thermo Sentron, respectively, for $1.4 million, $1.8 million, and $4.8 million, respectively. On February 5, 1998, the Company's Board of Directors voted to issue 4,880,533 shares of its common stock to Thermo Electron in exchange for 100% of the stock of TMO TCA Holdings Inc., which is the beneficial owner of 3,355,705 shares of Thermo Cardiosystems' common stock. The issuance of the 3,355,705 shares of Thermo Cardiosystems common stock is subject to the approval by Thermo Cardiosystems' shareholders for the acquisition of International Technidyne from Thermo Electron. The Company's issuance of the 4,880,533 shares of its common stock to Thermo Electron is subject to approval by the Company's shareholders. However, because Thermo Electron is the majority shareholder and intends to vote its shares in favor of the transaction, approval is assured. The shares of common stock will be exchanged at their respective fair market values as of February 5, 1998. 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 * References to 1997, 1996, and 1995 herein are for the fiscal years ended January 3, 1998, December 28, 1996, and December 30, 1995, respectively. 3PAGE forward-looking statements. Without limiting the foregoing, the words, "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Forward-looking Statements" in the Registrant's 1997 Annual Report to Shareholders, which statements are incorporated herein by reference. (b) Financial Information About Industry Segments Financial information concerning the Company's industry segments is summarized in Note 14 to Consolidated Financial Statements in the Registrant's 1997 Annual Report to Shareholders, which information 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 broad 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 belt scales, solid level-measurement and conveyor-monitoring systems, sampling systems, and small-capacity feeders. These products are sold primarily to customers in the mining and material-processing industries, as well as electric utilities, chemical, and other manufacturing companies. In February 1997, the Company acquired the business of RCC Industrial Electronics Pty. Limited (RCCI), an Australia-based manufacturer of in-motion checkweighers for the food and pharmaceutical industries. In July 1997, the Company acquired Westerland Engineering Ltd., a United Kingdom-based manufacturer of process-weighing and control equipment. During 1997, 1996, and 1995, the Company derived revenues of $78.7 million, $70.0 million, and $67.5 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 manufactures electrode-based chemical-measurement products that determine the quality of a wide variety of substances by measuring components, such as pH, ion, dissolved oxygen, and conductivity levels. Orion's products are used in the agricultural, biomedical research, food-processing, pharmaceutical, and many other industries. Pure water monitors, also marketed under the Orion name, use ion-selective technology to monitor parameters required for the control of high-purity water systems in power generation and other industrial applications. Other products include Cahn microweighing and moisture balances and Lear/Fischer filtration/moisture 4PAGE analysis products, all marketed under the Orion brand name. Orion also markets consumable products for its earlier instruments line. During 1997 and 1996, the Company derived revenues from laboratory products of approximately $53.1 million and $50.9 million, respectively. Process Detection Instruments. Thermedics Detection designs, manufactures, and markets high-speed on-line trace (parts-per-trillion) measurement, detection, and rejection equipment that uses particle- and vapor-detection and other technologies for product quality and productivity applications. The Alexus(R) system detects trace amounts of constituents that affect product quality in refillable plastic soft drink, water and other beverage containers. In 1996, the Company began selling its high-speed X-ray imaging system, marketed under the brand name InScan(TM), which uses high-speed X-ray imaging technology to determine accurate fill volume, net volume, and package integrity of containers for the beverage, food, and other industries. In 1996, the Company also introduced a high-speed gas chromatography instrument, marketed under the brand name Flash-GC(TM), which analyzes chemical samples at speeds 20 to 50 times faster than conventional gas chromatography. Thermedics Detection's Moisture Systems division, acquired in 1996, designs, manufactures, and markets equipment that uses near-infrared (NIR) spectroscopy to measure moisture and other product constituents, including fats, proteins, oils, flavorings, solvents, adhesives, and coatings, in a variety of manufacturing processes. These systems are used across the food, pharmaceutical, chemical, petrochemical, tobacco, forest products, paper converting, plastics, textiles, corrugating, and other industries. During 1997, 1996, and 1995, the Company derived revenues of approximately $37.8 million, $34.0 million, and $18.5 million, respectively, from its process detection instrument business. Security Instruments. Also through Thermedics Detection, the Company designs, manufactures, and markets security instruments that use trace particle- and vapor-detection techniques for forensics, search and screening applications under the direction of police, border police, transportation authorities, and carriers. The Company's principal security instrument is the EGIS(R) system, a highly sensitive particle- and vapor-detection system for screening people, baggage, packages, freight, and electronic equipment such as personal computers for the presence of a wide range of explosives, including plastic explosives that have proven difficult to detect using conventional methods. The EGIS system is designed for stand-alone use in the detection of explosives in carry-on items and on personnel, and can be used in conjunction with enhanced X-ray and other advanced imaging systems to provide a comprehensive explosives-detection system for checked luggage. Initially developed with internal funds and contract funding from the Federal Aviation Administration (FAA) and the U.S. Department of State, more than 200 EGIS units have been deployed to date. The EGIS system is currently operational in 24 countries and is in use in carry-on and checked-luggage screening at more than 45 international airports. EGIS is also used in government buildings and embassies, and at border crossings and other 5PAGE locations where there is a high degree of concern for security. The EGIS system has assisted in identifying explosives used in terrorist bombings, including those in the Federal Building in Oklahoma City and the World Trade Center in New York, as well as in Israel, Buenos Aires, and the United Kingdom. In March 1996, the Company supplied the U.S. government with eight EGIS systems to provide counter-terrorism support in Israel. 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. In September 1996, the Company entered into a development contract with the FAA to develop EGIS II, a lower-cost EGIS unit for use in more portable applications such as remote security checkpoints and counter-terrorism activities. In November 1996, the Company introduced its new SecurScan, a prototype of a walk-through trace detector designed to screen 10 passengers per minute, and introduced its Rampart system, a lower-cost unit for airport applications, in 1997. In addition, in 1997, the Company entered into a development contract with the British Ministry of Defense to develop an explosives-detection system that is even more sensitive than the EGIS system. Test Instruments and Power Products. Through its Thermo Voltek subsidiary, the Company designs, manufactures, and markets electronic-test instruments and a range of products related to power amplification, conversion, and quality. The Company's test instruments simulate pulsed electromagnetic interference, radio frequency interference, and changes in AC voltage, to allow manufacturers of electronic systems and integrated circuits to test for electromagnetic compatibility (EMC). These products are used in the product-development, design-verification, and quality-assurance stages, enabling customers to optimize performance, reliability, and safety in the final design, and to meet industry standards and regulatory requirements, including a European Union directive that took effect in January 1996. The Company's power products include radio frequency (RF) and microwave power amplifiers, power-conversion equipment, and high-voltage and application-specific power supplies. These power products are used in communications, broadcast, research, and medical imaging applications. During 1997, the Company experienced lower demand for its EMC test products, due to the declining influence of IEC 801, the European Union directive on electromagnetic compatibility that took effect January 1, 1996, and, to a lesser extent, a decline in the component-reliability market for electrostatic discharge test equipment that resulted from a slowdown in capital expenditures by the semiconductor industry. Due in part to these developments, during 1997 the Company implemented certain operational, organizational, and personnel changes. During 1997, 1996, and 1995, the Company derived revenues of $44.6 million, $48.5 million, and $36.3 million, respectively, from its test instruments and power products. 6PAGE Biomedical Products Left Ventricular-assist Systems. The Company, through its Thermo Cardiosystems subsidiary, has developed two versions of its LVAS: an implantable pneumatic, or air-driven, system that can be controlled by either a bedside or portable console; and an electric system that features an internal electric motor powered by an external battery pack worn by the patient. Both of the Company's systems employ the Company's HeartMate(R) blood pump, and are designed for long-term use. This pump is implanted just below the diaphragm in a position that minimizes interference with normal circulation and other bodily functions. An inlet tube is inserted into the apex of the left ventricle to drain blood into the pump chamber. Blood is then forced out of the pump through an animal tissue valve and back into the aorta. The HeartMate blood pump works with the biological control mechanism of the natural heart to increase pumping capability when required for activities such as climbing stairs. The Company's LVAS devices are at various stages of regulatory approval. Air-driven LVAS. In October 1994, the FDA approved the air-driven system 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 United States. In April 1994, the Company received the CE Mark for commercial sale of the air-driven LVAS in all European Community countries. In the air-driven LVAS, the HeartMate blood pump is coupled to an external console connected to the body by a tube. The Company has also developed the HeartPak(TM), a lightweight portable console that can be carried over the shoulder. The portable console received the CE Mark for commercial sale in European Community countries in February 1995. In July 1995, the FDA approved the beginning of Phase I clinical trials of the HeartPak portable pneumatic driver. The HeartPak is currently in Phase I clinical trials in the U.S. Phase I of the study is evaluating the safety of the system in the hospital; Phase II will evaluate the system in the home environment. 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 its external battery pack by wires that exit the body. Since the power source and control elements are worn on a battery belt, the system allows the patient complete mobility. In August 1995, the electric LVAS was awarded the CE Mark, allowing commercial sale of this system in all European Community countries. The electric system is used as a bridge to transplant in the United States and Europe, and is also implanted as an alternative to heart transplant in Europe. The electric LVAS may not be sold commercially in the United States until it has received approval from the FDA. The electric LVAS is currently being used in the United States in clinical trials for patients awaiting heart transplants. In June 1997, the Company submitted a PMA supplemental application to receive FDA approval of the electric LVAS as a bridge to transplant. This application is currently under review; however, no assurance can be given that the FDA will review this application on a timely basis or will grant approval once it completes its review. 7PAGE During 1997, 1996, and 1995, the Company derived revenues of $25.0 million, $30.0 million, and $20.6 million, respectively, from its LVAS. Blood-testing Equipment and Skin-incision Devices. The Company's International Technidyne subsidiary manufacturers and supplies whole-blood coagulation testing equipment and related disposables, as well as skin-incision devices. International Technidyne's product lines offer whole-blood coagulation systems for bedside anticoagulation management, coagulation screening, and transfusion management. Each analyzes small blood samples, then processes and quickly displays comprehensive patient homeostasis information. Blood management of this type is essential as the number of invasive medical procedures, such as cardiopulmonary bypass surgery and angioplasty, increase. The ProTime(R) Microcoagulation System is designed to allow long-term oral anticoagulant patient self-testing. International Technidyne also manufactures a family of single-use skin-incision devices for drawing blood from adults, children, and infants. 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 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. subsidiary designs, manufactures, and markets enteral feeding systems that introduce special nutritional solutions into the stomach or the small intestine through tubes entering the nose or stomach. Enteral therapy is used for patients who are unable to feed themselves but who do not require parenteral (intravenous) feeding. Corpak's products include bags for nutritional fluids, delivery pumps, associated pump sets that hook up to the pumps, and feeding tubes. In addition, Corpak markets a range of enteral feeding supplements. (ii) and (xi) New Products; Research and Development The Company maintains research and development capability to support its existing products and to develop new products. A number of programs are underway, funded by the Company solely or jointly with an outside 8PAGE source. These programs include development of new products to perform substantially all or part of the pumping function of the left ventricle of the natural heart, process detection and security instruments, electronic test instruments, and high voltage power supply products. The Company also develops new grades of polymers to meet specific customer requirements for industrial and medical applications. During 1997, 1996, and 1995, the Company expended $24,270,000, $21,363,000, and $14,874,000, respectively, on internally sponsored research and development programs, and $2,890,000, $1,410,000, and $3,125,000, respectively, on research and development programs sponsored by others. As of January 3, 1998, 213 professional employees were engaged full-time in research and development activities. (iii) 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 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. (iv) Patents, Licenses, and Trademarks The Company considers its intellectual property important in the operation and growth of its business, and its policy is to protect this property through patents, license and confidentiality agreements, trademarks, and trade secret protection. The Company applies for and maintains patents in the U.S. and in foreign countries, particularly in the areas of biomedical materials, medical products, and analytical instruments. Although some of these patent rights may provide the Company with a competitive advantage, the Company primarily relies on its know-how and trade secrets. In addition, there can be no assurance that third parties will not assert claims against the Company that the Company infringes the intellectual property rights of such parties. The Company could incur substantial costs and diversion of management resources with 9PAGE 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. (v) Seasonal Influences There are no significant seasonal influences on the Company's sales of its products. (vi) Working Capital Requirements There are no special inventory requirements or credit terms extended to customers that would have a material adverse effect on the Company's working capital. (vii) Dependency on a Single Customer No customer represented 10% or more of the Company's total revenues in 1997, 1996, and 1995. 10PAGE (viii) Backlog The Company's backlog of firm orders at year-end 1997 and 1996 was as follows: (In thousands) 1997 1996 ----------------------------------------------------------------------- Instruments and Other Equipment $32,735 $39,000 Biomedical Products 3,847 2,729 ------- ------- $36,582 $41,729 ======= ======= Certain of these orders are cancellable by the customer upon payment of a cancellation charge. The Company anticipates that substantially all of the backlog at the end of 1997 will be shipped or completed during 1998. The Company does not believe the size of its backlog is necessarily indicative of intermediate or long-term trends in its business. (ix) Government Contracts Not applicable. (x) Competition Instruments and Other Equipment Precision-weighing and Inspection Equipment. The Company's Thermo Sentron subsidiary encounters and expects to continue to encounter intense competition in the sale of its products. Thermo Sentron's principal competitors in the packaged-goods market are Ishida Scales Mfg. Co., Ltd. and Mettler-Toledo AG. In the more fragmented bulk-materials market, Thermo Sentron competes on a worldwide basis primarily with Carl Schenck AG and Milltronics Corporation. Thermo Sentron believes that the principal competitive pressures affecting the market for precision-weighing and inspection equipment include customer service and support, quality and reliability, price, accuracy, ease of use, distribution channels, technical features, compatibility with customers' manufacturing processes, and regulatory approvals. 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 each of the Company's process detection systems is based primarily on performance, durability, service and, to a lesser extent, price. The Company believes that its systems' performance and speed, as well as the Company's reputation for developing superior new technologies and for the innovative application of existing technologies to a variety of 11PAGE high-speed production environments and product quality-assurance problems, are competitive advantages. Security Instruments. In the explosives-detection market, the Company competes with a small number of companies, including other makers of chemical trace-detection instruments, and, to a lesser degree, makers of enhanced X-ray detectors. Competition in this market is based primarily on performance, including speed, accuracy, and the range of explosives that can be detected; ease of use; service; and price. The Company's principal competitor in the trace detection market is Barringer Technologies Inc., a Canadian firm that has placed several trace detectors in airport applications. Test Instruments and Power Products. The Company is a leading supplier of EMC testing equipment. There are numerous companies worldwide that independently manufacture and market pulsed EMC test equipment for electronic products, and several more that independently manufacture and market component-reliability test equipment. In the market for RF power amplifiers and programmable power amplifiers, the Company competes with several companies worldwide. In the market for high-voltage power supply systems of the general type manufactured and marketed by the Company, the Company competes with numerous companies for both contract and commercial sales. The Company competes in these markets primarily on the basis of performance, technical expertise, 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 an external device, positioned on the outside of the patient's chest, and is intended for short-term use in the hospital environment. In addition, the Company is aware that a total artificial heart is currently undergoing clinical trials. The requirement of obtaining FDA approval for commercial sale of an LVAS in the United States is a significant barrier to entry into the United States 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 that 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 12PAGE policies of government and private insurers. Any product for which reimbursement is not available from such third-party payers will be at a significant competitive disadvantage. Blood-testing Equipment and Skin-incision Devices. International Technidyne's principal competitor in the market for coagulation monitoring instruments such as HEMOCHRON is the HemoTec division of Medtronic, which manufactures a whole-blood ACT instrument as well as the Hepcon Hemostatic Monitoring System. International Technidyne also competes with CDI, which is attempting to compete with HEMOCHRON. Boehringer Mannheim Corporation has developed a patient blood coagulation self-testing device similar to the ProTime, which is marketed to professionals. Boehringer Mannheim has also recently received FDA clearance for patient self-testing for this product. International Technidyne's incision devices compete with products offered by a number of companies, including Organon Teknika; Becton, Dickinson and Company; and Sherwood Medical Company. International Technidyne's products compete primarily on the basis of quality, reliability, price, and reputation. 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. (xii) Environmental Protection Regulations The Company believes that compliance by the Company with federal, state, and local environmental protection regulations will not have a material adverse effect on its capital expenditures, earnings, or competitive position. (xiii) Number of Employees As of January 3, 1998, the Company's Instruments and Other Equipment and Biomedical Products segments employed 1,313 and 563 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 1997 Annual Report to Shareholders, which information is incorporated herein by reference. 13PAGE (e) Executive Officers of the Registrant Present Title (Year First Became Name Age Executive Officer) -------------------- --- --------------------------------------- John T. Keiser 62 President (1998) Victor L. Poirier 56 Senior Vice President (1983) John N. Hatsopoulos* 63 Chief Financial Officer and Senior Vice President (1983) David H. Fine 55 Vice President (1993) Paul F. Kelleher 55 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 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, and named President of the Company in March 1998. 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. Dr. Fine is a full-time employees of the Company. Messrs. Hatsopoulos and Kelleher are full-time employees of Thermo Electron, and Mr. Poirier is a full-time employee of Thermo Cardiosystems, but they devote such time to the affairs of the Company as the Company's needs reasonably require. Item 2. Properties The Company believes that its facilities are in good condition and are adequate to meet its current needs and that other suitable space is readily available if any leases are not extended. The location and general character of the Company's properties by industry segment as of January 3, 1998, are as follows: Instruments and Other Equipment The Company owns approximately 81,200 square feet of office, engineering, laboratory, and production space primarily in New York, England, and Scotland, and leases approximately 607,000 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 1998 through 2010. 14PAGE Biomedical Products The Company owns approximately 66,000 square feet of office, engineering, laboratory, and production space in New Jersey and leases approximately 195,000 square feet of office, engineering, laboratory, and production space in Illinois and Massachusetts, under leases expiring in 1998 through 2004. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 15PAGE 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 1997 Annual Report to Shareholders and is incorporated herein by reference. Item 6. Selected Financial Data Information concerning the Registrant's selected financial data is included under the sections labeled "Selected Financial Information" and "Dividend Policy" in the Registrant's 1997 Annual Report to Shareholders and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required under this item is included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1997 Annual Report to Shareholders and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Registrant's Consolidated Financial Statements as of January 3, 1998, are included in the Registrant's 1997 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. 16PAGE PART III Item 10. Directors and Executive Officers of the Registrant The information concerning directors required under this item is incorporated herein by reference from the material contained under the caption "Election of Directors" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. The information concerning delinquent filers pursuant to Item 405 of Regulation S-K is incorporated herein by reference from the material contained under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" under the caption "Stock Ownership" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 11. Executive Compensation The information required under this item is incorporated herein by reference from the material contained under the caption "Executive Compensation" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required under this item is incorporated herein by reference from the material contained under the caption "Stock Ownership" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. Item 13. Certain Relationships and Related Transactions The information required under this item is incorporated herein by reference from the material contained under the caption "Relationship with Affiliates" in the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the close of the fiscal year. 17PAGE 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. (b) Reports on Form 8-K None. (c) Exhibits See Exhibit Index on the page immediately preceding exhibits. 18PAGE 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 18, 1998 THERMEDICS INC. By: John T. Keiser ------------------------------ John T. Keiser President 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 18, 1998. Signature Title --------- ----- By: John T. Keiser President and Director ------------------------- John T. Keiser By: John N. Hatsopoulos Chief Financial Officer, Senior Vice ------------------------- John N. Hatsopoulos President, 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: John W. Wood Jr. Chairman of the Board and Director ------------------------- John W. Wood Jr. By: Nicholas T. Zervas Director ------------------------- Nicholas T. Zervas 19PAGE 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 12, 1998. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 on page 18 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 12, 1998 20PAGE 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 ---------------------------------------------------------------------------- Allowance for Doubtful Accounts Year Ended Jan. 3, 1998 $ 4,903 $ 815 $ - $(1,406) $ (105) $ 4,207 Year Ended Dec. 28, 1996 $ 4,244 $ 1,352 $ 206 $(1,048) $ 149 $ 4,903 Year Ended Dec. 30, 1995 $ 3,908 $ 689 $ 2 $ (720) $ 365 $ 4,244 --------------- (a) Includes allowance of businesses acquired during the year as described in Note 3 to Consolidated Financial Statements in the Registrant's 1997 Annual Report to Shareholders and the effect of foreign currency translation. 21PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ------------------------------------------------------------------------ 2.1 Asset and Stock Purchase Agreement dated as of January 28, 1994, between Thermo Electron and Baker Hughes Incorporated (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K relating to events occurring on March 16, 1994 [File No. 1-9567] and incorporated herein by reference). 2.2 Assignment and Assumption Agreement dated March 16, 1994, among Thermo Electron, the Registrant, and Thermo Instrument Systems Inc. (filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K relating to events occurring on March 16, 1994 [File No. 1-9567] and incorporated herein by reference). 2.3 Agreement and Plan of Merger dated as of November 29, 1995, by and among the Registrant, ATI Merger Corp., Analytical Technology, Inc., and, for certain limited purposes, Thermo Instrument Systems Inc. (filed as Exhibit 2 to the Registrant's Current Report on Form 8-K relating to events occurring on November 29, 1995 [File No. 1-9567] and incorporated herein by reference). 2.4 Asset and Share Purchase Agreement dated as of November 29, 1995, by and among Thermo Instrument Systems Inc., ATI Acquisition Corp., Analytical Technology, Inc., and, for certain limited purposes, the Registrant (filed as Exhibit 10(a) to the Registrant's Current Report on Form 8-K relating to events occurring on November 29, 1995 [File No. 1-9567] and incorporated herein by reference). 2.5 Asset Purchase Agreement dated as of January 25, 1996, among Thermedics Detection Limited, Moisture Systems Corporation, Moisture Systems Limited, and Anacon Corporation (filed as Exhibit 2.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-9567] and incorporated herein by reference). Schedules to this Agreement have been omitted pursuant to Rule 601(b)(2) of Regulation S-K. The Registrant hereby undertakes to furnish supplementally a copy of any omitted schedule to the Commission upon request. 2.6 Agreement and Plan of Reorganization among Thermo Cardiosystems Inc., ITC Acquisition Corp., Thermo Electron Corporation, ITC Holdings Inc., and International Technidyne Corporation dated as of May 2, 1997 (filed as Exhibit 2.1 to Thermo Cardiosystems' Quarterly Report on Form 10-Q for the quarter ended March 29, 1997 [File No. 1-10114] and incorporated herein by reference). 22PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ------------------------------------------------------------------------ 3.1 Articles of Organization (filed as Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 [File No. 1-9567] and incorporated herein by reference). 3.2 Amendment to Articles of Organization dated October 25, 1993 (filed as Exhibit 3(c) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 1993 [File No. 1-9567] and incorporated herein by reference). 3.3 Amended and Restated 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). 23PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ------------------------------------------------------------------------ 4.5 Fiscal Agency Agreement dated as of May 14, 1997, among Thermo Cardiosystems Inc., Thermo Electron Corporation, and Bankers Trust Company as fiscal agent relating to $70 million principal amount of 4 3/4% Convertible Subordinated Debentures due 2004 (filed as Exhibit 4 to Thermo Cardiosystems' Quarterly Report on Form 10-Q for the quarter ended June 28, 1997 [File No. 1-10114] and incorporated herein by reference). The Registrant hereby agrees, pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, to furnish to the Commission upon request, a copy of each other instrument with respect to other long-term debt of the Company or its subsidiaries. 10.1 Amended and Restated Corporate Services Agreement between Thermo Electron and the Registrant dated as of January 3, 1993 (filed as Exhibit 10(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-9567] and incorporated herein by reference). 10.2 Lease dated November 1983 between WGO Limited Partnership, as Lessor and the Registrant, as Lessee (filed as Exhibit 10(l) to the Registrant's Registration Statement on Form S-1 [Reg. No. 2-96962] and incorporated herein by reference; amendments thereto filed as Exhibit 10(l) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 [File No. 1-9567] and incorporated herein by reference). 10.3 Thermo Electron Corporate Charter as amended and restated effective January 3, 1993 (filed as Exhibit 10(h) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-9567] and incorporated herein by reference). 10.4 Lease dated August 25, 1978, between National Boulevard Bank of Chicago and Walpak Company (filed as Exhibit 10(p) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 [File No. 1-9567] and incorporated herein by reference). 10.5 Exclusive Base Technology License Agreement between Thermo Electron and the Registrant dated January 8, 1988 (filed as Exhibit 10(q) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 1988 [File No. 1-9567] and incorporated herein by reference). 24PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ------------------------------------------------------------------------ 10.6 Research and Development Contract between Thermo Electron and the Registrant dated January 8, 1988 (filed as Exhibit 10(r) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 1988 [File No. 1-9567] and incorporated herein by reference). 10.7 Exclusive License and Marketing Agreement between Thermo Electron and the Registrant dated January 8, 1988 (filed as Exhibit 10(s) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 1988 [File No. 1-9567] and incorporated herein by reference). 10.8 Intellectual Property Cross-license Agreement between the Registrant and Thermo Cardiosystems (filed as Exhibit 10(i) to Thermo Cardiosystems' Registration Statement on Form S-1 [Reg. No. 33-25144] and incorporated herein by reference). 10.9 Amendment No. 1 dated March 29, 1991, to Exclusive License and Marketing Agreement between the Registrant and Thermo Electron (filed as Exhibit 10(r) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 1991 [File No. 1-9567] and incorporated herein by reference). 10.10 Management Agreement by and between Thermo Electron and the Registrant dated November 15, 1991 (filed as Exhibit 10(t) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 [File No. 1-9567] and incorporated herein by reference). 10.11 Agreement dated May 26, 1993, between Thermo Cardiosystems and The Polymer Technology Group, Incorporated (filed as Exhibit 10(nn) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 1993 [File No. 1-9567] and incorporated herein by reference). 10.12 Amended and Restated Master Repurchase Agreement dated as of July 2, 1996, between the Registrant and Thermo Electron (filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 [File No. 1-9567] and incorporated herein by reference). 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). 25PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ------------------------------------------------------------------------ 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.) 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). 26PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ------------------------------------------------------------------------ 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 Thermedics Inc. - Thermo Voltek Corp. Nonqualified Stock Option Plan. 10.25 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). 10.26 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. The terms of such plans are substantially the same as those of the Registrant's Equity Incentive Plan. 10.27 Restated Stock Holdings Assistance Plan and Form of Promissory Note. 10.28 Amended and Restated Master Guarantee Reimbursement and Loan Agreement, dated December 10, 1997, between Thermo Electron and the Registrant. 13 Annual Report to Shareholders for the year ended January 3, 1998 (only those portions incorporated herein by reference). 21 Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP. 27.1 Financial Data Schedule for the year ended January 3, 1998. 27.2 Financial Data Schedule for the year ended December 30, 1995 (restated for the adoption of SFAS No. 128 and the acquisition of International Technidyne Corporation). 27.3 Financial Data Schedule for the quarter ended March 29, 1996 (restated for the adoption of SFAS No. 128 and the acquisition of International Technidyne Corporation). 27PAGE EXHIBIT INDEX Exhibit Number Description of Exhibit ------------------------------------------------------------------------ 27.4 Financial Data Schedule for the quarter ended June 28, 1996 (restated for the adoption of SFAS No. 128 and the acquisition of International Technidyne Corporation). 27.5 Financial Data Schedule for the quarter ended September 28, 1996 (restated for the adoption of SFAS No. 128 and the acquisition of International Technidyne Corporation). 27.6 Financial Data Schedule for the year ended December 28, 1996 (restated for the adoption of SFAS No. 128 and the acquisition of International Technidyne Corporation). 27.7 Financial Data Schedule for the quarter ended March 29, 1997 (restated for the adoption of SFAS No. 128). 27.8 Financial Data Schedule for the quarter ended June 28, 1997 (restated for the adoption of SFAS No. 128). 27.9 Financial Data Schedule for the quarter ended September 27, 1997 (restated for the adoption of SFAS No. 128). EX-10.24 2 Exhibit 10.24 THERMEDICS INC. THERMO VOLTEK CORP. NONQUALIFIED STOCK OPTION PLAN 1. Purpose ------- This Nonqualified Stock Option Plan (the "Plan") is intended to encourage ownership of Common Stock, $0.01 par value (the "Common Stock"), of Thermo Voltek Corp. ("Subsidiary"), a subsidiary of Thermedics Inc. (the "Company"), by persons selected by the Board of Directors (or a committee thereof) in its sole discretion, including directors, executive officers, key employees and consultants of the Company and its subsidiaries, and to provide additional incentive for them to promote the success of the business of the Company and Subsidiary. The Plan is intended to be a nonstatutory stock option plan. 2. Effective Date of the Plan -------------------------- The Plan shall become effective when adopted by the Board of Directors of the Company. 3. Stock Subject to Plan --------------------- At no time shall the number of shares of the Common Stock then outstanding which are attributable to the exercise of options granted under the Plan plus the number of shares then issuable upon the exercise of outstanding options granted under the Plan exceed 100,000 shares, subject provisions of paragraph 11 of the Plan. Shares to be issued upon the exercise of options granted under the Plan shall be shares of Subsidiary beneficially owned by the Company. If any option expires or terminates for any reason without having been exercised in full, the unpurchased shares subject thereto shall again be available for options thereafter to be granted. 4. Administration -------------- The Plan shall be administered by a committee (the "Committee") composed of the members of the Board of Directors of the Company, no member of which shall act upon any matter exclusively affecting any option granted or to be granted to himself or herself under the Plan. Subject to the provisions of the Plan, the Committee shall have complete authority, in its discretion, to make the following determinations with respect to each option to be granted by the Company: (a) the person to receive the option (the "Optionee"); (b) the time of granting the option; (c) the number of shares subject thereto; (d) the option price; (e) the option period; and (f) the terms of the option and form of option agreement (which need not be identical, but which shall conform to the applicable terms and conditions of the Plan and contain such other provisions as the Board of Directors deems advisable and not inconsistent with the Plan). In making such PAGE determinations, the Committee may take into account the nature of the services rendered by the Optionees, their present and potential contributions to the success of the Company and/or one or more of its subsidiaries, and such other factors as the Committee in its discretion shall deem relevant. Subject to the provisions of the Plan, the Committee shall also have complete authority to interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to it, to determine the terms and provisions of the respective option agreements (which need not be identical), and to make all other determinations necessary or advisable for the administration of the Plan. The Committee's determinations on the matters referred to in this paragraph 4 shall be conclusive. 5. Eligibility ----------- An option may be granted to any person selected by the Committee in its sole discretion. 6. Time of Granting Options ------------------------ The granting of an option shall take place at the time specified by the Committee. Only if expressly so provided by the Committee shall the granting of an option be regarded as taking place at the time when a written option agreement shall have been duly executed and delivered by or on behalf of the Company and the Optionee to whom such option shall be granted. The agreement shall provide, among other things, that it does not confer upon an Optionee any right to continue in the employ of the Company and/or one or more of its subsidiaries or to continue as a director or consultant of the Company, and that it does not interfere in any way with the right of the Company or any such subsidiary to terminate the employment of the Optionee at any time if the Optionee is an employee, to remove the Optionee as a director of the Company if the Optionee is a director, or to terminate the services of the Optionee if the Optionee is a consultant. 7. Option Period ------------- An option may become exercisable immediately or in such installments, cumulative or noncumulative, as the Committee may determine. 8. Exercise of Option ------------------ An option may be exercised in accordance with its terms by written notice of intent to exercise the option, specifying the number of shares of stock with respect to which the option is then being exercised. The notice shall be accompanied by payment in the form of cash or shares of Subsidiary Common Stock (the "Tendered Shares") with a then current market value equal to the option price of the shares to be purchased; provided, however, that such Tendered Shares shall have been acquired by the PAGE Optionee more than six months prior to the date of exercise, unless such requirement is waived in writing by the Company. Against such payment the Company shall deliver or cause to be delivered to the Optionee a certificate for the number of shares then being purchased, registered in the name of the Optionee or other person exercising the option. If any law or applicable regulation of the Securities and Exchange Commission or other body having jurisdiction in the premises shall require the Company, Subsidiary or the Optionee to take any action in connection with shares being purchased upon exercise of the option, exercise of the option and delivery of the certificate or certificates for such shares shall be postponed until completion of the necessary action, which shall be taken at the Company's expense. 9. Transferability --------------- Except as may be authorized by the Committee , in its sole discretion, no Option may be transferred other than by will or the laws of descent and distribution, and during a Optionee's lifetime an option requiring exercise may be exercised only by him or her (or in the event of incapacity, the person or persons properly appointed to act on his or her behalf). The Committee may, in its discretion, determine the extent to which options granted to an Optionee shall be transferable, and such provisions permitting or acknowledging transfer shall be set forth in the written agreement evidencing the option executed and delivered by or on behalf of the Company and the Optionee. 10. Vesting, Restrictions and Termination of Options ------------------------------------------------ The Committee, in its sole discretion, may determine the manner in which options shall vest, the rights of the Company to repurchase the shares issued upon the exercise of any option and the manner in which such rights shall lapse, and the terms upon which any option granted shall terminate. The Board of Directors shall have the right to accelerate the date of exercise of any installment or to accelerate the lapse of the Company's repurchase rights. All of such terms shall be specified in a written option agreement executed and delivered by or on behalf of the Company and the Optionee to whom such option shall be granted. 11. Adjustment of Number of Shares ------------------------------ Each stock option agreement shall provide that in the event of any stock dividend payable in the Common Stock or any split-up or contraction in the number of shares of the Common Stock occurring after the date of the agreement and prior to the exercise in full of the option, the number of shares for which the option may thereafter be exercised shall be proportionately adjusted and the price to be paid for each share subject to the option shall be proportionately adjusted. Each such agreement shall also provide that in case of any reclassification or change PAGE of outstanding shares of the Common Stock or in case of any consolidation or merger of Subsidiary with or into another company or in case of any sale or conveyance to another company or entity of the property of Subsidiary as a whole or substantially as a whole, the Optionee shall, upon exercise of the option, be entitled to receive shares of stock or other securities in its place equivalent in kind and value to those shares which he would have received if he had exercised the option in full immediately prior to such reclassification, change, consolidation, merger, sale or conveyance and had continued to hold the shares subject to the option (together with all other shares, stock and securities thereafter issued in respect thereof) to the time of the exercise of the option; provided, that if any recapitalization is to be effected through an increase in the par value of the Common Stock without an increase in the number of authorized shares and such new par value will exceed the option price under such agreement, the Company shall notify the Optionee of such proposed recapitalization, and the Optionee shall then have the right, exercisable at any time prior to such recapitalization becoming effective, to purchase all of the shares subject to the option which he has not theretofore purchased (anything in such agreement to the contrary notwithstanding), but if the Optionee fails to exercise such right before such recapitalization becomes effective, the option price under such agreement shall be appropriately adjusted. Each such agreement shall further provide that upon dissolution or liquidation of Subsidiary, the option shall terminate, but the Optionee (if at the time an employee or director of the Company and/or any one or more of its subsidiaries) shall have the right, immediately prior to such dissolution or liquidation, to exercise the option to the full extent not theretofore exercised; that no adjustment provided for above shall apply to any share with respect to which the option has been exercised prior to the effective date of such adjustment; and that no fraction of a share or fractional shares shall be purchasable or deliverable under such agreement, but in the event any adjustment thereunder of the number of shares covered by the option shall cause such number to include a fraction of a share, such fraction shall be adjusted to the nearest smaller whole number of shares. In the event of changes in the outstanding Common Stock by reason of any stock dividend, split-up, contraction, reclassification, or change of outstanding shares of the Common Stock of the nature contemplated by this paragraph 11, the number of shares of Common Stock available for the purpose of the Plan as stated in paragraph 3 hereof shall be correspondingly adjusted by the Committee. 12. Limitation of Rights in Option Stock ------------------------------------ The Optionees shall have no rights as stockholders in respect of shares as to which their options shall not have been exercised, certificates issued and delivered and payment as herein provided made in full, and shall have no rights with respect to such shares not expressly conferred by this Plan. PAGE 13. Stock Reserved -------------- The Company shall at all times during the term of the options reserve and keep available such number of shares of the Common Stock as will be sufficient to satisfy the requirements of this Plan and shall pay all other fees and expenses necessarily incurred by the Company in connection therewith. 14. Securities Laws Restrictions ---------------------------- Each Optionee exercising an option, at the request of the Company, will be required to give a representation in form satisfactory to counsel for the Company that he will not transfer, sell or otherwise dispose of the shares received upon exercise of the option at any time purchased by him, upon exercise of any portion of the option, in a manner which would violate the Securities Act of 1933, as amended, and the regulations of the Securities and Exchange Commission thereunder and the Company may, if required or at its discretion, make a notation on any certificates issued upon exercise of options to the effect that such certificate may not be transferred except after receipt by the Company of an opinion of counsel satisfactory to it to the effect that such transfer will not violate such Act and such regulations. 15. Tax Withholding --------------- The Company shall have the right to deduct from payments of any kind otherwise due to an Optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any shares issued upon exercise of options under the Plan (the "withholding requirements"). The Committee will have the right to require that the Optionee or other appropriate person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements satisfactory to the Committee with regard to such requirements, prior to the delivery of any Common Stock pursuant to exercise of an option. If and to the extent that such withholding is required, the Committee may permit the Optionee or such other person to elect at such time and in such manner as the Committee provides to have the Company hold back from the shares to be delivered, or to deliver to the Company, Common Stock having a value calculated to satisfy the withholding requirements. 16. Termination and Amendment of Plan --------------------------------- The Board of Directors may at any time, and from time to time, modify or amend the Plan in any respect, except that if at any time the approval of the Stockholders of the Company is required as to such modification or amendment under Rule 16b-3, the Board of Directors may not effect such modification or amendment without such approval. PAGE The termination or any modification or amendment of the Plan shall not, without the consent of an Optionee, affect his or her rights under an option previously granted to him or her. With the consent of the Optionees affected, the Board of Directors may amend outstanding option agreements in a manner not inconsistent with the Plan. The Board of Directors shall have the right to amend or modify the terms and provisions of the Plan and of any outstanding option to the extent necessary to ensure the qualification of the Plan under Rule 16b-3. Notwithstanding any other provisions hereof, the Plan shall terminate on December 31, 2008 and no options shall be granted hereunder thereafter. EX-10.27 3 Exhibit 10.27 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 on the fifth anniversary of the date of the Loan, provided that the Committee may, in its sole and absolute discretion, authorize such other maturity and repayment PAGE schedule as the Committee may determine. Each Loan shall also become immediately due and payable in full, without demand, upon the occurrence of any of the events set forth in the Note; provided that the Committee may, in its sole and absolute discretion, authorize an extension of the time for repayment of a Loan upon such terms and conditions as the Committee may determine. SECTION 7. Amendment and Termination of the Plan. The Committee may from time to time alter or amend the Plan or the Stock Holding Policy in any respect, or terminate the Plan or the Stock Holding Policy at any time. No such amendment or termination, however, shall alter or otherwise affect the terms and conditions of any Loan then outstanding to Key Employee without such Key Employee's written consent, except as otherwise provided herein or in the promissory note evidencing such Loan. SECTION 8. Miscellaneous Provisions. (a) No employee or other person shall have any claim or right to receive a Loan under the Plan, and no employee shall have any right to be retained in the employ of the Company due to his or her participation in the Plan. (b) No Loan shall be made hereunder unless counsel for the Company shall be satisfied that such Loan will be in compliance with applicable federal, state and local laws. (c) The expenses of the Plan shall be borne by the Company. (d) The Plan shall be unfunded, and the Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the making of any Loan under the Plan. (e) Except as otherwise provided in Section 7 hereof, by accepting any Loan under the Plan, each Key Employee shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under the Plan or the Stock Holding Policy by the Company, the Board of Directors of the Company or the Committee. (f) The appropriate officers of the Company shall cause to be filed any reports, returns or other information regarding Loans hereunder, as may be required by any applicable statute, rule or regulation. SECTION 9. Effective Date. The Plan and the Stock Holding Policy shall become effective upon approval and adoption by the Committee. PAGE EXHIBIT A TO STOCK HOLDING ASSISTANCE PLAN THERMEDICS 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 to the Company from the Employee's annual cash incentive compensation (referred to as bonus), beginning with the first such bonus payment to occur after the date of this Note and on each of the next four bonus payment dates occurring prior to the Maturity Date, such amount as may be designated by the Company. Any amount remaining unpaid under this Note shall be due and payable on the Maturity Date. This Note may be prepaid at any time or from time to time, in whole or in part, without any premium or penalty. The Employee acknowledges and agrees that the Company has advanced to the Employee the principal amount of this Note pursuant to the Company's Stock Holding Assistance Plan, and that all terms and conditions of such Plan are incorporated herein by reference. The unpaid principal amount of this Note shall be and become immediately due and payable without notice or demand, at the option of the Company, upon the occurrence of any of the following events: (a) the termination of the Employee's employment with the Company, with or without cause, for any reason or for no reason; (b) the death or disability of the Employee; PAGE (c) the failure of the Employee to pay his or her debts as they become due, the insolvency of the Employee, the filing by or against the Employee of any petition under the United States Bankruptcy Code (or the filing of any similar petition under the insolvency law of any jurisdiction), or the making by the Employee of an assignment or trust mortgage for the benefit of creditors or the appointment of a receiver, custodian or similar agent with respect to, or the taking by any such person of possession of, any property of the Employee; or (d) the issuance of any writ of attachment, by trustee process or otherwise, or any restraining order or injunction not removed, repealed or dismissed within thirty (30) days of issuance, against or affecting the person or property of the Employee or any liability or obligation of the Employee to the Company. In case any payment herein provided for shall not be paid when due, the Employee further promises to pay all costs of collection, including all reasonable attorneys' fees. No delay or omission on the part of the Company in exercising any right hereunder shall operate as a waiver of such right or of any other right of the Company, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. The Employee hereby waives presentment, demand, notice of prepayment, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note. The undersigned hereby assents to any indulgence and any extension of time for payment of any indebtedness evidenced hereby granted or permitted by the Company. This Note has been made pursuant to the Company's Stock Holding Assistance Plan and shall be governed by and construed in accordance with, such Plan and the laws of the State of Massachusetts and shall have the effect of a sealed instrument. _______________________________ Employee Name: _________________ ________________________ Witness AA980750014 EX-10.28 4 EXHIBIT 10.28 AMENDED AND RESTATED MASTER GUARANTEE REIMBURSEMENT AND LOAN AGREEMENT This AGREEMENT is entered into as of the 10th day of December, 1997 by and among Thermo Electron Corporation (the "Parent") and those of its subsidiaries that join in this Agreement by executing the signature page hereto (the "Majority Owned Subsidiaries"). WITNESSETH: WHEREAS, the Majority Owned Subsidiaries and their wholly-owned subsidiaries wish to enter into various financial transactions, such as convertible or nonconvertible debt, loans, and equity offerings, and other contractual arrangements with third parties (the "Underlying Obligations") and may provide credit support to, on behalf of or for the benefit of, other subsidiaries of the Parent ("Credit Support Obligations"); WHEREAS, the Majority Owned Subsidiaries and the Parent acknowledge that the Majority Owned Subsidiaries and their wholly-owned subsidiaries may be unable to enter into many kinds of Underlying Obligations without a guarantee of their performance thereunder from the Parent (a "Parent Guarantee") or without obtaining Credit Support Obligations from other Majority Owned Subsidiaries; WHEREAS, the Majority Owned Subsidiaries and their wholly-owned subsidiaries may borrow funds from the Parent, and the Parent may loan funds or provide credit to the Majority Owned Subsidiaries and their wholly-owned subsidiaries, on a short-term and unsecured basis; WHEREAS, certain Majority Owned Subsidiaries ("Second Tier Majority Owned Subsidiaries ") may themselves be majority owned subsidiaries of other Majority Owned Subsidiaries ("First Tier Majority Owned Subsidiaries"); WHEREAS, for various reasons, Parent Guarantees of a Second Tier Majority Owned Subsidiary's Underlying Obligations may be demanded and given without the respective First Tier Majority Owned Subsidiary also issuing a guarantee of such Underlying Obligation; WHEREAS, the Parent may itself make a loan or provide other credit to a Second Tier Majority Owned Subsidiary or its wholly-owned subsidiaries under circumstances where the applicable First Tier Majority Owned Subsidiary does not provide such credit; and WHEREAS, the Parent is willing to consider continuing to issue Parent Guarantees and providing credit, and the Majority Owned Subsidiaries are willing to consider continuing to provide PAGE Credit Support Obligations and to borrow funds, on the terms and conditions set forth below; NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each party hereto, the parties agree as follows: 1. If the Parent provides a Parent Guarantee of an Underlying Obligation, and the beneficiary(ies) of the Parent Guarantee enforce the Parent Guarantee, or the Parent performs under the Parent Guarantee for any other reason, then the Majority Owned Subsidiary that is obligated, either directly or indirectly through a wholly-owned subsidiary, under such Underlying Obligation shall indemnify and save harmless the Parent from any liability, cost, expense or damage (including reasonable attorneys' fees) suffered by the Parent as a result of the Parent Guarantee. If the Underlying Obligation is issued by a Second Tier Majority Owned Subsidiary or a wholly-owned subsidiary thereof, and such Second Tier Majority Owned Subsidiary is unable to fully indemnify the Parent (because of the poor financial condition of such Second Tier Majority Owned Subsidiary, or for any other reason), then the First Tier Majority Owned Subsidiary that owns the majority of the stock of such Second Tier Majority Owned Subsidiary shall indemnify and save harmless the Parent from any remaining liability, cost, expense or damage (including reasonable attorneys' fees) suffered by the Parent as a result of the Parent Guarantee. If a Majority Owned Subsidiary or a wholly-owned subsidiary thereof provides a Credit Support Obligation for any subsidiary of the Parent, other than a subsidiary of such Majority Owned Subsidiary, and the beneficiary(ies) of the Credit Support Obligation enforce the Credit Support Obligation, or the Majority Owned Subsidiary or its wholly-owned subsidiary performs under the Credit Support Obligation for any other reason, then the Parent shall indemnify and save harmless the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, from any liability, cost, expense or damage (including reasonable attorneys' fees) suffered by the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, as a result of the Credit Support Obligation. Without limiting the foregoing, Credit Support Obligations include the deposit of funds by a Majority Owned Subsidiary or a wholly-owned subsidiary thereof in a credit arrangement with a banking facility whereby such funds are available to the banking facility as collateral for overdraft obligations of other Majority Owned Subsidiaries or their subsidiaries also participating in the credit arrangement with such banking facility. 2. For purposes of this Agreement, the term "guarantee" shall include not only a formal guarantee of an obligation, but PAGE also any other arrangement where the Parent is liable for the obligations of a Majority Owned Subsidiary or its wholly-owned subsidiaries. Such other arrangements include (a) representations, warranties and/or covenants or other obligations joined in by the Parent, whether on a joint or joint and several basis, for the benefit of the Majority Owned Subsidiary or its wholly-owned subsidiaries and (b) responsibility of the Parent by operation of law for the acts and omissions of the Majority Owned Subsidiary or its wholly-owned subsidiaries, including controlling person liability under securities and other laws. 3. Promptly after the Parent receives notice that a beneficiary of a Parent Guarantee is seeking to enforce such Parent Guarantee, the Parent shall notify the Majority Owned Subsidiary(s) obligated, either directly or indirectly through a wholly-owned subsidiary, under the relevant Underlying Obligation. Such Majority Owned Subsidiary(s) or wholly-owned subsidiary thereof, as applicable, shall have the right, at its own expense, to contest the claim of such beneficiary. If a Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, is contesting the claim of such beneficiary, the Parent will not perform under the relevant Parent Guarantee unless and until, in the Parent's reasonable judgment, the Parent is obligated under the terms of such Parent Guarantee to perform. Subject to the foregoing, any dispute between a Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, and a beneficiary of a Parent Guarantee shall not affect such Majority Owned Subsidiary's obligation to promptly indemnify the Parent hereunder. Promptly after a Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, receives notice that a beneficiary of a Credit Support Obligation is seeking to enforce such Credit Support Obligation, the Majority Owned Subsidiary shall notify the Parent. The Parent shall have the right, at its own expense, to contest the claim of such beneficiary. If the Parent or the subsidiary of the Parent on whose behalf the Credit Support Obligation is given is contesting the claim of such beneficiary, the Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, will not perform under the relevant Credit Support Obligation unless and until, in the Majority Owned Subsidiary's reasonable judgment, the Majority Owned Subsidiary or wholly-owned subsidiary thereof, as applicable, is obligated under the terms of such Credit Support Obligation to perform. Subject to the foregoing, any dispute between the Parent or the subsidiary of the Parent on whose behalf the Credit Support Obligation was given, on the one hand, and a beneficiary of a Credit Support Obligation, on the other, shall not affect the Parent's obligation to promptly indemnify the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, hereunder. PAGE 4. Upon the request of a Majority Owned Subsidiary, the Parent may make loans and advances to the Majority Owned Subsidiary or its wholly-owned subsidiaries on a short-term, revolving credit basis, from time to time in such amounts as mutually determined by the Parent and the Majority Owned Subsidiary. The aggregate principal amount of such loans and advances shall be reflected on the books and records of the Majority Owned Subsidiary (or wholly-owned subsidiary, as applicable) and the Parent. All such loans and advances shall be on an unsecured basis unless specifically provided otherwise in loan documents executed at that time. The Majority Owned Subsidiary or its wholly-owned subsidiaries, as applicable, shall pay interest on the aggregate unpaid principal amount of such loans from time to time outstanding at a rate ("Interest Rate") equal to the rate of the Commercial Paper Composite Rate for 90-day maturities as reported by Merrill Lynch Capital Markets, as an average of the last five business days of such Majority Owned Subsidiary's latest fiscal quarter then ended, plus twenty-five (25) basis points. The Interest Rate shall be adjusted on the first business day of each fiscal quarter of such Majority Owned Subsidiary pursuant to the Interest Rate formula contained in the preceding sentence and shall be in effect for the entirety of such fiscal quarter. Interest shall be computed on a 360-day basis. The aggregate principal amount outstanding and accrued interest thereon shall be payable on demand. The principal and accrued interest may be paid by the Majority Owned Subsidiaries or their wholly-owned subsidiaries, as applicable, at any time or from time to time, in whole or in part, without premium or penalty. All payments shall be applied first to accrued interest and then to principal. Principal and interest shall be payable in lawful money of the United States of America, in immediately available funds, at the principal office of the Parent or at such other place as the Parent may designate from time to time in writing to the Majority Owned Subsidiary. The unpaid principal amount of any such borrowings, and accrued interest thereon, shall become immediately due and payable, without demand, upon the failure of the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, to pay its debts as they become due, the insolvency of the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, the filing by or against the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, of any petition under the U.S. Bankruptcy Code (or the filing of any similar petition under the insolvency law of any jurisdiction), or the making by the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, of an assignment or trust mortgage for the benefit of creditors or the appointment of a receiver, custodian or similar agent with respect to, or the taking by any such person of possession of, any property of the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable. In case any payments of principal and interest shall not be paid when PAGE due, the Majority Owned Subsidiary or its wholly-owned subsidiary, as applicable, further promises to pay all cost of collection, including reasonable attorneys' fees. 5. If the Parent makes a loan or provides other credit ("Credit Extension") to a Second Tier Majority Owned Subsidiary, the First Tier Majority Owned Subsidiary that owns the majority of the stock of such Second Tier Majority Owned Subsidiary hereby guarantees the Second Tier Majority Owned Subsidiary's obligations to the Parent thereunder. Such guaranty shall be enforced only after the Parent, in its reasonable judgment, determines that the Second Tier Majority Owned Subsidiary is unable to fully perform its obligations under the Credit Extension. If the Parent provides Credit Extension to a wholly-owned subsidiary of a Second Tier Majority Owned Subsidiary, the Second Tier Majority Owned Subsidiary hereby guarantees it wholly-owned subsidiary's obligations to the Parent thereunder and the First Tier Majority Owned Subsidiary that owns the majority of the stock of such Second Tier Majority Owned Subsidiary hereby guarantees the Second Tier Majority Owned Subsidiary's obligations to the Parent hereunder. Such guaranty by the First Tier Majority Owned Subsidiary shall be enforced only after the Parent, in its reasonable judgment, determines that the Second Tier Majority Owned Subsidiary is unable to fully perform its guaranty obligation hereunder. 6. All payments required to be made by a Majority Owned Subsidiary or its wholly-owned subsidiaries, as applicable, shall be made within two days after receipt of notice from the Parent. All payments required to be made by the Parent shall be made within two days after receipt of notice from the Majority Owned Subsidiary. 7. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts applicable to contracts made and performed therein. PAGE IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the date first above written. THERMO ELECTRON CORPORATION By: _____________________________ Melissa F.Riordan Title: Treasurer THERMEDICS INC. By: _____________________________ John W. Wood Jr. Title: President EX-13 5 Exhibit 13 THERMEDICS INC. Consolidated Financial Statements 1997 PAGE Thermedics Inc. 1997 Financial Statements Consolidated Statement of Income (In thousands except per share amounts) 1997 1996 1995 ------------------------------------------------------------------------ Revenues (Note 14) $307,666 $292,077 $208,041 -------- -------- -------- Costs and Operating Expenses: Cost of revenues 155,680 148,137 110,935 Selling, general, and administrative expenses (Note 8) 86,308 85,045 55,951 Research and development expenses 24,270 21,363 14,874 Nonrecurring costs (Notes 3 and 13) - 17,637 - -------- -------- -------- 266,258 272,182 181,760 -------- -------- -------- Operating Income 41,408 19,895 26,281 Interest Income 13,326 10,765 9,073 Interest Expense (3,398) (3,770) (3,677) Gain on Issuance of Stock by Subsidiaries (Note 11) 17,075 23,651 3,455 Gain on Sale of Investments, Net (includes gain on sale of related- party investments of $428 in 1997; Notes 2 and 8) 432 956 421 Other Income 54 - 14 -------- -------- -------- Income Before Provision for Income Taxes and Minority Interest 68,897 51,497 35,567 Provision for Income Taxes (Note 5) 19,675 13,969 11,781 Minority Interest Expense 7,730 8,390 6,612 -------- -------- -------- Net Income $ 41,492 $ 29,138 $ 17,174 ======== ======== ======== Earnings per Share (Note 15): Basic $ 1.13 $ .80 $ .51 ======== ======== ======== Diluted $ 1.07 $ .75 $ .48 ======== ======== ======== Weighted Average Shares (Note 15): Basic 36,700 36,417 33,660 ======== ======== ======== Diluted 38,911 38,202 35,036 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 2PAGE Thermedics Inc. 1997 Financial Statements Consolidated Balance Sheet (In thousands) 1997 1996 ------------------------------------------------------------------------ Assets Current Assets: Cash and cash equivalents $187,012 $ 82,800 Short-term available-for-sale investments, at quoted market value (amortized cost of $58,144 and $64,950; includes $3,336 of related-party investments in 1996; Notes 2 and 8) 58,317 65,054 Accounts receivable, less allowances of $4,207 and $4,903 61,488 62,783 Inventories 59,574 54,230 Prepaid income taxes and expenses (Note 5) 12,769 14,713 -------- -------- 379,160 279,580 -------- -------- Property, Plant, and Equipment, at Cost, Net 21,611 21,550 -------- -------- Long-term Available-for-sale Investments, at Quoted Market Value (amortized cost of $12,655 and $33,929; Note 2) 12,665 33,920 -------- -------- Other Assets (Note 5) 12,139 7,885 -------- -------- Cost in Excess of Net Assets of Acquired Companies (Notes 3, 5, and 13) 110,977 113,764 -------- -------- $536,552 $456,699 ======== ======== 3PAGE Thermedics Inc. 1997 Financial Statements Consolidated Balance Sheet (continued) (In thousands except share amounts) 1997 1996 ------------------------------------------------------------------------ Liabilities and Shareholders' Investment Current Liabilities: Notes payable and current maturity of long-term obligation (Note 7) $ 7,498 $ 9,017 Accounts payable 18,020 19,615 Accrued payroll and employee benefits 12,576 11,951 Accrued income taxes 6,815 5,438 Accrued warranty costs 3,784 3,971 Other accrued expenses 18,838 19,818 Due to parent company and affiliates 2,266 1,600 -------- -------- 69,797 71,410 -------- -------- Deferred Income Taxes and Other Deferred Items (Note 5) 177 1,382 -------- -------- Long-term Obligations (Note 7) 142,771 74,359 -------- -------- Minority Interest 96,461 97,966 -------- -------- Commitments and Contingency (Notes 6 and 9) Shareholders' Investment (Notes 4, 8, 10, and 17): Common stock, $.10 par value, 100,000,000 shares authorized; 36,846,175 and 36,842,500 shares issued 3,685 3,684 Capital in excess of par value 113,913 138,433 Retained earnings 116,034 74,542 Treasury stock at cost, 134,172 and 166,144 shares (3,449) (4,729) Cumulative translation adjustment (2,954) (409) Net unrealized gain on available-for-sale investments (Note 2) 117 61 -------- -------- 227,346 211,582 -------- -------- $536,552 $456,699 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 4PAGE Thermedics Inc. 1997 Financial Statements Consolidated Statement of Cash Flows (In thousands) 1997 1996 1995 ------------------------------------------------------------------------ Operating Activities: Net income $ 41,492 $ 29,138 $ 17,174 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,361 10,431 6,766 Gain on issuance of stock by subsidiaries (Note 11) (17,075) (23,651) (3,455) Nonrecurring costs (Notes 3 and 13) - 17,637 - Provision for losses on accounts receivable 815 1,352 689 Gain on sale of investments, net (Note 2) (432) (956) (421) Minority interest expense 7,730 8,390 6,612 Increase (decrease) in deferred income taxes 45 (601) 766 Other noncash expenses 780 938 990 Changes in current accounts, excluding the effects of acquisitions: Accounts receivable 491 (13,906) 53 Inventories (5,367) (839) (11,675) Prepaid income taxes and expenses (845) 16 (2,367) Accounts payable (2,042) 892 3,643 Other current liabilities 2,906 (1,162) 2,704 Other - (270) (182) -------- -------- -------- Net cash provided by operating activities 38,859 27,409 21,297 -------- -------- -------- Investing Activities: Acquisitions, net of cash acquired (Note 3) (5,658) (37,044) (56,560) Acquisition of product lines - (4,737) - Purchases of property, plant, and equipment (7,087) (8,621) (6,691) Purchases of available-for-sale investments (89,900) (99,800) (101,246) Proceeds from sale and maturities of available-for-sale investments 118,413 118,356 104,786 Other 275 (754) 371 -------- -------- -------- Net cash provided by (used in) investing activities $ 16,043 $(32,600) $(59,340) -------- -------- -------- 5PAGE Thermedics Inc. 1997 Financial Statements Consolidated Statement of Cash Flows (continued) (In thousands) 1997 1996 1995 ------------------------------------------------------------------------ Financing Activities: Net proceeds from issuance of Company and subsidiaries' common stock (Note 10) $ 29,122 $ 49,780 $ 4,515 Purchases of Company and subsidiaries' common stock (51,091) (15,665) (179) Proceeds from issuance of note payable to parent company (Notes 3 and 7) - 15,000 38,000 Repayment of notes payable to parent company (Notes 3 and 7) - (53,000) - Net proceeds from issuance of subordinated convertible obligations (Note 7) 68,028 63,249 - Repayment and repurchase of long-term obligations (700) (2,432) (132) Net increase (decrease) in short-term borrowings 2,699 (1,944) (1,961) International Technidyne transfers (to) from Thermo Electron 350 (5,567) (2,158) Other - (146) 740 -------- -------- -------- Net cash provided by financing activities 48,408 49,275 38,825 -------- -------- -------- Exchange Rate Effect on Cash 902 1,303 (502) -------- -------- -------- Increase in Cash and Cash Equivalents 104,212 45,387 280 Cash and Cash Equivalents at Beginning of Year 82,800 37,413 37,133 -------- -------- -------- Cash and Cash Equivalents at End of Year $187,012 $ 82,800 $ 37,413 ======== ======== ======== 6PAGE Thermedics Inc. 1997 Financial Statements Consolidated Statement of Cash Flows (continued) (In thousands) 1997 1996 1995 ------------------------------------------------------------------------ Cash Paid For: Interest $ 2,467 $ 5,333 $ 3,328 Income taxes $ 14,588 $ 7,108 $ 6,489 Noncash Activities: Fair value of assets of acquired companies $ 9,351 $ 42,955 $ 67,394 Cash paid for acquired companies (6,291) (37,445) (56,879) -------- -------- -------- Liabilities assumed of acquired companies $ 3,060 $ 5,510 $ 10,515 ======== ======== ======== Issuance of Company common stock to parent company in exchange for subsidiary common stock (Note 8) $ - $ 4,236 $ - ======== ======== ======== Conversions of Company and subsidiary convertible obligations (Note 7) $ 4,650 $ 31,562 $ 37,317 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 7PAGE Thermedics Inc. 1997 Financial Statements Consolidated Statement of Shareholders' Investment (In thousands) 1997 1996 1995 ------------------------------------------------------------------------ Common Stock, $.10 Par Value Balance at beginning of year $ 3,684 $ 3,399 $ 3,330 Issuance of stock under employees' and directors' stock plans 1 12 7 Conversions of subordinated convertible debentures - 74 62 Issuance of Company common stock to parent company in exchange for common stock of subsidiaries (Note 8) - 199 - -------- -------- -------- Balance at end of year 3,685 3,684 3,399 -------- -------- -------- Capital in Excess of Par Value Balance at beginning of year 138,433 120,665 102,975 Issuance of stock under employees' and directors' stock plans (1,239) 737 378 Tax benefit related to employees' and directors' stock plans 55 1,218 434 Conversions of subordinated convertible debentures (Note 7) - 7,631 6,259 Issuance of Company common stock to parent company in exchange for common stock of subsidiaries (Note 8) - 4,037 - Effect of majority-owned subsidiaries' equity transactions (23,336) 4,145 9,858 Capital contribution from parent company - - 761 -------- -------- -------- Balance at end of year 113,913 138,433 120,665 -------- -------- -------- Retained Earnings Balance at beginning of year 74,542 47,928 32,084 Net income 41,492 29,138 17,174 International Technidyne transfers to Thermo Electron - (2,524) (1,330) -------- -------- -------- Balance at end of year 116,034 74,542 47,928 -------- -------- -------- Treasury Stock Balance at beginning of year (4,729) (42) (310) Issuance of stock under employees' and directors' stock plans 1,572 58 268 Purchases of Company common stock (292) (4,745) - -------- -------- -------- Balance at end of year $ (3,449) $ (4,729) $ (42) -------- -------- -------- 8PAGE Thermedics Inc. 1997 Financial Statements Consolidated Statement of Shareholders' Investment (continued) (In thousands) 1997 1996 1995 ------------------------------------------------------------------------ Cumulative Translation Adjustment Balance at beginning of year $ (409) $ (88) $ 326 Translation adjustment (2,545) (321) (414) -------- -------- -------- Balance at end of year (2,954) (409) (88) -------- -------- -------- Net Unrealized Gain on Available- for-sale Investments Balance at beginning of year 61 889 (1,622) Change in net unrealized gain (loss) on available-for-sale investments (Note 2) 56 (828) 2,511 -------- -------- -------- Balance at end of year 117 61 889 -------- -------- -------- Total Shareholders' Investment $227,346 $211,582 $172,751 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 9PAGE Thermedics Inc. 1997 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 a range of power electronics, and security devices, as well as implantable heart-assist systems, whole-blood coagulation testing equipment, skin-incision devices, and other biomedical products. Relationship with Thermo Electron Corporation The Company was incorporated in 1983 as a wholly owned subsidiary of Thermo Electron Corporation. As of January 3, 1998, Thermo Electron owned 21,141,471 shares of the Company's common stock, representing 58% of such stock outstanding. Principles of Consolidation The accompanying financial statements include the accounts of the Company; its wholly owned subsidiaries; and its majority-owned public subsidiaries, Thermo Cardiosystems Inc., Thermo Voltek Corp., Thermo Sentron Inc., and Thermedics Detection Inc. All material intercompany accounts and transactions have been eliminated. Fiscal Year The Company has adopted a fiscal year ending the Saturday nearest December 31. References to 1997, 1996, and 1995 are for the fiscal years ended January 3, 1998, December 28, 1996, and December 30, 1995, respectively. Fiscal 1997 included 53 weeks; 1996 and 1995 each included 52 weeks. Cash and Cash Equivalents At year-end 1997 and 1996, $175,101,000 and $74,625,000, respectively, of the Company's cash equivalents were invested in a repurchase agreement with Thermo Electron. Under this agreement, the Company in effect lends excess cash to Thermo Electron, which Thermo Electron collateralizes with investments principally consisting of corporate notes, commercial paper, U.S. government-agency securities, money market funds, and other marketable securities, in the amount of at least 103% of such obligation. The Company's funds subject to the repurchase agreement are readily convertible into cash by the Company and have an original maturity of three months or less. The repurchase agreement earns a rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. At year-end 1997 and 1996, the Company's cash equivalents were also invested in U.S. government-agency discount notes and money market preferred stock. Cash equivalents are carried at cost, which approximates market value. 10PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Inventories Inventories are stated at the lower of cost (on a first-in, first-out basis) or market value and include materials, labor, and manufacturing overhead. The components of inventories are as follows: (In thousands) 1997 1996 ----------------------------------------------------------------------- Raw materials and supplies $23,857 $28,210 Work in process 18,218 10,719 Finished goods 17,499 15,301 ------- ------- $59,574 $54,230 ======= ======= 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 31.5 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) 1997 1996 ----------------------------------------------------------------------- Land and buildings $ 6,154 $ 5,778 Machinery, equipment, and leasehold improvements 49,443 43,114 ------- ------- 55,597 48,892 Less: Accumulated depreciation and amortization 33,986 27,342 ------- ------- $21,611 $21,550 ======= ======= 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 40 years. These assets were $4,400,000 and $4,146,000, net of accumulated amortization of $3,253,000 and $2,798,000, at year-end 1997 and 1996, 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 $12,116,000 and $9,343,000 at year-end 1997 and 1996, respectively. The Company assesses 11PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies (continued) 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." There were no material foreign currency transaction gains or losses in the accompanying statement of income. Revenue Recognition The Company recognizes the majority of its revenues upon shipment of its products. The Company provides a reserve for its estimate of warranty costs at the time of shipment. Revenues and profits on substantially all contracts are recognized using the percentage-of-completion method. Revenues recorded under the percentage-of-completion method were $8,735,000 in 1997, $6,564,000 in 1996, and $8,521,000 in 1995. 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 1997 and 1996. 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 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 12PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies (continued) 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 During the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings per Share" (Note 15). As a result, all previously reported earnings per share have been restated and the Company is required to report diluted earnings per share. Basic earnings per share have been computed by dividing net income by the weighted average number of shares outstanding during the year. Diluted earnings per share have been computed assuming the conversion of convertible obligations and the elimination of the related interest expense, and the exercise of stock options, as well as their related income tax effects. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Presentation The historical information for all periods presented has been restated to reflect the May 2, 1997, acquisition of International Technidyne Corporation by Thermo Cardiosystems from Thermo Electron, which has been accounted for at historical cost in a manner similar to a pooling of interests (Note 3). 13PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 2. Available-for-sale Investments In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company's debt and equity securities are considered available-for-sale investments in the accompanying balance sheet and are carried at market value, with the difference between cost and market value, net of related tax effects, recorded currently as a component of shareholders' investment titled "Net unrealized gain on available-for-sale investments." 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, are as follows: Gross Gross Market Cost Unrealized Unrealized (In thousands) Value Basis Gains Losses ----------------------------------------------------------------------- 1997 Government-agency securities $55,391 $55,334 $ 66 $ (9) Corporate bonds 11,547 11,521 26 - Other 4,044 3,944 174 (74) ------- ------- ------- ------- $70,982 $70,799 $ 266 $ (83) ======= ======= ======= ======= 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) ======= ======= ======= ======= Short- and long-term available-for-sale investments in the accompanying 1997 balance sheet include $57,356,000 with contractual maturities of one year or less and $13,626,000 with contractual maturities of more than one year through 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. The cost of available-for-sale investments that were sold was based on specific identification in determining realized gains and losses recorded in the accompanying statement of income. Gain on sale of investments, net, resulted from gross realized gains of $432,000, $1,086,000, and $439,000 in 1997, 1996, and 1995, respectively, and gross realized losses of $130,000 and $18,000 in 1996 and 1995, respectively, relating to the sale of available-for-sale investments. 14PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 3. Acquisitions On May 2, 1997, Thermo Cardiosystems acquired International Technidyne from Thermo Electron in exchange for the right to receive 3,355,705 shares of Thermo Cardiosystems' common stock. International Technidyne is a leading manufacturer of near-patient, whole-blood coagulation testing equipment and related disposables, and also manufactures premium-quality, single-use skin-incision devices. Because the Company, Thermo Cardiosystems, and International Technidyne were deemed for accounting purposes to be under control of their common majority owner, Thermo Electron, the transaction has been accounted for at historical cost in a manner similar to a pooling of interests. Accordingly, all historical financial information presented has been restated to reflect the acquisition of International Technidyne. The 3,355,705 shares of Thermo Cardiosystems' common stock issuable in connection with the acquisition will not be issued until the listing of such shares for trading upon the American Stock Exchange has been approved by Thermo Cardiosystems' shareholders. Because the Company is the majority shareholder and intends to vote its shares in favor of such listing, the approval is assured and, therefore, the results of International Technidyne are included in the Company's results for all periods presented. Revenues and net income, as previously reported by the separate entities prior to the acquisition and as restated for the combined Company, are as follows: (In thousands) 1996 1995 ----------------------------------------------------------------------- Revenues: Historical $258,085 $175,754 International Technidyne 33,992 32,287 -------- -------- $292,077 $208,041 ======== ======== Net income: Historical $ 26,831 $ 15,121 International Technidyne 4,672 4,210 Minority interest expense not previously reported (2,365) (2,157) -------- -------- $ 29,138 $ 17,174 ======== ======== 15PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 3. Acquisitions (continued) In addition, during 1997, two of the Company's majority-owned subsidiaries made acquisitions for $6,291,000 in cash. 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. The cost of these acquisitions exceeded the estimated fair value of the acquired net assets by $16,905,000, which is being amortized over 40 years. 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. 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. The cost of this acquisition exceeded the estimated fair value of the acquired net assets by $42,681,000, which is being amortized over 40 years. 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 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. 16PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 3. Acquisitions (continued) These acquisitions, excluding Thermo Cardiosystems' acquisition of International Technidyne, 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 all of these acquisitions exceeded the estimated fair value of the acquired net assets by $76,845,000, 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 1997, is subject to adjustment upon finalization of the purchase price allocation. The Company has gathered no information that indicates the final allocation of purchase price will differ materially from the preliminary estimates. Based on unaudited data, the following table presents selected financial information on a pro forma basis, assuming the Company and Orion had been combined since the beginning of 1995. 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 ------------------------------------------------------------------------ Revenues $251,207 Net income 19,239 Earnings per share: Basic .57 Diluted .54 The pro forma results are not necessarily indicative of future operations or the actual results that would have occurred had the acquisition of Orion been made at the beginning of 1995. 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. Two other plans, adopted in 1993 and 1997, permit the grant of a variety of stock and stock-based awards as determined by the human resources committee of the Company's Board of Directors (the Board Committee), including restricted stock, stock options, stock bonus shares, or performance-based shares. To date, only nonqualified stock options have been awarded under these plans. The option recipients and the terms of options granted under these plans are determined by the Board Committee. Generally, options granted to date are exercisable immediately, but are subject to certain transfer restrictions and the right of the Company to repurchase shares issued upon exercise of the options at the exercise price, upon certain events. The restrictions and repurchase rights 17PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 4. Employee Benefit Plans (continued) 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. A summary of the Company's stock option activity is as follows: 1997 1996 1995 ----------------- ---------------- ----------------- Weighted Weighted Weighted Number Average Number Average Number Average (Shares in of Exercise of Exercise of Exercise thousands) Shares Price Shares Price Shares Price -------------------------------------------------------------------------- Options outstanding, beginning of year 1,664 $14.99 1,557 $12.38 1,773 $12.14 Granted 111 19.00 303 27.17 27 17.65 Exercised (63) 7.92 (137) 9.12 (74) 8.16 Forfeited (128) 22.75 (59) 22.42 (169) 12.57 ----- ----- ----- Options outstanding, end of year 1,584 $14.93 1,664 $14.99 1,557 $12.38 ===== ====== ===== ====== ===== ====== Options exercisable 1,584 $14.93 1,664 $14.99 1,557 $12.38 ===== ====== ===== ====== ===== ====== Options available for grant 296 284 545 ===== ===== ===== 18PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 4. Employee Benefit Plans (continued) A summary of the status of the Company's stock options at January 3, 1998, is as follows: Options Outstanding and Exercisable ----------------------------------- Weighted Number Weighted Average Average of Remaining Exercise Range of Exercise Prices Shares Contractual Life Price ------------------------------------------------------------------------- (Shares in thousands) $ 4.70 - $10.96 398 1.5 years $ 7.13 10.97 - 17.21 878 7.8 years 15.22 17.22 - 23.47 134 7.8 years 19.07 23.48 - 29.73 174 5.5 years 28.10 ----- $ 4.70 - $29.73 1,584 6.0 years $14.93 ===== 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 1997, 1996, and 1995, the Company issued 9,445 shares, 9,503 shares, and 14,552 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 1997, 1996, and 1995 under the Company's stock-based compensation plans been determined based on the fair value at 19PAGE Thermedics Inc. 1997 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) 1997 1996 1995 ----------------------------------------------------------------------- Net income: As reported $41,492 $29,138 $17,174 Pro forma 39,454 27,960 17,004 Basic earnings per share: As reported 1.13 .80 .51 Pro forma 1.08 .77 .51 Diluted earnings per share: As reported 1.07 .75 .48 Pro forma 1.01 .72 .48 Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation expense may not be representative of the amount to be expected in future years. Pro forma compensation expense for options granted is reflected over the vesting period; therefore, future pro forma compensation expense may be greater as additional options are granted. The weighted average fair value per share of options granted was $8.81, $11.49, and $6.50 in 1997, 1996, and 1995, respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1997 1996 1995 ------------------------------------------------------------------------ Volatility 39% 39% 39% Risk-free interest rate 6.2% 5.7% 6.1% Expected life of options 5.6 years 5.0 years 3.7 years The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 401(k) Savings Plan The majority of the Company's full-time U.S. employees are eligible to participate in Thermo Electron's 401(k) savings plan. Contributions to the 401(k) savings plan are made by both the employee and the Company. Company contributions to the 401(k) plan are based upon the level of 20PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 4. Employee Benefit Plans (continued) employee contributions. For these plans, the Company contributed and charged to expense $1,758,000, $1,460,000, and $1,289,000 in 1997, 1996, and 1995, respectively. 5. Income Taxes The components of income before provision for income taxes and minority interest are as follows: (In thousands) 1997 1996 1995 ----------------------------------------------------------------------- Domestic $63,053 $43,172 $31,857 Foreign 5,844 8,325 3,710 ------- ------- ------- $68,897 $51,497 $35,567 ======= ======= ======= The components of the provision for income taxes are as follows: (In thousands) 1997 1996 1995 ----------------------------------------------------------------------- Currently payable: Federal $13,256 $12,058 $ 9,850 State 3,008 2,327 2,202 Foreign 2,049 3,618 1,783 ------- ------- ------- 18,313 18,003 13,835 ------- ------- ------- Net deferred (prepaid): Federal 496 (3,843) (1,633) State 145 24 (421) Foreign 721 (215) - ------- ------- ------- 1,362 (4,034) (2,054) ------- ------- ------- $19,675 $13,969 $11,781 ======= ======= ======= The Company and its majority-owned subsidiaries receive a tax deduction upon exercise of nonqualified stock options by employees for the difference between the exercise price and the market price of the Company's common stock on the date of exercise. The provision for income taxes that is currently payable does not reflect $1,591,000, $3,520,000, and $3,935,000 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 1997, 1996, and 1995, 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. 21PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 5. Income Taxes (continued) The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate of 35% to income before provision for income taxes and minority interest due to the following: (In thousands) 1997 1996 1995 ----------------------------------------------------------------------- Provision for income taxes at statutory rate $24,114 $18,024 $12,448 Increases (decreases) resulting from: Gain on issuance of stock by subsidiaries (5,976) (8,278) (1,206) State income taxes, net of federal tax 2,057 1,534 1,163 Amortization and write-off of cost in excess of net assets of acquired companies 401 3,256 232 Reduction in valuation allowance - (684) (854) Tax-exempt investment income - (11) (115) Tax benefit of foreign sales corporation (698) (437) (426) Foreign tax rate and regulation differential (125) (132) 485 Nondeductible expenses 107 228 137 Other, net (205) 469 (83) ------- ------- ------- $19,675 $13,969 $11,781 ======= ======= ======= Prepaid and deferred income taxes in the accompanying balance sheet consist of the following: (In thousands) 1997 1996 ------------------------------------------------------------- Prepaid (deferred) income taxes: Reserves and accruals $ 3,732 $ 4,455 Inventory reserves 3,869 2,234 Depreciation and amortization 1,912 958 Accrued compensation 1,988 1,380 Write-off of acquired technology (Note 3) 1,834 1,865 Tax loss and credit carryforwards 1,180 652 Trademarks and other intangible assets (1,069) (962) Allowance for doubtful accounts 328 1,079 Warranty reserves 107 934 Other, net 72 264 ------- ------- $13,953 $12,859 ======= ======= 22PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 5. Income Taxes (continued) Thermo Voltek has federal tax net loss carryforwards, subject to the limitations described below. These net operating loss carryforwards will begin to expire in 1999. Pursuant to U.S. Internal Revenue Code Sections 382 and 383, the utilization of the net operating loss carryforwards is limited to the tax benefit of a deduction of approximately $240,000 per year with any unused portion of this annual limitation carried forward to future years. As of January 3, 1998, net operating loss carryforwards totaled $2,500,000, including $600,000 that have not been benefited since they will expire unused. The Company has not recognized a deferred tax liability for the difference between the book basis and tax basis of its investment in the common stock of its domestic subsidiaries (such difference relates primarily to unremitted earnings and gains on issuance of stock by subsidiaries) because the Company does not expect this basis difference to become subject to tax at the parent level. The Company believes it can implement certain tax strategies to recover its investment in its domestic subsidiaries tax-free. A provision has not been made for U.S. or additional foreign taxes on $10,769,000 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. 6. Commitments The Company and its subsidiaries lease various office and manufacturing facilities under operating lease arrangements expiring from 1998 through 2003. The accompanying statement of income includes expenses from operating leases of $5,470,000, $5,689,000, and $3,416,000 in 1997, 1996, and 1995, respectively. Future minimum payments due under noncancellable operating leases as of January 3, 1998, are $5,345,000 in 1998; $4,030,000 in 1999; $3,224,000 in 2000; $2,281,000 in 2001; $2,077,000 in 2002; and $6,506,000 in 2003 and thereafter. Total future minimum lease payments are $23,463,000. 23PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 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) 1997 1996 ------------------------------------------------------------------------ Noninterest-bearing subordinated convertible debentures, due 2003, convertible at $32.68 per share $ 65,000 $ 65,000 3 3/4% Subordinated convertible debentures, due 2000, convertible into shares of Thermo Voltek at $7.83 per share 7,750 9,345 4 3/4% Subordinated convertible debentures, due 2004, convertible into shares of Thermo Cardiosystems at $31.415 per share 70,000 - Noninterest-bearing subordinated convertible debentures, due 1997, convertible into shares of Thermo Cardiosystems at $14.49 per share - 3,755 Other 52 14 -------- -------- 142,802 78,114 Less: Current maturity of long-term obligation 31 3,755 -------- -------- $142,771 $ 74,359 ======== ======== The Company's convertible obligations are guaranteed on a subordinated basis by Thermo Electron. The Company has agreed to reimburse Thermo Electron in the event Thermo Electron is required to make a payment under its guarantee of the Company's, 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 last trading date prior to conversion. During 1997, 1996, and 1995, convertible obligations of $4,650,000, $31,562,000, and $37,317,000, 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 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 outstanding of $5,506,000 and $5,262g,000 as of year-end 1997 and 1996, respectively. Amounts borrowed under these agreements are included in notes payable and current maturity of long-term obligation in the 24PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 7. Short- and Long-term Obligations and Other Financing Arrangements (continued) accompanying balance sheet, and are guaranteed by either the Company or Thermo Electron. The weighted average interest rate on these borrowings was 7.4% and 6.3% at year-end 1997 and 1996, respectively. Unused lines of credit were $12,305,000 as of year-end 1997. In addition, included in notes payable and current maturity of long-term obligation in 1997 is a $1,961,000 promissory note relating to an acquisition by Thermo Sentron, bearing interest at 7.94%. The promissory note was repaid in January 1998. 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 paid Thermo Electron annually an amount equal to 1.0% of the Company's revenues in 1997 and 1996 and 1.20% of the Company's revenues in 1995. Beginning in fiscal 1998, the Company will pay an annual fee equal to 0.8% of the Company's revenues. The annual fee is reviewed and adjusted annually by mutual agreement of the parties. The corporate services agreement is renewed annually but can be terminated upon 30 days' prior notice by the Company or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron Corporate Charter defines the relationships among Thermo Electron and its majority-owned subsidiaries). In addition, the Company 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 $3,143,000, $2,953,000, and $2,529,000 in 1997, 1996, and 1995, respectively. Management believes that the service fees charged by Thermo Electron and its subsidiaries are reasonable and that such fees are representative of the expenses the Company would have incurred on a stand-alone basis. For additional items such as employee benefit plans, insurance coverage, and other identifiable costs, Thermo Electron charges the Company based upon costs attributable to the Company. Research and Development Agreement Pursuant to a subcontract entered into in October 1993, Thermedics Detection performs research and development services for Thermo Coleman Corporation, which is the prime contractor under a contract with the U.S. Department of Energy. Thermo Coleman is a wholly owned subsidiary of Thermo Electron. Thermo Coleman paid Thermedics Detection $533,000, $619,000, and $829,000 for services rendered in 1997, 1996, and 1995, respectively. 25PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 8. Related-party Transactions (continued) Distribution Agreement 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, another member of The Olayan Group, which is indirectly controlled by Suliman S. Olayan, Ms. Olayan's father. Revenues recorded under this agreement totaled $480,000, $652,000, and $3,000 in 1997, 1996, and 1995, respectively. Management Contract One of the Company's executive employees in 1997 and two of the Company's executive employees in 1996 allocated 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 Thermo Electron's wholly owned biomedical businesses. In 1997, 1996, and 1995, the Company was reimbursed $194,000, $707,000, and $402,000, 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, the Company's short-term available-for-sale investments included $3,336,000 (amortized cost of $3,182,000) of 6 1/2% subordinated convertible debentures due 1997, which were purchased on the open market. The debentures have a par value of $3,100,000 and were issued by Thermo TerraTech Inc., a majority-owned subsidiary of Thermo Electron. The debentures were sold in 1997, resulting in a gain of $428,000, included in gain on sale of investments in the accompanying statement of income. 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. See Note 17 for additonal information pertaining to related-party common stock activity. 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 26PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 9. Contingency (continued) 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 January 3, 1998, the Company had reserved 4,250,895 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 1997, Thermedics Detection sold 2,671,292 shares of its common stock in an initial public offering at $11.50 per share, for net proceeds of $28,078,000, resulting in a gain of $17,075,000. In March 1996, Thermedics Detection sold 300,000 shares of its common stock in a private placement at $10.00 per share, for net proceeds of $3,000,000, resulting in a gain of $2,516,000. In November 1996, Thermedics Detection sold 383,500 shares of its common stock in a private placement at $10.75 per share, for net proceeds of $3,964,000, resulting in a gain of $3,165,000. In April 1996, Thermo Sentron sold 2,875,000 shares of its common stock in an initial public offering at $16.00 per share, 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. During 1997, 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. The Company's percentage ownership of its majority-owned subsidiaries at year end was as follows: 1997 1996 1995 ----------------------------------------------------------------------- Thermo Cardiosystems 51% 54% 52% Thermo Voltek 65% 51% 50% Thermo Sentron 71% 71% 100% Thermedics Detection 76% 94% 100% 27PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 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 affiliates, and long-term obligations. The carrying amount 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 long-term obligations was determined based on quoted market prices. The carrying amount and fair value of the Company's long-term obligations are as follows: 1997 1996 ------------------- -------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value --------------------------------------------------------------------- Current maturity of long-term obligation $ - $ - $ 3,755 $ 7,435 ======== ======== ======== ======== Convertible obligations $142,750 $130,201 $ 74,345 $ 62,666 Other long-term obligations 21 21 14 14 -------- -------- -------- -------- $142,771 $130,222 $ 74,359 $ 62,680 ======== ======== ======== ======== 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 that the expected future undiscounted cash flow from this business would be insufficient to recover the Company's investment. In addition, in 1996, the Company wrote off $4,909,000 of acquired technology associated with the acquisition of Nimbus by Thermo Cardiosystems (Note 3). 28PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 14. Business Segments, Geographical Information, and Concentrations of Risk The Company's principal businesses can be divided into two segments. The Company's Instruments and Other Equipment segment develops, manufactures, sells, and distributes precision equipment that weighs and inspects bulk materials and packaged goods; electrochemistry, microweighing, and other laboratory instruments; process detection instruments; security instruments; instruments that test electronic and electrical systems and components for immunity to electromagnetic interference; and a range of power electronics, including programmable power amplifiers and high-voltage power-conversion systems. The Company's Biomedical Products segment develops, manufactures, and sells LVAS; whole-blood, coagulation testing equipment, and skin-incision devices; and other biomedical products. The Company's Instruments and Other Equipment segment derived revenues from precision weighing and inspection equipment of $78,695,000, $70,027,000, and $67,474,000 in 1997, 1996, and 1995, respectively, and from laboratory products of $53,054,000 and $50,854,000 in 1997 and 1996, respectively. In addition, this segment derived revenues from electronic test instruments and power products of $44,648,000, $48,507,000, and $36,326,000 in 1997, 1996, and 1995, respectively. The Company's Biomedical Products segment derived revenues from LVAS devices of $24,969,000, $29,970,000, and $20,593,000 in 1997, 1996, and 1995, respectively. In addition, this segment derived revenues from blood-coagulation testing equipment and skin-incision devices of $35,873,000, $33,992,000, and $32,287,000 in 1997, 1996, and 1995, 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. 29PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 14. Business Segments, Geographical Information, and Concentrations of Risk (continued) (In thousands) 1997 1996 1995 ------------------------------------------------------------------------ Business Segment Information Revenues: Instruments and Other Equipment $227,717 $213,138 $136,742 Biomedical Products 79,949 78,939 71,299 -------- -------- -------- $307,666 $292,077 $208,041 ======== ======== ======== Income before provision for income taxes and minority interest: Instruments and Other Equipment $ 29,371 $ 22,725 $ 14,778 Biomedical Products 14,141 (718) 13,965 Corporate (a) (2,104) (2,112) (2,462) -------- -------- -------- Total operating income 41,408 19,895 26,281 Interest and other income, net 27,489 31,602 9,286 -------- -------- -------- $ 68,897 $ 51,497 $ 35,567 ======== ======== ======== Identifiable assets: Instruments and Other Equipment $325,219 $297,141 $213,755 Biomedical Products 183,734 133,048 146,269 Corporate (b) 27,599 26,510 26,225 -------- -------- -------- $536,552 $456,699 $386,249 ======== ======== ======== Depreciation and amortization: Instruments and Other Equipment $ 7,115 $ 7,304 $ 4,040 Biomedical Products 3,232 3,115 2,697 Corporate 14 12 29 -------- -------- -------- $ 10,361 $ 10,431 $ 6,766 ======== ======== ======== Capital expenditures: Instruments and Other Equipment $ 3,530 $ 5,185 $ 2,669 Biomedical Products 3,539 3,436 3,999 Corporate 18 - 23 -------- -------- -------- $ 7,087 $ 8,621 $ 6,691 ======== ======== ======== 30PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 14. Business Segments, Geographical Information, and Concentrations of Risk (continued) (In thousands) 1997 1996 1995 ------------------------------------------------------------------------ Geographical Information Revenues: United States $245,682 $227,077 $160,016 Europe 56,827 61,894 43,018 Other 18,362 14,311 13,084 Transfers among geographical areas (c) (13,205) (11,205) (8,077) -------- -------- -------- $307,666 $292,077 $208,041 ======== ======== ======== Income before provision for income taxes and minority interest: United States $ 37,231 $ 12,863 $ 23,961 Europe 3,461 7,366 3,170 Other 2,820 1,778 1,612 Corporate (a) (2,104) (2,112) (2,462) -------- -------- -------- Total operating income 41,408 19,895 26,281 Interest and other income, net 27,489 31,602 9,286 -------- -------- -------- $ 68,897 $ 51,497 $ 35,567 ======== ======== ======== Identifiable assets: United States $445,839 $371,326 $319,712 Europe 51,520 51,376 33,259 Other 11,594 7,487 7,053 Corporate (b) 27,599 26,510 26,225 -------- -------- -------- $536,552 $456,699 $386,249 ======== ======== ======== Export revenues included in United States revenues above (d): Europe $ 30,723 $ 24,769 $ 21,432 Other 49,001 42,233 25,602 -------- -------- -------- $ 79,724 $ 67,002 $ 47,034 ======== ======== ======== ____________ (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. 31PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 15. Earnings per Share Basic and diluted earnings per share were calculated as follows: (In thousands except per share amounts) 1997 1996 1995 ------------------------------------------------------------------------ Basic Net income $ 41,492 $ 29,138 $ 17,174 -------- -------- -------- Weighted average shares 36,700 36,417 33,660 -------- -------- -------- Basic earnings per share $ 1.13 $ .80 $ .51 ======== ======== ======== Diluted Net income $ 41,492 $ 29,138 $ 17,174 Effect of: Convertible obligations - 50 428 Majority-owned subsidiaries' dilutive securities (39) (441) (651) -------- -------- -------- Income available to common shareholders, as adjusted $ 41,453 $ 28,747 $ 16,951 -------- -------- -------- Weighted average shares 36,700 36,417 33,660 Effect of: Convertible obligations 1,989 1,346 1,055 Stock options 222 439 321 -------- -------- -------- Weighted average shares, as adjusted 38,911 38,202 35,036 -------- -------- -------- Diluted earnings per share $ 1.07 $ .75 $ .48 ======== ======== ======== The computation of diluted earnings per share excludes the effect of assuming the exercise of certain outstanding stock options because the effect would be antidilutive. As of January 3, 1998, there were 496,380 of such options outstanding, with exercise prices ranging from $17.73 to $29.73 per share. 32PAGE Thermedics Inc. 1997 Financial Statements Notes to Consolidated Financial Statements 16. Unaudited Quarterly Information (In thousands except per share amounts) 1997 First(a) Second Third Fourth --------------------------------------------------------------------- Revenues $72,057 $75,996 $76,217 $83,396 Gross profit 35,096 37,856 37,784 41,250 Net income 21,966 5,506 6,664 7,356 Earnings per share: Basic .60 .15 .18 .20 Diluted .56 .14 .17 .19 1996(b) First Second Third Fourth --------------------------------------------------------------------- Revenues $68,994 $71,094 $74,202 $77,787 Gross profit 33,185 34,121 37,668 38,966 Net income 5,257 9,754 6,359 7,768 Earnings per share: Basic .15 .27 .17 .21 Diluted .14 .25 .16 .20 ____________ (a) Results include a nontaxable gain of $17,075,000 from the issuance of stock by subsidiaries. (b) 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. 17. Subsequent Event On February 5, 1998, the Company's Board of Directors voted to issue 4,880,533 shares of its common stock to Thermo Electron in exchange for 100% of the stock of TMO TCA Holdings Inc., which is the beneficial owner of 3,355,705 shares of Thermo Cardiosystems' common stock. The issuance of the 3,355,705 shares of Thermo Cardiosystems common stock is subject to the approval by Thermo Cardiosystems' shareholders for the acquisition of International Technidyne from Thermo Electron (Note 3). The Company's issuance of the 4,880,533 shares of its common stock to Thermo Electron is subject to approval by the Company's shareholders. However, because Thermo Electron is the majority shareholder and intends to vote its shares in favor of the transaction, approval is assured. The shares of common stock will be exchanged at their respective fair market values as of February 5, 1998. 33PAGE Thermedics Inc. 1997 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 58%-owned subsidiary of Thermo Electron Corporation) and subsidiaries as of January 3, 1998, and December 28, 1996, and the related consolidated statements of income, shareholders' investment, and cash flows for each of the three years in the period ended January 3, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thermedics Inc. and subsidiaries as of January 3, 1998, and December 28, 1996, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts February 12, 1998 34PAGE Thermedics Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed immediately after this Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading "Forward-looking Statements." Overview The Company's business are divided into two segments: Instruments and Other Equipment, and Biomedical Products. The Instruments and Other Equipment segment includes the Company's Thermo Sentron Inc. 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 electrode-based chemical-measurement products that determine the quality of a wide variety of substances by measuring components, such as pH, ion, dissolved oxygen, and conductivity levels and are used in the agricultural, biomedical research, food-processing, pharmaceutical, and many other industries; its Thermedics Detection Inc. subsidiary, which develops, manufactures, and markets high-speed, on-line detection instruments used in a variety of industrial process applications, security applications, and laboratory analysis; and its Thermo Voltek Corp. subsidiary, which manufactures electronic-test instruments and a range of products related to power amplification, conversion, and quality. As part of its Biomedical Products segment, the Company's Thermo Cardiosystems Inc. subsidiary manufactures two implantable left ventricular-assist systems (LVAS): a pneumatic, or air-driven, system and an electric version. 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 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. Thermo Cardiosystems' International Technidyne Corporation subsidiary is a leading manufacturer of near-patient, whole-blood coagulation testing equipment and related disposables and also manufactures single-use, premium-quality, skin-incision devices. The Company also develops and 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. 35PAGE Thermedics Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Overview (continued) Approximately 46% of the Company's revenues in 1997 were derived from sales of products outside of the U.S., through export sales and sales by the Company's foreign subsidiaries. During 1997, the Company had exports from its U.S. and foreign operations to Asia of approximately 8% of total revenues. Exports to Asia in 1997 were primarily to Japan, China, and South Korea. Asia is experiencing a severe economic crisis, which has been characterized by sharply reduced economic activity and liquidity, highly volatile foreign-currency-exchange and interest rates, and unstable stock markets. The Company's export sales could be adversely affected by the unstable economic conditions in Asia. 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 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 1997 Compared With 1996 Total revenues increased to $307.7 million in 1997 from $292.1 million in 1996. Instruments and Other Equipment segment revenues increased to $227.7 million in 1997 from $213.1 million in 1996, primarily due to increases in revenues of $7.6 million, $8.7 million, and $2.2 million at Thermedics Detection, Thermo Sentron, and Orion, respectively, offset in part by a $3.9 million decrease in revenues at Thermo Voltek. Revenues at Thermedics Detection increased to $51.3 million in 1997 from $43.8 million in 1996. Revenues from Thermedics Detection's process detection instruments and related services increased to $22.4 million in 1997 from $16.0 million in 1996, primarily as a result of the fulfillment of a mandated product-line upgrade from The Coca-Cola Company to its existing installed base and, to a lesser extent, increased shipments of its InScan systems, introduced in 1996. The mandated product-line upgrade was completed in 1997. These increases were offset in part by a decrease in demand from The Coca-Cola Company for new installations in 1997. As a result of this decrease in demand and the completion of the product-line upgrade, the Company anticipates that sales of Alexus systems will slow in 1998, which is the primary reason for the $5.1 million decrease in the Company's backlog in 1997. Revenues from Thermedics Detection's EGIS security systems and related services increased to $10.3 million in 1997 from $7.1 million in 1996, primarily due to $3.2 million of shipments under a contract with the Federal Aviation Administration (FAA). Revenues from Thermo Sentron increased to $78.7 million in 1997 from $70.0 million in 1996, primarily due to an increase of $7.2 million related to an increase in product demand and $4.2 million due to acquisitions. These increases were offset in part by a decrease of $2.7 million due to the impact of a stronger U.S. dollar relative to currencies in foreign 36PAGE Thermedics Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations 1997 Compared With 1996 (continued) countries in which Thermo Sentron operates. Revenues from Thermo Voltek decreased to $44.6 million in 1997 from $48.5 million in 1996, primarily due to a lower demand for EMC test products, resulting from the declining influence of IEC 801, the European Union directive on electromagnetic compatibility that took effect January 1, 1996, and, to a lesser extent, a decline in the component-reliability market for electrostatic discharge test equipment resulting from a slowdown in capital expenditures by the semiconductor industry. These decreases in revenues at Thermo Voltek were offset in part by an increase in revenues of $5.8 million due to acquisitions. Biomedical Products segment revenues increased slightly to $79.9 million in 1997 from $78.9 million in 1996. Revenues from Thermo Cardiosystems decreased to $62.8 million in 1997 from $64.0 million in 1996, primarily due to a $6.6 million decrease in revenues from its air-driven LVAS, offset in part by a $1.9 million increase in revenues from its electric LVAS. Thermo Cardiosystems expects that revenues from sales of its LVAS will stabilize at approximately current levels until the electric system is approved in the U.S. for commercial sale. Thermo Cardiosystems believes that this approval could occur within the first six months of 1998; however, there can be no assurance that the Company will receive this approval within the expected time period, or at all. The decrease in revenues at Thermo Cardiosystems in 1997 was also offset in part by the inclusion of $2.0 million in revenues from an acquisition. In addition, revenues from International Technidyne and the Company's Polymer Products division increased $1.9 million and $1.8 million, respectively, during 1997 due to an increase in demand. The gross profit margin remained constant at 49% in 1997 and 1996. The gross profit margin for the Instruments and Other Equipment segment was 48% in both 1997 and 1996. The gross profit margin at Thermedics Detection increased primarily due to a change in product mix to higher-margin revenues from The Coca-Cola Company's mandated product line upgrade, field service efficiencies in 1997, and a change in sales mix to higher-margin revenues at Moisture Systems and Rutter. To a lesser extent, the gross profit margin improved at Thermedics Detection due to the effect in 1996 of a charge for inventory obsolescence in connection with planned product changes. In addition, the gross profit margin improved at Orion in 1997, primarily due to lower overhead costs at its new operating location. These increases were offset in part by a decrease in the gross profit margin at Thermo Voltek, primarily due to a decrease in sales of certain higher-margin EMC test products, as well as the effect of a decrease in total revenues. The gross profit margin for the Biomedical Products segment remained constant at 54% in 1997 and 1996. The gross profit margin at Thermo Cardiosystems decreased primarily due to a shift in the sales mix to the lower-margin electric LVAS and, to a lesser extent, increased warranty costs due to a company-initiated modification of certain of its LVAS, completed in the first quarter of 1997. This decrease was offset by improved margins at International Technidyne, primarily due to manufacturing efficiencies. Thermo Cardiosystems announced an overall 37PAGE Thermedics Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations 1997 Compared With 1996 (continued) price increase of approximately 10% in the electric LVAS product line, effective June 28, 1997, to help offset increased production costs. Thermo Cardiosystems will continue to be unable to earn a profit on sales of the electric LVAS in the U.S. until FDA approval of that system is obtained. The gross profit margin increased at the Company's Polymer Products division due in part to the effect of establishing certain inventory and related reserves in 1996. Selling, general, and administrative expenses as a percentage of revenues decreased to 28% in 1997 from 29% in 1996. Selling, general, and administrative expenses as a percentage of revenues decreased at Thermedics Detection due to $0.4 million of nonrecurring costs in 1996 and, to a lesser extent, an increase in revenues in 1997, offset in part by increased selling expenses as Thermedics Detection developed a sales force for its InScan and Flash-GC systems. Selling, general, and administrative expenses as a percentage of revenues increased at Thermo Cardiosystems due to higher marketing expenses as a result of an increase in its LVAS sales force and, to a lesser extent, promotional expenses at International Technidyne. Selling, general, and administrative expenses as a percentage of revenues also increased at Thermo Voltek due to the effect of a decrease in revenues, and severance and related costs incurred as part of a continuing evaluation of its lines of business. Research and development expenses increased to $24.3 million in 1997 from $21.4 million in 1996, primarily due to increased research and development expenses at Orion to develop new products and at Thermo Cardiosystems. The increase in research and development expenses at Thermo Cardiosystems primarily relates to a clinical trial being conducted to evaluate the electric LVAS as an alternative to medical therapy and, to a lesser extent, the inclusion of expenditures at Nimbus, acquired in December 1996. Thermo Cardiosystems expects research and development expenses to continue to increase over the life of the clinical trial, estimated at two to three years. There can be no assurance that the Company will complete this study or that it will receive FDA approval of the electric LVAS as an alternative to medical therapy during this time period, or at all. In 1996, the Company recorded nonrecurring expenses 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 (Note 3). Interest income increased to $13.3 million in 1997 from $10.8 million in 1996, due to higher average invested balances at Thermedics Detection and Thermo Sentron as a result of their initial public offerings of common stock in March 1997 and April 1996, respectively, and at Thermo Cardiosystems as a result of the issuance of $70.0 million principal amount of 4 3/4% subordinated convertible debentures in May 1997. Interest expense decreased to $3.4 million in 1997 from $3.8 million in 1996, primarily due to the repayment of $53.0 million of notes payable to Thermo Electron in September 1996, conversions of subordinated convertible obligations, and a reduction in short-term borrowings at 38PAGE Thermedics Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations 1997 Compared With 1996 (continued) Thermo Sentron, offset in part by Thermo Cardiosystems' issuance of debentures. 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 subsidiaries through the establishment of subsidiary-level stock option incentive programs, as well as capital to support the subsidiaries' growth. As a result of the sale of stock by subsidiaries, the Company recorded gains of approximately $17.1 million and $23.7 million in 1997 and 1996, respectively (Note 11). 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. 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 would 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 exposure draft addresses the consolidation issues in two parts: consolidation procedures, which includes proposed rule changes affecting the Company's ability to recognize gains on issuances of subsidiary stock, and consolidation policy, which does not address accounting for such gains. During 1997, the FASB decided to focus its efforts on the consolidation policy part of the exposure draft and to consider resuming discussion on consolidation procedures after completion of the efforts on consolidation policy. The timing and content of any final statement are uncertain. The effective tax rates were 29% and 27% in 1997 and 1996, respectively. The effective tax rates were below the statutory federal income tax rate primarily due to nontaxable gains on issuance of stock by subsidiaries, offset in part by the impact of state income taxes and nondeductible amortization of cost in excess of net assets of acquired companies. Minority interest expense decreased to $7.7 million in 1997 from $8.4 million in 1996, primarily due to lower profits at Thermo Cardiosystems and Thermo Voltek, offset in part by the minority interest associated with Thermedics Detection and Thermo Sentron. The Company is currently assessing the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems and on products sold as well as products purchased by the Company. The Company believes that its internal 39PAGE Thermedics Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations 1997 Compared With 1996 (continued) information systems and current products are either year 2000 compliant or will be so prior to the year 2000 without incurring material costs. There can be no assurance, however, that the Company will not experience unexpected costs and delays in achieving year 2000 compliance for its internal information systems and current products, which could result in a material adverse effect on the Company's future results of operations. The Company is presently assessing the effect that the year 2000 problem may have on its previously sold products. The Company is also assessing whether its key suppliers are adequately addressing this issue and the effect this might have on the Company. The Company has not completed its analysis and is unable to conclude at this time that the year 2000 problem as it relates to its previously sold products and products purchased from key suppliers is not reasonably likely to have a material adverse effect on the Company's future results of operations. 1996 Compared With 1995 Total revenues increased 40% to $292.1 million in 1996 from $208.0 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 and 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 EGIS security 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 $78.9 million in 1996 from $71.3 million in 1995. Revenues from Thermo Cardiosystems increased $11.1 million to $64.0 million in 1996, primarily due to a $9.4 million increase in LVAS sales and, to a lesser extent, a $1.7 million increase in sales of International Technidyne products. International Technidyne revenue growth resulted primarily from a $1.4 million increase in sales of skin-incision devices due to an increase in demand. These increases were 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 40PAGE Thermedics Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations 1996 Compared With 1995 (continued) the licensee. The Company recorded royalty income of $426,000 in 1996 and $197,000 in 1995 related to this agreement. The gross profit margin was 49% in 1996, compared with 47% 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 54% in 1996 from 53% in 1995, primarily from an increase in revenues in Thermo Cardiosystems' LVAS product line due to 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 29% 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, $0.4 million of 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 increased to $21.4 million in 1996 from $14.9 million in 1995, primarily due to the inclusion of expenses from Orion for a full year in 1996 and, to a lesser extent, increased research and development expenses at Thermo Voltek and Thermedics Detection. 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 (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 (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. The Company recorded gains of $23.7 million and $3.5 million in 1996 and 1995, respectively, from issuance of stock by subsidiaries (Note 11). The effective tax rate was 27% in 1996, compared with 33% 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 41PAGE Thermedics Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations 1996 Compared With 1995 (continued) subsidiaries and the elimination of the valuation allowance no longer required, offset in part by the nondeductible write-off of certain intangible assets at the Company's Corpak subsidiary, 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. Minority interest expense increased to $8.4 million in 1996 from $6.6 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. Liquidity and Capital Resources Consolidated working capital was $309.4 million at January 3, 1998, compared with $208.2 million at December 28, 1996. Cash, cash equivalents, and short- and long-term available-for-sale investments were $258.0 million at January 3, 1998, compared with $181.8 million at December 28, 1996. Of the $258.0 million balance at January 3, 1998, $231.7 million was held by the Company's majority-owned subsidiaries and the remainder by the Company and its wholly owned subsidiaries. During 1997, $38.9 million of cash was provided by operating activities. Cash of $2.9 million, provided by an increase in other current liabilities, was more than offset by the use of $5.4 million of cash to fund an increase in inventories. The increase in inventories related to an order received from the FAA, which resulted in increased inventory purchases at Thermedics Detection. Inventories at Orion increased to normal operating levels from a low level at year-end 1996, which was due to its relocation in the fourth quarter of 1996. Excluding available-for-sale investment activity, the Company's primary investing activities during 1997 included expenditures of $5.7 million for acquisitions (Note 3) and $7.1 million for purchases of property, plant, and equipment. During 1998, the Company expects to make capital expenditures of approximately $10.0 million. During 1997, the Company's financing activities provided $48.4 million in cash. In March 1997, Thermedics Detection issued shares of its common stock in an initial public offering for net proceeds of approximately $28.1 million (Note 11). In addition, in May 1997, Thermo Cardiosystems issued and sold $70.0 million principal amount of 4 3/4% subordinated convertible debentures due 2004 for net proceeds of $68.0 million (Note 7). The Company intends, for the foreseeable future, to maintain at least 50% ownership of its majority-owned subsidiaries. This may require the Company to purchase 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 these companies' outstanding shares increases, whether as a result of conversion of convertible notes orexercise of stock options issued by them, or otherwise. These or any other purchases may be made (i) in the open market or in negotiated 42PAGE Thermedics Inc. 1997 Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources (continued) transactions, (ii) directly from Thermo Electron or the relevant subsidiary, or (iii) in the case of Thermo Voltek, pursuant to the conversion of all or part of its subordinated convertible notes held by the Company. During 1997, the Company and certain of its majority-owned subsidiaries expended $9.1 million and $42.7 million, respectively, to purchase securities of the Company and certain of its majority-owned subsidiaries. These purchases were made pursuant to authorizations by the Company's and the applicable majority-owned subsidiaries' Boards of Directors. As of January 3, 1998, $0.8 million and $21.7 million remained under the Company's and its majority-owned subsidiaries' authorizations, respectively. In March 1998, the Company's Board of Directors authorized the repurchase, through March 5, 1999, of up to an additional $10.0 million of its own securities and those of its majority-owned subsidiaries in private and open markets, or in negotiated transactions. Any such purchases are funded from working capital. 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. In March 1998, Thermo Sentron reached a definitive agreement with Smiths Industries plc to acquire the three businesses that constitute the product-monitoring group of its Graseby plc division, for approximately $43.0 million in cash, net of cash acquired. The purchase price is subject to a post-closing adjustment. Graseby plc designs, manufactures, and distributes specialized packaged-goods equipment, including checkweighers, metal detectors, and thermal printers, primarily for use by food producers and pharmaceutical companies. The completion of this transaction is subject to the receipt of approvals from anti-trust authorities in the United States and Germany. While the Company currently has no other agreements to make any acquisitions, it expects that it would finance any acquisitions through a combination of internal funds, additional debt or equity financing from the capital markets, or short-term borrowings from Thermo Electron, although its has no agreement with Thermo Electron that assures funds will be available on acceptable terms or at all. The Company believes its existing resources are sufficient to meet the capital requirements of its existing operations for the foreseeable future. 43PAGE Thermedics Inc. 1997 Financial Statements Forward-looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause its actual results in 1998 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. 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 exposure draft addresses the consolidation issues in two parts: consolidation procedures, which includes proposed rule changes affecting the Company's ability to recognize gains on issuances of subsidiary stock, and consolidation policy, which does not address accounting for such gains. During 1997, the FASB decided to focus its efforts on the consolidation policy part of 44PAGE Thermedics Inc. 1997 Financial Statements Forward-looking Statements the exposure draft and to consider resuming discussion on consolidation procedures after completion of the efforts on consolidation policy. The timing and content of any final statement are uncertain. International Operations. Sales outside the U.S. have accounted for a significant percentage of the Company's total revenues. The Company intends to continue to expand its presence in international markets. International sales are subject to a number of risks, including the following: agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; foreign customers may have longer payment cycles; foreign countries may impose additional withholding taxes or otherwise tax the Company's foreign income, impose tariffs, or adopt other restrictions on foreign trade; fluctuations in exchange rates may affect product demand and adversely affect the profitability in U.S. dollars of products and services provided by the Company in foreign markets where payment for the Company's products and services is made in the local currency; U.S. export licenses may be difficult to obtain; and the protection of intellectual property in foreign countries may be more difficult to enforce. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business and results of operations. During 1997, the Company had exports from its U.S. and foreign operations to Asia of approximately 8% of total revenues. Exports to Asia in 1997 were primarily to Japan, China, and South Korea. Asia is experiencing a severe economic crisis, which has been characterized by sharply reduced economic activity and liquidity, highly volatile foreign-currency-exchange and interest rates, and unstable stock markets. The Company's export sales could be adversely affected by the unstable economic conditions in Asia. 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. 45PAGE Thermedics Inc. 1997 Financial Statements Forward-looking Statements 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 were 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 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' biomedical devices, including its 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. 46PAGE Thermedics Inc. 1997 Financial Statements Forward-looking Statements 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. In June 1997, Thermo Cardiosystems submitted a PMA supplemental application to receive FDA approval of its electric system for use as a bridge to transplant. This application is currently under review; however, no assurance can be given that the FDA will review this application on a timely basis or will grant approval once it completes its review. Significant 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 likely 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. In addition, the Company's coagulation-testing equipment can cost several thousand dollars per instrument. Without the financial support of 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' 47PAGE Thermedics Inc. 1997 Financial Statements Forward-looking Statements HeartMate pneumatic LVAS. Several major nongovernment insurers have already agreed to offer coverage for the pneumatic LVAS. HCFA's coverage policy could also extend to the electric LVAS once approved, although there can be no assurance such coverage will extend to the electric LVAS. In addition, some major nongovernment insurers currently offer coverage for the electric LVAS because of its investigational device exemption status as a category B device (eligible for Medicare coverage and payment). Even though reimbursement has been established by HCFA and by certain nongovernment insurers for the pneumatic LVAS, 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. 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. In addition, acceptance by these physicians of Thermo Cardiosystems' whole-blood coagulation monitoring systems and Coumadin monitors is also important to the success of Thermo Cardiosystems' business. Thermo Cardiosystems has developed working relationships with a number of leading medical centers, and its existing and proposed LVAS and its blood-coagulation monitoring systems 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. 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 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 48PAGE Thermedics Inc. 1997 Financial Statements Forward-looking Statements 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 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 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' LVAS business was engaged only in the research and development. 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 volume, 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 and/or components are approved for commercial sale. Thermo Cardiosystems does not have experience in the large-scale commercialization of LVAS medical devices. Although 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 LVAS 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 protect Thermo Cardiosystems completely in the event of a successful product liability claim. Effect of Government Regulations and Approvals on Market for Thermo Sentron's Products. The market for certain of Thermo Sentron's products, both in the United States and abroad, is subject to or influenced by various domestic and foreign clean air and consumer protection laws. Thermo Sentron designs, develops, and markets its products to meet customer needs created by existing and anticipated regulations, and any changes in these regulations may adversely affect consumer demand for Thermo Sentron's products. In addition, the marketing of certain of Thermo Sentron's products is dependent upon the receipt of regulatory and other approvals, including industry association approvals of the design, construction, and accuracy of Thermo Sentron's products. Delays in 49PAGE Thermedics Inc. 1997 Financial Statements Forward-looking Statements obtaining, or the failure to obtain, any such approvals could have a 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 many of Thermo Voltek's products results from efforts by manufacturers to comply with IEC 801, an EU directive that became effective on January 1, 1996. As the number of noncomplying manufacturers is reduced over time, demand for Thermo Voltek's products is likely to be adversely affected. In addition, if new EMC standards requiring new testing capabilities are enacted less frequently or if EMC standards become less strict or not strictly enforced, 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 Company beleives the FAA is of the opinion that, to date, no system has demonstrated that it meets all FAA standards under realistic airport operating conditions. As a result, the FAA has not mandated the installation of automated explosives-detection systems, and only a limited number of these systems have been deployed in the United States. The FAA first certified a computed X-ray tomography system for checked luggage in December 1994. Thermedics Detection's systems are trace detectors for which no FAA certification process for checked baggage, carry-on, or personal screening exists to date. Currently, Thermedics Detection is seeking FAA approval for Thermedics Detection's EGIS and Ramport systems for use by airlines in screening carry-on electronic items and luggage searches, however, there can be no assurance that such FAA approvals will be obtained. Each airline must seek this approval for each application. Although the FAA has provided significant funding to Thermedics Detection 50PAGE Thermedics Inc. 1997 Financial Statements Forward-looking Statements in connection with the development of its explosives-detection technology, there can be no assurance that any of Thermedics Detection's systems will ever meet this or any other United States certification standard. Any product utilizing a technology ultimately recommended or required by the FAA will have a significant competitive advantage in the market for explosives-detection devices. Unless the FAA takes action with respect to a particular explosives-detection product or technology, airlines will not be required to purchase or upgrade their security systems, including upgrading existing metal-detection equipment. Earnings of U.S. air carriers tends to fluctuate significantly from time to time. Any depression in the financial condition of such carriers would likely result in lower capital spending for discretionary items. Moreover, there can be no assurance that additional countries will mandate the implementation of effective explosives screening for airline baggage, carry-on items or personal, or that, if mandated, 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. The FAA has made purchases of, or placed orders for the purchase of, security equipment under this legislation, including an order to purchase $5.8 million of Thermedics Detection's EGIS systems. There can be no assurance, however, that this legislation will not be modified to reduce the funding for advanced explosives equipment, that the necessary appropriations will be made to fund further purchases of advanced explosives-detection equipment contemplated by the legislation, that trace-detection equipment such as the systems manufactured by Thermedics Detection will be mandated, or that, even if further appropriations are made and such equipment is mandated, any of Thermedics Detection's explosives-detection systems will be purchased for installation at any airports in the United States. Further, there can be no assurance that the U.S. will mandate the widespread use of these systems after completion of the initial purchases. Significance of Certain Customers to Thermedics Detection. Sales of process detection instruments and related services to bottlers licensed by The Coca-Cola Company (Coca-Cola Bottlers) were $13,194,000, $10,641,000, and $9,974,000 in 1997, 1996, and 1995, respectively. In 1997, Thermedics Detection completed the fulfillment of a mandated product-line upgrade for The Coca-Cola Bottlers. 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. Further, the Company intends to continue to develop and introduce new process detection products for the food, beverage, and other markets; however, there can be no assurance that Thermedics 51PAGE Thermedics Inc. 1997 Financial Statements Forward-looking Statements 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. Potential Impact of Year 2000 on Processing of Date-sensitive Information. The Company is currently assessing the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems and on products sold as well as products purchased by the Company. The Company believes that its internal information systems and current products are either year 2000 compliant or will be so prior to the year 2000 without incurring material costs. There can be no assurance, however, that the Company will not experience unexpected costs and delays in achieving year 2000 compliance for its internal information systems and current products, which could result in a material adverse effect on the Company's future results of operations. The Company is presently assessing the effect that the year 2000 problem may have on its previously sold products. The Company is also assessing whether its key suppliers are adequately addressing this issue and the effect this might have on the Company. The Company has not completed its analysis and is unable to conclude at this time that the year 2000 problem as it relates to its previously sold products and products purchased from key suppliers is not reasonably likely to have a material adverse effect on the Company's future results of operations. 52PAGE Thermedics Inc. 1997 Financial Statements Selected Financial Information (In thousands except per share amounts) 1997(a) 1996(b) 1995(c) 1994(d) 1993 ------------------------------------------------------------------------ Statement of Income Data: Revenues $307,666 $292,077 $208,041 $183,753 $104,545 Net income 41,492 29,138 17,174 12,695 7,633 Earnings per share: Basic 1.13 .80 .51 .39 .25 Diluted 1.07 .75 .48 .38 .25 Balance Sheet Data: Working capital $309,363 $208,170 $114,340 $131,578 $135,992 Total assets 536,552 456,699 386,249 306,691 251,874 Long-term obligations 142,771 74,359 45,201 82,551 59,130 Shareholders' investment 227,346 211,582 172,751 136,783 122,186 ------------ (a)Reflects a nontaxable gain of $17.1 million from the issuance of stock by subsidiaries and the May 1997 issuance of $70.0 million principal amount of 4 3/4% subordinated convertible debentures by Thermo Cardiosystems. (b)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. (c)Reflects the December 1995 acquisition of Orion. (d)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 Technology, Inc. 53PAGE Thermedics Inc. 1997 Financial Statements Common Stock Market Information The Company's common stock is traded on the American Stock Exchange under the symbol TMD. The following table sets forth the high and low sale prices of the Company's common stock for 1997 and 1996, as reported in the consolidated transaction reporting system. 1997 1996 ------------------- ------------------ Quarter High Low High Low -------------------------------------------------------------------- First $21 1/4 $16 5/8 $30 1/2 $23 1/4 Second 19 7/16 15 31 7/8 24 5/8 Third 19 7/8 15 1/8 31 1/8 20 1/8 Fourth 20 1/2 15 1/16 26 3/8 17 5/8 As of January 30, 1998, the Company had 2,358 holders of record of its common stock. This does not include holdings in street or nominee names. The closing market price on the American Stock Exchange for the Company's common stock on January 30, 1998, was $15 1/4 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. (symbol 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, (781) 622-1111. A mailing list is maintained to enable shareholders whose stock is held in street name, and other interested individuals, to receive quarterly reports, annual reports, and press releases as quickly as possible. Distribution of printed quarterly reports is limited to the second quarter report only. All material will be available from Thermo Electron's Internet site (http://www.thermo.com/subsid/tmd1.html). Stock Transfer Agent BankBoston is the stock transfer agent and maintains shareholder activity records. The agent will respond to questions on issuance of stock certificates, change of ownership, lost stock certificates, and change of address. For these and similar matters, please direct inquiries to: BankBoston c/o Boston EquiServe Limited Partnership P.O. Box 8040 Boston, Massachusetts 02266-8040 (617) 575-3120 54PAGE Thermedics Inc. 1997 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 January 3, 1998, as filed with the Securities and Exchange Commission, may be obtained at no charge by writing to John N. Hatsopoulos, Chief Financial Officer, Thermedics Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046. Annual Meeting The annual meeting of shareholders will be held on Monday, June 1, 1998, at 1:30 p.m., at the Hyatt Regency Hotel, Scottsdale, Arizona. 55PAGE EX-21 6 Exhibit 21 THERMEDICS INC. As of January 30, 1998, the Registrant owned the following subsidiaries: STATE OR JURISDICTION PERCENT NAME OF OF INCORPORATION OWNERSHIP Corpak Inc. Massachusetts 100 Walpak Company Illinois 100 Orion Research, Inc. Massachusetts 100 Advanced Sensor Technology Massachusetts 100 Orion Research Limited United 100 Kingdom Orion Research Puerto Rico, Inc. Delaware 100 Russell pH Limited Scotland 100 Thermedics Detection Inc. Massachusetts 75.83 Detection Securities Corporation Massachusetts 100 Moisture Systems Corporation Ltd. United 100 Kingdom Rutter & Co. Netherlands 100 Rutter Instrumentation S.A.R.L. France 90 Systech B.V. Netherlands 50 ThermedeTec Corporation Delaware 100 Thermedics Detection de Argentina S.A.Argentina 100 (1% of which shares are owned directly by Thermedics Detection Inc.) Thermedics Detection de Mexico, S.A. Mexico 100 de C.V. Thermedics Detection GmbH Germany 100 Thermedics Detection Limited United 100 Kingdom Thermedics Detection Scandinavia AS Norway 100 Thermo Sentron Inc. Delaware 70.95 (additionally, 6.86% 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 S.R.L. Italy 100 Ramsey Technology Inc. Massachusetts 100 Xuzhou Ramsey Technology Co., Limited China 50* Page 1PAGE Exhibit 21 THERMEDICS INC. STATE OR JURISDICTION PERCENT NAME OF OF INCORPORATION OWNERSHIP 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 100 Kingdom Hitech Electrocontrols Limited United 100 Kingdom Hitech Licenses Ltd. United 100 Kingdom Hitech Metal Detectors Ltd. United 100 Kingdom Westerland Engineering Ltd. United 100 Kingdom Thermo Sentron SEC Corporation Massachusetts l00 Thermo Sentron (South Africa) Pty. Ltd. South Africa 100 TMD Securities Corporation Massachusetts 100 Thermo Cardiosystems Inc. Massachusetts 50.64 (additionally, 8.84% of the shares are owned directly by The Thermo Electron Companies Inc.) International Technidyne Corporation Delaware 100 International Technidyne United 100 Corporation Limited Kingdom Nimbus Inc. Massachusetts 100 TCA Securities Corporation Massachusetts 100 Thermo Voltek Corp. Delaware 65.28 (additionally, 2.69% of the shares are owned directly by The Thermo Electron Companies Inc.) Thermo Voltek Europe B.V. Netherlands 100 Comtest Instrumentation, B.V. Netherlands 100 Comtest Italia S.R.L. Italy 100 Comtest Limited United 100 Kingdom Milmega Limited United 100 Kingdom TVL Securities Corporation Delaware 100 UVC Realty Corp. New York 100 * Joint Venture/Partnership Page 2 EX-23 7 Exhibit 23 Consent of Independent Public Accountants ----------------------------------------- As independent public accountants, we hereby consent to the incorporation by reference of our report for Thermedics Inc. dated February 12, 1998, included in or made a part of this Form 10-K, into the Company's previously filed Registration Statement No. 2-93746 on Form S-8, Registration Statement No. 33-00183 on Form S-8, Registration Statement No. 2-93747 on Form S-8, Registration Statement No. 33-8992 on Form S-8, Registration Statement No. 33-31621 on Form S-8, Registration Statement No. 33-9215 on Form S-8, Registration Statement No. 33-43707 on Form S-3, Registration Statement No. 33-40866 on Form S-3, Registration Statement No. 33-64070 on Form S-8, Registration Statement No. 33-86972 on Form S-8, Registration Statement No. 33-86974 on Form S-8, Registration Statement No. 033-65279 on Form S-8, Registration Statement No. 033-61435 on Form S-8, Registration No. 333-2149 on Form S-3, and Registration No. 333-32035 on Form S-3. Arthur Andersen LLP Boston, Massachusetts March 17, 1998 EX-27.1 8
5 THIS SCHEDULE CONATAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANANCIAL STATEMENTS. 1,000 YEAR JAN-03-1998 JAN-03-1998 187,012 58,317 65,695 4,207 59,574 379,160 55,597 33,986 536,552 69,797 142,771 0 0 3,685 223,661 536,552 307,666 307,666 155,680 155,680 24,270 815 3,398 68,897 19,675 41,492 0 0 0 41,492 1.13 1.07
EX-27.2 9
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-30-1995 DEC-30-1995 37,413 77,916 50,813 4,244 47,947 219,768 40,899 21,452 386,249 105,428 45,201 0 0 3,399 169,352 386,249 208,041 208,041 110,935 110,935 14,874 689 3,677 35,567 11,781 17,174 0 0 0 17,174 .51 .48
EX-27.3 10
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINACIAL STATEMENTS. 1,000 3-MOS DEC-28-1996 MAR-30-1996 48,745 75,850 59,319 4,493 52,908 242,954 43,988 23,486 422,415 136,924 32,706 0 0 3,647 185,959 422,415 68,994 68,994 35,809 35,809 4,974 202 1,278 10,659 3,332 5,257 0 0 0 5,257 .15 .14
EX-27.4 11
5 THIS SCHEUDLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-28-1996 JUN-29-1996 131,416 85,823 60,189 4,747 54,011 337,220 44,880 25,031 504,601 121,118 88,073 0 0 3,679 198,771 504,601 140,088 140,088 72,782 72,782 23,090 606 2,537 24,775 5,060 15,011 0 0 0 15,011 .41 .40
EX-27.5 12
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THEMEDICS INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-28-1996 SEP-28-1996 89,189 67,262 62,722 4,384 54,468 280,079 46,701 26,689 452,466 69,301 82,543 0 0 3,682 198,987 452,466 214,290 214,290 109,316 109,316 28,554 883 3,530 39,582 10,629 21,370 0 0 0 21,370 .59 .55
EX-27.6 13
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 82,800 65,054 67,686 4,903 54,230 279,580 48,892 27,342 456,699 71,410 74,359 0 0 3,684 207,898 456,699 292,077 292,077 148,137 148,137 39,000 1,352 3,770 51,497 13,969 29,138 0 0 0 29,138 .80 .75
EX-27.7 14
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-03-1998 MAR-29-1997 130,252 65,272 63,436 4,891 56,105 325,438 50,560 28,897 488,312 69,906 73,465 0 0 3,685 225,585 488,312 72,057 72,057 36,961 36,961 5,584 202 269 26,991 3,764 21,966 0 0 0 21,966 .60 .56
EX-27.8 15
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JAN-03-1998 JUN-28-1997 168,344 57,576 65,426 4,851 59,905 361,576 52,220 30,643 533,903 79,011 143,464 0 0 3,685 212,085 533,903 148,053 148,053 75,101 75,101 11,811 285 983 39,659 8,938 27,472 0 0 0 27,472 .75 .71
EX-27.9 16
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFEENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-03-1998 SEP-27-1997 165,419 60,404 66,802 4,151 61,505 365,308 53,917 32,385 535,601 75,983 143,464 0 0 3,685 216,911 535,601 224,270 224,270 113,534 113,534 17,752 486 2,185 53,923 14,391 34,136 0 0 0 34,136 .93 .88
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