-----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, MwnsHA/0MiDRRMDOlo/9Vd5ZR9mumKOqW8PIcx8ykVOY80s5kNU5+WUtCCe7hb+w u6iGK+0ELluiHxS8l/H2FQ== 0000721356-99-000006.txt : 19990319 0000721356-99-000006.hdr.sgml : 19990319 ACCESSION NUMBER: 0000721356-99-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990318 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: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09567 FILM NUMBER: 99567547 BUSINESS ADDRESS: STREET 1: 470 WILDWOOD ST STREET 2: P O BOX 2697 CITY: WOBURN STATE: MA ZIP: 01888-1799 BUSINESS PHONE: 7819383786 MAIL ADDRESS: STREET 1: 81 WYMAN STREET STREET 2: P.O. BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02254 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------------------------------------------- FORM 10-K (mark one) [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 2, 1999 [ ] 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 Identification No.) incorporation or organization) 470 Wildwood Street, P.O. Box 2999 Woburn, Massachusetts 01888-1799 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (781) 622-1000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ---------------------------- ----------------------------------------- Common Stock, $.10 par value American Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), 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 29, 1999, was approximately $95,552,000. As of January 29, 1999, the Registrant had 41,696,696 pro forma shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended January 2, 1999, are incorporated by reference into Parts I and II. Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 27, 1999, are incorporated by reference into Part III. PART I Item 1. Business (a) General Development of Business The businesses of Thermedics Inc. (the Company or the Registrant) operate in four reportable segments: Quality Assurance and Security Products, Precision Weighing and Inspection Equipment, Heart Assist and Blood Testing Devices, and Power Electronics and Test Equipment. Through the Company's Thermedics Detection Inc. subsidiary, the Quality Assurance and Security Products segment develops, manufactures, and markets high-speed, detection and measurement instruments used in a variety of on-line industrial process applications, security applications, and for laboratory analysis. On May 6, 1998, Thermedics Detection acquired Thermedics' Orion laboratory products division in exchange for the right to receive 5,961,225 shares of Thermedics Detection common stock. Orion manufactures electrochemistry systems that determine the quality of a wide variety of substances, including food, cosmetics, and household products by measuring components such as pH, specific ion concentration, dissolved oxygen, and conductivity. The issuance of the 5,961,225 shares of Thermedics Detection common stock issuable in the merger was approved by the January 1999 vote of Thermedics Detection shareholders. The Company's Precision Weighing and Inspection Equipment segment includes the Company's Thermo Sentron Inc. subsidiary, which develops, manufactures, and markets high-speed precision-weighing and inspection equipment for industrial production and packaging lines. The Heart Assist and Blood Testing Devices segment consists of the Company's Thermo Cardiosystems Inc. subsidiary, which has developed two implantable left ventricular-assist systems (LVAS): a pneumatic, or air-driven, system and an electric version. Thermo Cardiosystems' International Technidyne Corporation subsidiary is a leading manufacturer of near-patient, whole-blood coagulation testing equipment and related disposables and also manufactures premium-quality, single-use skin-incision devices. The Power Electronics and Test Equipment segment, through the Company's Thermo Voltek Corp. subsidiary, designs, manufactures, and markets a range of products related to power amplification, conversion, and quality and electronics-test instruments. On March 31, 1998, the Company proposed to acquire, through a merger, all of the outstanding shares of common stock of Thermo Voltek that the Company does not own, other than shares owned by Thermo Electron, at a price of $7.00 per share in cash. A meeting of Thermo Voltek's shareholders will occur on March 25, 1999, to consider this matter. The proposed merger is discussed in Note 16 to Consolidated Financial Statements in the Registrant's Fiscal 1998* Annual Report to Shareholders, which information is incorporated herein by reference. In addition, the Company develops, manufactures, and markets enteral nutrition-delivery systems and a line of medical-grade polymers used in medical disposables and in nonmedical, industrial applications, including safety glass and automotive coatings. The Company was incorporated in 1983 under the laws of Massachusetts as a wholly owned subsidiary of Thermo Electron. On February 5, 1998, the Company's Board of Directors voted to issue 4,880,533 shares of its common stock to Thermo Electron in exchange for 3,355,705 shares of Thermo Cardiosystems' common stock. 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 at a meeting to occur on March 31, 1999. 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. As of January 2, 1999, on a pro forma - -------------------- * References to 1998, 1997, and 1996 herein are for the fiscal years ended January 2, 1999, January 3, 1998, and December 28, 1996, respectively. 2 basis, assuming the completion of the transaction discussed above, Thermo Electron owned 30,850,049 shares of the Company's common stock, representing 74% of such stock outstanding. Thermo Electron is a world leader in monitoring, analytical, and biomedical instrumentation; biomedical products including heart-assist devices, respiratory-care equipment, and mammography systems; and paper recycling and papermaking equipment. Thermo Electron also develops alternative-energy systems and clean fuels, provides a range of services including industrial outsourcing and environmental-liability management, and conducts research and development in advanced imaging, laser, and electronic information-management technologies. 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 1998 Annual Report to Shareholders for a description of the Company's outstanding stock options and convertible debentures. During 1998, Thermo Electron purchased 4,828,895 shares of the Company's common stock in the open market for $52.8 million. Additionally, during 1998, Thermo Electron purchased in the open market 882,450 shares of common stock of Thermedics Detection for $8.2 million and 454,224 shares of common stock of Thermo Sentron for $4.3 million. During 1998, Thermo Electron announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. Under this plan, the Company may acquire Thermo Electron's wholly owned biomedical group for shares of Company common stock and the Company's equity interest in its Thermo Sentron, Thermedics Detection, and Thermo Voltek subsidiaries. Thermo Electron may, in turn, take Thermo Sentron and Thermedics Detection private, and shareholders of these subsidiaries would receive cash in exchange for their shares of common stock. The proposed transactions are subject to a number of conditions, as outlined in Note 16 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders, which information is incorporated herein by reference. Forward-looking Statements Forward-looking statements, within the meaning of Section 21E of the Securities and Exchange Act of 1934, are made throughout this Annual Report on Form 10-K. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words, "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Forward-looking Statements" in the Registrant's 1998 Annual Report to Shareholders, which statements are incorporated herein by reference. (b) Financial Information About Segments Financial information concerning the Company's segments is summarized in Note 13 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders, which information is incorporated herein by reference. (c) Description of Business (i) Principal Products and Services 3 Quality Assurance and Security Products Detection Instruments Thermedics Detection supplies high-speed detection and measurement systems to examine a variety of products and substances either on-line or in a laboratory to ensure their quality. The ALEXUS(R) systems detect trace amounts of constituents that would affect product quality in refillable plastic beverage containers. The InScan(R) high-speed X-ray imaging system uses high-speed X-ray imaging technology to determine accurate fill volume, net volume, proper contents, and package integrity of containers for the beverage, food, and other industries. Through its Moisture Systems division, Thermedics Detection designs, manufactures, and markets equipment that uses near-infrared spectroscopy to measure moisture and other product constituents, including fats, proteins, oils, flavorings, solvents, adhesives, and coatings, in a variety of products as they move along manufacturing lines. These systems are used across the food, pharmaceutical, chemical, petrochemical, tobacco, forest products, paper converting, plastics, textiles, corrugating, and other industries. Thermedics Detection's high-speed gas chromatograph, called Flash-GC(TM), provides information on the composition of a wide range of substances, such as pharmaceuticals, food, and water, at speeds 20 to 50 times faster than conventional gas chromatographs, while its EZ-Flash(TM) system is an upgrade kit that can be integrated with virtually any conventional gas chromatograph to enable it to conduct chemical analyses up to 30 times faster. Also through Thermedics Detection, the Company produces security instruments that use trace particle- and vapor-detection techniques for forensics, search, and screening applications under the direction of police, border police, transportation authorities, and carriers. Thermedics Detection's principal security instrument is the EGIS(R) system, a highly sensitive particle- and vapor-detection system for screening 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. Currently, more than 275 EGIS units are deployed at airports, border crossings, and other checkpoints. In addition, EGIS units have been used in highly visible forensic investigations, including the crash of TWA Flight 800, as well as the bombings in Oklahoma City, at New York's World Trade Center, and at locations in Israel, Buenos Aries, and the United Kingdom. In 1998, Thermedics Detection introduced a new line of benchtop explosives-detection systems based on its EGIS technology. This family of products includes the EGIS II, the more sensitive EGIS III, and the EGIS IV, Thermedics Detection's most sensitive explosives detector to date. Thermedics Detection also has developed SecurScan(TM), a walk-through explosives detector. During 1998, 1997, and 1996, the Company derived revenues of $40.3 million, $51.3 million, and $43.8 million, respectively, from its detection instruments. Laboratory Products Through its Orion subsidiary, Thermedics Detection manufactures a wide range of electrochemistry products that determine the quality of many substances by measuring their pH, specific ion concentration, dissolved oxygen, and conductivity. Orion's products are used in the food, beverage, pharmaceutical, chemical, environmental analysis, drinking water, wastewater treatment, agricultural, biomedical research, and many other industries. Pure water monitors, also marketed under the Orion name, use ion-selective technology to evaluate water quality in the power, semiconductor, drinking water, and pharmaceutical industries. Other products include microweighing equipment and titration systems. During 1998, 1997, and 1996, the Company derived revenues of $51.3 million, $53.1 million, and $50.9 million, respectively, from its laboratory products. 4 Precision Weighing and Inspection Equipment Thermo Sentron serves two principal markets: packaged goods and bulk materials. Thermo Sentron's products for the packaged-goods market include a broad line of checkweighing equipment and metal detectors that can be integrated at various stages in production lines for process control and quality assurance, as well as hot foil and thermal printers and X-ray inspection equipment. These products are sold primarily to customers in the food-processing, pharmaceutical, mail-order, and other diverse industries. Products in Thermo Sentron's bulk-materials line include conveyor-belt scales, solid level-measurement and conveyor-monitoring systems, sampling systems, and small-capacity feeders. These products are sold primarily to customers in the mining and material-processing industries, as well as electric utilities and chemical and other manufacturing companies. In June 1998, Thermo Sentron acquired the three businesses that constituted the product-monitoring group of Graseby Limited (the product-monitoring businesses), a subsidiary of Smiths Industries plc. The product-monitoring businesses design, manufacture, and distribute specialized packaged-goods equipment, including checkweighers and metal detectors, for the food and pharmaceutical industries. In February 1997, Thermo Sentron acquired the business of RCC Industrial Electronics Pty. Limited, an Australia-based manufacturer of in-motion checkweighers for the food and pharmaceutical industries. In July 1997, Thermo Sentron acquired Westerland Engineering Ltd., a U. K.-based manufacturer of process-weighing and control equipment. Heart Assist and Blood Testing Devices 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 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's air-driven LVAS received the CE Mark required for commercial sale of medical devices in all European Community countries. In August 1998, the Medical Devices Bureau of Health Canada issued a Notice of Compliance for the Company's air-driven HeartMate LVAS, permitting its sale throughout Canada. 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 clinical trials of the HeartPak portable pneumatic driver. The Company is currently evaluating the safety of the system in the hospital, and the Company also plans to 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 received 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, Europe, and other regions, and is also implanted as an alternative to heart transplant in Europe and other regions. In August 1998, the Medical Devices Bureau of Health Canada issued a Notice of Compliance for the 5 Company's electric system, permitting its sale throughout Canada. In September 1998, the FDA approved the electric system for commercial sale as a bridge to transplant for patients awaiting heart transplantation. In December 1995, the FDA approved the protocol for conducting clinical trials of the electric LVAS as a long-term solution for nontransplant candidates. The trial is expected to compare the results of approved patients using the device to a similar number using drug therapy. In December 1997, the FDA approved the Company's proposal to broaden the entrance criteria and increase the number of participating sites under this trial. The Company estimates that it will complete this trial in two to three years; however, no assurance can be given that the Company will complete this study in this time period or that it will receive FDA approval after the trial or at all. During 1998, 1997, and 1996, the Company derived revenues of $30.3 million, $27.0 million, and $30.0 million, respectively, from its LVAS. Blood-testing Equipment and Skin-incision Devices. Thermo Cardiosystems' International Technidyne subsidiary manufactures 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 hemostatis information. Blood management of this type is essential for cardiopulmonary bypass surgery and angioplasty. The ProTime(R) Microcoagulation System is designed to allow self-testing for patients who take the blood-thinning drug warfarin (Coumadin). International Technidyne also manufactures a family of single-use skin-incision devices for drawing blood from adults, children, and infants. During 1998, 1997, and 1996, the Company derived revenues of $36.5 million, $35.9 million, and $34.0 million, respectively, from its blood-testing equipment and skin-incision devices. Power Electronics and Test Equipment Through its Thermo Voltek subsidiary, the Company designs, manufactures, and markets a range of products related to power amplification and conversion as well as instruments that test electronic systems and components. The Company's power products include radio frequency (RF) and microwave power amplifiers, power-conversion equipment, and application-specific power supplies. These power products are used in communications, broadcast, research, and medical imaging applications. Thermo Voltek'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. During 1997 and 1998, Thermo Voltek 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 and 1998 the Company implemented certain operational, organizational, and personnel changes. In November 1998, Thermo Voltek sold substantially all of the assets, excluding real property, of its Universal Voltronics division to an unrelated buyer. The purchase price for the transferred assets was $2,500,000 in cash, $2,250,000 of which had been received as of year-end 1998. 6 Other The Company's research relating principally to the development of its LVAS has resulted in the development of proprietary medical-grade plastics marketed under the names Tecoflex(R) and Tecothane(R). Tecoflex and Tecothane are thermoplastic polyurethanes used in medical disposables and industrial products. The Company sells Tecoflex and Tecothane in bulk form for fabrication by the customer, and also extrudes precision tubing to customer specifications. The Company's Corpak 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 catheters for peritoneal dialysis. (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 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, quality assurance and security instruments, electronics-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 1998, 1997, and 1996, the Company expended $26.6 million, $24.3 million, $21.4 million, respectively, on internally sponsored research and development programs, and $4.2 million, $2.9 million, and $1.4 million, respectively, on research and development programs sponsored by others. As of January 2, 1999, 168 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 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 alternative materials or components to the original materials or components, and the amount of third-party testing that may have already been completed on alternative materials or components. There can be no assurance that the substitution of alternative materials or components will not cause delays in 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. 7 In addition, there can be no assurance that third parties will not assert claims against the Company that the Company infringes the intellectual property rights of such parties. The Company could incur substantial costs and diversion of management resources with respect to the defense of any such claims, which could have a material adverse effect on 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. In general, an owner of intellectual property can prevent others from using such property without a license and is entitled to damages for unauthorized usage. The Company has investigated the bases of the allegation and, based on the opinion of its counsel and the Company's assessment of the proceedings in the United States Patent and Trademark Office to date, it believes that if it were sued on these bases, it would have meritorious defenses. Given the inherent uncertainties in dispute resolution, however, if the Company were sued and the outcome were unfavorable, the Company's results of operations or financial condition could be materially adversely affected in amounts the Company cannot reasonably estimate. In August 1998, Thermo Cardiosystems obtained an exclusive license to incorporate technology developed by Sulzer Electronics Ltd. into an advanced version of Thermo Cardiosystems' LVAS, HeartMate III. Sulzer Electronics Ltd., based in Switzerland, is a company within the Sulzer Corporation. HeartMate III is a miniature centrifugal pump featuring a magnetically controlled system that has been developed by Sulzer Electronics' Magnetics Group. Quality Assurance and Security Devices The Company has certain licenses to the technology resulting from its customer-sponsored development of the ALEXUS system. The Company's patents and agreements have varying lives ranging from one year to approximately 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 1998, 1997, and 1996. 8 (viii) Backlog The Company's backlog of firm orders at year-end 1998 and 1997 was:
(In thousands) 1998 1997 - ---------------------------------------------------------------------------------------- -------- --------- Quality Assurance and Security Products $ 6,065 $ 9,374 Precision Weighing and Inspection Equipment 14,683 13,142 Heart Assist and Blood Testing Devices 1,818 2,556 Power Electronics and Test Equipment 5,397 10,218 Other 1,843 1,292 ------- -------- $29,806 $ 36,582 ======= ========
Certain of these orders are cancelable by the customer upon payment of a cancellation charge. The Company anticipates that substantially all of the backlog at the end of 1998 will be shipped or completed during 1999. The decrease in backlog at the Quality Assurance and Security Products segment resulted primarily from completion of large orders for quality-assurance and security systems in 1998. The decrease in backlog at the Power Electronics and Test Equipment segment resulted primarily from lower demand. 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 Quality Assurance and Security Products The Company's quality assurance products compete with systems manufactured by numerous companies. The Company believes, however, that these companies are generally focused on particular niches in the process detection systems market, only in some of which the Company competes. Competition in the markets for each of the Company's quality assurance systems is based primarily on performance, durability, service and, to a lesser extent, price. The Company believes that its systems' performance and speed, as well as the Company's reputation for developing superior new technologies and for the innovative application of existing technologies to a variety of high-speed production environments and product quality-assurance problems, are competitive advantages. In the security instrument market, the Company competes with a small number of companies, including other makers of chemical trace detection instruments, and, to a lesser degree, makers of enhanced X-ray detectors. Competition in this market is based primarily on performance, including speed, accuracy, and the range of explosives that can be detected; ease of use; service; and price. The Company's principal competitor in the trace detection market is Barringer Technologies Inc., a Canadian firm that has placed several trace detectors in airport applications. In the laboratory products market, the Company competes with several international companies. The Company competes on the basis of performance, service, technology, and price. Competitors include Corning, Fisher Scientific, Mettler-Toledo, and Beckman Coulter. 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 9 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. Heart Assist and Blood Testing Devices Left Ventricular-assist Systems. The Company is aware of one other company that has received PMA approval from the FDA for an implantable LVAS similar to the Company's. Also, the Company is aware of one other company that has received commercial approval from the FDA 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 November, this company announced that it had received approval from the FDA for its IDE for a portable power source. In addition, the Company is aware that a total artificial heart is currently undergoing clinical trials. The Company is aware that other cardiac-assist devices are in various stages of development by other companies. 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 policies of government and private insurers. Any product for which reimbursement is not available from such third-party payors will be at a significant competitive disadvantage. Blood-testing Equipment and Skin-incision Devices. International Technidyne's principal competitor for the HEMOCHRON coagulation monitoring instruments, used in the operating room and in cardiac catheterization, is the HemoTec division of Medtronic, Inc. The Roche Group competes with the ProTime with a blood coagulation monitor which is marketed to clinics and also for patient self-testing. There are also several new competitors that have recently entered the blood coagulation monitoring market. ITC's products compete primarily on the basis of reputation, utility, and price. The skin-incision devices compete with products offered by a number of companies including Organon Teknika; Becton, Dickinson and Company; and Owen-Mumford. The incision devices compete primarily on the basis of safety, quality, and reputation. Power Electronics and Test Equipment 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. 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. Other In the market for medical-grade polymers and enteral nutrition-delivery systems, the Company competes primarily with large pharmaceutical, medical-device, and chemical companies, many of which have substantially greater financial, technical, and human resources than those of the Company. Competition within these markets is intense, and is based primarily on price, efficacy, and technological advances. 10 (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 2, 1999, the Company employed 2,045 people. (d) Financial Information About Geographic Areas Financial information about geographic areas is summarized in Note 13 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders, which information is incorporated herein by reference. (e) Executive Officers of the Registrant Name Age Present Title (Fiscal Year First Became Executive Officer) ----------------------------------------------------------------- John T. Keiser 63 President and Chief Executive Officer (1998) Victor L. Poirier 57 Senior Vice President (1983) Theo Melas-Kyriazi 39 Chief Financial Officer (1998) Paul F. Kelleher 56 Chief Accounting Officer (1985) Each executive officer serves until his successor is chosen or appointed and qualified, or until earlier resignation, death, or removal. All executive officers, except Messrs. Keiser and Melas-Kyriazi, have held comparable positions for at least five years, either with the Company or with its parent company, Thermo Electron. Mr. Keiser was appointed Senior Vice President of the Company in 1994. At the same time, he was named President of Thermo Biomedical, a newly created subsidiary of Thermo Electron. He was named President and Chief Executive Officer of the Company in March and December 1998, respectively. From 1985 until 1994, he was President of the Eberline Instrument division of Thermo Instrument Systems Inc., a majority-owned public subsidiary of Thermo Electron. Mr. Melas-Kyriazi was appointed Chief Financial Officer of the Company and Thermo Electron on January 1, 1999. He joined Thermo Electron in 1986 as Assistant Treasurer, and became Treasurer in 1988. In 1994, he was named President and Chief Executive Officer of ThermoSpectra Corporation, a public subsidiary of Thermo Instrument. In 1998, he became Vice President of Corporate Strategy for Thermo Electron. He remains a Vice President of Thermo Electron. Messrs. Keiser, Melas-Kyriazi, and Kelleher are full-time employees of Thermo Electron, and Mr. Poirier is a full-time employee of Thermo Cardiosystems, but they devote such time to the affairs of the Company as the Company's needs reasonably require. Item 2. Properties The Company believes that its facilities are in good condition and are adequate to meet its current needs and that other suitable space is readily available if any leases are not extended. The location and general character of the Company's properties by industry segment as of January 2, 1999, are as follows: Quality Assurance and Security Products The Quality Assurance and Security Products segment operates from two principal facilities: an 85,000-square foot office, research and development, and manufacturing facility in Massachusetts occupied under a lease expiring in 2006, subject to one five-year renewal option at the election of the Company; and a 115,000-square foot office and manufacturing facility in Massachusetts, occupied under a lease expiring in 2005. The Company also leases approximately 10,000 square feet in Enschede, Holland, occupied under a lease expiring in 2000. In addition, the 11 Company leases approximately 20,400 square feet of office space throughout the world for its sales and service operations, and owns approximately 14,300 square feet of manufacturing, office, and storage facilities in Scotland. Precision Weighing and Inspection Equipment The Precision Weighing and Inspection Equipment segment owns approximately 26,500 square feet of office, engineering, and production space in Canada and the United Kingdom and leases approximately 324,500 square feet of office, engineering, and production space principally in Minnesota, the United Kingdom, Australia, and Germany under leases expiring at various dates through 2068. Heart Assist and Blood Testing Devices The Company's Heart Assist and Blood Testing Devices segment owns approximately 61,000 square feet of office, engineering, laboratory, and production space in New Jersey and leases approximately 83,000 square feet of office, engineering, laboratory, and production space in California, Massachusetts, and New Jersey, under leases expiring at various dates through 2004. Power Electronics and Test Equipment The Power Electronics and Test Equipment segment leases approximately 110,000 square feet of office, engineering, laboratory, and production space principally in Massachusetts, Washington, California, the United Kingdom, and the Netherlands, under leases expiring at various dates through 2010. Approximately 40,400 square feet of office, engineering, laboratory, and production space that the Company owns in Mount Kisco, New York, is currently under agreement to be sold. Other The Company also leases approximately 131,000 square feet of office, engineering, laboratory, and production space in Massachusetts and Illinois, under leases expiring at various dates through 2004. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 12 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 1998 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 1998 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 1998 Annual Report to Shareholders and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required under this item is included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1998 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 2, 1999, are included in the Registrant's 1998 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. 13 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. 14 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a,d) Financial Statements and Schedules. (1)The consolidated financial statements set forth in the list below are filed as part of this Report. (2)The consolidated financial statement schedule set forth in the list below is filed as part of this Report. (3)Exhibits filed herewith or incorporated herein by reference are set forth in Item 14(c) below. List of Financial Statements and Schedules Referenced in this Item 14 Information incorporated by reference from Exhibit 13 filed herewith: Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Comprehensive Income and Shareholders' Investment Notes to Consolidated Financial Statements 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 On December 10, 1998, the Company filed a Current Report on Form 8-K dated December 10, 1998, the purpose of which was to provide an update to a proposed corporate reorganization by Thermo Electron, involving certain of Thermo Electron's subsidiaries, including the Company. (c) Exhibits See Exhibit Index on the page immediately preceding exhibits. 15 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 17, 1999 THERMEDICS INC. By: /s/ John T. Keiser John T. Keiser President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, as of March 17, 1999. Signature Title - --------- ----- By: /s/ John T. Keiser President, Chief Executive Officer, John T. Keiser and Director By: /s/ Theo Melas-Kyriazi Chief Financial Officer Theo Melas-Kyriazi By: /s/ Paul F. Kelleher Chief Accounting Officer Paul F. Kelleher By: /s/ T. Anthony Brooks Director T. Anthony Brooks By: /s/ Peter O. Crisp Director Peter O. Crisp By: /s/ Paul F. Ferrari Director Paul F. Ferrari By: /s/ George N. Hatsopoulos Director George N. Hatsopoulos By: /s/ John N. Hatsopoulos Director John N. Hatsopoulos By: /s/ John W. Wood Jr. Chairman of the Board and Director John W. Wood Jr. By: /s/ Nicholas T. Zervas Director Nicholas T. Zervas 16 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 11, 1999. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 on page 15 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the consolidated financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Boston, Massachusetts February 11, 1999 17 SCHEDULE II THERMEDICS INC. Valuation and Qualifying Accounts (In thousands)
Description Provision Accounts Accounts Other (a) Balance Balance at Charged to Recovered Written at End Beginning Expense of Year of Off Year - ----------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- Allowance for Doubtful Accounts Year Ended January 2, 1999 $4,207 $1,002 $ - $(1,614) $ 903 $4,498 Year Ended January 3, 1998 $4,903 $ 815 $ - $(1,406) $ (105) $4,207 Year Ended December 28, 1996 $4,244 $1,352 $ 206 $(1,048) $ 149 $4,903 Description Amount Expenditures Other (c) Balance Balance at Capitalized at End Beginning as Cost of of Year of Year Acquisition - --------------------------------------------- ----------- ----------- ------------- ----------- ----------- Accrued Acquisition Reserves (b) Year Ended January 2, 1999 $ 259 $1,309 $ (592) $ (11) $ 965 Year Ended January 3, 1998 $ 903 $ 299 $ (839) $ (104) $ 259 Year Ended December 28, 1996 $1,402 $ 758 $(1,151) $ (106) $ 903 (a) Includes allowance of businesses acquired and disposed of during the year as described in Note 3 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders and the effect of foreign currency translation. (b) The nature of the activity in this account is described in Note 3 to Consolidated Financial Statements in the Registrant's 1998 Annual Report to Shareholders. (c) Represents reversal of accrued acquisition expenses and corresponding reduction of cost in excess of net assets of acquired companies resulting from finalization of restructuring plans and the effect of foreign currency translation.
18 EXHIBIT INDEX Exhibit Number Description of Exhibit 2.1 Asset and Stock Purchase Agreement dated as of January 28, 1994, between Thermo Electron and Baker Hughes Incorporated (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K relating to events occurring on March 16, 1994 [File No. 1-9567] and incorporated herein by reference). 2.2 Assignment and Assumption Agreement dated March 16, 1994, among Thermo Electron, the Registrant, and Thermo Instrument Systems Inc. (filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K relating to events occurring on March 16, 1994 [File No. 1-9567] and incorporated herein by reference). 2.3 Agreement and Plan of Merger dated as of November 29, 1995, by and among the Registrant, ATI Merger Corp., Analytical Technology, Inc., and, for certain limited purposes, Thermo Instrument Systems Inc. (filed as Exhibit 2 to the Registrant's Current Report on Form 8-K relating to events occurring on November 29, 1995 [File No. 1-9567] and incorporated herein by reference). 2.4 Asset and Share Purchase Agreement dated as of November 29, 1995, by and among Thermo Instrument Systems Inc., ATI Acquisition Corp., Analytical Technology, Inc., and, for certain limited purposes, the Registrant (filed as Exhibit 10(a) to the Registrant's Current Report on Form 8-K relating to events occurring on November 29, 1995 [File No. 1-9567] and incorporated herein by reference). 2.5 Asset Purchase Agreement dated as of January 25, 1996, among Thermedics Detection Limited, Moisture Systems Corporation, Moisture Systems Limited, and Anacon Corporation (filed as Exhibit 2.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-9567] and incorporated herein by reference). Schedules to this Agreement have been omitted pursuant to Rule 601(b)(2) of Regulation S-K. The Registrant hereby undertakes to furnish supplementally a copy of any omitted schedule to the Commission upon request. 2.6 Agreement and Plan of Reorganization among Thermo Cardiosystems Inc., ITC Acquisition Corp., Thermo Electron Corporation, ITC Holdings Inc., and International Technidyne Corporation dated as of May 2, 1997 (filed as Exhibit 2.1 to Thermo Cardiosystems' Quarterly Report on Form 10-Q for the quarter ended March 29, 1997 [File No. 1-10114] and incorporated herein by reference). 3.1 Articles of Organization (filed as Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 [File No. 1-9567] and incorporated herein by reference). 3.2 Amendment to Articles of Organization dated October 25, 1993 (filed as Exhibit 3(c) to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 1993 [File No. 1-9567] and incorporated herein by reference). 3.3 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). 19 Exhibit Number Description of Exhibit 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). 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). 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). 20 Exhibit Number Description of Exhibit 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). 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.) 21 Exhibit Number Description of Exhibit 10.20 Equity Incentive Plan of the Registrant (filed as Appendix A to the Proxy Statement dated May 10, 1993, of the Registrant [File No. 1-9567] and incorporated herein by reference). (Maximum number of shares issuable is 1,500,000 shares, after adjustment to reflect 3-for-2 stock split effected in November 1993.) 10.21 Thermedics Inc. - Thermedics Detection Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.20 to Thermo Electron's Annual Report on Form 10-K for the fiscal year ended January 2, 1993 [File No. 1-8002] and incorporated herein by reference). 10.22 Thermedics Inc. - Thermo Sentron Inc. Nonqualified Stock Option Plan (filed as Exhibit 10.51 to Thermo Cardiosystems' Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [File No. 1-10114] and incorporated herein by reference). 10.23 Thermedics Inc. - Thermo Cardiosystems Inc. Nonqualified Stock Option Plan (filed as Exhibit 4(b) to Thermo Cardiosystems' Registration Statement on Form S-8 [Reg. No. 33-45282] and incorporated herein by reference). 10.24 Thermedics Inc. - Thermo Voltek Corp. Nonqualified Stock Option Plan (filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9567] and incorporated herein by reference). 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 (filed as Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9567] and incorporated herein by reference). 10.28 Amended and Restated Master Guarantee Reimbursement and Loan Agreement, dated December 10, 1997, between Thermo Electron and the Registrant (filed as Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [File No. 1-9567] and incorporated herein by reference). 13 Annual Report to Shareholders for the year ended January 2, 1999 (only those portions incorporated herein by reference). 21 Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. EX-13 2 Exhibit 13 Thermedics Inc. Consolidated Financial Statements 1998
Thermedics Inc. 1998 Financial Statements Consolidated Statement of Income (In thousands except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------- ----------- ---------- ---------- Revenues (Note 13) $ 313,131 $307,666 $ 292,077 --------- -------- --------- Costs and Operating Expenses: Cost of revenues 164,345 155,680 148,137 Selling, general, and administrative expenses (Note 8) 89,660 86,308 85,045 Research and development expenses 26,595 24,270 21,363 Nonrecurring costs (Notes 3 and 12) - - 17,637 --------- ------- --------- 280,600 266,258 272,182 --------- ------- --------- Operating Income 32,531 41,408 19,895 Interest Income 13,069 13,326 10,765 Interest Expense (includes $663 to parent company in 1998; (5,581) (3,398) (3,770) Note 3) Gain on Issuance of Stock by Subsidiaries (Note 10) - 17,075 23,651 Gain on Sale of Investments, Net (includes gain on sale of 39 432 956 related-party investments of $428 in 1997; Notes 2 and 8) Other Income - 54 - --------- ------- --------- Income Before Provision for Income Taxes, Minority Interest, and 40,058 68,897 51,497 Extraordinary Item Provision for Income Taxes (Note 5) 15,312 19,675 13,969 Minority Interest Expense 5,774 7,730 8,390 --------- ------- --------- Income Before Extraordinary Item 18,972 41,492 29,138 Extraordinary Item, Net of Provision for Income Taxes of $3,092 (Note7) 4,638 - - --------- ------- --------- Net Income $ 23,610 $41,492 $ 29,138 ========= ======= ========= Earnings per Share (Note 14) Basic $ .57 $ 1.13 $ .80 ========= ======= ========= Diluted $ .55 $ 1.07 $ .75 ========= ======= ========= Weighted Average Shares (Notes 8 and 14) Basic 41,221 36,700 36,417 ========= ======= ========= Diluted 43,242 38,911 38,202 ========= ======= =========
The accompanying notes are an integral part of these consolidated financial statements. 2
Thermedics Inc. 1998 Financial Statements Consolidated Balance Sheet (In thousands) 1998 1997 - -------------------------------------------------------------------------------------- ---------- ---------- Assets Current Assets: Cash and cash equivalents (includes $73,377 and $175,101 under $142,108 $187,012 repurchase agreements with parent company) Short-term available-for-sale investments, at quoted market value 43,310 58,317 (amortized cost of $43,155 and $58,144; Note 2) Accounts receivable, less allowances of $4,498 and $4,207 63,438 61,488 Inventories 62,783 59,574 Prepaid income taxes and expenses (Note 5) 14,572 12,769 -------- -------- 326,211 379,160 -------- -------- Property, Plant, and Equipment, at Cost, Net 21,907 21,611 -------- -------- Long-term Available-for-sale Investments, at Quoted Market Value 47,259 12,665 (amortized cost of $47,226 and $12,655; Note 2) -------- -------- Other Assets 12,723 12,139 -------- -------- Cost in Excess of Net Assets of Acquired Companies (Note 3) 145,518 110,977 -------- -------- $553,618 $536,552 ======== ======== 3 Thermedics Inc. 1998 Financial Statements Consolidated Balance Sheet (continued) (In thousands except share amounts) 1998 1997 - -------------------------------------------------------------------------------------- ---------- ---------- Liabilities and Shareholders' Investment Current Liabilities: Note payable to parent company (Note 3) $ 19,000 $ - Notes payable and current maturity of long-term obligation (Note 3) 6,312 7,498 Accounts payable 20,695 18,020 Accrued payroll and employee benefits 12,830 12,576 Accrued income taxes 8,159 6,815 Accrued warranty costs 4,483 3,784 Other accrued expenses 20,344 18,838 Due to parent company and affiliated companies 2,096 2,266 -------- -------- 93,919 69,797 -------- -------- Other Deferred Items 191 177 -------- -------- Long-term Obligations (Note 7) 122,802 142,771 -------- -------- Minority Interest 88,730 96,461 -------- --------- Commitments and Contingencies (Note 6) Shareholders' Investment (Notes 4, 7, 8, and 9): Common stock, $.10 par value, 100,000,000 shares authorized; 41,739,308 4,174 3,685 pro forma and 36,846,175 shares issued Capital in excess of par value 106,846 113,913 Retained earnings 139,644 116,034 Treasury stock at cost, 47,348 and 134,172 shares (1,026) (3,449) Accumulated other comprehensive items (Note 15) (1,662) (2,837) -------- -------- 247,976 227,346 -------- -------- $553,618 $536,552 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 4 Thermedics Inc. 1998 Financial Statements Consolidated Statement of Cash Flows (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------- ----------- ---------- ---------- Operating Activities Net income $ 23,610 $41,492 $ 29,138 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,593 10,361 10,431 Gain on repurchase and exchange of subordinated (7,730) - - convertible debentures (Note 7) Minority interest expense 5,774 7,730 8,390 Gain on issuance of stock by subsidiaries (Note 10) - (17,075) (23,651) Nonrecurring costs (Notes 3 and 12) - - 17,637 Provision for losses on accounts receivable 1,002 815 1,352 Gain on sale of investments, net (Note 2) (39) (432) (956) Increase (decrease) in deferred income taxes - 45 (601) Other noncash expenses 1,725 780 938 Changes in current accounts, excluding the effects of acquisitions: Accounts receivable 3,969 491 (13,906) Inventories 843 (5,367) (839) Prepaid income taxes and expenses (44) (845) 16 Accounts payable (64) (2,042) 892 Other current liabilities (3,637) 2,906 (1,162) Other - - (270) --------- ------- --------- Net cash provided by operating activities 37,002 38,859 27,409 --------- ------- --------- Investing Activities Acquisitions, net of cash acquired (Note 3) (43,976) (5,658) (37,044) Acquisition of product lines - - (4,737) Purchases of available-for-sale investments (213,035) (89,900) (99,800) Proceeds from sale and maturities of available-for-sale 193,492 118,413 118,356 investments Purchases of property, plant, and equipment (7,638) (7,087) (8,621) Proceeds from sale of business 2,250 - - Other (594) 275 (754) --------- ------- --------- Net cash provided by (used in) investing activities (69,501) 16,043 (32,600) --------- ------- --------- Financing Activities Proceeds from issuance of notes payable to parent company (Note 3) 21,000 - 15,000 Repayment of notes payable to parent company (Note 3) (2,000) - (53,000) Purchases of Company and subsidiaries' common stock (19,517) (51,091) (15,665) Net proceeds from issuance of subordinated convertible obligations - 68,028 63,249 (Note 7) Repayment and repurchase of long-term obligations (Note 7) (11,384) (700) (2,432) Net increase (decrease) in short-term borrowings (1,533) 2,699 (1,944) Net proceeds from issuance of Company and subsidiaries' common 442 29,122 49,780 stock (Note 10) International Technidyne transfers (to) from Thermo Electron - 350 (5,567) Other 137 - (146) --------- ------- --------- Net cash provided by (used in) financing activities $ (12,855) $48,408 $ 49,275 --------- ------- --------- 5 Thermedics Inc. 1998 Financial Statements Consolidated Statement of Cash Flows (continued) (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------- ----------- ---------- ---------- Exchange Rate Effect on Cash $ 450 $ 902 $ 1,303 -------- ------- --------- Increase (Decrease) in Cash and Cash Equivalents (44,904) 104,212 45,387 Cash and Cash Equivalents at Beginning of Year 187,012 82,800 37,413 -------- ------- --------- Cash and Cash Equivalents at End of Year $142,108 $187,012 $ 82,800 ======== ======== ========= Cash Paid For Interest $ 5,196 $ 2,467 $ 5,333 Income taxes $ 16,628 $14,588 $ 7,108 Noncash Activities Fair value of assets of acquired companies $ 54,390 $ 9,351 $ 42,955 Cash paid for acquired companies (43,976) (6,291) (37,445) -------- ------- --------- Liabilities assumed of acquired companies $ 10,414 $ 3,060 $ 5,510 ======== ======= ========= Issuance of subordinated convertible debentures in connection $ 15,859 $ - $ - with exchange offer ======== ======= ========= Issuance of Company common stock to parent company in exchange $ 8,040 $ - $ 4,236 for common stock of subsidiaries ======== ======= ========= Conversions of Company and subsidiary convertible obligations $ - $ 4,650 $ 31,562 ======== ======= ========= The accompanying notes are an integral part of these consolidated financial statements. 6 Thermedics Inc. 1998 Financial Statements Consolidated Statement of Comprehensive Income and Shareholders' Investment (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------- ----------- ---------- ---------- Comprehensive Income Net Income $ 23,610 $41,492 $ 29,138 --------- ------- --------- Other Comprehensive Items, Net (Note 15): Foreign currency translation adjustment 1,172 (2,545) (321) Net unrealized gains (losses) on available-for-sale investments 3 56 (828) --------- ------- --------- 1,175 (2,489) (1,149) --------- ------- --------- Minority interest (270) 626 495 --------- ------- --------- $ 24,515 $39,629 $ 28,484 ========= ======= ========= Shareholders' Investment Common Stock, $.10 Par Value: Balance at beginning of year $ 3,685 $ 3,684 $ 3,399 Activity under employees' and directors' stock plans 1 1 12 Conversions of subordinated convertible debentures - - 74 Issuance of Company common stock to parent company in exchange 488 - 199 for common stock of subsidiaries (Note 8) --------- ------- --------- Balance at end of year 4,174 3,685 3,684 --------- ------- --------- Capital in Excess of Par Value: Balance at beginning of year 113,913 138,433 120,665 Activity under employees' and directors' stock plans (1,966) (1,239) 737 Tax benefit related to employees' and directors' stock plans 280 55 1,218 Conversions of subordinated convertible debentures - - 7,631 Issuance of Company common stock to parent company in exchange 7,552 - 4,037 for common stock of subsidiaries (Note 8) Effect of majority-owned subsidiaries' equity transactions (12,933) (23,336) 4,145 --------- ------- --------- Balance at end of year 106,846 113,913 138,433 --------- ------- --------- Retained Earnings: Balance at beginning of year 116,034 74,542 47,928 Net income 23,610 41,492 29,138 International Technidyne transfers to Thermo Electron - - (2,524) --------- ------- --------- Balance at end of year $ 139,644 $116,034 $ 74,542 --------- -------- --------- 7 Thermedics Inc. 1998 Financial Statements Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued) (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------- ----------- ---------- ---------- Treasury Stock: Balance at beginning of year $ (3,449) $(4,729) $ (42) Activity under employees' and directors' stock plans 2,423 1,572 58 Purchases of Company common stock - (292) (4,745) --------- ------- --------- Balance at end of year (1,026) (3,449) (4,729) --------- ------- --------- Accumulated Other Comprehensive Items (Note 15): Balance at beginning of year (2,837) (348) 801 Other comprehensive items 1,175 (2,489) (1,149) --------- ------- --------- Balance at end of year (1,662) (2,837) (348) --------- ------- --------- $ 247,976 $227,346 $ 211,582 ========= ======== ========= The accompanying notes are an integral part of these consolidated financial statements. 8 Thermedics Inc. 1998 Financial Statements Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Thermedics Inc. (the Company) develops, manufactures, and markets on-line product quality assurance systems, security devices, and laboratory products including electrochemistry and microweighing systems; precision weighing and inspection equipment, implantable heart-assist systems, whole-blood coagulation testing equipment, and skin-incision devices; and electronics-test instruments and a range of power electronics; as well as other products. Relationship With Thermo Electron Corporation The Company was incorporated in 1983 as a wholly owned subsidiary of Thermo Electron Corporation. As of January 2, 1999, on a pro forma basis, assuming the completion of the transaction discussed in Note 8, Thermo Electron owned 30,850,049 shares of the Company's common stock, representing 74% of such stock outstanding. During 1998, Thermo Electron announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. As part of this reorganization, Thermo Electron announced that the Company may acquire Thermo Electron's wholly owned biomedical group in exchange for shares of Company common stock, and the Company's equity interest in its Thermedics Detection Inc., Thermo Sentron Inc., and Thermo Voltek Corp. subsidiaries (Note 16). Principles of Consolidation The accompanying financial statements include the accounts of the Company; its wholly owned subsidiaries; and its majority-owned public subsidiaries, Thermedics Detection, Thermo Sentron, Thermo Cardiosystems Inc., and Thermo Voltek. 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 1998, 1997, and 1996 are for the fiscal years ended January 2, 1999, January 3, 1998, and December 28, 1996, respectively. Fiscal 1998 and 1996 each included 52 weeks; fiscal 1997 included 53 weeks. Revenue Recognition The Company recognizes the majority of its revenues upon shipment of its products. The Company provides a reserve for its estimate of warranty 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 $7,494,000, $8,735,000, and $6,564,000 in 1998, 1997, and 1996, respectively. 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 1998 and 1997. 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. 9 1. Nature of Operations and Summary of Significant Accounting Policies (continued) If gains have been recognized on issuances of a subsidiary's stock and shares of the subsidiary are subsequently repurchased by the subsidiary, the Company, or Thermo Electron, gain recognition does not occur on issuances subsequent to the date of a repurchase until such time as shares have been issued in an amount equivalent to the number of repurchased shares. Such transactions are reflected as equity transactions, and the net effect of these transactions is reflected in the accompanying statement of comprehensive income and 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 shareholders' investment. Income Taxes In accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. Earnings 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 (Note 14). Cash and Cash Equivalents At year-end 1998 and 1997, $72,714,000 and $175,101,000, 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, U.S. government-agency securities, commercial paper, money market funds, and other marketable securities, in the amount of at least 103% of such obligation. The Company's funds subject to the repurchase agreement 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 1998, $663,000 of the Company's cash equivalents, denominated in Dutch guilders, were invested in a repurchase agreement with a wholly owned subsidiary of Thermo Electron. Under this agreement, the Company in effect lends excess cash to the subsidiary, which Thermo Electron collateralizes with investments principally consisting of corporate notes, U.S. government-agency securities, commercial paper, money market funds, and other marketable securities, in the amount of at least 103% of such obligation. The Company's funds subject to the repurchase agreement are readily convertible into cash by the Company. The repurchase agreement earns a rate based on Netherlands market rates, set at the beginning of each month. At year-end 1998 and 1997, 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. 10 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: (In thousands) 1998 1997 - ---------------------------------------------------------------------------------- ----------- ----------- Raw Material and Supplies $25,275 $23,857 Work in Process 15,918 18,218 Finished Goods 21,590 17,499 ------- ------- $62,783 $59,574 ======= ======= 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 32 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: (In thousands) 1998 1997 - ---------------------------------------------------------------------------------- ----------- ----------- Land and Buildings $ 6,139 $ 6,154 Machinery, Equipment, and Leasehold Improvements 54,548 49,443 ------- ------- 60,687 55,597 Less: Accumulated Depreciation and Amortization 38,780 33,986 ------- ------- $21,907 $21,611 ======= ======= 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 $5,492,000 and $4,400,000, net of accumulated amortization of $3,716,000 and $3,253,000, at year-end 1998 and 1997, 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 $14,925,000 and $12,116,000 at year-end 1998 and 1997, respectively. The Company assesses the future useful life of this asset whenever events or changes in circumstances indicate that the current useful life has diminished. The Company considers the future undiscounted cash flows of the acquired companies in assessing the recoverability of this asset. If impairment has occurred, any excess of carrying value over fair value is recorded as a loss. Foreign Currency All assets and liabilities of the Company's foreign subsidiaries are translated at year-end exchange rates, and revenues and expenses are translated at average exchange rates for the year in accordance with SFAS No. 52, "Foreign Currency Translation." Resulting translation adjustments, net of minority interest, are reflected in the "Accumulated other comprehensive items" component of shareholders' investment (Note 15). Foreign currency transaction gains or losses are included in the accompanying statement of income and are not material for the three years presented. 11 1. Nature of Operations and Summary of Significant Accounting Policies (continued) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Presentation Certain amounts in 1997 and 1996 have been reclassified to conform to the presentation in the 1998 financial statements.
2. Available-for-sale Investments The Company's debt securities are considered available-for-sale investments in the accompanying balance sheet and are carried at market value, with the difference between cost and market value, net of related tax effects and minority interest, recorded in the "Accumulated other comprehensive items" component of shareholders' investment (Note 15). 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:
(In thousands) Gross Gross Market Cost Unrealized Unrealized Value Basis Gains Losses - -------------------------------------------------- ------------- ------------- ------------- -------------- 1998 Government-agency Securities $88,425 $88,336 $ 98 $ (9) Other 2,144 2,045 124 (25) ------- ------- ------- ------- $90,569 $90,381 $ 222 $ (34) ======= ======= ======= ======= 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) ======= ======= ======= ======= Short- and long-term available-for-sale investments in the accompanying 1998 balance sheet include $42,475,000 with contractual maturities of one year or less, $47,260,000 with contractual maturities of more than one year through five years, and $834,000 with contractual maturities of more than five years through ten 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 features of the securities that enable either the Company, the issuer, or both to redeem these securities at an earlier date. 12 2. Available-for-sale Investments (continued) The cost of available-for-sale investments that were sold was based on specific identification in determining realized gains and losses recorded in the accompanying statement of income. Gain on sale of investments, net, resulted from gross realized gains of $39,000, $432,000, and $1,086,000 in 1998, 1997, and 1996, respectively, and gross realized losses of $130,000 in 1996 relating to the sale of available-for-sale investments. 3. Acquisitions In June 1998, Thermo Sentron acquired the three businesses that constituted the product-monitoring group of Graseby Limited (the product-monitoring businesses), a subsidiary of Smiths Industries plc, for $43,976,000 in cash, net of cash acquired, and the assumption of certain liabilities. The U.K.-based product-monitoring businesses design, manufacture, and distribute specialized packaged-goods equipment, including checkweighers and metal detectors, for the food and pharmaceutical industries. To partially finance this acquisition, Thermo Sentron borrowed $21,000,000 from Thermo Electron pursuant to a promissory note due December 1998, bearing interest at the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. In December 1998, Thermo Sentron repaid $2,000,000 of this amount and issued Thermo Electron a new promissory note for $19,000,000 in exchange for the initial note. This note is due June 1999 and bears interest under the same terms as the initial note. As of January 2, 1999, the interest rate on this note was 5.36%. In May 1997, Thermo Cardiosystems acquired International Technidyne from Thermo Electron in exchange for 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. Revenues and net income, as previously reported by the separate entities prior to the acquisition and as restated for the combined Company, are: (In thousands) 1996 - -------------------------------------------------------------------------------------- ---------- ---------- Revenues: Historical $258,085 International Technidyne 33,992 -------- $292,077 ======== Net Income: Historical $ 26,831 International Technidyne 4,672 Minority interest expense not previously reported (2,365) -------- $ 29,138 ======== 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., 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, 13 3. Acquisitions (continued) 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. Moisture Systems and Rutter design, manufacture, and sell instruments that use near-infrared spectroscopy to measure moisture and other product components. 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. During 1996, the Company's majority-owned subsidiaries made other acquisitions for $15,501,000 in cash. 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 these acquisitions exceeded the estimated fair value of the acquired net assets by $67,945,000, 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, in the case of the product-monitoring businesses, 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. Pro forma data is not presented since the acquisitions were not material to the Company's results of operations. In connection with these acquisitions, the Company has undertaken restructuring activities at the acquired businesses. The Company's restructuring activities, which were accounted for in accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing levels and the abandonment of excess facilities. In connection with these restructuring activities, as part of the cost of the acquisitions, the Company established reserves, primarily for severance and excess facilities. In accordance with EITF 95-3, the Company finalized its restructuring plans no later than one year from the respective dates of the acquisitions, except for the acquisition completed in 1998, for which finalization will occur no later than one year from the date of the acquisition. Unresolved matters at January 2, 1999, primarily included completion of planned severances and 14 3. Acquisitions (continued) abandonment of excess facilities for the acquisition completed during 1998. A summary of the changes in accrued acquisition expenses, which are included in other accrued expenses in the accompanying balance sheet, is: Abandonment of Excess (In thousands) Severance Facilities Other Total - ----------------------------------------------- -------------- -------------- -------------- -------------- Balance at December 30, 1995 $ 849 $ 553 $ - $ 1,402 Reserves established 577 144 37 758 Usage (779) (372) - (1,151) Decrease due to finalization of (33) (69) - (102) restructuring plan, recorded as a decrease to cost in excess of net assets of acquired companies Currency translation adjustment (2) (2) - (4) -------- -------- -------- -------- Balance at December 28, 1996 612 254 37 903 Reserves established 237 62 - 299 Usage (548) (254) (37) (839) Decrease due to finalization of (104) - - (104) restructuring plan, recorded as a decrease to cost in excess of net assets of acquired companies Currency translation adjustment - - - - -------- -------- -------- -------- Balance at January 3, 1998 197 62 - 259 Reserves established 537 772 - 1,309 Usage (552) (40) - (592) Currency translation adjustment (5) (6) - (11) -------- -------- -------- -------- Balance at January 2, 1999 $ 177 $ 788 $ - $ 965 ======== ======== ======== ======== 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 permitted the grant of nonqualified and incentive stock options. These plans expired during 1993. Two other plans permit the grant of a variety of stock and stock-based awards as determined by the human resources committee of the Company's Board of Directors (the Board Committee), including restricted stock, stock options, stock bonus shares, or performance-based shares. The option recipients and the terms of options granted under these plans are determined by the Board Committee. As of year-end 1998, only nonqualified stock options have been awarded under these plans. Generally, options granted to date are exercisable immediately, but are subject to certain transfer restrictions and the right of the Company to repurchase shares issued upon exercise of the options at the exercise price, upon certain events. The restrictions and repurchase rights generally lapse ratably over a 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 15 4. Employee Benefit Plans (continued) than the fair market value of the Company's stock on the date of grant. To date, all options have been granted at fair market value. The Company also has a directors' stock option plan that provides for the grant of stock options to outside directors pursuant to a formula approved by the Company's shareholders. Options awarded under this plan are exercisable 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. In November 1998, the Company's employees, excluding its officers and directors, were offered the opportunity to exchange previously granted options to purchase shares of Company common stock for an amount of options equal to half of the number of options previously held, exercisable at a price equal to the fair market value at the time of the exchange offer. Holders of options to acquire 388,000 shares at a weighted average exercise price of $19.39 per share elected to participate in this exchange and, as a result, received options to purchase 194,000 shares of Company common stock at $10.81 per share, which are included in the 1998 grants in the table below. The other terms of the new options are the same as the exchanged options except that the holders may not sell shares purchased pursuant to such new options for six months from the exchange date. The options exchanged were canceled by the Company.
A summary of the Company's stock option activity is: 1998 1997 1996 ------------------- ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Price Price Price Number Number Number of of of (Shares in thousands) Shares Shares Shares - ---------------------------------------------- --------- ---------- -------- ---------- --------- --------- Options Outstanding, Beginning of Year 1,584 $14.93 1,664 $14.99 1,557 $12.38 Granted 628 13.52 111 19.00 303 27.17 Exercised (139) 7.91 (63) 7.92 (137) 9.12 Forfeited (137) 19.53 (128) 22.75 (59) 22.42 Canceled due to exchange (388) 19.39 - - - - ----- ----- ----- Options Outstanding, End of Year 1,548 $13.46 1,584 $14.93 1,664 $14.99 ===== ====== ===== ====== ===== ====== Options Exercisable 1,545 $13.46 1,584 $14.93 1,664 $14.99 ===== ====== ===== ====== ===== ====== Options Available for Grant 490 296 284 ===== ===== =====
16 4. Employee Benefit Plans (continued) A summary of the status of the Company's stock options at January 2, 1999, is: Options Outstanding ------------------------------------------------------ Range of Exercise Prices Number Weighted Weighted of Average Average Shares Remaining Exercise (In Contractual Life Price thousands) - ----------------------------------------------- ------------------- ------------------- -------------------- $ 4.70 - $ 10.96 605 4.5 years $ 8.47 10.97 - 17.22 765 6.6 years 15.26 17.23 - 23.47 107 7.1 years 19.04 23.48 - 29.73 71 4.4 years 28.21 ----- $ 4.70 - $ 29.73 1,548 5.7 years $13.46 =====
The information disclosed above for options outstanding at January 2, 1999, does not differ materially for options exercisable. 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. Prior to the 1998 program year, the applicable shares of common stock could be purchased at the end of a 12-month period at 95% of the fair market value at the beginning of the period, and shares purchased were subject to a six-month resale restriction. Effective November 1, 1998, the applicable shares of common stock may be purchased at 85% of the lower of the fair market value at the beginning or end of the period, and the shares purchased are subject to a one-year resale restriction. Shares are purchased through payroll deductions of up to 10% of each participating employee's gross wages. No shares were issued under this program during 1998. During 1997 and 1996, the Company issued 9,000 shares and 10,000 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 after 1994 under the Company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method set forth under SFAS No. 123, the effect on the Company's net income and earnings per share would have been:
(In thousands except per share amounts) 1998 1997 1996 - -------------------------------------------------------------------------- ---------- ---------- ---------- Net Income: As reported $23,610 $41,492 $29,138 Pro forma 20,886 39,454 27,960 Basic Earnings per Share: As reported .57 1.13 .80 Pro forma .51 1.08 .77 Diluted Earnings per Share: As reported .55 1.07 .75 Pro forma .49 1.01 .72 17 4. Employee Benefit Plans (continued) 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 $4.15, $8.81, and $11.49 in 1998, 1997, and 1996, 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: 1998 1997 1996 - -------------------------------------------------------------------------- ---------- ---------- ---------- Volatility 38% 39% 39% Risk-free Interest Rate 4.8% 6.2% 5.7% Expected Life of Options 4.1 years 5.6 years 5.0 years The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 401(k) Savings Plan The majority of the Company's full-time U.S. employees are eligible to participate in Thermo Electron's 401(k) savings plan. Contributions to the 401(k) savings plan are made by both the employee and the Company. Company contributions to the 401(k) plan are based upon the level of employee contributions. For these plans, the Company contributed and charged to expense $1,643,000, $1,758,000, and $1,460,000 in 1998, 1997, and 1996, respectively. 5. Income Taxes The components of income before provision for income taxes, minority interest, and extraordinary item are: (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- -------- --------- -------- Domestic $30,606 $ 63,053 $43,172 Foreign 9,452 5,844 8,325 ------- -------- ------- $40,058 $ 68,897 $51,497 ======= ======== ======= 18 5. Income Taxes (continued) The components of the provision for income taxes are: (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- -------- --------- -------- Currently Payable: Federal $ 7,615 $ 13,256 $12,058 State 2,074 3,008 2,327 Foreign 3,534 2,049 3,618 ------- -------- ------- 13,223 18,313 18,003 ------- -------- ------- Net Deferred (Prepaid): Federal 2,063 496 (3,843) State 322 145 24 Foreign (296) 721 (215) ------- -------- ------- 2,089 1,362 (4,034) ------- -------- ------- $15,312 $ 19,675 $13,969 ======= ======== ======= The Company and its majority-owned subsidiaries receive a tax deduction upon exercise of nonqualified stock options by employees for the difference between the exercise price and the market price of the underlying common stock on the date of exercise. The provision for income taxes that is currently payable does not reflect $808,000, $1,591,000, and $3,520,000 of such benefits of the Company and its majority-owned subsidiaries that have been allocated to capital in excess of par value, directly or through the effect of majority-owned subsidiaries' equity transactions, in 1998, 1997, and 1996, respectively. The provision for income taxes that is currently payable also does not reflect $1,800,000 of tax benefits used to reduce cost in excess of net assets of acquired companies in 1996. The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate of 35% to income before provision for income taxes, minority interest, and extraordinary item due to: (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- -------- --------- -------- Provision for Income Taxes at Statutory Rate $14,020 $ 24,114 $18,024 Increases (Decreases) Resulting From: Gain on issuance of stock by subsidiaries - (5,976) (8,278) State income taxes, net of federal tax 1,557 2,057 1,534 Amortization and write-off of cost in excess of net assets of 483 401 3,256 acquired companies Reduction in valuation allowance - - (684) Tax benefit of foreign sales corporation (442) (698) (437) Foreign tax rate and regulation differential (27) (125) (132) Nondeductible expenses 153 107 228 Other, net (432) (205) 458 ------- -------- ------- $15,312 $19,675 $13,969 ======= ======= ======= 19 5. Income Taxes (continued) Prepaid and deferred income taxes in the accompanying balance sheet consist of: (In thousands) 1998 1997 - --------------------------------------------------------------------------------------- --------- -------- Prepaid (Deferred) Income Taxes: Reserves and accruals $ 4,701 $ 3,732 Inventory reserves 3,196 3,869 Depreciation and amortization 2,029 1,912 Accrued compensation 1,131 1,988 Write-off of acquired technology (Note 3) 1,560 1,834 Tax loss and credit carryforwards 1,756 1,180 Trademarks and other intangible assets (924) (1,069) Allowance for doubtful accounts 560 328 Warranty reserves 400 107 Other, net - 72 -------- ------- $ 14,409 $13,953 ======== ======== 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 2, 1999, net operating loss carryforwards totaled $3,852,000, including $603,000 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 $15,331,000 of undistributed earnings of foreign subsidiaries that could be subject to taxation if remitted to the U.S. because the Company plans to keep these amounts permanently reinvested overseas. 6. Commitments and Contingencies Operating Leases The Company and its subsidiaries lease various office and manufacturing facilities under operating lease arrangements expiring from 1999 through 2068. The accompanying statement of income includes expenses from operating leases of $6,221,000, $5,470,000, and $5,689,000 in 1998, 1997, and 1996, respectively. Future minimum payments due under noncancelable operating leases as of January 2, 1999, are $5,543,000 in 1999, $4,544,000 in 2000, $3,554,000 in 2001, $3,222,000 in 2002, $2,266,000 in 2003, and $4,455,000 in 2004 and thereafter. Total future minimum lease payments are $23,584,000. 20 6. Commitments and Contingencies (continued) Contingencies Thermo Cardiosystems has received correspondence alleging that the textured surface of the left ventricular-assist systems' (LVAS) housing infringed the intellectual property rights of another party. In general, an owner of intellectual property can prevent others from using such property without a license and is entitled to damages for unauthorized past usage. The Company has investigated the bases of the allegation and, based on the opinion of its counsel and the Company's assessment of the proceedings in the United States Patent and Trademark Office to date, believes that if Thermo Cardiosystems were sued on these bases, it would have meritorious defenses. Given the inherent uncertainties in dispute resolution, however, if Thermo Cardiosystems were sued and the outcome were unfavorable, the Company's results of operations or financial condition could be materially adversely affected in amounts the Company cannot reasonably estimate. See Note 16 for a discussion of litigation concerning the Company's merger with Thermo Voltek. 7. Short- and Long-term Obligations and Other Financing Arrangements Long-term Obligations (In thousands except per share amounts) 1998 1997 - -------------------------------------------------------------------------------------- ---------- ---------- Noninterest-bearing Subordinated Convertible Debentures, due 2003, $ 31,565 $ 65,000 Convertible at $32.68 per Share 2 7/8% Subordinated Convertible Debentures, due 2003, Convertible at 15,859 - $14.928 per Share 3 3/4% Subordinated Convertible Debentures, due 2000, Convertible Into 5,250 7,750 Shares of Thermo Voltek at $7.83 per Share 4 3/4% Subordinated Convertible Debentures, due 2004, Convertible Into 70,000 70,000 Shares of Thermo Cardiosystems at $31.415 per Share Other 176 52 -------- -------- 122,850 142,802 Less: Current Maturity of Long-term Obligation 48 31 -------- -------- $122,802 $142,771 ======== ======== In June 1998, the Company offered holders of its noninterest-bearing subordinated convertible debentures due 2003, convertible at $32.68 per share, the opportunity to exchange such debentures for newly issued 2 7/8% subordinated convertible debentures due 2003, convertible at $14.928 per share. Holders of $21,724,000 principal amount of outstanding debentures exchanged such debentures for $15,859,000 principal amount of newly issued debentures. This transaction resulted in an extraordinary gain of $3,076,000, net of taxes of $2,071,000, in accordance with the provisions of EITF No. 96-19. In addition, during 1998, the Company and a majority-owned subsidiary repurchased $14,211,000 principal amount of subordinated convertible debentures for $11,384,000 in cash, resulting in an extraordinary gain of $1,562,000, net of taxes of $1,021,000. The Company's convertible obligations are guaranteed on a subordinated basis by Thermo Electron. The Company has agreed to reimburse Thermo Electron in the event Thermo Electron is required to make a payment under its guarantee of the Company's, 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. 21 7. Short- and Long-term Obligations and Other Financing Arrangements (continued) During 1997 and 1996, convertible obligations of $4,650,000 and $31,562,000, respectively, were converted into common stock of the Company or its subsidiaries. See Note 11 for fair value information pertaining to the Company's long-term obligations. Short-term Obligations and Other Financing Arrangements Several of the Company's foreign subsidiaries have lines of credit outstanding of $5,473,000 and $5,506,000 as of year-end 1998 and 1997, respectively. Amounts borrowed under these agreements are included in notes payable and current maturity of long-term obligation in the accompanying balance sheet, and are guaranteed by either the Company or Thermo Electron. In addition, the Company's Netherlands-based subsidiaries have an agreement with a wholly owned subsidiary of Thermo Electron under which the subsidiaries can borrow funds that bear interest at a rate based on Netherlands market rates, set at the beginning of each month. At year-end 1998, the Company had borrowings under this agreement of $791,000, which are included in notes payable and current maturity of long-term obligation in the accompanying 1998 balance sheet. The weighted average interest rate on these borrowings was 6.5% and 7.4% at year-end 1998 and 1997, respectively. Unused lines of credit were $11,123,000 as of year-end 1998. 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 currently pays Thermo Electron annually an amount equal to 0.8% of the Company's revenues. In 1997 and 1996, the Company paid an amount equal to 1.0% of the Company's revenues. The fee is reviewed and adjusted annually by mutual agreement of the parties. The corporate services agreement is renewed annually but can be terminated upon 30 days' prior notice by the Company or upon the Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron Corporate Charter defines the relationships among Thermo Electron and its majority-owned subsidiaries). In addition, the Company uses data processing and contract administration services of two majority-owned subsidiaries of Thermo Electron, and is charged based on actual usage. For these services, as well as the administrative services provided by Thermo Electron, the Company was charged $2,517,000, $3,143,000, and $2,953,000 in 1998, 1997, and 1996, respectively. Management believes that the service fees charged by Thermo Electron and its subsidiaries are reasonable and that such fees are representative of the expenses the Company would have incurred on a stand-alone basis. For additional items such as employee benefit plans, insurance coverage, and other identifiable costs, Thermo Electron charges the Company based upon costs attributable to the Company. Research and Development Agreements Pursuant to a subcontract entered into in October 1993, which expires in February 1999, 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 majority-owned subsidiary of Thermo Electron. Thermo Coleman paid Thermedics Detection $2,000, $533,000, and $619,000 for services rendered in 1998, 1997, and 1996, respectively. Thermedics Detection entered into a funded research and development arrangement with ThermoLase Corporation, a publicly traded, majority-owned subsidiary of ThermoTrex Corporation, which itself is a publicly 22 8. Related-party Transactions (continued) traded, majority-owned subsidiary of Thermo Electron, in December 1997 to develop a cryogenic cooling device for ThermoLase. ThermoLase purchased product totaling $303,000 from Thermedics Detection in 1998. 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 and Competrol Real Estate Limited, two other members of The Olayan Group, which is indirectly controlled by Suliman S. Olayan, Ms. Olayan's father. Revenues recorded under this agreement totaled $248,000, $480,000, and $652,000 in 1998, 1997, and 1996, respectively. Management Contract One of the Company's executive employees in 1998 and 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 and Thermo Instrument. In 1998, 1997, and 1996, the Company was reimbursed $270,000, $194,000, and $707,000, respectively, under this arrangement. Other Related-party Transactions Thermedics Detection purchases an X-ray source that is used as a component in its InScan systems from Trex Medical Corporation, a publicly traded, majority-owned subsidiary of ThermoTrex. Thermedics Detection paid Trex Medical $381,000 and $48,000 for these products in 1998 and 1997, respectively. Thermo Electron's Tecomet division provides metal fabrication services in connection with the manufacture of the heart-assist devices sold by Thermo Cardiosystems. Thermo Cardiosystems paid $1,717,000, $1,872,000, and $2,892,000 for these services in 1998, 1997, and 1996, respectively. Repurchase Agreements The Company invests excess cash in repurchase agreements 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 had 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, net, in the accompanying statement of income. Short-term Obligations See Note 3 for a discussion of the Company's related-party obligations. Common Stock On February 5, 1998, the Company's Board of Directors voted to issue 4,880,533 shares of its common stock to Thermo Electron in exchange for 3,355,705 shares of common stock of Thermo Cardiosystems. 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 in a meeting scheduled for March 31, 1999. However, because Thermo Electron is the majority shareholder and intends to vote its shares in favor of the transaction, approval is assured and, therefore, the shares are considered to be outstanding as of February 5, 1998, for purposes of computing weighted average shares. The shares of common stock will be exchanged at their respective fair market values as of February 5, 1998. 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 23 8. Related-party Transactions (continued) 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 16 for additional information pertaining to related-party common stock activity. 9. Common Stock At January 2, 1999, the Company had reserved 4,111,635 unissued shares of its common stock for possible issuance under stock-based compensation plans and possible issuance upon conversion of its subordinated convertible debentures. 10. 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 1997 and 1996, 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: 1998 1997 1996 - ------------------------------------------------------------------------- ---------- ----------- ---------- Thermo Cardiosystems (a) 60% 51% 54% Thermo Voltek 67% 65% 51% Thermo Sentron 74% 71% 71% Thermedics Detection 84% 83% 96% (a) Reflects the Company's purchase of 3,355,705 shares of Thermo Cardiosystems common stock in 1998 as discussed in Note 8. 11. Fair Value of Financial Instruments The Company's financial instruments consist mainly of cash and cash equivalents, available-for-sale investments, accounts receivable, note payable to parent company, notes payable and current maturity of long-term obligation, accounts payable, due to parent company and affiliated companies, and long-term obligations. The carrying amount of these financial instruments, with the exception of available-for-sale investments 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. 24 11. Fair Value of 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: 1998 1997 -------------------- ---------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value - -------------------------------------------------------------- ---------- ---------- ---------- ----------- Convertible Obligations $122,674 $103,480 $142,750 $ 130,201 Other Long-term Obligations 128 128 21 21 -------- -------- -------- --------- $122,802 $103,608 $142,771 $ 130,222 ======== ======== ======== ========= 12. 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 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, Thermo Cardiosystems wrote off $4,909,000 of acquired technology associated with the acquisition of Nimbus (Note 3). 13. Business Segments, Geographical Information, and Concentrations of Risk The Company's principal businesses operate in four reportable segments. The Quality Assurance and Security Products segment develops, manufactures, and markets high-speed detection and measurement instruments and security products. The Precision Weighing and Inspection Equipment segment develops, manufactures, and markets high-speed precision-weighing and inspection equipment. The Heart Assist and Blood Testing Devices segment develops, manufactures, and markets LVAS, whole-blood coagulation testing equipment, and skin-incision devices. The Power Electronics and Test Equipment segment designs, manufactures, and markets electronics-test instruments and a range of products related to power amplification, conversion, and quality. The Company also develops, manufactures, and markets enteral nutrition-delivery systems and a line of medical-grade polymers used in medical disposables and in nonmedical, industrial applications, including safety glass and automotive coatings. The Company's Quality Assurance and Security Products segment derived revenues from laboratory products of $51,302,000, $53,054,000, and $50,854,000 in 1998, 1997, and 1996, respectively, and from detection instruments of $40,273,000, $51,320,000, and $43,750,000 in 1998, 1997, and 1996, respectively. The Company's Heart Assist and Blood Testing Devices segment derived revenues from LVAS of $30,303,000, $26,960,000, and $29,970,000 in 1998, 1997, and 1996, respectively. In addition, this segment derived revenues from blood-coagulation testing equipment and skin-incision devices of $36,545,000, $35,874,000, and $33,992,000 in 1998, 1997, and 1996, 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. 25 13. Business Segments, Geographical Information, and Concentrations of Risk (continued) (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------- ----------- ---------- ---------- Business Segment Information Revenues: Quality Assurance and Security Products $ 91,575 $104,374 $ 94,604 Precision Weighing and Inspection Equipment 98,763 78,695 70,027 Heart Assist and Blood Testing Devices 66,848 62,834 63,962 Power Electronics and Test Equipment 37,940 44,648 48,507 Other 18,005 17,115 14,977 --------- ------- --------- $ 313,131 $307,666 $ 292,077 ========= ======== ========= Income Before Provision for Income Taxes, Minority Interest, and Extraordinary Item: Quality Assurance and Security Products $ 12,937 $20,430 $ 9,848 Precision Weighing and Inspection Equipment 9,056 8,886 7,355 Heart Assist and Blood Testing Devices 8,554 10,461 10,220 Power Electronics and Test Equipment (493) 56 5,522 Other 3,998 3,679 (10,938) Corporate (a) (1,521) (2,104) (2,112) --------- ------- --------- Total operating income 32,531 41,408 19,895 Interest and other income, net 7,527 27,489 31,602 --------- ------- --------- $ 40,058 $68,897 $ 51,497 ========= ======= ========= Total Assets: Quality Assurance and Security Products $ 132,971 $146,224 $115,547 Precision Weighing and Inspection Equipment 140,164 115,101 107,185 Heart Assist and Blood Testing Devices 172,363 173,208 124,978 Power Electronics and Test Equipment 58,915 63,895 74,409 Other 12,893 10,525 8,070 Corporate (b) 36,312 27,599 26,510 --------- ------- --------- $ 553,618 $536,552 $ 456,699 ========= ======== ========= Depreciation and Amortization: Quality Assurance and Security Products $ 3,301 $ 3,298 $ 3,979 Precision Weighing and Inspection Equipment 2,603 1,641 1,676 Heart Assist and Blood Testing Devices 2,599 2,258 2,032 Power Electronics and Test Equipment 1,995 2,176 1,649 Other 1,077 974 1,081 Corporate 18 14 14 --------- ------- --------- $ 11,593 $10,361 $ 10,431 ========= ======= ========= 26 13. Business Segments, Geographical Information, and Concentrations of Risk (continued) (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------- ----------- ---------- ---------- Capital Expenditures: Quality Assurance and Security Products $ 2,775 $ 1,887 $ 2,266 Precision Weighing and Inspection Equipment 1,043 708 872 Heart Assist and Blood Testing Devices 1,599 2,333 2,571 Power Electronics and Test Equipment 998 935 2,047 Other 1,223 1,206 865 Corporate - 18 - --------- ------- --------- $ 7,638 $ 7,087 $ 8,621 ========= ======= ========= Geographical Information Revenues (c): United States $ 244,710 $245,680 $ 227,078 England 31,437 17,116 12,995 Other 53,309 59,114 64,024 Transfers among geographical areas (d) (16,325) (14,244) (12,020) --------- ------- --------- $ 313,131 $307,666 $ 292,077 ========= ======== ========= Long-lived Assets (e): United States $ 19,968 $19,675 $ 19,475 Other 3,631 3,041 3,090 --------- ------- --------- $ 23,599 $22,716 $ 22,565 ========= ======= ========= Export Revenues Included in United States Revenues Above (f): $ 70,165 $79,724 $ 67,002 ========= ======= ========= (a) Primarily general and administrative expenses. (b) Primarily cash, cash equivalents, and short- and long-term available-for-sale investments. (c) Revenues are attributed to countries based on selling location. (d) Transfers among geographical areas are accounted for at prices that are representative of transactions with unaffiliated parties. (e) Includes property, plant, and equipment, net, and other long-term tangible assets. (f) In general, export revenues are denominated in U.S. dollars. 27 14. Earnings per Share Basic and diluted earnings per share were calculated as follows: (In thousands except per share amounts) 1998 1997 1996 - ----------------------------------------------------------------------------- -------- --------- -------- Basic Net Income $23,610 $ 41,492 $29,138 ------- -------- ------- Weighted Average Shares 36,783 36,700 36,417 Effect of Shares Issuable in Exchange for Thermo Cardiosystems 4,438 - - ------- -------- ------- Common Stock (Note 8) Pro Forma Basic Weighted Average Shares 41,221 36,700 36,417 ------- -------- ------- Basic Earnings per Share $ .57 $ 1.13 $ .80 ======= ======== ======= Diluted Net Income $23,610 $ 41,492 $29,138 Effect of: Convertible obligations 138 - 50 Majority-owned subsidiary's dilutive securities (23) (39) (441) ------- -------- ------- Income Available to Common Shareholders, as Adjusted $23,725 $ 41,453 $28,747 ------- -------- ------- Pro Forma Basic Weighted Average Shares 41,221 36,700 36,417 Effect of: Convertible obligations 1,928 1,989 1,346 Stock options 93 222 439 ------- -------- ------- Pro Forma Weighted Average Shares, as Adjusted 43,242 38,911 38,202 ------- -------- ------- Diluted Earnings per Share $ .55 $ 1.07 $ .75 ======= ======== ======= 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 2, 1999, there were 1,198,000 of such options outstanding, with exercise prices ranging from $10.13 to $29.73 per share. An extraordinary gain recorded by the Company increased basic and diluted earnings per share by $.11 in 1998 (Note 7). 15. Comprehensive Income During the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This pronouncement sets forth requirements for disclosure of the Company's comprehensive income and accumulated other comprehensive items. In general, comprehensive income combines net income and "other comprehensive items, net," which represents certain amounts that are reported as components of shareholders' investment in the accompanying balance sheet, including foreign currency translation adjustments and unrealized net of tax gains and losses from available-for-sale investments. 28 15. Comprehensive Income (continued) Accumulated other comprehensive items in the accompanying consolidated balance sheet consist of the following: (In thousands) 1998 1997 - --------------------------------------------------------------------------------------- --------- -------- Cumulative Translation Adjustment $(1,782) $(2,954) Net Unrealized Gain on Available-for-sale Investments 120 117 ------- ------- $(1,662) $(2,837) ======= ======= Unrealized gains (losses) on available-for-sale investments, a component of other comprehensive items in the accompanying statement of comprehensive income and shareholders' investment, includes the following: (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- -------- --------- -------- Unrealized Holding Gains (Losses) Arising During the Year (net of $ 27 $ 333 $ (216) income tax (provision) benefit of $(16), $(187), and $125) Reclassification Adjustment for Gains Included in Net Income (net of (24) (277) (612) income tax provision of $14, $155, and $344) ------- -------- ------- Net Unrealized Gains (Losses) (net of income tax (provision) benefit $ 3 $ 56 $ (828) of $(2), $(32), and $469) ======= ======== ======= 16. Proposed Reorganization and Merger With Thermo Voltek Proposed Reorganization During 1998, Thermo Electron announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. Under this plan, the Company would acquire Thermo Electron's wholly owned biomedical group for shares of Company common stock. In addition, the Company's equity interests in Thermo Sentron, Thermedics Detection, and Thermo Voltek subsidiaries would be transferred to Thermo Electron for shares of common stock of the Company. Thermo Electron would, in turn, take Thermo Sentron and Thermedics Detection private; shareholders of these subsidiaries would receive cash in exchange for their shares of common stock. The proposed transactions are subject to a number of conditions, including the establishment of prices and exchange ratios; confirmation of anticipated tax consequences; the approval by the Board of Directors of the Company (including its independent directors); negotiation and execution of definitive agreements; clearance by the Securities and Exchange Commission of any necessary documents in connection with the proposed transactions; approval by the Board of Directors of Thermo Electron; and receipt of fairness opinions from an investment banking firm on certain financial aspects of the transactions. Merger With Thermo Voltek On March 31, 1998, the Company proposed to acquire, through a merger, all of the outstanding shares of common stock of Thermo Voltek that the Company does not own, other than shares owned by Thermo Electron, at a price of $7.00 per share in cash. In addition, the proposal contemplates the assumption of Thermo Voltek's $5,250,000 principal amount of 3 3/4% subordinated convertible debentures due 2000. As of January 2, 1999, the Company owned 67% of the outstanding common stock of Thermo Voltek. In addition, Thermo Electron owns approximately 3% of the outstanding common stock of Thermo Voltek. Thermo Voltek appointed a special committee, comprised of its independent directors, to evaluate the proposal with the assistance of a financial advisor, HSBC Securities, Inc. In September 1998, Thermo Voltek's Board of Directors, upon recommendation of the special committee, voted to proceed with the Company's proposal and in November 1998 entered into a definitive merger agreement with the Company. The merger is still subject to approval by the holders of a majority of Thermo Voltek's shares, excluding the Company, Thermo Electron, and the directors and officers of the Company, Thermo Voltek, and Thermo Electron. A meeting of Thermo Voltek's shareholders will occur on March 25, 1999, to consider this matter. 29 16. Proposed Reorganization and Merger With Thermo Voltek (continued) In late March and early April 1998, four putative class actions were filed in the Court of Chancery of the State of Delaware in and for New Castle County by shareholders of Thermo Voltek. On October 6, 1998, the Court of Chancery entered an order consolidating these four actions under the caption In re Thermo Voltek Corp. Shareholders Litigation, Consolidated C.A. 16287 (the Action). The complaint in the Action names the Company, Thermo Voltek, Thermo Electron, and directors of Thermo Voltek as defendants and alleges, among other things, that Thermo Voltek's directors violated the fiduciary duties of loyalty, good faith, and fair dealing that they owed to all shareholders of Thermo Voltek other than the named defendants and the affiliates of the named defendants because the proposed price of $7.00 per share to be paid to Thermo Voltek's shareholders under the terms of the proposed Merger Agreement was allegedly unfair and grossly inadequate. The complaints further allege that the Company, Thermo Voltek, and Thermo Electron have violated their alleged fiduciary duty of fair dealing by proposing the merger transaction at the time. The complaints request that the Court of Chancery, among other things, declare that the Action is a proper class action and enjoin the proposed transaction or order that any transaction be approved by a majority of the Thermo Voltek shareholders other than the named defendants and their affiliates. On November 17, 1998, the Company, Thermo Voltek, Thermo Electron, and the individual defendants filed an answer to the complaint in the Action in which they deny the allegations of any violation of law or breaches of any duty to the plaintiffs or the purported class set forth in the complaints. The Company filed a motion to dismiss the complaint for, among other things, procedural and jurisdictional defects and failure to state a claim upon which relief can be granted, which is currently pending before the court. The parties are currently conducting discovery. Due to the inherent uncertainty of litigation, the outcome of this matter cannot be estimated. The Company expects, however, that any resolution will not materially affect its future results of operations or financial position. 17. Unaudited Quarterly Information (In thousands except per share amounts) 1998 First Second Third Fourth - --------------------------------------------------------------- ---------- ---------- ---------- ---------- Revenues $75,661 $76,711 $81,515 $79,244 Gross Profit 37,000 37,839 37,454 36,493 Income Before Extraordinary Item 5,368 5,274 4,278 4,052 Net Income (a) 6,573 8,707 4,278 4,052 Earnings per Share: Basic .16 .21 .10 .10 Diluted .16 .20 .10 .09 1997 First (b) 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 (a) Reflects the effect of net of tax extraordinary gains of $1,205,000 and $3,433,000 in the first and second quarters, respectively, which increased basic and diluted earnings per share by $.03 and $.08 in the first and second quarters, respectively. (b) Reflects a nontaxable gain of $17,075,000 from the issuance of stock by subsidiaries. 30 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 74%-owned subsidiary of Thermo Electron Corporation) and subsidiaries as of January 2, 1999, and January 3, 1998, the related consolidated statements of income, cash flows, and comprehensive income and shareholders' investment for each of the three years in the period ended January 2, 1999. 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 2, 1999, and January 3, 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 1999, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts February 11, 1999 31 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 businesses operate in four reportable segments: Quality Assurance and Security Products (Quality Assurance), Precision Weighing and Inspection Equipment (Inspection Equipment), Heart Assist and Blood Testing Devices (Heart Assist Devices), and Power Electronics and Test Equipment (Power Equipment). Through the Company's Thermedics Detection Inc. subsidiary, the Quality Assurance segment develops, manufactures, and markets high-speed detection and measurement instruments used in a variety of on-line industrial process applications, security applications, and laboratory analyses. The Inspection Equipment segment includes the Company's Thermo Sentron Inc. subsidiary, which develops, manufactures, and markets high-speed precision-weighing and inspection equipment for industrial production and packaging lines. In June 1998, Thermo Sentron acquired the three businesses that constituted the product-monitoring group of Graseby Limited (the product-monitoring businesses), a subsidiary of Smiths Industries plc (Note 3). The Power Equipment segment, through the Company's Thermo Voltek Corp. subsidiary, manufactures electronics-test instruments and a range of products related to power amplification, conversion, and quality. The Heart Assist Devices segment, consisting of 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. The electric LVAS is being used in Europe as a bridge to transplant and to provide long-term cardiac support for patients not eligible for a heart transplant. In general, a profit cannot be earned from the sale of an LVAS in the United States until approval of the device for commercial sale has been received from the U.S. Food and Drug Administration (FDA). With the FDA's approval, the Company began earning a profit on the sale of its air-driven LVAS in 1994. In September 1998, the Company announced that the FDA granted approval for commercial sale in the U.S. of the electric LVAS as a bridge to transplant, and as a result, Thermo Cardiosystems has become eligible to earn a profit on the sale of the electric LVAS. Until FDA approval has been obtained, the Company may not earn a profit on the sale in the U.S. of other products 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 premium-quality, single-use skin-incision devices. The Company also develops and manufactures enteral nutrition-delivery systems and a line of medical-grade polymers used in medical disposables and in nonmedical, industrial applications, including safety glass and automotive coatings. A significant amount of the Company's revenues is derived from sales of products outside of the United States, through export sales and sales by the Company's foreign subsidiaries. The Company expects an increase in the percentage of revenues derived from international operations. During 1998, the Company had exports from its U.S. and foreign operations to Asia of approximately 8% of total revenues. Exports to Asia in 1998 were primarily to Japan, Taiwan, and China. 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 have been adversely affected by the unstable economic conditions in Asia. 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. 32 Results of Operations 1998 Compared With 1997 Total revenues increased to $313.1 million in 1998 from $307.7 million in 1997. Increases in revenues at the Inspection Equipment segment of $20.1 million and Heart Assist Devices segment of $4.0 million were partially offset by decreases in revenues at the Quality Assurance segment of $12.8 million and Power Equipment segment of $6.7 million. Revenues from the Inspection Equipment segment increased to $98.8 million in 1998 from $78.7 million in 1997. Revenues increased $24.6 million as a result of acquisitions made by Thermo Sentron in 1998 and 1997. This increase was offset in part by decreases of $2.3 million primarily due to decreased demand in the United Kingdom and $2.2 million due to the impact of a stronger U.S. dollar relative to currencies in foreign countries in which Thermo Sentron operates. Heart Assist Devices segment revenues increased to $66.8 million in 1998 from $62.8 million in 1997. Revenues from Thermo Cardiosystems' LVAS increased to $30.3 million in 1998 from $27.0 million in 1997, primarily due to an increase in revenues from the electric LVAS as a result of FDA approval, which was granted in September 1998. To a lesser extent revenues increased due to a price increase for the electric LVAS and an increase in revenues from the air-driven LVAS. These increases were offset in part by a decrease in revenues due to the expiration of several government contracts. Revenues from the Quality Assurance segment decreased to $91.6 million in 1998 from $104.4 million in 1997. Revenues from Thermedics Detection's industrial process instruments and related services decreased to $30.1 million in 1998 from $39.2 million in 1997, primarily due to lower revenues from ALEXUS(R) and near-infrared analyzers, offset in part by an increase in revenues from Thermedics Detection's InScan(R) product line. Revenues in 1997 included $6.6 million from a mandated ALEXUS product-line upgrade of The Coca-Cola Company's existing installed base. Revenues from EGIS(R) explosives-detection systems and related services decreased to $8.2 million in 1998 from $10.3 million in 1997, primarily due to lower shipments of security systems. Thermedics Detection completed shipments under a contract with the U.S. Federal Aviation Administration (FAA) during 1998, which contributed $2.6 million of revenues in 1998. Revenues from the Power Equipment segment decreased to $37.9 million in 1998 from $44.6 million in 1997, primarily due to lower demand for certain lower-margin products in Europe and lower sales of electrostatic discharge (ESD) test equipment to the semiconductor industry, due in part to Asian economic conditions. In November 1998, Thermo Voltek sold its Universal Voltronics division for $2.5 million, $2.2 million of which had been received as of year-end 1998. Universal Voltronics had unaudited revenues and operating income of $4.7 million and $0.7 million, respectively, in 1998. The Company's backlog decreased to $29.8 million at year-end 1998 from $36.6 million at year-end 1997, primarily due to Thermedics Detection's completion of its contract with the FAA and a decrease in demand at Thermo Voltek. The gross profit margin decreased to 48% in 1998 from 49% in 1997. The gross profit margin at the Quality Assurance segment decreased to 54% in 1998 from 56% in 1997, primarily due to lower revenues and, to a lesser extent, changes in product mix. The gross profit margin at the Inspection Equipment segment decreased to 38% in 1998 from 40% in 1997, primarily due to the inclusion of lower-margin revenues from the product-monitoring businesses. These decreases were offset in part by an increase in the gross profit margin at the Heart Assist Devices segment to 58% in 1998 from 57% in 1997, primarily due to manufacturing efficiencies and cost reduction efforts implemented at International Technidyne in 1998. Selling, general, and administrative expenses as a percentage of revenues increased to 29% in 1998 from 28% in 1997. The increase is primarily due to a decrease in revenues at the Quality Assurance segment and, to a lesser extent, an increase in sales and marketing staff at the Heart Assist Devices segment in anticipation of increased electric LVAS sales following the FDA's approval. These increases were offset in part by a decrease in selling, general, and 33 1998 Compared With 1997 (continued) administrative expenses as a percentage of revenues at the Power Equipment segment due to efficiencies gained from operational, organizational, and personnel changes implemented in 1997. Research and development expenses increased to $26.6 million in 1998 from $24.3 million in 1997. The increase reflects increased expenses at the Heart Assist Devices segment associated with a clinical trial being conducted to evaluate the electric LVAS as an alternative to medical therapy as well as costs associated with the development of Thermo Cardiosystems' HeartMate II system. In addition, research and development expenses increased at Thermo Sentron due to the inclusion of expenses from the product-monitoring businesses. Interest income decreased to $13.1 million in 1998 from $13.3 million in 1997, primarily due to lower average invested balances as a result of cash expended for the acquisition of the product-monitoring businesses and repurchase of securities of the Company and certain of its majority-owned subsidiaries. These decreases were offset in part by an increase in interest income due to higher average invested balances as a result of Thermo Cardiosystems' issuance of $70.0 million principal amount of 4 3/4% subordinated convertible debentures in May 1997. Interest expense increased to $5.6 million in 1998 from $3.4 million in 1997, primarily as a result of Thermo Cardiosystems' issuance of 4 3/4% subordinated convertible debentures and interest expense on borrowings from Thermo Electron Corporation used to partially finance the acquisition of the product-monitoring businesses. 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 a gain of approximately $17.1 million in 1997 (Note 10). Such 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. Further, 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." In February 1999, the FASB issued a revision of the earlier document entitled "Consolidated Financial Statements: Purpose and Policy." The October 1995 exposure draft had proposed new rules for how consolidated financial statements should be prepared. Under that proposed statement, 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 in equity of the consolidated entity with no gain or loss being recorded. The 1995 exposure draft addressed rule changes concerning consolidation procedures, which would affect the Company's ability to record gains on issuance of subsidiary stock, and consolidation policy, which does not affect the accounting for such gains. The February 1999 revised exposure draft addresses only consolidation policy. The FASB indicated that it will consider resuming discussion on consolidation procedures after completion of the efforts on consolidation policy. The timing and contents of any final statement on consolidation procedures are uncertain. The effective tax rates were 38% and 29% in 1998 and 1997, respectively. The effective tax rate in 1998 exceeded the statutory federal income tax rate primarily due to the impact of state income taxes and nondeductible amortization of cost in excess of net assets of acquired companies. The effective tax rate in 1997 was below the statutory federal income tax rate primarily due to the nontaxable gain on issuance of stock by subsidiary, offset in part by the impact of state income taxes and nondeductible amortization of cost in excess of net assets of acquired companies. Minority interest expense decreased to $5.8 million in 1998 from $7.7 million in 1997, primarily due to lower profits at certain of the Company's majority-owned subsidiaries and the Company's increased ownership of Thermo Cardiosystems (Note 8). 34 1998 Compared With 1997 (continued) In June 1998, the Company exchanged $21.7 million principal amount of noninterest-bearing subordinated convertible debentures for $15.9 million principal amount of 2 7/8% subordinated convertible debentures due 2003, resulting in an extraordinary gain of $3.0 million, net of related income taxes of $2.1 million. In addition, the Company and a majority-owned subsidiary repurchased $14.2 million principal amount of subordinated convertible debentures for $11.4 million in cash, resulting in an extraordinary gain of $1.6 million, net of related income taxes of $1.0 million (Note 7). 1997 Compared With 1996 Total revenues increased to $307.7 million in 1997 from $292.1 million in 1996. Increases in revenues of $9.8 million and $8.7 million at the Quality Assurance and Inspection Equipment segments, respectively, were offset in part by decreases of $3.9 million and $1.1 million at the Power Equipment and Heart Assist Devices segments, respectively. Revenues from the Quality Assurance segment increased to $104.4 million in 1997 from $94.6 million in 1996. Revenues from Thermedics Detection's process detection instruments and related services increased to $39.2 million in 1997 from $35.7 million in 1996, primarily due to ALEXUS revenues of $6.6 million from 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 Thermedics Detection's InScan systems, which were introduced in 1996. These increases were offset in part by a decrease in demand in Europe at Thermedics Detection's Moisture Systems subsidiary. Revenues from Thermedics Detection's EGIS explosives-detection 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 FAA. Revenues from the Inspection Equipment segment increased to $78.7 million in 1997 from $70.0 million in 1996, primarily due to an increase of $7.2 million related to greater product demand and $4.2 million due to acquisitions made by Thermo Sentron in 1997 and 1996. 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 countries in which Thermo Sentron operates. Revenues from the Power Equipment segment decreased to $44.6 million in 1997 from $48.5 million in 1996, primarily due to lower demand for electromagnetic compatibility (EMC) test products, resulting from the declining influence of IEC 801, the European Union directive on EMC that took effect January 1, 1996, and, to a lesser extent, a decline in the component-reliability market for ESD 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. Heart Assist Devices segment revenues decreased to $62.8 million in 1997 from $64.0 million in 1996, primarily due to a $6.6 million decrease in revenues from the air-driven LVAS, offset in part by the inclusion of $2.0 million in revenues from an acquisition. The decrease in revenues was also offset by a $1.9 million increase in revenues from its electric LVAS and a $1.9 million increase in revenues from International Technidyne. The gross profit margin remained constant at 49% in 1997 and 1996. The gross profit margin at the Quality Assurance segment increased to 56% in 1997 from 52% in 1996, 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. To a lesser extent, the gross profit margin improved at the Quality Assurance segment due to the effect in 1996 of a charge for inventory obsolescence in connection with planned product changes. These increases were offset in part by a decrease in the gross profit margin at the Power Equipment segment, 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. 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 the Quality Assurance segment due to $1.5 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- 35 1997 Compared With 1996 (continued) GC(TM) systems. Selling, general, and administrative expenses as a percentage of revenues increased at the Heart Assist Devices segment 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 the Power Equipment segment 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 the Quality Assurance segment 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. 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 (Note 12). In addition, in connection with the December 1996 acquisition of Nimbus, Thermo Cardiosystems 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 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 Thermo Sentron, offset in part by Thermo Cardiosystems' issuance of debentures. The Company recorded gains on issuance of stock by subsidiaries of $17.1 million and $23.7 million in 1997 and 1996, respectively. 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. 36 Liquidity and Capital Resources Consolidated working capital was $232.3 million at January 2, 1999, compared with $309.4 million at January 3, 1998. Cash, cash equivalents, and short- and long-term available-for-sale investments were $232.7 million at January 2, 1999, compared with $258.0 million at January 3, 1998. Of the $232.7 million balance at January 2, 1999, $197.8 million was held by the Company's majority-owned subsidiaries and the remainder by the Company and its wholly owned subsidiaries. During 1998, $37.0 million of cash was provided by operating activities. Cash of $4.0 million was provided by a decrease in accounts receivable, primarily at the Power Equipment segment due to lower revenues. This increase in cash was partially offset by $3.6 million of cash used to fund a decrease in other current liabilities, primarily at the Inspection Equipment segment. Excluding available-for-sale investments activity, the Company's primary investing activity in 1998 was the purchase of the product-monitoring businesses by Thermo Sentron for $44.0 million, net of cash acquired, and the assumption of certain liabilities (Note 3). In November 1998, Thermo Voltek sold its Universal Voltronics division for $2.5 million, $2.2 million of which had been received as of year-end 1998. Universal Voltronics had unaudited revenues and operating income of $4.7 million and $0.7 million, respectively, in 1998. The Company expended $7.6 million for purchases of property, plant, and equipment during 1998. During 1999, the Company expects to make capital expenditures of approximately $10 million. During 1998, the Company's financing activities used cash of $12.9 million. In June 1998, Thermo Sentron borrowed $21.0 million from Thermo Electron to partially finance the acquisition of the product-monitoring businesses. In December 1998, Thermo Sentron repaid $2.0 million of this amount and issued Thermo Electron a new note for $19.0 million in exchange for the initial note (Note 3). In addition, The Company and a majority-owned subsidiary expended $11.4 million for the repurchase of subordinated convertible debentures (Note 7). During 1998, the Company and certain of its majority-owned subsidiaries expended $0.9 million and $18.6 million, respectively, to purchase the common stock of certain of the Company's 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 2, 1999, $0.3 million and $13.9 million remained under the Company's and its majority-owned subsidiaries' authorizations, respectively. 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, the Company proposed to acquire, through a merger, all of the outstanding shares of common stock of Thermo Voltek that the Company does not own other than shares owned by Thermo Electron, as well as assume Thermo Voltek's $5.3 million principal amount of 3 3/4% subordinated convertible debentures due 2000. The total transaction cost is estimated to be approximately $25 million, which would be paid from internal funds. The Company is currently party to litigation in the Delaware State Chancery Court with respect to this transaction (Note 16). While the Company currently has no other definitive acquisition agreements, it expects that it would finance any acquisitions through internal funds or through borrowings from Thermo Electron, although it has no agreement with Thermo Electron that assures funds will be available on acceptable terms or at all. The Company believes that its existing resources are sufficient to meet the capital requirements of its existing operations for the foreseeable future. 37 Market Risk The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, and equity prices, which could affect its future results of operations and financial condition. The Company manages its exposure to these risks through its regular operating and financing activities. Foreign Currency Exchange Rates The Company generally views its investment in foreign subsidiaries with a functional currency other than the Company's reporting currency as long-term. The Company's investment in foreign subsidiaries is sensitive to fluctuations in foreign currency exchange rates. The functional currencies of the Company's foreign subsidiaries are principally denominated in British pounds sterling and German deutsche marks. The effect of a change in foreign exchange rates on the Company's net investment in foreign subsidiaries is reflected in the "Accumulated other comprehensive items" component of shareholders' investment. A 10% depreciation in year-end 1998 functional currencies, relative to the U.S. dollar, would result in a $8.4 million reduction of shareholders' investment. Interest Rates Certain of the Company's short- and long-term available-for-sale investments and subordinated convertible debentures are sensitive to changes in interest rates. Interest rate changes would result in a change in the fair value of these financial instruments due to the difference between the market interest rate and the rate at the date of purchase or issuance of the financial instrument. A 10% decrease in year-end 1998 market interest rates would result in a negative impact of $7.8 million on the net fair value of the Company's interest-sensitive financial instruments. The Company's cash, cash equivalents, available-for-sale investments maturing within one year, note payable to parent company, and notes payable and current maturity of long-term obligation are sensitive to changes in interest rates. Interest rate changes would result in a change in interest income due to the difference between the current interest rates on cash and cash equivalents and the variable rate that these financial instruments may adjust to in the future. A 10% decrease in year-end 1998 interest rates would result in a negative impact of $0.4 million on the Company's net income. Equity Prices The Company's and its subsidiaries' subordinated convertible debentures are sensitive to fluctuations in the price of Company or subsidiary common stock into which the obligations are convertible. Changes in equity prices would result in changes in the fair value of the subordinated convertible debentures due to the difference between the current market price and the market price at the date of issuance of the financial instrument. A 10% increase in the year-end 1998 market equity prices would result in a negative impact of $3.2 million on the fair value of the Company's subordinated convertible debentures. Year 2000 The Company continues to assess the potential impact of the year 2000 on the Company's internal business systems, products, and operations. The Company's year 2000 initiatives include (i) testing and upgrading significant information technology systems and facilities; (ii) testing and developing upgrades, if necessary, for the Company's current products and certain discontinued products; (iii) contacting key suppliers and vendors to determine their year 2000 compliance status; and (iv) developing a contingency plan. The Company's State of Readiness The Company has implemented a compliance program to ensure that its critical information technology systems and facilities will be ready for the year 2000. The first phase of the program, testing and evaluating the Company's critical information technology systems and facilities for year 2000 compliance, has largely been completed. During phase one, the Company tested and evaluated its significant computer systems, software applications, and related 38 Year 2000 (continued) equipment for year 2000 compliance. The Company also evaluated the potential year 2000 impact on its critical facilities. The Company is currently in phase two of its program, during which any noncompliant systems or facilities that were identified during phase one are prioritized and remediated. Based on our evaluation, the Company does not believe that any material upgrades to its critical facilities are required. The Company is currently upgrading or replacing such noncompliant information technology systems, and this process was approximately 70% complete as of January 2, 1999. In many cases, such upgrades or replacements are being made in the ordinary course of business, without accelerating previously scheduled upgrades or replacements. The Company expects that all of its material information technology systems and critical facilities will be year 2000 compliant by the end of 1999. The Company has also implemented a compliance program to test and evaluate the year 2000 readiness of the material products that it currently manufactures and sells or for which the Company continues to provide technical support. The Company has completed testing all of its material current products and it believes that all of such material products are year 2000 compliant. However, as many of the Company's products are complex, interact with or incorporate third-party products, and operate on computer systems that are not under the Company's control, there can be no assurance that the Company has identified all of the year 2000 problems with its current products. The Company believes that certain of its older products, which it no longer manufactures or sells, may not be year 2000 compliant. The Company is continuing to test and evaluate such products. The Company is offering upgrades and/or identifying potential solutions where reasonably practicable. The Company is in the process of identifying and assessing the year 2000 readiness of key suppliers and vendors that are believed to be significant to the Company's business operations. As part of this effort, the Company has developed and is distributing questionnaires relating to year 2000 compliance to its significant suppliers and vendors. The Company has started to follow-up and monitor the year 2000 compliance progress of significant suppliers and vendors that indicate that they are not year 2000 compliant or that do not respond to the Company's questionnaires. The Company has not completed the majority of its assessment of third party risk, but expects to be substantially completed by October 1999. Year 2000 Compliance Status - -------------------------------------------------------------------------------------- Material Information Technology Systems and Facilities Approximately 70% completed Material Current Products Substantially completed Evaluation of Third Party Risk Less than 50% completed Contingency Plan The Company is developing a contingency plan that will allow its primary business operations to continue despite disruptions due to year 2000 problems. This plan may include identifying and securing other suppliers, increasing inventories, and modifying production facilities and schedules. As the Company continues to evaluate the year 2000 readiness of its business systems and facilities, products, and significant suppliers and vendors, it will modify and adjust its contingency plan as may be required. Estimated Costs to Address the Company's Year 2000 Issues The Company had incurred expenses to third parties (external costs) related to year 2000 issues of approximately $0.7 million as of January 2, 1999, and the total external costs of year 2000 remediation are expected to be approximately $1.3 million. Year 2000 costs are funded from working capital. All internal costs and related external 39 Year 2000 (continued) costs other than capital additions related to year 2000 remediation have been and will continue to be expensed as incurred. The Company does not track the internal costs incurred for its year 2000 compliance project. Such costs are principally the related payroll costs for its information systems group. Risks of the Company's Year 2000 Issues While the Company is attempting to minimize any negative consequences arising from the year 2000 issue, there can be no assurance that year 2000 problems will not have a material adverse impact on the Company's business, operations, or financial condition. While the Company expects that upgrades to its internal business systems will be completed in a timely fashion, there can be no assurance that the Company will not encounter unexpected costs or delays. Despite its efforts to ensure that its material current products are year 2000 compliant, the Company may see an increase in warranty and other claims, especially those related to Company products that incorporate, or operate using, third-party software or hardware. In addition, certain of the Company's older products, which it no longer manufactures or sells, may not be year 2000 compliant, which may expose the Company to claims. If any of the Company's material suppliers or vendors experience business disruptions due to year 2000 issues, the Company might also be materially adversely affected. There is expected to be a significant amount of litigation relating to the year 2000 issue and there can be no assurance that the Company will not incur material costs in defending or bringing lawsuits. In addition, if any year 2000 issues are identified, there can be no assurance that the Company will be able to retain qualified personnel to remedy such issues. Any unexpected costs or delays arising from the year 2000 issue could have a significant adverse impact on the Company's business, operations, and financial condition, in amounts that cannot be reasonably estimated at this time. 40 Forward-looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause its actual results in 1999 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Risks Associated With Acquisition Strategy. The Company's strategy includes the acquisition of businesses and technologies that complement or augment its existing product lines. Promising acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers and the need for regulatory approval, including antitrust approvals. There can be no assurance that the Company will be able to complete future acquisitions or that it will be able to successfully integrate any acquired business. In order to finance such acquisitions, it may be necessary for the Company to raise additional funds through public or private financings. 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 shareholders. Recently, Thermo Electron Corporation, the Company's parent, proposed a plan whereby the Company would acquire Thermo Electron's wholly owned biomedical group for shares of Company common stock, and the Company's equity interest in Thermo Sentron Inc., Thermedics Detection Inc., and Thermo Voltek Corp. The proposal is subject to a number of conditions and there can be no assurance that it will be completed. Further, if the transaction is completed, there can be no assurance that the Company can successfully integrate this business into its existing businesses. 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. Further, 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." In February 1999, the FASB issued a revision of the earlier document entitled "Consolidated Financial Statements: Purpose and Policy." The October 1995 exposure draft had proposed new rules for how consolidated financial statements should be prepared. Under that proposed statement, 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 in equity of the consolidated entity with no gain or loss being recorded. The 1995 exposure draft addressed rule changes concerning consolidation procedures, which would affect the Company's ability to record gains on issuance of subsidiary stock, and consolidation policy, which does not affect the accounting for such gains. The February 1999 revised exposure draft addresses only consolidation policy. The FASB indicated that it will consider resuming discussion on consolidation procedures after completion of the efforts on consolidation policy. The timing and contents of any final statement on consolidation procedures 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 41 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 1998, the Company had exports from its U.S. and foreign operations to Asia of approximately 8% of total revenues. Exports to Asia in 1998 were primarily to Japan, Taiwan, and China. 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 have been 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. The Company is aware of one other company that has received premarket approval from the FDA for an implantable LVAS that competes with the Company's LVAS. Certain of the Company's competitors, including its competitor in the implantable LVAS market, have greater resources, manufacturing and marketing capabilities, technical staff, and production facilities than those of the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than can the Company. Competition could increase if new companies enter the market, or if existing competitors expand their product lines. Intellectual Property Rights. The Company relies upon trade secret protection and patents to protect its proprietary rights. There can be no assurance that patents will issue from any pending or future patent applications owned by or licensed to the Company, or that the claims allowed under any issued patents will be sufficiently broad to protect the Company's technology. In the absence of patent protection, the Company may be vulnerable to competitors who attempt to copy the Company's products or gain access to its trade secrets and know-how. Proceedings initiated by the Company to protect its proprietary rights could result in substantial costs to the Company. The Company has received correspondence from a third party alleging that the textured surface of the LVAS infringes certain patent rights of such third party. The Company believes that it has meritorious defenses to the claims of the third party. However, no assurance can be given that the Company would be successful if litigation 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. 42 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 and other regulatory approvals have been obtained, such approvals can be suspended or revoked if Thermo Cardiosystems' products do not continue to satisfy regulatory requirements. Failure to comply with applicable regulatory requirements can result in, among other things, fines, suspensions of approvals, recalls of products, operating restrictions, and criminal prosecutions. In October 1994, Thermo Cardiosystems received FDA approval for the commercial sale of its pneumatic LVAS. In April 1994, Thermo Cardiosystems received the CE Mark for commercial sale of the pneumatic LVAS in all European Union countries. Thermo Cardiosystems' HeartPak(TM) portable console received the CE Mark in February 1995 and is currently in Phase I clinical trials in the U.S. In September 1998, Thermo Cardiosystems' electric LVAS received premarket approval by the FDA for use as a bridge to transplant. The electric LVAS received the CE Mark in August 1995 for use as a bridge to transplant and as an alternative to transplant. Thermo Cardiosystems' electric LVAS is currently in use in clinical trials in the U.S. testing the safety and efficacy of the device as both a bridge to transplant and as an alternative to transplant. 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 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 LVAS devices used as a bridge to heart transplant, which fulfill certain Medicare coverage criteria. This decision, updated in April 1997, has applied to Thermo Cardiosystems' pneumatic LVAS and has been extended to the electric LVAS. Several major non-government insurers have also agreed to offer coverage for the pneumatic LVAS and the electric LVAS; however, no assurance can be given that additional third party payers will cover the electric LVAS immediately because of the device's intended out-patient use. Even though reimbursement has been established by HCFA and by certain non-government insurers for LVAS devices, the Medicare coverage criteria could be amended or revised by HCFA, 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 LVAS devices will be granted within a reasonable period of time, or at all. The unavailability of third-party reimbursement for procedures involving Thermo 43 Cardiosystems' systems or for Thermo Cardiosystems' biomedical devices would have a material adverse effect on the Company's business. Uncertainty of Opinion Leader Acceptance and Support. A limited number of cardiac surgeons and cardiologists influence medical device selection and purchase decisions for a large portion of the target patient population. The Company 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 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 research and development. Since that time, Thermo Cardiosystems has been building its manufacturing, marketing, and sales capabilities. Although 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 and Thermedics Detection face an inherent business risk of exposure to product liability claims relating to the use of their products. With respect to Thermo Cardiosystems, this risk may increase as the number of LVAS implants increase and as the number of centers implanting the device expands. Although Thermo Cardiosystems and Thermedics Detection currently maintain product liability insurance against this risk, there can be no assurance that they will continue to be able to obtain such coverage at economically feasible rates, 44 if at all, or that such coverage will be adequate in terms and scope to protect Thermo Cardiosystems and Thermedics Detection completely in the event of a successful product liability claim. Effect of Government Regulations and Approvals on Market for Thermo Sentron's Products. The market for certain of Thermo Sentron's products, both in the United States and abroad, is subject to or influenced by various domestic and foreign clean air and consumer protection laws. Thermo Sentron designs, develops, and markets its products to meet customer needs created by existing and anticipated regulations, and any changes in these regulations may adversely affect consumer demand for Thermo Sentron's products. In addition, the marketing of certain of Thermo Sentron's products is dependent upon the receipt of regulatory and other approvals, including industry association approvals of the design, construction, and accuracy of Thermo Sentron's products. Delays in obtaining, or the failure to obtain, any such approvals could have a material adverse effect on Thermo Sentron's business and results of operations. 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 Security Instruments 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 FAA to develop a standard for explosives-detection systems and required airports in the United States to deploy systems meeting this standard in 1993. 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 its EGIS and EGIS II (formerly named Rampart) 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 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 45 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 items, 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 industrial process instruments and related services to bottlers licensed by The Coca-Cola Company (Coca-Cola Bottlers) were $6,199,000, $13,194,000, and $10,641,000 in 1998, 1997, and 1996, 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, Thermedics Detection does not expect that revenues derived from these customers will continue at a rate comparable to prior years. Further, Thermedics Detection intends to continue to develop and introduce new industrial process products for the food, beverage, and other markets; however, there can be no assurance that Thermedics Detection will be successful in the introduction of new industrial process products or that any sales of these products will be sufficient to maintain a rate of growth equivalent to prior years. Dependence Upon OEM Relationships. A portion of the Company's sales are through Original Equipment Manufacturers (OEM) arrangements. The Company's sales depend, in part, on the continuation of these OEM arrangements and the level of end-user sales by such OEMs. There can be no assurance that the Company will be able to maintain its existing, or establish new, OEM relationships. Risks of the Company's Year 2000 Issues. While the Company is attempting to minimize any negative consequences arising from the year 2000 issue, there can be no assurance that year 2000 problems will not have a material adverse impact on the Company's business, operations, or financial condition. While the Company expects that upgrades to its internal business systems will be completed in a timely fashion, there can be no assurance that the Company will not encounter unexpected costs or delays. Despite its efforts to ensure that its material current products are year 2000 compliant, the Company may see an increase in warranty and other claims, especially those related to Company products that incorporate, or operate using, third-party software or hardware. In addition, certain of the Company's older products, which it no longer manufactures or sells, may not be year 2000 compliant, which may expose the Company to claims. If any of the Company's material suppliers, customers, or vendors experience business disruptions due to year 2000 issues, the Company might also be materially adversely affected. There is expected to be a significant amount of litigation relating to the year 2000 issue and there can be no assurance that the Company will not incur material costs in defending or bringing lawsuits. In addition, if any year 2000 issues are identified, there can be no assurance that the Company will be able to retain qualified personnel to remedy such issues. Any unexpected costs or delays arising from the year 2000 issue could have a significant adverse impact on the Company's business, operations, and financial condition in amounts that cannot be reasonably estimated at this time. 46 Selected Financial Information (In thousands except per share amounts) 1998(a) 1997(b) 1996(c) 1995(d) 1994 - -------------------------------------------------- ---------- ----------- ---------- ---------- ---------- Statement of Income Data Revenues $313,131 $ 307,666 $292,077 $208,041 $183,753 Income Before Extraordinary Item 18,972 41,492 29,138 17,174 12,695 Net Income 23,610 41,492 29,138 17,174 12,695 Earnings per Share: Basic .57 1.13 .80 .51 .39 Diluted .55 1.07 .75 .48 .38 Balance Sheet Data Working Capital $232,292 $ 309,363 $208,170 $114,340 $131,578 Total Assets 553,618 536,552 456,699 386,249 306,691 Long-term Obligations 122,802 142,771 74,359 45,201 82,551 Shareholders' Investment 247,976 227,346 211,582 172,751 136,783 (a) Reflects an extraordinary gain of $4.6 million, net of taxes. (b) 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. (c) 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. (d) Reflects the December 1995 acquisition of Orion Research Inc. 47 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 1998 and 1997, as reported in the consolidated transaction reporting system. 1998 1997 ------------------- -------------------- Quarter High Low High Low - --------------------------------------------------------------- ---------- ---------- ---------- ----------- First $17 13/16 $14 5/8 $21 1/2 $16 5/8 Second 17 15/16 12 3/8 19 1/16 15 Third 13 9/16 7 1/2 19 7/8 15 1/8 Fourth 11 1/4 6 5/8 20 1/2 15 1/16 As of January 29, 1999, the Company had 2,106 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 29, 1999 was $9 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 the Investor Relations Department, Thermedics Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046, (781) 622-1111. A mailing list is maintained to enable shareholders whose stock is held in street name, and other interested individuals, to receive 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 is 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 (781) 575-3120 Dividend Policy The Company has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future because its policy has been to use earnings to finance expansion and growth. Payment of dividends will rest within the discretion of the Company's Board of Directors and will depend upon, among other factors, the Company's earnings, capital requirements, and financial condition. Form 10-K Report A copy of the Annual Report on Form 10-K for the fiscal year ended January 2, 1999, as filed with the Securities and Exchange Commission, may be obtained at no charge by writing to the Investor Relations Department, Thermedics Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046. Annual Meeting The annual meeting of shareholders will be held on Thursday, May 27, 1999, at 1:30 p.m., at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts. 48
EX-21 3 THERMEDICS INC. Subsidiaries of the Registrant
At February 28, 1999, the Registrant owned the following companies: STATE OR JURISDICTION OF PERCENT OF NAME INCORPORATION OWNERSHIP - ------------------------------------------------------------------------------------------------------------ Corpak Inc. Massachusetts 100 Walpak Company Illinois 100 TV Acquisition Corporation Delaware 100 TMD Holdings Inc. Delaware 100 TMO TCA Holdings, Inc. Delaware 100 Thermedics Detection Inc. Massachusetts 83.79** (additionally, 4.57% of the shares are owned directly by The Thermo Electron Companies Inc.) Detection Securities Corporation Massachusetts 100 Orion Research, Inc. Massachusetts 100 Advanced Sensor Technology Massachusetts 100 Orion Research Limited United Kingdom 100 Orion Research Puerto Rico, Inc. Delaware 100 Russell pH Limited Scotland 100 Rutter & Co. Netherlands 100 Rutter Instrumentation S.A.R.L. France 90 Systech B.V. Netherlands 50 ThermedeTec Corporation Delaware 100 Thermedics Detection de Argentina S.A. Argentina 100 (1% of which shares are owned directly by Thermedics Detection Inc.) Thermedics Detection de Mexico, S.A. de C.V. Mexico 100 Thermedics Detection GmbH Germany 100 Thermedics Detection Limited United Kingdom 100 Thermedics Detection Scandinavia AS Norway 100 Thermo Sentron Inc. Delaware 74.25** (additionally, 12.00% of the shares are owned directly by The Thermo Electron Companies Inc.) Allen Coding Systems Limited United Kingdom 100 Allen Coding Corporation Delaware 100 Goring Kerr Limited United Kingdom 100 Best Checkweighers Limited United Kingdom 100 Intertest (UK) Limited United Kingdom 100 Goring Kerr Detection Limited United Kingdom 100 Graseby Goring Kerr (NZ) Limited New Zealand 100 Graseby Goring Kerr Canada Inc. Ontario 100 Graseby Product Monitoring GmbH Germany 100 Goring Kerr Inc. New York 100 Ramsey France S.A.R.L. France 100 Ramsey Ingenieros S.A. Spain 100 Ramsey Italia S.R.L. Italy 100 Tecno Europa Elettromeccanica S.R.L. Italy 100 Ramsey Technology Inc. Massachusetts 100 Xuzhou Ramsey Technology Development Co., Limited China 50* Thermo Sentron Australia Pty. Ltd.. Australia 100 STATE OR JURISDICTION OF PERCENT OF NAME INCORPORATION OWNERSHIP - ------------------------------------------------------------------------------------------------------------ Thermo Sentron B.V. Netherlands 100 Thermo Sentron Canada Inc. Canada 100 Thermo Sentron GmbH Germany 100 Thermo Sentron Limited United Kingdom 100 Hitech Electrocontrols Limited United Kingdom 100 Hitech Licenses Ltd. United Kingdom 100 Hitech Metal Detectors Ltd. United Kingdom 100 Westerland Engineering Ltd. United Kingdom 100 Thermo Sentron SEC Corporation Massachusetts l00 Thermo Sentron (South Africa) Pty. Ltd. South Africa 100 TMD Securities Corporation Massachusetts 100 Thermo Cardiosystems Inc. Massachusetts 60.05** (additionally, 0.21% of the shares are owned directly by The Thermo Electron Companies Inc.) International Technidyne Corporation Delaware 100 International Technidyne Corporation Limited United Kingdom 100 Nimbus Inc. Massachusetts 100 TCA Securities Corporation Massachusetts 100 Thermo Voltek Corp. Delaware 66.45** (additionally, 2.74% 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 Kingdom 100 Milmega Limited United Kingdom 100 TVL Securities Corporation Delaware 100 UVC Realty Corp. New York 100 * Joint Venture/Partnership ** As of January 2, 1999
EX-23 4 Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation by reference of our report for Thermedics Inc. dated February 11, 1999, included in or made a part of this Form 10-K, into the Company's previously filed Registration Statement No. 2-93746 on Form S-8, Registration Statement No. 33-00183 on Form S-8, Registration Statement No. 2-93747 on Form S-8, Registration Statement No. 33-8992 on Form S-8, Registration Statement No. 33-31621 on Form S-8, Registration Statement No. 33-9215 on Form S-8, Registration Statement No. 33-43707 on Form S-3, Registration Statement No. 33-40866 on Form S-3, Registration Statement No. 33-64070 on Form S-8, Registration Statement No. 33-86972 on Form S-8, Registration Statement No. 33-86974 on Form S-8, Registration Statement No. 033-65279 on Form S-8, Registration Statement No. 033-61435 on Form S-8, Registration No. 333-02149 on Form S-3, and Registration No. 333-32035 on Form S-3. Arthur Andersen LLP Boston, Massachusetts March 12, 1999 EX-27 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-02-1999 JAN-02-1999 142,108 43,310 67,936 4,498 62,783 326,211 60,687 38,780 553,618 93,919 122,802 0 0 4,174 243,802 553,618 313,131 313,131 164,345 164,345 26,595 1,002 5,581 40,058 15,312 18,972 0 4,638 0 23,610 0.57 0.55
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