<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
THERMEDICS DETECTION INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
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(2) Aggregate number of securities to which transaction applies:
5,961,225
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
The filing fee of $7,750 represents 1/50 of 1% of $38,747,962, which
amount is the value of the securities to be issued by the registrant as
consideration in the transaction (as calculated by multiplying the
average of the high and low prices of the registrant's common stock on
October 21, 1998 by the number of shares to be issued: $6.50 x
5,961,225 = $38,747,962).
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(4) Proposed maximum aggregate value of transaction:
$38,747,963
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(5) Total fee paid:
$7,750
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
November [ ], 1998
Dear Stockholder:
The enclosed Notice calls a Special Meeting of the Stockholders of
Thermedics Detection Inc. I respectfully request that all Stockholders attend
this meeting, if possible.
Enclosed with this letter is a proxy authorizing three officers of the
Company to vote your shares for you if you do not attend the meeting. Whether or
not you are able to attend the Meeting, I urge you to complete your proxy and
return it to our transfer agent, American Stock Transfer & Trust Company, in the
enclosed addressed, postage-paid envelope, as a quorum of the Stockholders must
be present at the meeting, either in person or by proxy.
I would appreciate your immediate attention to the mailing of this proxy.
Yours very truly,
James Barbookles
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
NOTICE OF SPECIAL MEETING
November [ ], 1998
To the Holders of the Common Stock of
THERMEDICS DETECTION INC.
A Special Meeting of the Stockholders (the "Meeting") of Thermedics
Detection Inc. (the "Company") will be held on [ ], [December , 1998],
at 10:00 a.m. local time at the offices of Thermo Electron Corporation, 81 Wyman
Street, Waltham, Massachusetts. The purpose of the Meeting is to consider and
vote upon a proposal to approve the listing on the American Stock Exchange, Inc.
of 5,961,225 shares of the Company's common stock to be issued in connection
with the acquisition by the Company of Orion Research Inc. ("Orion"), a
manufacturer and supplier of electrochemistry systems, from Thermedics Inc.
pursuant to an Agreement and Plan of Reorganization dated as of May 6, 1998.
The transfer books of the Company will not be closed prior to the Meeting,
but, pursuant to appropriate action by the Board of Directors, the record date
for the determination of the Stockholders entitled to receive notice of and to
vote at the Meeting is [ ], 1998.
The By-laws require that the holders of a majority of the stock issued and
outstanding and entitled to vote be present or represented by proxy at the
Meeting in order to constitute a quorum for the transaction of business. It is
important that your stock be represented at the Meeting regardless of the number
of shares you may hold. Whether or not you are able to be present in person,
please sign and return promptly the enclosed proxy in the accompanying envelope,
which requires no postage if mailed in the United States.
This Notice, the proxy and proxy statement enclosed herewith are sent to you
by order of the Board of Directors.
SANDRA L. LAMBERT
CLERK
<PAGE>
PROXY STATEMENT
The enclosed proxy is solicited by the Board of Directors of Thermedics
Detection Inc. (the "Company") for use at the Special Meeting of the
Stockholders (the "Meeting") to be held on [ ] [ ], 1998, at 10:00 a.m.
local time at the offices of Thermo Electron Corporation, 81 Wyman Street,
Waltham, Massachusetts and any adjournment thereof. The mailing address of the
executive office of the Company is 220 Mill Road, Chelmsford, Massachusetts
01824-4178, and its telephone number is (781) 622-1000. This proxy statement and
the enclosed proxy were first furnished to Stockholders of the Company on or
about [November ], 1998.
VOTING PROCEDURES
The Board of Directors intends to present to the Meeting a proposal to
approve the listing on the American Stock Exchange, Inc. of 5,961,225 shares
(the "TDX Shares") of the Company's common stock, $.10 par value per share
("Common Stock"), to be issued in connection with the acquisition by the Company
of Orion Research Inc., a manufacturer and supplier of electrochemistry systems
("Orion"), pursuant to an Agreement and Plan of Reorganization dated as of May
6, 1998 (the "Merger Agreement") among the Company, Thermedics Inc.
("Thermedics"), a publicly held subsidiary of Thermo Electron Corporation, Orion
Acquisition Inc., a wholly-owned subsidiary of the Company, and Orion. A copy of
the Merger Agreement is attached hereto as Appendix A.
The representation in person or by proxy of a majority of the outstanding
shares of Common Stock entitled to vote at the Meeting is necessary to provide a
quorum for the transaction of business at the Meeting. Shares can only be voted
if the Stockholder is present in person or is represented by returning a
properly signed proxy. Each Stockholder's vote is very important. Whether or not
you plan to attend the Meeting in person, please sign and promptly return the
enclosed proxy card, which requires no postage if mailed in the United States.
All signed and returned proxies will be counted towards establishing a quorum
for the Meeting, regardless of how the shares are voted. Proxies are being
solicited by the Company.
Shares represented by proxy will be voted in accordance with your
instructions. You may specify your choice by marking the appropriate box on the
proxy card. If your proxy card is signed and returned without specifying
choices, your shares will be voted FOR the management proposal and as the
individuals named as proxy holders on the proxy deem advisable on all other
matters as may properly come before the Meeting.
The proposal to be voted upon at the Meeting must receive the affirmative
vote of a majority of shares present in person or represented by proxy, and
entitled to vote on the matter, for approval. An instruction to abstain from
voting on the proposal will be treated as shares present and entitled to vote
and, for purposes of determining the outcome of the vote, will have the same
effect as a vote against the proposal. Broker "non-votes" will not be treated as
shares present and entitled to vote on a voting matter and will have no effect
on the outcome of the vote. A broker "non-vote" occurs when a nominee holding
shares for a beneficial holder does not have discretionary voting power and does
not receive voting instructions from the beneficial owner.
Thermedics has agreed to vote all of the shares of Common Stock held by it
as of the Record Date in favor of the management proposal to list the TDX Shares
on the American Stock Exchange and all matters related thereto. As of the Record
Date (without giving effect to the issuance of the TDX Shares), Thermedics
beneficially owned approximately [76.6%] of the outstanding Common Stock.
ACCORDINGLY, APPROVAL OF THE PROPOSAL BY THE STOCKHOLDERS OF THE COMPANY IS
ASSURED.
A Stockholder who returns a proxy may revoke it at any time before the
Stockholder's shares are voted at the Meeting by written notice to the Clerk of
the Company received prior to the Meeting, by executing and returning a
later-dated proxy or by voting by ballot at the Meeting. Representatives of
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Arthur Andersen LLP, the Company's independent public accountants since its
inception in 1995, are not expected to be present at the Meeting.
The outstanding stock of the Company entitled to vote (excluding shares held
in treasury by the Company) as of [ ], 1998 (the "Record Date"),
consisted of [ ] shares of Common Stock. Only Stockholders of record at
the close of business on the Record Date, are entitled to vote at the Meeting.
Each share is entitled to one vote.
PROPOSAL TO APPROVE THE LISTING OF SHARES
ISSUABLE IN CONNECTION WITH THE ACQUISITION OF ORION RESEARCH INC.
SUMMARY OF TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT
On May 6, 1998, the Company, a publicly held subsidiary of Thermedics Inc.
("Thermedics"), agreed to purchase from Thermedics, a publicly held subsidiary
of Thermo Electron Corporation ("Thermo Electron"), Orion Research Inc., a
global manufacturer and supplier of electrochemistry systems ("Orion") in
exchange for the right to receive 5,961,225 shares of the Company's Common
Stock. The acquisition, which will become legally effective upon the filing of
Articles of Merger with the Secretary of State of the Commonwealth of
Massachusetts will be made pursuant to an Agreement and Plan of Reorganization
dated as of May 6, 1998 (the "Merger Agreement"), among the Company, Orion
Acquisition Inc., a wholly-owned subsidiary of the Company ("Acquisition"),
Thermedics, and Orion. Under the terms of the Merger Agreement, (i) Acquisition
will be merged with and into Orion, (ii) outstanding shares of Orion's common
stock will be canceled and converted into the right to receive 5,961,225 shares
of the Company's Common Stock (the "TDX Shares"), (iii) each outstanding share
of Acquisition's common stock will be canceled and converted into one share of
the common stock of Orion and (iv) Orion will become a wholly-owned subsidiary
of the Company.
Approval of the Merger Agreement and the transactions contemplated thereby
by the Stockholders of the Company is not required by the Business Corporation
Law of the Commonwealth of Massachusetts, or by the Company's Articles of
Organization or By-laws, as amended. However, the rules of the American Stock
Exchange, Inc. (the "AMEX"), on which the Company's Common Stock is listed for
trading, require that the holders of a majority of the Company's outstanding
shares present and voting at a shareholders' meeting approve the listing of the
TDX Shares to be issued pursuant to the Merger Agreement prior to their
issuance. This approval is required pursuant to Section 712 of the AMEX Company
Guide, which requires shareholder approval prior to listing of shares to be
issued as consideration for an acquisition if any substantial shareholder of the
listed company has a five percent or greater interest in the company to be
acquired and the issuance of such shares as consideration could result in an
increase in the outstanding shares of the listed company of five percent or
more. Thermedics is a "substantial shareholder" of the Company and also has a
greater than five percent interest in Orion. Moreover, the issuance of the
5,961,225 TDX Shares would result in an increase in the Company's outstanding
shares of more than five percent. Thermedics has agreed to vote all of the
shares of the Company's Common Stock held by it as of the Record Date of the
Meeting in favor of the listing of the TDX Shares and all matters related
thereto. As of the Record Date (without giving effect to the issuance of the TDX
Shares), Thermedics owned approximately 76.6% of the outstanding Common Stock of
the Company. After giving effect to the issuance of the TDX Shares pursuant to
the Merger Agreement, Thermedics will own approximately 83.8% of such
outstanding Common Stock.
BACKGROUND OF THE MERGER AGREEMENT
The Company and Orion were initially intended to be combined in 1995 when
Orion was acquired by Thermedics from an unrelated seller. Due to management
changes at that time, however, it was determined that Orion should be a
wholly-owned subsidiary of Thermedics. Management of the Company, Orion, and
Thermedics believe the combination of the Company and Orion will bridge a gap
between
2
<PAGE>
laboratory and process environments, and tap underdeveloped markets and
applications for both companies in potential growth areas such as bio-chemistry,
electro-chemistry, and other sensor technologies. The Company's products are
largely high-end capital equipment. In contrast, Orion's solutions are generally
high-volume, broad market catalog products. High-end capital equipment has
limited market potential. The Company believes that the acquisition of Orion
will enable it to leverage the sensor aspect of the Company's technology and
provide products that access larger market applications. It is contemplated that
the Company's next generation of products would maintain the technical integrity
of the Company's existing products but be designed for lower cost markets and
open new markets, applications and other opportunities for both the Company and
Orion in the bio-science markets.
DETERMINATION OF THE PURCHASE PRICE FOR THE ACQUIRED COMPANY
The Company has agreed to issue the 5,961,225 TDX Shares to Thermedics in
consideration of the acquisition of Orion. The TDX Shares had a value of
$65,800,000 based on the average of the closing prices of the Company's Common
Stock for the five trading days ending immediately prior to April 14, 1998, the
date of the Company's public announcement of its intent to acquire Orion. The
consideration to be paid was derived by applying methodologies, to the extent
possible, similar to the methodologies applied by an independent investment bank
engaged by Thermedics in October 1995 prior to its acquisition of Orion, as well
as an analysis based upon current and trailing ratios applied to both revenue
and operating income of Orion.
REASONS FOR THE ACQUISITION/RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors believes that the acquisition of Orion
complements the Company's existing product lines and is consistent with its
long-term strategy. The Company's long-term strategy includes the development
and marketing of new applications for its advanced instrumentation technologies
and the acquisition of complementary businesses and technologies. The Company
presently develops, manufactures and markets high-speed systems used for
detection and product quality assurance in a variety of industrial and
laboratory processes as well as in security system applications, which are
generally combined with proprietary operations and analysis software to address
the specific needs of the Company's customers. The Company plans to integrate
the electrochemical analysis products manufactured by Orion for use by
environmental, chemical, pharmaceutical, biotechnology and food and beverage
industries into the Company's existing product lines. The Company's Board of
Directors believes that the Company's acquisition of Orion will enable the
Company to enter new markets for its products in which it is not well
represented and to strengthen its presence in markets in which it already
operates.
In making the decision to engage in the acquisition of Orion, the Company's
Board of Directors considered the following factors, which were considered to
have a material bearing on the Board's decision: the types of products
manufactured by Orion; the potential to integrate those products with those
manufactured by the Company; the ability to expand the Company's existing
technological and research capabilities; the geographic presence of sales,
manufacturing, distribution and other facilities of Orion as compared with the
existing geographic presence of the Company; perceived strengths of Orion's
management, research and other personnel; Orion's financial history and
financial projections; and the Company's ability to expand its market share,
research capabilities, and technological capacity through integration of Orion
with the Company's existing operations.
The Company's Board of Directors considers attractive acquisition
opportunities from time to time that are identified by the Company for the
Board's review. The Board of Directors decided to proceed with the acquisition
of Orion because it perceived synergies between the Company and Orion, as
described above, that would make the acquisition beneficial for the Company and
its Stockholders. At the time the Board approved the acquisition, the Company
had not identified any acquisition candidates that it believed to be as
attractive as Orion. Consequently, the Board did not consider at length any
alternative transactions to the acquisition of Orion at the time it voted to
approve such acquisition.
3
<PAGE>
As with any acquisition, however, there can be no assurance that the Company
will be successful in integrating the businesses of Orion with its current
operations, nor that the benefits which the Company's Board of Directors expects
from the acquisition of Orion, as described above, will be achieved. If the
Company were unsuccessful in achieving such integration, such failure could
adversely affect the Company's performance. See "Forward-Looking
Statements--Risks Associated with Acquisition Strategy."
The Board of Directors has unanimously approved the Merger Agreement and the
transactions contemplated thereby and believes that the Merger Agreement is fair
to and in the best interests of the Company and its Stockholders. THE BOARD OF
DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF THE LISTING OF THE TDX
SHARES TO BE ISSUED IN CONNECTION WITH THE MERGER AGREEMENT.
ACCOUNTING TREATMENT OF THE ACQUISITION
Because the Company and Orion were deemed for accounting purposes to be
under control of their common majority owner, Thermedics, the acquisition has
been accounted for in a manner similar to a pooling of interests. Accordingly,
the Company's financial statements include the results of Orion from December 1,
1995, the date on which Thermedics acquired Orion. The TDX Shares have been
deemed to be outstanding from that date.
SUMMARY OF THE MERGER AGREEMENT
GENERAL
On May 6, 1998, the Company agreed to purchase Orion from Thermedics in
exchange for 5,961,225 shares of the Company's Common Stock. Under the terms of
the Merger Agreement, Acquisition will be merged with and into Orion (the
"Merger") with Orion being the surviving corporation, and the separate corporate
existence of Acquisition shall cease. Following the Merger, Orion will be a
wholly-owned subsidiary of the Company.
EFFECTIVE DATE
As soon as practicable after the satisfaction or waiver of all conditions to
the Merger set forth in the Merger Agreement, the parties will cause articles of
merger (the "Articles of Merger") with respect to the Merger to be filed and
recorded in accordance with Section 78 of the Business Corporation Law of the
Commonwealth of Massachusetts (the "BCLM"), and will take all such further
actions as may be required by law to make the Merger effective. The Merger will
become effective at such time as the Articles of Merger are filed with the
Secretary of State of the Commonwealth of Massachusetts in accordance with the
BCLM or at such later time as is specified in the Articles of Merger (the
"Effective Time").
ISSUANCE OF THE TDX SHARES
Both (i) Thermedics' right to receive the TDX Shares and (ii) the closing of
the transactions contemplated by the Merger Agreement (the "Closing") are
conditioned on the prior listing of the TDX Shares for trading upon the AMEX. In
the Merger Agreement, the Company agreed to take all action necessary in
accordance with applicable law to convene a meeting of its Stockholders for the
purpose of approving the listing of the TDX Shares for trading upon AMEX, and to
recommend to the Stockholders the approval of such listing. In the Merger
Agreement, Thermedics agreed to vote all of the shares of the Company's Common
Stock held by it as of the record date of such meeting in favor of such listing.
Accordingly, because Thermedics owns more than 50% of the Company's outstanding
Common Stock, the listing of the TDX Shares is assured. Consequently, despite
the fact that the Closing has not yet taken place, the Company and Thermedics
have treated the acquisition of Orion as effectively complete.
As of the Record Date (without giving effect to the issuance of the TDX
Shares), Thermedics beneficially owned 10,225,387 shares of the Company's Common
Stock, or approximately [76.6%] of the
4
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outstanding shares. Giving effect to the issuance of the TDX Shares to
Thermedics would increase Thermedics's ownership percentage to 83.8%.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, the Company and Thermedics made certain
representations and warranties to one another with respect to certain customary
matters, such as their respective organization, their respective authority to
enter into the Merger Agreement and the enforceability of the Merger Agreement.
In addition, Thermedics made certain representations and warranties to the
Company with respect to (i) the capitalization of Orion, (ii) environmental
conditions with respect to Orion's properties, and (iii) Orion's audited
consolidated balance sheets as at January 3, 1998 and as at December 28, 1996,
and Orion's audited consolidated statements of earnings and cash flows for the
fiscal years ended January 3, 1998 and December 28, 1996. Orion's audited
consolidated balance sheet as of December 28, 1996, and Orion's audited
consolidated statements of earnings and cash flows for the fiscal year ended
December 28, 1996. The representations and warranties made by Thermedics with
respect to environmental conditions at Orion's properties include statements
regarding the absence of activity on premises occupied by Orion involving use,
handling, storage, or disposal of hazardous or toxic wastes in violation of
common law or any applicable environmental law. In addition, the representations
and warranties of Thermedics with respect to Orion's consolidated financial
statements state that such financial statements fairly present the financial
condition, results of operations, and cash flows of Orion as of the dates and
for the periods indicated, in each case in accordance with generally accepted
accounting principles consistently applied. Each of these representations and
warranties survives the Closing.
AMENDMENTS; WAIVERS
Any provision of the Merger Agreement may be amended or waived by the mutual
consent of the parties at any time. The Company does not expect that any
material provisions of the Merger Agreement will be amended or waived. However,
as any amendment or waiver of any provision of the Merger Agreement requires the
consent of both the Company and Thermedics, any changes made will be the result
of negotiation between and agreement by both parties.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
No gain or loss for federal income tax purposes will be recognized by the
Company in connection with the acquisition of Orion or the issuance of the TDX
Shares. Neither the Company nor Thermedics intends to request a ruling from the
Internal Revenue Service with respect to the transaction.
REGULATORY APPROVALS
No federal or state regulatory approvals are required in order to issue the
TDX Shares pursuant to the Merger Agreement.
NO DISSENTERS' APPRAISAL RIGHTS
Under applicable provisions of BCML, holders of the Company's Common Stock
will not have any dissenters' appraisal rights in connection with the listing of
the TDX Shares, or any other transaction described in this proxy statement, to
be acted upon at the Meeting.
5
<PAGE>
INFORMATION CONCERNING ORION RESEARCH INC.
BUSINESS
GENERAL
Under the terms of the Merger Agreement, the Company will acquire all of the
issued and outstanding shares of Orion in exchange for the right to receive
5,961,225 TDX Shares. The principal executive office of Orion is 500 Cummings
Center, Beverly, Massachusetts 01915, and its telephone number is 978-922-4400.
Orion manufactures electrochemistry systems that determine the quality of a
wide variety of substances by measuring their pH, ions, dissolved oxygen, and
conductivity. These systems are used primarily in the environmental, food,
beverage, chemical, biomedical research and pharmaceutical industries. The
underlying sensor technology in Orion's products is used as a measurement or
analysis device for controlling a process. Some characteristics include
interacting directly with a sample, repeated use, and real time continuous
monitoring. Sensor technology provides a basic methodology for obtaining the
state of the product quality.
Orion's products include the following:
<TABLE>
<CAPTION>
PRODUCTS BRAND
- --------------------------------------- ---------
<S> <C>
Pure Water Monitors Orion
AutoChemistry Orion
Karl Fischer Titrators Orion
Sage-TM- Pumps Orion
Loss-on-drying Moisture Balance Orion
Microbalances Orion
pH meters Orion
ISE meters Orion
Dissolved Oxygen meters Orion
Conductivity meters Orion
Buffers Orion
Electrode Fill Solutions Orion
Electrodes (pH, ISE) Russell
Electrodes (pH, ISE) Orion
</TABLE>
The Laboratory pH/ISE segment of products identify and quantify more than
100 chemical substances found in various solutions, foods, pharmaceuticals,
soils, bodily fluids and industrial and municipal water and waste-water systems.
Products used in these applications include pH/ISE electrodes, meters, reagents,
and automated analysis systems. These products are marketed under the Orion
brand name and under private label arrangements with major instrumentation
companies and distributors around the world.
The Pure Water Monitors segment of products include a family of high-purity
water monitoring systems marketed under the Orion brand name. These systems use
ion selective technology to monitor more than 10 different parameters required
for the control of high-purity water systems in power generation and other
industrial applications such as pulp and paper, chemicals, semiconductors,
pharmaceutical and food and beverages.
Orion distributes its products through major laboratory supply dealers,
various third-party distributors and a small direct sales force.
INTELLECTUAL PROPERTY
Orion's policy is to protect its intellectual property rights by appropriate
means, including applying for patents. Orion is the owner of 18 patents expiring
at various dates between December 27, 1998 and March 2, 2015.
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PRINCIPAL CUSTOMERS
Orion's principal industrial customers are in the environmental, chemical,
and petrochemical, pharmaceutical and biotechnology and food and beverage
industries. Orion also sells its products to governmental agencies and academic
institutions.
COMPETITION
Orion competes primarily on the basis of performance, price, and customer
service. Major competitors in pH and ISE products include Fisher Scientific
Corp., Horiba Instruments, Inc., and Mettler-Toledo International Inc., Horiba
Instruments, Inc., Wissenchaftlich-Technische Werkstaetten GmbH, and YSI
Incorporated are competitors in the dissolved oxygen and conductivity products.
Major competitors in microbalances include Mettler-Toledo International Inc. and
Sartorius Corp. In pure water process monitors, competitors include Hach
Company, Horiba International Inc., and Honeywell/Leeds Northrop. The broad
titration and moisture analysis markets are dominated by industry leaders
Brinkmann Instruments, Inc. and Mettler-Toledo International Inc.
MANAGEMENT
The following sets forth information concerning management of Orion.
James Barbookles is president and chief executive officer of Orion. Mr.
Barbookles joined Orion in February of 1989 as vice president of research,
development and engineering. In March 1993 he was promoted to president and
chief operating officer and in 1995 he was named chief executive officer. Prior
to joining Orion, Mr. Barbookles served as Director of Engineering at Cambridge
Instruments. Previously, Mr. Barbookles served in a number of engineering
management positions at a variety of technology based companies, including
Sierra Research Corporation, United Nuclear Corporation and Pratt & Whitney
Aircraft. He holds a bachelor's degree in electrical engineering from the State
University of New York at Buffalo and an M.B.A. from Rensselaer Polytechnical
Institute. Mr. Barbookles is also president of the Company. He was appointed
president of the Company in November 1997.
EMPLOYEES
As of July 4, 1998, Orion had 339 employees. Of these, 47 were engaged in
research and development, 177 were engaged in manufacturing, and 115 were
engaged in selling, general, and administration. The Company believes that
Orion's relations with its employees are good.
RESEARCH AND DEVELOPMENT
Orion's research and development organization operates at its two primary
manufacturing facilities. This structure allows R&D teams to focus on products
that are manufactured in the facility where they are based and to work closely
with the relevant engineering, sales, and service personnel while developing
products. Orion's development programs focus on upgrading capabilities while
increasing product quality and reliability. Orion's in-house capabilities are
centered around high value-added engineering and design, testing and assembly.
Orion focuses on designing products that are not only technically superior, but
also easier to manufacture and test than competing products. Orion's internally
funded research and development expenses were $3,412,000, $4,592,000, and
$2,639,000 in fiscal years, 1996, 1997, and the first six months of fiscal 1998,
respectively.
PROPERTIES
Orion is headquartered in 115,000 square feet of office and manufacturing
space in Beverly, Massachusetts pursuant to a lease expiring in 2006. Orion also
maintains manufacturing facilities in Carolina, Puerto Rico and Auchtermuchty,
Fife, Scotland. With the exception of the facility in Scotland, all the
facilities are leased. The Company believes that Orion's facilities are adequate
for its present operations and that other suitable space is readily available if
any of the leases for such facilities are not extended.
7
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SELECTED QUARTERLY FINANCIAL DATA--ORION RESEARCH INC.
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.............................................................. $ 13,103 $ 13,242 $ 13,600 $ 13,109
Gross Profit.......................................................... 7,694 7,822 7,940 7,734
Net Income............................................................ 1,218 1,610 1,840 1,768
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.............................................................. $ 12,855 $ 12,265 $ 13,008 $ 12,726
Gross Profit.......................................................... 6,517 7,005 7,126 7,099
Net Income............................................................ 844 1,239 1,393 1,461
</TABLE>
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SELECTED FINANCIAL INFORMATION--ORION RESEARCH INC.
The selected financial information below as of and for the fiscal years
ended January 3, 1998, and December 28, 1996, and for the period from December
1, 1995 through December 30, 1995, and the period from January 1, 1995 through
November 30, 1995, has been derived from Orion Research Inc.'s Consolidated
Financial Statements, which have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report included elsewhere
in this Proxy Statement. The selected financial information as of and for the
fiscal years ended December 31, 1994, January 1, 1994, and as of December 30,
1995, and November 30, 1995, has not been audited but, in the opinion of Orion
Research Inc., includes all adjustments (consisting only of normal, recurring
adjustments) necessary to present fairly such information in accordance with
generally accepted accounting principles applied on a consistent basis.
<TABLE>
<CAPTION>
THE COMPANY(1) PREDECESSOR(1)
--------------------------------- ---------------------------------
DEC. 1, JAN. 1,
FISCAL YEAR ENDED 1995 1995 FISCAL YEAR ENDED
-------------------- THROUGH THROUGH --------------------
JAN. 3, DEC. 28, DEC. 30, NOV. 30, DEC. 31, JAN. 1,
1998 1996 1995 1995 1994 1994
--------- --------- ----------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues....................... $ 53,054 $ 50,854 $ 4,989 $ 43,165 $ 46,265 $ 47,698
--------- --------- ----------- ----------- --------- ---------
Cost and Operating Expenses:
Cost of revenues............. 21,864 23,107 2,216 18,308 20,549 19,996
Selling, general, and
administrative expenses.... 15,871 16,106 1,337 15,379 13,309 14,494
Research and development
expenses................... 4,592 3,412 327 3,244 3,511 3,994
Restructuring expenses....... -- -- -- -- -- 1,460
--------- --------- ----------- ----------- --------- ---------
42,327 42,625 3,880 36,931 37,369 39,944
--------- --------- ----------- ----------- --------- ---------
Operating Income............... 10,727 8,229 1,109 6,234 8,896 7,754
Interest Expense............... -- -- -- (220) (60) (529)
--------- --------- ----------- ----------- --------- ---------
Income Before Provision for
Income Taxes................. 10,727 8,229 1,109 6,014 8,836 7,225
Provision for Income Taxes..... 4,291 3,292 444 2,206 3,199 2,532
--------- --------- ----------- ----------- --------- ---------
Net Income..................... $ 6,436 $ 4,937 $ 665 $ 3,808 $ 5,637 $ 4,693
--------- --------- ----------- ----------- --------- ---------
--------- --------- ----------- ----------- --------- ---------
BALANCE SHEET DATA (AT END OF
PERIOD):
Working Capital................ $ 9,126 $ 8,957 $ 8,096 $ $ 8,268 $ 7,323
Total Assets................... 61,570 62,575 64,273 25,187 26,539
Long-term Obligations.......... -- -- -- 560 769
Shareholder's Investment....... 53,114 54,544 55,442 18,824 18,691
</TABLE>
- ------------------------
(1) In December 1995, Thermedics acquired the Orion Products Division (the
"Predecessor") of Analytical Technology Inc. (ATI). Periods prior to
December 1995 represent the results of Orion included in Thermedic's
December 1, 1995 Current Report on Form 8-K/A, filed with the Securities and
Exchange Commission.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--ORION RESEARCH INC.
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 Orion to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements."
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
Revenues increased to $53.1 million in 1997 from $50.9 million in 1996. Of
the total increase in revenues, $1.4 million was from international sales while
the remainder was domestic. Sales of Orion's laboratory products increased
primarily due to an increase in both domestic and international demand for pH,
ISE (ion-selective electrodes), dissolved oxygen and conductivity measurement
products. In addition, sales of process monitoring products increased. These
increases were offset in part by decreases in sales of private-label brand
laboratory products.
The gross profit margin increased to 59% in 1997 from 55% in 1996. This
increase was primarily due to lower overhead expenses resulting from the
relocation of Orion's domestic manufacturing facility in October 1996 and also
from the inclusion of a $0.8 million charge in 1996 as a result of obsolescence
created by planned product changes.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 30% in 1997 from 32% in 1996. The decline was primarily due to
nonrecurring costs of $1.5 million in 1996 related to moving expenses for the
relocation of Orion's domestic manufacturing facility and, to a lesser extent,
an increase in revenues in 1997.
Research and development expenses increased to $4.6 million in 1997 from
$3.4 million in 1996, primarily due to costs related to the improvement and
expansion of both Orion's laboratory and process monitoring products, as well as
internal development of enhanced sensor technology.
The effective tax rate was 40% in 1997 and 1996. The effective tax rates in
both periods exceeded the statutory federal income tax rate primarily due to the
impact of state income taxes and amortization of cost in excess of net assets of
acquired companies, offset in part by a foreign tax rate differential.
Orion is currently assessing the potential impact of the year 2000 on the
processing of date-sensitive information by Orion's computerized information
systems and on products sold as well as products purchased by Orion. Orion
believes that its internal information systems and current products are either
year 2000 compliant or will be so prior to the year 2000 without incurring
material costs. There can be no assurance, however, that Orion will not
experience unexpected costs and delays in achieving year 2000 compliance for its
internal information systems and current products, which could result in a
material adverse effect on Orion's future results of operations.
Orion is presently assessing the effect that the year 2000 problem may have
on its previously sold products. Orion is also assessing whether its key
suppliers are adequately addressing this issue and the effect this might have on
the Orion. Orion has not completed its analysis and is unable to conclude at
this time that the year 2000 problem as it relates to its previously sold
products and products purchased from key suppliers is not reasonably likely to
have a material adverse effect on the Orion's future results of operations.
10
<PAGE>
1996 COMPARED WITH 1995
Revenues increased to $50.9 million in 1996 from $48.2 million in 1995. Of
the total increase in revenues, $2.5 million was from domestic sales while the
remainder was international. Sales of private-label brand laboratory products
increased $2.7 million due to a full year of manufacturing under a contract
received during 1995. Sales of pH and conductivity measurement products
increased due to higher demand. These increases were offset in part by a 4%
decrease in sales of both laboratory and process monitoring products as a result
of lower demand.
The gross profit margin decreased to 55% in 1996 from 57% in 1995 as a
result of volume increases in lower margin private-label brand laboratory
products.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 32% in 1996 from 35% in 1995. This decrease is primarily due to an
increase in revenues offset in part by nonrecurring costs of $1.5 million in
1996 related to moving expenses for the relocation of Orion's domestic
manufacturing facility.
Research and development expenses remained relatively unchanged at $3.4
million in 1996 and $3.6 million in 1995.
Interest expense of $0.2 million in 1995 relates to short- and long-term
obligations of Orion as the predecessor company.
The effective tax rates were 40% and 37% in 1996 and 1995, respectively. The
effective tax rates in both periods exceeded the statutory federal income tax
rate primarily due to the impact of state income taxes. The effective tax rate
increased in 1996 as a result of amortization of cost in excess of net assets
acquired companies as a result of the acquisition of Orion by Thermedics
Detection.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $9.1 million at January 3, 1998, compared
with $9.0 million at December 28, 1996. Included in working capital are cash and
cash equivalents of $1.6 million at January 3, 1998, compared with $0.8 million
at December 28, 1996.
During 1997, $9.8 million of cash was provided by operating activities.
During this period, cash of $1.3 million was used to fund an increase in
inventories primarily relating to ensuring proper service levels. This use of
cash was offset in part by $1.0 million of cash provided by a decrease in
accounts receivable, due to timing of receipts as a result of increased
collection efforts during 1997.
Orion's investing activities during 1997 consisted of the expenditure of
$1.1 million for purchases of property, plant, and equipment.
During 1997, the Orion's financing activities used cash of $7.8 million, due
to transfers to parent company.
11
<PAGE>
INFORMATION CONCERNING THE COMPANY
On August 12, 1998, Thermo Electron issued a press release regarding a
proposed reorganization at Thermo Electron involving certain of Thermo
Electron's subsidiaries, including the Company.
In the press release, Thermo Electron announced that the Company may be
taken private and become a wholly-owned subsidiary of Thermo Instrument Systems
Inc. It is currently contemplated that Stockholders of the Company would receive
cash or shares of the common stock of Thermo Instrument Systems Inc. in exchange
for their shares of the Company's Common Stock.
The completion of the transaction described in the preceding paragraph is
subject to numerous conditions, including the establishment of prices or
exchange ratios; confirmation of anticipated tax consequences; the approval of
the Board of Directors of Thermedics; the negotiation and execution of a
definitive merger agreement; the receipt of a fairness opinion from an
investment banking firm that the transaction is fair to the Company's
shareholders (other than Thermedics and Thermo Electron) from a financial point
of view; the approval of the Company's Board of Directors, including its
independent directors; and clearance by the Securities and Exchange Commission
of any necessary documents regarding the proposed transaction.
BUSINESS
GENERAL
The Company is engaged in the development, manufacture, and sale of
high-speed detection and measurement systems used in on-line industrial process
applications, security applications, and laboratory analysis.
PRINCIPAL PRODUCTS AND SERVICES
PROCESS DETECTION SYSTEMS.
The Company designs, manufactures, and markets high-speed on-line trace
(parts-per-trillion) measurement, detection, and rejection equipment that uses
particle- and vapor-detection, and other technologies for product quality and
productivity applications.
Alexus. The Company's Alexus systems detect trace amounts of constituents
that affect product quality in refillable plastic soft drink, water and other
beverage containers. The Company's Alexus systems, introduced in 1992, have been
installed on almost 300 bottling lines in more than 30 countries throughout the
world, primarily in Europe and Latin America by The Coca-Cola Company, Perrier,
and other major beverage producers. For the six months ended July 4, 1998, and
during 1997, 1996, and 1995, the Company derived revenues of $5.1 million, $19.2
million, $14.9 million, and $18.5 million, respectively, from Alexus systems.
InScan. The Company's InScan system uses high-speed X-ray imaging
technology to determine accurate fill volume, net volume, and package integrity
of containers for the beverage, food, and other industries. InScan uses a
low-power X-ray to capture data both vertically and horizontally. This data
produces an instant, detailed image of each container, which InScan's
proprietary software automatically compares to a predetermined profile used to
generate mathematical algorithms to determine whether the container is
acceptable. InScan incorporates a sophisticated, high-speed rejection system
that automatically removes unacceptable containers from the line. The Company
shipped its first InScan units in 1996. The Company's InScan systems are
currently used by major beer and soft drink companies in the U.S. and overseas,
including Miller, Molson, Coors, Guinness Brewing Company, and The Coca-Cola
Company. The Company also made its first sales in 1997 to the household product
industry, through Clorox, and to the cosmetics industry, through Estee Lauder.
12
<PAGE>
Moisture Systems. The Company's Moisture Systems division, acquired in
1996, designs, manufactures, and markets equipment that uses near-infrared
("NIR") spectroscopy to measure moisture and other product constituents,
including fats, proteins, oils, flavorings, solvents, adhesives, and coatings,
in a variety of manufacturing processes. The Company's systems are used across
the food, pharmaceutical, chemical, petrochemical, tobacco, forest products,
paper converting, plastics, textiles, corrugating, and other industries. In
1997, the Company introduced the Quadra Beam 6600T, a system that combines an
NIR sensor with a processor that displays ingredient information to offer
customers a less expensive, easy-to-install, and space-saving on-line analyzer.
For the first six months ended July 4, 1998 and during 1997 and 1996, the
Company derived revenues of $6.9 million and $15.4 million and $18.0 million,
respectively, from Moisture Systems.
LABORATORY INSTRUMENTS
Flash-GC Gas Chromatography Systems. The Company designs, manufactures, and
markets high-speed gas chromatography systems that can analyze chemical samples
at speeds 20 to 50 times faster than conventional gas chromatography. The
Company currently markets its systems under the trade name "Flash-GC" to
analytical services and quality laboratories and for near on-line process and
quality-control applications that require high-speed results. The Company also
intends to target certain other segments of the conventional gas chromatography
market in which access to high-speed analysis would be advantageous. The
Flash-GC has applications in the food, flavors, fragrance, chemical,
pharmaceutical, forensics, and automotive industries, as well as in medical and
environmental laboratories. The Company intends to target only those sectors of
the laboratory and process gas chromatography market that are expected to place
a premium on near-instant analysis.
EZ FLASH SYSTEMS.
EZ Flash-TM- systems. The Company designs, manufactures and markets
laboratory products that interface with most any conventional GC system. The
EZ-Flash-TM- is an upgrade kit that converts a conventional GC to a
Flash-GC-TM-. EZ Flash combines industry proven Flash-GC column technology with
a conventional GC in a simple to install upgrade kit. EZ Flash columns mount
inside an oven a GC system and allows a user of a GC to increase sample
throughput from 5 to 30 times with accurate and repeatable analyses. The Company
has applications in food, flavors, fragrance, polymer, residual solvents,
environmental, pharmaceutical, petrochemical, hydrocarbon, forensics and
clinical markets.
SECURITY INSTRUMENTS.
The Company designs, manufactures, and markets security instruments that use
trace particle- and vapor-detection techniques for forensics, search and
screening applications under the direction of police, border police,
transportation authorities, and carriers.
EGIS Systems. The Company's principal security instrument is the EGIS
system, a highly sensitive particle- and vapor-detection system for screening
people, baggage, packages, freight, and electronic equipment such as personal
computers for the presence of a wide range of explosives, including plastic
explosives that have proven difficult to detect using conventional methods. The
EGIS system is designed for stand-alone use in the detection of explosives in
carry-on items and on personnel, and can be used in conjunction with enhanced
X-ray and other advanced imaging systems to provide a comprehensive
explosives-detection system for checked luggage. The Company believes that EGIS
is the most accurate and most sensitive high-speed trace explosives-detection
system available today. EGIS utilizes the same high-speed gas chromatography
technology used in the Flash-GC, combined with chemiluminescent detection
techniques to detect ultratrace quantities of certain explosives and taggants,
and to indicate the concentration and type of explosive detected. Because EGIS'
chemiluminescent detector responds only to compounds of certain structures in
the sample, rather than to the thousands of compounds that may be
13
<PAGE>
contained in the sample, EGIS is more selective than competing trace-detection
systems, with fewer false-positive readings. A processor in EGIS compares the
chemical profile of the sample to the known profiles of various explosives,
including TNT, nitroglycerin, PETN, Semtex, and C-4. Within seconds of the
introduction of the sample into EGIS, the system determines whether explosives
are present, and, if so, identifies the type and amount. Initially developed
with internal funds and contract funding from the Federal Aviation
Administration (the "FAA") and the U.S. Department of State, more than 200 EGIS
units have been deployed to date. The EGIS system is currently operational in 24
countries and is in use in carry-on and checked-luggage screening at more than
45 international airports. EGIS is also used in government buildings and
embassies, and at border crossings and other locations where there is a high
degree of concern for security. The EGIS system has assisted in identifying
explosives used in terrorist bombings, including those in the Federal Building
in Oklahoma City and the World Trade Center in New York, as well as in Israel,
Buenos Aires, and the United Kingdom. In March 1996, the Company supplied the
U.S. government with eight EGIS systems to provide counter-terrorism support in
Israel. Most recently, the Bureau of Alcohol, Tobacco and Firearms and the
Federal Bureau of Investigation used EGIS systems in their attempt to identify
the cause of the crash of TWA Flight 800. For the six months ended July 4, 1998,
and during 1997, 1996, and 1995, the Company derived revenues of $4.6 million,
$10.3 million, $7.1 million, and $4.6 million, respectively, from EGIS systems.
In September 1996, the Company entered into a development contract with the FAA
to develop EGIS II, a lower-cost EGIS unit for use in more portable applications
such as remote security checkpoints and counter-terrorism activities. In
November 1996, the Company introduced its new SecurScan, a prototype of a
walk-through trace detector designed to screen 10 passengers per minute, and
introduced its Rampart system, a lower-cost unit for airport applications, in
1997. In addition, in 1997, the Company entered into a development contract with
the British Ministry of Defense to develop an explosive-detection system that is
even more sensitive than the EGIS system.
PATENTS, LICENSES, AND TRADEMARKS
The Company's policy is to protect its intellectual property rights by
appropriate means, including applying for patents. The Company also enters into
licensing agreements with other companies in which it grants or receives rights
to specific patents and technical know-how. The Company owns 38 U.S. patents,
and has filed applications for four additional United States patents. The
Company's U.S. patents, more than 60% of which were issued after 1990, have
expiration dates ranging from 1998 through 2014. The Company also owns
corresponding patents, or has filed corresponding applications, in a number of
jurisdictions throughout the world. In addition, the Company has an exclusive,
perpetual, royalty-free license under ten patents covering the use of
near-infrared and very near-infrared emitting diodes for on-line spectral
measurements. The Company owns several patents covering certain aspects of its
chemiluminescent analysis technology and high-speed gas chromatography
technology. The Company believes that these patents provide the Company with
competitive advantages in the markets for certain of its products. The Company
also considers technical know-how, trade secrets, and trademarks to be important
to its business.
DEPENDENCY ON A SINGLE CUSTOMER
Sales to The Coca-Cola Company accounted for 6.5%, 13%, 11%, and 36% of the
Company's total revenues in the first six months of 1998, and during 1997, 1996,
and 1995, respectively.
BACKLOG
The Company's backlog of firm orders was $5,900,000, $9,374,000 and
$14,574,000 as of July 4, 1998, January 3, 1998, and December 28, 1996,
respectively. Certain of these orders are cancellable by the customer upon
payment of a cancellation charge. The Company believes that substantially all of
the backlog at July 4, 1998 will be shipped or completed during the next twelve
months. The Company does
14
<PAGE>
not believe that the size of its backlog is necessarily indicative of
intermediate or long-term trends in its business.
GOVERNMENT CONTRACTS
The security instruments manufactured and marketed by the Company for use in
airports are subject to regulation by the FAA, corresponding foreign
governmental authorities, The International Civil Aviation Organization, and the
United Nations organization and are responsible for establishing standard
practices for the aviation industry on a worldwide basis. Sales of the Company's
security instruments for use in airports have been and will continue to be
dependent upon governmental initiatives to require or support the screening of
baggage, carry-on items, and people with advanced explosives-detection
equipment. Substantially all of such systems have been installed at airports in
countries in which the applicable government or regulatory authority overseeing
the operations of the airport has mandated such screening. Such mandates are
influenced by many factors outside of the control of the Company, including
political and budgetary concerns of governments, airlines, and airports. To
date, the FAA has not mandated the use of any explosives-detection system.
COMPETITION
The markets for the Company's products are highly competitive. Competitors
may develop superior products or products of similar quality for sale at the
same or lower prices. Moreover, there can be no assurance that the Company's
products will not be rendered obsolete by new industry standards or changing
technology. There can be no assurance that the Company will be able to compete
successfully with existing or new competitors. The Company employs a variety of
sales methods for its products and services that are designed to fit the needs
of particular customer groups.
PROCESS DETECTION SYSTEMS
The Company's product quality assurance systems compete with detection
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. The Alexus
system encounters competition throughout the world, but primarily in the
German-speaking areas of Europe, with products offered by Walter Grassle GmbH of
Germany and Sudtronics S.A. of Switzerland. InScan competes with gamma-based
beverage fill-height detectors offered by a number of companies, including
Industrial Dynamics Company, based in California, and Heuft Systemtechnik GmbH,
based in Germany. Alexus systems are also sold through Krones GmbH, a large
German turnkey plant contractor for new bottling lines. Competition in the
moisture-detection market is highly fragmented. The Company's principal
competitor in this market is Infrared Engineering Limited, based in England. The
Company sells and services both its InScan and moisture systems equipment
through a mix of direct sales, manufacturers' representatives, and original
equipment manufacturer relationships around the world. The Company also operates
factory service centers for these products. The Flash-GC is a new technology
competing in the developing high-speed gas chromatography market segment. The
Company's Flash-GC competes principally against high-speed gas chromatographs
offered by ChromFast, based in Michigan. The Company's Flash-GC systems are sold
through a direct sales and services organization. The Company is currently
attempting to recruit additional direct sales representatives for certain
regions of the United States.
Competition in the markets for each of the Company's process detection
systems is based primarily on performance, durability, service and, to a lesser
extent, price. The Company believes that its systems' performance and speed, as
well as the Company's reputation for developing superior new technologies and
for the innovative application of existing technologies to a variety of
high-speed production environments and product quality assurance problems, are
competitive advantages.
15
<PAGE>
SECURITY INSTRUMENTS
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. The Company's security instruments are sold to a few key
decision-makers around the world, primarily government agencies or private
companies fulfilling government regulations. Accordingly, sales are made by a
small, specialized direct sales force, supported by a broader service
organization, from offices shared with Alexus sales and service organizations.
NEW PRODUCTS; AND RESEARCH AND DEVELOPMENT
The Company maintains active programs for the development and introduction
of new products and improvements to existing products. The Company also seeks to
develop new applications for its existing products and technology. The Company
is currently devoting significant resources toward the enhancement of its
existing products and the development of new products and technologies,
including: enhancing InScan with wider and higher tunnels and varying x-ray
arrays, which will allow larger containers to be examined, and make possible the
detection of foreign objects and, in some applications, product defects in
packaged goods for the food, consumer products, and other industries; developing
an advanced generation of moisture-detection products to address recently
identified customers needs; enhancing the Flash-GC to broaden its applications,
and developing EZ-Flash which interfaces with any conventional GC system to
increase its performance time. The Company also is continuing to develop EGIS II
(formerly named "Rampart"), a lower-cost unit for use in airport screening of
carry-on baggage. In addition, the British Ministry of Defense ("MOD") is
sponsoring the MOD Explosion Particle Detection Program. The contract is a
sole-source contract presented to the Company based upon the well-known
performance of the EGIS System.
The Company also performs contract engineering and/or development on behalf
of its customers. Recent contracts have included funding by the FAA of the
development of the SecurScan walk-through explosives-detection system as well as
feasibility studies and initial development work for EGIS II. The Company
believes that its reputation for being able to apply its core technologies to
solve the problems of its customers provides the Company with a significant
competitive advantage.
Company-funded research and development expenses were $5,065,000,
$9,643,000, $8,100,000, and $3,068,000 in the first six months of 1998, and
during 1997, 1996, and 1995, respectively. Contract research and development
revenues were $382,000, $1,376,000, $1,758,000, and $3,987,000 in the first six
months of 1998 and during 1997, 1996, and 1995, respectively.
NUMBER OF EMPLOYEES
As of July 4, 1998, the Company had 210 full-time employees. The Company
considers its relations with its employees to be good.
PROPERTIES
The Company operates from two principal facilities: an 85,000-square foot
office, research and development, and manufacturing facility in Chelmsford,
Massachusetts occupied under a lease expiring in 2006, subject to one five-year
renewal option at the election of the Company; and a 35,000-square foot office
and manufacturing facility in Hopkinton, Massachusetts, occupied under a lease
expiring in 1999. The Company also leases approximately 10,000 square feet in
Enschede, Holland, occupied under a lease expiring in 2000. In addition, the
Company leases approximately 8,500 square feet of office space
16
<PAGE>
throughout the world for its sales and service operations. The Company believes
that these facilities are adequate for its present operations.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been publicly traded on the AMEX since its
initial public offering on February 21, 1997. The following table sets forth the
high and low sales prices for the periods indicated of the Company's Common
Stock, as reported in the consolidated transaction reporting system.
<TABLE>
<CAPTION>
HIGH LOW
------- --------
<S> <C> <C>
1997
First Quarter (beginning February 21, 1997).................................... 12 1/8 10 7/8
Second Quarter................................................................. 12 7/8 9 3/4
Third Quarter.................................................................. 12 9 7/8
Fourth Quarter................................................................. 11 5/8 9 3/16
1998
First Quarter.................................................................. 11 5/8 8 5/8
Second Quarter................................................................. 11 3/8 8 1/8
Third Quarter.................................................................. 9 1/2 6 9/16
Fourth Quarter (through November [ ], 1998)...................................
</TABLE>
The high, low and closing prices of the Company's Common Stock on the AMEX
on April 13, 1998, the date preceding the public announcement of the Merger
Agreement, were $11, $10 1/2 and $10 1/2, respectively. On [November ], 1998,
the closing price of the Common Stock on the AMEX was $[ ] per share. There
were [ ] holders of Common Stock of record as of [November ], 1998.
Holders of Common Stock do not have any preemptive rights to subscribe for
additional issuances of Common Stock or securities convertible into Common
Stock.
The Company has never paid cash dividends to its stockholders and does not
expect to pay cash dividends in the future because its policy has been to use
earnings to finance expansion and growth. Payment of dividends rests 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.
17
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA--THERMEDICS DETECTION INC.
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998
------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND
--------- ---------
Revenues.............................................................. $ 23,707 $ 23,957
Gross Profit.......................................................... 12,708 13,217
Net Income............................................................ 2,050 2,235
Basic and Diluted Earnings per Share.................................. .11 .12
<CAPTION>
1997
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.............................................................. $ 25,532 $ 25,639 $ 26,232 $ 26,971
Gross Profit.......................................................... 14,027 14,342 14,590 15,020
Net Income............................................................ 2,242 3,025 3,526 3,713
Basic and Diluted Earnings per Share.................................. .13 .16 .18 .19
<CAPTION>
1996
------------------------------------------
FIRST(1) SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.............................................................. $ 22,200 $ 22,369 $ 24,125 $ 25,910
Gross Profit.......................................................... 10,680 11,033 12,673 14,608
Net Income (Loss)..................................................... 320 (5) 2,098 2,886
Basic and Diluted Earnings per Share.................................. .02 -- .13 .18
</TABLE>
- ------------------------
(1) Reflects the January 1996 acquisitions of Moisture Systems and Rutter.
18
<PAGE>
SELECTED FINANCIAL INFORMATION--THERMEDICS DETECTION INC.
The selected financial information included below for Thermedics Detection
Inc. (the Company) as of and for the fiscal years ended January 3, 1998, and
December 28, 1996, and for the fiscal year ended December 30, 1995, has been
derived from the Company's Consolidated Financial Statements, which have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report included elsewhere in this Proxy Statement. The selected financial
information as of December 30, 1995, and as of and for the fiscal year ended
December 31, 1994, has been derived from the Company's Consolidated Financial
Statements, which have been audited by Arthur Andersen LLP, but have not been
included in this Proxy Statement. The selected financial information as of and
for the six months ended July 4, 1998, and June 28, 1997, and as of and for the
fiscal year ended January 1, 1994, has not been audited but, in the opinion of
the Company, includes all adjustments (consisting only of normal, recurring
adjustments) necessary to present fairly such information in accordance with
generally accepted accounting principles applied on a consistent basis. The
results of operations for the six months ended July 4, 1998, are not necessarily
indicative of results for the entire year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------- FISCAL YEAR
JULY 4, JUNE 28, -------------------------------------------------------
1998 1997 1997 1996(1) 1995(2) 1994 1993
---------- ---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues................................ $ 47,664 $ 51,171 $ 104,374 $ 94,604 $ 32,943 $ 50,343 $ 42,031
---------- ---------- ---------- ---------- --------- --------- ---------
Costs and Operating Expenses:
Cost of revenues...................... 21,739 22,802 46,395 45,610 17,452 24,906 23,759
Selling, general, and administrative
expenses............................ 14,357 15,032 28,515 31,198 8,824 11,973 7,526
Research and development expenses..... 5,065 4,788 9,643 8,100 3,068 3,895 1,790
---------- ---------- ---------- ---------- --------- --------- ---------
41,161 42,622 84,553 84,908 29,344 40,774 33,075
---------- ---------- ---------- ---------- --------- --------- ---------
Operating Income........................ 6,503 8,549 19,821 9,696 3,599 9,569 8,956
Interest Income......................... 878 859 2,072 229 -- -- --
Interest Expense, Related Party......... (303) (623) (1,239) (1,119) -- -- --
Other Income (Expense), Net............. 5 (7) 23 12 (72) -- --
---------- ---------- ---------- ---------- --------- --------- ---------
Income Before Provision for Income
Taxes................................. 7,083 8,778 20,677 8,818 3,527 9,569 8,956
Provision for Income Taxes.............. 2,798 3,511 8,171 3,519 1,354 3,189 3,153
---------- ---------- ---------- ---------- --------- --------- ---------
Net Income.............................. $ 4,285 $ 5,267 $ 12,506 $ 5,299 $ 2,173 $ 6,380 $ 5,803
---------- ---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- ---------- --------- --------- ---------
Basic and Diluted Earnings per Share.... $ .22 $ .29 $ .67 $ .33 $ .21 $ .63 $ .58
---------- ---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- ---------- --------- --------- ---------
Weighted Average Shares:
Basic................................. 19,317 18,127 18,721 16,236 10,491 10,069 10,069
---------- ---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- ---------- --------- --------- ---------
Diluted............................... 19,321 18,139 18,732 16,253 10,494 10,071 10,069
---------- ---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- ---------- --------- --------- ---------
BALANCE SHEET DATA (AT END OF PERIOD):
Working Capital......................... $ 52,188 $ 43,025 $ 46,345 $ 32,315 $ 19,369 $ 6,116 $ 447
Total Assets............................ 130,957 149,245 148,265 116,058 84,595 17,793 25,544
Long-term Obligations................... -- -- -- 21,200 -- -- --
Shareholders' Investment................ 112,657 106,100 107,346 75,454 69,215 9,208 3,822
</TABLE>
- ------------------------
(1) Reflects the January 1996 acquisitions of Moisture Systems and Rutter.
(2) Reflects the December 1995 acquisition by Thermedics Inc. of Orion Research
Inc.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--THERMEDICS DETECTION INC.
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 Operation under
the heading "Forward-looking Statements."
OVERVIEW
The Company develops, manufactures, and markets high-speed detection and
measurement systems used in on-line industrial process applications, laboratory
analysis, and security.
The Company's industrial process instruments use ultratrace chemical
detectors, X-ray imaging, near-infrared spectroscopy, and other technologies for
quality assurance of in-process or finished products, primarily in the food,
beverage, pharmaceutical, forest products, chemical, and other consumer products
industries. The Company's Alexus systems detect trace amounts of contaminants in
refillable plastic bottles for the beverage industry. The Company's InScan
systems use high-speed X-ray imaging to determine accurate fill volume, net
volume, package integrity, and other quality measures for a variety of products
in cans, bottles, boxes, and other containers. In addition, the Company's
moisture analyzers measure moisture and other product constituents, such as
fats, proteins, oils, flavorings, solvents, adhesives, and coatings, in a broad
range of products as they move along manufacturing lines.
The Company's laboratory products use high-speed gas chromatography,
electrochemistry, and other technologies for quality assurance and regulatory
compliance, primarily in the environmental, food, beverage, chemical,
pharmaceutical, and biomedical research industries. The Company's Flash-GC gas
chromatograph provides--at speeds 20 to 50 times faster--the same information
that conventional gas chromatographs provide on the chemical composition of a
wide range of substances, including pharmaceuticals, chemicals, food, beverages,
soil, and water. An offshoot of the Flash-GC, the Company's EZ Flash system is
an upgrade kit that can be integrated with almost any conventional gas
chromatograph to enable it to conduct chemical analysis up to 30 times faster.
The Company's recently acquired Orion Research Inc. subsidiary is a worldwide
leading manufacturer of electrode-based, chemical-measurement products that
determine the quality of various substances, from food and pharmaceuticals to
water and wastewater, by measuring their pH, ions, dissolved oxygen, and
conductivity.
In addition, the Company makes explosives-detection equipment that uses
simultaneous trace particle- and vapor-detection techniques based on its
proprietary chemiluminescence and high-speed gas chromatography technologies.
Customers use these explosives-detection systems to detect plastic and other
explosives at airports and border crossings, for other high-security screening
applications, and for forensics and search applications.
The Company also performs contract research and development services for
government and industry customers and earns service revenues through long-term
contracts.
20
<PAGE>
RESULTS OF OPERATIONS
FIRST SIX MONTHS 1998 COMPARED WITH FIRST SIX MONTHS 1997
Revenues in the first six months of 1998 decreased to $47.7 million from
$51.2 million in the first six months of 1997. Product revenues decreased to
$39.4 million in 1998 from $43.4 million in 1997, while service revenues
increased to $8.3 million in 1998 from $7.7 million in 1997. Revenues from the
Company's industrial process instruments and related services decreased to $15.2
million in 1998 from $19.2 million in 1997, primarily due to a decrease in
Alexus-related revenues, offset in part by an increase in InScan product sales.
As a result of this decrease in demand, the Company anticipates that sales of
Alexus systems will continue to slow during the remainder of 1998 as compared to
the same period in 1997. Revenues in the first six months of 1997 included $4.1
million from a mandated Alexus product-line upgrade of The Coca-Cola Company's
existing installed base. Revenues from industrial process instruments also
declined as a result of a $0.8 million decrease in revenues from moisture
analyzers, primarily due to a slowdown in product demand in North America.
Revenues from the Company's laboratory products instruments and related services
increased to $27.5 million in 1998 from $26.9 million in 1997. Revenues from the
Company's EGIS explosives-detection systems and related services increased to
$4.6 million in 1998 from $4.2 million in 1997, primarily due to $1.1 million of
shipments under a contract with the U.S. Federal Aviation Administration (the
"FAA"). Product shipments under this contract were completed in the first
quarter of 1998.
The gross profit margin decreased to 54% in the first six months of 1998
from 55% in the first six months of 1997. The gross profit margin on product
revenues decreased slightly to 55% in 1998 from 56% in 1997. The gross profit
margin on service revenues decreased to 50% in 1998 from 53% in 1997, primarily
due to a decrease in higher-margin Alexus service revenues, as well as higher
costs relating to the Company's contract with the FAA.
Selling, general, and administrative expenses as a percentage of revenues
increased to 30% in the first six months of 1998 from 29% in the first six
months of 1997, primarily due to a decrease in revenues. Research and
development expenses increased to $5.1 million in 1998 from $4.8 million in
1997, primarily due to costs associated with developing a low-cost portable
security detection device, improving and expanding the product lines of the
Company's moisture systems and laboratory products businesses, and development
costs associated with the EZ Flash, which was introduced in May 1998.
Interest income remained consistent at $0.9 million in the first six months
of 1998 and 1997. Interest expense, related party, of $0.3 million and $0.6
million in the first six months of 1998 and 1997, respectively, relates to a
promissory note issued to Thermedics, which was repaid in March 1998.
The effective tax rate was 40% in the first six months of 1998 and 1997. The
effective tax rate exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes.
The Company is currently assessing the potential impact of the year 2000 on
the processing of date-sensitive information by the Company's computerized
information systems and on products sold as well as products purchased by the
Company. The Company believes that its internal information systems and current
products are either year 2000 compliant or will be so prior to the year 2000
without incurring material costs. There can be no assurance, however, that the
Company will not experience unexpected costs and delays in achieving year 2000
compliance for its internal information systems and current products, which
could result in a material adverse effect on the Company's future results of
operations.
The Company is presently assessing the effect that the year 2000 problem may
have on its previously sold products. The Company is also assessing whether its
key suppliers are adequately addressing this issue and the effect this might
have on the Company. The Company has not completed its analysis and is unable to
conclude at this time that the year 2000 problem as it relates to its previously
sold products and products purchased from key suppliers is not reasonably likely
to have a material adverse effect on the Company's future results of operations.
21
<PAGE>
1997 COMPARED WITH 1996
Revenues increased 10% to $104.4 million in 1997 from $94.6 million in 1996.
Product revenues increased 11% to $89.3 million in 1997 from $80.6 million in
1996, while service revenues increased 8% to $15.1 million in 1997 from $14.0
million in 1996. Revenues from the Company's process detection instruments and
related services increased to $22.4 million in 1997 from $16.0 million in 1996,
primarily due to Alexus revenues of $6.6 million from the fulfillment of a
mandated existing product-line upgrade from The Coca-Cola Company to its
existing installed base and, to a lesser extent, increased shipments of the
Company's InScan systems, which were introduced in 1996. The mandated
product-line upgrade was completed in 1997. These increases were offset in part
by a decrease in demand from The Coca-Cola Company for new installations in
1997. Revenues from the Company's EGIS security systems and related services
increased to $10.3 million in 1997 from $7.1 million in 1996, primarily due to
$3.2 million of shipments under the Company's contract with the FAA. Revenues
from the Company's Moisture Systems and Rutter subsidiaries, acquired in January
1996, decreased to $15.4 million in 1997 from $18.0 million in 1996, primarily
due to a slowdown in product demand in Europe in 1997, offset in part by the
inclusion of revenues for the full year of 1997. Revenues from the Company's
laboratory products instruments and related services increased 6% to $54.8
million in 1997 from $51.7 million in 1996, primarily due to sales of the
Company's Flash-GC systems which were introduced in 1997 and an increase in
international demand for pH and conductivity measurement products.
The gross profit margin increased to 56% in 1997 from 52% in 1996. The gross
profit margin on product revenues increased to 57% in 1997 from 53% in 1996,
primarily due to a change in product mix to higher-margin revenues from The
Coca-Cola Company's mandated product-line upgrade, as well as higher-margin
revenues on the Company's laboratory products instruments. To a lesser extent,
the increase also resulted from the inclusion of an $0.8 million charge in 1996
as a result of obsolescence created by planned product changes and a decrease in
overhead expenses. The gross profit margin on service revenues increased to 49%
in 1997 from 45% in 1996, primarily due to increased field service efficiencies
and, to a lesser extent, the change in sales mix to higher-margin service
revenues at Moisture Systems and Rutter.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 27% in 1997 from 33% in 1996. The decline was primarily due to
nonrecurring costs of $1.5 million in 1996 related to moving expenses for the
relocation of Orion's domestic manufacturing facility and reductions in
personnel and leased space in response to a lower sales volume of process
detection instruments, and to a lesser extent, an increase in revenues in 1997.
This decrease was offset in part by increased selling expenses as the Company
developed a sales force for its InScan and Flash-GC systems.
Research and development expenses increased to $9.6 million in 1997 from
$8.1 million in 1996, primarily due to costs related to the improvement and
expansion of Moisture System's moisture analysis equipment product line and to
internal development of a more portable explosive detection unit.
Interest income increased to $2.1 million in 1997 from $0.2 million in 1996,
primarily due to interest income earned on the invested proceeds from the
Company's March 1997 initial public offering (see Note 7 to the Company's
Consolidated Financial Statements included elsewhere in this Proxy Statement.)
Interest expense, related party, of $1.2 million and $1.1 million in 1997
and 1996, respectively, reflects the issuance of a $21.2 million promissory note
to Thermedics in connection with the January 1996 acquisitions of Moisture
Systems and Rutter.
The effective tax rate was 40% in 1997 and 1996. The effective tax rates in
both periods exceeded the statutory federal income tax rate primarily due to the
impact of state income taxes.
22
<PAGE>
1996 COMPARED WITH 1995
Revenues increased to $94.6 million in 1996 from $32.9 million in 1995.
Product revenues increased to $80.6 million in 1996 from $23.3 million in 1995,
while service revenues increased to $14.0 million in 1996 from $9.6 million in
1995. Revenues increased in 1996 due to the inclusion of $45.9 million in
revenues from Orion, acquired in December 1995, and $18.0 million in revenues
from Moisture Systems and Rutter, which were acquired in January 1996. Revenues
from the Company's process detection instruments and related services decreased
to $16.0 million in 1996 from $18.5 million in 1995, primarily due to a decrease
in demand from The Coca-Cola Company, which has substantially completed its
initial deployment of Alexus systems. Revenues from the Company's security
systems and related services increased to $7.1 million in 1996 from $4.6 million
in 1995, primarily due to the sale of eight EGIS units to the U.S. government to
provide counterterrorism support in Israel. Revenues from research and
development contracts decreased by $2.2 million to $1.8 million in 1996 due to
the completion of a commercial contract with the Miller Brewing Company for the
InScan system and, to a lesser extent, the completion of various phases of
government contracts, which have since been renewed.
The gross profit margin increased to 52% in 1996 from 47% in 1995. The gross
profit margin on product revenues increased to 53% in 1996 from 48% in 1995,
primarily due to higher-margin revenues from Moisture Systems, Rutter, and
Orion, offset in part by an inventory write-down of $0.8 million in 1996 due to
obsolescence created by planned product changes. The gross profit margin on
service revenues remained relatively unchanged at 44.8% in 1996 and 44.1% in
1995.
Selling, general, and administrative expenses as a percentage of revenues
increased to 33% in 1996 from 27% in 1995. This increase is primarily due to
$1.1 million of expenses incurred in 1996 related to the relocation of Orion's
domestic manufacturing facility, higher expenses as a percentage of revenues at
Moisture Systems and Rutter and, to a lesser extent, $0.4 million of costs
incurred in 1996 related to reductions in personnel and a reduction in leased
space in response to the lower sales volume of process detection instruments.
Research and development expenses increased to $8.1 million in 1996 from
$3.1 million in 1995, primarily due to a full year of research and development
expenses of Orion, the inclusion of research and development expenses of
Moisture Systems, which was acquired in January 1996, and research and
development relating to the Company's Flash-GC and InScan systems. In addition,
the Company recorded a nonrecurring charge of $0.2 million in 1996 for the
write-off of certain research and development equipment no longer of use.
Interest expense, related party, of $1.1 million in 1996 reflects the
issuance of a $21.2 million promissory note to Thermedics in connection with the
January 1996 acquisitions of Moisture Systems and Rutter.
The effective tax rates were 39.9% and 38.4% in 1996 and 1995, respectively.
The effective tax rates in both periods exceeded the statutory federal income
tax rate primarily due to the impact of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated working capital was $52.2 million at July 4, 1998, compared
with $46.3 million at January 3, 1998. Included in working capital are cash and
cash equivalents of $29.7 million at July 4, 1998, compared with $46.4 million
at January 3, 1998.
During the first six months of 1998, $4.5 million of cash was provided by
operating activities. During this period, $1.2 million of cash was provided by a
decrease in accounts receivable. This source of cash was offset in part by $2.0
million of cash used to reduce other current liabilities, including $1.0 million
of accrued payroll and employee benefits. In addition, cash of $2.0 million was
used to fund an increase in
23
<PAGE>
inventories and unbilled contract costs and fees, primarily relating to
purchases for the production of the EZ Flash, which began in May 1998.
During the first six months of 1998, the Company expended $1.1 million on
purchases of property, plant, and equipment. During the remainder of 1998, the
Company expects to make capital expenditures of approximately $1.2 million.
In March 1998, the Company repaid its $21.2 million promissory note to
Thermedics.
During 1997, $13.7 million of cash was provided by operating activities.
During this period, cash of $1.1 million and $3.3 million was used to fund
increases in accounts receivable and inventories, respectively, primarily
relating to an shipments made to the FAA, which provides for extended payment
terms and resulted in inventory purchases. This use of cash was offset in part
by $1.9 million of cash provided by an increase in other current liabilities,
including $1.3 million of accrued income taxes and $0.6 million of accrued
payroll and employee benefits.
During 1997, the Company's investing activities included the expenditure of
$1.8 million for purchases of property, plant, and equipment.
The Company's financing activities provided $20.2 million of cash in 1997.
In March 1997, the Company sold 2,671,292 shares of its common stock in an
initial public offering for net proceeds of $28.1 million
Although the Company expects to have positive cash flow from its existing
operations, the Company anticipates it will require significant amounts of cash
for the possible acquisition of complementary businesses and technologies. While
the Company currently has no agreement to make an acquisition, it expects that
it would finance any acquisition through a combination of internal funds, and/or
short-term borrowings from Thermedics or Thermo Electron, although it has no
agreement with these companies to ensure that 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 businesses for the
foreseeable future.
24
<PAGE>
FORWARD-LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in 1998 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
UNCERTAINTY OF MARKET ACCEPTANCE OF NEW PRODUCTS. Certain of the Company's
products represent alternatives to traditional detection and analytical methods.
As a result, such products may be slow to achieve, or may not achieve, market
acceptance, as customers may seek further validation of the efficiency and
efficacy of the Company's technology, particularly where the purchase of the
product requires a significant capital commitment. The Company believes that, to
a significant extent, its growth prospects depend on its ability to gain
acceptance of the efficiency and efficacy of the Company's innovative
technologies by a broader group of customers. The Company is currently devoting
significant resources toward the enhancement of its existing products and the
development of new products and technologies, including its derivative products
of the Company's Flash-GC high-speed gas chromatography system; a more portable
EGIS; and EGIS II (formerly named "Rampart") Rampart, a lower-cost EGIS unit for
use in airport screening of carry-on baggage. There can be no assurance that the
Company will be successful in obtaining such broad acceptance or that, if
obtained, such acceptance will be sustained. The failure of the Company to
obtain and sustain such broad acceptance could have a material adverse effect on
the Company's business, financial condition and results of operations.
ONGOING PRODUCT DEVELOPMENT EFFORTS REQUIRED BY RAPID TECHNOLOGICAL CHANGE.
The markets for the Company's products are 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. There can be no assurance that the Company will
successfully complete the enhancement and development of these products in a
timely fashion or that the Company's current or future products will satisfy the
needs of its markets.
DEPENDENCE OF SECURITY INSTRUMENTS MARKET ON GOVERNMENT REGULATION AND
AIRLINE INDUSTRY. The Company's sales of its 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 the Company,
including political and budgetary concerns of governments, airlines, and
airports. Of the more than 600 commercial airports worldwide, more than 400 are
located in the United States. Accordingly, the Company believes that the size of
the market for explosives-detection equipment is, and will increasingly be,
significantly influenced by United States government regulation. In the United
States, the Aviation Security Act of 1990 directed the Federal Aviation
Administration (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. The Company's systems are trace detectors for which no FAA
certification process for checked baggage, carry-on, or personal screening
exists to date. Currently, the Company is seeking FAA approval for the Company's
EGIS and EGIS II systems for use by airlines in screening carry-on electronic
items and luggage searches. There can be no assurance, however, that such FAA
approvals will be obtained. Each airline must seek this approval for each
application. Although the FAA has provided significant funding to the Company in
connection with
25
<PAGE>
the development of its explosives-detection technology, there can be no
assurance that any of the Company's systems will ever meet this or any other
United States certification standard. Any product utilizing a technology
ultimately recommended or required by the FAA will have a significant
competitive advantage in the market for explosives-detection devices. Unless the
FAA takes action with respect to a particular explosives-detection product or
technology, airlines will not be required to purchase or upgrade their security
systems, including upgrading existing metal-detection equipment. Earnings of
U.S. air carriers tends to fluctuate significantly from time to time. Any
depression in the financial condition of such carriers would likely result in
lower capital spending for discretionary items. Moreover, there can be no
assurance that additional countries will mandate the implementation of effective
explosives screening for airline baggage, carry-on items or personal, or that,
if mandated, the Company's systems will meet the certification or other
requirements of the applicable government authority. Even if the Company's
systems were to meet the applicable requirements, there can be no assurance that
the Company 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 the Company, 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
the Company'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
the Company will be mandated, or that, even if further appropriations are made
and such equipment is mandated, any of the Company'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. Sales of process detection instruments
and services to bottlers licensed by The Coca-Cola Company (Coca-Cola Bottlers)
were $3,100,000, $13,939,000, $10,641,000, and $9,974,000, for the first six
months of 1998, and in 1997, 1996, and 1995, respectively, or 6.5%, 13%, 11%,
and 31% of the Company's revenues, respectively, during such periods. In 1997,
the Company completed the fulfillment of a mandated product-line upgrade for The
Coca-Cola Bottlers. Although the Company anticipates that it will continue to
derive revenues from the sale of upgrades and new systems to new plants, as well
as services to the Coca-Cola Bottlers, the Company does not expect that revenues
derived from these customers will continue at a rate comparable to prior years.
Further, the Company intends to continue to develop and introduce new process
detection products for the food, beverage and other markets, however, there can
be no assurance that the Company will be successful in the introduction of new
process detection products or that any sales of these products will be
sufficient to maintain a rate of growth equivalent to prior years.
COMPETITION; TECHNOLOGICAL CHANGE. The Company encounters, and expects to
continue to encounter, competition in the sale of its current and future
products. Many of the Company's competitors and potential competitors have
substantially greater resources, manufacturing and marketing capabilities,
research and development staff and production facilities than those of the
Company. Some of these competitors have large existing installed bases of
products with substantial numbers of customers. In addition, other major
corporations have recently announced their intention to enter certain of the
Company's markets, including the security screening market. The Company believes
that many of its products are successful because they are technologically
superior to alternative products offered by some of the Company's competitors.
In order to continue to be successful, the Company believes that it will be
important to maintain this technological advantage. No assurance can be given
that the Company will be able to maintain such an advantage or that competitors
of the Company will not develop technological innovations that will render
products of the Company obsolete. For example, the Company's EGIS system
26
<PAGE>
competes against other trace explosives detection systems as well as systems
utilizing dual energy X-ray or computed X-ray tomography imaging technologies.
There can be no assurance that such technologies will not be enhanced to a
degree that would impair the Company's ability to market its explosives
detection systems.
POTENTIAL FOR PRODUCT LIABILITY CLAIMS. The Company's business involves the
risk of product liability claims inherent to the explosives detection business,
as well as the food, beverage and other industries. There are many factors
beyond the control of the Company that could result in the failure of the
Company's products to detect explosives or contaminants in food or beverage
containers, such as the reliability of a customer's operators, the ongoing
training of such operators and the maintenance of the Company's products by its
customers. For these and other reasons, there can be no assurance that the
Company's products will detect all explosives or contaminants. The failure to
detect explosives or contaminants could give rise to product liability claims
and result in negative publicity that could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company currently maintains both aviation and general product liability
insurance in amounts the Company believes to be commercially reasonable. There
can be no assurance that this insurance will be sufficient to protect the
Company from product liability claims, or that product liability insurance will
continue to be available to the Company at a reasonable cost, if at all.
UNCERTAINTIES ASSOCIATED WITH INTERNATIONAL OPERATIONS. For the first six
months in 1998, and in 1997, 1996, and 1995, international sales accounted for
64%, 52%, 46%, and 67%, respectively, of the Company's revenues, and the Company
anticipates that international sales will continue to account for a significant
percentage of the Company's revenues. Sales to customers in The Netherlands
accounted for approximately 3%, 5% and 8% of the Company's revenues in the first
six months in 1998, and in 1997 and 1996, respectively. See Note 8 of Notes to
the Company's Consolidated Financial Statements included elsewhere in this Proxy
Statement. International revenues are subject to a number of uncertainties,
including the following: agreements may be difficult to enforce and receivables
difficult to collect through a foreign country's legal system; foreign customers
may have longer payment cycles; foreign countries may impose additional
withholding taxes or otherwise tax the Company's foreign income, impose tariffs
or adopt other restrictions on foreign trade; fluctuations in exchange rates may
affect product demand and adversely affect the profitability in U.S. dollars of
products and services provided by the Company in foreign markets where payment
for the Company's products and services is made in the local currency; U.S.
export licenses may be difficult to obtain; and the protection of intellectual
property in foreign countries may be more difficult to enforce. Moreover, many
foreign countries have their own regulatory approval requirements for sales of
the Company's products. As a result, the Company's introduction of new products
into international markets can be costly and time-consuming, and there can be no
assurance that the Company will be able to obtain the required regulatory
approvals on a timely basis, if at all. There can be no assurance that any of
these factors will not have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not attempt to
minimize currency and exchange rate risks through material hedging activities.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY AND RISKS OF THIRD-PARTY
CLAIMS. Proprietary rights relating to the Company's products will be protected
from unauthorized use by third parties only to the extent that they are covered
by valid and enforceable patents or are maintained in confidence as trade
secrets. There can be no assurance, however, that any patents now or hereafter
owned by the Company will afford protection against competitors, or as to the
likelihood that patents will issue from pending patent applications. Proceedings
initiated by the Company to protect its proprietary rights could result in
substantial costs to the Company. Although the Company believes that its
products and technology do not infringe any existing proprietary rights of
others, there can be no assurance that third parties will not assert such claims
against the Company in the future or that such future claims will not be
successful. The Company could incur substantial costs and diversion of
management resources in connection with the defense of any claims relating to
proprietary rights, which could have a material adverse effect on the
27
<PAGE>
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. Such a judgment could have a material adverse
effect on the Company's business, financial condition and results of operations.
In the event that a claim relating to proprietary technology or information is
asserted against the Company, the Company may seek licenses to such intellectual
property. There can be no assurance, however, that such a license could be
obtained on commercially reasonable terms, if at all, or that the terms of any
offered licenses will be acceptable to the Company. The failure to obtain the
necessary licenses or other rights could preclude the sale, manufacture or
distribution of the Company's products and, therefore, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The cost of responding to any such claim may be material, whether or
not the assertion of such claim is valid. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate to
prevent misappropriation of its technology or independent development by others
of similar technology. In addition, the laws of some jurisdictions do not
protect the Company's proprietary rights to the same extent as the laws of the
U.S. There can be no assurance that these protections will be adequate.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY. The Company's strategy includes
the acquisition of businesses and technologies that complement or augment the
Company's 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 approvals, including antitrust
approvals. Any acquisitions completed by the Company may be made at substantial
premiums over the fair value of the net assets of the acquired companies. There
can be no assurance that the Company will be able to complete future
acquisitions or that the Company will be able to successfully integrate any
acquired businesses. In order to finance such acquisitions, it may be necessary
for the Company to raise additional funds through public or private financings.
Any equity or debt financing, if available at all, may be on terms which are not
favorable to the Company and, in the case of equity financing, may result in
dilution to the Company's stockholders.
DIFFICULTIES IN MANAGING RAPID GROWTH. Due to the level of technical and
marketing expertise necessary to support its existing and new customers, the
Company must attract and retain highly qualified and well-trained personnel.
There are a limited number of persons with the requisite skills to serve in
these positions, and it may become increasingly difficult for the Company to
hire such personnel. Further rapid expansion may also significantly strain the
Company's administrative, operational and financial personnel, management
information systems, manufacturing operations, and other resources. There can be
no assurance that the Company's systems, procedures, and controls will be
adequate to support the Company's operations. Failure to manage growth properly
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
POTENTIAL FLUCTUATIONS IN QUARTERLY PERFORMANCE. Significant annual and
quarterly fluctuations in the Company's results of operations may be caused by,
among other factors, the overall demand for, and market acceptance of, the
Company's products; the timing of regulatory approvals for certain of the
Company's products; government initiatives to promote the use of explosives
detection systems such as those manufactured and sold by the Company; the timing
of the announcement, introduction and delivery of new products and product
enhancements by the Company and its competitors; variations in the Company's
product mix and component costs; timing of customer orders; adjustments of
delivery schedules to accommodate customer's programs; the availability of
components from suppliers; the timing and level of expenditures in anticipation
of future sales; the mix of products sold by the Company; and pricing and other
competitive conditions. Because certain of the Company's products require
significant capital expenditures and other commitments by its customers, the
Company has experienced extended sales cycles. Delays in anticipated purchase
orders could have a material adverse effect on the Company's business, financial
condition and results of operations. Customers may also cancel or reschedule
shipments, and product difficulties could delay shipments. Because the Company's
operating expenses are
28
<PAGE>
based on anticipated revenue levels and a high percentage of the Company's
expenses are fixed for the short term, a small variation in the timing of
recognition of revenue can cause significant variations in operating results
from quarter to quarter. There can be no assurance that any of these factors
will not have a material adverse impact on the Company's business and results of
operations.
POTENTIAL IMPACT OF YEAR 2000 ON PROCESSING OF DATE-SENSITIVE
INFORMATION. The Company is currently assessing the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems and on products sold as well as products
purchased by the Company. The Company believes that its internal information
systems and current products are either year 2000 compliant or will be so prior
to the year 2000 without incurring material costs. There can be no assurance,
however, that the Company will not experience unexpected costs and delays in
achieving year 2000 compliance for its internal information systems and current
products, which could result in a material adverse effect on the Company's
future results of operations.
The Company is presently assessing the effect that the year 2000 problem may
have on its previously sold products. The Company is also assessing whether its
key suppliers are adequately addressing this issue and the effect this might
have on the Company. The Company has not completed its analysis and is unable to
conclude at this time that the year 2000 problem as it relates to its previously
sold products and products purchased from key suppliers is not reasonably likely
to have a material adverse effect on the Company's future results of operations.
29
<PAGE>
STOCK OWNERSHIP
The following table sets forth the beneficial ownership of Common Stock, as
well as the common stock of Thermedics, the Company's parent company, and of
Thermo Electron, Thermedics' parent company, as of September 30, 1998, with
respect to (i) each director of the Company, (ii) the chief executive officer of
the Company and other executive officers of the Company who, during the last
completed fiscal year of the Company, met the definition of "highly compensated"
within the meaning of the Securities and Exchange Commission's executive
compensation disclosure rules, and (iii) all directors and current executive
officers as a group. In addition, the following table sets forth the beneficial
ownership of Common Stock as of September 30, 1998, with respect to each person
who was known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock.
While certain directors and executive officers of the Company are also
directors and executive officers of Thermo Electron or its subsidiaries other
than the Company (including Thermedics), all such persons disclaim beneficial
ownership of the shares of Common Stock owned by Thermo Electron.
<TABLE>
<CAPTION>
THERMO
THERMEDICS DETECTION THERMEDICS ELECTRON
NAME(1) INC.(2) INC.(3) CORPORATION(4)
- --------------------------------------------------------------- -------------------- ----------- --------------
<S> <C> <C> <C>
Thermo Electron Corporation(5)................................. 16,752,162 N/A N/A
James C. Barbookles............................................ 138,800 75,000 20,400
Morton Collins................................................. 26,088 0 0
David H. Fine.................................................. 109,967 106,687 71,190
John T. Keiser................................................. 17,000 81,793 192,508
Matthew C. Weisman............................................. 21,069 0 1,000
John W. Wood Jr................................................ 38,051 157,006 269,366
All directors and current executive officers as a group (8
persons)..................................................... 377,337 505,476 1,508,083
</TABLE>
- ------------------------
(1) Except as reflected in the footnotes to this table, shares beneficially
owned consist of shares owned by the indicated person or by that person for
the benefit of minor children, and all share ownership includes sole voting
and investment power.
(2) Shares of Common Stock beneficially owned by Mr. Barbookles, Mr. Collins,
Dr. Fine, Mr. Keiser, Mr. Weisman, Mr. Wood and all directors and current
executive officers as a group include 120,800, 20,000, 99,967, 17,000,
20,000, 20,800 and 323,567 shares, respectively, that such person or group
has the right to acquire within 60 days of September 30, 1998, through the
exercise of stock options. Shares of Common Stock beneficially owned by Mr.
Collins, Mr. Weisman and all directors and current executive officers as a
group include 1,088, 1,069 and 2,157 whole shares, respectively, allocated
to their respective accounts through July 4, 1998, maintained under the
Company's Deferred Compensation Plan for directors. No director or current
executive officer beneficially owned more than 1% of the Common Stock
outstanding as of September 30, 1998; all directors and current executive
officers as a group beneficially owned 1.92% of the Common Stock outstanding
as of such date.
(3) Shares of the common stock of Thermedics beneficially owned by Mr.
Barbookles, Dr. Fine, Mr. Keiser, Mr. Wood and all directors and current
executive officers as a group include 75,000, 90,300, 78,000, 99,300 and
411,600 shares, respectively, that such person or group has the right to
acquire within 60 days of September 30, 1998, through the exercise of stock
options. Shares beneficially owned by all directors and current executive
officers as a group include 3,031 whole shares allocated through March 1,
1998, to their respective accounts maintained pursuant to Thermo Electron's
Employee Stock Ownership Plan of which the trustees, who have investment
power over its assets, are executive officers of Thermo Electron (the
"ESOP"). Shares beneficially owned by
30
<PAGE>
Mr. Wood include 2,600 shares held in trust for the benefit of two children
of which Mr. Wood's spouse is the trustee. No director or current executive
officer beneficially owned more than 1% of the common stock of Thermedics
outstanding as of September 30, 1998; all directors and current executive
officers as a group beneficially owned 1.37% of such common stock
outstanding as of such date.
(4) Shares of the common stock of Thermo Electron beneficially owned by Mr.
Barbookles, Dr. Fine, Mr. Keiser, Mr. Wood and all directors and current
executive officers as a group include 20,400, 54,912, 151,622, 228,359 and
1,315,965 shares, respectively, that such person or group has the right to
acquire within 60 days of September 30, 1998, through the exercise of stock
options. Shares beneficially owned by all directors and current executive
officers as a group include 3,462 whole shares, allocated through March 1,
1998 to their respective accounts maintained pursuant to the ESOP. No
director or current executive officer beneficially owned more than 1% of the
common stock of Thermo Electron outstanding as of September 30, 1998; all
directors and current executive officers as a group beneficially owned less
than 1% of the common stock of Thermo Electron as of such date.
(5) As of September 30, 1998, Thermo Electron beneficially owned approximately
86.72% of the outstanding Common Stock, primarily through its majority-owned
subsidiary Thermedics (after giving effect to the issuance of the TDX
Shares). Thermo Electron's address is 81 Wyman Street, Waltham,
Massachusetts 02254-9046. As of September 30, 1998, Thermo Electron had the
power to elect all of the members of the Company's board of directors.
RELATIONSHIP WITH AFFILIATES
Thermo Electron has adopted a strategy of selling a minority interest in
subsidiary companies to outside investors as an important tool in its future
development. As part of this strategy, Thermo Electron and certain of its
subsidiaries have created several privately and publicly held subsidiaries, and
Thermedics has created the Company and other subsidiaries as publicly held
majority-owned subsidiaries and privately held majority-owned subsidiaries. From
time to time, Thermo Electron and its subsidiaries will create other
majority-owned subsidiaries as part of its spinout strategy. (The Company and
such other majority-owned Thermo Electron subsidiaries are hereinafter referred
to as the "Thermo Subsidiaries.")
Thermo Electron and each of the Thermo Subsidiaries recognize that the
benefits and support that derive from their affiliation are essential elements
of their individual performance. Accordingly, Thermo Electron and each of the
Thermo Subsidiaries, including the Company, have adopted the Thermo Electron
Corporate Charter (the "Charter") to define the relationships and delineate the
nature of such cooperation among themselves. The purpose of the Charter is to
ensure that (1) all of the companies and their stockholders are treated
consistently and fairly, (2) the scope and nature of the cooperation among the
companies, and each company's responsibilities, are adequately defined, (3) each
company has access to the combined resources and financial, managerial and
technological strengths of the others, and (4) Thermo Electron and the Thermo
Subsidiaries, in the aggregate, are able to obtain the most favorable terms from
outside parties.
To achieve these ends, the Charter identifies the general principles to be
followed by the companies, addresses the role and responsibilities of the
management of each company, provides for the sharing of group resources by the
companies and provides for centralized administrative, banking and credit
services to be performed by Thermo Electron. The services provided by Thermo
Electron include collecting and managing cash generated by members, coordinating
the access of Thermo Electron and the Thermo Subsidiaries (the "Thermo Group")
to external financing sources, ensuring compliance with external financial
covenants and internal financial policies, assisting in the formulation of
long-range planning and providing other banking and credit services. Pursuant to
the Charter, Thermo Electron may also provide guarantees of debt or other
obligations of the Thermo Subsidiaries or may obtain external financing at the
parent level for the benefit of the Thermo Subsidiaries. In certain instances,
the Thermo Subsidiaries may
31
<PAGE>
provide credit support to, or on behalf of, the consolidated entity or may
obtain financing directly from external financing sources. Under the Charter,
Thermo Electron is responsible for determining that the Thermo Group remains in
compliance with all covenants imposed by external financing sources, including
covenants related to borrowings of Thermo Electron or other members of the
Thermo Group, and for apportioning such constraints within the Thermo Group. In
addition, Thermo Electron establishes certain internal policies and procedures
applicable to members of the Thermo Group. The cost of the services provided by
Thermo Electron to the Thermo Subsidiaries is covered under existing corporate
services agreements between Thermo Electron and each of the Thermo Subsidiaries.
The Charter presently provides that it shall continue in effect so long as
Thermo Electron and at least one Thermo Subsidiary participate. The Charter may
be amended at any time by agreement of the participants. Any Thermo Subsidiary,
including the Company, can withdraw from participation in the Charter upon 30
days' prior notice. In addition, Thermo Electron may terminate a subsidiary's
participation in the Charter in the event the subsidiary ceases to be controlled
by Thermo Electron or ceases to comply with the Charter or the policies and
procedures applicable to the Thermo Group. A withdrawal from the Charter
automatically terminates the corporate services agreement and tax allocation
agreement (if any) in effect between the withdrawing company and Thermo
Electron. The withdrawal from participation does not terminate outstanding
commitments to third parties made by the withdrawing company, or by Thermo
Electron or other members of the Thermo Group, prior to the withdrawal. In
addition, a withdrawing company is required to continue to comply with all
policies and procedures applicable to the Thermo Group and to provide certain
administrative functions mandated by Thermo Electron so long as the withdrawing
company is controlled by or affiliated with Thermo Electron.
As provided in the Charter, the Company and Thermo Electron have entered
into a Corporate Services Agreement (the "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 to the Company. The
Company was assessed an annual fee equal to 1.0% of the Company's revenues for
these services in fiscal 1996 and 1997. The annual fee has been reduced to 0.8%
of the Company's total revenues for fiscal 1998. The fee is reviewed annually
and may be changed by mutual agreement of the Company and Thermo Electron.
During the first six months of 1998, and during fiscal 1997, Thermo Electron
assessed the Company $381,000 and $579,000 in fees under the Services Agreement.
Management believes that the charges under the Services Agreement are reasonable
and that the terms of the Services Agreement are fair to the Company. For
additional items such as employee benefit plans, insurance coverage, and other
identifiable costs, Thermo Electron charges the Company based on charges
attributable to the Company. The Services Agreement automatically renews for
successive one-year terms, unless canceled by the Company upon 30 days' prior
notice. In addition, the Services Agreement terminates automatically in the
event the Company ceases to be a member of the Thermo Group or ceases to be a
participant in the Charter. In the event of a termination of the Services
Agreement, the Company will be required to pay a termination fee equal to the
fee that was paid by the Company for services under the Services Agreement for
the nine-month period prior to termination. Following termination, Thermo
Electron may provide certain administrative services on an as-requested basis by
the Company or as required in order to meet the Company's obligations under
Thermo Electron's policies and procedures. Thermo Electron will charge the
Company a fee equal to the market rate for comparable services if such services
are provided to the Company following termination.
From time to time, the Company may transact business with other companies in
the Thermo Group.
In January 1996, the Company acquired the assets of Moisture Systems
Corporation and certain affiliated companies for a total of $21.7 million in
cash, including repayment of approximately $0.7 million of indebtedness. In
connection with this acquisition, the Company borrowed $21.2 million from
Thermedics pursuant to a promissory note due March 1998, and bearing interest at
the 90-day Commercial
32
<PAGE>
Paper Composite Rate plus 25 basis points, set at the beginning of each quarter.
The Company repaid this note in March 1998.
Pursuant to a subcontract entered into in October 1993, the Company
performed research and development services for Thermo Coleman Corporation
("Thermo Coleman"), whose wholly owned subsidiary Coleman Research Corporation
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 the Company $533,000 under this arrangement in fiscal 1997. No revenues
were recorded under this subcontract in the first six months of 1998.
The Company 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 Corporation ("Thermo Trex"), which is itself a publicly
traded, majority-owned subsidiary of Thermo Electron. The Company paid Trex
Medical Corporation $318,000 and $47,965 for these products during the first six
months and in fiscal 1997, respectively.
The Company entered into a funded research and development arrangement with
ThermoLase Corporation ("ThermoLase"), a publicly traded, majority-owned
subsidiary of ThermoTrex, in December 1997 to develop a cryogenic cooling device
for ThermoLase. ThermoLase agreed to purchase five prototype devices for an
aggregate purchase price of $270,000. The Company expects to complete shipment
of the devices in the third quarter of 1998.
The Company has subleased approximately 12,000 square feet of space in its
Chelmsford, Massachusetts, facility to Thermo Cardiosystems Inc., a publicly
traded, majority-owned subsidiary of Thermedics ("Thermo Cardiosystems"), under
a two-year sublease agreement. Under this sublease, Thermo Cardiosystems paid
the Company base rent of $23,333 and $44,000 during the first six months and in
fiscal 1997, together with amounts equal to approximately $19,000, $33,000,
representing Thermo Cardiosystems' pro rata allocations of the facility's
aggregate operating costs, real estate taxes and utilities for these periods.
Pursuant to an international distributorship agreement, the Company
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, a member of The
Olayan Group, which is indirectly controlled by Suliman S. Olayan, Ms. Olayan's
father. Revenues recorded under this agreement totaled $480,000 in fiscal 1997.
No revenues were recorded under this agreement during the first six months of
1998.
The Company, along with certain other Thermo Subsidiaries, also participates
in a notional pool arrangement with ABN AMRO, which includes a $50 million
credit facility. Only European-based Thermo Subsidiaries participate in this
arrangement. Under this arrangement the Bank notionally combines the positive
and negative cash balances held by the participants to calculate the net
interest yield/expense for the group. The benefit derived from this arrangement
is then allocated based on balances attributable to the respective participants.
Thermo Electron guarantees all of the obligations of each participant in this
arrangement. In addition, funds on deposit under this arrangement provide credit
support for overdraft obligations of other participants. As of January 3, 1998,
the Company had a positive cash balance of approximately $1,312,893, based on an
exchange rate of $0.495/NLG 1.00 as of January 3, 1998. For 1997, the average
annual interest rate earned on NLG deposits by participants in this credit
arrangement was approximately 4.8% and the average annual interest rate paid on
NLG overdrafts was approximately 4.8%.
As of January 3, 1998, the Company owed Thermo Electron and its other
subsidiaries an aggregate of $1,294,000 for amounts due under the Corporate
Services Agreement and related administrative charges, for other products and
services and for miscellaneous items, net of amounts owed to the Company by
Thermo Electron and its other subsidiaries for products, services and for
miscellaneous items. The largest amount of net indebtedness owed by the Company
to Thermo Electron and its other subsidiaries since
33
<PAGE>
December 29, 1996 was $1,294,000. These amounts do not bear interest and are
expected to be paid in the normal course of business.
As of January 3, 1998, $40,043,000 of the Company's cash equivalents were
invested pursuant to 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, money market funds,
commercial paper 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 a 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.
STOCK HOLDING ASSISTANCE PLAN
In 1997, the Company adopted a stock holding policy which requires its
executive officers to acquire and hold a minimum number of shares of Common
Stock. In order to assist the executive officers in complying with the policy,
the Company also adopted a stock holding assistance plan under which it may make
interest-free loans to certain key employees, including its executive officers,
to enable such employees to purchase the Common Stock in the open market. During
1997, Mr. James Barbookles, the Company's president and chief executive officer,
received loans in the principal amount of $160,721 under this plan to purchase
15,900 shares, the entire amount of which was outstanding as of September 30,
1998. In 1998, Mr. Barbookles received a loan in the principal amount of $21,476
under this plan to purchase 2,100 shares, the entire amount of which was
outstanding as of September 30, 1998. These loans are repayable upon the earlier
of demand or the fifth anniversary of the date of the loan, unless otherwise
authorized by the human resources committee of the Company's board of directors.
This policy and plan were amended in 1998 to apply only to the chief executive
officer of the Company in the future.
RECOMMENDATION
The Board of Directors believes that the proposal is in the best interest of
the Company and its Stockholders and recommends that the Stockholders vote FOR
the approval of the listing of the TDX Shares on the American Stock Exchange,
Inc. in connection with the acquisition of the Acquired Company. If not
otherwise specified, proxies will be voted FOR approval of this proposal.
Thermedics, which owned approximately [76.6%] of the outstanding Common Stock as
of the Record Date (without giving effect to the issuance of the TDX shares),
has sufficient votes to approve the proposal and has indicated its intention to
vote for the proposal.
OTHER ACTION
Management is not aware at this time of any other matters that will be
presented for action at the Meeting. Should any such matters be presented, the
proxies grant power to the proxy holders to vote shares represented by the
proxies in the discretion of such proxy holders.
STOCKHOLDER PROPOSALS
Proposals of Stockholders intended to be included in the proxy statement and
form of proxy relating to the 1999 Annual Meeting of the Stockholders of the
Company must be received by the Company for inclusion in the proxy statement and
form of proxy no later than December 29, 1998. Management proxies will be
authorized to exercise discretionary voting authority with respect to any
shareholder proposal not included in the Company's proxy materials for the 1999
Annual Meeting unless (a) the Company receives notice of such proposal by March
13, 1999 and (b) the conditions set forth in Rule 14a-4(c)(2)(i)-(iii) under the
Securities Exchange Act of 1934 are met.
34
<PAGE>
SOLICITATION STATEMENT
The cost of this solicitation of proxies will be borne by the Company.
Solicitation will be made primarily by mail, but regular employees of the
Company may solicit proxies personally or by telephone or telegram. Brokers,
nominees, custodians and fiduciaries are requested to forward solicitation
materials to obtain voting instructions from beneficial owners of stock
registered in their names, and the Company will reimburse such parties for their
reasonable charges and expenses in connection therewith.
Chelmsford, Massachusetts
, 1998
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
THERMEDICS DETECTION INC.
Report of Independent Public Accountants........................................... F-2
Consolidated Statement of Income for the six months ended July 4, 1998, and June
28, 1997, and the years ended January 3, 1998, December 28, 1996, and December
30, 1995......................................................................... F-3
Consolidated Balance Sheet as of July 4, 1998, January 3, 1998, and December 28,
1996............................................................................. F-4
Consolidated Statement of Cash Flows for the six months ended July 4, 1998, and
June 28, 1997 and the years ended January 3, 1998, December 28, 1996, and
December 30, 1995................................................................ F-5
Consolidated Statement of Shareholders' Investment for the six months ended July 4,
1998 and the years ended January 3, 1998, December 28, 1996, and December 30,
1995............................................................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
ORION RESEARCH INC.
Report of Independent Public Accountants........................................... F-23
Consolidated Statement of Income for the years ended January 3, 1998, and December
28, 1996, the period from December 1, 1995, through December 30, 1995, and the
period from January 1, 1995, through November 30, 1995........................... F-24
Consolidated Balance Sheet as of January 3, 1998 and December 28, 1996............. F-25
Consolidated Statement of Cash Flows for the years ended January 3, 1998, and
December 28, 1996, the period from December 1, 1995 through December 30, 1995,
and the period from January 1, 1995, through November 30, 1995................... F-26
Consolidated Statement of Shareholder's Investment for the years ended January 3,
1998, and December 28, 1996, the period from December 1, 1995, through December
30, 1995, and the period from January 1, 1995, through November 30, 1995......... F-27
Notes to Consolidated Financial Statements......................................... F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Thermedics Detection Inc.:
We have audited the accompanying consolidated balance sheet of Thermedics
Detection Inc. (a Massachusetts corporation and 83%-owned subsidiary of
Thermedics Inc.) and subsidiaries as of January 3, 1998, and December 28, 1996,
and the related consolidated statements of income, cash flows, and shareholders'
investment for each of the three years in the period ended January 3, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermedics
Detection Inc. and subsidiaries as of January 3, 1998, and December 28, 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended January 3, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
July 17, 1998
(except with respect to certain
matters discussed in Note 11, as
to which the date is August 12, 1998)
F-2
<PAGE>
THERMEDICS DETECTION INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JULY 4, JUNE 28,
1998 1997 1997 1996 1995
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues (Notes 6 and 8):
Product revenues........................................ $ 39,366 $ 43,437 $ 89,264 $ 80,557 $ 23,298
Service revenues........................................ 8,298 7,734 15,110 14,047 9,645
--------- --------- ---------- --------- ---------
47,664 51,171 104,374 94,604 32,943
--------- --------- ---------- --------- ---------
Costs and Operating Expenses:
Cost of product revenues (Note 6)....................... 17,613 19,147 38,694 37,857 12,065
Cost of service revenues................................ 4,126 3,655 7,701 7,753 5,387
Selling, general, and administrative expenses
(Note 6).............................................. 14,357 15,032 28,515 31,198 8,824
Research and development expenses....................... 5,065 4,788 9,643 8,100 3,068
--------- --------- ---------- --------- ---------
41,161 42,622 84,553 84,908 29,344
--------- --------- ---------- --------- ---------
Operating Income.......................................... 6,503 8,549 19,821 9,696 3,599
Interest Income........................................... 878 859 2,072 229 --
Interest Expense, Related Party (Note 2).................. (303) (623) (1,239) (1,119) --
Other Income (Expense), Net............................... 5 (7) 23 12 (72)
--------- --------- ---------- --------- ---------
Income Before Provision for Income Taxes.................. 7,083 8,778 20,677 8,818 3,527
Provision for Income Taxes (Note 4)....................... 2,798 3,511 8,171 3,519 1,354
--------- --------- ---------- --------- ---------
Net Income................................................ $ 4,285 $ 5,267 $ 12,506 $ 5,299 $ 2,173
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Basic and Diluted Earnings per Share (Note 9)............. $ .22 $ .29 $ .67 $ .33 $ .21
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Weighted Average Shares (Note 9):
Basic................................................... 19,317 18,127 18,721 16,236 10,491
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Diluted................................................. 19,321 18,139 18,732 16,253 10,494
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
THERMEDICS DETECTION INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 4,
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents (includes $21,311, $40,043, and $10,976 under
repurchase agreement with affiliated company)........................... $ 29,684 $ 46,352 $ 14,264
Accounts receivable, less allowances of $1,016, $1,127, and $1,455........ 16,826 18,223 17,588
Inventories............................................................... 17,770 16,819 14,090
Unbilled contract costs and fees.......................................... 1,270 836 307
Prepaid and refundable income taxes (Note 4).............................. 3,589 3,595 4,465
Prepaid expenses.......................................................... 1,349 1,439 965
----------- ---------- ----------
70,488 87,264 51,679
----------- ---------- ----------
Property, Plant, and Equipment, at Cost, Net................................ 4,230 4,011 4,024
----------- ---------- ----------
Other Assets................................................................ 1,194 1,198 1,923
----------- ---------- ----------
Cost in Excess of Net Assets of Acquired Companies (Note 2)................. 55,045 55,792 58,432
----------- ---------- ----------
$ 130,957 $ 148,265 $ 116,058
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Promissory note to parent company (Note 2)................................ $ -- $ 21,200 $ --
Accounts payable.......................................................... 4,214 3,868 4,788
Accrued income taxes...................................................... 2,316 2,331 1,016
Deferred revenue.......................................................... 1,606 1,689 1,281
Accrued payroll and employee benefits..................................... 2,820 3,852 3,302
Accrued installation and warranty expenses................................ 1,129 1,154 1,714
Customer deposits......................................................... 305 782 637
Other accrued expenses.................................................... 4,117 4,628 6,314
Due to parent company and affiliated companies............................ 1,793 1,415 312
----------- ---------- ----------
18,300 40,919 19,364
----------- ---------- ----------
Deferred Income Taxes (Note 4).............................................. -- -- 40
----------- ---------- ----------
Promissory Note to Parent Company (Note 2).................................. -- -- 21,200
----------- ---------- ----------
Commitments (Note 5)
Shareholders' Investment (Notes 3, 7, and 11):
Common stock, $.10 par value, 50,000,000 shares authorized; 19,316,684 pro
forma shares issued and outstanding..................................... 1,932 1,932 1,664
Capital in excess of par value............................................ 94,781 93,755 67,043
Retained earnings......................................................... 17,491 13,206 7,136
Cumulative translation adjustment......................................... (1,547) (1,547) (389)
----------- ---------- ----------
112,657 107,346 75,454
----------- ---------- ----------
$ 130,957 $ 148,265 $ 116,058
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
THERMEDICS DETECTION INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
<S> <C> <C> <C> <C> <C>
JULY 4, JUNE 28,
1998 1997 1997 1996 1995
--------- ----------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income..................................................... $ 4,285 $ 5,267 $ 12,506 $ 5,299 $ 2,173
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................. 1,641 1,613 3,287 4,366 1,357
Provision for losses on accounts receivable................ 150 98 201 642 103
Other noncash expenses..................................... 768 524 376 1,906 738
Increase (decrease) in deferred income taxes............... -- -- 1,371 1,045 (356)
Changes in current accounts, excluding the effects of
acquisitions:
Accounts receivable...................................... 1,232 826 (1,134) (2,570) 795
Unbilled contract costs and fees......................... (453) (169) (549) 845 (931)
Inventories.............................................. (1,596) (3,622) (3,298) 2,283 (3,472)
Other current assets..................................... 94 (51) (52) (741) 162
Accounts payable......................................... 347 397 (884) (552) 122
Other current liabilities................................ (1,957) 2,222 1,870 1,580 (3,076)
--------- ----------- --------- --------- ---------
Net cash provided by (used in) operating activities.............. 4,511 7,105 13,694 14,103 (2,385)
--------- ----------- --------- --------- ---------
INVESTING ACTIVITIES:
Acquisitions (Note 2).......................................... -- -- -- (21,668) --
Acquisition of product line (Note 2)........................... -- -- -- (300) --
Purchases of property, plant, and equipment.................... (1,148) (1,070) (1,832) (2,608) (628)
Proceeds from sale of property, plant, and equipment........... 99 -- 28 113 19
Other.......................................................... -- 80 82 -- --
--------- ----------- --------- --------- ---------
Net cash used in investing activities............................ (1,049) (990) (1,722) (24,463) (609)
--------- ----------- --------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds from issuance of Company common stock (Note 7).... -- 28,121 28,078 6,964 --
Proceeds from issuance of promissory note to parent company
(Note 2)..................................................... -- -- -- 21,200 --
Repayment of promissory note to parent company................. (21,200) -- --
Additional capital contributions and transfers to parent
company, net................................................. -- -- -- 120 3,170
Orion transfers (to) from parent company....................... 1,026 (1,835) (7,845) (5,924) 1,318
Other.......................................................... -- (35) (61) (174) --
--------- ----------- --------- --------- ---------
Net cash provided by (used in) financing activities.............. (20,174) 26,251 20,172 22,186 4,488
--------- ----------- --------- --------- ---------
Exchange Rate Effect on Cash..................................... 44 30 (56) 1 (182)
--------- ----------- --------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents................. (16,668) 32,396 32,088 11,827 1,312
Cash and Cash Equivalents at Beginning of Period................. 46,352 14,264 14,264 2,437 1,125
--------- ----------- --------- --------- ---------
Cash and Cash Equivalents at End of Period....................... $ 29,684 $ 46,660 $ 46,352 $ 14,264 $ 2,437
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
CASH PAID FOR:
Interest....................................................... $ 305 $ 609 $ 609 $ 596 $ --
Income taxes................................................... $ 1,867 $ 635 $ 3,057 $ 1,322 $ 856
NONCASH ACTIVITIES (NOTE 2):
Fair value of assets of acquired companies..................... $ -- $ -- $ -- $ 24,328 $ --
Cash paid for acquired companies............................... $ -- $ -- -- (21,668) --
--------- ----------- --------- --------- ---------
Liabilities assumed of acquired companies.................... $ -- $ -- $ -- $ 2,660 $ --
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
THERMEDICS DETECTION INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
<S> <C> <C> <C> <C>
JULY 4, 1998 1997 1996 1995
----------------- ---------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
COMMON STOCK, $.10 PAR VALUE
Balance at beginning of period............................. $ 1,932 $ 1,664 $ 1,596 $ 1,000
Net proceeds from issuance of Company common stock (Note
7)....................................................... -- 268 68 --
Company common stock issuable for the acquisition of Orion
(Note 11)................................................ -- -- -- 596
-------- ---------- --------- ---------
Balance at end of period................................... 1,932 1,932 1,664 1,596
-------- ---------- --------- ---------
CAPITAL IN EXCESS OF PAR VALUE
Balance at beginning of period............................. 93,755 67,043 60,349 2,814
Issuance of stock under employees' and directors' stock
plans.................................................... -- 6 -- --
Tax benefit related to employees' and directors' stock
plans.................................................... -- 305 -- --
Net proceeds from issuance of Company common stock (Note
7)....................................................... -- 27,810 6,896 --
Additional capital contributions........................... -- -- 120 3,300
Orion transfers (to) from parent company................... 1,026 (1,409) (322) 1,318
Company common stock issuable for the acquisition of Orion
(Note 11)................................................ -- -- -- 52,917
-------- ---------- --------- ---------
Balance at end of period................................... 94,781 93,755 67,043 60,349
-------- ---------- --------- ---------
RETAINED EARNINGS
Balance at beginning of period............................. 13,206 7,136 7,439 5,396
Net income................................................. 4,285 12,506 5,299 2,173
Transfer to parent company, net............................ -- -- -- (130)
Orion transfers to parent company.......................... -- (6,436) (5,602) --
-------- ---------- --------- ---------
Balance at end of period................................... 17,491 13,206 7,136 7,439
-------- ---------- --------- ---------
CUMULATIVE TRANSLATION ADJUSTMENT
Balance at beginning of period............................. (1,547) (389) (169) (2)
Translation adjustment..................................... -- (1,158) (220) (167)
-------- ---------- --------- ---------
Balance at end of period................................... (1,547) (1,547) (389) (169)
-------- ---------- --------- ---------
TOTAL SHAREHOLDERS' INVESTMENT............................... $ 112,657 $ 107,346 $ 75,454 $ 69,215
-------- ---------- --------- ---------
-------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Thermedics Detection Inc. (the Company) develops, manufactures, and markets
high-speed detection and measurement systems used in on-line industrial process
applications, security applications, and laboratory analysis. The Company's
industrial process systems use ultratrace chemical detectors, high-speed gas
chromatography, X-ray imaging, near-infrared spectroscopy, and other
technologies for quality assurance of in-process and finished products,
primarily in the food, beverage, pharmaceutical, forest products, chemical, and
other consumer products industries. The Company's security instruments use
simultaneous trace particle- and vapor-detection techniques based on its
proprietary chemiluminesence and high-speed gas chromatography technologies.
Customers use the Company's security instruments to detect plastic and other
explosives at airports and border crossings, for other high-security screening
applications, and for forensics and search applications. The Company's Orion
Research Inc. subsidiary manufactures electrode-based chemical-measurement
products that determine the quality of a wide variety of substances by measuring
components, such as pH, ion, dissolved oxygen, and conductivity levels and are
used in the agricultural, biomedical research, food processing, and
pharmaceutical industries.
RELATIONSHIP WITH THERMEDICS INC. AND THERMO ELECTRON CORPORATION
The Company operated as a division of Thermedics Inc. until its
incorporation as a Massachusetts corporation in December 1990. In connection
with the Company's incorporation, Thermedics transferred to the Company its TEA
Analyzer and certain other trace detection technologies in exchange for
10,000,000 shares of the Company's common stock. As of January 3, 1998,
Thermedics owned 16,088,900 shares of the Company's pro forma outstanding common
stock, representing 83% of such pro forma stock outstanding (as adjusted to
reflect 5,961,225 shares of the Company's common stock issuable to Thermedics
for the acquisition of Orion; Note 11). As of January 3, 1998, Thermedics is a
58%-owned subsidiary of Thermo Electron Corporation.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated. Certain amounts in fiscal 1996 have been
reclassified to conform to the fiscal 1997 financial statement presentation.
FISCAL YEAR
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1997, 1996, and 1995 are for the fiscal years ended January 3,
1998, December 28, 1996, and December 30, 1995, respectively. Fiscal year 1997
included 53 weeks; 1996 and 1995 each included 52 weeks.
REVENUE RECOGNITION
The Company recognizes product revenues upon shipment of its products. The
Company provides a reserve for its estimate of warranty and installation costs
at the time of shipment. The Company recognizes service revenues over the term
of the contract. Deferred revenue in the accompanying balance sheet consists of
unearned revenue on service contracts which is recognized over the life of the
service contract. Revenues and profits on long-term contracts are recognized
using the percentage-of-completion method.
F-7
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenues recorded under the percentage of-completion method, including revenues
from long-term research and development contracts, were $1,376,000, $1,758,000,
and $3,987,000 in 1997, 1996, and 1995, respectively. The percentage of
completion is determined by relating the actual costs incurred to date to
management's estimate of total costs 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. Contracts generally provide for the billing of customers on a
cost-plus-fixed-fee basis as costs are incurred. Revenues earned on contracts in
process in excess of billings are classified as unbilled contract costs and fees
in the accompanying balance sheet. There are no significant amounts included in
the accompanying balance sheet that are not expected to be recovered from
existing contracts at current contract values, or that are not expected to be
collected within one year, including amounts that are billed but not paid under
retainage provisions.
STOCK-BASED COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its stock-based compensation plans (Note 3). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to equity.
INCOME TAXES
In the periods prior to its initial public offering, the Company was
included in Thermedics' consolidated federal and certain state income tax
returns. Subsequent to the Company's initial public offering in March 1997,
Thermedics' equity ownership of the Company was reduced below 80% and, as a
result, the Company is required to file its own federal income tax return.
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
During the fourth quarter of 1997, the Company adopted SFAS No. 128,
"Earnings per Share" (Note 9). As a result, all previously reported earnings per
share have been restated. 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 exercise of
stock options, as well as their related income tax effects.
STOCK SPLIT
In March 1996, the Company declared and effected a two-for-three reverse
stock split. All share and per share information reflects the reverse stock
split.
CASH AND CASH EQUIVALENTS
At year-end 1997 and 1996, $40,043,000 and $10,976,000, 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
F-8
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
investments principally consisting of corporate notes, commercial paper, U.S.
government-agency securities, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The Company's
funds subject to the repurchase agreement are readily convertible into cash by
the Company and have an original maturity of three months or less. The Company's
repurchase agreement earns a rate based on the 90-day Commercial Paper Composite
Rate plus 25 basis points, set at the beginning of each quarter. At year-end
1997 and 1996, the Company's cash equivalents also included investments in
commercial paper and short-term certificates of deposits of the Company's
foreign operations, which have an original maturity of three months or less.
Cash equivalents are carried at cost, which approximates market value.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market value and include materials, labor, and manufacturing overhead. The
components of inventories are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Raw material and supplies............................................... $ 9,698 $ 8,820
Work in process......................................................... 1,599 1,350
Finished goods.......................................................... 5,522 3,920
--------- ---------
$ 16,819 $ 14,090
--------- ---------
--------- ---------
</TABLE>
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, 25 years; machinery and
equipment, three to ten years; and leasehold improvements, the lesser of the
term of the lease or the life of the asset.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Land and buildings...................................................... $ 250 $ 255
Machinery, equipment, and leasehold improvements........................ 10,447 8,816
--------- ---------
10,697 9,071
Less: Accumulated depreciation and amortization......................... 6,686 5,047
--------- ---------
$ 4,011 $ 4,024
--------- ---------
--------- ---------
</TABLE>
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method over 40 years. Accumulated
amortization was $3,021,000 and $1,552,000 at January 3, 1998, and December 28,
1996, 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.
F-9
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOREIGN CURRENCY
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected as a
separate component of shareholders' investment titled "Cumulative translation
adjustment." Foreign currency transaction gains and losses are included in the
accompanying statement of income and are not material for the three years
presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, promissory note to parent company, accounts
payable, and due to parent company and affiliated companies. Their respective
carrying amounts in the accompanying balance sheet approximate fair value due to
their short-term nature, except for the promissory note to parent company. The
carrying amount of the promissory note to parent company approximates fair value
due to its variable interest rate.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRESENTATION
The historical information for all periods presented has been restated to
reflect the May 6, 1998, acquisition of Orion (Note 11). Because the Company and
Orion were deemed for accounting purposes to be under control of their common
majority owner, Thermedics, since December 1, 1995, the date Thermedics acquired
Orion, the transaction has been accounted for at historical cost in a manner
similar to a pooling of interests for the period under common control.
INTERIM FINANCIAL STATEMENTS
The financial statements as of July 4, 1998, and for the six-month periods
ended July 4, 1998, and June 28, 1997, are unaudited but, in the opinion of the
management, reflect all adjustments of a normal recurring nature necessary for a
fair presentation of results for these interim periods. The results of
operations for the six-month period ended July 4, 1998, are not necessarily
indicative of the results to be expected for the entire year.
2. ACQUISITIONS
On January 25, 1996, the Company acquired the assets 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 constituents,
including fats, proteins, oils, flavorings, solvents, adhesives, and coatings,
in a variety of manufacturing processes. These systems are used in the food,
pharmaceutical, chemical, pulp and paper, and other industries. To finance these
acquisitions, the
F-10
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company borrowed $21,200,000 from Thermedics pursuant to a promissory note due
March 1998, bearing interest at the 90-day Commercial Paper Composite Rate plus
25 basis points, set at the beginning of each quarter. As of January 3, 1998,
and December 28, 1996, the interest rate on the promissory note was 5.76% and
5.77%, respectively. In December 1996, the Company acquired certain moisture
measurement product lines for approximately $300,000 in cash. In addition, the
Company has agreed to pay a licensing fee on sales of these products through
December 2000.
These acquisitions have been accounted for using the purchase method of
accounting and their results of operations have been included in the
accompanying financial statements from their respective dates of acquisition.
The aggregate cost of Moisture Systems and Rutter exceeded the estimated fair
value of the acquired net assets by $16,905,000, which is being amortized over
40 years. Allocation of the purchase price for these acquisitions was completed
in 1997 and was based on estimates of the fair value of the net assets acquired.
The following table presents selected financial information for the Company,
Moisture Systems, and Rutter on a pro forma basis, assuming the companies had
been combined since the beginning of 1995.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
Revenues................................................................ $ 96,151 $ 51,474
Net income.............................................................. 5,457 2,461
Basic and diluted earnings per share.................................... .34 .23
</TABLE>
The pro forma results are not necessarily indicative of future operations or
the actual results that would have occurred had the acquisitions of Moisture
Systems and Rutter been made at the beginning of 1995.
3. EMPLOYEE BENEFIT PLANS
STOCK-BASED COMPENSATION PLANS
Stock Option Plan
The Company has a stock-based compensation plan for its key employees,
directors, and others, which permits the grant of a variety of stock and
stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted stock,
stock options, stock bonus shares, or performance-based shares. The option
recipients and the terms of options granted under this plan are determined by
the Board Committee. To date, only nonqualified stock options have been granted
by the Board Committee under this plan. Options granted prior to the Company's
initial public offering became exercisable in June 1997, 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 generally ranges
from seven to twelve years. Nonqualified stock options may be granted at any
price determined by the Board Committee, although incentive stock options must
be granted at not less than the fair market value of the Company's common stock
on the date of grant. To date, all options have been granted at fair market
value.
F-11
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ -----------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER
OF EXERCISE OF EXERCISE OF
SHARES PRICE SHARES PRICE SHARES
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Options outstanding, beginning of year...................... 218 $ 10.41 25 $ 9.75 26
Granted................................................... 550 10.94 207 10.45 2
Exercised................................................. (1) 9.75 -- -- --
Forfeited................................................. (111) 11.09 (14) 9.79 (3)
--- --- ---
Options outstanding, end of year............................ 656 $ 10.74 218 $ 10.41 25
--- ----------- --- ----------- ---
--- ----------- --- ----------- ---
Options exercisable......................................... 656 $ 10.74 -- $ -- --
--- ----------- --- ----------- ---
--- ----------- --- ----------- ---
Options available for grant................................. 177 116 309
--- --- ---
--- --- ---
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE
-----------
<S> <C>
Options outstanding, beginning of year...................... $ 9.75
Granted................................................... 9.75
Exercised................................................. --
Forfeited................................................. 9.75
Options outstanding, end of year............................ $ 9.75
-----
-----
Options exercisable......................................... $ --
-----
-----
Options available for grant.................................
</TABLE>
As of January 3, 1998, the options outstanding were exercisable at prices
ranging from $9.55 to $12.46 and had a weighted average remaining contractual
life of 8.1 years.
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 Thermedics and
Thermo Electron. Under this program, shares of Thermedics' and Thermo Electron's
common stock may be purchased at the end of a 12-month period at 95% of the fair
market value at the beginning of the period, and the shares purchased are
subject to a six-month resale restriction. Prior to November 1, 1995, the
applicable shares of common stock could be purchased at 85% of the fair market
value at the beginning of the period, and the shares purchased were subject to a
one-year resale restriction. Shares are purchased through payroll deductions of
up to 10% of each participating employee's gross wages.
PRO FORMA STOCK-BASED COMPENSATION PLANS 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 25 in accounting
for its stock-based compensation plans. Had compensation cost for awards in 1997
and 1996 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 as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
Net income:
As reported........................................................ $ 12,506 $ 5,299
Pro forma.......................................................... 11,794 4,908
Basic and diluted earnings per share:
As reported........................................................ .67 .33
Pro forma.......................................................... .63 .30
</TABLE>
Pro forma net income for 1995 was not materially different from historical
net income in 1995.
F-12
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 $4.44,
$3.76, and $4.15 in 1997, 1996, and 1995, respectively. The fair value of each
option grant is estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Volatility............................................................ 28% --
Risk-free interest rate............................................... 6.1% 6.4%
Expected life of options.............................................. 5.9 years 7.0 years
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions. 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
Substantially all 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 are based upon the level of employee contributions. For this plan,
the Company contributed and charged to expense $611,000, $619,000, and $253,000
in 1997, 1996, and 1995, respectively.
DEFINED BENEFIT PENSION PLAN
The Company's Rutter subsidiary, acquired in January 1996, has a defined
benefit pension plan covering substantially all of its full-time employees. The
Company's funding policy is to make contributions within a range required by
applicable regulations in The Netherlands.
Net periodic pension costs included the following components:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
<CAPTION>
(In thousands)
<S> <C> <C>
Service cost.......................................................... $ 23 $ 22
Interest cost on projected benefit obligation......................... 53 45
Return on plan assets................................................. (62) (9)
Amortization of unrecognized obligations.............................. 18 (26)
---------- ----------
$ 32 $ 32
---------- ----------
---------- ----------
</TABLE>
F-13
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The funded status of the Company's defined benefit pension plan is as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefits............................................................ $ 316 $ 607
Nonvested benefits......................................................... -- --
--------- ---------
Accumulated benefit obligations............................................ 316 607
Effect of projected future salary increases.................................. 90 152
--------- ---------
Projected benefit obligation................................................. 406 759
Less: Plan assets at fair value.............................................. 662 965
--------- ---------
Excess of plan assets over projected benefit obligation...................... 256 206
Unrecognized net gain........................................................ 181 196
Initial unrecognized net obligation.......................................... (63) (69)
--------- ---------
Prepaid pension cost....................................................... $ 374 $ 333
--------- ---------
--------- ---------
</TABLE>
Significant actuarial assumptions used to determine the net periodic pension
cost were as follows: discount rate--7.5%; rate of increase in salary levels up
to age 45--4.5%; rate of increase in salary levels after age 45--2.5%; and
expected long-term rate of return on assets--4.0%.
F-14
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
The components of income before provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Domestic..................................................... $ 15,051 $ 3,357 $ 2,788
Foreign...................................................... 5,626 5,461 739
--------- --------- ---------
$ 20,677 $ 8,818 $ 3,527
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Currently payable:
Federal.................................................... $ 3,716 $ 465 $ 1,193
State...................................................... 1,285 578 300
Foreign.................................................... 1,512 1,456 208
--------- --------- ---------
6,513 2,499 1,701
--------- --------- ---------
Net deferred (prepaid):
Federal.................................................... 1,467 996 (270)
State...................................................... 75 (180) (77)
Foreign.................................................... 116 204 --
--------- --------- ---------
1,658 1,020 (347)
--------- --------- ---------
$ 8,171 $ 3,519 $ 1,354
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company receives a tax deduction upon exercise of nonqualified stock
options by employees for the difference between the exercise price and the
market price of the Company's common stock on the date of exercise. The
provision for income taxes that is currently payable does not reflect $305,000
of such benefits that have been allocated to capital in excess of par value in
1997.
F-15
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 34% to income before provision for income taxes due to the
following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Provision for income taxes at statutory rate..................... $ 7,030 $ 2,998 $ 1,199
Increases (decreases) resulting from:
State income taxes, net of federal tax......................... 891 258 147
Amortization of cost in excess of net assets of acquired
companies.................................................... 432 424 33
Foreign tax rate and tax law differential...................... (321) (229) (48)
Tax benefit of foreign sales corporation....................... (289) (141) (133)
Deemed dividend from foreign subsidiary........................ -- -- 80
Other, net..................................................... 428 209 76
--------- --------- ---------
$ 8,171 $ 3,519 $ 1,354
--------- --------- ---------
--------- --------- ---------
</TABLE>
Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Prepaid (deferred) income taxes:
Reserves and other accruals.............................................. $ 2,009 $ 1,974
Inventory basis difference............................................... 1,615 1,106
Long-term assets......................................................... 188 (40)
Accrued compensation..................................................... 56 130
Depreciation and amortization............................................ 673 364
Tax loss and credit carryforwards........................................ 1,454 884
Other, net............................................................... (124) (217)
--------- ---------
$ 5,871 $ 4,201
--------- ---------
--------- ---------
</TABLE>
A provision has not been made for U.S. or additional foreign taxes on
$4,415,000 of undistributed earnings of foreign subsidiaries that could be
subject to taxation if remitted to the U.S. because the Company currently plans
to keep these amounts permanently reinvested overseas.
5. COMMITMENTS
The Company leases portions of its office and operating facilities under
various operating lease arrangements. The accompanying statement of income
includes expenses from operating leases of $1,984,000, $2,727,000, and $673,000
in 1997, 1996, and 1995, respectively, net of third party sublease income of
$181,000 in 1997. Total future minimum payments due under noncancelable
operating leases at January 3, 1998, are $2,113,000 in 1998; $1,762,000 in 1999;
$1,518,000 in 2000; $1,350,000 in 2001; $1,439,000 in 2002; and $5,486,000 in
2003 and thereafter. Total future minimum lease payments are $13,668,000 and
have not been reduced by minimum sublease rental income of $1,160,000 due
through 2002 under noncancelable operating subleases. See Note 6 for office and
manufacturing space leased from a related party.
F-16
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RELATED-PARTY TRANSACTIONS
CORPORATE SERVICES AGREEMENT
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company paid Thermo Electron an annual fee equal to 1.0% of the Company's
revenues in 1997 and 1996, and an amount equal to 1.20% of the Company's
revenues in 1995. Beginning in fiscal 1998, the Company will pay an annual fee
equal to 0.8% of the Company's revenues. The annual fee is reviewed and adjusted
annually by mutual agreement of the parties. Management believes that the
service fee charged by Thermo Electron is reasonable and that such fees are
representative of the expenses the Company would have incurred on a stand-alone
basis. 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 relationship among Thermo Electron and its
majority-owned subsidiaries). In addition, the Company uses contract
administration services of a majority-owned subsidiary 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 $1,110,000,
$947,000, and $397,000 in 1997, 1996, and 1995, respectively. For additional
items such as employee benefit plans, insurance coverage, and other identifiable
costs, Thermo Electron charges the Company based upon costs attributable to the
Company.
RESEARCH AND DEVELOPMENT AGREEMENT
Pursuant to a subcontract entered into in October 1993, the Company performs
research and development services for Thermo Coleman Corporation, which is the
prime contractor under a contract with the U.S. Department of Energy. Thermo
Coleman is a wholly owned subsidiary of Thermo Electron. Thermo Coleman paid the
Company $533,000, $619,000, and $829,000 for services rendered in 1997, 1996,
and 1995, respectively.
DISTRIBUTION AGREEMENT
Pursuant to an international distributorship agreement, the Company
appointed Arabian Business Machines Co. (ABM) as its exclusive distributor of
the Company's security instruments in certain Middle Eastern countries. ABM is a
member of The Olayan Group. Ms. Hutham S. Olayan, a director of Thermo Electron,
is the president and a director of Olayan America Corporation and Competrol Real
Estate Limited, two other members of The Olayan Group, which are indirectly
controlled by Suliman S. Olayan, Ms. Olayan's father. Revenues recorded under
this agreement totaled $480,000, $652,000, and $3,000 in 1997, 1996, and 1995,
respectively.
OTHER RELATED-PARTY TRANSACTIONS
The Company purchases and sells products in the ordinary course of business
with other companies affiliated with Thermo Electron. Sales of products to such
affiliated companies totaled $147,000, $114,000, and $122,000 in 1997, 1996, and
1995, respectively. Purchases of products from such affiliated companies totaled
$237,000, $253,000, and $330,000 in 1997, 1996, and 1995, respectively.
F-17
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUBLEASE AGREEMENT
In 1997, the Company subleased approximately 8,000 square feet of space in
its Chelmsford, Massachusetts, facility to Thermo Cardiosystems Inc., a publicly
traded, majority-owned subsidiary of Thermedics, under a two-year sublease
agreement. Under this sublease, Thermo Cardiosystems will pay the Company base
rent of $40,000 in the first year and $44,000 in the second year, as well as
approximately $33,000 per year, representing Thermo Cardiosystems' pro rata
allocation of the facility's aggregate operating costs, real estate taxes, and
utilities. The accompanying statement of income includes income from this
sublease agreement of $73,000 in 1997.
REPURCHASE AGREEMENT
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
7. COMMON STOCK
SALE OF COMMON STOCK
In March 1997, the Company sold 2,671,292 shares of common stock in an
initial public offering at $11.50 per share, for net proceeds of $28,078,000.
In November 1996, the Company sold 383,500 shares of its common stock in a
private placement at $10.75 per share, for net proceeds of $3,964,000.
In March 1996, the Company sold 300,000 shares of its common stock in a
private placement at $10.00 per share, for net proceeds of $3,000,000.
RESERVED SHARES
At January 3, 1998, the Company had reserved 857,666 unissued shares of its
common stock for possible issuance under the stock-based compensation plans.
8. SIGNIFICANT CUSTOMER, PRODUCT LINES, AND GEOGRAPHICAL INFORMATION
Sales to one customer accounted for 13%, 11%, and 31% of the Company's total
revenues in 1997, 1996, and 1995, respectively. The Company is engaged in one
business segment: the development, manufacture, and sale of high-speed detection
and measurement systems used in on-line industrial process applications,
security applications, and laboratory analysis. Within the Company's process
detection product line, the Company derived revenues of $19,198,000,
$14,917,000, and $18,488,000 in 1997, 1996, and 1995, respectively, from
Alexus-Registered Trademark- systems and $15,387,000 and $17,950,000 in 1997 and
1996, respectively, from moisture systems. Within the Company's security
instrument product line, the Company derived revenues of $10,337,000,
$7,149,000, and $4,642,000 in 1997, 1996, and 1995, respectively, from
EGIS-Registered Trademark- systems. The Company derived revenues from its
laboratory analysis product line of $53,054,000, $50,854,000, and $4,989,000 in
1997, 1996, and 1995, respectively, from Orion.
F-18
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table shows data for the Company by geographical area.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues:
United States................................................................ $ 93,251 $ 81,447 $ 27,447
The Netherlands.............................................................. 5,489 7,547 --
Other Europe................................................................. 9,237 8,416 4,292
Other........................................................................ 3,290 2,588 2,600
Transfers among geographical areas (a)....................................... (6,893) (5,394) (1,396)
---------- ---------- ---------
$ 104,374 $ 94,604 $ 32,943
---------- ---------- ---------
---------- ---------- ---------
Income before provision for income taxes:
United States................................................................ $ 20,739 $ 12,040 $ 4,057
The Netherlands.............................................................. 454 1,514 --
Other Europe................................................................. 1,587 1,076 (80)
Other........................................................................ 716 412 348
Corporate and eliminations (b)............................................... (3,675) (5,346) (726)
---------- ---------- ---------
Total operating income....................................................... 19,821 9,696 3,599
Interest income (expense), net............................................... 833 (890) --
Other income (expense), net.................................................. 23 12 (72)
---------- ---------- ---------
$ 20,677 $ 8,818 $ 3,527
---------- ---------- ---------
---------- ---------- ---------
Identifiable assets:
United States................................................................ $ 89,226 $ 92,891 $ 80,510
The Netherlands.............................................................. 7,200 8,574 --
Other Europe................................................................. 7,375 4,948 2,850
Other........................................................................ 3,074 1,615 1,666
Corporate and eliminations (c)............................................... 41,390 8,030 --
---------- ---------- ---------
$ 148,265 $ 116,058 $ 85,026
---------- ---------- ---------
---------- ---------- ---------
Export revenues included in United States revenues above (d):
Germany...................................................................... $ 5,855 $ 2,943 $ 3,941
Other Europe................................................................. 11,646 9,314 4,512
Mexico....................................................................... 5,083 2,555 1,396
South America................................................................ 7,491 6,479 3,426
Other........................................................................ 12,855 10,796 3,051
---------- ---------- ---------
$ 42,930 $ 32,087 $ 16,326
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
- ------------------------
(a) Transfers among geographical areas are accounted for at prices that are
representative of transactions with unaffiliated parties.
(b) Primarily general and administrative expenses.
(c) Primarily cash and cash equivalents.
(d) In general, export sales are denominated in U.S. dollars.
F-19
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EARNINGS PER SHARE
Basic and diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
JULY 4, JUNE 28,
1998 1997 1997 1996 1995
--------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BASIC
Net income........................................... $ 4,285 $ 5,267 $ 12,506 $ 5,299 $ 2,173
--------- ----------- --------- --------- ---------
Weighted average shares.............................. 13,356 12,166 12,760 10,275 10,000
Weighted average shares issuable in connection with
the acquisition of Orion (Note 11)................. 5,961 5,961 5,961 5,961 491
--------- ----------- --------- --------- ---------
Proforma weighted average shares,
as adjusted........................................ 19,317 18,127 18,721 16,236 10,491
--------- ----------- --------- --------- ---------
Basic earnings per share............................. $ .22 $ .29 $ .67 $ .33 $ .21
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
DILUTED
Net income........................................... $ 4,285 $ 5,267 $ 12,506 $ 5,299 $ 2,173
--------- ----------- --------- --------- ---------
Basic weighted average shares........................ 19,317 18,127 18,721 16,236 10,491
Effect of stock options.............................. 4 12 11 17 3
--------- ----------- --------- --------- ---------
Proforma weighted average shares,
as adjusted........................................ 19,321 18,139 18,732 16,253 10,494
--------- ----------- --------- --------- ---------
Diluted earnings per share........................... $ .22 $ .29 $ .67 $ .33 $ .21
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
</TABLE>
The computation of diluted earnings per share for 1997 excludes the effect
of assuming the exercise of certain outstanding stock options because the effect
would be antidilutive. As of January 3, 1998, there were 342,240 of such options
outstanding, with exercise prices ranging from $10.75 to $12.46 per share.
10. UNAUDITED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
1997 FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues.............................................................. $ 25,532 $ 25,639 $ 26,232 $ 26,971
Gross profit.......................................................... 14,027 14,342 14,590 15,020
Net income............................................................ 2,242 3,025 3,526 3,713
Basic and diluted earnings per share.................................. .13 .16 .18 .19
</TABLE>
<TABLE>
<CAPTION>
1996 FIRST(A) SECOND THIRD FOURTH
- ---------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.............................................................. $ 22,200 $ 22,369 $ 24,125 $ 25,910
Gross profit.......................................................... 10,680 11,033 12,673 14,608
Net income (loss)..................................................... 320 (5) 2,098 2,886
Basic and diluted earnings (loss) per share........................... .02 -- .13 .18
</TABLE>
- ------------------------
(a) Reflects the January 1996 acquisitions of Moisture Systems and Rutter.
F-20
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENTS
ACQUISITION
In December 1995, Thermedics acquired Orion for $52,724,000 in cash, which
included the repayment of approximately $8,600,000 of indebtedness. The
acquisition was accounted for as a purchase. The purchase price exceeded the net
assets acquired by $42,681,000, which is being amortized over 40 years. The
purchase price was allocated based on estimates of the fair value of the net
assets acquired.
On May 6, 1998, the Company acquired Orion from Thermedics in exchange for
the right to receive 5,961,225 shares of the Company's common stock. Orion
manufactures electrode-based chemical-measurement products that determine the
quality of a wide variety of substances by measuring components, such as pH,
ion, dissolved oxygen, and conductivity levels and are used in the agricultural,
biomedical research, food processing, and pharmaceutical industries.
Because the Company and Orion were deemed for accounting purposes to be
under control of their common majority owner, Thermedics, 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 include the acquisition of Orion since December 1, 1995, the date
Orion was purchased by Thermedics. The 5,961,225 shares of the Company's common
stock issuable in the merger will not be issued until the listing of such shares
for trading upon American Stock Exchange has been approved by the Company's
shareholders. Because Thermedics is the majority shareholder and intends to vote
its shares in favor of such listing, the approval is assured and, therefore, the
shares are considered to be outstanding as of December 1, 1995, for purposes of
computing weighted average shares.
The following table presents selected pro forma financial information for
the Company and Orion, assuming the companies and the acquired businesses
discussed in Note 2 had been combined since the beginning of 1995.
<TABLE>
<CAPTION>
1995
-----------------------
<S> <C>
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
Revenues............................................................. $ 94,639
Net income........................................................... 4,628
Basic and diluted earnings per share................................. .29
</TABLE>
The pro forma results are not necessarily indicative of future operations or
the actual results that would have occurred had the acquisition of Orion and the
businesses discussed in Note 2 been made at the beginning of 1995.
F-21
<PAGE>
THERMEDICS DETECTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
Revenues and net income, as previously reported by the separate entities
prior to the acquisition and as restated for the combined Company, are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
<S> <C> <C> <C> <C>
JUNE 28,
1997 1997 1996 1995
----------------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Historical.............................................. $ 24,826 $ 51,320 $ 43,750 $ 27,954
Orion................................................... 26,345 53,054 50,854 4,989
-------- ---------- ---------- ----------
$ 51,171 $ 104,374 $ 94,604 $ 32,943
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
Net Income:
Historical.............................................. $ 2,439 $ 6,070 $ 362 $ 1,508
Orion................................................... 2,828 6,436 4,937 665
-------- ---------- ---------- ----------
$ 5,267 $ 12,506 $ 5,299 $ 2,173
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>
CORPORATE REORGANIZATION
On August 12, 1998, Thermo Electron announced a proposed corporate
reorganization in order to simplify its corporate structure, consolidate and
strategically realign certain businesses to enhance their competitive market
positions, and create better liquidity for investors. Under this plan, the
Company would leave the Thermedics family to join Thermo Instrument Systems Inc.
as a wholly owned subsidiary. Shareholders of the Company would receive cash or
Thermo Instrument common stock in exchange for their shares of the Company
common stock. The proposed transactions leading to this transfer are subject to
a number of conditions, as outlined in the Company's Current Report on Form 8-K
for events occurring on August 12, 1998, filed with the Securities and Exchange
Commission. Thermo Electron expects to begin implementing the reorganization
promptly, although it may take up to two years to complete all aspects of the
plan.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Orion Research Inc.:
We have audited the accompanying consolidated balance sheet of Orion
Research Inc. (a wholly owned subsidiary of Thermedics Inc.) and subsidiaries as
of January 3, 1998, and December 28, 1996, and the related consolidated
statements of income, shareholder's investment, and cash flows for the fiscal
years ended January 3, 1998, and December 28, 1996, and for the period from
December 1, 1995, through December 30, 1995. We have also audited the
accompanying statements of income, shareholder's investment, and cash flows of
the Orion Laboratory Products Division of Analytical Technology Inc. (the
Predecessor) for the period from January 1, 1995, through November 30, 1995.
These consolidated financial statements are the responsibility of management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orion
Research Inc. and subsidiaries as of January 3, 1998, and December 28, 1996, and
the results of their operations and their cash flows for the years ended January
3, 1998, and December 28, 1996, and for the period from December 1, 1995,
through December 30, 1995, and the results of operations and cash flows of the
Predecessor for the period from January 1, 1995, through November 30, 1995, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
April 27, 1998
F-23
<PAGE>
ORION RESEARCH INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
--------------------------------- -----------
<S> <C> <C> <C> <C>
DEC. 1, JAN. 1,
FISCAL YEAR ENDED 1995 1995
-------------------- THROUGH THROUGH
JAN. 3, DEC. 28, DEC. 30, NOV. 30,
1998 1996 1995 1995
--------- --------- ----------- -----------
Revenues (Note 7).................................................... $ 53,054 $ 50,854 $ 4,989 $ 43,165
--------- --------- ----------- -----------
Costs and Operating Expenses:
Cost of revenues................................................... 21,864 23,107 2,216 18,308
Selling, general, and administrative expenses (Note 5)............. 15,871 16,106 1,337 15,379
Research and development expenses.................................. 4,592 3,412 327 3,244
--------- --------- ----------- -----------
42,327 42,625 3,880 36,931
--------- --------- ----------- -----------
Operating Income..................................................... 10,727 8,229 1,109 6,234
Interest Expense..................................................... -- -- -- 220
--------- --------- ----------- -----------
Income Before Provision for Income Taxes............................. 10,727 8,229 1,109 6,014
Provision for Income Taxes (Note 4).................................. 4,291 3,292 444 2,206
--------- --------- ----------- -----------
Net Income........................................................... $ 6,436 $ 4,937 $ 665 $ 3,808
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
ORION RESEARCH INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY
--------------------
JAN. 3, DEC. 28,
1998 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................................................... $ 1,617 $ 780
Accounts receivable, less allowances of $317 and $240..................................... 7,097 8,201
Inventories............................................................................... 6,570 5,297
Prepaid income taxes (Note 4)............................................................. 1,760 2,292
Prepaid expenses.......................................................................... 538 418
--------- ---------
17,582 16,988
--------- ---------
Property, Plant, and Equipment, at Cost..................................................... 4,433 3,388
Less: Accumulated depreciation and amortization........................................... 1,840 1,148
--------- ---------
2,593 2,240
--------- ---------
Cost in Excess of Net Assets of Acquired Companies.......................................... 40,671 41,738
--------- ---------
Other Assets................................................................................ 724 1,609
--------- ---------
$ 61,570 $ 62,575
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S INVESTMENT
Current Liabilities:
Accounts payable.......................................................................... $ 1,975 $ 1,758
Accrued payroll and employee benefits..................................................... 2,426 1,927
Accrued income taxes...................................................................... 776 682
Accrued acquisition expenses (Note 2)..................................................... -- 565
Accrued commissions....................................................................... 628 427
Other accrued expenses.................................................................... 2,530 2,521
Due to affiliated companies............................................................... 121 151
--------- ---------
8,456 8,031
--------- ---------
Commitments and Contingencies (Note 6)
Shareholder's Investment:
Net parent company investment............................................................. 53,100 54,509
Cumulative translation adjustment......................................................... 14 35
--------- ---------
53,114 54,544
--------- ---------
$ 61,570 $ 62,575
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
ORION RESEARCH INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
------------------------------- -----------
<S> <C> <C> <C> <C>
DEC. 1, JAN. 1,
FISCAL YEAR ENDED 1995 1995
-------------------- THROUGH THROUGH
JAN. 3, DEC. 28, DEC. 30, NOV. 30,
1998 1996 1995 1995
--------- --------- --------- -----------
OPERATING ACTIVITIES:
Net income........................................................ $ 6,436 $ 4,937 $ 665 $ 3,808
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization................................. 1,765 2,002 198 1,632
Provision for losses on accounts receivable................... 85 60 5 78
Increase (decrease) in deferred income taxes
(Note 4).................................................... 1,411 1,045 (316) 414
Other noncash expenses........................................ 92 102 11 255
Changes in current accounts:
Accounts receivable......................................... 1,019 (794) (256) (690)
Inventories................................................. (1,338) 1,029 (259) (2,007)
Other current assets........................................ (120) (142) 278 101
Accounts payable............................................ 217 (1,310) (60) 362
Other current liabilities................................... 189 535 (684) 5,701
--------- --------- --------- -----------
Net cash provided by (used in) operating activities................. 9,756 7,464 (418) 9,654
--------- --------- --------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment....................... (1,057) (1,842) (20) (228)
Transfers to affiliates........................................... -- -- -- (4,794)
Other............................................................. -- -- (34) --
--------- --------- --------- -----------
Net cash used in investing activities............................... (1,057) (1,842) (54) (5,022)
--------- --------- --------- -----------
FINANCING ACTIVITIES:
Transfers (to) from parent company................................ (7,845) (5,924) 1,318 --
Payments under long-term and capital lease obligations............ -- -- -- (4,727)
Other............................................................. -- (159) -- --
--------- --------- --------- -----------
Net cash provided by (used in) financing activities................. (7,845) (6,083) 1,318 (4,727)
--------- --------- --------- -----------
Exchange Rate Effect on Cash........................................ (17) 86 (44) 446
--------- --------- --------- -----------
Increase (Decrease) in Cash......................................... 837 (375) 802 351
Cash at Beginning of Period......................................... 780 1,155 353 2
--------- --------- --------- -----------
Cash at End of Period............................................... $ 1,617 $ 780 $ 1,155 $ 353
--------- --------- --------- -----------
--------- --------- --------- -----------
CASH PAID FOR:
Income taxes...................................................... $ 877 $ 704 $ 704 $ --
Interest.......................................................... $ -- $ -- $ -- $ 220
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE>
ORION RESEARCH INC.
CONSOLIDATED STATEMENT OF SHAREHOLDER'S INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE NET PARENT
TRANSLATION COMPANY
ADJUSTMENT INVESTMENT
-------------- --------------
<S> <C> <C>
PREDECESSOR
BALANCE DECEMBER 31, 1994......................................................... $ (3,062) $ 23,963
Net income...................................................................... -- 3,808
Translation adjustment.......................................................... 446 --
------- -------
BALANCE NOVEMBER 30, 1995......................................................... (2,616) 27,771
THE COMPANY
Net equity investment by parent company in excess of the net assets of the
Predecessor................................................................... 2,616 25,742
Net income...................................................................... -- 665
Net transfer from parent company................................................ -- 1,318
Translation adjustment.......................................................... (54) --
------- -------
BALANCE DECEMBER 30, 1995......................................................... (54) 55,496
Net income...................................................................... -- 4,937
Net transfer to parent company.................................................. -- (5,924)
Translation adjustment.......................................................... 89 --
------- -------
BALANCE DECEMBER 28, 1996......................................................... 35 54,509
Net income...................................................................... -- 6,436
Net transfer to parent company.................................................. -- (7,845)
Translation adjustment.......................................................... (21) --
------- -------
BALANCE JANUARY 3, 1998........................................................... $ 14 $ 53,100
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
ORION RESEARCH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Orion Research Inc. (the Company) manufactures electrode-based
chemical-measurement products that determine the quality of a wide variety of
substances by measuring components, such as pH, ion, dissolved oxygen, and
conductivity levels and are used in the agricultural, biomedical research, food-
processing, and pharmaceutical industries.
RELATIONSHIP WITH THERMEDICS INC. AND THERMO ELECTRON CORPORATION
In December 1995, Thermedics Inc. acquired the Orion Laboratory Products
Division (the Predecessor) of Analytical Technology Inc. (ATI) for $44,139,000
in cash and the assumption of approximately $8,600,000 of indebtedness. The
borrowings were under a revolving credit agreement under which borrowings could
be made in various currencies with interest at a base or LIBOR rate, as defined,
for each currency, plus a spread which varied based on operating performance.
The accompanying financial statements include the assets, liabilities, income,
and expenses of the Company as included in Thermedics' consolidated financial
statements. The accompanying financial statements do not include Thermedics'
general corporate debt, which is used to finance operations of all of its
respective business segments, or an allocation of Thermedics' interest expense.
As of January 3, 1998, Thermedics is a 58%-owned subsidiary of Thermo Electron
Corporation. The Company has had positive cash flows from operations for all
periods presented.
PRINCIPLES OF CONSOLIDATION
The accompanying 1997 financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany accounts
and transactions have been eliminated.
FISCAL YEAR AND PERIODS PRESENTED
The Company has adopted a fiscal year ending the Saturday nearest December
31. The Predecessor also had a fiscal year ending the Saturday nearest December
31. The accompanying financial statements include the Predecessor's financial
results for the period from January 1, 1995, through November 30, 1995. The
accompanying financial statements include the Company's financial results for
the period from December 1, 1995, the date the Company was acquired by
Thermedics, through December 30, 1995, and the fiscal years ended December 28,
1996, (fiscal 1996) and January 3, 1998 (fiscal 1997). Fiscal 1997 and fiscal
1996 included 53 weeks and 52 weeks, respectively.
REVENUE RECOGNITION
The Company recognizes revenues upon shipment of its products. The Company
provides a reserve for its estimate of warranty and installation costs at the
time of shipment. The Company recognizes service revenues over the term of the
contract.
INCOME TAXES
The Company and Thermedics have a tax allocation agreement under which the
Company is included in Thermedics consolidated federal and certain state income
tax returns. The agreement provides that in years in which the Company has
taxable income, it will pay to Thermedics amounts comparable to the taxes the
Company would have paid if it had filed separate tax returns.
F-28
<PAGE>
ORION RESEARCH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
CASH
The cash receipts and disbursements of the Company's domestic operations are
combined with other Thermedics corporate cash transactions and balances.
Therefore, cash of the Company's domestic operations is not included in the
accompanying balance sheet.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out, or
weighted average basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are as follows:
<TABLE>
<CAPTION>
THE COMPANY
----------------------
<S> <C> <C>
JAN. 3, DEC. 28,
1998 1996
--------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Raw materials.............................................................. $ 4,275 $ 2,685
Work in process and finished goods......................................... 2,295 2,612
--------- -----------
$ 6,570 $ 5,297
--------- -----------
--------- -----------
</TABLE>
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, 25 years; machinery and
equipment, 3 to 7 years; and leasehold improvements, the shorter of the term of
the lease or the life of the asset. Property, plant, and equipment consist of
the following:
<TABLE>
<CAPTION>
THE COMPANY
----------------------
<S> <C> <C>
JAN. 3, DEC. 28,
1998 1996
--------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Land....................................................................... $ 41 $ 41
Buildings.................................................................. 209 214
Machinery, equipment, and leasehold improvements........................... 4,183 3,133
--------- -----------
4,433 3,388
Less: Accumulated depreciation and amortization............................ 1,840 1,148
--------- -----------
$ 2,593 $ 2,240
--------- -----------
--------- -----------
</TABLE>
F-29
<PAGE>
ORION RESEARCH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method over 40 years. Accumulated
amortization was $2,216,000 and $1,149,000 at January 3, 1998, and December 28,
1996, 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 businesses 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 are reflected as a
separate component of shareholder's investment, titled "Cumulative translation
adjustment." Foreign currency transaction gains and losses are included in the
accompanying statement of income and are not material for each of the periods
presented.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash, accounts
receivable, accounts payable, and due to affiliated companies, which approximate
fair value due to their short-term nature.
2. ACQUISITION AND BASIS OF ACCOUNTING
In December 1995, Thermedics acquired the predecessor for $52,724,000 in
cash, which included the repayment of approximately $8,600,000 of long-term
indebtedness. The borrowings were under a revolving credit agreement under which
borrowings could be made in various currencies with interest at a base or LIBOR
rate, as defined, for each currency, plus a spread which varied based on
operating performance. The acquisition was accounted for as a purchase, and
Thermedics' new basis of accounting is reflected as of December 1, 1995.
The purchase price exceeded the tangible net assets acquired by $42,681,000,
which is being amortized over 40 years. The purchase price was allocated based
on estimates of the fair value of the net assets acquired.
In connection with its acquisition by Thermedics, the Company established
reserves totaling $1,460,000 for restructuring certain business activities in
accordance with Emerging Issues Task Force Pronouncement 95-3. The reserves were
primarily for severance payments. During fiscal 1997 and 1996, the Company
expended $895,000 and $565,000, respectively, of such reserves.
F-30
<PAGE>
ORION RESEARCH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EMPLOYEE BENEFIT PLANS
401(K) SAVINGS PLAN
Substantially all of the Company's full-time U.S. employees are eligible to
participate in Thermo Electron's 401(k) savings plan. Prior to December 1, 1995,
eligible employees of the Predecessor participated in ATI's 401(k) savings plan.
Contributions to the 401(k) savings plan are made by both the employee and the
Company or Predecessor. Company and Predecessor contributions to the 401(k) plan
are based upon the level of employee contributions. Contributions charged to
expense were $309,000 for fiscal 1997, $372,000 for fiscal 1996, $20,000 for the
period from December 1, 1995, through December 30, 1995, and $249,000 for the
period from January 1, 1995, through November 30, 1995.
4. INCOME TAXES
The components of income before provision for income taxes are as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
----------------------------------- -----------
DEC. 1, JAN. 1,
FISCAL YEAR ENDED 1995 1995
---------------------- THROUGH THROUGH
JAN. 3, DEC. 28, DEC. 30, NOV. 30,
1998 1996 1995 1995
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Domestic.............................................................. $ 7,040 $ 5,099 $ 591 $ 4,014
Foreign............................................................... 3,687 3,130 518 2,000
--------- ----------- ----------- -----------
$ 10,727 $ 8,229 $ 1,109 $ 6,014
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
----------------------------------- -----------
DEC. 1, JAN. 1,
FISCAL YEAR ENDED 1995 1995
---------------------- THROUGH THROUGH
JAN. 3, DEC. 28, DEC. 30, NOV. 30,
1998 1996 1995 1995
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Currently payable:
Federal.............................................................. $ 1,333 $ 815 $ 512 $ 1,803
State................................................................ 660 668 134 1,049
Foreign.............................................................. 887 764 114 440
--------- ----------- ----------- -----------
2,880 2,247 760 3,292
--------- ----------- ----------- -----------
(Prepaid) Deferred:
Federal.............................................................. 1,362 1,191 (245) (424)
State................................................................ 49 (146) (71) (662)
--------- ----------- ----------- -----------
1,411 1,045 (316) (1,086)
--------- ----------- ----------- -----------
$ 4,291 $ 3,292 $ 444 $ 2,206
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
F-31
<PAGE>
ORION RESEARCH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income before provision for income taxes due to the
following:
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
----------------------------------- -----------
DEC. 1, JAN. 1,
FISCAL YEAR ENDED 1995 1995
---------------------- THROUGH THROUGH
JAN. 3, DEC. 28, DEC. 30, NOV. 30,
1998 1996 1995 1995
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Provision for income taxes at statutory rate........................... $ 3,754 $ 2,880 $ 388 $ 2,105
Increases (decreases) resulting from:
State income taxes, net of federal tax............................... 461 339 41 306
Amortization of cost in excess of net assets of acquired companies... 397 391 28 --
Foreign tax rate differential........................................ (403) (332) (67) (260)
Foreign sales corporation benefit.................................... (114) (141) -- --
Nondeductible expenses and other..................................... 196 155 54 55
--------- ----------- ----------- -----------
$ 4,291 $ 3,292 $ 444 $ 2,206
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
Short- and long-term prepaid income taxes in the accompanying balance sheet
consist of the following:
<TABLE>
<CAPTION>
THE COMPANY
--------------------
<S> <C> <C>
JAN. 3, DEC. 28
1998 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Prepaid income taxes:
Depreciation and amortization............................................ $ 364 $ 673
Reserves and other accruals.............................................. 975 1,050
Inventory basis difference............................................... 463 795
Tax loss and credit carryforwards........................................ 884 1,454
Other, net............................................................... (249) (124)
--------- ---------
$ 2,437 $ 3,848
--------- ---------
--------- ---------
</TABLE>
A provision has not been made for U.S. or additional foreign taxes on
$1,000,000 of undistributed earnings of foreign subsidiaries that could be
subject to taxation if remitted to the U.S. because the Company currently plans
to keep these amounts permanently reinvested overseas.
5. RELATED PARTY TRANSACTIONS
CORPORATE SERVICES AGREEMENT
Under a corporate services agreement between Thermedics and Thermo Electron,
Thermo Electron's corporate staff provides certain administrative services,
including certain legal advice and services, risk management, certain employee
benefit administration, tax advice and preparation of tax returns, centralized
cash management, and certain financial and other services, for which the Company
paid Thermo Electron annually an amount equal to 1.0% of the Company's revenues
in 1997 and 1996,
F-32
<PAGE>
ORION RESEARCH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
and an amount equal to 1.20% of the Company's revenues in 1995. Beginning in
fiscal 1998, the Company will pay an annual fee equal to 0.8% of the Company's
revenues. The annual fee is reviewed and adjusted annually by mutual agreement
of the parties. The corporate services agreement is renewed annually but can be
terminated upon 30 days' prior notice by Thermedics or upon Thermedics
withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron
Corporate Charter defines the relationship among Thermo Electron and its
majority-owned subsidiaries). For these services, the Company was charged
$531,000 and $509,000 for fiscal 1997 and 1996, respectively, and $62,000 for
the period from December 1, 1995 to December 30, 1995. Management believes that
the service fees charged by Thermo Electron 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.
6. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases portions of its manufacturing and office facilities under
various operating lease arrangements. The accompanying statement of income
includes expenses from operating leases of $906,000, $1,392,000, $131,000 and
$1,437,000 for fiscal 1997 and 1996, the period from December 1, 1995 through
December 30, 1995, and the period from January 1, 1995 through November 30,
1995, respectively. Total future minimum payments due under noncancelable
operating leases at January 3, 1998, are $912,000 in 1998; $723,000 in 1999;
$640,000 in 2000; $571,000 in 2001; $642,000 in 2002; and $2,568,000 in 2003 and
thereafter. Total future minimum lease payments are $6,056,000.
CONTINGENCIES
The Company is contingently liable with respect to lawsuits and other
matters that arose in the ordinary course of business. In the opinion of
management, these contingencies will not have a material adverse effect upon the
financial position of the Company or its results of operations.
7. SIGNIFICANT CUSTOMERS AND EXPORT SALES
Sales to one customer accounted for 18%, 17%, and 13% and sales to a second
customer accounted for 18%, 13%, and 11% of total revenues for fiscal 1997 and
1996, and for the period from January 1, 1995 through November 30, 1995,
respectively.
Export revenues to Asia accounted for 12%, 11%, 10%, and 11% of the
Company's total revenues for fiscal 1997 and 1996, the period from December 1,
1995 through December 30, 1995, and the period from January 1, 1995 through
November 30, 1995, respectively. Export revenues to Europe accounted for 11%,
11%, 11%, and 12% of the Company's total revenues for fiscal 1997 and 1996, the
period from December 1, 1995 through December 30, 1995, and the period from
January 1, 1995 through November 30, 1995, respectively. Other export revenues
accounted for 9%, 7%, 5%, and 8% of the Company's total revenues for fiscal 1997
and 1996, the period from December 1, 1995 through December 30, 1995, and the
period from January 1, 1995 through November 30, 1995, respectively. In general,
export sales are denominated in U.S. dollars.
8. SUBSEQUENT EVENT
In April 1998, Thermedics agreed to sell the Company to Thermedics Detection
Inc., one of its publicly held, majority-owned subsidiaries, for 5,961,225
shares of Thermedics Detection common stock.
F-33
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
THERMEDICS DETECTION INC.,
ORION ACQUISITION INC.,
THERMEDICS INC.
AND
ORION RESEARCH INC.
------------------
DATED MAY 6, 1998
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
SECTION 1--THE REORGANIZATION
1.1 The Merger.................................................................................. A-1
1.2 Effective Time.............................................................................. A-1
1.3 Closing..................................................................................... A-1
1.4 Articles of Organization and By-Laws........................................................ A-1
1.5 Directors and Officers...................................................................... A-1
1.6 Conversion of Stock......................................................................... A-1
1.7 Payment for Orion Common Stock.............................................................. A-2
1.8 Adjustments................................................................................. A-2
1.9 Lost Certificates........................................................................... A-3
1.10 No Fractional Shares........................................................................ A-3
SECTION 2-- REPRESENTATIONS AND WARRANTIES OF THERMEDICS AND ORION
2.1 Organization and Qualification.............................................................. A-3
2.2 Authority................................................................................... A-3
2.3 Capitalization and Title to Shares.......................................................... A-4
2.4 Subsidiaries and Other Affiliates........................................................... A-4
2.5 Financial Statements........................................................................ A-5
2.6 Absence of Undisclosed Liabilities; No Dealings with Affiliates............................. A-5
2.7 Taxes....................................................................................... A-5
2.8 Properties.................................................................................. A-5
2.9 Hazardous Materials......................................................................... A-6
2.10 Accounts Receivable......................................................................... A-6
2.11 Inventories................................................................................. A-6
2.12 Purchase and Sale Commitments............................................................... A-7
2.13 Governmental Authorizations................................................................. A-7
2.14 Intellectual Property....................................................................... A-7
2.15 Insurance................................................................................... A-7
2.16 Employee Benefit Plans...................................................................... A-8
2.17 Agreements and Documents.................................................................... A-8
2.18 Validity.................................................................................... A-9
2.19 No Changes.................................................................................. A-9
2.20 Litigation or Proceedings................................................................... A-10
2.21 Compliance with Laws........................................................................ A-10
2.22 Labor Matters............................................................................... A-10
2.23 Recalls..................................................................................... A-10
2.24 Brokers and Finders......................................................................... A-10
2.25 Powers of Attorney.......................................................................... A-10
2.26 No Termination of Relationship.............................................................. A-11
2.27 All Information............................................................................. A-11
2.28 Statements True and Correct................................................................. A-11
SECTION 3-- REPRESENTATIONS AND WARRANTIES OF DETECTION AND ACQUISITION
3.1 Organization................................................................................ A-11
3.2 Authority................................................................................... A-11
3.3 Statements True and Correct................................................................. A-11
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
SECTION 4--COVENANTS AND AGREEMENTS
4.1 Conduct of Business......................................................................... A-12
4.2 Corporate Examinations and Investigations................................................... A-13
4.3 Expenses.................................................................................... A-13
4.4 Authorization from Others................................................................... A-13
4.5 Consummation of Agreement................................................................... A-13
4.6 Further Assurances.......................................................................... A-13
4.7 Tax-Free Reorganization..................................................................... A-13
4.8 Listing of Shares........................................................................... A-13
4.9 Public Announcements and Confidentiality.................................................... A-14
4.10 No Solicitation............................................................................. A-14
4.11 Indemnification............................................................................. A-14
4.12 Participation in Employee Benefit Plans..................................................... A-14
4.13 Certain Tax Matters......................................................................... A-15
SECTION 5-- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF DETECTION AND ACQUISITION TO CONSUMMATE THE MERGER
5.1 Representations, Warranties and Covenants................................................... A-15
5.2 Articles of Merger.......................................................................... A-15
5.3 Certificates................................................................................ A-15
SECTION 6-- CONDITIONS PRECEDENT TO THE OBLIGATION OF THERMEDICS AND ORION TO CONSUMMATE THE MERGER
6.1 Representations, Warranties and Covenants................................................... A-16
6.2 Articles of Merger.......................................................................... A-16
6.3 Certificates................................................................................ A-16
SECTION 7--TERMINATION, AMENDMENT AND WAIVER
7.1 Termination................................................................................. A-16
7.2 Effect of Termination....................................................................... A-16
7.3 Amendment................................................................................... A-16
7.4 Waiver...................................................................................... A-16
SECTION 8--MISCELLANEOUS
8.1 Notices..................................................................................... A-17
8.2 Survival and Materiality of Representations................................................. A-17
8.3 Entire Agreement............................................................................ A-17
8.4 Parties in Interest......................................................................... A-17
8.5 No Implied Rights or Remedies............................................................... A-18
8.6 Headings.................................................................................... A-18
8.7 Severability................................................................................ A-18
8.8 Counterparts................................................................................ A-18
8.9 Further Assurances.......................................................................... A-18
8.10 Governing Law............................................................................... A-18
</TABLE>
ii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") dated May 6,
1998 is among Thermedics Detection Inc. ("Detection"), a Massachusetts
corporation, Orion Acquisition Inc. ("Acquisition"), a Massachusetts corporation
and a wholly-owned subsidiary of Detection, Thermedics Inc. ("Thermedics"), a
Massachusetts corporation, and Orion Research Inc. ("Orion"), a Massachusetts
corporation and a wholly-owned subsidiary of Thermedics. The parties wish to
effect the acquisition of Orion by Detection through a merger of Acquisition
with and into Orion on the terms and conditions hereof. This Agreement is
intended to be a "plan of reorganization" within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code").
Accordingly, in consideration of the foregoing and the mutual
representations and covenants contained herein, the parties hereto agree as
follows:
SECTION 1--THE REORGANIZATION
1.1 THE MERGER. Upon the terms and subject to the conditions hereof, and
in accordance with the Business Corporation Law of the Commonwealth of
Massachusetts (the "BCLM"), Acquisition shall be merged with and into Orion (the
"Merger"). The Merger shall occur at the Effective Time (as defined in Section
1.2). Following the Merger, Orion shall be the surviving corporation (the
"Surviving Corporation") and the separate corporate existence of Acquisition
shall cease.
1.2 EFFECTIVE TIME. As soon as practicable after the execution of this
Agreement and satisfaction or waiver of all conditions to the Merger, the
parties shall cause articles of merger (the "Articles of Merger") with respect
to the Merger to be filed and recorded in accordance with Section 78 of the BCLM
and shall take all such further actions as may be required by law to make the
Merger effective. The Merger shall be effective at such time as the Articles of
Merger are duly filed with the Secretary of State of the Commonwealth of
Massachusetts in accordance with the BCLM or at such later time as is specified
in the Articles of Merger (the "Effective Time"). The date on which the Merger
shall be effective is hereafter referred to as the "Effective Date."
1.3 CLOSING. Immediately prior to the filing of the Articles of Merger, a
closing (the "Closing") will be held at the offices of Thermo Electron
Corporation, 81 Wyman Street, Waltham, Massachusetts (or such other place as the
parties may agree) for the purpose of confirming satisfaction or waiver of all
conditions to the Merger. The date on which the Closing occurs is referred to
herein as the "Effective Date."
1.4 ARTICLES OF ORGANIZATION AND BY-LAWS. The Articles of Organization and
By-laws of Acquisition, in each case as in effect immediately prior to the
Effective Time, shall be the Articles of Organization and By-laws of the
Surviving Corporation immediately after the Effective Time.
1.5 DIRECTORS AND OFFICERS. The directors and officers of Acquisition
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Corporation immediately after the Effective Time.
1.6 CONVERSION OF STOCK.
At the Effective Time, by virtue of the Merger and without any action on the
part of Detection, Acquisition, Thermedics or Orion:
(a) Each share of common stock of Orion ("Orion Common Stock")
outstanding immediately prior to the Effective Time, other than (A) shares
held by Orion as treasury stock or shares held by any subsidiary of Orion
and (B) shares owned beneficially by Detection, Acquisition or any other
subsidiary of Detection, (the "Orion Shares") shall be converted into and
become the right to receive a pro rata share of a total of 5,961,225 shares
(the "Detection Shares") of common stock, $.10 par
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value per share, of Detection ("Detection Common Stock"). The Detection
Shares are referred to herein as the "Merger Consideration."
(b) All shares of Orion Common Stock held at the Effective Time by Orion
as treasury stock or by a subsidiary of Orion shall be canceled without any
conversion thereof and no payment shall be made with respect thereto.
(c) All shares of Orion Common Stock owned beneficially at the Effective
Time by Detection, Acquisition or any other subsidiary of Detection shall be
cancelled without any conversion thereof and no payment shall be made with
respect thereto.
(d) Each share of the common stock of Acquisition ("Acquisition Common
Stock") outstanding immediately prior to the Effective Time shall be
converted into and become one validly issued, fully paid and nonassessable
share of common stock, $0.10 par value per share, of the Surviving
Corporation.
1.7 PAYMENT FOR ORION COMMON STOCK.
(a) At the Effective Time, the stock transfer books of Orion shall be closed
and no transfers of Orion Common Stock may be made thereafter. Promptly after
the later of (i) the listing of the Detection Shares for trading on the American
Stock Exchange, Inc. ("AMEX"), as contemplated by Section 4.8 below, and (ii)
the proper surrender by Thermedics of such certificates representing the Orion
Shares, Detection shall cause its stock transfer agent to issue and deliver to
Thermedics a certificate for the Detection Shares. It shall be a condition of
such payment and delivery that the surrendered certificate(s) be properly
endorsed or otherwise in proper form for transfer and that Thermedics shall pay
any transfer or other taxes required by reason of such payment or delivery or
establish, to the satisfaction of Detection and the Surviving Corporation that
such tax has been paid or is not applicable. The date on which all of the
conditions to the issuance of the certificate representing the Detection Shares
shall have been met is referred to hereinafter as the "Payment Date."
(b) Notwithstanding the provisions of subsection (a) of this Section 1.7, in
the event that, notwithstanding Detection's best efforts, Detection is unable to
obtain the approval of its stockholders of the listing of the Detection Shares
for trading on AMEX on or before December 31, 1998, then, on December 31, 1998,
Detection will pay to Holdings the sum of $65,800,000 in cash in lieu of issuing
the Detection Shares.
1.8 ADJUSTMENTS.
(a) In the event Detection shall declare, pay, make or effect between the
date of this Agreement and the Payment Date, (i) any stock dividend or other
distribution in respect of the Detection Common Stock payable in shares of
capital stock of Detection, (ii) any stock split or other subdivision of
outstanding shares of Detection Common Stock into a larger number of shares,
(iii) any combination of outstanding shares of Detection Common Stock into a
smaller number of shares, (iv) any reclassification of Detection Common Stock
into other shares of capital stock or securities, or (v) any exchange of the
outstanding shares of Detection Common Stock, in connection with a merger or
consolidation of Detection or sale by Detection of all or part of its assets,
for a different number or class of shares of stock or securities of Detection or
for the share of the capital stock or other securities of any other corporation,
appropriate adjustment shall be made in the number of Detection Shares to be
issued in connection with the Merger as may be required to put Holdings in the
same position as if the record date, with respect to any such transaction or
transactions which shall so occur, had been immediately after the Payment Date,
or otherwise to carry out the intents and purposes of this Agreement.
(b) In the event Detection shall declare, pay, make or effect between the
date of this Agreement and the Payment Date any dividend or other distribution
in respect of the Detection Common Stock payable in cash or other property other
than in shares of capital stock of Detection, then the Detection Shares to be
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issued in connection with the Merger shall be deemed to be outstanding as of the
record date with respect to any such dividend or distribution, and the cash or
other property otherwise payable or distributable to Thermedics with respect to
such Detection Shares shall be held by Detection for the benefit of Thermedics;
and Detection shall take all actions reasonably necessary to prevent such cash
or other property from being or becoming subject to any lien, security interest
or other encumbrance not for the benefit of Thermedics. Upon the issuance of the
Detection Shares to Thermedics pursuant to Section 1.7(a) above, such cash or
other property shall likewise be distributed by Detection to Thermedics. In no
event shall Thermedics be entitled to receive interest on such dividends or
distributions. In the event that Detection pays Thermedics cash consideration
pursuant to Section 1.7(b) above, then such cash or other property held by
Detection on behalf of Thermedics shall not be paid or distributed to Thermedics
and Thermedics shall have no further interest therein or claim thereto.
1.9 LOST CERTIFICATES. In the event any certificate representing
Thermedics' Orion Shares shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by Thermedics, Detection shall issue in
exchange for such lost, stolen or destroyed certificate the consideration
payable in exchange therefor pursuant to this Section 1.
1.10 NO FRACTIONAL SHARES. No certificates representing fractional
Detection Shares shall be issued upon the surrender for exchange of the Orion
Shares. No fractional interest shall entitle the owner to vote or to any rights
of a security holder. In lieu of a fractional share, Thermedics will receive
upon surrender of the Orion Shares an amount in cash (without interest)
determined by multiplying such fraction by $11.0379.
SECTION 2--REPRESENTATIONS AND WARRANTIES OF THERMEDICS AND ORION
Except as set forth on the disclosure schedule delivered to Detection on the
date hereof (the "Orion Disclosure Schedule"), Thermedics and Orion, jointly and
severally, represent and warrant to Detection and Acquisition as follows. The
term "knowledge," when used in this Agreement, shall mean actual knowledge after
reasonable investigation.
2.1 ORGANIZATION AND QUALIFICATION.
(a) Each of Thermedics and Orion is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has full corporate power and authority to own, lease and
operate its assets and to carry on its business as now being and as heretofore
conducted. Each of Thermedics and Orion is qualified or otherwise authorized to
transact business as a foreign corporation in all jurisdictions in which such
qualification or authorization is required by law, except for jurisdictions in
which the failure to be so qualified or authorized would not have a material
adverse effect on the assets, properties, business, results of operations,
condition (financial or otherwise) or prospects of Orion (the "Business of
Orion").
(b) Thermedics and Orion have previously provided to Detection true and
complete copies of their charter and By-laws as in effect on the date hereof,
and neither of such corporations is in default thereunder.
2.2 AUTHORITY. Each of Thermedics and Orion has full right, power,
capacity and authority to execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby. The execution, delivery and
performance of this Agreement, the filing of the Articles of Merger and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of Thermedics and
Orion. This Agreement has been duly and validly executed and delivered by each
of Thermedics and Orion and constitutes the valid and binding obligation of
Thermedics and Orion, enforceable against them in accordance with the terms
hereof. Neither the execution, delivery and performance of this Agreement, the
filing of the Articles of Merger nor the consummation of the transactions
contemplated hereby will (i) conflict with or result in a violation,
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breach, termination or acceleration of, or default under (or would result in a
violation, breach, termination, acceleration or default with the giving of
notice or passage of time, or both) any of the terms, conditions or provisions
of the Articles of Organization or By-laws of Thermedics or Orion, as amended,
or of any note, bond, mortgage, indenture, license, agreement or other
instrument or obligation to which either of Thermedics or Orion is a party or by
which either of Thermedics or Orion or any of their respective properties or
assets may be bound or affected; (ii) result in the violation of any order,
writ, injunction, decree, statute, rule or regulation applicable to Thermedics
or Orion or any of their respective properties or assets; (iii) result in the
imposition of any lien, encumbrance, charge or claim upon any of Thermedics' or
Orion's assets; or (iv) entitle any employee to severance or other payments by
Orion or create any other obligation to an employee. Except for the filing of
the Articles of Merger, no consent or approval by, or notification to or filing
with, any court, governmental authority or third party is required in connection
with the execution, delivery and performance of this Agreement by Thermedics and
Orion or the consummation of the transactions contemplated hereby.
2.3 CAPITALIZATION AND TITLE TO SHARES.
(a) The authorized capital stock of Orion consists of 200,000 shares of
Orion Common Stock, of which 100 shares are issued and outstanding as of the
date hereof. Thermedics is the record and beneficial owner of all of such issued
and outstanding shares. All of the issued and outstanding shares of the capital
stock of Orion are duly authorized and are validly issued, fully paid,
nonassessable and free of preemptive rights.
(b) Except as set forth above, there are not as of the date hereof, and at
the Effective Time there will not be, any other shares of capital stock of Orion
authorized or outstanding or any subscriptions, options, conversion or exchange
rights, warrants, repurchase or redemption agreements, or other agreements or
commitments obligating Orion to issue, transfer, sell, repurchase or redeem any
shares of its capital stock or other securities of Orion. To the knowledge of
Thermedics and Orion, there are no written shareholder agreements, voting
trusts, proxies or other agreements, instruments or understandings with respect
to the voting of the capital stock of Orion. The books and records of Orion,
including without limitation the books of account, minute books, stock
certificate books and stock ledgers, are complete and correct and accurately
reflect the conduct of the business and affairs of Orion.
2.4 SUBSIDIARIES AND OTHER AFFILIATES.
(a) The Orion Disclosure Schedule sets forth all Subsidiaries of Orion and
the jurisdiction in which each is incorporated. All shares of the capital stock
of each Subsidiary owned by Orion are owned free and clear of any charges,
liens, encumbrances, security interests or adverse claims. As used in this
Agreement, "Subsidiary" means any corporation or other legal entity of which a
party to this Agreement owns, directly or indirectly, fifty percent (50%) or
more of the stock or other equity interest entitled to vote for the election of
directors and representations, warranties and covenants referring to Orion
contained herein shall be deemed to mean Orion and each of its Subsidiaries,
both separately and together as a consolidated whole, unless and except to the
extent expressly indicated otherwise.
(b) There are not as of the date hereof, and at the Effective Time there
will not be, any other shares of capital stock of any Subsidiary of Orion
authorized or outstanding or any subscriptions, options, conversion or exchange
rights, warrants, repurchase or redemption agreements, or other agreements or
commitments obligating any Subsidiary of Orion to issue, transfer, sell,
repurchase or redeem any shares of its capital stock or other securities. There
are no shareholder agreements, voting trusts, proxies or other agreements,
instruments or understandings with respect to the voting of the capital stock of
any Subsidiary of Orion.
(c) Except for its Subsidiaries, Orion does not, directly or indirectly, own
any material equity interest in any corporation, partnership, joint venture or
other entity.
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2.5 FINANCIAL STATEMENTS. Orion has delivered to Detection prior to the
execution of this Agreement true and complete copies of: (a) the audited
consolidated balance sheet of Orion as at January 3, 1998 (the "Balance Sheet"),
(b) Orion's audited consolidated statements of earnings and cash flows for the
fiscal year ended January 3, 1998, (c) the audited consolidated balance sheet of
Orion as at December 28, 1996, and (d) Orion's audited consolidated statements
of earnings and cash flows for the fiscal year ended December 28, 1996
(collectively, the "Financial Statements"). The Financial Statements have been
prepared from, and are in accordance with, the books and records of Orion and
fairly present the financial condition, results of operations, and cash flows of
Orion as at the dates and for the periods indicated, in each case in accordance
with generally accepted accounting principles applied on a basis consistent with
previous years.
2.6 ABSENCE OF UNDISCLOSED LIABILITIES; NO DEALINGS WITH AFFILIATES. As of
the date of the Balance Sheet, Orion had no material liabilities or obligations
of any nature, whether accrued, absolute, contingent or otherwise and whether
due or to become due (including without limitation, liabilities as guarantor or
otherwise with respect to obligations of others or liabilities for taxes due or
then accrued or to become due), required to be reflected or disclosed on the
Balance Sheet that were not adequately reflected or reserved against on the
Balance Sheet. Orion has no liabilities of the type required to be reflected or
disclosed on a balance sheet in accordance with generally accepted accounting
principles, other than liabilities (i) adequately reflected or reserved against
on the Balance Sheet, (ii) incurred since the date of the Balance Sheet in the
ordinary course of business and consistent with past practice, (iii) that would
not, in the aggregate, have a material adverse effect on the Business of Orion,
or (iv) disclosed in this Agreement. Orion does not have any contractual
arrangement with or commitment to or from any of its stockholders, officers,
management, directors or employees (or their family members) other than such as
may have been entered into in the normal course of employment, including,
without limiting the generality of the foregoing, being directly or indirectly a
joint investor or coventurer with respect to, or owner, lessor, lessee, licenser
or licensee of, any real or personal property, tangible or intangible, owned or
used by, or a lender to or debtor of, Orion.
2.7 TAXES. Orion has accurately prepared and duly and timely filed all
federal, state, local or foreign tax and other returns and reports ("Tax
Returns") which were required to be filed, in respect of all income, franchise,
excise, sales, use, property (real and personal), payroll and other taxes,
levies, imports, duties, license and registration fees, charges or withholdings
of any nature whatsoever (collectively "Taxes"). None of the federal, state,
local or foreign Tax returns of Orion has been audited or examined by the
governmental authority having jurisdiction. No waivers of any statutes of
limitation are in effect in respect of any Taxes. There are no claims pending
or, to the best of its knowledge, threatened, against Orion for past due Taxes.
All Taxes incurred but not yet due have been fully accrued on the books of Orion
or full reserves have been established therefor; the reserves indicated on the
Balance Sheet are also adequate to cover all Taxes that may become payable by
Orion in future periods in respect of any transactions or sales occurring on or
prior to the date of the Balance Sheet. Without limiting the generality of the
foregoing, Orion has withheld or collected from each payment made to each of its
employees, consultants or non-U.S. payees, the amount of all Taxes required to
be withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositories. Orion has no liability for Taxes
of any person other than Orion (a) under Regulation Sec. 1.1502-6 (or any
similar provision of federal, state, local or foreign law, (b) as a transferee
or successor, (c) by contract or (d) otherwise.
2.8 PROPERTIES. Except as set forth on the Orion Disclosure Schedule,
Orion owns and has good title to all of the assets and properties reflected as
owned by it on the Balance Sheet or acquired by Orion since the date of the
Balance Sheet (except personal property sold or otherwise disposed of in the
ordinary course of business since the date of the Balance Sheet), free and clear
of any lien, claim or other encumbrance, except for (i) the liens, claims or
other encumbrances reflected on the Balance Sheet, (ii) assets and properties
disposed of, or subject to purchase or sales orders, in the ordinary course of
business since the date of the Balance Sheet, (iii) liens, claims or other
encumbrances securing the liens of
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materialmen, carriers, landlords and like persons, all of which are not yet due
and payable, (iv) liens for taxes not yet delinquent and (v) liens, claims,
other encumbrances or defects in title that, in the aggregate, are not material
to the Business of Orion. Orion owns or has a valid leasehold interest in all of
the buildings, structures, leasehold improvements, equipment and other tangible
property material to the Business of Orion, all of which are in good and
sufficient operating condition and repair, ordinary wear and tear excepted, for
the conduct of its business in accordance with past practices and Orion has not
received notice that any of such property is in violation in any material
respect of any existing law or any building, zoning, health, safety or other
ordinance, code or regulation.
2.9 HAZARDOUS MATERIALS.
(a) Orion has previously made available to Detection a true and correct list
of all Hazardous Materials (as hereinafter defined) generated, used, handled or
stored by Orion, the proper disposal of which will require any material
expenditure by Orion. There has been no generation, use, handling, storage or
disposal of any Hazardous Materials in violation of common law or any applicable
environmental law at any site owned or premises leased by Orion during the
period of Orion's ownership or lease that could have a material adverse effect
on the Business of Orion. Nor has there been or is there threatened any release
of any Hazardous Materials on or at any such site or premises during such period
in violation of common law or any applicable environmental law or which created
or will create an obligation to report or remediate such release, which release
or failure to report or remediate could have a material adverse effect on the
Business of Orion. For purposes of this Agreement, "Hazardous Material" means
any medical waste, flammable, explosive or radioactive material, or any
hazardous or toxic waste, substance or material, including substances defined as
"hazardous substances," "hazardous materials," "solid waste" or "toxic
substances" under any applicable laws or ordinances relating to hazardous or
toxic materials and substances, air pollution (including noise and odors), water
pollution, liquid and solid waste, pesticides, drinking water, community and
employee health, environmental land use management, stormwater, sediment
control, nuisances, radiation, wetlands, endangered species, environmental
permitting, petroleum products, and all rules and regulations promulgated
pursuant to any such laws and ordinances.
(b) Orion has previously made available to Detection copies of all documents
concerning any environmental or health and safety matter that could have a
material adverse effect on the Business of Orion, if any, and copies of any
environmental audits or risk assessments, site assessments, documentation
regarding off-site disposal of Hazardous Materials, spill control plans and
material correspondence with any governmental authority regarding the foregoing.
2.10 ACCOUNTS RECEIVABLE. All accounts and notes receivable of Orion shown
on the Balance Sheet and all accounts and notes receivable acquired by Orion
subsequent to the date of the Balance Sheet have arisen in the ordinary course
of business and have been collected, or are in the process of collection and are
collectible in the ordinary course of business and in any event within nine
months from the Effective Date, in the aggregate recorded amounts thereof, less
the applicable allowances reflected on the Balance Sheet with respect to the
accounts and notes receivable shown thereon, or set up consistent with past
practice on the books of Orion with respect to the accounts and notes receivable
acquired subsequent to the date of the Balance Sheet.
2.11 INVENTORIES. All Inventories (as defined below) of Orion are of a
quality and quantity usable and saleable in the ordinary course of business,
except for obsolete items and items of below-standard quality, all of which are
in the aggregate immaterial to the Business of Orion. Items included in such
Inventories are carried on the books of Orion, and are valued on the Balance
Sheet, at the lower of cost or market. The value of obsolete materials and
materials of below-standard quality or quantity has been written down on Orion's
books of account to realizable market value. The term "Inventories" includes all
stock of raw materials, work-in-process and finished goods, including but not
limited to finished goods purchased for resale, held by Orion for manufacturing,
assembly, processing, finishing, sale or resale to others, from time to time in
the ordinary course of business of Orion in the form in which such inventories
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then are held or after manufacturing, assembling, finishing, processing,
incorporating with other goods or items, refining or the like.
2.12 PURCHASE AND SALE COMMITMENTS. No outstanding purchase commitments by
Orion are in excess of the normal, ordinary and usual requirements of Orion, and
the aggregate of the contract prices to which Orion has agreed in any
outstanding purchase commitments is not so excessive when compared with current
market prices for the relevant commodities or services that a material loss is
likely to result. No outstanding sales commitment by Orion obligates Orion to
sell any product or service at a price which, because of currently prevailing
and projected costs of materials or labor, is likely to result, when all such
sales commitments are taken in the aggregate, in a material loss to Orion. There
are no suppliers to Orion of significant goods or services with respect to which
practical alternative sources of supply, or comparable products, are not
available on comparable terms and conditions.
2.13 GOVERNMENTAL AUTHORIZATIONS. Orion has all governmental permits,
licenses, franchises, concessions, zoning variances and other approvals,
authorizations and orders (collectively "Permits") material to the Business of
Orion. Such Permits constitute all the permits which are required under all
applicable local, state, federal or foreign laws and regulations for the
operation of the Business of Orion. All such Permits are presently in full force
and effect, Orion is in compliance with the requirements thereof, no suspension
or cancellation of any of them is threatened so far as is known to Orion, and
the Merger will not adversely affect the validity or effectiveness of, and will
not require, for retention thereof after the Merger, the consent or approval of
any party to, or any other person or governmental authority having jurisdiction
of, any such Permit. Orion has no knowledge of any fact or circumstance which
would prevent, limit or restrict it from continuing to operate its business in
the present manner, and no new requirements pertaining to the manner of
operating its business have been issued or announced by any governmental
authority during the past year nor are there any disputes pending between Orion
and any governmental authority relating to Orion's operations as presently being
conducted or actively considered. Orion has furnished or made available to
Detection all reports and applications filed by it with any governmental
authority in the last three years.
2.14 INTELLECTUAL PROPERTY. Orion owns, or is licensed to use, or
otherwise has the right to use all patents, trademarks, service marks, trade
names, trade secrets, franchises, and copyrights, and all applications for any
of the foregoing, and all technology, know-how and processes necessary for the
conduct of its businesses as now conducted (collectively, the "Proprietary
Rights"). A list of all such copyrights, trademarks, tradenames and patents, and
all applications therefor, has been furnished or made available to Detection.
Orion is not aware of any claim by any third party that the Business of Orion as
currently conducted or proposed to be conducted infringes upon the unlicensed
Proprietary Rights of others, nor has Orion received any notice or claim from
any third party of such infringement by Orion. Orion is not aware of any
infringement by any third party on, or any competing claim of right to use or
own any of, the Proprietary Rights of Orion. Orion has the right to use, free
and clear of claims or rights of others, all customer lists and computer
software material to its business as presently conducted. To the best knowledge
of Orion, none of the activities of the employees of Orion on behalf of Orion
violates any agreements or arrangements which any such employees have with
former employers in a way which is materially adverse to the Business of Orion.
2.15 INSURANCE. Orion is not in default with respect to any provisions of
any policy of general liability, fire, title or other form of insurance held by
it, is current in the payment of all premiums due on such insurance and has not
failed to give any notice or present any claim thereunder in due and timely
fashion, except for claims that are immaterial in both the nature of the claim
and in the amount of such claim. Orion maintains insurance on all of its assets
and its business (including products liability insurance) from insurers which to
its knowledge are financially sound and reputable, in amounts and coverages and
against the kinds of risks and losses reasonably prudent to be insured against
by corporations engaged in the same or similar businesses. No basis exists which
would jeopardize the coverage under any such insurance. No such insurance will
be terminated or cancelled by reason of the execution, delivery and
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performance of this Agreement, the filing of the Articles of Merger or the
consummation of the transactions contemplated hereby. Orion has previously
furnished or made available to Detection all policies of general liability,
fire, title or other forms of insurance held by Orion and a description of all
claims pending thereunder other than health or dental insurance claims.
2.16 EMPLOYEE BENEFIT PLANS.
(a) Orion has made available or furnished to Detection true and complete
copies of each pension, profit-sharing, deferred compensation, incentive
compensation, severance pay, retirement, welfare benefit or other plan or
arrangement providing benefits to employees or retirees, including both those
that do and do not constitute employee benefit plans within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), currently maintained or contributed to by Orion or Thermedics for the
benefit of Orion's employees or retirees (each, a "Plan").
(b) Except as set forth on the Orion Disclosure Schedule, (i) each such Plan
that is an "employee pension benefit plan" within the meaning of Section 3(2) of
ERISA is being operated and administered in compliance with Section 401(a) of
the Code, a favorable determination letter has been obtained from the Internal
Revenue Service (the "IRS") for such Plan, and there is no accumulated funding
deficiency, as defined in Section 302(a)(2) of ERISA or Section 412 of the Code,
with respect to such Plan; (ii) there has been no non-exempt "prohibited
transaction" within the meaning of Section 406 of ERISA or Section 4975 of the
Code involving the assets of any Plan nor any "reportable event" within the
meaning of Section 4043 of ERISA with respect to any Plan; (iii) all required
employer contributions to such Plan have been made (or, in the case of
contributions not yet due, have been accrued on the Balance Sheet); (iv) Orion
has made available to Detection as to each such Plan a true and correct copy of
(w) the annual report (Form 5500) filed with the IRS for each of the three most
recent plan years, (x) each plan, trust agreement, group annuity contract and
insurance contract, if any, relating to such Plan, (y) each actuarial report
prepared for each of the last three years for each Plan and (z) each summary
plan description distributed to participants in each Plan and each summary of
material modifications to each Plan (as defined in ERISA); and (v) each such
Plan is, and at all relevant times has been, in compliance with ERISA, the Code
and the terms of such Plan. Neither Orion, Thermedics nor any Subsidiary of
Thermedics has ever participated in a "multiemployer pension plan" as defined in
Section 3(37) of ERISA.
(c) Except as set forth on the Orion Disclosure Schedule, Orion has no
obligation to provide any welfare benefits to retired or former employees other
than continuation of welfare benefits as required by applicable law.
(d) Orion has no liability under or with respect to any employee benefit
plans or arrangements that it no longer maintains or in which it no longer
participates.
2.17 AGREEMENTS AND DOCUMENTS. Orion has previously furnished or made
available to Detection true, correct and complete copies of each document that
is referred to or otherwise related to any of the following items referred to in
this Section 2.17:
(a) each document related to interests in real property owned, leased or
otherwise used or claimed by Orion;
(b) (i) each agreement of Orion made in the ordinary course of business
which involves aggregate future payments by or to Orion of more than one
hundred fifty thousand dollars ($150,000) in the case of payments to Orion
(including current firm purchase orders for Orion products), seventy five
thousand dollars ($75,000) in the case of payments by Orion, or any
agreement made in the ordinary course of business whose term extends beyond
one year after the date hereof; (ii) each agreement containing any covenant
restricting the freedom of Orion to compete in any line of business or with
any person; and (iii) each agreement of Orion not made in the ordinary
course of business which is or was to be performed after the date hereof;
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(c) all employment or similar compensation agreements of Orion which may
not be terminated by Orion without penalty within thirty days after the
Closing;
(d) all bonus, incentive compensation, deferred compensation,
profit-sharing, stock option, retirement, pension, severance,
indemnification, insurance, death benefit or other fringe benefit plans,
agreements or arrangements of Orion (or applying to Orion) in effect, or
under which any amounts remain unpaid, on the date hereof or to become
effective after the date hereof;
(e) all labor unions or other organizations representing, purporting to
represent or attempting to represent any employees of Orion, and all
collective bargaining agreements of Orion with any labor unions or other
representatives or employees;
(f) each agreement or other instrument or arrangement defining the terms
on which any indebtedness of Orion (or a guarantee by Orion of indebtedness)
is or may be issued; and
(g) the names and addresses of all banks in which Orion has accounts or
lines of credit, and with respect to each such account or line of credit,
the names of all persons authorized to drawn thereon.
Orion is not a party to any oral contract or agreement which would be
required to have been furnished or made available to Detection under this
Section 2.17 had such contract or agreement been committed to writing.
2.18 VALIDITY. There is no default or claimed or purported or alleged
default, or basis on which with notice or lapse of time or both (including
notice of this Agreement), a default would exist, in any obligation on the part
of any party (including Orion) to be performed under any lease, contract, plan,
policy or other instrument or arrangement referred to in Section 2.17 or
otherwise in this Agreement.
2.19 NO CHANGES. Since the date of the Balance Sheet there has not been:
(a) any material adverse change in the Business of Orion;
(b) any material damage, destruction or loss (whether or not covered by
insurance) adversely affecting the Business of Orion;
(c) any declaration, setting aside or payment of any dividend, or other
distribution, in respect of Orion's capital stock or any direct or indirect
redemption, purchase or other acquisition of such stock;
(d) any option to purchase Orion's capital stock granted to any person,
or any employment or deferred compensation agreement entered into between
Orion and any of its stockholders, officers, directors, employees or
consultants;
(e) any issuance or sale by Orion of any stock, bonds or other corporate
securities, or any partial or complete formation, acquisition, disposition
or liquidation of Orion;
(f) any labor union activity (including without limitation any
negotiation, or request for negotiation, with respect to any union
representation or any labor contract) respecting Orion;
(g) any statute, rule or regulation, or, to the best of Orion's
knowledge, any government policy, adopted which may materially and adversely
affect the Business of Orion;
(h) any mortgage, lien, attachment, pledge, encumbrance or security
interest created on any asset, tangible or intangible, of Orion, or assumed,
either by Orion or by others, with respect to any such assets;
(i) any indebtedness or other liability or obligation (whether absolute,
accrued, contingent or otherwise) incurred, or other transaction (except
that reflected in this Agreement) engaged in, by Orion, except those in the
ordinary course of business that are individually, or in the aggregate to
one group of related parties, less than ten thousand dollars ($10,000);
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(j) any obligation or liability discharged or satisfied by Orion, except
items included in current liabilities shown on the Balance Sheet and current
liabilities incurred since the date of the Balance Sheet in the ordinary
course of business which are individually, or in the aggregate to one group
of related parties, less than ten thousand dollars ($10,000) in amount;
(k) any sale, assignment, lease, transfer or other disposition of any
tangible asset of Orion, except in the ordinary course of business, or any
sale, assignment, lease, transfer or other disposition of any of its
patents, trademarks, trade names, brand names, copyrights, licenses or other
intangible assets;
(l) any amendment, termination or waiver of any material right belonging
to Orion;
(m) any increase in the compensation or benefits payable or to become
payable by Orion to any of its officers or employees;
(n) any transaction or contract with Thermedics; or
(o) any other action or omission by Orion, or the passage of any
resolution, other than in the ordinary course of business.
2.20 LITIGATION OR PROCEEDINGS. Orion is not engaged in, or a party to,
or, to the best of Thermedics' or Orion's knowledge, threatened with, any claim
or legal action or other proceeding before any court, any arbitrator of any kind
or any governmental authority, nor does any basis for any claim or legal action
or other proceeding or governmental investigation exist. There are no orders,
rulings, decrees, judgments or stipulations to which Orion is a party by or with
any court, arbitrator or governmental authority affecting the Business of Orion.
2.21 COMPLIANCE WITH LAWS. Orion (i) has not been and is not in violation
of any applicable building, zoning, occupational safety and health, pension,
export control, environmental or other federal, state, local or, to the best of
its knowledge, foreign, law, ordinance, regulation, rule, order or governmental
policy applicable to the Business of Orion; (ii) has not received any complaint
from any governmental authority, and to the best knowledge of Orion, none is
threatened, alleging that Orion has violated any such law, ordinance,
regulation, rule, order or governmental policy; (iii) has not received any
notice from any governmental authority of any pending proceedings to take all or
any part of the properties of Orion (whether leased or owned) by condemnation or
right of eminent domain and, to the best knowledge of Orion, no such proceeding
is threatened; and (iv) is not a party to any agreement or instrument, or
subject to any charter or other corporate restriction or judgment, order, writ,
injunction, rule, regulation, code or ordinance, which materially and adversely
affects, or might reasonably be expected materially and adversely to affect the
Business of Orion.
2.22 LABOR MATTERS. There are no labor organizing activities, election
petitions or proceedings, labor strikes, disputes, slowdowns, work stoppages or
unfair labor practice complaints pending or, to the best of Orion's knowledge,
threatened against Orion or between Orion and any of its employees.
2.23 RECALLS. There is no basis for the recall, withdrawal or suspension
of any approval by any governmental authority with respect to any product sold
or proposed to be sold by Orion. None of Orion's products is subject to any
recall proceedings and to the best of its knowledge no such proceedings have
been threatened. No product of Orion has ever been recalled.
2.24 BROKERS AND FINDERS. Neither Orion nor Thermedics has employed any
broker, agent or finder or incurred any liability on behalf of Orion or for any
brokerage fees, agents' commissions or finders' fees in connection with the
transactions contemplated hereby.
2.25 POWERS OF ATTORNEY. Orion has no powers of attorney or similar
authorizations outstanding.
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2.26 NO TERMINATION OF RELATIONSHIP. As of the date hereof, Thermedics and
Orion are unaware, and have no reason to expect, that any relationship between
Orion and a distributor, customer, supplier, lender, employee or other person
will be terminated or adversely affected as a result of the Merger.
2.27 ALL INFORMATION. Detection has been furnished in writing prior to the
execution of this Agreement all information as to the Business of Orion material
to a reasonable buyer's determination to enter into this Agreement and to
consummate the transactions contemplated hereby.
2.28 STATEMENTS TRUE AND CORRECT. The statements contained herein or in
any written documents prepared and delivered by or on behalf of Thermedics or
Orion pursuant to the terms hereof are true, complete and correct in all
material respects, and such documents do not omit any material fact required to
be stated herein or therein or necessary to make the statements contained herein
or therein not misleading.
SECTION 3--REPRESENTATIONS AND WARRANTIES OF DETECTION AND ACQUISITION
Detection and Acquisition, jointly and severally, represent and warrant to
Thermedics and Orion as follows.
3.1 ORGANIZATION. Each of Detection and Acquisition is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation and has full corporate power and authority to own, lease and
operate its assets and to carry on its business as now being and as heretofore
conducted. All outstanding shares of Acquisition capital stock are owned by
Detection, free and clear of any charges, liens, encumbrances, security
interests or adverse claims.
3.2 AUTHORITY. Each of Detection and Acquisition has full right, power,
capacity and authority to execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby. The execution, delivery and
performance of this Agreement, the filing of the Articles of Merger and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of Detection and
Acquisition. This Agreement has been duly and validly executed and delivered by
each of Detection and Acquisition and constitutes the valid and binding
obligation of Detection and Acquisition, enforceable against them in accordance
with the terms hereof. Neither the execution, delivery and performance of this
Agreement, the filing of the Articles of Merger nor the consummation of the
transactions contemplated hereby will (i) conflict with or result in a
violation, breach, termination or acceleration of, or default under (or would
result in a violation, breach, termination, acceleration or default with the
giving of notice or passage of time, or both) any of the terms, conditions or
provisions of the Articles of Organization or By-laws of Detection, as amended,
or Articles of Organization or By-laws of Acquisition, as amended, or of any
note, bond, mortgage, indenture, license, agreement or other instrument or
obligation to which either Detection or Acquisition is a party or by which
Detection or Acquisition or any of their respective properties or assets may be
bound or affected; (ii) result in the violation of any order, writ, injunction,
decree, statute, rule or regulation applicable to Detection or Acquisition or
any of their respective properties or assets; or (iii) result in the imposition
of any lien, encumbrance, charge or claim upon any of Detection's or
Acquisition's assets. Except for the filing of the Articles of Merger and the
listing of the Detection Shares for trading on the AMEX, no consent or approval
by, or notification to or filing with, any court, governmental authority or
third party is required in connection with the execution, delivery and
performance of this Agreement by Detection and Acquisition or the consummation
of the transactions contemplated hereby.
3.3 STATEMENTS TRUE AND CORRECT. The statements contained herein or in any
written documents prepared and delivered by or on behalf of Detection or
Acquisition pursuant to the terms hereof are true, complete and correct in all
material respects, and such documents do not omit any material fact required to
be stated herein or therein or necessary to make the statements contained herein
or therein not misleading.
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SECTION 4--COVENANTS AND AGREEMENTS
4.1 CONDUCT OF BUSINESS. Except with the prior written consent of
Detection, which will not be unreasonably withheld or delayed, and except as
otherwise contemplated herein, during the period from the date hereof to the
Effective Time, Thermedics and Orion shall observe the following covenants:
(a) AFFIRMATIVE COVENANTS PENDING CLOSING. Thermedics and Orion shall:
(i) Preservation of Personnel. Use all reasonable efforts to
preserve intact Orion's business organization and keep available the
services of Orion's present employees, in each case in accordance with
past practice, it being understood that Orion's termination of employees
with poor performance ratings shall not constitute a violation of this
covenant;
(ii) Insurance. Use all reasonable efforts to keep in effect
casualty, public liability, worker's compensation and other insurance
policies applicable to Orion in coverage amounts not less than those in
effect at the date of this Agreement;
(iii) Preservation of the Business; Maintenance of Properties. Use
all reasonable efforts to preserve the Business of Orion, advertise,
promote and market its products and services in accordance with past
practices over the last twelve months, keep its properties intact,
preserve its goodwill, maintain all physical properties in such operating
condition as will permit the conduct of Orion's business on a basis
consistent with past practice;
(iv) Intellectual Property Rights. Use all reasonable efforts to
preserve and protect Orion's Proprietary Rights; and
(v) Ordinary Course of Business. Operate Orion's business solely in
the ordinary course.
(b) NEGATIVE COVENANTS PENDING CLOSING. Thermedics and Orion will not:
(i) DISPOSITION OF ASSETS. Sell or transfer, or mortgage, pledge or
create or permit to be created any lien on, any of Orion's assets other
than sales or transfers in the ordinary course of business or the
creation of liens under existing arrangements disclosed hereunder and
liens permitted under Section 2.8;
(ii) LIABILITIES. Permit Orion to (A) incur any obligation or
liability other than in the ordinary course of business, (B) incur any
indebtedness for borrowed money in excess of $100,000 or (C) enter into
any contracts or commitments involving payments by Orion of $100,000 or
more other than purchase orders and commitments for inventory, materials
and supplies in the ordinary course of business;
(iii) COMPENSATION. Except as required by applicable law or any
existing employment or severance agreement, (A) change the compensation
or fringe benefits of any Orion officer, director, employee or agent,
except for ordinary merit increases for employees other than officers
based on periodic reviews in accordance with past practices, or (B) enter
into or modify any employment, severance or other agreement with any
officer, director or employee of Orion or any benefit plan (it being
understood that Orion's hiring of at will employees in the ordinary
course of business shall not constitute a violation of this covenant) or
(C) enter into or modify any agreement with any consultant, except for
agreements terminable upon not more than one year's notice that are
consistent with Orion's past practices with respect to consulting
agreements.
(iv) CAPITAL STOCK. Make any change in the number of shares of
Orion's capital stock authorized, issued or outstanding or grant any
option, warrant or other right to purchase, or to convert any obligation
into, shares of Orion's capital stock, or declare or pay any dividend or
other distribution with respect to any shares of Orion's capital stock,
or sell or transfer any shares of its capital stock;
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(v) CHARTER AND BY-LAWS. Amend the Articles of Organization or
By-laws of Orion;
(vi) ACQUISITIONS. Make any material acquisition of property other
than in the ordinary course of the Business of Orion; or
(vii) LICENSE AGREEMENTS. Enter into or modify any license,
technology development or technology transfer agreement between Orion and
any other person or entity.
4.2 CORPORATE EXAMINATIONS AND INVESTIGATIONS. Prior to the Effective
Time, Detection shall be entitled, through its employees and representatives, to
have such access to the assets, properties, business and operations of Orion, as
is reasonably necessary or appropriate in connection with its investigation of
Orion with respect to the transaction contemplated hereby. Any such
investigation and examination shall be conducted at reasonable times and under
reasonable circumstances so as to minimize any disruption to or impairment of
Orion's business and each party shall cooperate fully therein. No investigation
by Detection shall diminish or obviate any of the representations, warranties,
covenants or agreements of Thermedics or Orion contained in this Agreement. In
order that Detection may have full opportunity to make such investigation,
Thermedics and Orion shall furnish the representatives of Detection with all
such information and copies of such documents concerning its affairs as
Detection may reasonably request and cause their officers, employees,
consultants, agents, accountants and attorneys to cooperate fully with
Detection's representatives in connection with such investigation.
4.3 EXPENSES. Whether or not the Merger is consummated, Detection,
Thermedics and Orion shall bear their respective expenses incurred in connection
with the preparation, execution and performance of this Agreement and the
transactions contemplated hereby, including without limitation, all fees and
expenses of agents, representatives, counsel and accountants.
4.4 AUTHORIZATION FROM OTHERS. Prior to the Effective Date, the parties
shall use all reasonable efforts to obtain all authorizations, consents and
permits of others required to permit the consummation of the transactions
contemplated by this Agreement.
4.5 CONSUMMATION OF AGREEMENT. Each party shall use all reasonable efforts
to perform and fulfill all conditions and obligations to be performed and
fulfilled by it under this Agreement and to ensure that to the extent within its
control or capable of influence by it, no breach of any of its respective
representations, warranties and agreements hereunder occurs or exists on or
prior to the Effective Time, all to the end that the transactions contemplated
by this Agreement shall be fully carried out in a timely fashion.
4.6 FURTHER ASSURANCES. Each of the parties shall execute such documents,
further instruments of transfer and assignment and other papers and take such
further actions as may be reasonably required or desirable to carry out the
provisions hereof and the transactions contemplated hereby.
4.7 TAX-FREE REORGANIZATION. Detection, Acquisition, Thermedics and Orion
agree that no party shall take any action directly or indirectly that would
prevent the Merger from qualifying as a tax-free reorganization under Section
368(a) of the Code.
4.8 LISTING OF SHARES. Promptly after the Effective Date, Detection shall
take all action necessary in accordance with applicable law to convene a meeting
of its stockholders to be held for the purpose of approving the listing of the
Detection Shares for trading upon AMEX in accordance with Section 712 of AMEX's
Listing Standards, Policies and Requirements. Orion acknowledges and agrees that
such meeting may be held subsequent to Detection's 1998 annual meeting. In
connection with such meeting, Detection's Board of Directors shall recommend to
the Detection stockholders the approval of the listing of the Detection Shares
pursuant to this Agreement. Detection shall use all reasonable efforts to obtain
all votes and approvals of the Detection stockholders necessary for the listing
of the Detection Shares and all related matters under the BCLM, and its Articles
of Organization and By-laws. Thermedics hereby agrees
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to vote all of the shares of Detection Common Stock held by it as of the record
date of any such meeting in favor of the listing of the Detection Shares and all
such related matters.
4.9 PUBLIC ANNOUNCEMENTS AND CONFIDENTIALITY. Any press release or other
information to the press or any third party with respect to this Agreement or
the transactions contemplated hereby shall require the prior approval of
Detection and Orion, which approval shall not be unreasonably withheld, provided
that a party shall not be prevented from making such disclosure as it shall be
advised by counsel is required by law.
4.10 NO SOLICITATION. Thermedics and Orion will not (i) solicit or
initiate discussions with any person, other than Detection, relating to the
possible acquisition of Orion or all or a material portion of the assets or any
of the capital stock of Orion or any merger or other business combination with
Orion (an "Acquisition Transaction") or (ii) except to the extent reasonably
required by fiduciary obligations under applicable law as advised by legal
counsel, participate in any negotiations regarding, or furnish to any other
person information with respect to, any effort or attempt by any other person to
do or to seek any Acquisition Transaction. Thermedics and Orion agree to inform
Detection within one business day of its receipt of any offer, proposal or
inquiry relating to any Acquisition Transaction.
4.11 INDEMNIFICATION.
(a) RIGHT TO INDEMNIFICATION. Detection and Thermedics (as the case
may be, the "Indemnitee") shall be indemnified on its respective demand made to
the other (the "Indemnitor") for the full amount of all damages (as defined
below) suffered by it as a direct or indirect result of:
(i) the inaccuracy of any representation or warranty made by the
Indemnitor in or pursuant to this Agreement; and
(ii) any failure by the Indemnitor to perform any obligation or comply
with any covenant or agreement specified in this Agreement.
For the purpose of this Section 4.11, (a) references to Detection shall be
deemed to mean Detection and Acquisition; (b) the term "damages" shall be
determined and computed by reference to the effect of the compensable event on
the Indemnitee, and shall be deemed to include (i) all losses, liabilities,
expenses or costs incurred by the Indemnitee, including reasonable attorneys'
fees, and (ii) interest at a rate per annum equal to that announced from time to
time by BankBoston as its "base rate" (or the legal rate of interest, if lower)
from the date 30 days after notice of any such claim for indemnification is
given to the Indemnitor, or if an unliquidated claim, from such later date as
the claim is liquidated, to the date full indemnification is made therefor; and
(c) damages shall not include any amounts for which the Indemnitee actually
receives payment under an insurance policy, excluding self-insured amounts and
deductible amounts.
(b) INDEMNIFICATION PROCEDURES. The Indemnitee shall give the
Indemnitor notice of any claim, action or proceeding by a third party which is
reasonably likely to result in a claim for indemnification under this Section
4.11. The Indemnitor shall have the right, at its expense, to defend, contest,
protest, settle and otherwise control the resolution of any such claim, action
or proceeding. The Indemnitee shall have the right to participate in any such
legal proceeding, subject to the Indemnitor's right of control thereof, at the
expense of the Indemnitee and with counsel selected by the Indemnitee.
(c) LIMITATIONS ON INDEMNIFICATION. Detection's and Thermedics' rights
to be indemnified pursuant to Section 4.11 shall survive the Effective Date of
this Agreement indefinitely.
4.12 PARTICIPATION IN EMPLOYEE BENEFIT PLANS. Thermedics and Orion will
take whatever actions may be required to continue in effect without interruption
the participation of Orion in the employee benefit plans in which Orion is
participating as of the Effective Date, until such time as Orion may choose not
to participate in those plans.
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4.13 CERTAIN TAX MATTERS.
(a) ALLOCATION OF CERTAIN TAXES. In the case of any Tax that is
attributable to a taxable period which begins before the Effective Date and ends
after the Effective Date, the amount of Taxes attributable to the period prior
to the Effective Date (the "Pre-Effective Period") and the period subsequent to
the Effective Date (the "Post-Effective Period") shall be determined as follows:
(i) Thermedics and Detection agree that if Orion is permitted but not
required under applicable foreign, state or local Tax laws to treat the
Effective Date as the last day of a taxable period, Thermedics and Detection
shall treat such day as the last day of a taxable period.
(ii) Except to the extent provided in clause (i) of this subsection
4.13(a), in the case of ad valorem Taxes imposed on Orion and franchise or
similar Taxes imposed on Orion based on capital (including net worth or
long-term debt) or number of shares of stock authorized, issued or
outstanding, such Taxes shall be allocated between the Pre-Effective Period
and the Post-Effective Period based upon the respective number of days in
each such period.
(iii) Except to the extent provided in clauses (i) and (ii) of this
subsection 4.13(a), all other Taxes shall be allocated between the
Pre-Effective Period and the Post-Effective Period based upon an interim
closing of the books of Orion as of the end of the day of the Effective
Date, and the computation of the Tax for each resulting period as if the
period were a separate taxable period; provided, however, that in no event
shall the hypothetical Tax for any period be less than zero.
(b) TAX SHARING AGREEMENTS. Any Tax sharing agreement between Orion
and Thermedics or any other related corporation shall be terminated as of the
Effective Date and, after the Effective Date, Orion shall not be bound thereby
or have any liability thereunder.
(c) WAIVERS OF CARRYBACKS. Orion and Thermedics agree, to the maximum
extent permitted, to elect to waive the carryback of any loss, credit or
deduction incurred in or attributable to any taxable period (or portion thereof)
after the Effective Date to any taxable period (or portion thereof) prior to the
Effective Date.
SECTION 5--CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
DETECTION AND ACQUISITION TO CONSUMMATE THE MERGER
The obligation of Detection and Acquisition to consummate the Merger is
subject to the satisfaction or waiver, at or before the Effective Time, of the
following conditions:
5.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of Thermedics and Orion contained in this Agreement shall be true and
correct in all material respects on and as of the Effective Time with the same
force and effect as though made on and as of the Effective Time (with such
exceptions as may be permitted under or contemplated by this Agreement) and
there shall not have been any material adverse change in the Business of Orion
since the date hereof. Thermedics and Orion shall have performed and complied in
all material respects with all covenants and agreements required by this
Agreement to be performed or complied with by them on or prior to the Effective
Time and shall have obtained all required consents and approvals. Thermedics and
Orion shall have delivered to Detection a certificate, dated the Effective Time,
to the foregoing effect.
5.2 ARTICLES OF MERGER. Orion shall have executed and delivered the
Articles of Merger.
5.3 CERTIFICATES. Thermedics and Orion shall have furnished Detection and
Acquisition with such certificates of public officials and of Thermedics and
Orion officers as may be reasonably requested by Detection and Acquisition.
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SECTION 6--CONDITIONS PRECEDENT TO THE OBLIGATION OF
THERMEDICS AND ORION TO CONSUMMATE THE MERGER
The obligation of Thermedics and Orion to consummate the Merger is subject
to the satisfaction or waiver, at or before the Effective Time, of the following
conditions:
6.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of Detection and Acquisition contained in this Agreement shall be
true and correct in all material respects on and as of the Effective Time with
the same force and effect as though made on and as of the Effective Time (with
such exceptions as may be permitted under or contemplated by this Agreement) and
there shall not have been any material adverse change in the Business of
Detection since the date hereof. Detection shall have performed and complied in
all material respects with all covenants and agreements required by this
Agreement to be performed or complied with by it on or prior to the Effective
Time and shall have obtained all required consents and approvals. Detection and
Acquisition shall have delivered to Orion a certificate, dated the Effective
Time, to the foregoing effect.
6.2 ARTICLES OF MERGER. Acquisition shall have executed and delivered the
Articles of Merger.
6.3 CERTIFICATES. Detection and Acquisition shall have furnished
Thermedics and Orion with such certificates of public officials and of Detection
and Acquisition officers as may be reasonably requested by Thermedics and Orion.
SECTION 7--TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time as follows:
(a) by Thermedics upon written notice to Detection if Detection or
Acquisition has materially breached any representation, warranty, covenant
or agreement contained herein and has not cured such breach within ten (10)
business days of receipt of written notice from Thermedics;
(b) by Detection upon written notice to Thermedics if Thermedics or
Orion has materially breached any representation, warranty, covenant or
agreement contained herein and has not cured such breach within ten (10)
business days of receipt of written notice from Detection;
(c) by either party if any court of competent jurisdiction or United
States governmental body shall have issued an order, decree or ruling or
taken any other action restraining, enjoining or otherwise prohibiting the
Merger and such order, decree or ruling shall have become final and
nonappealable; or
(d) at any time with the written consent of Thermedics and Detection.
7.2 EFFECT OF TERMINATION. If this Agreement is terminated as provided in
Section 7.1, this Agreement shall forthwith become void and have no effect,
without liability on the part of any party, its directors, officers or
stockholders, other than the provisions of this Section 7.2, Section 4.3
relating to expenses and Section 4.9 relating to publicity and confidentiality
to the extent provided therein. Nothing contained in this Section 7.2 shall
relieve any party from liability for any breach of this Agreement occurring
before such termination.
7.3 AMENDMENT. This Agreement may not be amended except by an instrument
signed by each of the parties hereto.
7.4 WAIVER. At any time, any party hereto may (a) extend the time for the
performance of any of the obligations or other acts of any other party hereto or
(b) waive compliance with any of the agreements of any other party or any
conditions to its own obligations, in each case only to the extent such
obligations, agreements and conditions are intended for its benefit; provided
that any such extension or waiver shall be binding upon a party only if such
extension or waiver is set forth in a writing executed by such party.
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SECTION 8--MISCELLANEOUS
8.1 NOTICES. All notices, requests, demands, consents and other
communications which are required or permitted hereunder shall be in writing,
and shall be deemed given when actually received or if earlier, one day after
deposit with a nationally recognized air courier or express mail, charges
prepaid or three days after deposit in the U.S. mail by certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to Detection or Acquisition:
Thermedics Detection Inc.
220 Mill Road
Chelmsford, Massachusetts 01824
Attention: President
With a copy to:
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02254
Attention: General Counsel
If to Thermedics or Orion:
Thermedics Inc.
470 Wildwood Street
Woburn, Massachusetts 01888
Attention: President
With a copy to:
Thermo Electron Corporation
81 Wyman Street
Waltham, Massachusetts 02254
Attention: General Counsel
or to such other address as any party hereto may designate in writing to the
other parties, specifying a change of address for the purpose of this Agreement.
8.2 SURVIVAL AND MATERIALITY OF REPRESENTATIONS. Each of the
representations, warranties and agreements made by the parties hereto shall be
deemed material and shall survive the Effective Date and the consummation of the
transactions contemplated hereby. All statements contained in any certificates
or other instruments delivered by or on behalf of the parties pursuant hereto or
in connection with the transactions contemplated hereby shall be deemed material
and shall constitute representations and warranties by the person making such
statement.
8.3 ENTIRE AGREEMENT. This Agreement, including the exhibits, the Orion
Disclosure Schedule and the other documents referred to herein, supersedes any
and all oral or written agreements or understandings heretofore made relating to
the subject matter hereof and constitutes the entire agreement of the parties
relating to the subject matter hereof.
8.4 PARTIES IN INTEREST. All covenants and agreements, representations and
warranties contained in this Agreement made by or on behalf of any of the
parties hereto shall bind and inure to the benefit of the parties hereto, and
their respective successors, assigns, heirs, executors, administrators and
personal representatives, whether so expressed or not.
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8.5 NO IMPLIED RIGHTS OR REMEDIES. Except as otherwise expressly provided
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or to give any person, firm or corporation, other than the parties
hereto, any rights or remedies under or by reason of this Agreement.
8.6 HEADINGS. The headings in this Agreement are inserted for convenience
of reference only and shall not be a part of or control or affect the meaning
hereof.
8.7 SEVERABILITY. If any provision of this Agreement shall be declared
void or unenforceable by any judicial or administrative authority, the validity
of any other provision shall not be affected thereby.
8.8 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
8.9 FURTHER ASSURANCES. Thermedics and Orion will execute and furnish to
Detection and Acquisition all documents and will do or cause to be done all
other things that Detection may reasonably request from time to time in order to
give full effect to this Agreement and to effectuate the intent of the parties.
8.10 GOVERNING LAW. This Agreement shall be governed by the law of the
Commonwealth of Massachusetts applicable to agreements made and to be performed
wholly within such jurisdiction, without regard to the conflicts of laws
provisions thereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first written above.
<TABLE>
<S> <C>
THERMEDICS DETECTION INC. ORION ACQUISITION INC.
By: /s/ JAMES BARBOOKLES By: /s/ JOHN W. WOOD
- ----------------------------------------- -----------------------------------------
Name: James Barbookles Name: John W. Wood
Title: President Title: President
THERMEDICS INC. ORION RESEARCH INC.
By: /s/ JOHN T. KEISER By: /s/ JAMES BARBOOKLES
- ----------------------------------------- -----------------------------------------
Name: John T. Keiser Name: James Barbookles
Title: President Title: President
</TABLE>
A-18
<PAGE>
ATTACHMENT A
FORM OF PROXY
THERMEDICS DETECTION INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD [ ], 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints JOHN N. HATSOPOULOS, JAMES BARBOOKELES and
SANDRA L. LAMBERT, or any one of them in the absence of the others, as attorneys
and proxies of the undersigned, with full power of substitution, for and in the
name of the undersigned, to represent the undersigned at the Special Meeting of
the Stockholders of Thermedics Detection Inc., a Massachusetts corporation (the
"Company"), to be held on [ ], 1998, at 10:00 a.m. at Thermo
Electron Corporation, 81 Wyman Street, Waltham, Massachusetts, and at any
adjournment or postponement thereof, and to vote all shares of common stock of
the Company standing in the name of the undersigned on [ ], 1998,
with all of the powers the undersigned would possess if personally present at
such meeting:
(IMPORTANT TO BE SIGNED AND DATED ON THE REVERSE SIDE.)
A-19
<PAGE>
SPECIAL MEETING OF STOCKHOLDERS
THERMEDICS DETECTION INC.
[ ], 1998
1. Approve management proposal to list 5,961,225 shares of common stock, to be
issued in connection with an acquisition, on the American Stock Exchange,
Inc.
FOR / / AGAINST / / ABSTAIN / /
2. In their discretion on such other matters as may properly come before the
Meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED "FOR" THE PROPOSALS SET
FORTH ABOVE IF NO INSTRUCTION TO THE CONTRARY IS INDICATED OR IF NO INSTRUCTION
IS GIVEN.
Copies of the Notice of Meeting and of the Proxy Statement have been
received by the undersigned.
PLEASE DATE, SIGN AND PROMPTLY RETURN
THIS PROXY IN THE ENCLOSED ENVELOPE.
Signature(s)
-----------------------------------------------------------------------------
Date
--------------------------------------
Note: This proxy should be dated,
signed by the shareholder(s) exactly
as his or her name appears hereon, and
returned promptly in the enclosed
envelope. Persons signing in a
fiduciary capacity should so indicate.
If shares are held by joint tenants or
as community property, both should
sign.
PLEASE DATE, SIGN AND MAIL YOUR PROXY CARD BACK AS SOON AS POSSIBLE!
A-20
