SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________________________
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended January 3, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-12745
THERMEDICS DETECTION INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-3106698
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Mill Road
Chelmsford, Massachusetts 01824-4178
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
---------------------------- -----------------------------------------
Common Stock, $.10 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to the
filing requirements for at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference into Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of January 30, 1998, was approximately $27,427,000.
As of January 30, 1998, the Registrant had 13,355,459 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year
ended January 3, 1998, are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on June 1, 1998, are incorporated by
reference into Part III.
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PART I
Item 1. Business
--------
(a) General Development of Business
-------------------------------
Thermedics Detection Inc. (the Company or the Registrant) was
established as a subsidiary of Thermedics Inc. to develop, manufacture,
and market 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
chemiluminescence 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.
Historically, the Company's principal product lines were process
detection systems, including Alexus(R) systems used to assure the quality
of refillable plastic containers, and EGIS(R) explosives detectors. The
Company expanded its product lines to include moisture analysis equipment
through its acquisition of Moisture Systems Corporation and Rutter & Co.
B.V. (collectively, Moisture Systems) in January 1996, and also
introduced its InScan(TM) high-speed X-ray imaging systems (InScan
systems) and Flash-GC(TM) gas chromatography systems (Flash-GC systems)
in 1996. The Company has also recently introduced Rampart(TM), the latest
portable trace-detection system, which incorporates the advanced Flash-GC
technology in tandem with a highly sensitive chemiluminescence detector.
In addition, the Company performs contract research and development
services for government and industry customers and earns service revenues
through long-term contracts.
In March and November 1996, the Company issued a total of 683,500
shares of its common stock in private placements for net proceeds of $7.0
million. In March 1997, the Company sold 2,671,292 shares of common stock
in an initial public offering for net proceeds of $28.1 million.
The Company operated as a division of Thermedics 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. A publicly traded subsidiary of Thermo Electron, Thermedics
develops, manufactures, and markets precision-weighing and inspection
equipment, electrochemistry and microweighing products, product quality
assurance systems, a range of power electronics and electronic test
instruments, and security instruments, as well as implantable
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heart-assist systems, whole-blood coagulation-testing equipment,
skin-incision devices, and other biomedical products. As of January 3,
1998, Thermedics owned 76% of the Company's outstanding common stock. As
of January 3, 1998, Thermedics is a 58%-owned subsidiary of Thermo
Electron Corporation. Thermo Electron provides analytical and monitoring
instruments, biomedical products including heart-assist devices,
respiratory-care equipment, and mammography systems; paper recycling and
papermaking equipment; alternative-energy systems; industrial process
equipment; and other specialized products. Thermo Electron also provides
industrial outsourcing, particularly in environmental-liability
management and laboratory analysis, and metallurgical services, and
conducts advanced-technology research and development. Thermedics and
Thermo Electron may, from time to time, purchase shares of the Company's
common stock either on the open market or directly from the Company. See
Note 3 to Consolidated Financial Statements in the Company's 1997* Annual
Report to Shareholders for a description of outstanding stock options.
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities and Exchange Act of 1934, are made throughout this Annual
Report on Form 10-K. For this purpose, any statements contained herein
that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words,
"believes," "anticipates," "plans," "expects," "seeks," "estimates," and
similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the results of
the Company to differ materially from those indicated by such
forward-looking statements, including those detailed under the heading
"Forward-looking Statements" in the Registrant's 1997 Annual Report to
Shareholders, which statements are incorporated herein by reference.
(b) Financial Information About Industry Segments
---------------------------------------------
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.
(c) Description of Business
-----------------------
(i) 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.
* References to 1997, 1996, and 1995 herein are for the fiscal years
ended January 3, 1998, December 28, 1996, and December 30, 1995,
respectively.
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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.
During 1997, 1996, and 1995, the Company derived revenues of $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.
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.
During 1997 and 1996, the Company derived revenues of $15.4 million
and $18.0 million, respectively, from Moisture Systems.
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
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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. The
Company is continuing to develop the Flash-GC to configure it with
additional detectors and to introduce a process-oriented version for
additional on-line applications.
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 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 (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,
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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.
During 1997, 1996, and 1995, the Company derived revenues of $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 (MOD) to develop an explosive-detection system that is even
more sensitive than the EGIS system.
(ii) and (xi) 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 a wider
and higher tunnel, 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; and enhancing
the Flash-GC to broaden its applications. The Company also is continuing
to develop Rampart, a lower-cost unit for use in airport screening of
carry-on baggage.
In addition, the British MOD is sponsoring the MOD Explosion Particle
Dilution 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 $5,051,000,
$4,688,000, and $2,741,000 in 1997, 1996, and 1995, respectively.
Contract research and development revenues were $1,376,000, 1,758,000,
and $3,987,000 in 1997, 1996, and 1995, respectively.
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(iii) Raw Materials
-------------
Supplies purchased by the Company are available either from a number
of different suppliers or from alternative sources that could be
developed without a material adverse effect on the Company's business. To
date, the Company has experienced no difficulties in obtaining these
materials.
(iv) 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.
(v) Seasonal Influences
-------------------
There are no significant seasonal influences on the Company's sales
of its products.
(vi) Working Capital Requirements
----------------------------
There are no special inventory requirements or credit terms extended
to customers that would have a material adverse effect on the Company's
working capital.
(vii) Dependency on a Single Customer
-------------------------------
Sales to The Coca-Cola Company accounted for 26%, 24%, and 36% of the
Company's total revenues in 1997, 1996, and 1995, respectively.
(viii) Backlog
-------
The Company's backlog of firm orders was $6,922,000 and $11,955,000
as of 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 January 3, 1998, will be shipped or completed during the next
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twelve months. The Company does not believe that the size of its backlog
is necessarily indicative of intermediate or long-term trends in its
business.
(ix) 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.
(x) 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,
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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.
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.
(xii) Environmental Protection Regulations
------------------------------------
The Company believes that compliance by the Company with federal,
state, and local environmental protection regulations will not have a
material adverse effect on its capital expenditures, earnings, or
competitive position.
(xiii) Number of Employees
-------------------
As of January 3, 1998, the Company had 218 full-time employees.
(d) Financial Information About Exports by Domestic Operations and About
--------------------------------------------------------------------
Foreign Operations
------------------
Financial information about exports by domestic operations and about
foreign operations is summarized in Note 8 to Consolidated Financial
Statements in the Registrant's 1997 Annual Report to Shareholders and is
incorporated herein by reference.
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(e) Executive Officers of the Registrant
------------------------------------
Present Title (Year First Became
Name Age Executive Officer)
-------------------- --- --------------------------------------
James Barbookles 49 Chief Executive Officer and President
(1997)
David H. Fine 55 Senior Vice President (1992)
John N. Hatsopoulos 63 Chief Financial Officer and Senior
Vice President (1990)
Paul F. Kelleher 55 Chief Accounting Officer (1990)
Each executive officer serves until his successor is chosen or
appointed by the Board of Directors and qualified, or until his earlier
resignation, death, or removal. Messrs. Hatsopoulos and Kelleher have
held comparable positions for at least five years with Thermedics or
Thermo Electron. Mr. Barbookles has been President and Chief Executive
Officer of the Company since November 1997. Mr. Barbookles is also
currently President and Chief Executive Officer of Orion Research, Inc.
(Orion), a wholly owned subsidiary of Thermedics, and has been since
1995. Mr. Barbookles joined Orion in 1989 as Vice President of Research,
Development, and Engineering and was promoted to President and Chief
Operating Officer in 1993. Dr. Fine has been Senior Vice President of the
Company from 1992 and was a Vice President of the Company since its
inception in 1990 until 1992. Messrs. Hatsopoulos and Kelleher are
full-time employees of Thermo Electron, but devote such portions of their
time to the Company's affairs as the Company's needs reasonably require
from time to time.
Item 2. 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 throughout the world for
its sales and service operations. The Company believes that these
facilities are adequate for its present operations.
Item 3. Legal Proceedings
-----------------
Not applicable.
Item 4. Submission of Matters to a Vote of the Security Holders
-------------------------------------------------------
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
-------------------------------------------------------------
Matters
-------
(a) Information concerning the market and market price for the
Registrant's common stock, $.10 par value, and dividend policy is
included under the sections labeled "Common Stock Market Information" and
"Dividend Policy" in the Registrant's 1997 Annual Report to Shareholders
and is incorporated herein by reference.
(b) The Company sold 2,671,292 shares of common stock, par value $.01
per share, pursuant to a Registration Statement on Form S-1 (File
No. 333-19199), which was declared effective by the Securities and
Exchange Commission on February 21, 1997. The managing underwriters of
the offering were NatWest Securities Limited and Lehman Brothers. The
aggregate gross proceeds of the offering were $30,720,000. The Company's
net proceeds from the offering were $28,078,000. As of January 3, 1998,
the Company had expended $644,000 of such net proceeds for the purchase
of property, plant, and equipment, $3,980,000 for research and
development, and $8,470,000 for working capital needs. As of January 3,
1998, the Company had expended an aggregate of $13,094,000 of such net
proceeds. The Company invested, from time to time, the balance of such
net proceeds primarily in investment-grade interest- or dividend-bearing
instruments. As of January 3, 1998, $14,984,000 was invested pursuant to
a repurchase agreement with Thermo Electron Corporation. As of January 3,
1998, the Company had $44,735,000 of cash and cash equivalents.
Item 6. Selected Financial Data
-----------------------
The information required under this item is included under the
sections labeled "Selected Financial Information" and "Dividend Policy"
in the Registrant's 1997 Annual Report to Shareholders and is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The information required under this item is included under the
heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Registrant's 1997 Annual Report to
Shareholders and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The Registrant's Consolidated Financial Statements as of January 3,
1998, and Supplementary Data are included in the Registrant's 1997 Annual
Report to Shareholders and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
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PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the
caption "Election of Directors" in the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A, not later than 120 days after the close of
the fiscal year. The information concerning delinquent filers pursuant to
Item 405 of Regulation S-K is incorporated herein by reference from the
material contained under the heading "Section 16(a) Beneficial Ownership
Reporting Compliance" under the caption "Stock Ownership" in the
Registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120
days after the close of the fiscal year.
Item 11. Executive Compensation
----------------------
The information required under this item is incorporated herein by
reference from the material contained under the caption "Executive
Compensation" in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information required under this item is incorporated herein by
reference from the material contained under the caption "Stock Ownership"
in the Registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later
than 120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The information required under this item is incorporated herein by
reference from the material contained under the caption "Relationship
with Affiliates" in the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation
14A, not later than 120 days after the close of the fiscal year.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
------------------------------------------------------------
8-K
---
(a,d) Financial Statements and Schedules
----------------------------------
(1) The consolidated financial statements set forth in the
list below are filed as part of this Report.
(2) The consolidated financial statement schedule set forth in
the list below is filed as part of this Report.
(3) Exhibits filed herewith or incorporated herein by
reference are set forth in Item 14(c) below.
List of Financial Statements and Schedules Referenced in this
-------------------------------------------------------------
Item 14
-------
Information incorporated by reference from Exhibit 13 filed
herewith:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders' Equity
Notes to Consolidated Financial Statements
Reports of Independent Public Accountants
Financial Statement Schedule filed herewith:
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable or not required, or because the required
information is shown either in the financial statements or
in the notes thereto.
(b) Reports on Form 8-K
-------------------
None.
(c) Exhibits
--------
See Exhibit Index on the page immediately preceding exhibits.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 16, 1998 THERMEDICS DETECTION INC.
By: James Barbookles
---------------------------
James Barbookles
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated, as of March 16, 1998.
Signature Title
--------- -----
By: James Barbookles Chief Executive Officer, President
---------------------- and Director
James Barbookles
By: John N. Hatsopoulos Chief Financial Officer, Senior Vice
---------------------- President and Director
John N. Hatsopoulos
By: Paul F. Kelleher Chief Accounting Officer
----------------------
Paul F. Kelleher
By: Morton Collins Director
----------------------
Morton Collins
By: Matthew C. Weisman Director
----------------------
Matthew C. Weisman
By: John W. Wood Jr. Chairman of the Board and Director
----------------------
John W. Wood Jr.
14PAGE
<PAGE>
Report of Independent Public Accountants
----------------------------------------
To the Shareholders and Board of Directors of Thermedics Detection Inc.:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements included in Thermedics
Detection Inc.'s Annual Report to Shareholders incorporated by reference
in this Form 10-K, and have issued our report thereon dated February 12,
1998. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in Item 14 on page 13 is
the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in the
audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the consolidated
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
February 12, 1998
15PAGE
<PAGE>
SCHEDULE II
THERMEDICS DETECTION INC.
Valuation And Qualifying Accounts
(In thousands)
Balance at Provision Accounts Balance
Beginning Charged to Accounts Written at End
Description of Year Expense Recovered Off Other(a) of Year
------------------------------------------------------------------------------
Allowance for
Doubtful Accounts
Year Ended
Jan. 3, 1998 $1,215 $ 116 $ 7 $ (522) $ (6) $ 810
Year Ended
Dec. 28, 1996 $ 516 $ 582 $ 167 $ (172) $ 122 $1,215
Year Ended
Dec. 30, 1995 $ 547 $ 98 $ - $ (129) $ - $ 516
(a)Allowance of business acquired during the year as described in Note 2 to
Consolidated Financial Statements in the Registrant's 1997 Annual Report
to Shareholders and the effect of foreign currency translation.
16PAGE
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
2.1* Asset Purchase Agreement dated as of January 25, 1996, among
the Registrant, Moisture Systems Corporation, and certain
Affiliates of Moisture Systems Corporation. Pursuant to Item
601(b)(2) of Regulation S-K, schedules to this Agreement have
been omitted. The Registrant hereby undertakes to furnish
supplementally a copy of such schedules to the Commission
upon request.
2.2* Share Purchase Agreement dated as of January 25, 1996, among
the Registrant, Rutter Holding B.V., and certain Affiliates
of Rutter Holding B.V. Pursuant to Item 601(b)(2) of
Regulation S-K, schedules to this Agreement have been
omitted. The Registrant hereby undertakes to furnish
supplementally a copy of such schedules to the Commission
upon request.
3.1* Articles of Organization of the Registrant, as amended.
3.2* By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2* Specimen Rights Certificate.
10.1* Corporate Services Agreement dated as of March 20, 1996,
between Thermo Electron Corporation and the Registrant.
10.2 Thermo Electron Corporate Charter, as amended and restated
effective January 3, 1993 (incorporated by reference herein
from Exhibit 10.1 to Thermo Electron's Annual Report on Form
10-K for the fiscal year ended January 2, 1993 [File No.
1-8002]).
10.3* Tax Allocation Agreement dated as of March 20, 1996, between
Thermedics Inc. and the Registrant.
10.4* Master Repurchase Agreement dated as of March 20, 1996,
between Thermo Electron and the Registrant.
10.5 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 10, 1997, between Thermo
Electron and the Registrant.
10.6 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement dated as of December 10, 1997, between Thermedics
and the Registrant.
17PAGE
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10.7* Equity Incentive Plan of the Registrant.
10.8* Deferred Compensation Plan for Directors of the Registrant.
In addition to the stock-based compensation plans of the
Registrant, the executive officers of the Registrant may be
granted awards under stock-based compensation plans of Thermo
Electron and Thermedics for services rendered to the
Registrant or to such affiliated corporations. The terms of
such plans are substantially the same as those of the
Registrant's Equity Incentive Plan.
10.9* $21.2 Million Principal Amount Promissory Note due March
1998, issued by the Registrant to Thermedics.
10.10* Form of Indemnification Agreement for Officers and Directors.
10.11* Stock Purchase Agreement dated as of March 25, 1996, between
David H. Fine and the Registrant.
10.12 Stock Holdings Assistance Plan and Form of Promissory Note.
13 Annual Report to Shareholders for the year ended January
3, 1998 (only those portions incorporated herein by
reference).
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Deloitte & Touche Registeraccountants.
27 Financial Data Schedule.
Each exhibit above that is marked with an asterisk (*)
is incorporated by reference to the correspondingly
numbered exhibit to the Company's Registration Statement
on Form S-1 [File No. 333-31987].
EXHIBT 10.5
AMENDED AND RESTATED MASTER GUARANTEE REIMBURSEMENT
AND LOAN AGREEMENT
This AGREEMENT is entered into as of the 16th day of
December, 1997, by and among Thermo Electron Corporation (the
"Parent") and those of its subsidiaries that join in this
Agreement by executing the signature page hereto (the "Majority
Owned Subsidiaries").
WITNESSETH:
WHEREAS, the Majority Owned Subsidiaries and their
wholly-owned subsidiaries wish to enter into various financial
transactions, such as convertible or nonconvertible debt, loans,
and equity offerings, and other contractual arrangements with
third parties (the "Underlying Obligations") and may provide
credit support to, on behalf of or for the benefit of, other
subsidiaries of the Parent ("Credit Support Obligations");
WHEREAS, the Majority Owned Subsidiaries and the Parent
acknowledge that the Majority Owned Subsidiaries and their
wholly-owned subsidiaries may be unable to enter into many kinds
of Underlying Obligations without a guarantee of their
performance thereunder from the Parent (a "Parent Guarantee") or
without obtaining Credit Support Obligations from other Majority
Owned Subsidiaries;
WHEREAS, the Majority Owned Subsidiaries and their
wholly-owned subsidiaries may borrow funds from the Parent, and
the Parent may loan funds or provide credit to the Majority Owned
Subsidiaries and their wholly-owned subsidiaries, on a short-term
and unsecured basis;
WHEREAS, certain Majority Owned Subsidiaries ("Second Tier
Majority Owned Subsidiaries ") may themselves be majority owned
subsidiaries of other Majority Owned Subsidiaries ("First Tier
Majority Owned Subsidiaries");
WHEREAS, for various reasons, Parent Guarantees of a Second
Tier Majority Owned Subsidiary's Underlying Obligations may be
demanded and given without the respective First Tier Majority
Owned Subsidiary also issuing a guarantee of such Underlying
Obligation;
WHEREAS, the Parent may itself make a loan or provide other
credit to a Second Tier Majority Owned Subsidiary or its
wholly-owned subsidiaries under circumstances where the
applicable First Tier Majority Owned Subsidiary does not provide
such credit; and
WHEREAS, the Parent is willing to consider continuing to
issue Parent Guarantees and providing credit, and the Majority
Owned Subsidiaries are willing to consider continuing to provide
PAGE
<PAGE>
Credit Support Obligations and to borrow funds, on the terms and
conditions set forth below;
NOW, THEREFORE, in consideration of the foregoing and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged by each party hereto, the parties
agree as follows:
1. If the Parent provides a Parent Guarantee of an Underlying
Obligation, and the beneficiary(ies) of the Parent Guarantee
enforce the Parent Guarantee, or the Parent performs under
the Parent Guarantee for any other reason, then the Majority
Owned Subsidiary that is obligated, either directly or
indirectly through a wholly-owned subsidiary, under such
Underlying Obligation shall indemnify and save harmless the
Parent from any liability, cost, expense or damage
(including reasonable attorneys' fees) suffered by the
Parent as a result of the Parent Guarantee. If the
Underlying Obligation is issued by a Second Tier Majority
Owned Subsidiary or a wholly-owned subsidiary thereof, and
such Second Tier Majority Owned Subsidiary is unable to
fully indemnify the Parent (because of the poor financial
condition of such Second Tier Majority Owned Subsidiary, or
for any other reason), then the First Tier Majority Owned
Subsidiary that owns the majority of the stock of such
Second Tier Majority Owned Subsidiary shall indemnify and
save harmless the Parent from any remaining liability, cost,
expense or damage (including reasonable attorneys' fees)
suffered by the Parent as a result of the Parent Guarantee.
If a Majority Owned Subsidiary or a wholly-owned subsidiary
thereof provides a Credit Support Obligation for any
subsidiary of the Parent, other than a subsidiary of such
Majority Owned Subsidiary, and the beneficiary(ies) of the
Credit Support Obligation enforce the Credit Support
Obligation, or the Majority Owned Subsidiary or its
wholly-owned subsidiary performs under the Credit Support
Obligation for any other reason, then the Parent shall
indemnify and save harmless the Majority Owned Subsidiary or
its wholly-owned subsidiary, as applicable, from any
liability, cost, expense or damage (including reasonable
attorneys' fees) suffered by the Majority Owned Subsidiary
or its wholly-owned subsidiary, as applicable, as a result
of the Credit Support Obligation. Without limiting the
foregoing, Credit Support Obligations include the deposit of
funds by a Majority Owned Subsidiary or a wholly-owned
subsidiary thereof in a credit arrangement with a banking
facility whereby such funds are available to the banking
facility as collateral for overdraft obligations of other
Majority Owned Subsidiaries or their subsidiaries also
participating in the credit arrangement with such banking
facility.
2. For purposes of this Agreement, the term "guarantee" shall
include not only a formal guarantee of an obligation, but
PAGE
<PAGE>
also any other arrangement where the Parent is liable for
the obligations of a Majority Owned Subsidiary or its
wholly-owned subsidiaries. Such other arrangements include
(a) representations, warranties and/or covenants or other
obligations joined in by the Parent, whether on a joint or
joint and several basis, for the benefit of the Majority
Owned Subsidiary or its wholly-owned subsidiaries and (b)
responsibility of the Parent by operation of law for the
acts and omissions of the Majority Owned Subsidiary or its
wholly-owned subsidiaries, including controlling person
liability under securities and other laws.
3. Promptly after the Parent receives notice that a beneficiary
of a Parent Guarantee is seeking to enforce such Parent
Guarantee, the Parent shall notify the Majority Owned
Subsidiary(s) obligated, either directly or indirectly
through a wholly-owned subsidiary, under the relevant
Underlying Obligation. Such Majority Owned Subsidiary(s) or
wholly-owned subsidiary thereof, as applicable, shall have
the right, at its own expense, to contest the claim of such
beneficiary. If a Majority Owned Subsidiary or wholly-owned
subsidiary thereof, as applicable, is contesting the claim
of such beneficiary, the Parent will not perform under the
relevant Parent Guarantee unless and until, in the Parent's
reasonable judgment, the Parent is obligated under the terms
of such Parent Guarantee to perform. Subject to the
foregoing, any dispute between a Majority Owned Subsidiary
or wholly-owned subsidiary thereof, as applicable, and a
beneficiary of a Parent Guarantee shall not affect such
Majority Owned Subsidiary's obligation to promptly indemnify
the Parent hereunder. Promptly after a Majority Owned
Subsidiary or wholly-owned subsidiary thereof, as
applicable, receives notice that a beneficiary of a Credit
Support Obligation is seeking to enforce such Credit Support
Obligation, the Majority Owned Subsidiary shall notify the
Parent. The Parent shall have the right, at its own
expense, to contest the claim of such beneficiary. If the
Parent or the subsidiary of the Parent on whose behalf the
Credit Support Obligation is given is contesting the claim
of such beneficiary, the Majority Owned Subsidiary or
wholly-owned subsidiary thereof, as applicable, will not
perform under the relevant Credit Support Obligation unless
and until, in the Majority Owned Subsidiary's reasonable
judgment, the Majority Owned Subsidiary or wholly-owned
subsidiary thereof, as applicable, is obligated under the
terms of such Credit Support Obligation to perform. Subject
to the foregoing, any dispute between the Parent or the
subsidiary of the Parent on whose behalf the Credit Support
Obligation was given, on the one hand, and a beneficiary of
a Credit Support Obligation, on the other, shall not affect
the Parent's obligation to promptly indemnify the Majority
Owned Subsidiary or its wholly-owned subsidiary, as
applicable, hereunder.
PAGE
<PAGE>
4. Upon the request of a Majority Owned Subsidiary, the Parent
may make loans and advances to the Majority Owned Subsidiary
or its wholly-owned subsidiaries on a short-term, revolving
credit basis, from time to time in such amounts as mutually
determined by the Parent and the Majority Owned Subsidiary.
The aggregate principal amount of such loans and advances
shall be reflected on the books and records of the Majority
Owned Subsidiary (or wholly-owned subsidiary, as applicable)
and the Parent. All such loans and advances shall be on an
unsecured basis unless specifically provided otherwise in
loan documents executed at that time. The Majority Owned
Subsidiary or its wholly-owned subsidiaries, as applicable,
shall pay interest on the aggregate unpaid principal amount
of such loans from time to time outstanding at a rate
("Interest Rate") equal to the rate of the Commercial Paper
Composite Rate for 90-day maturities as reported by Merrill
Lynch Capital Markets, as an average of the last five
business days of such Majority Owned Subsidiary's latest
fiscal quarter then ended, plus twenty-five (25) basis
points. The Interest Rate shall be adjusted on the first
business day of each fiscal quarter of such Majority Owned
Subsidiary pursuant to the Interest Rate formula contained
in the preceding sentence and shall be in effect for the
entirety of such fiscal quarter. Interest shall be computed
on a 360-day basis. The aggregate principal amount
outstanding and accrued interest thereon shall be payable on
demand. The principal and accrued interest may be paid by
the Majority Owned Subsidiaries or their wholly-owned
subsidiaries, as applicable, at any time or from time to
time, in whole or in part, without premium or penalty. All
payments shall be applied first to accrued interest and then
to principal. Principal and interest shall be payable in
lawful money of the United States of America, in immediately
available funds, at the principal office of the Parent or at
such other place as the Parent may designate from time to
time in writing to the Majority Owned Subsidiary. The
unpaid principal amount of any such borrowings, and accrued
interest thereon, shall become immediately due and payable,
without demand, upon the failure of the Majority Owned
Subsidiary or its wholly-owned subsidiary, as applicable, to
pay its debts as they become due, the insolvency of the
Majority Owned Subsidiary or its wholly-owned subsidiary, as
applicable, the filing by or against the Majority Owned
Subsidiary or its wholly-owned subsidiary, as applicable, of
any petition under the U.S. Bankruptcy Code (or the filing
of any similar petition under the insolvency law of any
jurisdiction), or the making by the Majority Owned
Subsidiary or its wholly-owned subsidiary, as applicable, of
an assignment or trust mortgage for the benefit of creditors
or the appointment of a receiver, custodian or similar agent
with respect to, or the taking by any such person of
possession of, any property of the Majority Owned Subsidiary
or its wholly-owned subsidiary, as applicable. In case any
payments of principal and interest shall not be paid when
PAGE
<PAGE>
due, the Majority Owned Subsidiary or its wholly-owned
subsidiary, as applicable, further promises to pay all cost
of collection, including reasonable attorneys' fees.
5. If the Parent makes a loan or provides other credit ("Credit
Extension") to a Second Tier Majority Owned Subsidiary, the
First Tier Majority Owned Subsidiary that owns the majority
of the stock of such Second Tier Majority Owned Subsidiary
hereby guarantees the Second Tier Majority Owned
Subsidiary's obligations to the Parent thereunder. Such
guaranty shall be enforced only after the Parent, in its
reasonable judgment, determines that the Second Tier
Majority Owned Subsidiary is unable to fully perform its
obligations under the Credit Extension. If the Parent
provides Credit Extension to a wholly-owned subsidiary of a
Second Tier Majority Owned Subsidiary, the Second Tier
Majority Owned Subsidiary hereby guarantees it wholly-owned
subsidiary's obligations to the Parent thereunder and the
First Tier Majority Owned Subsidiary that owns the majority
of the stock of such Second Tier Majority Owned Subsidiary
hereby guarantees the Second Tier Majority Owned
Subsidiary's obligations to the Parent hereunder. Such
guaranty by the First Tier Majority Owned Subsidiary shall
be enforced only after the Parent, in its reasonable
judgment, determines that the Second Tier Majority Owned
Subsidiary is unable to fully perform its guaranty
obligation hereunder.
6. All payments required to be made by a Majority Owned
Subsidiary or its wholly-owned subsidiaries, as applicable,
shall be made within two days after receipt of notice from
the Parent. All payments required to be made by the Parent
shall be made within two days after receipt of notice from
the Majority Owned Subsidiary.
7. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of
Massachusetts applicable to contracts made and performed
therein.
PAGE
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed by their duly authorized officers as of the date
first above written.
THERMO ELECTRON CORPORATION
By: /s/ Melissa F. Riordan
------------------------------
Title: Treasurer
THERMEDICS DETECTION INC.
By: /s/ James C. Barbookles
------------------------------
Title: President
EXHIBIT 10.6
AMENDED AND RESTATED MASTER GUARANTEE REIMBURSEMENT
AND LOAN AGREEMENT
This AGREEMENT is entered into as of the 16th day of
December, 1997, by and among Thermedics Inc. (the "Parent") and
those of its subsidiaries that join in this Agreement by
executing the signature page hereto (the "Majority Owned
Subsidiaries").
WITNESSETH:
WHEREAS, the Majority Owned Subsidiaries and their
wholly-owned subsidiaries wish to enter into various financial
transactions, such as convertible or nonconvertible debt, loans,
and equity offerings, and other contractual arrangements with
third parties (the "Underlying Obligations") and may provide
credit support to, on behalf of or for the benefit of, other
subsidiaries of the Parent ("Credit Support Obligations");
WHEREAS, the Majority Owned Subsidiaries and the Parent
acknowledge that the Majority Owned Subsidiaries and their
wholly-owned subsidiaries may be unable to enter into many kinds
of Underlying Obligations without a guarantee of their
performance thereunder from the Parent (a "Parent Guarantee") or
without obtaining Credit Support Obligations from other Majority
Owned Subsidiaries;
WHEREAS, the Majority Owned Subsidiaries and their
wholly-owned subsidiaries may borrow funds from the Parent, and
the Parent may loan funds or provide credit to the Majority Owned
Subsidiaries and their wholly-owned subsidiaries, on a short-term
and unsecured basis; and
WHEREAS, the Parent is willing to consider continuing to
issue Parent Guarantees and providing credit, and the Majority
Owned Subsidiaries are willing to consider continuing to provide
Credit Support Obligations and to borrow funds, on the terms and
conditions set forth below;
NOW, THEREFORE, in consideration of the foregoing and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged by each party hereto, the parties
agree as follows:
1. If the Parent provides a Parent Guarantee of an Underlying
Obligation, and the beneficiary(ies) of the Parent Guarantee
enforce the Parent Guarantee, or the Parent performs under
the Parent Guarantee for any other reason, then the Majority
Owned Subsidiary that is obligated, either directly or
indirectly through a wholly-owned subsidiary, under such
Underlying Obligation shall indemnify and save harmless the
Parent from any liability, cost, expense or damage
(including reasonable attorneys' fees) suffered by the
PAGE
<PAGE>
Parent as a result of the Parent Guarantee. If a Majority
Owned Subsidiary or a wholly-owned subsidiary thereof
provides a Credit Support Obligation for any subsidiary of
the Parent, other than a subsidiary of such Majority Owned
Subsidiary, and the beneficiary(ies) of the Credit Support
Obligation enforce the Credit Support Obligation, or the
Majority Owned Subsidiary or its wholly-owned subsidiary
performs under the Credit Support Obligation for any other
reason, then the Parent shall indemnify and save harmless
the Majority Owned Subsidiary or its wholly-owned
subsidiary, as applicable, from any liability, cost, expense
or damage (including reasonable attorneys' fees) suffered by
the Majority Owned Subsidiary or its wholly-owned
subsidiary, as applicable, as a result of the Credit Support
Obligation. Without limiting the foregoing, Credit Support
Obligations include the deposit of funds by a Majority Owned
Subsidiary or a wholly-owned subsidiary thereof in a credit
arrangement with a banking facility whereby such funds are
available to the banking facility as collateral for
overdraft obligations of other Majority Owned Subsidiaries
or their subsidiaries also participating in the credit
arrangement with such banking facility.
2. For purposes of this Agreement, the term "guarantee" shall
include not only a formal guarantee of an obligation, but
also any other arrangement where the Parent is liable for
the obligations of a Majority Owned Subsidiary or its
wholly-owned subsidiaries. Such other arrangements include
(a) representations, warranties and/or covenants or other
obligations joined in by the Parent, whether on a joint or
joint and several basis, for the benefit of the Majority
Owned Subsidiary or its wholly-owned subsidiaries and (b)
responsibility of the Parent by operation of law for the
acts and omissions of the Majority Owned Subsidiary or its
wholly-owned subsidiaries, including controlling person
liability under securities and other laws.
3. Promptly after the Parent receives notice that a beneficiary
of a Parent Guarantee is seeking to enforce such Parent
Guarantee, the Parent shall notify the Majority Owned
Subsidiary(s) obligated, either directly or indirectly
through a wholly-owned subsidiary, under the relevant
Underlying Obligation. Such Majority Owned Subsidiary(s) or
wholly-owned subsidiary thereof, as applicable, shall have
the right, at its own expense, to contest the claim of such
beneficiary. If a Majority Owned Subsidiary or wholly-owned
subsidiary thereof, as applicable, is contesting the claim
of such beneficiary, the Parent will not perform under the
relevant Parent Guarantee unless and until, in the Parent's
reasonable judgment, the Parent is obligated under the terms
of such Parent Guarantee to perform. Subject to the
foregoing, any dispute between a Majority Owned Subsidiary
or wholly-owned subsidiary thereof, as applicable, and a
beneficiary of a Parent Guarantee shall not affect such
PAGE
<PAGE>
Majority Owned Subsidiary's obligation to promptly indemnify
the Parent hereunder. Promptly after a Majority Owned
Subsidiary or wholly-owned subsidiary thereof, as
applicable, receives notice that a beneficiary of a Credit
Support Obligation is seeking to enforce such Credit Support
Obligation, the Majority Owned Subsidiary shall notify the
Parent. The Parent shall have the right, at its own
expense, to contest the claim of such beneficiary. If the
Parent or the subsidiary of the Parent on whose behalf the
Credit Support Obligation is given is contesting the claim
of such beneficiary, the Majority Owned Subsidiary or
wholly-owned subsidiary thereof, as applicable, will not
perform under the relevant Credit Support Obligation unless
and until, in the Majority Owned Subsidiary's reasonable
judgment, the Majority Owned Subsidiary or wholly-owned
subsidiary thereof, as applicable, is obligated under the
terms of such Credit Support Obligation to perform. Subject
to the foregoing, any dispute between the Parent or the
subsidiary of the Parent on whose behalf the Credit Support
Obligation was given, on the one hand, and a beneficiary of
a Credit Support Obligation, on the other, shall not affect
the Parent's obligation to promptly indemnify the Majority
Owned Subsidiary or its wholly-owned subsidiary, as
applicable, hereunder.
4. Upon the request of a Majority Owned Subsidiary, the Parent
may make loans and advances to the Majority Owned Subsidiary
or its wholly-owned subsidiaries on a short-term, revolving
credit basis, from time to time in such amounts as mutually
determined by the Parent and the Majority Owned Subsidiary.
The aggregate principal amount of such loans and advances
shall be reflected on the books and records of the Majority
Owned Subsidiary (or wholly-owned subsidiary, as applicable)
and the Parent. All such loans and advances shall be on an
unsecured basis unless specifically provided otherwise in
loan documents executed at that time. The Majority Owned
Subsidiary or its wholly-owned subsidiaries, as applicable,
shall pay interest on the aggregate unpaid principal amount
of such loans from time to time outstanding at a rate
("Interest Rate") equal to the rate of the Commercial Paper
Composite Rate for 90-day maturities as reported by Merrill
Lynch Capital Markets, as an average of the last five
business days of such Majority Owned Subsidiary's latest
fiscal quarter then ended, plus twenty-five (25) basis
points. The Interest Rate shall be adjusted on the first
business day of each fiscal quarter of such Majority Owned
Subsidiary pursuant to the Interest Rate formula contained
in the preceding sentence and shall be in effect for the
entirety of such fiscal quarter. Interest shall be computed
on a 360-day basis. The aggregate principal amount
outstanding and accrued interest thereon shall be payable on
demand. The principal and accrued interest may be paid by
the Majority Owned Subsidiaries or their wholly-owned
subsidiaries, as applicable, at any time or from time to
PAGE
<PAGE>
time, in whole or in part, without premium or penalty. All
payments shall be applied first to accrued interest and then
to principal. Principal and interest shall be payable in
lawful money of the United States of America, in immediately
available funds, at the principal office of the Parent or at
such other place as the Parent may designate from time to
time in writing to the Majority Owned Subsidiary. The
unpaid principal amount of any such borrowings, and accrued
interest thereon, shall become immediately due and payable,
without demand, upon the failure of the Majority Owned
Subsidiary or its wholly-owned subsidiary, as applicable, to
pay its debts as they become due, the insolvency of the
Majority Owned Subsidiary or its wholly-owned subsidiary, as
applicable, the filing by or against the Majority Owned
Subsidiary or its wholly-owned subsidiary, as applicable, of
any petition under the U.S. Bankruptcy Code (or the filing
of any similar petition under the insolvency law of any
jurisdiction), or the making by the Majority Owned
Subsidiary or its wholly-owned subsidiary, as applicable, of
an assignment or trust mortgage for the benefit of creditors
or the appointment of a receiver, custodian or similar agent
with respect to, or the taking by any such person of
possession of, any property of the Majority Owned Subsidiary
or its wholly-owned subsidiary, as applicable. In case any
payments of principal and interest shall not be paid when
due, the Majority Owned Subsidiary or its wholly-owned
subsidiary, as applicable, further promises to pay all cost
of collection, including reasonable attorneys' fees.
5. All payments required to be made by a Majority Owned
Subsidiary or its wholly-owned subsidiaries, as applicable,
shall be made within two days after receipt of notice from
the Parent. All payments required to be made by the Parent
shall be made within two days after receipt of notice from
the Majority Owned Subsidiary.
6. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of
Massachusetts applicable to contracts made and performed
therein.
IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed by their duly authorized officers as of the date
first above written.
THERMEDICS INC.
By: /s/ John W. Wood, Jr.
------------------------------
Title: President
THERMEDICS DETECTION INC.
By: /s/ James C. Barbookles
------------------------------
Title: President
EXHIBIT 10.12
THERMEDICS DETECTION INC.
RESTATED STOCK HOLDING ASSISTANCE PLAN
SECTION 1. Purpose.
The purpose of this Plan is to benefit Thermedics Detection
Inc. (the "Company") and its stockholders by encouraging Key
Employees to acquire and maintain share ownership in the Company,
by increasing such employees' proprietary interest in promoting
the growth and performance of the Company and its subsidiaries
and by providing for the implementation of the Stock Holding
Policy.
SECTION 2. Definitions.
The following terms, when used in the Plan, shall have the
meanings set forth below:
Committee: The Human Resources Committee of the Board of
Directors of the Company as appointed from time to time.
Common Stock: The common stock of the Company and any
successor thereto.
Company: Thermedics Detection Inc., a Massachusetts
corporation.
Stock Holding Policy: The Stock Holding Policy of the
Company, as adopted by the Committee and as in effect from time
to time.
Key Employee: Any employee of the Company or any of its
subsidiaries, including any officer or member of the Board of
Directors who is also an employee, as designated by the
Committee, and who, in the judgment of the Committee, will be in
a position to contribute significantly to the attainment of the
Company's strategic goals and long-term growth and prosperity.
Loans: Loans extended to Key Employees by the Company
pursuant to this Plan.
Plan: The Thermedics Detection Inc. Stock Holding
Assistance Plan, as amended from time to time.
SECTION 3. Administration.
The Plan and the Stock Holding Policy shall be administered
by the Committee, which shall have authority to interpret the
Plan and the Stock Holding Policy and, subject to their
provisions, to prescribe, amend and rescind any rules and
regulations and to make all other determinations necessary or
desirable for the administration thereof. The Committee's
PAGE
<PAGE>
interpretations and decisions with regard to the Plan and the
Stock Holding Policy and such rules and regulations as may be
established thereunder shall be final and conclusive. The
Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or the Stock Holding
Policy, or in any Loan in the manner and to the extent the
Committee deems desirable to carry it into effect. No member of
the Committee shall be liable for any action or omission in
connection with the Plan or the Stock Holding Policy that is made
in good faith.
SECTION 4. Loans and Loan Limits.
The Committee has determined that the provision of Loans
from time to time to Key Employees in such amounts as to cause
such Key Employees to comply with the Stock Holding Policy is, in
the judgment of the Committee, reasonably expected to benefit the
Company and authorizes the Company to extend Loans from time to
time to Key Employees in such amounts as may be requested by such
Key Employees in order to comply with the Stock Holding Policy.
Such Loans may be used solely for the purpose of acquiring Common
Stock (other than upon the exercise of stock options or under
employee stock purchase plans) in open market transactions or
from the Company.
Each Loan shall be full recourse and evidenced by a
non-interest bearing promissory note substantially in the form
attached hereto as Exhibit A (the "Note") and maturing in
accordance with the provisions of Section 6 hereof, and
containing such other terms and conditions, which are not
inconsistent with the provisions of the Plan and the Stock
Holding Policy, as the Committee shall determine in its sole and
absolute discretion.
SECTION 5. Federal Income Tax Treatment of Loans.
For federal income tax purposes, interest on Loans shall be
imputed on any interest free Loan extended under the Plan. A Key
Employee shall be deemed to have paid the imputed interest to the
Company and the Company shall be deemed to have paid said imputed
interest back to the Key Employee as additional compensation.
The deemed interest payment shall be taxable to the Company as
income, and may be deductible to the Key Employee to the extent
allowable under the rules relating to investment interest. The
deemed compensation payment to the Key Employee shall be taxable
to the employee and deductible to the Company, but shall also be
subject to employment taxes such as FICA and FUTA.
SECTION 6. Maturity of Loans.
Each Loan to a Key Employee hereunder shall be due and
payable on demand by the Company. If no such demand is made,
then each Loan shall mature and the principal thereof shall
become due and payable on the fifth anniversary of the date of
PAGE
<PAGE>
the Loan, provided that the Committee may, in its sole and
absolute discretion, authorize such other maturity and repayment
schedule as the Committee may determine. Each Loan shall also
become immediately due and payable in full, without demand, upon
the occurrence of any of the events set forth in the Note;
provided that the Committee may, in its sole and absolute
discretion, authorize an extension of the time for repayment of a
Loan upon such terms and conditions as the Committee may
determine.
SECTION 7. Amendment and Termination of the Plan.
The Committee may from time to time alter or amend the Plan
or the Stock Holding Policy in any respect, or terminate the Plan
or the Stock Holding Policy at any time. No such amendment or
termination, however, shall alter or otherwise affect the terms
and conditions of any Loan then outstanding to Key Employee
without such Key Employee's written consent, except as otherwise
provided herein or in the promissory note evidencing such Loan.
SECTION 8. Miscellaneous Provisions.
(a) No employee or other person shall have any claim or
right to receive a Loan under the Plan, and no employee shall
have any right to be retained in the employ of the Company due to
his or her participation in the Plan.
(b) No Loan shall be made hereunder unless counsel for the
Company shall be satisfied that such Loan will be in compliance
with applicable federal, state and local laws.
(c) The expenses of the Plan shall be borne by the Company.
(d) The Plan shall be unfunded, and the Company shall not
be required to establish any special or separate fund or to make
any other segregation of assets to assure the making of any Loan
under the Plan.
(e) Except as otherwise provided in Section 7 hereof, by
accepting any Loan under the Plan, each Key Employee shall be
conclusively deemed to have indicated his acceptance and
ratification of, and consent to, any action taken under the Plan
or the Stock Holding Policy by the Company, the Board of
Directors of the Company or the Committee.
(f) The appropriate officers of the Company shall cause to
be filed any reports, returns or other information regarding
Loans hereunder, as may be required by any applicable statute,
rule or regulation.
SECTION 9. Effective Date.
The Plan and the Stock Holding Policy shall become effective
upon approval and adoption by the Committee.
PAGE
<PAGE>
EXHIBIT A TO STOCK HOLDING ASSISTANCE PLAN
THERMEDICS DETECTION INC.
Promissory Note
$_________
Dated:____________
For value received, ________________, an individual whose
residence is located at _______________________ (the "Employee"),
hereby promises to pay to Thermedics Detection Inc. (the
"Company"), or assigns, ON DEMAND, but in any case on or before
[insert date which is the fifth anniversary of date of issuance]
(the "Maturity Date"), the principal sum of [loan amount in
words] ($_______), or such part thereof as then remains unpaid,
without interest. Principal shall be payable in lawful money of
the United States of America, in immediately available funds, at
the principal office of the Company or at such other place as the
Company may designate from time to time in writing to the
Employee.
Unless the Company has already made a demand for payment in
full of this Note, the Employee agrees to repay to the Company
from the Employee's annual cash incentive compensation (referred
to as bonus), beginning with the first such bonus payment to
occur after the date of this Note and on each of the next four
bonus payment dates occurring prior to the Maturity Date, such
amount as may be designated by the Company. Any amount remaining
unpaid under this Note shall be due and payable on the Maturity
Date.
This Note may be prepaid at any time or from time to time,
in whole or in part, without any premium or penalty. The
Employee acknowledges and agrees that the Company has advanced to
the Employee the principal amount of this Note pursuant to the
Company's Stock Holding Assistance Plan, and that all terms and
conditions of such Plan are incorporated herein by reference.
The unpaid principal amount of this Note shall be and become
immediately due and payable without notice or demand, at the
option of the Company, upon the occurrence of any of the
following events:
(a) the termination of the Employee's employment with
the Company, with or without cause, for any reason or for no
reason;
(b) the death or disability of the Employee;
PAGE
<PAGE>
(c) the failure of the Employee to pay his or her
debts as they become due, the insolvency of the Employee,
the filing by or against the Employee of any petition under
the United States Bankruptcy Code (or the filing of any
similar petition under the insolvency law of any
jurisdiction), or the making by the Employee of an
assignment or trust mortgage for the benefit of creditors or
the appointment of a receiver, custodian or similar agent
with respect to, or the taking by any such person of
possession of, any property of the Employee; or
(d) the issuance of any writ of attachment, by trustee
process or otherwise, or any restraining order or injunction
not removed, repealed or dismissed within thirty (30) days
of issuance, against or affecting the person or property of
the Employee or any liability or obligation of the Employee
to the Company.
In case any payment herein provided for shall not be paid
when due, the Employee further promises to pay all costs of
collection, including all reasonable attorneys' fees.
No delay or omission on the part of the Company in
exercising any right hereunder shall operate as a waiver of such
right or of any other right of the Company, nor shall any delay,
omission or waiver on any one occasion be deemed a bar to or
waiver of the same or any other right on any future occasion.
The Employee hereby waives presentment, demand, notice of
prepayment, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or
enforcement of this Note. The undersigned hereby assents to any
indulgence and any extension of time for payment of any
indebtedness evidenced hereby granted or permitted by the
Company.
This Note has been made pursuant to the Company's Stock
Holding Assistance Plan and shall be governed by and construed in
accordance with, such Plan and the laws of the State of
Massachusetts and shall have the effect of a sealed instrument.
_______________________________
Employee Name: _________________
________________________
Witness
Exhibit 13
THERMEDICS DETECTION INC.
Consolidated Financial Statements
1997
PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1997 1996 1995
-----------------------------------------------------------------------
Revenues (Notes 6 and 8):
Product revenues $37,754 $31,255 $18,457
Service revenues 13,566 12,495 9,497
------- ------- -------
51,320 43,750 27,954
------- ------- -------
Costs and Operating Expenses:
Cost of product revenues (Note 6) 17,243 15,490 9,895
Cost of service revenues 7,288 7,013 5,341
Selling, general, and administrative
expenses (Note 6) 12,644 15,092 7,487
Research and development expenses 5,051 4,688 2,741
------- ------- -------
42,226 42,283 25,464
------- ------- -------
Operating Income 9,094 1,467 2,490
Interest Income 2,072 229 -
Interest Expense, Related Party (Note 2) (1,239) (1,119) -
Other Income (Expense), Net 23 12 (72)
------- ------- -------
Income Before Provision for Income Taxes 9,950 589 2,418
Provision for Income Taxes (Note 4) 3,880 227 910
------- ------- -------
Net Income $ 6,070 $ 362 $ 1,508
======= ======= =======
Basic and Diluted Earnings per Share
(Note 9) $ .48 $ .04 $ .15
======= ======= =======
Weighted Average Shares (Note 9):
Basic 12,760 10,275 10,000
======= ======= =======
Diluted 12,771 10,292 10,003
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
2PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Consolidated Balance Sheet
(In thousands) 1997 1996
------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $44,735 $13,484
Accounts receivable, less allowances of $810
and $1,215 11,126 9,387
Inventories 10,249 8,793
Unbilled contract costs and fees 836 307
Prepaid and refundable income taxes (Note 4) 1,835 2,173
Prepaid expenses 901 547
------- -------
69,682 34,691
------- -------
Machinery, Equipment, and Leasehold Improvements,
at Cost 6,264 5,683
Less: Accumulated depreciation and amortization 4,846 3,899
------- -------
1,418 1,784
------- -------
Cost in Excess of Net Assets of Acquired Companies
(Note 2) 15,121 16,694
------- -------
Other Assets 474 314
------- -------
$86,695 $53,483
======= =======
3PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1997 1996
-----------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Promissory note to parent company (Note 2) $21,200 $ -
Accounts payable 1,893 3,030
Accrued income taxes 1,555 334
Deferred revenue 1,689 1,281
Accrued payroll and employee benefits 1,426 1,375
Accrued installation and warranty expenses 828 1,413
Customer deposits 782 637
Other accrued expenses 1,796 3,102
Due to parent company and affiliated companies 1,294 161
------- -------
32,463 11,333
------- -------
Deferred Income Taxes (Note 4) - 40
------- -------
Promissory Note to Parent Company (Note 2) - 21,200
------- -------
Commitments (Note 5)
Shareholders' Investment (Notes 3 and 7):
Common stock, $.10 par value, 50,000,000 shares
authorized; 13,355,459 and 10,683,500 shares
issued and outstanding 1,336 1,068
Capital in excess of par value 41,251 13,130
Retained earnings 13,206 7,136
Cumulative translation adjustment (1,561) (424)
------- -------
54,232 20,910
------- -------
$86,695 $53,483
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1997 1996 1995
------------------------------------------------------------------------
Operating Activities:
Net income $ 6,070 $ 362 $ 1,508
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,522 2,364 1,159
Provision for losses on accounts
receivable 116 582 98
Other noncash expense 284 1,804 727
Decrease in deferred income taxes (40) - (40)
Changes in current accounts,
excluding the effects of
acquisitions:
Accounts receivable (2,153) (1,776) 1,051
Unbilled contract costs and fees (549) 845 (931)
Inventories (1,960) 1,254 (3,213)
Other current assets 68 (599) (116)
Accounts payable (1,101) 758 182
Other current liabilities 1,681 1,045 (2,392)
-------- -------- --------
Net cash provided by (used in) operating
activities 3,938 6,639 (1,967)
-------- -------- --------
Investing Activities:
Acquisitions (Note 2) - (21,668) -
Acquisition of product line (Note 2) - (300) -
Purchases of machinery, equipment, and
leasehold improvements (775) (766) (608)
Proceeds from sale of machinery,
equipment, and leasehold improvements 28 113 19
Other 82 - -
-------- -------- --------
Net cash used in investing activities (665) (22,621) (589)
-------- -------- --------
Financing Activities:
Net proceeds from issuance of Company
common stock (Note 7) 28,078 6,964 -
Proceeds from issuance of promissory
note to parent company (Note 2) - 21,200 -
Additional capital contributions and
transfers to parent company, net - 120 3,170
Other (61) (15) -
-------- -------- --------
Net cash provided by financing activities $ 28,017 $ 28,269 $ 3,170
-------- -------- --------
5PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1997 1996 1995
------------------------------------------------------------------------
Exchange Rate Effect on Cash $ (39) $ (85) $ (138)
-------- -------- --------
Increase in Cash and Cash Equivalents 31,251 12,202 476
Cash and Cash Equivalents at Beginning of
Year 13,484 1,282 806
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 44,735 $ 13,484 $ 1,282
======== ======== ========
Cash Paid For:
Interest $ 609 $ 596 $ -
Income taxes $ 2,180 $ 618 $ 152
Noncash Activities:
Fair value of assets of acquired
companies $ - $ 24,328 $ -
Cash paid for acquired companies - (21,668) -
-------- -------- --------
Liabilities assumed of acquired
companies $ - $ 2,660 $ -
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
6PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Consolidated Statement Shareholders' Investment
(In thousands) 1997 1996 1995
-----------------------------------------------------------------------
Common Stock, $.10 Par Value
Balance at beginning of year $ 1,068 $ 1,000 $ 1,000
Net proceeds from issuance of Company
common stock (Note 7) 268 68 -
------- ------- -------
Balance at end of year 1,336 1,068 1,000
------- ------- -------
Capital in Excess of Par Value
Balance at beginning of year 13,130 6,114 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
------- ------- -------
Balance at end of year 41,251 13,130 6,114
------- ------- -------
Retained Earnings
Balance at beginning of year 7,136 6,774 5,396
Net income 6,070 362 1,508
Transfer to parent company, net - - (130)
------- ------- -------
Balance at end of year 13,206 7,136 6,774
------- ------- -------
Cumulative Translation Adjustment
Balance at beginning of year (424) (115) (2)
Translation adjustment (1,137) (309) (113)
------- ------- -------
Balance at end of year (1,561) (424) (115)
------- ------- -------
Total Shareholders' Investment $54,232 $20,910 $13,773
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
7PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
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.
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 10,127,675 shares of the
Company's outstanding common stock, representing 76% of such stock
outstanding. 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. Revenues recorded under the percentage-
8PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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; however, basic and diluted
earnings per share equals the Company's previously reported earnings per
share for 1996 and 1995. 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.
9PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Stock Split
In March 1996, the Company declared and effected a two-for-three
reverse stock split. All share and per share information has been
restated to reflect 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
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:
(In thousands) 1997 1996
------------------------------------------------------------------------
Raw material and supplies $ 5,423 $ 6,135
Work in process 1,251 871
Finished goods 3,575 1,787
------- -------
$10,249 $ 8,793
======= =======
Machinery, Equipment, and Leasehold Improvements
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: machinery and
equipment, three to ten years and leasehold improvements, the lesser of
the term of the lease or the life of the asset.
10PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(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 $805,000 and $403,000 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.
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.
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
11PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
2. Acquisitions (continued)
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 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.
(In thousands except per share amounts) 1996 1995
-----------------------------------------------------------------------
Revenues $45,297 $46,485
Net income 520 1,796
Basic and diluted earnings per share .05 .18
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
12PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans (continued)
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.
A summary of the Company's stock option activity is as follows:
1997 1996 1995
---------------- ---------------- -----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
(Shares in of Exercise of Exercise of Exercise
thousands) Shares Price Shares Price Shares Price
-----------------------------------------------------------------------
Options outstanding,
beginning of year 218 $10.41 25 $ 9.75 26 $ 9.75
Granted 550 10.94 207 10.45 2 9.75
Exercised (1) 9.75 - - - -
Forfeited (111) 11.09 (14) 9.79 (3) 9.75
----- ------ ----- ------ ----- ------
Options outstanding,
end of year 656 $10.74 218 $10.41 25 $ 9.75
===== ====== ===== ====== ===== ======
Options
exercisable 656 $10.74 - $ - - $ -
===== ====== ===== ====== ===== ======
Options available
for grant 177 116 309
===== ===== =====
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.
13PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans (continued)
Employee Stock Purchase Program
-------------------------------
Substantially all of the Company's full-time U.S. employees are
eligible to participate in an employee stock purchase program sponsored
by 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:
(In thousands except per share amounts) 1997 1996
----------------------------------------------------------------------
Net income:
As reported $6,070 $ 362
Pro forma 5,485 102
Basic and diluted earnings per share:
As reported .48 .04
Pro forma .43 .01
Pro forma net income for 1995 was not materially different from
historical net income in 1995.
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.
14PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans (continued)
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:
1997 1996
---------------------------------------------------------------------
Volatility 28% -
Risk-free interest rate 6.1% 6.4%
Expected life of options 5.9 years 7.0 years
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option-pricing
models require the input of highly subjective assumptions. 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 $302,000, $247,000, and $233,000 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:
(In thousands) 1997 1996
---------------------------------------------------------------------
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
==== ====
15PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans (continued)
The funded status of the Company's defined benefit pension plan is as
follows:
(In thousands) 1997 1996
-----------------------------------------------------------------------
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
==== ====
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%.
4. Income Taxes
The components of income before provision for income taxes are as
follows:
(In thousands) 1997 1996 1995
-----------------------------------------------------------------------
Domestic $ 8,011 $(1,742) $ 2,197
Foreign 1,939 2,331 221
------- ------- -------
$ 9,950 $ 589 $ 2,418
======= ======= =======
16PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
4. Income Taxes (continued)
The components of the provision for income taxes are as follows:
(In thousands) 1997 1996 1995
----------------------------------------------------------------------
Currently payable (refundable):
Federal $2,383 $ (350) $ 681
State 625 (90) 166
Foreign 625 692 94
------ ------ ------
3,633 252 941
------ ------ ------
Net deferred (prepaid):
Federal 105 (195) (25)
State 26 (34) (6)
Foreign 116 204 -
------ ------ ------
247 (25) (31)
------ ------ ------
$3,880 $ 227 $ 910
====== ====== ======
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.
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:
(In thousands) 1997 1996 1995
----------------------------------------------------------------------
Provision for income taxes at statutory
rate $3,383 $ 200 $ 822
Increases (decreases) resulting from:
State income taxes, net of federal tax 430 (81) 106
Foreign tax rate and tax law differential 82 103 19
Tax benefit of foreign sales corporation (175) - (133)
Deemed dividend from foreign subsidiary - - 80
Other, net 160 5 16
------ ------ ------
$3,880 $ 227 $ 910
====== ====== ======
17PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
4. Income Taxes (continued)
Prepaid income taxes and deferred income taxes in the accompanying
balance sheet consist of the following:
(In thousands) 1997 1996
--------------------------------------------------------------
Prepaid (deferred) income taxes:
Reserves and other accruals $ 959 $ 999
Inventory basis difference 820 643
Long-term assets 188 (40)
Accrued compensation 56 130
Other, net - 30
------ ------
$2,023 $1,762
====== ======
A provision has not been made for U.S. or additional foreign taxes on
$3,415,000 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 $1,078,000, $1,335,000,
and $542,000 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 $1,201,000
in 1998; $1,039,000 in 1999; $878,000 in 2000; $779,000 in 2001; $797,000
in 2002; and $2,918,000 in 2003 and thereafter. Total future minimum
lease payments are $7,612,000 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.
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
18PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
6. Related-party Transactions (continued)
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 $579,000, $438,000, and $335,000 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.
19PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
6. Related-party Transactions (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 27%, 24%, and 36% 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(R) 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(R) systems.
20PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
8. Significant Customer, Product Lines, and Geographical Information
(continued)
The following table shows data for the Company by geographical area.
(In thousands) 1997 1996 1995
------------------------------------------------------------------------
Revenues:
United States $41,576 $32,003 $22,571
The Netherlands 5,489 7,547 -
Other Europe 6,427 5,893 4,057
Other 3,290 2,588 2,600
Transfers among geographical areas (a) (5,462) (4,281) (1,274)
------- ------- -------
$51,320 $43,750 $27,954
======= ======= =======
Income before provision for income taxes:
United States $ 7,862 $ (859) $ 2,933
The Netherlands 454 1,514 -
Other Europe 746 394 (127)
Other 716 412 348
Corporate and eliminations (b) (684) 6 (664)
------- ------- -------
Total operating income 9,094 1,467 2,490
Interest income (expense), net 833 (890) -
Other income (expense), net 23 12 (72)
------- ------- -------
$ 9,950 $ 589 $ 2,418
======= ======= =======
Identifiable assets:
United States $29,995 $32,044 $15,806
The Netherlands 7,200 8,574 -
Other Europe 5,257 3,523 2,850
Other 3,074 1,615 1,666
Corporate and eliminations (c) 41,169 7,727 -
------- ------- -------
$86,695 $53,483 $20,322
======= ======= =======
Export revenues included in
United States revenues above (d):
Germany $ 5,386 $ 2,487 $ 3,914
Other Europe 6,535 4,420 3,995
Mexico 4,385 2,015 1,363
Other South America 6,089 3,998 3,271
Other 4,070 4,437 2,341
------- ------- -------
$26,465 $17,357 $14,884
======= ======= =======
--------------
(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.
21PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
9. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1997 1996 1995
------------------------------------------------------------------------
Basic
Net income $ 6,070 $ 362 $ 1,508
-------- -------- --------
Weighted average shares 12,760 10,275 10,000
-------- -------- --------
Basic earnings per share $ .48 $ .04 $ .15
======== ======== ========
Diluted
Net income $ 6,070 $ 362 $ 1,508
-------- -------- --------
Weighted average shares 12,760 10,275 10,000
Effect of stock options 11 17 3
-------- -------- --------
Weighted average shares, as adjusted 12,771 10,292 10,003
-------- -------- --------
Diluted earnings per share $ .48 $ .04 $ .15
======== ======== ========
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.
22PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
10. Unaudited Quarterly Information
(In thousands except per share amounts)
1997 First Second Third Fourth
-----------------------------------------------------------------------
Revenues $12,429 $12,397 $12,632 $13,862
Gross profit 6,333 6,520 6,650 7,286
Net income 1,024 1,415 1,686 1,945
Basic and diluted
earnings per share .09 .11 .13 .15
1996 First(a) Second Third Fourth
-----------------------------------------------------------------------
Revenues $ 9,345 $10,104 $11,117 $13,184
Gross profit 4,163 4,028 5,547 7,509
Net income (loss) (524) (1,244) 705 1,425
Basic and diluted
earnings (loss)
per share (.05) (.12) .07 .14
(a) Reflects the January 1996 acquisitions of Moisture Systems and
Rutter.
23PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
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 76%-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 did not audit the financial statements of Rutter & Co.
B.V. (a wholly owned subsidiary of Thermedics Detection Inc.), for the
period from January 25, 1996 (the date of acquisition) through and as of
December 28, 1996, and as of and for the year ended January 3, 1998,
which statements reflect total assets and total revenues of 9% and 4% in
1997, and 16% and 17% in 1996, respectively, of the consolidated totals.
Those statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to the amounts
included for that entity, is based solely on the report of the other
auditors.
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 and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
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
February 12, 1998
24PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Independent Auditor's Report
We have audited the consolidated balance sheet of the Rutter & Co.
B.V. segment of Thermedics Detection Inc. as of January 3, 1998, and
December 28, 1996, and the related consolidated statements of income,
stockholder's equity, and cash flows for the year ended January 3, 1998,
and the period from January 25, 1996 (acquisition date) to December 28,
1996 (all expressed in Netherlands Guilders) (not included herein). These
financial statements are the responsibility of Thermedics Detection
Inc.'s and Rutter & Co. B.V.'s management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. 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 audit provides a reasonable
basis for our opinion.
As discussed in the notes to the financial statements (not included
herein), the consolidated balance sheet of the Rutter & Co. B.V. segment
of Thermedics Detection Inc. includes the net assets acquired by
Thermedics Detection Inc. in its purchase of Rutter & Co. B.V. on January
25, 1996, after giving effect to the allocation of Thermedics Detection
Inc.'s purchase price to the consolidated net assets of Rutter & Co.
B.V., and to the changes in the consolidated net assets of Rutter & Co.
B.V. subsequent to the acquisition; the related consolidated statements
of income, stockholder's equity, and cash flows reflect the results of
operations and cash flows of Rutter & Co. B.V. subsequent to such
acquisition after giving effect to the allocation of Thermedics Detection
Inc.'s purchase price to Rutter & Co. B.V.'s consolidated net assets.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the Rutter &
Co. B.V. segment of Thermedics Detection Inc. at January 3, 1998, and
December 28, 1996, and the results of their operations and their cash
flows for the year ended January 3, 1998, and the period from January 25,
1996 to December 28, 1996, in conformity with generally accepted
accounting principles in the United States of America.
Deloitte & Touche Registeraccountants
Almelo, The Netherlands
Febraury 6, 1998
25PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," "seeks," "estimates," and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the results of the Company to differ
materially from those indicated by such forward-looking statements,
including those detailed immediately after this Management's Discussion
and Analysis of Financial Condition and Results of 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 and 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.
Historically, the Company's principal product lines were process
detection systems, including Alexus(R) systems used to assure the quality
of refillable plastic containers, and EGIS(R) explosives detectors. The
Company expanded its product lines to include moisture analysis equipment
through its acquisitions of Moisture Systems Corporation and Rutter & Co.
B.V. in January 1996, and also introduced its InScan(TM) high-speed X-ray
imaging systems (InScan systems) and Flash-GC(TM) gas chromatography
systems (Flash-GC systems) in 1996. The Company has also recently
introduced Rampart(TM), the latest portable trace-detection system that
incorporates the advanced Flash-GC technology in tandem with a highly
sensitive chemiluminesence detector. The Company also performs contract
research and development services for government and industry customers
and earns service revenues through long-term contracts.
A substantial portion of the Company's sales are derived from sales
of products outside the United States, through export sales, and sales by
the Company's foreign subsidiaries. Although the Company seeks to charge
its customers in the same currency as its operating costs, the Company's
financial performance and competitive position can be affected by
currency exchange-rate fluctuations.
26PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
1997 Compared With 1996
Revenues increased 17% to $51.3 million in 1997 from $43.8 million in
1996. Product revenues increased 21% to $37.8 million in 1997 from $31.3
million in 1996, while service revenues increased 9% to $13.6 million in
1997 from $12.5 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 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. As a result of this
decrease in demand and the completion of the product-line upgrade, the
Company anticipates that sales of Alexus systems will slow in 1998, which
is the primary reason for a $5.0 million decrease in the Company's
backlog 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 Federal Aviation Administration (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.
The gross profit margin increased to 52% in 1997 from 49% in 1996.
The gross profit margin on product revenues increased to 54% in 1997 from
50% 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 at Moisture Systems and Rutter. 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. The gross profit margin on service revenues increased to
46% in 1997 from 44% 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 25% in 1997 from 34% in 1996. The decline was
primarily due to nonrecurring costs in 1996 related to a reduction in
personnel and a reduction in 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 $5.1 million in 1997
from $4.7 million in 1996, primarily due to costs related to the
improvement and expansion of Moisture System's moisture analysis
equipment product line.
27PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1997 Compared With 1996 (continued)
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 (Note 7).
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 (Note 2).
The effective tax rate was 39% 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.
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.
1996 Compared With 1995
Revenues increased 57% to $43.8 million in 1996 from $28.0 million in
1995. Product revenues increased 69% to $31.3 million in 1996 from $18.5
million in 1995, while service revenues increased 32% to $12.5 million in
1996 from $9.5 million in 1995. Revenues increased in 1996 due to the
inclusion of $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 have substantially completed their
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 49% in 1996 from 45% in 1995.
The gross profit margin on product revenues increased to 50% in 1996 from
28PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1996 Compared With 1995 (continued)
46% in 1995, primarily due to higher-margin revenues from Moisture
Systems and Rutter, 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 unchanged at 44% in
1996 and 1995.
Selling, general, and administrative expenses as a percentage of
revenues increased to 34% in 1996 from 27% in 1995, primarily due to
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 $4.7 million in 1996
from $2.7 million in 1995, primarily due to 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% and 38% 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 $37.2 million at January 3, 1998,
compared with $23.4 million at December 28, 1996. Included in working
capital are cash and cash equivalents of $44.7 million at January 3,
1998, compared with $13.5 million at December 28, 1996.
During 1997, $3.9 million of cash was provided by operating
activities. During this period, cash of $2.2 million and $2.0 million was
used to fund increases in accounts receivable and inventories,
respectively, primarily relating to an order received from the FAA, which
provides for extended payment terms and resulted in inventory purchases.
This use of cash was offset in part by $1.7 million of cash provided by
an increase in other current liabilities, including $0.9 million of
accrued income taxes.
During 1997, the Company's investing activities included the
expenditure of $0.8 million for purchases of machinery, equipment, and
leasehold improvements. During 1998, the Company expects to make capital
expenditures of approximately $0.8 million.
The Company's financing activities provided $28.0 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. In
the first quarter of 1998, the Company expects to repay its $21.2 million
promissory note to Thermedics (Note 2).
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
29PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
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, additional debt or equity financing,
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.
30PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company wishes to caution
readers that the following important factors, among others, in some cases
have affected, and in the future could affect, the Company's actual
results and could cause its actual results in 1998 and beyond to differ
materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
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 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.
31PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Forward-looking Statements
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 (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 Ramport systems for use by airlines
in screening carry-on electronic items and luggage searches, however,
there can be no assurance that such FAA approvals will be obtained. Each
airline must seek this approval for each application. Although the FAA
has provided significant funding to the Company in connection with 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
32PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Forward-looking Statements
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 $13,939,000, $10,641,000, and $9,974,000, in
1997, 1996, and 1995, respectively, or 27%, 24%, and 36% 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 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
33PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Forward-looking Statements
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. In 1997,
1996, and 1995, international sales accounted for 71%, 67%, and 73%,
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 17% and 11% of the Company's revenues in 1997
and 1996, respectively. See Note 8 of Notes to the Company's Consolidated
Financial Statements. 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
34PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Forward-looking Statements
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
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.
35PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Forward-looking Statements
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 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
36PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Forward-looking Statements
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.
37PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Selected Financial Information
(In thousands except
per share amounts) 1997(a) 1996(b) 1995 1994 1993
------------------------------------------------------------------------
Statement of Income Data:
Revenues $51,320 $43,750 $27,954 $50,343 $42,031
Gross profit 26,789 21,247 12,718 25,437 18,272
Net income 6,070 362 1,508 6,380 5,803
Basic and diluted
earnings per share .48 .04 .15 .63 .58
Balance Sheet Data:
Working capital $37,219 $23,358 $11,273 $ 6,116 $ 447
Total assets 86,695 53,483 20,322 17,793 25,544
Long-term
obligation - 21,200 - - -
Shareholders'
investment 54,232 20,910 13,773 9,208 3,822
------------
(a)Reflects the March 1997 initial public offering of the Company's
common stock for net proceeds of $28.1 million.
(b)Reflects the January 1996 acquisition of Moisture Systems and Rutter
and the March and November 1996 private placements of the Company's
common stock for aggregate net proceeds of $7.0 million.
38PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange
under the symbol TDX. The following table sets forth the high and low
sale prices of the Company's common stock since February 24, 1997, the
date the Company's common stock began trading on that exchange, as
reported in the consolidated transaction reporting system:
1997
-------------------
Quarter High Low
----------------------------------------------------------------------
First $12 1/8 $10 7/8
Second 12 7/8 9 3/4
Third 12 3/8 9 3/16
Fourth 11 11/16 8 3/4
As of January 30, 1998, the Company had 325 holders of record of its
common stock. This does not include holdings in street or nominee names.
The closing market price on the American Stock Exchange for the Company's
common stock on January 30, 1998, was $8 5/8 per share.
Shareholder Services
Shareholders of Thermedics Detection Inc. who desire information
about the Company are invited to contact John N. Hatsopoulos, Chief
Financial Officer, Thermedics Detection Inc., 81 Wyman Street, P.O. Box
9046, Waltham, Massachusetts 02254-9046, (781) 622-1111. A mailing list
is maintained to enable shareholders whose stock is held in street name,
and other interested individuals, to receive quarterly reports, annual
reports, and press releases as quickly as possible. Distribution of
printed quarterly reports is limited to the second quarter only. All
material will be available through the Internet from Thermo Electron's
Internet site (http://www.thermo.com/subsid/tdx1.html).
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent
and maintains shareholder activity records. The agent will respond to
questions on issuance of stock certificates, change of ownership, lost
stock certificates, and change of address. For these and similar matters,
please direct inquiries to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Dividend Policy
The Company has never paid cash dividends and does not expect to pay
cash dividends in the foreseeable future because its policy has been to
use earnings to finance expansion and growth. Payment of dividends will
rest within the discretion of the Company's Board of Directors and will
depend upon, among other factors, the Company's earnings, capital
requirements, and financial condition.
39PAGE
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended
January 3, 1998, as filed with the Securities and Exchange Commission,
may be obtained at no charge by writing to John N. Hatsopoulos, Chief
Financial Officer, Thermedics Detection Inc., 81 Wyman Street, P.O. Box
9046, Waltham, Massachusetts 02254-9046.
Annual Meeting
The annual meeting of shareholders will be held on Monday, June 1,
1998, at 1:30 p.m. at the Hyatt Regency Hotel, Scottsdale, Arizona.
40<PAGE>
Exhibit 21
THERMEDICS DETECTION INC.
As of January 30, 1998, the Registrant owned the following subsidiaries:
STATE OR
JURISDICTION PERCENT
NAME OF OF
INCORPORATION OWNERSHIP
Detection Securities Corporation Massachusetts 100
Moisture Systems Corporation Ltd. United 100
Kingdom
Rutter & Co. Netherlands 100
Rutter Instrumentation S.A.R.L. France 90
Systech B.V. Netherlands 50
ThermedeTec Corporation Delaware 100
Thermedics Detection de Argentina S.A. Argentina 100
(1% of which shares are owned
directly by Thermedics Detection Inc.)
Thermedics Detection de Mexico, S.A. Mexico 100
de C.V.
Thermedics Detection GmbH Germany 100
Thermedics Detection Limited United 100
Kingdom
Thermedics Detection Scandinavia AS Norway 100
Exhibit 23.1
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the
incorporation by reference of our reports dated February 12, 1998,
included in or made a part of this Form 10-K, into Thermedics Detection
Inc.'s previously filed Registration Statement No. 333-28093 on Form S-8.
Arthur Andersen LLP
Boston, Massachusetts
March 13, 1998
Exhibit 23.2
Independent Auditors' Consent
-----------------------------
We consent to the incorporation by reference of our report dated
February 6, 1998, relating to the consolidated and parent company
financial statements of Rutter & Co. B.V. (not included separately
herein) included in or made a part of this Form 10-K, into the previously
filed Registration Statement No. 333-28093 on Form S-8 of Thermedics
Detection Inc.
Deloitte & Touche Registeraccountants
Almelo, The Netherlands
March 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONATAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS
DETECTION INC.'S ANNUAL REPORT ON FORM 10-K ON FOR THE YEAR ENDED JANUARY 3,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JAN-03-1998
<CASH> 44,735
<SECURITIES> 0
<RECEIVABLES> 11,936
<ALLOWANCES> 810
<INVENTORY> 10,249
<CURRENT-ASSETS> 69,682
<PP&E> 6,264
<DEPRECIATION> 4,846
<TOTAL-ASSETS> 86,695
<CURRENT-LIABILITIES> 32,463
<BONDS> 0
0
0
<COMMON> 1,336
<OTHER-SE> 52,896
<TOTAL-LIABILITY-AND-EQUITY> 86,695
<SALES> 37,754
<TOTAL-REVENUES> 51,320
<CGS> 17,243
<TOTAL-COSTS> 24,531
<OTHER-EXPENSES> 5,051
<LOSS-PROVISION> 116
<INTEREST-EXPENSE> 1,239
<INCOME-PRETAX> 9,950
<INCOME-TAX> 3,880
<INCOME-CONTINUING> 6,070
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,070
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
</TABLE>
