SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------
AMENDMENT NO. 1 ON FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported):
May 6, 1998
----------------------------------------
THERMEDICS DETECTION INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 1-12745 04-3106698
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification Number)
incorporation or
organization)
220 Mill Road
Chelmsford, Massachusetts 01824-4178
(Address of principal executive offices) (Zip Code)
(781) 622-1000
(Registrant's telephone number
including area code)
<PAGE>
FORM 8-K/A
Item 2. Acquisition or Disposition of Assets
On May 6, 1998, Thermedics Detection Inc. (the Company) acquired Orion
Research Inc. (Orion Research), a wholly owned subsidiary of Thermedics Inc.
(Thermedics), in exchange for the right to receive 5,961,225 shares of the
Company's common stock. Orion Research manufactures electrode-based
chemical-measurement products that determine the quality of a wide variety of
substances by measuring components, such as pH, ion, dissolved oxygen, and
conductivity levels. These products are used in the agricultural, biomedical
research, food-processing, and pharmaceutical industries.
The acquisition was made pursuant to an Agreement and Plan of Reorganization
dated as of May 6, 1998 (the Agreement), among the Company, Orion Acquisition
Inc., a wholly owned subsidiary of the Company (Acquisition), Thermedics and
Orion Research. Under the terms of the Agreement, (i) Acquisition will merge
with and into Orion Research, (ii) outstanding shares of Orion Research's common
stock will be cancelled and converted into the right to receive 5,961,225 shares
of the Company's common stock, (iii) each outstanding share of Acquisition's
common stock will be cancelled and converted into one share of the common stock
of Orion Research, and (iv) Orion Research will become a wholly owned subsidiary
of the Company.
The shares of the Company's common stock to be issued in connection with the
acquisition will be so issued as soon as such shares are listed for trading upon
the American Stock Exchange, Inc. The exchange requires that the listing be
approved by the holders of a majority of the Company's outstanding shares
present and voting at a shareholders' meeting. The meeting is expected to be
held before the end of fiscal 1998. Thermedics has agreed to vote all of the
shares of the Company's common stock held by it as of the record date of the
meeting in favor of the listing of the Company's shares and all matters related
thereto. Before giving effect to the issuance of the shares to be issued
pursuant to the Agreement, Thermedics owned approximately 77% of the outstanding
common stock of the Company. Giving effect to the issuance of such shares,
Thermedics owns approximately 84% of such outstanding common stock.
The consideration to be paid for Orion Research was based on the Company's
determination of the fair market value of Orion Research's business. Based on
the average of the closing prices of the Company's common stock as reported on
the American Stock Exchange for the five trading days ending on April 13, 1998
(the date preceding the Company's announcement of its intention to acquire Orion
Research), the shares to be issued to Thermedics had a value of $65,800,000
prior to such announcement.
<PAGE>
Because the Company and Orion Research were deemed for accounting purposes
to be under control of their common majority owner, Thermedics, the transaction
has been accounted for at historical cost in a manner similar to a pooling of
interests. Accordingly, the Company's financial statements (including the
financial statements included as part of the Company's Quarterly Report on Form
10-Q for the quarter ended April 4, 1998) include the results of Orion Research
from December 1, 1995, the date Orion Research was acquired by Thermedics, and
the shares issuable subject to listing on the Exchange have been deemed
outstanding from that date.
The Company has no present intention to use Orion Research's assets for
purposes materially different from the purposes for which such assets were used
prior to the acquisition. However, the Company will review Orion Research's
business and assets, corporate structure, capitalization, operations,
properties, policies, management and personnel and, upon completion of this
review, may develop alternative plans or proposals, including mergers, transfers
of a material amount of assets or other transactions or changes relating to such
business.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
Restated Exhibit 13 to the Registrant's Form 10-K for the year ended January
3, 1998 - Attached hereto.
(b) Pro Forma Financial Information
The pro forma financial information required by Form 8-K is not presented
due to the inclusion of the Restated Exhibit 13 to the Registrant's Form
10-K for the year ended January 3, 1998, attached hereto.
(c) Exhibits
2 Agreement and Plan of Reorganization dated as of May 6, 1998, by and
among the Company, Orion Acquisition Inc., Thermedics Inc., and Orion
Research Inc. (filed as Exhibit 2.3 to the Company's Quarterly Report on
Form 10-Q and incorporated herein by reference).
23 Consent of Arthur Andersen LLP.
<PAGE>
SIGNATURES
Pursuant to the requirements 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, on this 20th day of July, 1998.
THERMEDICS DETECTION INC.
By: Paul F. Kelleher
-------------------------
Paul F. Kelleher
Chief Accounting Officer
<PAGE>
ORION RESEARCH INC.
Consolidated Financial Statements
1997
<PAGE>
Orion Research Inc. 1997 Financial Statements
Report of Independent Public Accountants
To Orion Research Inc.:
We have audited the accompanying consolidated balance sheet of Orion
Research Inc. (a wholly owned subsidiary of Thermedics Inc.) and
subsidiaries as of January 3, 1998, and December 28, 1996, and the related
consolidated statements of income, shareholder's investment, and cash flows
for the fiscal years ended January 3, 1998, and December 28, 1996, and for
the period from December 1, 1995, through December 30, 1995. We have also
audited the accompanying statements of income, shareholder's investment, and
cash flows of the Orion Laboratory Products Division of Analytical
Technology Inc. (the Predecessor) for the period from January 1, 1995
through November 30, 1995. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orion
Research Inc. and subsidiaries as of January 3, 1998, and December 28, 1996,
and the results of their operations and their cash flows for the years ended
January 3, 1998, and December 28, 1996, and for the period from December 1,
1995 through December 30, 1995, and the results of operations and cash flows
of the Predecessor for the period from January 1, 1995, through November 30,
1995, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
April 27, 1998
2
<PAGE>
Orion Research Inc. 1997 Financial Statements
Consolidated Statement of Income
The Company Predecessor
------------------------------- -----------
Dec. 1, Jan. 1,
Fiscal Year Ended 1995 1995
------------------- through through
Jan. 3, Dec. 28, Dec. 30, Nov. 30,
(In thousands) 1998 1996 1995 1995
------------------------------------------------------------------------
Revenues (Note 7) $53,054 $50,854 $ 4,989 $43,165
------- ------- ------- -------
Costs and Operating Expenses:
Cost of revenues 21,864 23,107 2,216 18,308
Selling, general, and
administrative expenses
(Note 5) 15,871 16,106 1,337 15,379
Research and development
expenses 4,592 3,412 327 3,244
------- ------- ------- -------
42,327 42,625 3,880 36,931
------- ------- ------- -------
Operating Income 10,727 8,229 1,109 6,234
Interest Expense - - - 220
------- ------- ------- -------
Income Before Provision for
Income Taxes 10,727 8,229 1,109 6,014
Provision for Income Taxes
(Note 4) 4,291 3,292 444 2,206
------- ------- ------- -------
Net Income $ 6,436 $ 4,937 $ 665 $ 3,808
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
Orion Research Inc. 1997 Financial Statements
Consolidated Balance Sheet
The Company
---------------------
Jan. 3, Dec. 28,
(In thousands) 1998 1996
-----------------------------------------------------------------------
Assets
Current Assets:
Cash $ 1,617 $ 780
Accounts receivable, less allowances of
$317 and $240 7,097 8,201
Inventories 6,570 5,297
Prepaid income taxes (Note 4) 1,760 2,292
Prepaid expenses 538 418
------- -------
17,582 16,988
------- -------
Property, Plant, and Equipment, at Cost 4,433 3,388
Less: Accumulated depreciation and amortization 1,840 1,148
------- -------
2,593 2,240
------- -------
Cost in Excess of Net Assets of Acquired Companies 40,671 41,738
------- -------
Other Assets 724 1,609
------- -------
$61,570 $62,575
======= =======
Liabilities and Shareholder's Investment
Current Liabilities:
Accounts payable $ 1,975 $ 1,758
Accrued payroll and employee benefits 2,426 1,927
Accrued income taxes 776 682
Accrued acquisition expenses (Note 2) - 565
Accrued commissions 628 427
Other accrued expenses 2,530 2,521
Due to affiliated companies 121 151
------- -------
8,456 8,031
------- -------
Commitments and Contingencies (Note 6)
Shareholder's Investment:
Net parent company investment 53,100 54,509
Cumulative translation adjustment 14 35
------- -------
53,114 54,544
------- -------
$61,570 $62,575
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Orion Research Inc. 1997 Financial Statements
Consolidated Statement of Cash Flows
The Company Predecessor
------------------------------- -----------
Dec. 1, Jan. 1,
Fiscal Year Ended 1995 1995
------------------- through through
Jan. 3, Dec. 28, Dec. 30, Nov. 30,
(In thousands) 1998 1996 1995 1995
------------------------------------------------------------------------
Operating Activities:
Net income $ 6,436 $ 4,937 $ 665 $ 3,808
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 1,765 2,002 198 1,632
Provision for losses
on accounts
receivable 85 60 5 78
Increase (decrease)
in deferred income
taxes (Note 4) 1,411 1,045 (316) 414
Other noncash expenses 92 102 11 255
Changes in current
accounts:
Accounts receivable 1,019 (794) (256) (690)
Inventories (1,338) 1,029 (259) (2,007)
Other current assets (120) (142) 278 101
Accounts payable 217 (1,310) (60) 362
Other current
liabilities 189 535 (684) 5,701
-------- -------- -------- --------
Net cash provided by
(used in) operating
activities 9,756 7,464 (418) 9,654
-------- -------- -------- --------
Investing Activities:
Purchases of property,
plant, and equipment (1,057) (1,842) (20) (228)
Transfers to affiliates - - - (4,794)
Other - - (34) -
-------- -------- -------- --------
Net cash used in investing
activities (1,057) (1,842) (54) (5,022)
-------- -------- -------- --------
5
<PAGE>
Orion Research Inc. 1997 Financial Statements
Consolidated Statement of Cash Flows (continued)
The Company Predecessor
------------------------------- -----------
Dec. 1, Jan. 1,
Fiscal Year Ended 1995 1995
------------------- through through
Jan. 3, Dec. 28, Dec. 30, Nov. 30,
(In thousands) 1998 1996 1995 1995
------------------------------------------------------------------------
Financing Activities:
Transfers (to) from
parent company $ (7,845) $ (5,924) $ 1,318 $ -
Payments under long-term
and capital lease
obligations - - - (4,727)
Otther - (159) - -
-------- -------- -------- --------
Net cash provided by (used
in) financing activities (7,845) (6,083) 1,318 (4,727)
-------- -------- -------- --------
Exchange Rate Effect on Cash (17) 86 (44) 446
-------- -------- -------- --------
Increase (Decrease) in Cash 837 (375) 802 351
Cash at Beginning of Period 780 1,155 353 2
-------- -------- -------- --------
Cash at End of Period $ 1,617 $ 780 $ 1,155 $ 353
======== ======== ======== ========
Cash Paid For:
Income taxes $ 877 $ 704 $ 704 $ -
Interest - - - 220
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Orion Research Inc. 1997 Financial Statements
Consolidated Statement of Shareholder's Investment
Cumulative Net Parent
Translation Company
(In thousands) Adjustment Investment
-----------------------------------------------------------------------
PREDECESSOR
Balance December 31, 1994 $(3,062) $23,963
Net income - 3,808
Translation adjustment 446 -
------- -------
Balance November 30, 1995 (2,616) 27,771
THE COMPANY
Net equity investment by parent company in
excess of the net assets of the Predecessor 2,616 25,742
Net income - 665
Net transfer from parent company - 1,318
Translation adjustment (54) -
------- -------
Balance December 30, 1995 (54) 55,496
Net income - 4,937
Net transfer to parent company - (5,924)
Translation adjustment 89 -
------- -------
Balance December 28, 1996 35 54,509
Net income - 6,436
Net transfer to parent company - (7,845)
Translation adjustment (21) -
------- -------
Balance January 3, 1998 $ 14 $53,100
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
Orion Research Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Orion Research Inc. (the Company) manufactures electrode-based
chemical-measurement products that determine the quality of a wide variety of
substances by measuring components, such as pH, ion, dissolved oxygen, and
conductivity levels and are used in the agricultural, biomedical research,
food-processing, and pharmaceutical industries.
Relationship with Thermedics Inc. and Thermo Electron Corporation
In December 1995, Thermedics Inc. acquired the Orion Laboratory
Products Division (the Predecessor) of Analytical Technology Inc. (ATI) for
$44,139,000 in cash and the assumption of approximately $8,600,000 of
indebtedness. The borrowings were under a revolving credit agreement under
which borrowings could be made in various currencies with interest at a base
or LIBOR rate, as defined, for each currency, plus a spread which varied
based on operating performance. The accompanying financial statements include
the assets, liabilities, income, and expenses of the Company as included in
Thermedics' consolidated financial statements. The accompanying financial
statements do not include Thermedics' general corporate debt, which is used
to finance operations of all of its respective business segments, or an
allocation of Thermedics' interest expense. As of January 3, 1998, Thermedics
is a 58%-owned subsidiary of Thermo Electron Corporation. The Company has had
positive cash flows from operations for all periods presented.
Principles of Consolidation
The accompanying 1997 financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Fiscal Year and Periods Presented
The Company has adopted a fiscal year ending the Saturday nearest
December 31. The Predecessor also had a fiscal year ending the Saturday
nearest December 31. The accompanying financial statements include the
Predecessor's financial results for the period from January 1, 1995, through
November 30, 1995. The accompanying financial statements include the
Company's financial results for the period from December 1, 1995, the date
the Company was acquired by Thermedics, through December 30, 1995, and the
fiscal years ended December 28, 1996, (fiscal 1996) and January 3, 1998
(fiscal 1997). Fiscal 1997 and fiscal 1996 included 53 weeks and 52 weeks,
respectively.
Revenue Recognition
The Company recognizes revenues upon shipment of its products. The
Company provides a reserve for its estimate of warranty and installation
costs at the time of shipment. The Company recognizes service revenue over
the term of the contract.
Income Taxes
The Company and Thermedics have a tax allocation agreement under which
the Company is included in Thermedics consolidated federal and certain state
income tax returns. The agreement provides that in years in which the Company
has taxable income, it will pay to Thermedics amounts
8
<PAGE>
Orion Research Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
comparable to the taxes the Company would have paid if it had filed
separate tax returns.
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes," the Company recognizes deferred
income taxes based on the expected future tax consequences of differences
between the financial statement basis and the tax basis of assets and
liabilities, calculated using enacted tax rates in effect for the year in
which the differences are expected to be reflected in the tax return.
Cash
The cash receipts and disbursements of the Company's domestic operations
are combined with other Thermedics corporate cash transactions and balances.
Therefore, cash of the Company's domestic operations is not included in the
accompanying balance sheet.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out, or
weighted average basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are as follows:
The Company
-----------------
Jan. 3, Dec. 28,
(In thousands) 1998 1996
-----------------------------------------------------------------------
Raw materials $4,275 $2,685
Work in process and finished goods 2,295 2,612
------ ------
$6,570 $5,297
====== ======
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while
maintenance and repairs are charged to expense as incurred. The Company
provides for depreciation and amortization using the straight-line method
over the estimated useful lives of the property, as follows: buildings, 25
years; machinery and equipment, 3 to 7 years; and leasehold
9
<PAGE>
Orion Research Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
improvements, the shorter of the term of the lease or the life of the
asset. Property, plant, and equipment consist of the following:
The Company
-----------------
Jan. 3, Dec. 28,
(In thousands) 1998 1996
-----------------------------------------------------------------------
Land $ 41 $ 41
Buildings 209 214
Machinery, equipment, and leasehold improvements 4,183 3,133
------ ------
4,433 3,388
Less: Accumulated depreciation and amortization 1,840 1,148
------ ------
$2,593 $2,240
====== ======
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired
companies is amortized using the straight-line method over 40 years.
Accumulated amortization was $2,216,000 and $1,149,000 at January 3, 1998,
and December 28, 1996, respectively. The Company assesses the future useful
life of this asset whenever events or changes in circumstances indicate that
the current useful life has diminished. The Company considers the future
undiscounted cash flows of the acquired businesses in assessing the
recoverability of this asset. If impairment has occurred, any excess of
carrying value over fair value is recorded as a loss.
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are
translated at average exchange rates for the year in accordance with SFAS No.
52, "Foreign Currency Translation." Resulting translation adjustments are
reflected as a separate component of shareholder's investment, titled
"Cumulative translation adjustment." Foreign currency transaction gains and
losses are included in the accompanying statement of income and are not
material for each of the periods presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
10
<PAGE>
Orion Research Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash, accounts
receivable, accounts payable, and due to affiliated companies, which
approximate fair value due to their short-term nature.
2. Acquisition and Basis of Accounting
In December 1995, Thermedics acquired the predecessor for $52,724,000 in
cash, which included the repayment of approximately $8,600,000 of long-term
indebtedness. The borrowings were under a revolving credit agreement under
which borrowings could be made in various currencies with interest at a base
or LIBOR rate, as defined, for each currency, plus a spread which varied
based on operating performance. The acquisition was accounted for as a
purchase, and Thermedics' new basis of accounting is reflected as of December
1, 1995.
The purchase price exceeded the tangible net assets acquired by
$42,681,000, which is being amortized over 40 years. The purchase price was
allocated based on estimates of the fair value of the net assets acquired.
In connection with its acquisition by Thermedics, the Company established
reserves totaling $1,460,000 for restructuring certain business activities in
accordance with Emerging Issues Task Force Pronouncement 95-3. The reserves
were primarily for severance payments. During fiscal 1997 and 1996, the
Company expended $895,000 and $565,000 of such reserves.
11
<PAGE>
Orion Research Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans
401(k) Savings Plan
Substantially all of the Company's full-time U.S. employees are
eligible to participate in Thermo Electron's 401(k) savings plan. Prior
to December 1, 1995, eligible employees of the Predecessor participated
in ATI's 401(k) savings plan. Contributions to the 401(k) savings plan
are made by both the employee and the Company or Predecessor. Company and
Predecessor contributions to the 401(k) plan are based upon the level of
employee contributions. Contributions charged to expense were $309,000
for fiscal 1997, $372,000 for fiscal 1996, $20,000 for the period from
December 1, 1995 to December 30, 1995, and $249,000 for the period from
January 1, 1995 to November 30, 1995.
4. Income Taxes
The components of income before provision for income taxes are as
follows:
The Company Predecessor
------------------------------- -----------
Dec. 1, Jan. 1,
Fiscal Year Ended 1995 1995
------------------- through through
Jan. 3, Dec. 28, Dec. 30, Nov. 30,
(In thousands) 1998 1996 1995 1995
------------------------------------------------------------------------
Domestic $ 7,040 $ 5,099 $ 591 $ 4,014
Foreign 3,687 3,130 518 2,000
------- ------- ------- -------
$10,727 $ 8,229 $ 1,109 $ 6,014
======= ======= ======= =======
The components of the provision for income taxes are as follows:
The Company Predecessor
------------------------------- -----------
Dec. 1, Jan. 1,
Fiscal Year Ended 1995 1995
------------------- through through
Jan. 3, Dec. 28, Dec. 30, Nov. 30,
(In thousands) 1998 1996 1995 1995
------------------------------------------------------------------------
Currently payable:
Federal $ 1,333 $ 815 $ 512 $ 1,803
State 660 668 134 1,049
Foreign 887 764 114 440
------- ------- ------- -------
2,880 2,247 760 3,292
------- ------- ------- -------
(Prepaid) Deferred:
Federal 1,362 1,191 (245) (424)
State 49 (146) (71) (662)
------- ------- ------- -------
1,411 1,045 (316) (1,086)
------- ------- ------- -------
$ 4,291 $ 3,292 $ 444 $ 2,206
======= ======= ======= =======
12
<PAGE>
Orion Research Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
4. Income Taxes (continued)
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal
income tax rate of 35% to income before provision for income taxes due to the
following:
The Company Predecessor
------------------------------- -----------
Dec. 1, Jan. 1,
Fiscal Year Ended 1995 1995
------------------- through through
Jan. 3, Dec. 28, Dec. 30, Nov. 30,
(In thousands) 1998 1996 1995 1995
------------------------------------------------------------------------
Provision for income taxes
at statutory rate $ 3,754 $ 2,880 $ 388 $ 2,105
Increases (decreases)
resulting from:
State income taxes, net
of federal tax 461 339 41 306
Amortization of cost in
excess of net assets of
acquired companies 397 391 28 -
Foreign tax rate
differential (403) (332) (67) (260)
Foreign sales corporation
benefit (114) (141) - -
Nondeductible expenses
and other 196 155 54 55
------- ------- ------- -------
$ 4,291 $ 3,292 $ 444 $ 2,206
======= ======= ======= =======
Short- and long-term prepaid income taxes in the accompanying balance
sheet consist of the following:
The Company
-------------------
Jan. 3, Dec. 28
(In thousands) 1998 1996
------------------------------------------------------------------------
Prepaid income taxes:
Depreciation and amortization $ 364 $ 673
Reserves and other accruals 975 1,050
Inventory basis difference 463 795
Tax loss and credit carryforwards 884 1,454
Other, net (249) (124)
------- -------
$ 2,437 $ 3,848
======= =======
A provision has not been made for U.S. or additional foreign taxes on
$1,000,000 of undistributed earnings of foreign subsidiaries that could be
subject to taxation if remitted to the U.S. because the Company currently
plans to keep these amounts permanently reinvested overseas.
13
<PAGE>
Orion Research Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
5. Related Party Transactions
Corporate Services Agreement
Under a corporate services agreement between Thermedics and Thermo
Electron under which Thermo Electron's corporate staff provides certain
administrative services, including certain legal advice and services, risk
management, certain employee benefit administration, tax advice and
preparation of tax returns, centralized cash management, and certain
financial and other services, for which the Company paid Thermo Electron
annually an amount equal to 1.0% of the Company's revenues in 1997 and 1996,
and an amount equal to 1.20% of the Company's revenues in 1995. Beginning in
fiscal 1998, the Company will pay an annual fee equal to 0.8% of the
Company's revenues. The annual fee is reviewed and adjusted annually by
mutual agreement of the parties. The corporate services agreement is renewed
annually but can be terminated upon 30 days' prior notice by Thermedics or
upon Thermedics withdrawal from the Thermo Electron Corporate Charter (the
Thermo Electron Corporate Charter defines the relationship among Thermo
Electron and its majority-owned subsidiaries). For these services, the
Company was charged $531,000 and $509,000 for fiscal 1997 and 1996,
respectively, and $62,000 for the period from December 1, 1995 to December
30, 1995. Management believes that the service fees charged by Thermo
Electron are reasonable and that such fees are representative of the expenses
the Company would have incurred on a stand-alone basis. For additional items
such as employee benefit plans, insurance coverage, and other identifiable
costs, Thermo Electron charges the Company based upon costs attributable to
the Company.
6. Commitments and Contingencies
Commitments
The Company leases portions of its manufacturing and office facilities
under various operating lease arrangements. The accompanying statement of
income includes expenses from operating leases of $906,000, $1,392,000,
$131,000 and $1,437,000 for fiscal 1997 and 1996, the period from December 1,
1995 through December 30, 1995, and the period from January 1, 1995 through
November 30, 1995, respectively. Total future minimum payments due under
noncancelable operating leases at January 3, 1998 are $912,000 in 1998;
$723,000 in 1999; $640,000 in 2000; $571,000 in 2001; $642,000 in 2002; and
$2,568,000 in 2003 and thereafter. Total future minimum lease payments are
$6,056,000.
Contingencies
The Company is contingently liable with respect to lawsuits and other
matters that arose in the ordinary course of business. In the opinion of
management, these contingencies will not have a material adverse effect upon
the financial position of the Company or its results of operations.
14
<PAGE>
Orion Research Inc. 1997 Financial Statements
Notes to Consolidated Financial Statements
7. Significant Customers and Export Sales
Sales to one customer accounted for 18%, 17%, and 13% and sales to a
second customer accounted for 18%, 13%, and 11% of total revenues for fiscal
1997 and 1996, and for the period from January 1, 1995 through November 30,
1995, respectively.
Export revenues to Asia accounted for 12%, 11%, 10%, and 11% of the
Company's total revenues for fiscal 1997 and 1996, the period from December
1, 1995 through December 30, 1995, and the period from January 1, 1995
through November 30, 1995, respectively. Export revenues to Europe accounted
for 11%, 11%, 11%, and 12% of the Company's total revenues for fiscal 1997
and 1996, the period from December 1, 1995 through December 30, 1995, and the
period from January 1, 1995 through November 30, 1995, respectively. Other
export revenues accounted for 9%, 7%, 5%, and 8% of the Company's total
revenues for fiscal 1997 and 1996, the period from December 1, 1995 through
December 30, 1995, and the period from January 1, 1995 through November 30,
1995, respectively. In general, export sales are denominated in U.S. dollars.
8. Subsequent Event
In April 1998, Thermedics agreed to sell the Company to Thermedics
Detection Inc., one of its publicly held, majority-owned subsidiaries, for
5,961,225 shares of Thermedics Detection common stock.
<PAGE>
THERMEDICS DETECTION INC.
Consolidated Financial Statements
1997
<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 $ 89,264 $ 80,557 $ 23,298
Service revenues 15,110 14,047 9,645
-------- -------- --------
104,374 94,604 32,943
-------- -------- --------
Costs and Operating Expenses:
Cost of product revenues (Note 6) 38,694 37,857 12,065
Cost of service revenues 7,701 7,753 5,387
Selling, general, and administrative
expenses (Note 6) 28,515 31,198 8,824
Research and development expenses 9,643 8,100 3,068
-------- -------- --------
84,553 84,908 29,344
-------- -------- --------
Operating Income 19,821 9,696 3,599
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 20,677 8,818 3,527
Provision for Income Taxes (Note 4) 8,171 3,519 1,354
-------- -------- --------
Net Income $ 12,506 $ 5,299 $ 2,173
======== ======== ========
Basic and Diluted Earnings per Share
(Note 9) $ .67 $ .33 $ .21
======== ======== ========
Weighted Average Shares (Note 9):
Basic 18,721 16,236 10,491
======== ======== ========
Diluted 18,732 16,253 10,494
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Consolidated Balance Sheet
(In thousands) 1997 1996
- --------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents (includes $40,043
and $10,976 under repurchase agreement
with affiliated company) $ 46,352 $ 14,264
Accounts receivable, less allowances of $1,127
and $1,455 18,223 17,588
Inventories 16,819 14,090
Unbilled contract costs and fees 836 307
Prepaid and refundable income taxes (Note 4) 3,595 4,465
Prepaid expenses 1,439 965
-------- --------
87,264 51,679
-------- --------
Property, Plant, and Equipment, at Cost, Net 4,011 4,024
-------- --------
Cost in Excess of Net Assets of Acquired Companies
(Note 2) 55,792 58,432
-------- --------
Other Assets 1,198 1,923
-------- --------
$148,265 $116,058
======== ========
3
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Consolidated Balance Sheet
(In thousands except share amounts) 1997 1996
- --------------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Promissory note to parent company (Note 2) $ 21,200 $ -
Accounts payable 3,868 4,788
Accrued income taxes 2,331 1,016
Deferred revenue 1,689 1,281
Accrued payroll and employee benefits 3,852 3,302
Accrued installation and warranty expenses 1,154 1,714
Customer deposits 782 637
Other accrued expenses 4,628 6,314
Due to parent company and affiliated companies 1,415 312
-------- --------
40,919 19,364
-------- --------
Deferred Income Taxes (Note 4) - 40
-------- --------
Promissory Note to Parent Company (Note 2) - 21,200
-------- --------
Commitments (Note 5)
Shareholders' Investment (Notes 3, 7, and 11):
Common stock, $.10 par value, 50,000,000 shares
authorized; 19,316,684 and 16,645,725 pro forma
shares issued and outstanding 1,932 1,664
Capital in excess of par value 93,755 67,043
Retained earnings 13,206 7,136
Cumulative translation adjustment (1,547) (389)
-------- --------
107,346 75,454
-------- --------
$148,265 $116,058
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 12,506 $ 5,299 $ 2,173
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,287 4,366 1,357
Provision for losses on accounts
receivable 201 642 103
Other noncash expense 376 1,906 738
Decrease in deferred income taxes 1,371 1,045 (356)
Changes in current accounts,
excluding the effects of
acquisitions:
Accounts receivable (1,134) (2,570) 795
Unbilled contract costs and
fees (549) 845 (931)
Inventories (3,298) 2,283 (3,472)
Other current assets (52) (741) 162
Accounts payable (884) (552) 122
Other current liabilities 1,870 1,580 (3,076)
-------- -------- --------
Net cash provided by (used in) operating
activities 13,694 14,103 (2,385)
-------- -------- --------
Investing Activities:
Acquisitions (Note 2) - (21,668) -
Acquisition of product line (Note 2) - (300) -
Purchases of machinery, equipment, and
leasehold improvements (1,832) (2,608) (628)
Proceeds from sale of machinery,
equipment, and leasehold improvements 28 113 19
Other 82 - -
-------- -------- --------
Net cash used in investing activities (1,722) (24,463) (609)
-------- -------- --------
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
Orion transfers (to) from Thermedics (7,845) (5,924) 1,318
Other (61) (174) -
-------- -------- --------
Net cash provided by financing
activities $ 20,172 $ 22,186 $ 4,488
-------- -------- --------
5
<PAGE>
Thermedics Detection Inc. 1997 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------
Exchange Rate Effect on Cash $ (56) $ 1 $ (182)
-------- -------- --------
Increase in Cash and Cash Equivalents 32,088 11,827 1,312
Cash and Cash Equivalents at Beginning
of Year 14,264 2,437 1,125
-------- -------- --------
Cash and Cash Equivalents at End
of Year $ 46,352 $ 14,264 $ 2,437
======== ======== ========
Cash Paid For:
Interest $ 609 $ 596 $ -
Income taxes $ 3,057 $ 1,322 $ 856
Noncash Activities (Note 11):
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.
6
<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 $ 1,664 $ 1,596 $ 1,000
Net proceeds from issuance of Company
common stock (Note 7) 268 68 -
Company common stock issuable for the
acquisition of Orion (Note 11) - - 596
-------- -------- --------
Balance at end of year 1,932 1,664 1,596
-------- -------- --------
Capital in Excess of Par Value
Balance at beginning of year 67,043 60,349 2,814
Issuance of stock under employees'
and directors' stock plans 6 - -
Tax benefit related to employees' and
directors' stock plans 305 - -
Net proceeds from issuance of Company
common stock (Note 7) 27,810 6,896 -
Additional capital contributions - 120 3,300
Orion transfers (to) from Thermedics (1,409) (322) 1,318
Company common stock issuable for the
acquisition of Orion (Note 11) - - 52,917
-------- -------- --------
Balance at end of year 93,755 67,043 60,349
-------- -------- --------
Retained Earnings
Balance at beginning of year 7,136 7,439 5,396
Net income 12,506 5,299 2,173
Transfer to parent company, net - - (130)
Orion transfers to Thermedics (6,436) (5,602) -
-------- -------- --------
Balance at end of year 13,206 7,136 7,439
-------- -------- --------
Cumulative Translation Adjustment
Balance at beginning of year (389) (169) (2)
Translation adjustment (1,158) (220) (167)
-------- -------- --------
Balance at end of year (1,547) (389) (169)
-------- -------- --------
Total Shareholders' Investment $107,346 $ 75,454 $ 69,215
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<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. The Company's Orion
Research Inc. subsidiary manufactures electrode-based chemical-measurement
products that determine the quality of a wide variety of substances by measuring
components, such as pH, ion, dissolved oxygen, and conductivity levels and are
used in the agricultural, biomedical research, food processing, and
pharmaceutical industries.
Relationship with Thermedics Inc. and Thermo Electron Corporation
The Company operated as a division of Thermedics Inc. until its
incorporation as a Massachusetts corporation in December 1990. In connection
with the Company's incorporation, Thermedics transferred to the Company its TEA
Analyzer and certain other trace detection technologies in exchange for
10,000,000 shares of the Company's common stock. As of January 3, 1998,
Thermedics owned 16,088,900 shares of the Company's pro forma outstanding common
stock, representing 83% of such pro forma stock outstanding (as adjusted to
reflect 5,961,225 shares of the Company's common stock issuable to Thermedics
for the acquisition of Orion; Note 11). As of January 3, 1998, Thermedics is a
58%-owned subsidiary of Thermo Electron Corporation.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated. Certain amounts in fiscal 1996 have been
reclassified to conform to the fiscal 1997 financial statement presentation.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1997, 1996, and 1995 are for the fiscal years ended January 3,
1998, December 28, 1996, and December 30, 1995, respectively. Fiscal year 1997
included 53 weeks; 1996 and 1995 each included 52 weeks.
8
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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 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.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Earnings per Share
During the fourth quarter of 1997, the Company adopted SFAS No. 128,
"Earnings per Share" (Note 9). As a result, all previously reported earnings per
share have been restated. Basic earnings per share have been computed by
dividing net income by the weighted average number of shares outstanding during
the year. Diluted earnings per share have been computed assuming the exercise of
stock options, as well as their related income tax effects.
Stock Split
In March 1996, the Company declared and effected a two-for-three reverse
stock split. All share and per share information reflects the reverse stock
split.
Cash and Cash Equivalents
At year-end 1997 and 1996, $40,043,000 and $10,976,000, respectively, of the
Company's cash equivalents were invested in a repurchase agreement with Thermo
Electron. Under this agreement, the Company in effect lends excess cash to
Thermo Electron, which Thermo Electron collateralizes with 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 $ 9,698 $ 8,820
Work in process 1,599 1,350
Finished goods 5,522 3,920
------- -------
$16,819 $14,090
======= =======
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: buildings, 25 years; machinery and
equipment, three to ten years; and leasehold improvements, the lesser of the
term of the lease or the life of the asset.
(In thousands) 1997 1996
- --------------------------------------------------------------------------
Land and buildings $ 250 $ 255
Machinery, equipment, and leasehold improvements 10,447 8,816
------- -------
10,697 9,071
Less: Accumulated depreciation and amortization 6,686 5,047
------- -------
$ 4,011 $ 4,024
======= =======
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired
companies is amortized using the straight-line method over 40 years. Accumulated
amortization was $3,021,000 and $1,552,000 at January 3, 1998, and December 28,
1996, respectively. The Company assesses the future useful life of this asset
whenever events or changes in circumstances indicate that the current useful
life has diminished. The Company considers the future undiscounted cash flows of
the acquired companies in assessing the recoverability of this asset. If
impairment has occurred, any excess of carrying value over fair value is
recorded as a loss.
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
11
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
approximate fair value due to their short-term nature, except for the promissory
note to parent company. The carrying amount of the promissory note to parent
company approximates fair value due to its variable interest rate.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
The historical information for all periods presented has been restated to
reflect the May 6, 1998, acquisition of Orion (Note 11). Because the Company and
Orion were deemed for accounting purposes to be under control of their common
majority owner, Thermedics, since December 1, 1995, the date Thermedics acquired
Orion, the transaction has been accounted for at historical cost in a manner
similar to a pooling of interests for the period under common control.
2. Acquisitions
- ----------------------------------------------------------------------------
On January 25, 1996, the Company acquired the assets of Moisture Systems
Corporation and certain affiliated companies (collectively, Moisture Systems),
and the stock of Rutter & Co. B.V. (Rutter) for a total purchase price of
$21,668,000 in cash, which included the repayment of $700,000 of debt. Moisture
Systems and Rutter design, manufacture, and sell instruments that use
near-infrared spectroscopy to measure moisture and other product constituents,
including fats, proteins, oils, flavorings, solvents, adhesives, and coatings,
in a variety of manufacturing processes. These systems are used in the food,
pharmaceutical, chemical, pulp and paper, and other industries. To finance these
acquisitions, the 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
12
<PAGE>
2.Acquisitions (continued)
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 $96,151 $51,474
Net income 5,457 2,461
Basic and diluted earnings per share .34 .23
The pro forma results are not necessarily indicative of future operations or
the actual results that would have occurred had the acquisitions of Moisture
Systems and Rutter been made at the beginning of 1995.
3. Employee Benefit Plans
- ----------------------------------------------------------------------------
Stock-based Compensation Plans
Stock Option Plan
The Company has a stock-based compensation plan for its key employees,
directors, and others, which permits the grant of a variety of stock and
stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted stock,
stock options, stock bonus shares, or performance-based shares. The option
recipients and the terms of options granted under this plan are determined by
the Board Committee. To date, only nonqualified stock options have been granted
by the Board Committee under this plan. Options granted prior to the Company's
initial public offering became exercisable in June 1997, but are subject to
certain transfer restrictions and the right of the Company to repurchase shares
issued upon exercise of the options at the exercise price, upon certain events.
The restrictions and repurchase rights generally lapse ratably over a five- to
ten-year period, depending on the term of the option, which generally ranges
from seven to twelve years. Nonqualified stock options may be granted at any
price determined by the Board Committee, although incentive stock options must
be granted at not less than the fair market value of the Company's common stock
on the date of grant. To date, all options have been granted at fair market
value.
13
<PAGE>
3. Employee Benefit Plans (continued)
- ----------------------------------------------------------------------------
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.
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.
14
<PAGE>
3. Employee Benefit Plans (continued)
- ----------------------------------------------------------------------------
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 $12,506 $5,299
Pro forma 11,794 4,908
Basic and diluted earnings per share:
As reported .67 .33
Pro forma .63 .30
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.
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.
15
<PAGE>
3. Employee Benefit Plans (continued)
- ----------------------------------------------------------------------------
401(k) Savings Plan
Substantially all of the Company's full-time U.S. employees are eligible to
participate in Thermo Electron's 401(k) savings plan. Contributions to the
401(k) savings plan are made by both the employee and the Company. Company
contributions are based upon the level of employee contributions. For this plan,
the Company contributed and charged to expense $611,000, $619,000, and $253,000
in 1997, 1996, and 1995, respectively.
Defined Benefit Pension Plan
The Company's Rutter subsidiary, acquired in January 1996, has a defined
benefit pension plan covering substantially all of its full-time employees. The
Company's funding policy is to make contributions within a range required by
applicable regulations in The Netherlands.
Net periodic pension costs included the following components:
(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
==== ====
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
==== ====
16
<PAGE>
3. Employee Benefit Plans (continued)
- ----------------------------------------------------------------------------
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 $15,051 $ 3,357 $ 2,788
Foreign 5,626 5,461 739
------- ------- -------
$20,677 $ 8,818 $ 3,527
======= ======= =======
The components of the provision for income taxes are as follows:
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------
Currently payable:
Federal $3,716 $ 465 $1,193
State 1,285 578 300
Foreign 1,512 1,456 208
------ ------ ------
6,513 2,499 1,701
------ ------ ------
Net deferred (prepaid):
Federal 1,467 996 (270)
State 75 (180) (77)
Foreign 116 204 -
------ ------ ------
1,658 1,020 (347)
------ ------ ------
$8,171 $3,519 $1,354
====== ====== ======
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.
17
<PAGE>
4. Income Taxes (continued)
- ----------------------------------------------------------------------------
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 34% to income before provision for income taxes due to the
following:
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------
Provision for income taxes at statutory
rate $7,030 $2,998 $1,199
Increases (decreases) resulting from:
State income taxes, net of federal tax 891 258 147
Amortization of cost in excess of net
assets of acquired companies 432 424 33
Foreign tax rate and tax law differential (321) (229) (48)
Tax benefit of foreign sales corporation (289) (141) (133)
Deemed dividend from foreign subsidiary - - 80
Other, net 428 209 76
------ ------ ------
$8,171 $3,519 $1,354
====== ====== ======
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 $2,009 $1,974
Inventory basis difference 1,615 1,106
Long-term assets 188 (40)
Accrued compensation 56 130
Depreciation and amortization 673 364
Tax loss and credit carryforwards 1,454 884
Other, net (124) (217)
------ ------
$5,871 $4,201
====== ======
A provision has not been made for U.S. or additional foreign taxes on
$4,415,000 of undistributed earnings of foreign subsidiaries that could be
subject to taxation if remitted to the U.S. because the Company currently plans
to keep these amounts permanently reinvested overseas.
5. Commitments
- ----------------------------------------------------------------------------
The Company leases portions of its office and operating facilities under
various operating lease arrangements. The accompanying statement of income
includes expenses from operating leases of $1,984,000, $2,727,000, and $673,000
in 1997, 1996, and 1995, respectively, net of third party sublease income of
$181,000 in 1997. Total future minimum payments due under noncancelable
operating leases at January 3, 1998, are $2,113,000
18
<PAGE>
5. Commitments (continued)
- ----------------------------------------------------------------------------
in 1998; $1,762,000 in 1999; $1,518,000 in 2000; $1,350,000 in 2001; $1,439,000
in 2002; and $5,486,000 in 2003 and thereafter. Total future minimum lease
payments are $13,668,000 and have not been reduced by minimum sublease rental
income of $1,160,000 due through 2002 under noncancelable operating subleases.
See Note 6 for office and manufacturing space leased from a related party.
6. Related-party Transactions
- ----------------------------------------------------------------------------
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company paid Thermo Electron an annual fee equal to 1.0% of the Company's
revenues in 1997 and 1996, and an amount equal to 1.20% of the Company's
revenues in 1995. Beginning in fiscal 1998, the Company will pay an annual fee
equal to 0.8% of the Company's revenues. The annual fee is reviewed and adjusted
annually by mutual agreement of the parties. Management believes that the
service fee charged by Thermo Electron is reasonable and that such fees are
representative of the expenses the Company would have incurred on a stand-alone
basis. The corporate services agreement is renewed annually but can be
terminated upon 30 days' prior notice by the Company or upon the Company's
withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron
Corporate Charter defines the relationship among Thermo Electron and its
majority-owned subsidiaries). In addition, the Company uses contract
administration services of a majority-owned subsidiary of Thermo Electron and is
charged based on actual usage. For these services, as well as the administrative
services provided by Thermo Electron, the Company was charged $1,110,000,
$947,000, and $397,000 in 1997, 1996, and 1995, respectively. For additional
items such as employee benefit plans, insurance coverage, and other identifiable
costs, Thermo Electron charges the Company based upon costs attributable to the
Company.
Research and Development Agreement
Pursuant to a subcontract entered into in October 1993, the Company performs
research and development services for Thermo Coleman Corporation, which is the
prime contractor under a contract with the U.S. Department of Energy. Thermo
Coleman is a wholly owned subsidiary of Thermo Electron. Thermo Coleman paid the
Company $533,000, $619,000, and $829,000 for services rendered in 1997, 1996,
and 1995, respectively.
Distribution Agreement
Pursuant to an international distributorship agreement, the Company
appointed Arabian Business Machines Co. (ABM) as its exclusive distributor of
the Company's security instruments in certain Middle
19
<PAGE>
6. Related-party Transactions (continued)
- ----------------------------------------------------------------------------
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.
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.
20
<PAGE>
8. Significant Customer, Product Lines, and Geographical Information
- ----------------------------------------------------------------------------
Sales to one customer accounted for 13%, 11%, and 31% of the Company's total
revenues in 1997, 1996, and 1995, respectively.
The Company is engaged in one business segment: the development,
manufacture, and sale of high-speed detection and measurement systems used in
on-line industrial process applications, security applications, and laboratory
analysis. Within the Company's process detection product line, the Company
derived revenues of $19,198,000, $14,917,000, and $18,488,000 in 1997, 1996, and
1995, respectively, from Alexus(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. The Company derived revenues from its laboratory analysis product line
of $53,054,000, $50,854,000, and $4,989,000 in 1997, 1996, and 1995,
respectively, from Orion.
21
<PAGE>
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 $ 93,251 $ 81,447 $ 27,447
The Netherlands 5,489 7,547 -
Other Europe 9,237 8,416 4,292
Other 3,290 2,588 2,600
Transfers among geographical areas (a) (6,893) (5,394) (1,396)
-------- -------- --------
$104,374 $ 94,604 $ 32,943
======== ======== ========
Income before provision for income taxes:
United States $ 20,739 $ 12,040 $ 4,057
The Netherlands 454 1,514 -
Other Europe 1,587 1,076 (80)
Other 716 412 348
Corporate and eliminations (b) (3,675) (5,346) (726)
-------- -------- --------
Total operating income 19,821 9,696 3,599
Interest income (expense), net 833 (890) -
Other income (expense), net 23 12 (72)
-------- -------- --------
$ 20,677 $ 8,818 $ 3,527
======== ======== ========
Identifiable assets:
United States $ 89,226 $ 92,891 $ 80,510
The Netherlands 7,200 8,574 -
Other Europe 7,375 4,948 2,850
Other 3,074 1,615 1,666
Corporate and eliminations (c) 41,390 8,030 -
-------- -------- --------
$148,265 $116,058 $ 85,026
======== ======== ========
Export revenues included in United States revenues above (d):
Germany $ 5,855 $ 2,943 $ 3,941
Other Europe 11,646 9,314 4,512
Mexico 5,083 2,555 1,396
South America 7,491 6,479 3,426
Other 12,855 10,796 3,051
-------- -------- --------
$ 42,930 $ 32,087 $ 16,326
======== ======== ========
(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.
22
<PAGE>
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 $12,506 $ 5,299 $ 2,173
------- ------- -------
Weighted average shares 12,760 10,275 10,000
Weighted average shares issuable in
connection with the acquisition of
Orion (Note 11) 5,961 5,961 491
------- ------- -------
18,721 16,236 10,491
------- ------- -------
Basic earnings per share $ .67 $ .33 $ .21
======= ======= =======
Diluted
Net income $12,506 $ 5,299 $ 2,173
------- ------- -------
Basic weighted average shares 18,721 16,236 10,491
Effect of stock options 11 17 3
------- ------- -------
Weighted average shares, as adjusted 18,732 16,253 10,494
------- ------- -------
Diluted earnings per share $ .67 $ .33 $ .21
======= ======= =======
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.
23
<PAGE>
10. Unaudited Quarterly Information
- ----------------------------------------------------------------------------
(In thousands except per share amounts)
1997 First Second Third Fourth
- ----------------------------------------------------------------------------
Revenues $25,532 $25,639 $26,232 $26,971
Gross profit 14,027 14,342 14,590 15,020
Net income 2,242 3,025 3,526 3,713
Basic and diluted
earnings per share .13 .16 .18 .19
1996 First(a) Second Third Fourth
- ----------------------------------------------------------------------------
Revenues $22,200 $22,369 $24,125 $25,910
Gross profit 10,680 11,033 12,673 14,608
Net income (loss) 320 (5) 2,098 2,886
Basic and diluted
earnings (loss)
per share .02 - .13 .18
(a) Reflects the January 1996 acquisitions of Moisture Systems and Rutter.
11. Subsequent Event
In December 1995, Thermedics acquired Orion for $52,724,000 in cash, which
included the repayment of approximately $8,600,000 of indebtedness. The
acquisition was accounted for as a purchase. The purchase price exceeded the net
assets acquired by $42,681,000, which is being amortized over 40 years. The
purchase price was allocated based on estimates of the fair value of the net
assets acquired.
On May 6, 1998, the Company acquired Orion from Thermedics in exchange for
the right to receive 5,961,225 shares of the Company's common stock. Orion
manufactures electrode-based chemical-measurement products that determine the
quality of a wide variety of substances by measuring components, such as pH,
ion, dissolved oxygen, and conductivity levels and are used in the agricultural,
biomedical research, food processing, and pharmaceutical industries.
Because the Company and Orion were deemed for accounting purposes to be
under control of their common majority owner, Thermedics, the transaction has
been accounted for at historical cost in a manner similar to a pooling of
interests. Accordingly, all historical financial information presented has been
restated to include the acquisition of Orion since December 1, 1995, the date
Orion was purchased by Thermedics. The 5,961,225 shares of the Company's common
stock issuable in the merger will not be issued until the listing of such shares
for trading upon American Stock Exchange has been approved by the Company's
shareholders. Because Thermedics is the majority shareholder and intends to vote
its shares in favor of such listing, the approval is assured and, therefore, the
shares are considered to be outstanding as of December 1, 1995, for
24
<PAGE>
11. Subsequent Event (continued)
purposes of computing weighted average shares.
The following table presents selected pro forma financial information for
the Company and Orion, assuming the companies and the acquired businesses
discussed in Note 2 had been combined since the beginning of 1995.
(In thousands except per share amounts) 1995
- --------------------------------------------------------------------------
Revenues $94,639
Net income 4,628
Basic and diluted earnings per share .29
The pro forma results are not necessarily indicative of future operations or
the actual results that would have occurred had the acquisition of Orion and the
businesses discussed in Note 2 been made at the beginning of 1995.
Revenues and net income, as previously reported by the separate entities
prior to the acquisition and as restated for the combined Company, are as
follows:
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------
Revenues:
Historical $ 51,320 $ 43,750 $ 27,954
Orion 53,054 50,854 4,989
-------- -------- --------
$104,374 $ 94,604 $ 32,943
======== ======== ========
Net Income:
Historical $ 6,070 $ 362 $ 1,508
Orion 6,436 4,937 665
-------- -------- --------
$ 12,506 $ 5,299 $ 2,173
======== ======== ========
25
<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 83%-owned subsidiary of
Thermedics Inc.) and subsidiaries as of January 3, 1998, and December 28, 1996,
and the related consolidated statements of income, cash flows, and shareholders'
investment for each of the three years in the period ended January 3, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermedics
Detection Inc. and subsidiaries as of January 3, 1998, and December 28, 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended January 3, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
July 17, 1998
26
<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. The Company's Orion Research
Inc. subsidiary is a worldwide leading manufacturer of electrode-based, chemical
measurement products that determine the quality of various substances by
measuring their pH, ion, dissolved oxygen, or conductivity levels.
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
27
<PAGE>
Overview (continued)
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.
Results of Operations
1997 Compared With 1996
Revenues increased 10% to $104.4 million in 1997 from $94.6 million in 1996.
Product revenues increased 11% to $89.3 million in 1997 from $80.6 million in
1996, while service revenues increased 8% to $15.1 million in 1997 from $14.0
million in 1996. Revenues from the Company's process detection instruments and
related services increased to $22.4 million in 1997 from $16.0 million in 1996,
primarily due to Alexus revenues of $6.6 million from the fulfillment of a
mandated existing product-line upgrade from The Coca-Cola Company to its
existing installed base and, to a lesser extent, increased shipments of the
Company's InScan systems, which were introduced in 1996. The mandated
product-line upgrade was completed in 1997. These increases were offset in part
by a decrease in demand from The Coca-Cola Company for new installations in
1997. 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 $5.2 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. Revenues from the Company's laboratory products
instruments and related services increased 6% to $54.8 million in 1997 from
$51.7 million in 1996, primarily due to sales of the Company's Flash-GC systems
which were introduced in 1997 and an increase in international demand for pH and
conductivity measurement products.
The gross profit margin increased to 56% in 1997 from 52% in 1996. The gross
profit margin on product revenues increased to 57% in 1997 from 53% in 1996,
primarily due to a change in product mix to higher-margin revenues from The
Coca-Cola Company's mandated product-line upgrade, as well as higher-margin
revenues on the Company's laboratory products instruments. To a lesser extent,
the increase also resulted from the inclusion of an $0.8 million charge in 1996
as a result of obsolescence created by planned product changes and a decrease in
overhead expenses. The gross profit margin on service revenues increased to 49%
in 1997 from 45% in 1996, primarily due to increased field service efficiencies
and, to a lesser extent, the change in sales mix to higher-margin service
revenues at Moisture Systems and Rutter.
28
<PAGE>
1997 Compared With 1996 (continued)
Selling, general, and administrative expenses as a percentage of revenues
decreased to 27% in 1997 from 33% in 1996. The decline was primarily due to
nonrecurring costs of $1.5 million in 1996 related to moving expenses for the
relocation of Orion's domestic manufacturing facility and reductions in
personnel and leased space in response to a lower sales volume of process
detection instruments, and to a lesser extent, an increase in revenues in 1997.
This decrease was offset in part by increased selling expenses as the Company
developed a sales force for its InScan and Flash-GC systems.
Research and development expenses increased to $9.6 million in 1997 from
$8.1 million in 1996, primarily due to costs related to the improvement and
expansion of Moisture System's moisture analysis equipment product line and to
internal development of a more portable explosive detection unit.
Interest income increased to $2.1 million in 1997 from $0.2 million in 1996,
primarily due to interest income earned on the invested proceeds from the
Company's March 1997 initial public offering (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 40% in 1997 and 1996. The effective tax rates in
both periods exceeded the statutory federal income tax rate primarily due to the
impact of state income taxes.
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 to $94.6 million in 1996 from $32.9 million in 1995.
Product revenues increased to $80.6 million in 1996 from $23.3 million in 1995,
while service revenues increased to $14.0 million in 1996 from $9.6 million in
1995. Revenues increased in 1996 due to the
29
<PAGE>
1996 Compared With 1995 (continued)
inclusion of $45.9 million in revenues from Orion, acquired in December 1995
(Note 11) and $18.0 million in revenues from Moisture Systems and Rutter, which
were acquired in January 1996. Revenues from the Company's process detection
instruments and related services decreased to $16.0 million in 1996 from $18.5
million in 1995, primarily due to a decrease in demand from the Coca-Cola
Company, which 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 52% in 1996 from 47% in 1995. The gross
profit margin on product revenues increased to 53% in 1996 from 48% in 1995,
primarily due to higher-margin revenues from Moisture Systems, Rutter, and
Orion, offset in part by an inventory write-down of $0.8 million in 1996 due to
obsolescence created by planned product changes. The gross profit margin on
service revenues remained relatively unchanged at 44.8% in 1996 and 44.1% in
1995.
Selling, general, and administrative expenses as a percentage of revenues
increased to 33% in 1996 from 27% in 1995. This increase is primarily due to
$1.1 million of expenses incurred in 1996 related to the relocation of Orion's
domestic manufacturing facility, higher expenses as a percentage of revenues at
Moisture Systems and Rutter, and, to a lesser extent, $0.4 million of costs
incurred in 1996 related to reductions in personnel and a reduction in leased
space in response to the lower sales volume of process detection instruments.
Research and development expenses increased to $8.1 million in 1996 from
$3.1 million in 1995, primarily due to a full year of research and development
expenses of Orion, the inclusion of research and development expenses of
Moisture Systems, which was acquired in January 1996, and research and
development relating to the Company's Flash-GC and InScan systems. In addition,
the Company recorded a nonrecurring charge of $0.2 million in 1996 for the
write-off of certain research and development equipment no longer of use.
Interest expense, related party, of $1.1 million in 1996 reflects the
issuance of a $21.2 million promissory note to Thermedics in connection with the
January 1996 acquisitions of Moisture Systems and Rutter.
The effective tax rates were 39.9% and 38.4% in 1996 and 1995, respectively.
The effective tax rates in both periods exceeded the statutory federal income
tax rate primarily due to the impact of state income taxes.
30
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $46.3 million at January 3, 1998, compared
with $32.3 million at December 28, 1996. Included in working capital are cash
and cash equivalents of $46.4 million at January 3, 1998, compared with $14.3
million at December 28, 1996.
During 1997, $13.7 million of cash was provided by operating activities.
During this period, cash of $1.1 million and $3.3 million was used to fund
increases in accounts receivable and inventories, respectively, primarily
relating to an shipments made to the FAA, which provides for extended payment
terms and resulted in inventory purchases. This use of cash was offset in part
by $1.9 million of cash provided by an increase in other current liabilities,
including $1.3 million of accrued income taxes and $0.6 million of accrued
payroll and employee benefits.
During 1997, the Company's investing activities included the expenditure of
$1.8 million for purchases of machinery, equipment, and leasehold improvements.
During 1998, the Company expects to make capital expenditures of approximately
$2.6 million.
The Company's financing activities provided $20.2 million of cash in 1997.
In March 1997, the Company sold 2,671,292 shares of its common stock in an
initial public offering for net proceeds of $28.1 million. 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 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.
31
<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,
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including political and budgetary concerns of governments, airlines, and
airports. Of the more than 600 commercial airports worldwide, more than 400 are
located in the United States. Accordingly, the Company believes that the size of
the market for explosives-detection equipment is, and will increasingly be,
significantly influenced by United States government regulation. In the United
States, the Aviation Security Act of 1990 directed the Federal Aviation
Administration (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
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purchases of advanced explosives-detection equipment contemplated by the
legislation, that trace-detection equipment such as the systems manufactured by
the Company will be mandated, or that, even if further appropriations are made
and such equipment is mandated, any of the Company's explosives-detection
systems will be purchased for installation at any airports in the United States.
Further, there can be no assurance that the U.S. will mandate the widespread use
of these systems after completion of the initial purchases.
Significance of Certain Customers. Sales of process detection instruments
and services to bottlers licensed by The Coca-Cola Company (Coca-Cola Bottlers)
were $13,939,000, $10,641,000, and $9,974,000, in 1997, 1996, and 1995,
respectively, or 13%, 11%, and 31% of the Company's revenues, respectively,
during such periods. In 1997, the Company completed the fulfillment of a
mandated product-line upgrade for The Coca-Cola Bottlers. Although the Company
anticipates that it will continue to derive revenues from the sale of upgrades
and new systems to new plants, as well as services to the Coca-Cola Bottlers,
the Company does not expect that revenues derived from these customers will
continue at a rate comparable to prior years. Further, the Company intends to
continue to develop and introduce new process detection products for the food,
beverage and other markets, however, there can be no assurance that the Company
will be successful in the introduction of new process detection products or that
any sales of these products will be sufficient to maintain a rate of growth
equivalent to prior years.
Competition; Technological Change. The Company encounters, and expects to
continue to encounter, competition in the sale of its current and future
products. Many of the Company's competitors and potential competitors have
substantially greater resources, manufacturing and marketing capabilities,
research and development staff and production facilities than those of the
Company. Some of these competitors have large existing installed bases of
products with substantial numbers of customers. In addition, other major
corporations have recently announced their intention to enter certain of the
Company's markets, including the security screening market. The Company believes
that many of its products are successful because they are technologically
superior to alternative products offered by some of the Company's competitors.
In order to continue to be successful, the Company believes that it will be
important to maintain this technological advantage. No assurance can be given
that the Company will be able to maintain such an advantage or that competitors
of the Company will not develop technological innovations that will render
products of the Company obsolete. For example, the Company's EGIS system
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.
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Potential for Product Liability Claims. The Company's business involves the
risk of product liability claims inherent to the explosives detection business,
as well as the food, beverage and other industries. There are many factors
beyond the control of the Company that could result in the failure of the
Company's products to detect explosives or contaminants in food or beverage
containers, such as the reliability of a customer's operators, the ongoing
training of such operators and the maintenance of the Company's products by its
customers. For these and other reasons, there can be no assurance that the
Company's products will detect all explosives or contaminants. The failure to
detect explosives or contaminants could give rise to product liability claims
and result in negative publicity that could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company currently maintains both aviation and general product liability
insurance in amounts the Company believes to be commercially reasonable. There
can be no assurance that this insurance will be sufficient to protect the
Company from product liability claims, or that product liability insurance will
continue to be available to the Company at a reasonable cost, if at all.
Uncertainties Associated With International Operations. In 1997, 1996, and
1995, international sales accounted for 52%, 46%, and 67%, respectively, of the
Company's revenues, and the Company anticipates that international sales will
continue to account for a significant percentage of the Company's revenues.
Sales to customers in The Netherlands accounted for approximately 5% and 8% 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.
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Limited Protection of Proprietary Technology and Risks of Third-Party
Claims. Proprietary rights relating to the Company's products will be protected
from unauthorized use by third parties only to the extent that they are covered
by valid and enforceable patents or are maintained in confidence as trade
secrets. There can be no assurance, however, that any patents now or hereafter
owned by the Company will afford protection against competitors, or as to the
likelihood that patents will issue from pending patent applications. Proceedings
initiated by the Company to protect its proprietary rights could result in
substantial costs to the Company. Although the Company believes that its
products and technology do not infringe any existing proprietary rights of
others, there can be no assurance that third parties will not assert such claims
against the Company in the future or that such future claims will not be
successful. The Company could incur substantial costs and diversion of
management resources in connection with the defense of any claims relating to
proprietary rights, which could have a material adverse effect on the 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
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acquisitions or that the Company will be able to successfully integrate any
acquired businesses. In order to finance such acquisitions, it may be necessary
for the Company to raise additional funds through public or private financings.
Any equity or debt financing, if available at all, may be on terms which are not
favorable to the Company and, in the case of equity financing, may result in
dilution to the Company's stockholders.
Difficulties in Managing Rapid Growth. Due to the level of technical and
marketing expertise necessary to support its existing and new customers, the
Company must attract and retain highly qualified and well-trained personnel.
There are a limited number of persons with the requisite skills to serve in
these positions, and it may become increasingly difficult for the Company to
hire such personnel. Further rapid expansion may also significantly strain the
Company's administrative, operational and financial personnel, management
information systems, manufacturing operations, and other resources. There can be
no assurance that the Company's systems, procedures, and controls will be
adequate to support the Company's operations. Failure to manage growth properly
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
Potential Fluctuations in Quarterly Performance. Significant annual and
quarterly fluctuations in the Company's results of operations may be caused by,
among other factors, the overall demand for, and market acceptance of, the
Company's products; the timing of regulatory approvals for certain of the
Company's products; government initiatives to promote the use of explosives
detection systems such as those manufactured and sold by the Company; the timing
of the announcement, introduction and delivery of new products and product
enhancements by the Company and its competitors; variations in the Company's
product mix and component costs; timing of customer orders; adjustments of
delivery schedules to accommodate customer's programs; the availability of
components from suppliers; the timing and level of expenditures in anticipation
of future sales; the mix of products sold by the Company; and pricing and other
competitive conditions. Because certain of the Company's products require
significant capital expenditures and other commitments by its customers, the
Company has experienced extended sales cycles. Delays in anticipated purchase
orders could have a material adverse effect on the Company's business, financial
condition and results of operations. Customers may also cancel or reschedule
shipments, and product difficulties could delay shipments. Because the Company's
operating expenses are 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.
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Potential Impact of Year 2000 on Processing of Date-sensitive Information.
The Company is currently assessing the potential impact of the year 2000 on the
processing of date-sensitive information by the Company's computerized
information systems and on products sold as well as products purchased by the
Company. The Company believes that its internal information systems and current
products are either year 2000 compliant or will be so prior to the year 2000
without incurring material costs. There can be no assurance, however, that the
Company will not experience unexpected costs and delays in achieving year 2000
compliance for its internal information systems and current products, which
could result in a material adverse effect on the Company's future results of
operations.
The Company is presently assessing the effect that the year 2000 problem may
have on its previously sold products. The Company is also assessing whether its
key suppliers are adequately addressing this issue and the effect this might
have on the Company. The Company has not completed its analysis and is unable to
conclude at this time that the year 2000 problem as it relates to its previously
sold products and products purchased from key suppliers is not reasonably likely
to have a material adverse effect on the Company's future results of operations.
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Thermedics Detection Inc. 1997 Financial Statements
Selected Financial Information
(In thousands except
per share amounts) 1997(a) 1996(b) 1995(c) 1994 1993
- --------------------------------------------------------------------------
Statement of
Income Data:
Revenues $104,374 $ 94,604 $ 32,943 $ 50,343 $ 42,031
Gross profit 57,979 48,994 15,941 25,437 18,272
Net income 12,506 5,299 2,173 6,380 5,803
Basic and diluted
earnings per
share .67 .33 .21 .63 .58
Balance Sheet Data:
Working capital $ 46,345 $ 32,315 $ 18,938 $ 6,116 $ 447
Total assets 148,265 116,058 85,026 17,793 25,544
Long-term
obligation - 21,200 - - -
Shareholders'
investment 107,346 75,454 69,215 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.
(c) Reflects the December 1995 acquisition of Orion.
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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 02454-9046, (781) 622-1111. A mailing list is maintained to enable
shareholders whose stock is held in street name, and other interested
individuals, to receive quarterly reports, annual reports, and press releases as
quickly as possible. Distribution of printed quarterly reports is limited to the
second quarter 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.
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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 02454-9046.
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.
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Exhibit 23
Consent of Independent Public Accountants
To Thermedics Detection Inc.:
As independent public accountants, we hereby consent to the inclusion
herein of our reports for Thermedics Detection Inc. dated July 17, 1998, and for
Orion Research Inc. dated April 27, 1998, included in or made part of this Form
8-K/A.
Arthur Andersen LLP
Boston, Massachusetts
July 17, 1998
