SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 2, 1997
________________________________________
THERMEDICS INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 1-9567 04-2788806
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation or File Number) Identification Number)
organization)
470 Wildwood Street, P.O. Box 2697
Woburn, Massachusetts 01888-1799
(Address of principal executive offices) (Zip Code)
(617) 622-1000
(Registrant's telephone number
including area code)
PAGE
<PAGE>
FORM 8-K/A
Item 2. Acquisition or Disposition of Assets
On May 2, 1997, the Thermo Cardiosystems Inc. subsidiary ("Thermo
Cardiosystems") of Thermedics Inc. (the "Company") acquired International
Technidyne Corporation ("ITC"), a wholly owned subsidiary of Thermo
Electron Corporation ("Thermo Electron"), in exchange for the right to
receive 3,355,705 shares of Thermo Cardiosystems' common stock. ITC is a
manufacturer of near-patient, whole-blood coagulation-testing equipment
and related disposables, as well as single-use, premium-priced,
skin-incision devices. In 1996, ITC had revenues of $34,000,000, with net
income of $4,700,000.
The acquisition was made pursuant to an Agreement and Plan of
Reorganization dated as of May 2, 1997 (the "Agreement"), among Thermo
Cardiosystems, ITC Acquisition Inc., a wholly owned subsidiary of Thermo
Cardiosystems ("Acquisition"), Thermo Electron, ITC Holdings Inc., a
wholly owned subsidiary of Thermo Electron that owned ITC ("Holdings"),
and ITC. Under the terms of the Merger Agreement, (i) Acquisition merged
with and into ITC, (ii) outstanding shares of ITC's common stock were
canceled and converted into the right to receive 3,355,705 shares of
Thermo Cardiosystems common stock, (iii) each outstanding share of
Acquisition's common stock was canceled and converted into one share of
the common stock of ITC, and (iv) ITC became a wholly owned subsidiary of
Thermo Cardiosystems.
The shares of Thermo Cardiosystems' 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 Thermo Cardiosystems' outstanding shares present and voting
at a shareholders' meeting. The meeting is expected to be held before
the end of fiscal 1997. Thermo Electron and the Company have each agreed
to vote all of the shares of Thermo Cardiosystems' common stock held by
them as of the record date of the meeting in favor of the listing of
Thermo Cardiosystems shares and all matters related thereto. Before
giving effect to the issuance of the shares to be issued pursuant to the
Agreement, Thermo Electron and the Company owned an aggregate of 54.2% of
the outstanding common stock of Thermo Cardiosystems. Giving effect to
the issuance of such shares, Thermo Electron and the Company own an
aggregate of 58.1% of such outstanding common stock.
The consideration to be paid for ITC was based on Thermo
Cardiosystems' determination of the fair market value of ITC's business.
Based on the average of the closing prices of Thermo Cardiosystems'
common stock as reported on the American Stock Exchange for the five
trading days ending on March 27, 1997, the shares to be issued to Thermo
Electron had a value of $75,000,000 prior to the execution of the
Agreement.
Thermo Cardiosystems has no present intention to use ITC's assets
for purposes materially different from the purposes for which such assets
were used prior to the acquisition. However, Thermo Cardiosystems will
review ITC'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.
2PAGE
<PAGE>
FORM 8-K/A
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired - Attached hereto.
Restated Exhibit 11 to the Registrant's Form 10-K for the year
ended December 28, 1996 - Attached hereto.
Restated Exhibit 13 to the Registrant's Form 10-K for the year
ended December 28, 1996 - 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 December 28, 1996
attached hereto.
(c) Exhibits.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
3PAGE
<PAGE>
FORM 8-K/A
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 10th day of June,
1997.
THERMEDICS INC.
By: Paul F. Kelleher
--------------------
Paul F. Kelleher
Chief Accounting Officer
4PAGE
<PAGE>
INTERNATIONAL TECHNIDYNE CORPORATION
Consolidated Financial Statements
1996
PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Report of Independent Public Accountants
To International Technidyne Corporation:
We have audited the accompanying consolidated balance sheet of
International Technidyne Corporation (a Delaware corporation and
100%-owned subsidiary of Thermo Electron Corporation) and subsidiary as
of December 28, 1996 and December 30, 1995, and the related consolidated
statements of income, parent company investment, and cash flows for each
of the three years in the period ended December 28, 1996. 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 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
International Technidyne Corporation and subsidiary as of December 28,
1996 and December 30, 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 28,
1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 5, 1997 (except with
respect to Note 7 as to which
the date is March 29, 1997)
2PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Consolidated Statement of Income
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Revenues (Note 6) $33,992 $32,287 $28,642
------- ------- -------
Costs and Operating Expenses:
Cost of revenues 14,680 13,645 11,731
Selling, general, and administrative
expenses (Note 4) 8,067 8,018 7,079
Expenses for research and development 3,659 3,787 3,698
------- ------- -------
26,406 25,450 22,508
------- ------- -------
Income Before Provision for Income Taxes 7,586 6,837 6,134
Provision for Income Taxes (Note 3) 2,914 2,627 2,346
------- ------- -------
Net Income $ 4,672 $ 4,210 $ 3,788
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
3PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Consolidated Balance Sheet
(In thousands) 1996 1995
-----------------------------------------------------------------------
Assets
Current Assets:
Cash $ 127 $ 43
Accounts receivable, less allowances of
$262 in 1996 and 1995 4,047 4,612
Inventories 3,626 3,686
Prepaid income taxes (Note 3) 1,872 1,839
Prepaid expenses 43 69
------- -------
9,715 10,249
------- -------
Property, Plant, and Equipment, at Cost 12,072 10,597
Less: Accumulated depreciation and amortization 5,252 4,083
------- -------
6,820 6,514
------- -------
Prepaid Income Taxes 958 1,082
------- -------
Other Assets 364 254
------- -------
$17,857 $18,099
======= =======
Liabilities and Parent Company Investment
Current Liabilities:
Accounts payable $ 1,655 $ 1,374
Accrued payroll and employee benefits 1,963 1,890
Accrued warranty expenses 700 700
Other accrued expenses 2,357 2,058
------- -------
6,675 6,022
------- -------
Commitments and Contingencies (Note 5)
Parent Company Investment 11,182 12,077
------- -------
$17,857 $18,099
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Consolidated Statement of Cash Flows
(In thousands except in text) 1996 1995 1994
-----------------------------------------------------------------------
Operating Activities:
Net income $ 4,672 $ 4,210 $ 3,788
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,307 1,088 872
Provision for losses on accounts
receivable - - 43
Deferred income tax expense
(benefit) 91 (338) 195
Other noncash expenses (income) 60 36 (20)
Changes in current accounts:
Accounts receivable 565 (168) (169)
Inventories 60 (1,371) 178
Other current assets 26 43 (98)
Accounts payable 281 175 (274)
Other current liabilities 372 748 522
------- ------- -------
Net cash provided by operating activities 7,434 4,423 5,037
------- ------- -------
Investing Activities:
Purchases of property, plant, and
equipment (1,649) (2,284) (1,737)
Increase in other assets (134) (69) (81)
Other - 41 31
------- ------- -------
Net cash used in investing activities (1,783) (2,312) (1,787)
------- ------- -------
Financing Activities:
Transfers to parent company (5,567) (2,158) (3,299)
------- ------- -------
Increase (Decrease) in Cash 84 (47) (49)
Cash at Beginning of Year 43 90 139
------- ------- -------
Cash at End of Year $ 127 $ 43 $ 90
======= ======= =======
Noncash Activities:
In 1994, a note receivable of $633,000 was cancelled and applied to the
purchase price of a building and land acquired by the Company.
The accompanying notes are an integral part of these consolidated
financial statements.
5PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Consolidated Statement of Parent Company Investment
Parent
Company
(In thousands) Investment
-----------------------------------------------------------------------
Balance January 1, 1994 $ 9,536
Net income 3,788
Net transfers to parent company (3,299)
-------
Balance December 31, 1994 10,025
Net income 4,210
Net transfers to parent company (2,158)
-------
Balance December 30, 1995 12,077
Net income 4,672
Net transfers to parent company (5,567)
-------
Balance December 28, 1996 $11,182
=======
The accompanying notes are an integral part of these consolidated
financial statements.
6PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
International Technidyne Corporation (the Company) is a leading
manufacturer of near-patient, whole-blood, coagulation-testing equipment
and related disposables and also manufactures single-use, premium-priced,
skin-incision devices.
Relationship with Thermo Electron Corporation
The Company was incorporated in 1969. In September 1991, the Company
was acquired, through a pooling-of-interests transaction, and became a
wholly owned subsidiary of Thermo Electron Corporation (Thermo Electron).
As of December 28, 1996, Thermo Electron owned 153,700 shares of the
Company's common stock, representing 100% of such stock outstanding.
The accompanying financial statements include the assets,
liabilities, income, and expenses of the Company as included in Thermo
Electron's consolidated financial statements. The accompanying financial
statements do not include Thermo Electron's general corporate debt, which
is used to finance operations of all of its respective business segments,
or an allocation of Thermo Electron's interest expense. The Company has
had positive cash flows from operations for all periods presented.
Principles of Consolidation
The accompanying 1996 financial statements include the accounts of
the Company and its wholly owned subsidiary, International Technidyne
Corporation, Ltd. All material intercompany accounts and transactions
have been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest
December 31. References to 1996, 1995, and 1994 are for the fiscal years
ended December 28, 1996, December 30, 1995, and December 31, 1994,
respectively.
Cash and Cash Equivalents
The cash receipts and disbursements of the Company's domestic
operations are combined with other Thermo Electron corporate cash
transactions and balances. Therefore, cash of the Company's domestic
operations is not included in the accompanying balance sheet.
7PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Inventories
Inventories are stated at the lower of cost (on a first-in,
first-out basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are as follows:
(In thousands) 1996 1995
-----------------------------------------------------------------------
Raw materials $ 1,762 $ 1,958
Work in process and finished goods 1,864 1,728
------- -------
$ 3,626 $ 3,686
======= =======
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,
15 and 31.5 years; machinery and equipment, 5 to 10 years; and leasehold
improvements, the shorter of the term of the lease or the life of the
asset. Property, plant, and equipment consists of the following:
(In thousands) 1996 1995
-----------------------------------------------------------------------
Land and buildings $ 2,786 $ 2,786
Machinery, equipment, and leasehold improvements 9,286 7,811
------- -------
12,072 10,597
Less: Accumulated depreciation and amortization 5,252 4,083
------- -------
$ 6,820 $ 6,514
======= =======
Other Assets
Other assets in the accompanying consolidated balance sheet include
the cost of acquired patents and trademarks. These assets are being
amortized using the straight-line method over their estimated useful
lives, which range from 17 to 40 years. These assets were $461,000 and
$360,000, net of accumulated amortization of $130,000 and $106,000 at
year-end 1996 and 1995, respectively.
Revenue Recognition
The Company recognizes revenues upon shipment of its products. The
Company provides a reserve for its estimate of warranty costs at the time
of shipment.
8PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Income Taxes
The Company and Thermo Electron have a tax allocation agreement
under which the Company is included in the consolidated federal and
certain state income tax returns filed by Thermo Electron. The agreement
provides that in years in which the Company has taxable income, it will
pay to Thermo Electron amounts 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.
Concentration of Credit Risk
The Company sells its products to customers in the healthcare
industry. The Company does not normally require collateral or other
security to support its accounts receivable. Management does not believe
that this concentration of credit risk has, or will have, a significant
negative impact on the Company.
Foreign Currency
All assets and liabilities of the Company's wholly owned subsidiary
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." Foreign currency transaction
gains and losses are included in the accompanying statement of income and
are not material for each of the three years 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.
9PAGE
<PAGE>
International Technidyne Corporation 1996 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 accounts
receivable and accounts payable, which approximate fair value due to
their short-term nature.
2. Employee Benefit Plans
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 Thermo Electron. Under this program, shares of Thermo Electron common
stock can 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,
shares of Thermo Electron's common stock could be purchased at the end of
a 12-month period at 85% of the fair market value at the beginning of the
period, and the shares purchased were subject to a one-year resale
restriction. Shares are purchased through payroll deductions of up to 10%
of each participating employee's gross wages.
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 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 $267,000,
$278,000, and $169,000 in 1996, 1995, and 1994, respectively.
3. Income Taxes
The components of income before provision for income taxes are as
follows:
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Domestic $7,311 $6,837 $6,134
Foreign 275 - -
------ ------ ------
$7,586 $6,837 $6,134
====== ====== ======
10PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
3. Income Taxes (continued)
The components of the provision for income taxes are as follows:
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Currently payable:
Federal $2,221 $2,309 $1,677
State 602 656 474
------ ------ ------
2,823 2,965 2,151
------ ------ ------
(Prepaid) Deferred:
Federal 70 (260) 150
State 21 (78) 45
------ ------ ------
91 (338) 195
------ ------ ------
$2,914 $2,627 $2,346
====== ====== ======
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) 1996 1995 1994
------------------------------------------------------------------------
Provision for income taxes at statutory rate $2,579 $2,325 $2,086
Increases (decreases) resulting from:
State income taxes, net of federal tax 411 381 343
Foreign sales corporation benefit (111) (103) (87)
Nondeductible expenses and other 35 24 4
------ ------ ------
$2,914 $2,627 $2,346
====== ====== ======
Short- and long-term prepaid income taxes in the accompanying
balance sheet consist of the following:
(In thousands) 1996 1995
---------------------------------------------------------------
Prepaid income taxes:
Depreciation and amortization $ 958 $1,082
Reserves and other accruals 1,022 934
Inventory basis difference 831 774
Other, net 19 131
------ ------
$2,830 $2,921
====== ======
11PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
3. Income Taxes (continued)
A provision has not been made for U.S. or additional foreign taxes
on $181,000 of undistributed earnings of the Company's U.K. subsidiary
that could be subject to taxation if remitted to the U.S. because the
Company currently plans to keep this amount permanently reinvested
overseas. The Company believes that any additional U.S. tax liability due
upon remittance of such earnings would be immaterial due to available
U.S. foreign tax credits.
4. Related Party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement
under which Thermo Electron's corporate staff provides certain
administrative services, including certain legal advice and services,
risk management, certain employee benefit administration, tax advice and
preparation of tax returns, centralized cash management, and certain
financial and other services, for which the Company paid Thermo Electron
annually an amount equal to 1.0%, 1.20%, and 1.25% of the Company's
revenues in fiscal 1996, 1995, and 1994, respectively. The annual fee is
reviewed and adjusted annually by mutual agreement of the parties. The
corporate services agreement is renewed annually but can be terminated
upon 30 days' prior notice by the Company or upon the Company's
withdrawal from the Thermo Electron Corporate Charter (the Thermo
Electron Corporate Charter defines the relationship among Thermo Electron
and its majority-owned subsidiaries). For these services, the Company was
charged $340,000, $387,000, and $358,000 in 1996, 1995, and 1994,
respectively. 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.
Rent Expense
The Company's wholly owned subsidiary rents office space on a
month-to-month basis from an affiliate which is controlled by Thermo
Electron. The total rent expense paid to this affiliate was $8,000,
$17,000, and $18,000 in 1996, 1995, and 1994, respectively.
5. Commitments and Contingencies
Commitments
Beginning in 1995, the Company has leased manufacturing and office
facilities under a lease expiring in 1999. The accompanying statement of
income includes expenses from this lease of $188,000 and $13,000 in 1996
12PAGE
<PAGE>
International Technidyne Corporation 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Commitments and Contingencies (continued)
and 1995, respectively. Future minimum payments due under this
noncancelable operating lease as of December 28, 1996 are $194,000 in
1997; $199,000 in 1998; and $103,000 in 1999. Total future minimum lease
payments are $496,000.
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
effect upon the financial position of the Company or its results of
operations.
6. Significant Customers and Export Sales
Sales to one customer accounted for 43%, 41%, and 40% of the
Company's total revenues in 1996, 1995, and 1994, respectively. Export
sales to Europe accounted for 12%, 11%, and 12% of the Company's total
revenues in 1996, 1995, and 1994, respectively. All other export sales
accounted for 11%, 10%, and 11% of the Company's total revenues in 1996,
1995, and 1994, respectively.
7. Subsequent Event
In March 1997, Thermo Electron announced its intent to sell the
Company to Thermo Cardiosystems Inc., one of its publicly held,
majority-owned subsidiaries.
13PAGE
<PAGE>
Exhibit 11
THERMEDICS INC.
Computation of Earnings per Share
1996 1995 1994
----------- ----------- -----------
Computation of Primary Earnings
per Share:
Net Income (a) $29,138,000 $17,174,000 $12,695,000
----------- ----------- -----------
Shares:
Weighted average shares
outstanding 36,417,486 33,659,709 32,877,578
Add: Shares issuable from
assumed conversion of
subordinated convertible
debentures 1,223,990 - -
Shares issuable from
assumed exercise of
options (as determined
by the application
of the treasury stock
method) 438,401 - -
----------- ----------- -----------
Weighted average shares
outstanding, as
adjusted (b) 38,079,877 33,659,709 32,877,578
----------- ----------- -----------
Primary Earnings per Share
(a) / (b) $ .77 $ .51 $ .39
=========== =========== ===========
PAGE
<PAGE>
Exhibit 13
THERMEDICS INC.
Consolidated Financial Statements
1996
PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1996 1995 1994
-----------------------------------------------------------------------
Revenues (Note 14) $292,077 $208,041 $183,753
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues 148,137 110,935 99,328
Selling, general, and administrative
expenses (Note 8) 85,045 55,951 49,813
Research and development expenses 21,363 14,874 14,143
Nonrecurring costs (Notes 3 and 13) 17,637 - -
-------- -------- --------
272,182 181,760 163,284
-------- -------- --------
Operating Income 19,895 26,281 20,469
Interest Income 10,765 9,073 7,273
Interest Expense (3,770) (3,677) (3,206)
Gain on Issuance of Stock by
Subsidiaries (Note 11) 23,651 3,455 -
Gain on Sale of Investments, Net
(Note 2) 956 421 203
Other Income - 14 719
-------- -------- --------
Income Before Provision for Income
Taxes and Minority Interest 51,497 35,567 25,458
Provision for Income Taxes (Note 5) 13,969 11,781 9,680
Minority Interest Expense 8,390 6,612 3,083
-------- -------- --------
Net Income $ 29,138 $ 17,174 $ 12,695
======== ======== ========
Earnings per Share $ .77 $ .51 $ .39
======== ======== ========
Weighted Average Shares 38,080 33,660 32,878
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
2PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Consolidated Balance Sheet
(In thousands) 1996 1995
------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 82,800 $ 37,413
Short-term available-for-sale investments,
at quoted market value (amortized cost
of $64,950 and $76,682; includes $1,937
and $2,100 of related party investments;
Notes 2 and 8) 65,054 77,916
Accounts receivable, less allowances
of $4,903 and $4,244 62,783 45,939
Inventories 54,230 47,947
Prepaid income taxes and expenses (Note 5) 14,713 10,553
-------- --------
279,580 219,768
-------- --------
Property, Plant, and Equipment, at Cost, Net 21,550 19,447
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $33,929 and $39,795; Note 2) 33,920 39,953
-------- --------
Other Assets 7,885 5,507
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Notes 3, 5, and 13) 113,764 101,574
-------- --------
$456,699 $386,249
======== ========
3PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1996 1995
------------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable and current maturity of
long-term obligation (includes $38,000 due
to parent company in 1995; Notes 3 and 7) $ 9,017 $ 47,420
Accounts payable 19,615 17,710
Accrued payroll and employee benefits 11,951 10,783
Deferred revenue 1,397 1,705
Accrued income taxes 5,438 2,340
Accrued warranty costs 3,971 4,337
Other accrued expenses 18,421 19,527
Due to parent company 1,600 1,606
-------- --------
71,410 105,428
-------- --------
Deferred Income Taxes and Other Deferred
Items (Note 5) 1,382 2,173
-------- --------
Long-term Obligations (Note 7) 74,359 45,201
-------- --------
Minority Interest 97,966 60,696
-------- --------
Commitments and Contingency (Notes 6 and 9)
Shareholders' Investment (Notes 4, 8, and 10):
Common stock, $.10 par value, 100,000,000
shares authorized; 36,842,500 and
33,986,050 shares issued 3,684 3,399
Capital in excess of par value 138,433 120,665
Retained earnings 74,542 47,928
Treasury stock at cost, 166,144 and 2,146 shares (4,729) (42)
Cumulative translation adjustment (409) (88)
Net unrealized gain on available-for-sale
investments (Note 2) 61 889
-------- --------
211,582 172,751
-------- --------
$456,699 $386,249
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Operating Activities:
Net income $ 29,138 $ 17,174 $ 12,695
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 10,431 6,766 5,080
Gain on issuance of stock by
subsidiaries (Note 11) (23,651) (3,455) -
Nonrecurring costs (Notes
3 and 13) 17,637 - -
Provision for losses on accounts
receivable 1,352 689 1,233
Gain on sale of investments, net
(Note 2) (956) (421) (203)
Minority interest expense 8,390 6,612 3,083
Increase (decrease) in deferred
income taxes (601) 766 623
Other noncash expenses 1,098 990 1,377
Changes in current accounts,
excluding the effects of
acquisitions:
Accounts receivable (13,906) 53 (1,919)
Inventories (839) (11,675) 7,268
Prepaid income taxes and
expenses (10) (2,410) (398)
Other current assets 26 43 (98)
Accounts payable 892 3,643 (7,636)
Other current liabilities (1,162) 2,704 2,952
Other (270) (182) (62)
--------- --------- ---------
Net cash provided by operating
activities 27,569 21,297 23,995
--------- --------- ---------
Investing Activities:
Acquisitions, net of cash acquired
(Note 3) (37,044) (56,560) (44,657)
Acquisition of product lines (4,737) - -
Purchases of property, plant, and
equipment (8,621) (6,691) (4,957)
Purchases of available-for-sale
investments (99,800) (101,246) (78,303)
Proceeds from sale and maturities of
available-for-sale investments 118,356 104,786 77,677
Other (914) 371 216
--------- --------- ---------
Net cash used in investing activities $ (32,760) $ (59,340) $ (50,024)
--------- --------- ---------
5PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of Company
and subsidiaries' common stock
(Note 10) $ 49,780 $ 4,515 $ 2,020
Purchases of Company and subsidiaries'
common stock (15,665) (179) (8,064)
Proceeds from issuance of note
payable to parent company (Note 3) 15,000 38,000 -
Repayments of notes payable to parent
company (Notes 3 and 7) (53,000) - -
Net proceeds from issuance of
subordinated convertible
obligations (Note 7) 63,249 - 31,968
Repayment and repurchase of long-
term obligations (2,432) (132) -
Net decrease in short-term
borrowings (1,944) (1,961) -
Transfers to Thermo Electron from
International Technidyne (5,567) (2,158) (3,299)
Other (146) 740 134
--------- --------- ---------
Net cash provided by financing
activities 49,275 38,825 22,759
--------- --------- ---------
Exchange Rate Effect on Cash 1,303 (502) 85
--------- --------- ---------
Increase (Decrease) in Cash and
Cash Equivalents 45,387 280 (3,185)
Cash and Cash Equivalents at Beginning
of Year 37,413 37,133 40,318
--------- --------- ---------
Cash and Cash Equivalents at End
of Year $ 82,800 $ 37,413 $ 37,133
========= ========= =========
6PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Cash Paid For:
Interest $ 5,333 $ 3,328 $ 2,884
Income taxes $ 7,108 $ 6,489 $ 4,980
Noncash Activities:
Fair value of assets of acquired
companies $ 42,955 $ 67,394 $ 65,493
Cash paid for acquired companies (37,445) (56,879) (44,743)
--------- --------- ---------
Liabilities assumed of acquired
companies $ 5,510 $ 10,515 $ 20,750
========= ========= =========
Issuance of Company common stock to
parent company in exchange for
subsidiary common stock (Note 8) $ 4,236 $ - $ 936
Conversions of Company and
subsidiaries' convertible
obligations (Note 7) $ 31,562 $ 37,317 $ 9,745
Cancellation of note receivable and
application to purchase of property$ - $ - $ 633
The accompanying notes are an integral part of these consolidated
financial statements.
7PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Consolidated Statement of Shareholders' Investment
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Common Stock, $.10 Par Value
Balance at beginning of year $ 3,399 $ 3,330 $ 3,217
Issuance of stock under employees'
and directors' stock plans 12 7 14
Conversions of subordinated
convertible debentures 74 62 92
Issuance of Company common stock to
parent company in exchange for
common stock of subsidiaries (Note 8) 199 - 7
-------- -------- --------
Balance at end of year 3,684 3,399 3,330
-------- -------- --------
Capital in Excess of Par Value
Balance at beginning of year 120,665 102,975 98,279
Issuance of stock under employees'
and directors' stock plans 737 378 1,079
Tax benefit related to employees'
and directors' stock plans 1,218 434 668
Conversions of subordinated
convertible debentures (Note 7) 7,631 6,259 9,316
Issuance of Company common stock to
parent company in exchange for
common stock of subsidiaries (Note 8) 4,037 - 929
Effect of majority-owned subsidiaries'
equity transactions 4,145 9,858 (7,296)
Capital contribution from parent
company - 761 -
-------- -------- --------
Balance at end of year 138,433 120,665 102,975
-------- -------- --------
Retained Earnings
Balance at beginning of year 47,928 32,084 20,964
Net income 29,138 17,174 12,695
Transfers to Thermo Electron from
International Technidyne (2,524) (1,330) (1,575)
-------- -------- --------
Balance at end of year 74,542 47,928 32,084
-------- -------- --------
Treasury Stock
Balance at beginning of year (42) (310) (272)
Issuance of stock under employees'
and directors' stock plans 58 268 (38)
Purchase of Company common stock (4,745) - -
-------- -------- --------
Balance at end of year (4,729) (42) (310)
-------- -------- --------
Cumulative Translation Adjustment
Balance at beginning of year (88) 326 (2)
Translation adjustment (321) (414) 328
-------- -------- --------
Balance at end of year $ (409) $ (88) $ 326
-------- -------- --------
8PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Consolidated Statement of Shareholders' Investment (continued)
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Net Unrealized Gain (Loss) on Available-
for-sale Investments
Balance at beginning of year $ 889 $ (1,622) $ -
Effect of change in accounting
principle (Note 2) - - 1,185
Change in net unrealized gain (loss)
on available-for-sale investments
(Note 2) (828) 2,511 (2,807)
-------- -------- --------
Balance at end of year 61 889 (1,622)
-------- -------- --------
Total Shareholders' Investment $211,582 $172,751 $136,783
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
9PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermedics Inc. (the Company) develops, manufactures, and markets
precision weighing and inspection equipment, electrochemistry and
microweighing products, product quality assurance systems, electronic
test instruments, and explosives-detection devices, as well as
implantable heart-assist systems, whole-blood coagulation testing
equipment, skin-incision devices, and other biomedical products.
Relationship with Thermo Electron Corporation
The Company was incorporated in 1983 as a wholly owned subsidiary of
Thermo Electron Corporation (Thermo Electron). As of December 28, 1996,
Thermo Electron owned 20,293,310 shares of the Company's common stock,
representing 55% of such stock outstanding.
Principles of Consolidation
The accompanying financial statements include the accounts of the
Company; its wholly owned subsidiaries; its majority-owned public
subsidiaries, Thermo Cardiosystems Inc. (Thermo Cardiosystems), Thermo
Voltek Corp. (Thermo Voltek), and Thermo Sentron Inc. (Thermo Sentron);
and its majority-owned privately-held subsidiary, Thermedics Detection
Inc. (Thermedics Detection). All material intercompany accounts and
transactions have been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest
December 31. References to 1996, 1995, and 1994 are for the fiscal years
ended December 28, 1996, December 30, 1995, and December 31, 1994,
respectively.
Cash and Cash Equivalents
As of December 28, 1996, $74,625,000 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 U.S. government agency securities, corporate
notes, commercial paper, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The
Company's funds subject to the repurchase agreement are readily
convertible into cash by the Company and have an original maturity of
three months or less. The repurchase agreement earns a rate based on the
90-day Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter. As of December 28, 1996, the Company's cash
equivalents were also invested in U.S. government agency discount notes
and money market preferred stock. Cash equivalents are carried at cost,
which approximates market value.
10PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market value and include materials, labor, and manufacturing
overhead. The components of inventories are as follows:
(In thousands) 1996 1995
------------------------------------------------------------------------
Raw materials and supplies $28,210 $23,475
Work in process 10,719 9,696
Finished goods 15,301 14,776
------- -------
$54,230 $47,947
======= =======
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while
maintenance and repairs are charged to expense as incurred. The Company
provides for depreciation and amortization using the straight-line method
over the estimated useful lives of the property as follows: buildings and
improvements, 5 to 31.5 years; machinery and equipment, 2 to 10 years;
and leasehold improvements, the shorter of the term of the lease or the
life of the asset. Property, plant, and equipment consists of the
following:
(In thousands) 1996 1995
------------------------------------------------------------------------
Land and building $ 5,778 $ 5,730
Machinery, equipment, and leasehold improvements 43,114 35,169
------- -------
48,892 40,899
Less: Accumulated depreciation and amortization 27,342 21,452
------- -------
$21,550 $19,447
======= =======
Other Assets
Other assets in the accompanying balance sheet includes the cost of
acquired patents, trademarks, acquired technology, and other specifically
identifiable intangible assets. These assets are amortized using the
straight-line method over their estimated useful lives, which range from
4 to 40 years. These assets were $4,276,000 and $3,276,000, net of
accumulated amortization of $2,798,000 and $2,351,000, at year-end 1996
and 1995, respectively.
11PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired
companies is amortized using the straight-line method over periods not
exceeding 40 years. Accumulated amortization was $9,343,000 and
$6,343,000 at year-end 1996 and 1995, 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
Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected as
a separate component of shareholders' investment, titled "Cumulative
translation adjustment." In 1994, the Company recorded foreign currency
transaction gains of $635,000 on the repayment of intercompany
borrowings, denominated in U.S. dollars, by several of the Company's
foreign subsidiaries. The borrowings resulted from the acquisition of
Ramsey Technology, Inc. by the Company. Foreign currency transaction
gains are included in other income in the accompanying 1994 statement of
income. There were no material foreign currency transaction gains or
losses in 1996 and 1995.
Revenue Recognition
In general, the Company recognizes revenues upon shipment of its
products. The Company provides a reserve for its estimate of warranty
costs at the time of shipment. Revenues and profits on substantially all
contracts are recognized using the percentage-of-completion method.
Revenues recorded under the percentage-of-completion method were
$6,564,000 in 1996, $8,521,000 in 1995, and $2,253,000 in 1994. The
percentage of completion is determined by relating either the actual
costs or actual labor incurred to date to management's estimate of total
costs or total labor, respectively, to be incurred on each contract. If a
loss is indicated on any contract in process, a provision is made
currently for the entire loss. The Company's contracts generally provide
for customer billing on a cost-plus-fixed-fee basis when certain
milestones are attained, or monthly, as costs are incurred. Revenues
earned on contracts in process in excess of billings are included in
inventories in the accompanying balance sheet and were not material at
year-end 1996 and 1995. 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.
12PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Gain on Issuance of Stock by Subsidiaries
At the time a subsidiary sells its stock to unrelated parties at a
price in excess of its book value, the Company's net investment in that
subsidiary increases. If at that time the subsidiary is an operating
entity and not engaged principally in research and development, the
Company records the increase as a gain.
If gains have been recognized on issuances of a subsidiary's stock
and shares of the subsidiary are subsequently repurchased by the
subsidiary, the Company, or Thermo Electron, gain recognition does not
occur on issuances subsequent to the date of a repurchase until such time
as shares have been issued in an amount equivalent to the number of
repurchased shares. Such transactions are reflected as equity
transactions and the net effect of these transactions is reflected in the
accompanying statement of shareholders' investment as "Effect of
majority-owned subsidiaries' equity transactions."
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 4). Accordingly,
no accounting recognition is given to stock options granted at fair
market value until they are exercised. Upon exercise, net proceeds,
including tax benefits realized, are credited to equity.
Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes," the
Company recognizes deferred income taxes based on the expected future tax
consequences of differences between the financial statement basis and the
tax basis of assets and liabilities, calculated using enacted tax rates
in effect for the year in which the differences are expected to be
reflected in the tax return.
Earnings per Share
Earnings per share has been computed based on the weighted average
number of shares outstanding during the year. Weighted average shares in
1996 includes the effect of common stock equivalents, which represent the
assumed conversion of the Company's noninterest-bearing subordinated
convertible debentures and the assumed exercise of stock options that
were computed using the treasury stock method. Because the effect of the
assumed exercise of stock options would be immaterial in 1995 and 1994,
they have been excluded from the earnings per share calculation. Fully
diluted earnings per share has not been presented because the effect of
the assumed exercise of stock options and the assumed conversion of the
Company's interest-bearing subordinated convertible debentures would be
immaterial.
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,
13PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Presentation
The historical information for all periods presented has been
restated to reflect the May 2, 1997, acquisition of International
Technidyne by Thermo Cardiosystems from Thermo Electron (Note 15).
Because the Company and International Technidyne were deemed for
accounting purposes to be under control of their common majority owner,
Thermo Electron, the transaction has been accounted for at historical
cost in a manner similar to a pooling-of-interests.
2. Available-for-sale Investments
Effective January 2, 1994, the Company adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." In
accordance with SFAS No. 115, the Company's debt securities are
considered available-for-sale investments in the accompanying balance
sheet and are carried at market value, with the difference between cost
and market value, net of related tax effects, recorded currently as a
component of shareholders' investment titled "Net unrealized gain (loss)
on available-for-sale investments." Effect of change in accounting
principle in the accompanying 1994 statement of shareholders' investment
represents the unrealized gain, net of related tax effects, pertaining to
available-for-sale investments held by the Company on January 2, 1994.
14PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
2. Available-for-sale Investments (continued)
The aggregate market value, cost basis, and gross unrealized gains and
losses of short- and long-term available-for-sale investments by major
security type, as of December 28, 1996, and December 30, 1995, are as
follows:
Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
--------------------------------------------------------------------------
1996
Government agency securities $ 86,403 $ 86,412 $ 7 $ (16)
Corporate bonds 6,806 6,634 172 -
Money market preferred stock 1,060 1,071 - (11)
Other 4,705 4,762 - (57)
-------- -------- -------- --------
$ 98,974 $ 98,879 $ 179 $ (84)
======== ======== ======== ========
1995
Government agency securities $ 99,373 $ 98,434 $ 1,020 $ (81)
Corporate bonds 10,612 10,169 454 (11)
Money market preferred stock 6,297 6,287 28 (18)
Other 1,587 1,587 - -
-------- -------- -------- --------
$117,869 $116,477 $ 1,502 $ (110)
======== ======== ======== ========
Short- and long-term available-for-sale investments in the accompanying
1996 balance sheet include $59,457,000 with contractual maturities of one
year or less, $38,667,000 with contractual maturities of more than one year
through five years, and $850,000 with contractual maturities of more than
five years. Actual maturities may differ from contractual maturities as a
result of the Company's intent to sell these securities prior to maturity
and as a result of put and call options that enable either the Company, the
issuer, or both to redeem these securities at an earlier date.
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains recorded in the
accompanying statement of income. Gain on sale of investments, net,
resulted from gross realized gains of $1,086,000, $439,000, and $241,000
and gross realized losses of $130,000, $18,000, and $38,000 in 1996, 1995,
and 1994, respectively, relating to the sale of available-for-sale
investments.
15PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
3. Acquisitions
In December 1996, Thermo Cardiosystems acquired substantially all of
the assets, subject to certain liabilities, of Nimbus Medical, Inc.
(Nimbus), a research and development organization specializing in
ventricular-assist devices and total artificial hearts, for $5,013,000 in
cash. Nimbus is engaged strictly in research and development activities
and, through its acquisition date, had not completed development of any
commercial products for which it retains ownership rights. Nimbus' assets
acquired by Thermo Cardiosystems included certain technology in
development. The feasibility of the technology in development had not
been conclusively established at the acquisition date and such technology
had no future use other than in potential future generations of
heart-assist devices or in total artificial hearts. In connection with
the acquisition of Nimbus, Thermo Cardiosystems wrote off $4,909,000,
which represents the portion of the purchase price allocated to
technology in development based on estimated replacement cost.
In January 1996, Thermedics Detection acquired the assets and certain
liabilities of Moisture Systems Corporation and certain affiliated
companies (collectively, Moisture Systems), and the stock of Rutter & Co.
B.V. (Rutter) for a total purchase price of $21,668,000 in cash, which
included the repayment of $700,000 of debt. The cost of this acquisition
exceeded the estimated fair value of the acquired net assets by
$17,326,000, which is being amortized over 40 years. In connection with
these acquisitions, the Company borrowed $15,000,000 from Thermo Electron
pursuant to a promissory note due March 1997, and bearing interest at the
90-day Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter. The Company repaid the $15,000,000 promissory
note to Thermo Electron in September 1996 (Note 7). Moisture Systems and
Rutter design, manufacture, and sell instruments that use near-infrared
spectroscopy to measure moisture and other product components. During
1996, the Company's majority-owned subsidiaries made other acquisitions
for $15,501,000 in cash, subject to post-closing adjustments, as
applicable.
In December 1995, the Company acquired the Orion laboratory products
division (Orion) of Analytical Technology, Inc. for $52,724,000 in cash,
which included the repayment of $8,585,000 of debt. The cost of this
acquisition exceeded the estimated fair value of the acquired net assets
by $45,706,000, which is being amortized over 40 years. To partially
finance this acquisition, the Company borrowed $38,000,000 from Thermo
Electron pursuant to a promissory note due December 1996, and bearing
interest at the 90-day Commercial Paper Composite Rate plus 25 basis
points. The balance of the purchase price was funded from the Company's
working capital. The Company repaid the $38,000,000 promissory note to
Thermo Electron in September 1996 (Note 7). Orion manufactures
electrochemistry, microweighing, process, and other instruments used to
analyze the chemical composition of food, beverage, and pharmaceutical
products and detect contaminants in high-purity water. In 1995, one of
the Company's majority-owned subsidiaries made an acquisition for
$3,755,000 in cash.
In March 1994, the Company acquired substantially all of the assets,
subject to certain liabilities, of Ramsey Technology, Inc. (Ramsey), a
business of Baker Hughes Incorporated, for a cash purchase price of
16PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
3. Acquisitions (continued)
$41,872,000. The cost of this acquisition exceeded the estimated fair
value of the acquired net assets by $33,983,000, which is being amortized
over 40 years. In January 1996, Ramsey was contributed by the Company to
its newly formed Thermo Sentron subsidiary in exchange for shares of
Thermo Sentron common stock. Thermo Sentron designs, develops,
manufactures, and sells high-speed precision weighing and inspection
equipment for industrial production and packaging lines. In 1994, the
Company and one of its majority-owned subsidiaries made other
acquisitions for an aggregate of $2,871,000 in cash.
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 all of these acquisitions exceeded the
estimated fair value of the acquired net assets by $111,826,000, which is
being amortized over periods not exceeding 40 years. Allocation of the
purchase price for these acquisitions was based on estimates of the fair
value of the net assets acquired and, for acquisitions completed in 1996,
is subject to adjustment upon finalization of the purchase price
allocation.
Based on unaudited data, the following table presents selected
financial information on a pro forma basis, assuming the Company, Thermo
Sentron, and Orion had been combined since the beginning of 1994. The
effect of the acquisitions not included in the pro forma data was not
material to the Company's results of operations.
(In thousands except per share amounts) 1995 1994
-------------------------------------------------------------------------
Revenues $251,207 $241,034
Net income 19,239 14,679
Earnings per share .57 .45
The pro forma results are not necessarily indicative of future
operations or the actual results that would have occurred had the
acquisitions been made at the beginning of 1994.
4. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
------------------
The Company has stock-based compensation plans for its key employees,
directors, and others. Two of these plans, adopted in 1983, permitted the
grant of nonqualified and incentive stock options. These plans expired
during 1993. A third plan, adopted in 1993, 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. To date, only nonqualified stock
options have been awarded under this plan. The option recipients and the
terms of options granted under this plan are determined by the Board
Committee. Generally, options granted to date are exercisable
17PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
immediately, but are subject to certain transfer restrictions and the
right of the Company to repurchase shares issued upon exercise of the
options at the exercise price, upon certain events. The restrictions and
repurchase rights generally lapse ratably over a five to ten year period,
depending on the term of the option, which may range from seven to twelve
years. Nonqualified stock options may be granted at any price determined
by the Board Committee, although incentive stock options must be granted
at not less than the fair market value of the Company's stock on the date
of grant. To date, all options have been granted at fair market value.
The Company also has a directors' stock option plan, adopted in 1991,
that provides for the grant of stock options to outside directors
pursuant to a formula approved by the Company's shareholders. Options
awarded under this plan are exercisable six months after the date of
grant and expire three or seven years after the date of grant. In
addition to the Company's stock-based compensation plans, certain
officers and key employees may also participate in stock-based
compensation plans of Thermo Electron.
Employee Stock Purchase Program
-------------------------------
Substantially all of the Company's full-time U.S. employees are
eligible to participate in an employee stock purchase program sponsored
by the Company or its majority-owned public subsidiaries and Thermo
Electron. Under this program, shares of the Company's or its
majority-owned public subsidiaries', and shares of Thermo Electron's,
common stock can be purchased at 95% of the fair market value at the
beginning of the period, and the shares purchased are subject to a
six-month resale restriction. Prior to November 1, 1995, the applicable
shares of common stock could be purchased at the end of a 12-month period
at 85% of the fair market value at the beginning of the period, and the
shares purchased were subject to a one-year resale restriction. Shares
are purchased through payroll deductions of up to 10% of each
participating employee's gross wages. During 1996, 1995, and 1994, the
Company issued 9,503 shares, 14,552 shares, and 13,711 shares,
respectively, of its common stock under this program.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-based Compensation," which sets forth a
fair-value based method of recognizing stock-based compensation expense.
As permitted by SFAS No. 123, the Company has elected to continue to
apply APB No. 25 to account for its stock-based compensation plans. Had
compensation cost for awards granted in 1996 and 1995 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,
18PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
the effect on the Company's net income and earnings per share would have
been as follows:
(In thousands except per share amounts) 1996 1995
------------------------------------------------------------------------
Net income:
As reported $26,831 $15,121
Pro forma 25,653 14,951
Earnings per share:
As reported .70 .45
Pro forma .67 .44
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 fair value of each option grant was estimated on the grant date
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1996 1995
------------------------------------------------------------------------
Volatility 39% 39%
Risk-free interest rate 5.70% 6.05%
Expected life of options 5.03 years 3.72 years
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option-pricing
models require the input of highly subjective assumptions, including
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
19PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
Stock Option Activity
A summary of the Company's stock option activity is as follows:
1996 1995 1994
---------------- ---------------- -----------------
Weighted Weighted Range of
Number Average Number Average Number Option
(Shares in of Exercise of Exercise of Prices
thousands) Shares Price Shares Price Shares per Share
--------------------------------------------------------------------------
Options outstanding, $ 4.70-
beginning of year 1,557 $12.38 1,773 $12.14 1,669 16.45
12.43-
Granted 303 27.17 27 17.65 366 14.53
4.70-
Exercised (137) 9.12 (74) 8.16 (195) 10.65
5.00-
Forfeited (59) 22.42 (169) 12.57 (67) 16.28
----- ----- -----
Options outstanding, $ 4.70-
end of year 1,664 $14.99 1,557 $12.38 1,773 16.45
===== ====== ===== ====== ===== ======
$ 4.70-
Options exercisable 1,664 $14.99 1,557 $12.38 1,771 16.45
===== ====== ===== ====== ===== ======
Options available
for grant 284 545 457
===== ===== =====
Weighted average fair
value per share of
options granted
during year $11.49 $ 6.50
====== ======
A summary of the status of the Company's stock options at December 28,
1996, is as follows:
Options Outstanding and Exercisable
-----------------------------------
Weighted
Weighted Average Average
Number Remaining Exercise
Range of Exercise Prices of Shares Contractual Life Price
--------------------------------------------------------------------------
(Shares in thousands)
$ 4.70 - $ 9.03 458 2.4 years $ 7.16
9.04 - 15.93 319 8.3 years 13.20
15.94 - 22.83 642 8.9 years 16.46
22.84 - 29.73 245 6.5 years 28.11
-----
$ 4.70 - $29.73 1,664 6.6 years $14.99
=====
20PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
401(k) Savings Plan and Employee Stock Ownership Plan
The majority of the Company's full-time U.S. employees are eligible to
participate in Thermo Electron's 401(k) savings plan and, prior to 1995,
in Thermo Electron's employee stock ownership plan (ESOP). Contributions
to the 401(k) savings plan are made by both the employee and the Company.
Company contributions to the 401(k) plan are based upon the level of
employee contributions. For these plans, the Company contributed and
charged to expense $1,460,000, $1,289,000, and $1,111,000 in 1996, 1995,
and 1994, respectively. Effective December 31, 1994, the ESOP was split
into two plans: ESOP I, covering employees of Thermo Electron's corporate
office and its wholly owned subsidiaries, and ESOP II, covering employees
of certain of Thermo Electron's majority-owned subsidiaries, including
the Company. Also, effective December 31, 1994, the ESOP II plan was
terminated and as a result, the Company's employees are no longer
eligible to participate in an ESOP.
5. Income Taxes
The components of income before provision for income taxes and
minority interest are as follows:
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Domestic $43,172 $31,857 $23,895
Foreign 8,325 3,710 1,563
------- ------- -------
$51,497 $35,567 $25,458
======= ======= =======
The components of the provision for income taxes are as follows:
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Currently payable:
Federal $12,058 $ 9,850 $ 7,067
State 2,327 2,202 1,809
Foreign 3,618 1,783 998
------- ------- -------
18,003 13,835 9,874
------- ------- -------
Net deferred (prepaid):
Federal (3,843) (1,633) (181)
State 24 (421) (13)
Foreign (215) - -
------- ------- -------
(4,034) (2,054) (194)
------- ------- -------
$13,969 $11,781 $ 9,680
======= ======= =======
21PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Income Taxes (continued)
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 $3,520,000, $3,935,000, and $668,000 of such benefits of the
Company and its majority-owned subsidiaries that have been allocated to
capital in excess of par value, directly or through the effect of
majority-owned subsidiaries' equity transactions, in 1996, 1995, and
1994, respectively. The provision for income taxes that is currently
payable also does not reflect $1,800,000 of tax benefits used to reduce
cost in excess of net assets of acquired companies in 1996.
The provision for income taxes in the accompanying statement of
income differs from the provision calculated by applying the statutory
federal income tax rate of 35% to income before provision for income
taxes and minority interest due to the following:
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Provision for income taxes at
statutory rate $18,024 $12,448 $ 8,910
Increases (decreases) resulting from:
Gain on issuance of stock by subsidiaries (8,278) (1,206) -
Amortization and write-off of cost in
excess of net assets of acquired
companies 3,256 232 296
State income taxes, net of federal tax 1,534 1,163 1,173
Reduction in valuation allowance (684) (854) -
Tax-exempt investment income (11) (115) (113)
Tax benefit of foreign sales corporation (437) (426) (920)
Foreign tax rate and regulation
differential (132) 485 363
Nondeductible expenses 228 137 88
Other, net 469 (83) (117)
------- ------- -------
$13,969 $11,781 $ 9,680
======= ======= =======
22PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Income Taxes (continued)
Prepaid income taxes and deferred income taxes in the accompanying
balance sheet consist of the following:
(In thousands) 1996 1995
----------------------------------------------------------------
Prepaid income taxes:
Reserves and accruals $ 4,455 $ 1,976
Inventory reserves 2,234 2,700
Accrued compensation 1,380 1,013
Allowance for doubtful accounts 1,079 684
Depreciation and amortization 958 1,082
Warranty reserves 934 1,142
Tax loss and credit carryforwards 652 2,105
Available-for-sale investments 308 (116)
Write-off of acquired technology (Note 3) 1,865 -
Other, net 244 338
------- -------
14,109 10,924
Less: Valuation allowance - 1,516
------- -------
$14,109 $ 9,408
======= =======
Deferred income taxes:
Trademarks and other intangible assets $ 962 $ 1,627
Difference in book and tax basis
of fixed assets 288 348
------- -------
$ 1,250 $ 1,975
======= =======
The 1995 valuation allowance primarily related to uncertainty
surrounding the realization of tax loss and credit carryforwards and
other tax assets of certain subsidiaries. The elimination of the
valuation allowance in 1996 is primarily due to reduced uncertainty
surrounding the realizability of such future tax benefits and was
recorded in part as a reduction of $684,000 in the 1996 provision for
income taxes. The remaining decrease in the valuation allowance primarily
relates to the elimination of related tax loss and credit carryforwards
due to the inability to obtain a benefit prior to the expiration thereof.
The provision for income taxes in 1995 was reduced by $854,000 due to a
decrease in the valuation allowance as a result of reduced uncertainty
surrounding the realizability of tax assets of certain subsidiaries.
As of December 28, 1996, federal and state tax assets existed at
Thermo Voltek that are not consolidated for federal tax purposes. Thermo
Voltek had federal and state tax net operating loss carryforwards of
approximately $2,500,000 expiring in 1998 through 2006. The carryforwards
of Thermo Voltek are limited to a tax benefit of approximately $240,000
per year under Sections 382 and 383 of the U.S. Internal Revenue Code.
The Company has not recognized a deferred tax liability for the
difference between the book basis and tax basis of its investment in the
23PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
5. Income Taxes (continued)
common stock of its domestic subsidiaries (such difference relates
primarily to unremitted earnings and gains on issuance of stock by
subsidiaries) because the Company does not expect this basis difference
to become subject to tax at the parent level. The Company believes it can
implement certain tax strategies to recover its investment in its
domestic subsidiaries tax-free.
A provision has not been made for U.S. or additional foreign taxes on
$8,222,000 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.
The Company believes that any additional U.S. tax liability due upon
remittance of such earnings would be immaterial due to available U.S.
foreign tax credits.
6. Commitments
The Company and its subsidiaries lease various office and
manufacturing facilities under noncancellable operating lease
arrangements expiring from 1997 through 2003. The accompanying statement
of income includes expenses from operating leases of $5,689,000,
$3,416,000, and $2,081,000 in 1996, 1995, and 1994, respectively. Future
minimum payments due under noncancellable operating leases as of December
28, 1996, are $4,415,000 in 1997; $4,005,000 in 1998; $3,021,000 in 1999;
$2,433,000 in 2000; $1,892,000 in 2001; and $7,542,000 in 2002 and
thereafter. Total future minimum lease payments are $23,308,000.
7. Short- and Long-term Obligations and Other Financing Arrangements
Long-term Obligations
Long-term obligations of the Company are as follows:
(In thousands except per share amounts) 1996 1995
------------------------------------------------------------------------
Noninterest-bearing subordinated convertible notes,
due 2003, convertible at $32.68 per share $65,000 $ -
6 1/2% Subordinated convertible debentures,
due 1998, convertible at $10.42 per share - 8,037
3 3/4% Subordinated convertible debentures,
due 2000, convertible into shares of
Thermo Voltek at $7.83 per share 9,345 25,240
Noninterest-bearing subordinated convertible
debentures, due 1997, convertible into shares
of Thermo Cardiosystems at $14.49 per share 3,755 11,642
Other 14 282
------- -------
78,114 45,201
Less: Current maturity of long-term obligation 3,755 -
------- -------
$74,359 $45,201
======= =======
24PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
7. Short- and Long-term Obligations and Other Financing Arrangements
(continued)
In February 1996, the Company called for redemption on March 11,
1996, all of the outstanding principal amount of its 6 1/2% subordinated
convertible debentures due 1998. Approximately $7,780,000 of the
outstanding principal amount of the debentures was converted into the
Company's common stock.
The Company's convertible obligations are guaranteed on a
subordinated basis by Thermo Electron. The Company has agreed to
reimburse Thermo Electron in the event Thermo Electron is required to
make a payment under its guarantee of Thermo Voltek's or Thermo
Cardiosystems' obligations.
In lieu of issuing shares of Thermo Voltek common stock upon the
conversion of the 3 3/4% subordinated convertible debentures due 2000,
Thermo Voltek has the option to pay holders of the debentures cash equal
to the weighted average market price of its common stock on the trading
date prior to conversion.
During 1996, 1995, and 1994, convertible obligations of $31,562,000,
$37,317,000, and $9,745,000, respectively, were converted into common
stock of the Company or its subsidiaries.
See Note 12 for fair value information pertaining to the Company's
long-term obligations.
Short-term Obligations and Other Financing Arrangements
In September 1996, the Company repaid its $15,000,000 and $38,000,000
million promissory notes to Thermo Electron with proceeds from its 1996
issuance of $65,000,000 principal amount of noninterest-bearing
subordinated convertible debentures.
Several of the Company's foreign subsidiaries have lines of credit
under which an aggregate of $17,344,000 may be borrowed at a current rate
as determined by each country's local market. The lines of credit are
denominated in local currency. Unused lines of credit were $12,178,000 as
of December 28, 1996. Amounts borrowed under these agreements are
included in notes payable and current maturity of long-term obligation in
the accompanying balance sheet and are guaranteed by either the Company
or Thermo Electron. The weighted average interest rate on these
borrowings was 6.3% and 8.5% at year-end 1996 and 1995, respectively.
8. Related Party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement
under which Thermo Electron's corporate staff provides certain
administrative services, including certain legal advice and services,
risk management, certain employee benefit administration, tax advice and
preparation of tax returns, centralized cash management, and certain
financial and other services, for which the Company pays Thermo Electron
annually an amount equal to 1.0% of the Company's revenues. The Company
paid Thermo Electron an amount equal to 1.20% and 1.25% of the Company's
revenues in 1995 and 1994, respectively. The annual fee is reviewed and
adjusted annually by mutual agreement of the parties. The corporate
25PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
8. Related Party Transactions (continued)
services agreement is renewed annually but can be terminated upon 30
days' prior notice by the Company or upon the Company's withdrawal from
the Thermo Electron Corporate Charter (the Thermo Electron Corporate
Charter defines the relationships among Thermo Electron and its
majority-owned subsidiaries). In addition, the Company uses data
processing and contract administration services of two majority-owned
subsidiaries of Thermo Electron, and is charged based on actual usage.
For these services, as well as the administrative services provided by
Thermo Electron, the Company was charged $2,953,000, $2,529,000, and
$2,322,000 in 1996, 1995, and 1994, respectively. Management believes
that the service fees charged by Thermo Electron and its subsidiaries are
reasonable and that such fees are representative of the expenses the
Company would have incurred on a stand-alone basis. For additional items
such as employee benefit plans, insurance coverage, and other
identifiable costs, Thermo Electron charges the Company based upon costs
attributable to the Company.
Distribution Agreements
Pursuant to an international distributorship agreement, Thermedics
Detection appointed Arabian Business Machines Co. (ABM) as its exclusive
distributor of the Company's security instruments in certain Middle
Eastern countries. ABM is a member of The Olayan Group. Ms. Hutham S.
Olayan, a director of Thermo Electron, is the president and a director of
Olayan America Corporation and Competrol Real Estate Limited, two other
members of The Olayan Group, which are indirectly controlled by Suliman
S. Olayan, Ms. Olayan's father. Revenues recorded under this agreement
totaled $652,000, $3,000, and $42,000 in 1996, 1995, and 1994,
respectively. In addition, during 1994, the Company sold $1,240,000 of
security instruments directly to a customer in the Middle East and paid a
commission of $409,000 pursuant to the ABM distributor agreement.
Management Contract
Two executive employees of the Company allocate a portion of their
salary, bonus, and travel expenses for the time they devote to Thermo
Electron in connection with certain management responsibilities relating
to Thermo Electron's wholly owned biomedical businesses. In 1996, 1995,
and 1994, the Company was reimbursed $707,000, $402,000, and $84,000,
respectively, under this arrangement.
Repurchase Agreement
The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.
Short-term Available-for-sale Investments
As of December 28, 1996, and December 30, 1995, the Company's
short-term available-for-sale investments included $1,937,000 and
$2,100,000 (amortized cost of $1,846,000 and $1,844,000), respectively,
of 6 1/2% subordinated convertible debentures due 1997, which were
purchased on the open market. The debentures have a par value of
$1,800,000 and were issued by Thermo TerraTech Inc., a majority-owned
subsidiary of Thermo Electron.
26PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
8. Related Party Transactions (continued)
Common Stock
In January and April 1996, the Company issued an aggregate of
1,987,273 shares of its common stock to Thermo Electron in exchange for
634,049 shares of common stock of Thermo Voltek and 929,947 shares of
common stock of Thermo Cardiosystems. The shares of common stock were
exchanged at their respective fair market values on the dates of the
transactions.
During 1994, the Company issued 66,265 shares of its common stock
to Thermo Electron in exchange for 187,200 shares of Thermo Voltek common
stock.
Share information for Thermo Cardiosystems and Thermo Voltek has
been restated to reflect three-for-two stock splits, effected in the form
of 50% stock dividends, distributed in May 1996 and August 1996,
respectively.
9. Contingency
Thermo Cardiosystems has received correspondence alleging that the
textured surface of the left ventricular-assist system's (LVAS) housing
infringed the intellectual property rights of another party. In general,
an owner of intellectual property can prevent others from using such
property without a license and is entitled to damages for unauthorized
past usage. The Company has investigated the bases of the allegation and,
based on the opinion of its counsel, believes that if Thermo
Cardiosystems were sued on these bases, it would have meritorious
defenses.
10. Common Stock
At December 28, 1996, the Company had reserved 4,030,200 unissued
shares of its common stock for possible issuance under stock-based
compensation plans and possible issuance upon conversion of the
noninterest-bearing subordinated convertible debentures.
11. Transactions in Stock of Subsidiaries
In March 1996, Thermedics Detection issued 300,000 shares of its
common stock, at $10.00 per share, in a private placement for net
proceeds of $3,000,000, resulting in a gain of $2,516,000. In November
1996, Thermedics Detection issued 383,500 shares of its common stock, at
$10.75 per share, in a private placement for net proceeds of $3,964,000,
resulting in a gain of $3,165,000.
In April 1996, the Company's Thermo Sentron subsidiary issued
2,875,000 shares of its common stock, at $16.00 per share, in an initial
public offering for net proceeds of $42,335,000, resulting in a gain of
$17,970,000.
During 1995, $9,111,000 principal amount of Thermo Voltek's
subordinated convertible debentures was converted into 1,163,098 shares
of Thermo Voltek common stock, resulting in a gain of $3,455,000.
27PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
11. Transactions in Stock of Subsidiaries (continued)
During 1996 and 1995, a large portion of Thermo Cardiosystems'
subordinated convertible obligations was converted into shares of Thermo
Cardiosystems common stock. No gains were recorded on the conversions of
these convertible obligations as Thermo Cardiosystems was principally
engaged in research and development at the time the convertible
obligations were issued.
The Company's percentage ownership of its majority-owned
subsidiaries at year end was as follows:
1996 1995 1994
------------------------------------------------------------------------
Thermo Cardiosystems 54% 52% 55%
Thermo Voltek 51% 50% 60%
Thermo Sentron 71% 100% 100%
Thermedics Detection 94% 100% 100%
12. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale investments, accounts receivable, notes
payable and current maturity of long-term obligation, accounts payable,
due to parent company, and long-term obligations. The carrying amounts of
these financial instruments, with the exception of available-for-sale
investments, current maturity of long-term obligation, and long-term
obligations, approximates fair value due to their short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on
quoted market prices. See Note 2 for fair value information pertaining to
these financial instruments.
The fair value of short- and long-term obligations was determined
based on quoted market prices. The fair value of convertible obligations
at year-end 1995 exceeds the carrying amount primarily due to the market
price of the Company's or subsidiaries' common stock exceeding the
conversion price of the convertible obligations. The carrying amount and
fair value of the Company's short- and long-term obligations are as
follows:
1996 1995
-------------------- --------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
-----------------------------------------------------------------------
Current maturity of
long-term
obligation $ 3,755 $ 7,435 $ - $ -
======= ======= ======= =======
Convertible
obligations $74,345 $62,666 $44,919 $95,589
Other long-term
obligations 14 14 282 282
------- ------- ------- -------
$74,359 $62,680 $45,201 $95,871
======= ======= ======= =======
28PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
13. Nonrecurring Costs
The Company recorded nonrecurring costs of $12,728,000 in 1996 for
the write-off of cost in excess of net assets of acquired company and
certain other intangible assets associated with its Corpak subsidiary.
The primary growth focus of the Company's biomedical products segment has
become technology for improved product quality and implantable left
ventricular-assist systems. The Company no longer expects to reinvest in
its enteral nutrition-delivery business. The Company's analysis indicates
that the expected future undiscounted cash flow from this business would
be insufficient to recover the Company's investment.
In 1996, the Company wrote off $4,909,000 of acquired technology
associated with the acquisition of Nimbus by Thermo Cardiosystems (Note
3).
14. Business Segments, Geographical Information, and Concentrations
of Risk
The Company's principal businesses can be divided into two
segments. The Company's Instruments and Other Equipment segment develops,
manufactures, sells, and distributes precision equipment that weighs and
inspects bulk materials and packaged goods; electrochemistry,
microweighing, and other laboratory instruments; process detection
instruments; explosives-detection instruments; instruments that test
electronic and electrical systems and components for immunity to
electromagnetic interference; high-voltage power-conversion systems; and
programmable power amplifiers. The Company's Biomedical Products segment
develops, manufactures, and sells LVAS, whole-blood coagulation testing
equipment, skin-incision devices, and other biomedical products.
The Company's Instruments and Other Equipment segment derived
revenues from precision weighing and inspection equipment of $70,027,000,
$67,474,000 and $50,116,000 in 1996, 1995, and 1994, respectively, and
from laboratory products of $50,854,000 in 1996. In addition, this
segment derived revenues from process detection instruments of
$16,032,000, $18,488,000, and $38,001,000, and from electronic test
instruments of $44,081,000, $31,580,000, and $19,009,000 in 1996, 1995,
and 1994, respectively.
The Company's Biomedical Products segment derived revenues from
LVAS devices of $29,970,000, $20,593,000, and $10,409,000 in 1996, 1995,
and 1994, respectively. In addition, this segment derived revenues from
blood coagulation testing equipment and skin-incision devices of
$33,992,000, $32,287,000, and $28,642,000, in 1996, 1995, and 1994,
respectively.
Certain raw materials used in the manufacture of Thermo
Cardiosystems' LVAS are available from only one or two suppliers. Thermo
Cardiosystems is making efforts to minimize the risks associated with
sole sources and ensure long-term availability, including qualifying
certain other alternative materials and components or developing
alternative sources for materials or components supplied by a single
source. Although the Company believes that it has adequate supplies of
materials and components to meet demand for the LVAS for the foreseeable
future, no assurance can be given that the Company will not experience
29PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
14. Business Segments, Geographical Information, and Concentrations
of Risk (continued)
shortages of certain materials or components in the future that could
delay shipments of the LVAS.
No customer accounted for 10% or more of the Company's total
revenues in 1996 and 1995. During 1994, revenues derived from one
customer accounted for 21% of the Company's total revenues.
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Business Segment Information
Revenues:
Instruments and Other Equipment $213,138 $136,742 $124,100
Biomedical Products 78,939 71,299 59,653
-------- -------- --------
$292,077 $208,041 $183,753
======== ======== ========
Income before provision for income
taxes and minority interest:
Instruments and Other Equipment $ 22,725 $ 14,778 $ 16,054
Biomedical Products (718) 13,965 7,471
Corporate (a) (2,112) (2,462) (3,056)
-------- -------- --------
Total operating income 19,895 26,281 20,469
Interest and other income, net 31,602 9,286 4,989
-------- -------- --------
$ 51,497 $ 35,567 $ 25,458
======== ======== ========
Identifiable assets:
Instruments and Other Equipment $297,141 $213,755 $141,763
Biomedical Products 133,048 146,269 132,599
Corporate (b) 26,510 26,225 32,329
-------- -------- --------
$456,699 $386,249 $306,691
======== ======== ========
Depreciation and amortization:
Instruments and Other Equipment $ 7,304 $ 4,040 $ 2,923
Biomedical Products 3,115 2,697 2,128
Corporate 12 29 29
-------- -------- --------
$ 10,431 $ 6,766 $ 5,080
======== ======== ========
Capital expenditures:
Instruments and Other Equipment $ 5,185 $ 2,669 $ 1,919
Biomedical Products 3,436 3,999 3,015
Corporate - 23 23
-------- -------- --------
$ 8,621 $ 6,691 $ 4,957
======== ======== ========
30PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
14. Business Segments, Geographical Information, and Concentrations
of Risk (continued)
(In thousands) 1996 1995 1994
------------------------------------------------------------------------
Geographical Information
Revenues:
United States $226,473 $160,016 $149,993
Europe 63,932 43,018 31,640
Other 14,420 13,084 12,594
Transfers among geographical areas (c) (12,748) (8,077) (10,474)
-------- -------- --------
$292,077 $208,041 $183,753
======== ======== ========
Income before provision for income
taxes and minority interest:
United States $ 12,863 $ 23,961 $ 21,426
Europe 7,366 3,170 1,040
Other 1,778 1,612 1,059
Corporate (a) (2,112) (2,462) (3,056)
-------- -------- --------
Total operating income 19,895 26,281 20,469
Interest and other income, net 31,602 9,286 4,989
-------- -------- --------
$ 51,497 $ 35,567 $ 25,458
======== ======== ========
Identifiable assets:
United States $371,326 $319,712 $240,693
Europe 51,376 33,259 27,361
Other 7,487 7,053 6,308
Corporate (b) 26,510 26,225 32,329
-------- -------- --------
$456,699 $386,249 $306,691
======== ======== ========
Export revenues included in United States
revenues above (d):
Europe $ 24,769 $ 21,432 $ 25,024
Other 42,233 25,602 37,287
-------- -------- --------
$ 67,002 $ 47,034 $ 62,311
======== ======== ========
(a) Primarily general and administrative expenses.
(b) Primarily cash, cash equivalents, and short- and long-term
available-for-sale investments.
(c) Transfers among geographical areas are accounted for at prices that
are representative of transactions with unaffiliated parties.
(d) In general, export sales are denominated in U.S. dollars.
31PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
15. Subsequent Events
Issuance of Stock by Subsidiary
In March 1997, Thermedics Detection issued 2,671,292 shares of its
common stock in an initial public offering at $11.50 per share, for net
proceeds of approximately $28.1 million, resulting in a gain of $17.1
million. Following the initial public offering, the Company owned 75% of
Thermedics Detection's outstanding common stock.
Acquisition
On May 2, 1997, Thermo Cardiosystems acquired International
Technidyne from Thermo Electron in exchange for the right to receive
3,355,705 shares of Thermo Cardiosystems' common stock. International
Technidyne is a leading manufacturer of near-patient, whole-blood
coagulation testing equipment and related disposables and also
manufactures single-use, premium-priced, skin-incision devices.
Because the Company, Thermo Cardiosystems, and International
Technidyne were deemed for accounting purposes to be under control of
their common majority owner, Thermo Electron, the transaction has been
accounted for at historical cost in a manner similar to a
pooling-of-interests. Accordingly, all historical financial information
presented has been restated to include the acquisition of International
Technidyne. The 3,355,705 shares of Thermo Cardiosystems' common stock
issuable in the merger will not be issued until the listing of such
shares for trading upon American Stock Exchange has been approved by
Thermo Cardiosystems' shareholders.
Revenues and net income, as previously reported by the separate
entities prior to the acquisition and as restated for the combined
Company, are as follows:
(In thousands) 1996 1995 1994
-----------------------------------------------------------------------
Revenues:
Historical $258,085 $175,754 $155,111
International Technidyne 33,992 32,287 28,642
-------- -------- --------
$292,077 $208,041 $183,753
======== ======== ========
Net income:
Historical $ 26,831 $ 15,121 $ 10,837
International Technidyne 4,672 4,210 3,788
Minority interest expense not
previously reported (2,365) (2,157) (1,930)
-------- -------- --------
$ 29,138 $ 17,174 $ 12,695
======== ======== ========
Issuance of Subordinated Convertible Debentures
On May 9, 1997, Thermo Cardiosystems issued and sold at par
$70,000,000 principal amount of 4 3/4% subordinated convertible
debentures due 2004 for net proceeds of approximately $68,100,000. The
debentures are convertible into shares of Thermo Cardiosystems' common
stock at a conversion price of $31.415 per share and are guaranteed on a
subordinated basis by Thermo Electron Corporation.
32PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Notes to Consolidated Financial Statements
16. Unaudited Quarterly Information
(In thousands except per share amounts)
1996(a) First(b) Second Third Fourth
----------------------------------------------------------------------
Revenues $68,994 $71,094 $74,202 $77,787
Gross profit 33,185 34,121 37,668 38,966
Net income 5,257 9,754 6,359 7,768
Earnings per share .15 .26 .16 .20
1995 First Second Third Fourth(c)
------------------------------------------------------------------------
Revenues $51,680 $51,907 $49,127 $55,327
Gross profit 23,799 24,681 22,294 26,332
Net income 3,572 4,267 4,578 4,757
Earnings per share .11 .13 .14 .14
(a) Results include nontaxable gains of $2,516,000, $17,970,000, and
$3,165,000 in the first, second, and fourth quarters, respectively,
from the issuance of stock by subsidiaries.
(b) Reflects the January 1996 acquisition of Moisture Systems and Rutter.
(c) Reflects the December 1995 acquisition of Orion.
33PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermedics Inc.:
We have audited the accompanying consolidated balance sheet of
Thermedics Inc. (a Massachusetts corporation and 55%-owned subsidiary of
Thermo Electron Corporation) and subsidiaries as of December 28, 1996,
and December 30, 1995, and the related consolidated statements of income,
shareholders' investment, and cash flows for each of the three years in
the period ended December 28, 1996. 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 financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Thermedics Inc. and subsidiaries as of December 28, 1996, and December
30, 1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 28, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
May 2, 1997 (except with
respect to the matter
discussed in Note 15,
as to which the date is
May 9, 1997)
34PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," "seeks," "estimates," and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the results of the Company to differ
materially from those indicated by such forward-looking statements,
including those detailed immediately after this Management's Discussion
and Analysis of Financial Condition and Results of Operations under the
caption "Forward-looking Statements."
Overview
The Company's business can be divided into two segments: Instruments
and Other Equipment, and Biomedical Products. The Instruments and Other
Equipment segment includes the Company's Thermo Sentron Inc. (Thermo
Sentron) subsidiary, which designs, develops, manufactures, and sells
high-speed precision weighing and inspection equipment for industrial
production and packaging lines; its Orion laboratory products division
(Orion), which manufactures electrochemistry, microweighing, process, and
other instruments used to analyze the chemical compositions of foods,
beverages, and pharmaceuticals and to detect contaminants in high-purity
water; its Thermedics Detection Inc. (Thermedics Detection) subsidiary,
which develops, manufactures, and markets high-speed, on-line detection
instruments used in a variety of industrial process applications,
explosives detection, and laboratory analysis; and its Thermo Voltek
Corp. (Thermo Voltek) subsidiary, which manufactures electromagnetic
compatibility testing instruments, high-voltage power-conversion systems,
and programmable power amplifiers.
As part of its Biomedical Products segment, the Company's Thermo
Cardiosystems Inc. (Thermo Cardiosystems) subsidiary manufactures
implantable left ventricular-assist systems (LVAS). Thermo Cardiosystems'
electric LVAS is being used in Europe as a bridge to transplant and as an
alternative to medical therapy. According to terms set by the U.S. Food
and Drug Administration (FDA), no profit can be earned from the sale of
an LVAS in the U.S. until the FDA has approved the device for commercial
sale. With the FDA's approval, the Company began earning a profit on the
sale of its air-driven LVAS in the fourth quarter of 1994. Until FDA
approval has been obtained, the Company may not earn a profit on the sale
in the U.S. of other products, such as the electric LVAS, currently used
in clinical studies. Thermo Cardiosystems' International Technidyne
Corporation (International Technidyne) subsidiary is a leading
manufacturer of near-patient, whole-blood coagulation testing equipment
and related disposables and also manufactures single-use, premium-priced,
skin-incision devices. The Company also develops and manufactures enteral
nutrition delivery systems and a line of medical-grade polymers used in
medical disposables and nonmedical, industrial applications, including
safety glass and automotive coatings.
35PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview (continued)
Approximately 45% of the Company's revenues in 1996 were derived from
sales of products outside of the U.S., through export sales and sales by
the Company's foreign subsidiaries. The Company expects an increase in
the percentage of revenues derived from international operations.
Although the Company seeks to charge its customers in the same currency
as its operating costs, the Company's financial performance and
competitive position can be affected by currency exchange rate
fluctuations between the U.S. dollar and foreign currencies. Where
appropriate, the Company uses forward contracts to reduce its exposure to
currency fluctuations.
Results of Operations
1996 Compared With 1995
Total revenues increased 40% to $292.1 million in 1996 from $208.0
million in 1995. Instruments and Other Equipment segment revenues
increased to $213.1 million in 1996 from $136.7 million in 1995,
primarily due to the inclusion of $73.5 million in revenues from acquired
businesses (Note 3), principally Orion, acquired in December 1995,
Moisture Systems Corporation (Moisture Systems) and Rutter & Co. B.V.
(Rutter), acquired by Thermedics Detection in January 1996 and, to a
lesser extent, acquisitions by Thermo Sentron and Thermo Voltek.
Thermedics Detection's process detection instrument sales to the beverage
industry declined to $16.0 million in 1996 from $18.5 million in 1995,
primarily due to a decrease in product demand from Thermedics Detection's
principal customer, which has substantially completed its initial
deployment of Alexus systems. Revenues from Thermedics Detection's
explosives-detection systems increased to $7.1 million in 1996 from $4.6
million in 1995, primarily due to the sale of eight EGIS units to the
U.S. government to provide counter-terrorism support in Israel. Revenues
from Thermo Voltek increased $12.2 million to $48.5 million in 1996 due
in part to an increase in revenues at its Comtest subsidiary from sales
of electrostatic-discharge test equipment and its introduction of a new
product line in 1995. In addition, Thermo Voltek's revenues increased due
to the inclusion of $3.0 million in revenues from Pacific Power Source
Corporation, acquired in July 1996, and increased demand for
electromagnetic compatibility test equipment at its Keytek division.
Biomedical Products segment revenues increased to $78.9 million in
1996 from $71.3 million in 1995. Revenues from Thermo Cardiosystems
increased $11.1 million to $64.0 million in 1996, primarily due to a $9.4
million increase in LVAS sales and, to a lesser extent, a $1.7 million
increase in International Technidyne product sales. The increase in LVAS
revenues reflects a 61% increase in the number of air-driven and electric
LVAS units shipped for subsequent implant and a 30% increase in the
number of LVAS implementation programs sold during 1996. International
Technidyne revenue growth resulted primarily from a $1.4 million increase
in sales of skin-incision devices due to an increase in demand. These
increases were offset in part by a decline of $4.3 million in revenues
from Scent Seal fragrance samplers. In June 1995, the Company entered
into an agreement with a third party granting an exclusive license to all
36PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1996 Compared With 1995 (continued)
of its patents and know-how relating to the Scent Seal fragrance samplers
to a third party in consideration for royalty payments on future sales by
the licensee. The Company recorded royalty income of $426,000 in 1996 and
$197,000 in 1995 related to this agreement. The Company expects that
shipments of LVAS will stabilize at current levels until the electric
LVAS is approved for commercial sale in the U.S. and for use outside the
hospital. The Company believes that this approval could occur during
1997, however, there can be no assurance that the Company will receive
this approval within the expected time period or at all.
The gross profit margin was 49% in 1996, compared with 47% in 1995.
The gross profit margin for the Instruments and Other Equipment segment
increased to 48% in 1996 from 43% in 1995, primarily due to the inclusion
of higher-margin revenues at Orion, Moisture Systems, and Rutter.
The gross profit margin for the Biomedical Products segment increased
to 54% in 1996 from 53% in 1995, primarily from an increase in revenues
in Thermo Cardiosystems' LVAS product line due to higher-margin
implementation programs, an increase in sales volume and, to a lesser
extent, improvements in manufacturing efficiencies. These increases were
offset in part by inventory write-offs at the Company's Corpak subsidiary
associated with discontinued product lines. In addition, 1995 included
lower-margin revenues from the sale of Scent Seal fragrance samplers.
Selling, general, and administrative expenses as a percentage of
revenues increased to 29% in 1996 from 27% in 1995, primarily due to
higher expenses as a percentage of revenues at Orion, Moisture Systems,
and Rutter and, to a lesser extent, costs incurred by Thermedics
Detection related to a reduction in personnel and leased space in
response to the lower sales volume of process detection instruments to
the beverage industry.
Research and development expenses as a percentage of revenues
increased to 7.3% in 1996 from 7.1% in 1995, primarily due to increased
research and development expenses at Thermedics Detection. The Company
does not expect research and development expenses to increase as a result
of Thermo Cardiosystems' acquisition of Nimbus Medical, Inc. (Nimbus)
(Note 3), as most of Nimbus' research and development costs have
historically been externally funded through government contracts.
The primary growth focus of the Company's Biomedical Products segment
has become technology for improved product quality and implantable LVAS.
The Company no longer expects to reinvest in its enteral
nutrition-delivery business. The Company's analysis indicates that the
expected future undiscounted cash flow from this business will be
insufficient to recover the Company's investment. Accordingly, in 1996,
the Company recorded nonrecurring costs of $12.7 million for the
write-off of cost in excess of net assets of acquired company and certain
other intangible assets associated with its Corpak subsidiary. In
addition, in connection with the December 1996 acquisition of Nimbus, the
Company wrote off $4.9 million, which represents the portion of the
purchase price allocated to technology in development based on estimated
replacement cost (Note 3).
Interest income increased to $10.8 million in 1996 from $9.1 million
in 1995, primarily due to interest income earned on invested proceeds
from the Company's May 1996 issuance of $65.0 million principal amount of
37PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1996 Compared With 1995 (continued)
noninterest-bearing subordinated convertible debentures and Thermo
Sentron's April 1996 initial public offering of common stock. These
increases were offset in part by cash used for the repayment of an
aggregate of $53.0 million of promissory notes to Thermo Electron
Corporation (Thermo Electron) (Note 3). Interest expense increased to
$3.8 million in 1996 from $3.7 million in 1995, as a result of additional
borrowings by the Company to fund acquisitions, largely offset by a
decrease in interest expense due to conversions of the Company's and its
subsidiaries' subordinated convertible obligations.
The Company has adopted a strategy of spinning out certain of its
businesses into separate subsidiaries and having these subsidiaries sell
a minority interest to outside investors. The Company believes that this
strategy provides additional motivation and incentives for the management
of the subsidiary through the establishment of subsidiary-level stock
option incentive programs, as well as capital to support the
subsidiaries' growth. As a result of Thermo Sentron's April 1996 initial
public offering of its common stock and Thermedics Detection's March 1996
and November 1996 private placements of its common stock, the Company
recorded gains of $23.7 million in 1996. These gains represent an
increase in the Company's proportionate share of the subsidiary's equity
and are classified as "Gain on issuance of stock by subsidiaries" in the
accompanying statement of income. The size and timing of these
transactions are dependent on market and other conditions that are beyond
the Company's control. In addition, in October 1995, the Financial
Accounting Standards Board (FASB) issued an exposure draft of a Proposed
Statement of Financial Accounting Standards, "Consolidated Financial
Statements: Policy and Procedures" (the Proposed Statement). The Proposed
Statement would establish new rules for how consolidated financial
statements should be prepared. If the Proposed Statement is adopted,
there could be significant changes in the way the Company records certain
transactions of its controlled subsidiaries. Among those changes, any
sale of the stock of a subsidiary that does not result in a loss of
control would be accounted for as a transaction in equity of the
consolidated entity with no gain or loss being recorded. The FASB expects
to issue a final statement or a revised exposure draft in 1997.
The effective tax rate was 27% in 1996, compared with 33% in 1995.
The effective tax rate in 1996 was below the statutory federal income tax
rate primarily due to the nontaxable gain on issuance of stock by
subsidiaries and the elimination of the valuation allowance no longer
required (Note 5), offset in part by the nondeductible write-off of
certain intangible assets at the Company's Corpak subsidiary (Note 13),
the impact of state income taxes, and nondeductible amortization of cost
in excess of net assets of acquired companies. The effective tax rate in
1995 was below the statutory federal income tax rate primarily due to
nontaxable gain on issuance of stock by subsidiaries and the reduction of
the valuation allowance no longer required (Note 5), offset in part by
the impact of state income taxes.
Minority interest expense increased to $8.4 million in 1996 from $6.6
million in 1995 due to higher profits at the Company's Thermo Voltek
subsidiary, and to a lesser extent, the minority interest associated with
the Company's newly public Thermo Sentron subsidiary.
38PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1995 Compared With 1994
Total revenues increased 13% to $208.0 million in 1995 from $183.8
million in 1994. Instruments and Other Equipment segment revenues
increased 10% to $136.7 million in 1995 from $124.1 million in 1994.
Revenues increased $17.4 million due to the inclusion of sales for a full
year from Thermo Sentron, acquired in March 1994. Revenues from Thermo
Voltek increased $12.7 million, due to the inclusion of an additional
$7.2 million in revenues from businesses acquired in 1994 and 1995, an
increase of $3.1 million in revenues from Comtest primarily due to the
introduction of a new product line in 1995, and an increase of $2.3
million in revenues from Keytek due to greater demand. Revenues at
Thermedics Detection were $28.0 million in 1995, compared with $50.3
million in 1994. Revenues from Thermedics Detection's process detection
instruments declined to $18.5 million in 1995 from $38.0 million in 1994.
This decline was due to a decrease in product demand from Thermedics
Detection's principal customer, which has substantially completed its
initial deployment of Alexus systems. Revenues from Thermedics
Detection's EGIS explosives-detection system declined to $4.6 million in
1995 from $10.1 million in 1994. The Company's sales of the EGIS system
have been made primarily to government entities outside of the U.S.
During 1993 and 1994, large orders from the U.K. and German governments
accounted for a significant portion of EGIS sales. These orders were
substantially filled by the end of 1994.
Biomedical Products segment revenues increased 19% to $71.3 million
in 1995 from $59.7 million in 1994. Revenues from Thermo Cardiosystems
increased by $13.8 million to $52.9 million primarily due to a $10.2
million increase in LVAS sales and, to a lesser extent, a $3.6 million
increase in International Technidyne product sales. LVAS revenues
increased due in part to an increase in the price of the LVAS. Revenues
also increased due to a 43% increase in the number of air-driven and
electric LVAS units shipped during 1995 compared with 1994. International
Technidyne revenue growth resulted primarily from sales of new blood
coagulation products, as well as a $1.6 million increase in sales of
skin-incision devices due primarily to an increase in demand. The
increase in revenues from Thermo Cardiosystems was partially offset by a
decline of $2.8 million in revenues from Scent Seal fragrance samplers.
In June 1995, the Company entered into an agreement granting an exclusive
license to all of its patents and know-how relating to the Scent Seal
fragrance samplers to a third party in consideration for royalty payments
on future sales by the licensee. The Company recorded royalty income of
$197,000 in 1995.
The gross profit margin was 47% in 1995, compared with 46% in 1994.
The gross profit margin for the Instruments and Other Equipment segment
was 43% in 1995, compared with 44% in 1994. This decline was primarily
due to lower gross margins at Thermedics Detection as a result of a lower
sales volume and, to a lesser extent, the inclusion of lower-margin
research and development contract revenues. In addition, Thermo Voltek's
gross profit margin decreased to 48% in 1995 from 49% in 1994 primarily
due to higher European sales in one product line, which has lower margins
due to competitive pricing pressures. These decreases were offset in part
by improved gross profit margins at Thermo Sentron due to a reduction in
operating expenses.
39PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1995 Compared With 1994 (continued)
The gross profit margin for the Biomedical Products segment was 53%
in 1995, compared with 50% in 1994, reflecting higher margins for the
Thermo Cardiosystems LVAS product line resulting from the price increase
and, to a lesser extent, the increase in sales volume and improvements in
manufacturing efficiencies. This increase was offset in part by a
decrease in International Technidyne gross profit margin to 58% in 1995
from 59% in 1994 as a result of increased costs associated with new
coagulation products.
Selling, general, and administrative expenses as a percentage of
revenues remained constant at 27% in 1995 and 1994. Lower expenses as a
percentage of revenues at Thermo Cardiosystems as a result of a higher
sales volume in 1995 and, to a lesser extent, a reduction in operating
expenses at Thermo Sentron were offset by higher expenses as a percentage
of revenues at Thermedics Detection due to a lower sales volume in 1995.
Research and development expenses as a percentage of revenues
decreased to 7.1% in 1995 from 7.7% in 1994, primarily due to lower
expenses as a percentage of revenues at Thermo Cardiosystems as a result
of an increase in total revenues.
Interest income increased to $9.1 million in 1995 from $7.3 million
in 1994 due to higher prevailing interest rates in 1995. Interest expense
increased to $3.7 million in 1995 from $3.2 million in 1994 as a result
of borrowings by Thermo Sentron's and Thermo Voltek's foreign
subsidiaries, offset in part by a decrease in interest expense due to
conversions of the Company's and its subsidiaries' subordinated
convertible obligations.
Gain on issuance of stock by subsidiaries of $3.5 million in 1995
resulted from the conversion of $9.1 million principal amount of Thermo
Voltek's 3 3/4% subordinated convertible debentures.
The effective tax rate was 33% in 1995, compared with 38% in 1994.
The effective tax rate in 1995 was below the statutory federal income tax
rate primarily due to the nontaxable gain on issuance of stock by
subsidiaries and the reduction of the valuation allowance no longer
required, offset in part by the impact of state income taxes (Note 5).
The effective tax rate in 1994 was higher than the statutory federal
income tax rate primarily due to the impact of state income taxes.
Minority interest expense increased to $6.6 million in 1995 from $3.1
million in 1994 due to higher net income at the Company's Thermo
Cardiosystems subsidiary and, to a lesser extent, the Company's Thermo
Voltek subsidiary.
Liquidity and Capital Resources
Consolidated working capital was $208.2 million at December 28, 1996,
compared with $114.3 million at December 30, 1995. Cash, cash
equivalents, and short- and long-term available-for-sale investments were
$181.8 million at December 28, 1996, compared with $155.3 million at
December 30, 1995. Of the $181.8 million balance at December 28, 1996,
$81.5 million was held by Thermo Cardiosystems, $34.8 million by Thermo
Sentron, $27.9 million by Thermo Voltek, $13.5 million by Thermedics
Detection, and the remainder by the Company and its wholly owned
subsidiaries.
40PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
During 1996, $27.6 million of cash was provided by operating
activities. Cash provided by operations was offset in part by cash of
$13.9 million used to fund an increase in accounts receivable primarily
due to increased sales at Thermo Voltek and Thermo Cardiosystems and, to
a lesser extent, due to a high level of sales in December 1996 at Thermo
Sentron.
During 1996, the Company's primary investing activities, excluding
purchases, sales, and maturities of available-for-sale investments,
included acquisitions and capital expenditures. In January 1996, the
Company acquired the assets and certain liabilities of Moisture Systems
and the stock of Rutter, for a total purchase price of $21.7 million in
cash, which included the repayment of $0.7 million of debt. In connection
with these acquisitions, the Company borrowed $15.0 million from Thermo
Electron pursuant to a promissory note due February 1997 (Note 3). In
September 1996, the Company repaid the promissory note with proceeds from
the sale of subordinated convertible debentures (Note 7). During 1996,
the Company, through its majority-owned subsidiaries, made other
acquisitions of businesses and product lines for approximately $20.5
million in cash. During 1996, the Company expended $8.6 million on
purchases of property, plant, and equipment and expects to make capital
expenditures of approximately $11 million in 1997.
During 1996, the Company expended approximately $49.3 million for
financing activities. In March and November 1996, Thermedics Detection
issued shares of its common stock in private placements for aggregate net
proceeds of $7.0 million. In April 1996, Thermo Sentron issued shares of
its common stock in an initial public offering for net proceeds of $42.3
million (Note 11). In May 1996, the Company issued and sold $65.0 million
principal amount of noninterest-bearing subordinated convertible
debentures due 2003, for net proceeds of $63.2 million (Note 7). In
September 1996, the Company repaid its $15.0 million and $38.0 million
promissory notes to Thermo Electron with proceeds from the debenture
offering.
The Company intends, for the foreseeable future, to maintain at least
50% ownership of Thermo Cardiosystems, Thermo Voltek, Thermo Sentron, and
Thermedics Detection. This may require the Company's purchase of
additional shares of common stock or, if applicable, convertible
debentures (which are then converted) of these companies from time to
time, as the number of the companies' outstanding shares increases,
whether as a result of conversion of convertible notes or exercise of
stock options issued by them, or otherwise. These or any other purchases
may be made in the open market; directly from the applicable subsidiary,
or Thermo Electron; or pursuant to the conversion of all or part of
Thermo Voltek's subordinated convertible notes held by the Company. The
Company's and Thermo Cardiosystems' Boards of Directors each authorized
the repurchase, through June 1, 1997, and August 12, 1997, respectively,
of up to $10.0 million of their own securities. The Company's
authorization also includes the repurchase of securities of Thermo
Cardiosystems, Thermo Voltek, and Thermo Sentron. Any such purchases
would be funded from working capital. Through December 28, 1996, the
Company and Thermo Cardiosystems had expended $10.0 million and $5.7
41PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
million, respectively, under their authorizations. In March 1997,
Thermedics Detection issued shares of its common stock in an initial
public offering for net proceeds of approximately $28.1 million.
In May 1997, Thermo Cardiosystems received net proceeds of
approximately $68.1 million from the issuance of $70 million principal
amount of 4 3/4% subordinated convertible debentures (Note 12).
In January and April 1996, the Company issued an aggregate of
1,987,273 shares of its common stock to Thermo Electron in exchange for
634,049 shares of Thermo Voltek common stock and 929,947 shares of Thermo
Cardiosystems common stock. The shares of common stock were exchanged at
their respective fair market values on the dates of the transactions.
The Company expects to continue to pursue its strategy of expanding
its business both through the continued development, manufacture, and
sale of new products, and through the possible acquisition of companies
that will provide additional marketing or manufacturing capabilities and
new products. The Company expects that it will finance these acquisitions
through a combination of internal funds, additional debt or equity
financing from the capital markets, or short-term borrowings from Thermo
Electron. The Company believes its existing resources are sufficient to
meet the capital requirements of its existing operations for the
foreseeable future.
42PAGE
<PAGE>
Thermedics Inc. 1996 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 1997 and beyond to differ
materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
Risks Associated With Acquisition Strategy. The Company's strategy
includes the acquisition of businesses and technologies that complement
or augment its existing product lines. Promising acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory
approval, including antitrust approvals. There can be no assurance that
the Company will be able to complete future acquisitions or that it will
be able to successfully integrate any acquired business. In order to
finance such acquisitions, it may be necessary for the Company to raise
additional funds through public or private financings. Any equity or debt
financing, if available at all, may be on terms which are not favorable
to the Company and, in the case of equity financing, may result in
dilution to the Company's stockholders.
Risks Associated with Spin-Out of Subsidiaries. The Company has
adopted a strategy of spinning out certain of its businesses into
separate subsidiaries and having these subsidiaries sell a minority
interest to outside investors. As a result of the sale of stock by
subsidiaries, the issuance of stock by subsidiaries upon conversion of
convertible debentures and similar transactions, the Company records
gains that represent the increase in the Company's net investment in the
subsidiaries. These gains have represented a substantial portion of the
net income reported by the Company in certain periods. The size and
timing of these transactions are dependent on market and other conditions
that are beyond the Company's control. Accordingly, there can be no
assurance that the Company will be able to generate gains from such
transactions in the future.
In addition, in October 1995, the Financial Accounting Standards
Board (FASB) issued an exposure draft of a Proposed Statement of
Financial Accounting Standards, "Consolidated Financial Statements:
Policy and Procedures" (the Proposed Statement). The Proposed Statement
would establish new rules for how consolidated financial statements
should be prepared. If the Proposed Statement is adopted, there could be
significant changes in the way the Company records certain transactions
of its controlled subsidiaries. Among those changes, any sale of the
stock of a subsidiary that does not result in a loss of control would be
accounted for as a transaction in equity of the consolidated entity with
no gain or loss being recorded. The FASB expects to issue a final
statement or a revised exposure draft in 1997.
International Operations. Sales outside the U.S. have accounted for
a significant percentage of the Company's total revenues. The Company
intends to continue to expand its presence in international markets.
International sales are subject to a number of risks, including the
following: agreements may be difficult to enforce and receivables
43PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
difficult to collect through a foreign country's legal system; foreign
customers may have longer payment cycles; foreign countries may impose
additional withholding taxes or otherwise tax the Company's foreign
income, impose tariffs, or adopt other restrictions on foreign trade;
fluctuations in exchange rates may affect product demand and adversely
affect the profitability in U.S. dollars of products and services
provided by the Company in foreign markets where payment for the
Company's products and services is made in the local currency; U.S.
export licenses may be difficult to obtain; and the protection of
intellectual property in foreign countries may be more difficult to
enforce. There can be no assurance that any of these factors will not
have a material adverse effect on the Company's business and results of
operations.
Technological Change and Competition. The market for many of the
Company's products is characterized by changing technology, evolving
industry standards, and new product introductions. The Company's future
success will depend, in part, upon its ability to enhance its existing
products and to develop and introduce new products and technologies to
meet changing customer requirements. The Company is currently devoting
significant resources toward the enhancement of its existing products and
the development of new products and technologies. There can be no
assurance that the Company will successfully complete the enhancement and
development of these products in a timely fashion, or that these products
will compete successfully with those of the Company's competitors.
Certain of the Company's competitors have greater resources,
manufacturing and marketing capabilities, technical staff, and production
facilities than those of the Company. As a result, they may be able to
adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion
and sale of their products than can the Company. Competition could
increase if new companies enter the market, or if existing competitors
expand their product lines.
Intellectual Property Rights. The Company relies upon trade secret
protection and patents to protect its proprietary rights. There can be no
assurance that patents will issue from any pending or future patent
applications owned by or licensed to the Company, or that the claims
allowed under any issued patents will be sufficiently broad to protect
the Company's technology. In the absence of patent protection, the
Company may be vulnerable to competitors who attempt to copy the
Company's products or gain access to its trade secrets and know-how.
Proceedings initiated by the Company to protect its proprietary rights
could result in substantial costs to the Company. The Company has
received correspondence from a third party alleging that the textured
surface of the LVAS infringes certain patent rights of such third party.
The Company believes that it has meritorious defenses to the claims of
the third party. However, no assurance can be given that the Company
would be successful if litigation was commenced or that others will not
claim that the Company infringes their intellectual property rights.
There can be no assurance that competitors of the Company will not
initiate litigation to challenge the validity of the Company's patents,
or that they will not use their resources to design comparable products
44PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
that do not infringe the Company's patents. There may also be pending or
issued patents held by parties not affiliated with the Company that
relate to the Company's products or technologies. The Company may need to
acquire licenses to, or contest the validity of, any such patents. There
can be no assurance that any license required under any such patent would
be made available on acceptable terms, or that the Company would prevail
in any such contest. The Company could incur substantial costs in
defending itself in suits brought against it, or in suits in which the
Company may assert its patent rights against others. If the outcome of
any such litigation is unfavorable to the Company, the Company's business
and results of operations could be materially adversely affected. In
addition, the Company relies on trade secrets and proprietary know-how
which it seeks to protect, in part, by confidentiality agreements with
its collaborators, employees, and consultants. There can be no assurance
that these agreements will not be breached, that the Company would have
adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently developed by
competitors.
Uncertainty of Regulatory Approval for Biomedical Devices. Thermo
Cardiosystems' biomedical devices, including its LVAS, are subject to
approval by the FDA before they may be sold for profit in the United
States. Thermo Cardiosystems is also subject to regulatory requirements
in foreign countries in which it markets its devices. The process of
obtaining regulatory approvals is lengthy, expensive, and inherently
uncertain. Even after FDA approval has been obtained, such approval can
be suspended or revoked if the FDA does not continue to be satisfied with
the safety and efficacy of a product. Failure to comply with applicable
regulatory requirements can result in, among other things, fines,
suspensions of approvals, recalls of products, operating restrictions,
and criminal prosecutions.
In October 1994, Thermo Cardiosystems received FDA approval for the
commercial sale of its pneumatic LVAS. In April 1994, Thermo
Cardiosystems received the CE Mark for commercial sale of the pneumatic
LVAS in all European Union countries. Thermo Cardiosystems has developed
the HeartPak(TM), a lightweight, portable console that can be carried
over the shoulder and which can be used as an alternative to the larger
external console approved for use with the pneumatic LVAS. The HeartPak
received the CE Mark in February 1995 and is currently in Phase I
clinical trials in the U.S. Thermo Cardiosystems' electric LVAS is
currently in use in clinical trials in the U.S. These trials are testing
the safety and efficacy of the device as both a bridge to transplant and
as an alternative to transplant. The electric LVAS received the CE Mark
in August 1995.
No assurance can be given that Thermo Cardiosystems will file a
supplement to its pre-market approval (PMA) application with the FDA with
respect to the electric LVAS on a timely basis, or at all, or that the
PMA supplement, if filed, will ultimately be approved by the FDA. In
addition, any design changes to Thermo Cardiosystems' LVAS, including use
of the portable console for the pneumatic LVAS, must be approved pursuant
to a supplement to an approved PMA application. Failure of Thermo
Cardiosystems to obtain FDA approval for the commercial sale of the
electric LVAS, either as a bridge to transplant or as an alternative to
45PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
transplant, would have a material adverse effect on Thermo Cardiosystems'
long-term growth prospects. In addition, failure of Thermo Cardiosystems
to obtain approval for the HeartPak portable console would require
patients supported by the pneumatic LVAS to remain hospitalized. This
could materially decrease the market for the pneumatic LVAS.
Uncertainty of Patient Reimbursement. The cost of implanting a
cardiac support system is substantial. Without the financial support of
the government or third-party insurers, the market for Thermo
Cardiosystems' devices will be limited. Medicare and Medicaid limit the
reimbursement that U.S. hospitals receive for treating certain medical
conditions by setting maximum fees that can be charged to their patients.
Under these systems, hospitals are paid a fixed amount for treating each
patient with a particular diagnosis. Private insurers also have initiated
reimbursement systems designed to slow the escalation of health care
costs. In addition, the federal government is considering, and certain
state governments are considering or have adopted, new health care
policies intended to curb rising health care costs. Such policies include
rationing of government-funded reimbursement for health care services and
imposing price controls upon providers of medical products and services.
These policies could have the effect of limiting the availability of
reimbursement for procedures, such as the implantation of an LVAS, that
involve prolonged treatment of critically ill patients.
In November 1995, the U.S. Health Care Finance Administration (HCFA)
issued a decision that extends Medicare coverage to Thermo Cardiosystems'
HeartMate pneumatic LVAS. Several major nongovernment insurers have
already agreed to offer coverage for the pneumatic LVAS. Even though
reimbursement has been established by HCFA and by certain nongovernment
insurers, the amount of available reimbursement may change, and
reimbursement may be denied by an insurer under certain circumstances,
including if it is determined that a procedure was not the most
cost-effective treatment method, was experimental, or was used for an
unapproved indication. No assurance can be given that additional
third-party reimbursement for the pneumatic LVAS will be granted within a
reasonable period of time, or at all. The unavailability of third-party
reimbursement for procedures involving Thermo Cardiosystems' systems
would have a material adverse effect on Thermo Cardiosystems' business.
Uncertainty of Opinion Leader Acceptance and Support. A limited
number of cardiac surgeons and cardiologists influences medical device
selection and purchase decisions for a large portion of the target
patient population. Thermo Cardiosystems will achieve its business
objectives only if its LVAS are recommended for use by such opinion
leaders. In addition, acceptance by these physicians of Thermo
Cardiosystems' whole-blood coagulation monitoring systems and Coumadin
monitors is also important to the success of Thermo Cardiosystems'
business. Thermo Cardiosystems has developed working relationships with a
number of leading medical centers, and its existing and proposed LVAS and
its blood-coagulation monitoring systems have been well received by
opinion leaders in cardiac surgery and cardiology. Moreover, since the
inception of its work on cardiac support systems in 1966, Thermo
Cardiosystems has relied upon surgical teams at medical institutions to
perform clinical trials that are necessary to obtain FDA approvals. A
46PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
continuing working relationship with those and other institutions will be
important to the success of Thermo Cardiosystems. No assurance can be
given that existing relationships and arrangements can be maintained or
that new relationships will be established. Furthermore, economic,
psychological, ethical, and other concerns may limit acceptance of heart
assist devices in general, and there can be no assurance that markets of
sufficient size will develop for Thermo Cardiosystems' LVAS.
Availability of Components and Raw Materials. Thermo Cardiosystems
relies on a number of custom-designed components and materials supplied
by other companies to manufacture its LVAS. Thermo Cardiosystems is
making efforts to minimize the risks associated with sole sources and
ensure long-term availability, including qualifying alternative materials
and components or developing alternative sources for the materials and
components supplied by a single source. Although Thermo Cardiosystems
believes that it has adequate supplies of materials and components to
meet demand for its products for the foreseeable future, no assurance can
be given that Thermo Cardiosystems will not experience in the future
shortages of certain materials or components that could delay shipments
of its products. The cost to Thermo Cardiosystems to evaluate and test
alternative materials and components and the time necessary to obtain FDA
approval for these materials are inherently difficult to determine
because both time and cost are dependent on at least two factors: the
similarity of the alternative material or component to the original
material or component, and the amount of third-party testing that may
have already been completed on alternative materials or components. There
can be no assurance that the substitution of alternative materials or
components would not cause delays in Thermo Cardiosystems' LVAS
development programs or adversely affect Thermo Cardiosystems' ability to
manufacture and ship LVAS to meet demand.
Limited Manufacturing and Marketing Experience of Thermo
Cardiosystems. Prior to FDA approval of commercial sale of the pneumatic
LVAS, Thermo Cardiosystems was engaged only in the research and
development of its LVAS. Since that time, Thermo Cardiosystems has been
building its manufacturing, marketing, and sales capabilities. While
Thermo Cardiosystems has not experienced difficulties in manufacturing
its LVAS at volumes, cost, and quality levels, sufficient to satisfy the
increased demand resulting from commercial approval, no assurance can be
given that Thermo Cardiosystems will not encounter difficulties as sales
volumes increase or new products and/or components are approved for
commercial sale. Thermo Cardiosystems does not have experience in the
large-scale commercialization of medical devices. While Thermo
Cardiosystems has added sales and marketing staff and is expanding its
distribution capabilities worldwide, no assurance can be given that
Thermo Cardiosystems will be able to market and sell its products
successfully in high volumes.
Product Liability. Thermo Cardiosystems faces an inherent business
risk of exposure to product liability claims relating to the use of its
products. Although Thermo Cardiosystems currently maintains product
liability insurance against this risk, there can be no assurance that it
will continue to be able to obtain such coverage at economically feasible
47PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
rates, if at all, or that such coverage will be adequate in terms and
scope to completely protect Thermo Cardiosystems in the event of a
successful product liability claim.
Effect of Government Regulations and Approvals on Market for Thermo
Sentron's Products. The market for certain of Thermo Sentron's products,
both in the United States and abroad, is subject to or influenced by
various domestic and foreign clean air and consumer protection laws.
Thermo Sentron designs, develops, and markets its products to meet
customer needs created by existing and anticipated regulations, and any
changes in these regulations may adversely affect consumer demand for
Thermo Sentron's products. In addition, the marketing of certain of
Thermo Sentron's products is dependent upon the receipt of regulatory and
other approvals, including industry association approvals of the design,
construction, and accuracy of Thermo Sentron's products. Delays in
obtaining, or the failure to obtain, any such approvals could have a
material adverse effect on Thermo Sentron's business and results of
operations.
Effect of Electrical Standards on Demand for Thermo Voltek's
Products. Demand for Thermo Voltek's EMC testing products and services is
driven to a large extent by mandatory government standards and voluntary
industry standards relating to electromagnetic compatibility. In
particular, demand for Thermo Voltek's products results from efforts by
manufacturers to comply with IEC 801, an EU directive that became
effective on January 1, 1996. Although many manufacturers have not yet
complied with IEC 801, as the number of non-complying manufacturers is
reduced over time, demand for Thermo Voltek's products could be adversely
affected. In addition, if new EMC standards requiring new testing
capabilities are enacted less frequently or if EMC standards become less
strict, demand for Thermo Voltek's products could be adversely affected.
Dependence of Explosives-Detection Market on Government Regulation
and Airline Industry. Sales of Thermedics Detection's explosives-
detection systems for use in airports has been and will continue to be
dependent on governmental initiatives to require, or support, the
screening of checked luggage, carry-on items, and personnel with advanced
explosives-detection equipment. Substantially all of such systems have
been installed at airports in countries other than the United States in
which the applicable government or regulatory authority overseeing the
operations of the airport has mandated such screening. Such mandates are
influenced by many factors outside of the control of Thermedics
Detection, including political and budgetary concerns of governments,
airlines, and airports. Of the more than 600 commercial airports
worldwide, more than 400 are located in the United States. Accordingly,
Thermedics Detection believes that the size of the market for
explosives-detection equipment is, and will increasingly be,
significantly influenced by United States government regulation. In the
United States, the Aviation Security Act of 1990 directed the Federal
Aviation Administration (FAA) to develop a standard for
explosives-detection systems and required airports in the United States
to deploy systems meeting this standard in 1993. The standard adopted by
the FAA is more comprehensive than standards adopted in most other
48PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
countries. To date, no system has demonstrated that it meets the FAA
standard 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,
primarily on a test basis, in the United States. The FAA first certified
a computed X-ray tomography system for checked luggage in December 1994.
However, the FAA has recognized that this system must undergo further
testing to resolve whether it can operate under realistic airport
operating conditions. Thermedics Detection's systems are trace detectors
for which no FAA certification process for checked baggage, carry-on, or
personal screening exists to date. In 1992, the FAA approved Thermedics
Detection's EGIS system for use by airlines in screening carry-on
electronic items and luggage searches. Each airline must seek this
approval for each application. Although the FAA has provided significant
funding to Thermedics Detection in connection with the development of its
explosives-detection technology, there can be no assurance that any of
Thermedics Detection' 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 upgrade existing metal-detection equipment. Earnings of U.S. air
carriers tend 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 personnel, or that, if mandated, Thermedics Detection's
systems will meet the certification or other requirements of the
applicable government authority. Even if Thermedics Detection's systems
were to meet the applicable requirements, there can be no assurance that
Thermedics Detection would be able to market its systems effectively.
In October 1996, the United States enacted legislation which includes
a $144.2 million allocation to purchase explosives-detection systems and
other advanced security equipment, including trace detection equipment
such as the systems manufactured by Thermedics Detection, for carry-on
and checked baggage screening. There can be no assurance that this
legislation will not be modified to reduce the funding for advanced
explosives equipment; that the necessary appropriations will be made to
fund the purchases of advanced explosives-detection equipment
contemplated by the legislation; that trace-detection equipment such as
the systems manufactured by Thermedics Detection will be mandated; or
that, even if such appropriation is made and such equipment is mandated,
any of the Thermedics Detection's explosives-detection systems will be
purchased for installation at any airports in the United States. Further,
there can be no assurance that the U.S. will mandate the widespread use
of these systems after completion of the initial purchases.
Significance of Certain Customers to Thermedics Detection. Sales of
process detection instruments and related services to bottlers licensed
by The Coca-Cola Company (Coca-Cola Bottlers) were $32,184,000,
$9,974,000 and $10,641,000 in 1994, 1995, and 1996, respectively. Sales
49PAGE
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Thermedics Inc. 1996 Financial Statements
Forward-looking Statements
to Coca-Cola Bottlers have decreased as these customers have
substantially completed full deployment of Thermedics Detection's Alexus
system in existing plant locations. Although the Company anticipates that
Thermedics Detection will continue to derive revenues from the sale of
upgrades and new systems to new plants, as well as services to the
Coca-Cola Bottlers, the Company does not expect that revenues derived
from these customers will continue at a rate comparable to prior years.
While the Company believes that the introduction of new process detection
products for the food, beverage, and other markets will continue to
reduce the significance of the Coca-Cola Bottlers to Thermedics
Detection's results of operations, there can be no assurance that
Thermedics Detection will be successful in the introduction of new
process detection products or that any sales of these products will be
sufficient to maintain a rate of growth equivalent to prior years.
50PAGE
<PAGE>
Thermedics Inc. 1996 Financial Statements
Selected Financial Information
(In thousands except
per share amounts) 1996(a) 1995(b) 1994(c) 1993(d) 1992
------------------------------------------------------------------------
Statement of Income Data:
Revenues $292,077 $208,041 $183,753 $104,545 $ 65,126
Net income 29,138 17,174 12,695 7,633 3,384
Earnings per share .77 .51 .39 .25 .12
Balance Sheet Data:
Working capital $208,170 $114,340 $131,578 $135,992 $ 66,112
Total assets 456,699 386,249 306,691 251,874 158,260
Long-term
obligations 74,359 45,201 82,551 59,130 33,820
Common stock
of subsidiary
subject to
redemption - - - - 5,468
Shareholders'
investment 211,582 172,751 136,783 122,186 73,486
(a)Reflects the January 1996 acquisition of Moisture Systems and Rutter,
the May 1996 issuance of $65.0 million principal amount of
noninterest-bearing subordinated convertible debentures, and
nontaxable gains of $23.7 million from the issuance of stock by
subsidiaries.
(b)Reflects the December 1995 acquisition of Orion.
(c)Reflects the January 1994 issuance of $33.0 million principal amount
of noninterest-bearing subordinated convertible debentures by Thermo
Cardiosystems and the March 1994 acquisition of Ramsey.
(d)Reflects the May 1993 public offering of the Company's common stock
for net proceeds of $30.0 million, the August 1993 acquisition of
Comtest Instrumentation B.V. and Comtest Limited, and the November
1993 issuance of $34.5 million principal amount of 3 3/4%
subordinated convertible debentures by Thermo Voltek.
51PAGE
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Thermedics Inc. 1996 Financial Statements
Common Stock Market Information
The following table shows the market range for the Company's common
stock based on reported sales prices on the American Stock Exchange
(symbol TMD) for 1996 and 1995:
1996 1995
------------------- -----------------
Quarter High Low High Low
First $30 1/2 $23 3/8 $17 1/2 $12 1/2
Second 31 7/8 24 5/8 20 1/2 15 1/2
Third 31 1/8 20 1/4 21 3/4 17 3/4
Fourth 33 3/8 17 5/8 28 17 1/2
As of January 24, 1997, the Company had 2,297 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 24, 1997, was $18 3/8 per share.
Common stock of the Company's majority-owned public subsidiaries is
traded on the American Stock Exchange: Thermo Cardiosystems Inc. (symbol
TCA), Thermo Voltek Corp. (symbol TVL), Thermo Sentron Inc. (symbol TSR),
and Thermedics Detection Inc. (TDX).
Shareholder Services
Shareholders of Thermedics Inc. who desire information about the
Company are invited to contact John N. Hatsopoulos, Chief Financial
Officer, Thermedics Inc., 81 Wyman Street, P.O. Box 9046, Waltham,
Massachusetts 02254-9046, (617) 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. Beginning in 1997, quarterly
distribution will be limited to the second quarter report only. All
quarterly reports and press releases will be available through the
Internet from Thermo Electron's home page on the World Wide Web
(http://www.thermo.com/subsid/tmd.html).
Stock Transfer Agent
Bank of Boston 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:
Bank of Boston
c/o Boston EquiServe Limited Partnership
P.O. Box 8040
Boston, Massachusetts 02266-8040
(617) 575-3120
52PAGE
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Thermedics Inc. 1996 Financial Statements
Dividend Policy
The Company has never paid cash dividends and does not expect to pay
cash dividends in the foreseeable future because its policy has been to
use earnings to finance expansion and growth. Payment of dividends will
rest within the discretion of the Company's Board of Directors and will
depend upon, among other factors, the Company's earnings, capital
requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended
December 28, 1996, as filed with the Securities and Exchange Commission,
may be obtained at no charge by writing to John N. Hatsopoulos, Chief
Financial Officer, Thermedics Inc., 81 Wyman Street, P.O. Box 9046,
Waltham, Massachusetts 02254-9046.
Annual Meeting
The annual meeting of shareholders will be held on Monday, June 2,
1997, at 1:30 p.m. at the Hyatt Regency Hotel, Hilton Head, South
Carolina.
Exhibit 23
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the inclusion
herein or by reference of our report for Thermedics Inc. dated May 2, 1997
(except with respect to the matter discussed in Note 15, as to which the
date is May 9, 1997) and for International Technidyne Corporation dated
February 5, 1997 (except with respect to the matter discussed in Note 7, as
to which the date is March 29, 1997) included in or made a part of this
Form 8-K/A, into the Company's previously filed Registration Statement No.
2-93746 on Form S-8, Registration Statement No. 33-00183 on Form S-8,
Registration Statement No. 2-93747 on Form S-8, Registration Statement No.
33-8992 on Form S-8, Registration Statement No. 33-31621 on Form S-8,
Registration Statement No. 33-9215 on Form S-8, Registration Statement No.
33-43707 on Form S-3, Registration Statement No. 33-40866 on Form S-3,
Registration Statement No. 33-64070 on Form S-8, Registration Statement No.
33-86972 on Form S-8, Registration Statement No. 33-86974 on Form S-8,
Registration Statement No. 033-65279 on Form S-8, and Registration
Statement No. 033-61435 on Form S-8.
Arthur Andersen LLP
Boston, Massachusetts
June 6, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS
INC.'S AMENDMENT NO. 1 ON FORM 8-K/A AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-28-1996 DEC-30-1995
<PERIOD-END> DEC-28-1996 DEC-30-1995
<CASH> 82,800 37,413
<SECURITIES> 65,054 77,916
<RECEIVABLES> 67,686 50,183
<ALLOWANCES> 4,903 4,244
<INVENTORY> 54,230 47,947
<CURRENT-ASSETS> 279,580 219,768
<PP&E> 48,892 40,899
<DEPRECIATION> 27,342 21,452
<TOTAL-ASSETS> 456,699 386,249
<CURRENT-LIABILITIES> 71,410 105,428
<BONDS> 74,359 45,201
0 0
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<COMMON> 3,684 3,399
<OTHER-SE> 207,898 169,352
<TOTAL-LIABILITY-AND-EQUITY> 456,699 386,249
<SALES> 292,077 208,041
<TOTAL-REVENUES> 292,077 208,041
<CGS> 148,137 110,935
<TOTAL-COSTS> 148,137 110,935
<OTHER-EXPENSES> 39,000 14,874
<LOSS-PROVISION> 1,352 689
<INTEREST-EXPENSE> 3,770 3,677
<INCOME-PRETAX> 51,497 35,567
<INCOME-TAX> 13,969 11,781
<INCOME-CONTINUING> 29,138 17,174
<DISCONTINUED> 0 0
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