SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended January 2, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-9567
THERMEDICS INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2788806
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
470 Wildwood Street, P.O. Box 2999
Woburn, Massachusetts 01888-1799
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ---------------------------- -----------------------------------------
Common Stock, $.10 par value American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of January 29, 1999, was approximately $95,552,000.
As of January 29, 1999, the Registrant had 41,696,696 pro forma shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
January 2, 1999, are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 27, 1999, are incorporated by reference into
Part III.
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PART I
Item 1. Business
(a) General Development of Business
The businesses of Thermedics Inc. (the Company or the Registrant)
operate in four reportable segments: Quality Assurance and Security
Products, Precision Weighing and Inspection Equipment, Heart Assist and
Blood Testing Devices, and Power Electronics and Test Equipment.
Through the Company's Thermedics Detection Inc. subsidiary, the Quality
Assurance and Security Products segment develops, manufactures, and markets
high-speed, detection and measurement instruments used in a variety of on-line
industrial process applications, security applications, and for laboratory
analysis. On May 6, 1998, Thermedics Detection acquired Thermedics' Orion
laboratory products division in exchange for the right to receive 5,961,225
shares of Thermedics Detection common stock. Orion manufactures electrochemistry
systems that determine the quality of a wide variety of substances, including
food, cosmetics, and household products by measuring components such as pH,
specific ion concentration, dissolved oxygen, and conductivity. The issuance of
the 5,961,225 shares of Thermedics Detection common stock issuable in the merger
was approved by the January 1999 vote of Thermedics Detection shareholders.
The Company's Precision Weighing and Inspection Equipment segment includes
the Company's Thermo Sentron Inc. subsidiary, which develops, manufactures, and
markets high-speed precision-weighing and inspection equipment for industrial
production and packaging lines.
The Heart Assist and Blood Testing Devices segment consists of the Company's
Thermo Cardiosystems Inc. subsidiary, which has developed two implantable left
ventricular-assist systems (LVAS): a pneumatic, or air-driven, system and an
electric version. Thermo Cardiosystems' International Technidyne Corporation
subsidiary is a leading manufacturer of near-patient, whole-blood coagulation
testing equipment and related disposables and also manufactures premium-quality,
single-use skin-incision devices.
The Power Electronics and Test Equipment segment, through the Company's
Thermo Voltek Corp. subsidiary, designs, manufactures, and markets a range of
products related to power amplification, conversion, and quality and
electronics-test instruments. On March 31, 1998, the Company proposed to
acquire, through a merger, all of the outstanding shares of common stock of
Thermo Voltek that the Company does not own, other than shares owned by Thermo
Electron, at a price of $7.00 per share in cash. A meeting of Thermo Voltek's
shareholders will occur on March 25, 1999, to consider this matter. The proposed
merger is discussed in Note 16 to Consolidated Financial Statements in the
Registrant's Fiscal 1998* Annual Report to Shareholders, which information is
incorporated herein by reference.
In addition, the Company develops, manufactures, and markets enteral
nutrition-delivery systems and a line of medical-grade polymers used in medical
disposables and in nonmedical, industrial applications, including safety glass
and automotive coatings.
The Company was incorporated in 1983 under the laws of Massachusetts as a
wholly owned subsidiary of Thermo Electron. On February 5, 1998, the Company's
Board of Directors voted to issue 4,880,533 shares of its common stock to Thermo
Electron in exchange for 3,355,705 shares of Thermo Cardiosystems' common stock.
The Company's issuance of the 4,880,533 shares of its common stock to Thermo
Electron is subject to approval by the Company's shareholders at a meeting to
occur on March 31, 1999. However, because Thermo Electron is the majority
shareholder and intends to vote its shares in favor of the transaction, approval
is assured. The shares of common stock will be exchanged at their respective
fair market values as of February 5, 1998. As of January 2, 1999, on a pro forma
- --------------------
* References to 1998, 1997, and 1996 herein are for the fiscal years ended
January 2, 1999, January 3, 1998, and December 28, 1996, respectively.
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basis, assuming the completion of the transaction discussed above, Thermo
Electron owned 30,850,049 shares of the Company's common stock, representing 74%
of such stock outstanding. Thermo Electron is a world leader in monitoring,
analytical, and biomedical instrumentation; biomedical products including
heart-assist devices, respiratory-care equipment, and mammography systems; and
paper recycling and papermaking equipment. Thermo Electron also develops
alternative-energy systems and clean fuels, provides a range of services
including industrial outsourcing and environmental-liability management, and
conducts research and development in advanced imaging, laser, and electronic
information-management technologies.
Thermo Electron intends, for the foreseeable future, to maintain at least
50% ownership of the Company. This may require Thermo Electron to purchase
additional shares of the Company's common stock (or debentures convertible into
common stock) from time to time, as the number of the Company's outstanding
shares increases. These or any other purchases may be made either in the open
market or directly from the Company. See Notes 4 and 7 to Consolidated Financial
Statements in the Company's 1998 Annual Report to Shareholders for a description
of the Company's outstanding stock options and convertible debentures. During
1998, Thermo Electron purchased 4,828,895 shares of the Company's common stock
in the open market for $52.8 million. Additionally, during 1998, Thermo Electron
purchased in the open market 882,450 shares of common stock of Thermedics
Detection for $8.2 million and 454,224 shares of common stock of Thermo Sentron
for $4.3 million.
During 1998, Thermo Electron announced a proposed reorganization involving
certain of Thermo Electron's subsidiaries, including the Company. Under this
plan, the Company may acquire Thermo Electron's wholly owned biomedical group
for shares of Company common stock and the Company's equity interest in its
Thermo Sentron, Thermedics Detection, and Thermo Voltek subsidiaries. Thermo
Electron may, in turn, take Thermo Sentron and Thermedics Detection private, and
shareholders of these subsidiaries would receive cash in exchange for their
shares of common stock. The proposed transactions are subject to a number of
conditions, as outlined in Note 16 to Consolidated Financial Statements in the
Registrant's 1998 Annual Report to Shareholders, which information is
incorporated herein by reference.
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities and Exchange Act of 1934, are made throughout this Annual Report on
Form 10-K. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words, "believes," "anticipates," "plans,"
"expects," "seeks," "estimates," and similar expressions are intended to
identify forward-looking statements. There are a number of important factors
that could cause the results of the Company to differ materially from those
indicated by such forward-looking statements, including those detailed under the
heading "Forward-looking Statements" in the Registrant's 1998 Annual Report to
Shareholders, which statements are incorporated herein by reference.
(b) Financial Information About Segments
Financial information concerning the Company's segments is summarized in
Note 13 to Consolidated Financial Statements in the Registrant's 1998 Annual
Report to Shareholders, which information is incorporated herein by reference.
(c) Description of Business
(i) Principal Products and Services
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Quality Assurance and Security Products
Detection Instruments
Thermedics Detection supplies high-speed detection and measurement systems
to examine a variety of products and substances either on-line or in a
laboratory to ensure their quality. The ALEXUS(R) systems detect trace amounts
of constituents that would affect product quality in refillable plastic beverage
containers. The InScan(R) high-speed X-ray imaging system uses high-speed X-ray
imaging technology to determine accurate fill volume, net volume, proper
contents, and package integrity of containers for the beverage, food, and other
industries. Through its Moisture Systems division, Thermedics Detection designs,
manufactures, and markets equipment that uses near-infrared spectroscopy to
measure moisture and other product constituents, including fats, proteins, oils,
flavorings, solvents, adhesives, and coatings, in a variety of products as they
move along manufacturing lines. These systems are used across the food,
pharmaceutical, chemical, petrochemical, tobacco, forest products, paper
converting, plastics, textiles, corrugating, and other industries.
Thermedics Detection's high-speed gas chromatograph, called Flash-GC(TM),
provides information on the composition of a wide range of substances, such as
pharmaceuticals, food, and water, at speeds 20 to 50 times faster than
conventional gas chromatographs, while its EZ-Flash(TM) system is an upgrade kit
that can be integrated with virtually any conventional gas chromatograph to
enable it to conduct chemical analyses up to 30 times faster.
Also through Thermedics Detection, the Company produces security instruments
that use trace particle- and vapor-detection techniques for forensics, search,
and screening applications under the direction of police, border police,
transportation authorities, and carriers. Thermedics Detection's principal
security instrument is the EGIS(R) system, a highly sensitive particle- and
vapor-detection system for screening people, baggage, packages, freight, and
electronic equipment such as personal computers, for the presence of a wide
range of explosives, including plastic explosives that have proven difficult to
detect using conventional methods. Currently, more than 275 EGIS units are
deployed at airports, border crossings, and other checkpoints. In addition, EGIS
units have been used in highly visible forensic investigations, including the
crash of TWA Flight 800, as well as the bombings in Oklahoma City, at New York's
World Trade Center, and at locations in Israel, Buenos Aries, and the United
Kingdom. In 1998, Thermedics Detection introduced a new line of benchtop
explosives-detection systems based on its EGIS technology. This family of
products includes the EGIS II, the more sensitive EGIS III, and the EGIS IV,
Thermedics Detection's most sensitive explosives detector to date. Thermedics
Detection also has developed SecurScan(TM), a walk-through explosives detector.
During 1998, 1997, and 1996, the Company derived revenues of $40.3 million,
$51.3 million, and $43.8 million, respectively, from its detection instruments.
Laboratory Products
Through its Orion subsidiary, Thermedics Detection manufactures a wide range
of electrochemistry products that determine the quality of many substances by
measuring their pH, specific ion concentration, dissolved oxygen, and
conductivity. Orion's products are used in the food, beverage, pharmaceutical,
chemical, environmental analysis, drinking water, wastewater treatment,
agricultural, biomedical research, and many other industries. Pure water
monitors, also marketed under the Orion name, use ion-selective technology to
evaluate water quality in the power, semiconductor, drinking water, and
pharmaceutical industries. Other products include microweighing equipment and
titration systems.
During 1998, 1997, and 1996, the Company derived revenues of $51.3 million,
$53.1 million, and $50.9 million, respectively, from its laboratory products.
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Precision Weighing and Inspection Equipment
Thermo Sentron serves two principal markets: packaged goods and bulk
materials. Thermo Sentron's products for the packaged-goods market include a
broad line of checkweighing equipment and metal detectors that can be integrated
at various stages in production lines for process control and quality assurance,
as well as hot foil and thermal printers and X-ray inspection equipment. These
products are sold primarily to customers in the food-processing, pharmaceutical,
mail-order, and other diverse industries. Products in Thermo Sentron's
bulk-materials line include conveyor-belt scales, solid level-measurement and
conveyor-monitoring systems, sampling systems, and small-capacity feeders. These
products are sold primarily to customers in the mining and material-processing
industries, as well as electric utilities and chemical and other manufacturing
companies. In June 1998, Thermo Sentron acquired the three businesses that
constituted the product-monitoring group of Graseby Limited (the
product-monitoring businesses), a subsidiary of Smiths Industries plc. The
product-monitoring businesses design, manufacture, and distribute specialized
packaged-goods equipment, including checkweighers and metal detectors, for the
food and pharmaceutical industries. In February 1997, Thermo Sentron acquired
the business of RCC Industrial Electronics Pty. Limited, an Australia-based
manufacturer of in-motion checkweighers for the food and pharmaceutical
industries. In July 1997, Thermo Sentron acquired Westerland Engineering Ltd., a
U. K.-based manufacturer of process-weighing and control equipment.
Heart Assist and Blood Testing Devices
Left Ventricular-assist Systems. The Company, through its Thermo
Cardiosystems subsidiary, has developed two versions of its LVAS: an implantable
pneumatic, or air-driven, system that can be controlled by either a bedside or
portable console; and an electric system that features an internal electric
motor powered by an external battery pack worn by the patient. Both of the
Company's systems employ the Company's HeartMate(R) blood pump, and are designed
for long-term use. This pump is implanted just below the diaphragm in a position
that minimizes interference with normal circulation and other bodily functions.
An inlet tube is inserted into the apex of the left ventricle to drain blood
into the pump chamber. Blood is then forced out of the pump through an animal
tissue valve and back into the aorta. The HeartMate blood pump works with the
biological control mechanism of the natural heart to increase pumping capability
when required for activities such as climbing stairs. The Company's LVAS are at
various stages of regulatory approval.
Air-driven LVAS. In October 1994, the FDA approved the air-driven system as
a bridge to transplant for patients awaiting heart transplantation. This
approval allows the Company to sell the air-driven LVAS to any of the nearly 900
cardiac surgery centers in the United States. In April 1994, the Company's
air-driven LVAS received the CE Mark required for commercial sale of medical
devices in all European Community countries. In August 1998, the Medical Devices
Bureau of Health Canada issued a Notice of Compliance for the Company's
air-driven HeartMate LVAS, permitting its sale throughout Canada. In the
air-driven LVAS, the HeartMate blood pump is coupled to an external console
connected to the body by a tube. The Company has also developed the
HeartPak(TM), a lightweight portable console that can be carried over the
shoulder. The portable console received the CE Mark for commercial sale in
European Community countries in February 1995. In July 1995, the FDA approved
the beginning of clinical trials of the HeartPak portable pneumatic driver. The
Company is currently evaluating the safety of the system in the hospital, and
the Company also plans to evaluate the system in the home environment.
Electric LVAS. The Company has also developed an electric LVAS that uses the
HeartMate blood pump driven by an internal electric motor mounted in the blood
pump housing. The system is connected to its external battery pack by wires that
exit the body. Since the power source and control elements are worn on a battery
belt, the system allows the patient complete mobility. In August 1995, the
electric LVAS received the CE Mark, allowing commercial sale of this system in
all European Community countries. The electric system is used as a bridge to
transplant in the United States, Europe, and other regions, and is also
implanted as an alternative to heart transplant in Europe and other regions. In
August 1998, the Medical Devices Bureau of Health Canada issued a Notice of
Compliance for the
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Company's electric system, permitting its sale throughout Canada. In September
1998, the FDA approved the electric system for commercial sale as a bridge to
transplant for patients awaiting heart transplantation.
In December 1995, the FDA approved the protocol for conducting clinical
trials of the electric LVAS as a long-term solution for nontransplant
candidates. The trial is expected to compare the results of approved patients
using the device to a similar number using drug therapy. In December 1997, the
FDA approved the Company's proposal to broaden the entrance criteria and
increase the number of participating sites under this trial. The Company
estimates that it will complete this trial in two to three years; however, no
assurance can be given that the Company will complete this study in this time
period or that it will receive FDA approval after the trial or at all.
During 1998, 1997, and 1996, the Company derived revenues of $30.3 million,
$27.0 million, and $30.0 million, respectively, from its LVAS.
Blood-testing Equipment and Skin-incision Devices. Thermo Cardiosystems'
International Technidyne subsidiary manufactures and supplies whole-blood
coagulation testing equipment and related disposables, as well as skin-incision
devices. International Technidyne's product lines offer whole-blood coagulation
systems for bedside anticoagulation management, coagulation screening, and
transfusion management. Each analyzes small blood samples, then processes and
quickly displays comprehensive patient hemostatis information. Blood management
of this type is essential for cardiopulmonary bypass surgery and angioplasty.
The ProTime(R) Microcoagulation System is designed to allow self-testing for
patients who take the blood-thinning drug warfarin (Coumadin). International
Technidyne also manufactures a family of single-use skin-incision devices for
drawing blood from adults, children, and infants.
During 1998, 1997, and 1996, the Company derived revenues of $36.5 million,
$35.9 million, and $34.0 million, respectively, from its blood-testing equipment
and skin-incision devices.
Power Electronics and Test Equipment
Through its Thermo Voltek subsidiary, the Company designs, manufactures, and
markets a range of products related to power amplification and conversion as
well as instruments that test electronic systems and components. The Company's
power products include radio frequency (RF) and microwave power amplifiers,
power-conversion equipment, and application-specific power supplies. These power
products are used in communications, broadcast, research, and medical imaging
applications. Thermo Voltek's test instruments simulate pulsed electromagnetic
interference, radio frequency interference, and changes in AC voltage, to allow
manufacturers of electronic systems and integrated circuits to test for
electromagnetic compatibility (EMC). These products are used in the
product-development, design-verification, and quality-assurance stages, enabling
customers to optimize performance, reliability, and safety in the final design,
and to meet industry standards and regulatory requirements, including a European
Union directive that took effect in January 1996. During 1997 and 1998, Thermo
Voltek experienced lower demand for its EMC test products, due to the declining
influence of IEC 801, the European Union directive on electromagnetic
compatibility that took effect January 1, 1996, and, to a lesser extent, a
decline in the component-reliability market for electrostatic discharge test
equipment that resulted from a slowdown in capital expenditures by the
semiconductor industry. Due in part to these developments, during 1997 and 1998
the Company implemented certain operational, organizational, and personnel
changes.
In November 1998, Thermo Voltek sold substantially all of the assets,
excluding real property, of its Universal Voltronics division to an unrelated
buyer. The purchase price for the transferred assets was $2,500,000 in cash,
$2,250,000 of which had been received as of year-end 1998.
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Other
The Company's research relating principally to the development of its LVAS
has resulted in the development of proprietary medical-grade plastics marketed
under the names Tecoflex(R) and Tecothane(R). Tecoflex and Tecothane are
thermoplastic polyurethanes used in medical disposables and industrial products.
The Company sells Tecoflex and Tecothane in bulk form for fabrication by the
customer, and also extrudes precision tubing to customer specifications.
The Company's Corpak Inc. subsidiary designs, manufactures, and markets
enteral feeding systems that introduce special nutritional solutions into the
stomach or the small intestine through tubes entering the nose or stomach.
Enteral therapy is used for patients who are unable to feed themselves but who
do not require parenteral (intravenous) feeding. Corpak's products include bags
for nutritional fluids, delivery pumps, associated pump sets that hook up to the
pumps, and feeding tubes. In addition, Corpak markets catheters for peritoneal
dialysis.
(ii) and (xi) New Products; Research and Development
The Company maintains research and development capability to support its
existing products and to develop new products. A number of programs are
underway, funded by the Company solely or jointly with an outside source. These
programs include development of new products to perform substantially all or
part of the pumping function of the left ventricle of the natural heart, quality
assurance and security instruments, electronics-test instruments, and high
voltage power supply products. The Company also develops new grades of polymers
to meet specific customer requirements for industrial and medical applications.
During 1998, 1997, and 1996, the Company expended $26.6 million, $24.3
million, $21.4 million, respectively, on internally sponsored research and
development programs, and $4.2 million, $2.9 million, and $1.4 million,
respectively, on research and development programs sponsored by others. As of
January 2, 1999, 168 professional employees were engaged full-time in research
and development activities.
(iii) Raw Materials
Certain raw materials used in the manufacture of the Company's LVAS are
available from only one or two suppliers. The Company is making efforts to
minimize the risks associated with sole sources and ensure long-term
availability, including qualifying alternative materials and components or
developing alternative sources for materials and components supplied by a single
source. Although the Company believes that it has adequate supplies of materials
and components to meet demand for the LVAS for the foreseeable future, no
assurance can be given that the Company will not experience shortages of certain
materials or components in the future that could delay shipments of the LVAS.
The cost to the Company to evaluate and test alternative materials and
components and the time necessary to obtain FDA approval for these materials and
components are inherently difficult to determine because both time and cost are
dependent on at least two factors: the similarity of alternative materials or
components to the original materials or components, and the amount of
third-party testing that may have already been completed on alternative
materials or components. There can be no assurance that the substitution of
alternative materials or components will not cause delays in the Company's LVAS
development program or adversely affect the Company's ability to manufacture and
ship LVAS to meet demand.
(iv) Patents, Licenses, and Trademarks
The Company considers its intellectual property important in the operation
and growth of its business, and its policy is to protect this property through
patents, license and confidentiality agreements, trademarks, and trade secret
protection. The Company applies for and maintains patents in the U.S. and in
foreign countries, particularly in the areas of biomedical materials, medical
products, and analytical instruments. Although some of these patent rights may
provide the Company with a competitive advantage, the Company primarily relies
on its know-how and trade secrets.
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In addition, there can be no assurance that third parties will not assert claims
against the Company that the Company infringes the intellectual property rights
of such parties. The Company could incur substantial costs and diversion of
management resources with respect to the defense of any such claims, which could
have a material adverse effect on the Company's business, financial condition,
and results of operations. Furthermore, parties making such claims could secure
a judgment awarding substantial damages, as well as injunctive or other
equitable relief, which could effectively block the Company's ability to make,
use, sell, distribute, or market its products and services in the U.S. or
abroad. In the event that a claim relating to intellectual property is asserted
against the Company, the Company may seek licenses to such intellectual
property. There can be no assurance, however, that such licenses could be
obtained on commercially reasonable terms, if at all. The failure to obtain the
necessary licenses or other rights could preclude the sale, manufacture, or
distribution of the Company's products and, therefore, could have a material
adverse effect on the Company's business, financial condition, and results of
operations. Thermo Cardiosystems has received correspondence from a third party
alleging that the textured surface of the LVAS housing infringes certain patent
rights of such third party. In general, an owner of intellectual property can
prevent others from using such property without a license and is entitled to
damages for unauthorized usage. The Company has investigated the bases of the
allegation and, based on the opinion of its counsel and the Company's assessment
of the proceedings in the United States Patent and Trademark Office to date, it
believes that if it were sued on these bases, it would have meritorious
defenses. Given the inherent uncertainties in dispute resolution, however, if
the Company were sued and the outcome were unfavorable, the Company's results of
operations or financial condition could be materially adversely affected in
amounts the Company cannot reasonably estimate.
In August 1998, Thermo Cardiosystems obtained an exclusive license to
incorporate technology developed by Sulzer Electronics Ltd. into an advanced
version of Thermo Cardiosystems' LVAS, HeartMate III. Sulzer Electronics Ltd.,
based in Switzerland, is a company within the Sulzer Corporation. HeartMate III
is a miniature centrifugal pump featuring a magnetically controlled system that
has been developed by Sulzer Electronics' Magnetics Group.
Quality Assurance and Security Devices
The Company has certain licenses to the technology resulting from its
customer-sponsored development of the ALEXUS system. The Company's patents and
agreements have varying lives ranging from one year to approximately twenty
years, and the Company does not believe that the expiration or termination of
any one of these patents or agreements would materially affect the Company's
business.
(v) Seasonal Influences
There are no significant seasonal influences on the Company's sales of its
products.
(vi) Working Capital Requirements
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on the Company's working
capital.
(vii) Dependency on a Single Customer
No customer represented 10% or more of the Company's total revenues in 1998,
1997, and 1996.
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(viii) Backlog
The Company's backlog of firm orders at year-end 1998 and 1997 was:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------- -------- ---------
Quality Assurance and Security Products $ 6,065 $ 9,374
Precision Weighing and Inspection Equipment 14,683 13,142
Heart Assist and Blood Testing Devices 1,818 2,556
Power Electronics and Test Equipment 5,397 10,218
Other 1,843 1,292
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$29,806 $ 36,582
======= ========
</TABLE>
Certain of these orders are cancelable by the customer upon payment of a
cancellation charge. The Company anticipates that substantially all of the
backlog at the end of 1998 will be shipped or completed during 1999. The
decrease in backlog at the Quality Assurance and Security Products segment
resulted primarily from completion of large orders for quality-assurance and
security systems in 1998. The decrease in backlog at the Power Electronics and
Test Equipment segment resulted primarily from lower demand. The Company does
not believe the size of its backlog is necessarily indicative of intermediate or
long-term trends in its business.
(ix) Government Contracts
Not applicable.
(x) Competition
Quality Assurance and Security Products
The Company's quality assurance products compete with systems manufactured
by numerous companies. The Company believes, however, that these companies are
generally focused on particular niches in the process detection systems market,
only in some of which the Company competes. Competition in the markets for each
of the Company's quality assurance systems is based primarily on performance,
durability, service and, to a lesser extent, price. The Company believes that
its systems' performance and speed, as well as the Company's reputation for
developing superior new technologies and for the innovative application of
existing technologies to a variety of high-speed production environments and
product quality-assurance problems, are competitive advantages.
In the security instrument market, the Company competes with a small number
of companies, including other makers of chemical trace detection instruments,
and, to a lesser degree, makers of enhanced X-ray detectors. Competition in this
market is based primarily on performance, including speed, accuracy, and the
range of explosives that can be detected; ease of use; service; and price. The
Company's principal competitor in the trace detection market is Barringer
Technologies Inc., a Canadian firm that has placed several trace detectors in
airport applications.
In the laboratory products market, the Company competes with several
international companies. The Company competes on the basis of performance,
service, technology, and price. Competitors include Corning, Fisher Scientific,
Mettler-Toledo, and Beckman Coulter.
Precision Weighing and Inspection Equipment
The Company's Thermo Sentron subsidiary encounters and expects to continue
to encounter intense competition in the sale of its products. Thermo Sentron's
principal competitors in the packaged-goods market are Ishida Scales
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Mfg. Co., Ltd. and Mettler-Toledo AG. In the more fragmented bulk-materials
market, Thermo Sentron competes on a worldwide basis primarily with Carl Schenck
AG and Milltronics Corporation. Thermo Sentron believes that the principal
competitive pressures affecting the market for precision-weighing and inspection
equipment include customer service and support, quality and reliability, price,
accuracy, ease of use, distribution channels, technical features, compatibility
with customers' manufacturing processes, and regulatory approvals.
Heart Assist and Blood Testing Devices
Left Ventricular-assist Systems. The Company is aware of one other company
that has received PMA approval from the FDA for an implantable LVAS similar to
the Company's. Also, the Company is aware of one other company that has received
commercial approval from the FDA for its cardiac-assist device. This is an
external device, positioned on the outside of the patient's chest, and is
intended for short-term use in the hospital environment. In November, this
company announced that it had received approval from the FDA for its IDE for a
portable power source. In addition, the Company is aware that a total artificial
heart is currently undergoing clinical trials. The Company is aware that other
cardiac-assist devices are in various stages of development by other companies.
The requirement of obtaining FDA approval for commercial sale of an LVAS in the
United States is a significant barrier to entry into the United States market
for these devices. There can be no assurance, however, that FDA regulations will
not change in the future, reducing the time and testing required for others to
obtain FDA approval for commercial sale. In addition, other research groups and
companies, some that have significantly greater resources than those of the
Company, are developing cardiac systems using alternative technologies or
concepts, one or more of which might prove functionally equivalent to, or more
suitable than, the Company's systems. Among products that have been approved for
commercial sale, the Company competes primarily on the basis of performance,
service capability, and price. Competition in the market for medical devices is
also significantly affected by the reimbursement policies of government and
private insurers. Any product for which reimbursement is not available from such
third-party payors will be at a significant competitive disadvantage.
Blood-testing Equipment and Skin-incision Devices. International
Technidyne's principal competitor for the HEMOCHRON coagulation monitoring
instruments, used in the operating room and in cardiac catheterization, is the
HemoTec division of Medtronic, Inc. The Roche Group competes with the ProTime
with a blood coagulation monitor which is marketed to clinics and also for
patient self-testing. There are also several new competitors that have recently
entered the blood coagulation monitoring market. ITC's products compete
primarily on the basis of reputation, utility, and price. The skin-incision
devices compete with products offered by a number of companies including Organon
Teknika; Becton, Dickinson and Company; and Owen-Mumford. The incision devices
compete primarily on the basis of safety, quality, and reputation.
Power Electronics and Test Equipment
The Company is a leading supplier of EMC testing equipment. There are
numerous companies worldwide that independently manufacture and market pulsed
EMC test equipment for electronic products, and several more that independently
manufacture and market component-reliability test equipment. In the market for
RF power amplifiers and programmable power amplifiers, the Company competes with
several companies worldwide. The Company competes in these markets primarily on
the basis of performance, technical expertise, reputation, and price.
Substantially all of the Company's contract and commercial revenues are subject
to intense competitive bidding.
Other
In the market for medical-grade polymers and enteral nutrition-delivery
systems, the Company competes primarily with large pharmaceutical,
medical-device, and chemical companies, many of which have substantially greater
financial, technical, and human resources than those of the Company. Competition
within these markets is intense, and is based primarily on price, efficacy, and
technological advances.
10
<PAGE>
(xii) Environmental Protection Regulations
The Company believes that compliance by the Company with federal, state, and
local environmental protection regulations will not have a material adverse
effect on its capital expenditures, earnings, or competitive position.
(xiii) Number of Employees
As of January 2, 1999, the Company employed 2,045 people.
(d) Financial Information About Geographic Areas
Financial information about geographic areas is summarized in Note 13 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders, which information is incorporated herein by
reference.
(e) Executive Officers of the Registrant
Name Age Present Title (Fiscal Year First
Became Executive Officer)
-----------------------------------------------------------------
John T. Keiser 63 President and Chief Executive Officer
(1998)
Victor L. Poirier 57 Senior Vice President (1983)
Theo Melas-Kyriazi 39 Chief Financial Officer (1998)
Paul F. Kelleher 56 Chief Accounting Officer (1985)
Each executive officer serves until his successor is chosen or appointed and
qualified, or until earlier resignation, death, or removal. All executive
officers, except Messrs. Keiser and Melas-Kyriazi, have held comparable
positions for at least five years, either with the Company or with its parent
company, Thermo Electron. Mr. Keiser was appointed Senior Vice President of the
Company in 1994. At the same time, he was named President of Thermo Biomedical,
a newly created subsidiary of Thermo Electron. He was named President and Chief
Executive Officer of the Company in March and December 1998, respectively. From
1985 until 1994, he was President of the Eberline Instrument division of Thermo
Instrument Systems Inc., a majority-owned public subsidiary of Thermo Electron.
Mr. Melas-Kyriazi was appointed Chief Financial Officer of the Company and
Thermo Electron on January 1, 1999. He joined Thermo Electron in 1986 as
Assistant Treasurer, and became Treasurer in 1988. In 1994, he was named
President and Chief Executive Officer of ThermoSpectra Corporation, a public
subsidiary of Thermo Instrument. In 1998, he became Vice President of Corporate
Strategy for Thermo Electron. He remains a Vice President of Thermo Electron.
Messrs. Keiser, Melas-Kyriazi, and Kelleher are full-time employees of Thermo
Electron, and Mr. Poirier is a full-time employee of Thermo Cardiosystems, but
they devote such time to the affairs of the Company as the Company's needs
reasonably require.
Item 2. Properties
The Company believes that its facilities are in good condition and are
adequate to meet its current needs and that other suitable space is readily
available if any leases are not extended. The location and general character of
the Company's properties by industry segment as of January 2, 1999, are as
follows:
Quality Assurance and Security Products
The Quality Assurance and Security Products segment operates from two
principal facilities: an 85,000-square foot office, research and development,
and manufacturing facility in Massachusetts occupied under a lease expiring in
2006, subject to one five-year renewal option at the election of the Company;
and a 115,000-square foot office and manufacturing facility in Massachusetts,
occupied under a lease expiring in 2005. The Company also leases approximately
10,000 square feet in Enschede, Holland, occupied under a lease expiring in
2000. In addition, the
11
<PAGE>
Company leases approximately 20,400 square feet of office space throughout the
world for its sales and service operations, and owns approximately 14,300 square
feet of manufacturing, office, and storage facilities in Scotland.
Precision Weighing and Inspection Equipment
The Precision Weighing and Inspection Equipment segment owns approximately
26,500 square feet of office, engineering, and production space in Canada and
the United Kingdom and leases approximately 324,500 square feet of office,
engineering, and production space principally in Minnesota, the United Kingdom,
Australia, and Germany under leases expiring at various dates through 2068.
Heart Assist and Blood Testing Devices
The Company's Heart Assist and Blood Testing Devices segment owns
approximately 61,000 square feet of office, engineering, laboratory, and
production space in New Jersey and leases approximately 83,000 square feet of
office, engineering, laboratory, and production space in California,
Massachusetts, and New Jersey, under leases expiring at various dates through
2004.
Power Electronics and Test Equipment
The Power Electronics and Test Equipment segment leases approximately
110,000 square feet of office, engineering, laboratory, and production space
principally in Massachusetts, Washington, California, the United Kingdom, and
the Netherlands, under leases expiring at various dates through 2010.
Approximately 40,400 square feet of office, engineering, laboratory, and
production space that the Company owns in Mount Kisco, New York, is currently
under agreement to be sold.
Other
The Company also leases approximately 131,000 square feet of office,
engineering, laboratory, and production space in Massachusetts and Illinois,
under leases expiring at various dates through 2004.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
12
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Information concerning the market and market price for the Registrant's
Common Stock, $.10 par value, and dividend policy are included under the
sections labeled "Common Stock Market Information" and "Dividend Policy" in the
Registrant's 1998 Annual Report to Shareholders
and is incorporated herein by reference.
Item 6. Selected Financial Data
Information concerning the Registrant's selected financial data is included
under the sections labeled "Selected Financial Information" and "Dividend
Policy" in the Registrant's 1998 Annual Report to Shareholders
and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1998 Annual Report to Shareholders and
is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required under this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1998 Annual Report to Shareholders and
is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's Consolidated Financial Statements as of January 2, 1999,
are included in the Registrant's 1998 Annual Report to Shareholders and are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Public Accountants on Accounting
and Financial Disclosure
Not applicable.
13
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the caption
"Election of Directors" in the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year. The information
concerning delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated herein by reference from the material contained under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance" under the caption
"Stock Ownership" in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
The information required under this item is incorporated herein by reference
from the material contained under the caption "Executive Compensation" in the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated herein by reference
from the material contained under the caption "Stock Ownership" in the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required under this item is incorporated herein by reference
from the material contained under the caption "Relationship with Affiliates" in
the Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
14
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a,d) Financial Statements and Schedules.
(1)The consolidated financial statements set forth in the list below are
filed as part of this Report.
(2)The consolidated financial statement schedule set forth in the list below
is filed as part of this Report.
(3)Exhibits filed herewith or incorporated herein by reference are set forth
in Item 14(c) below.
List of Financial Statements and Schedules Referenced in this Item 14
Information incorporated by reference from Exhibit 13 filed herewith:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Comprehensive Income and Shareholders'
Investment
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statement Schedules filed herewith:
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or in the notes thereto.
(b) Reports on Form 8-K
On December 10, 1998, the Company filed a Current Report on Form 8-K dated
December 10, 1998, the purpose of which was to provide an update to a
proposed corporate reorganization by Thermo Electron, involving certain of
Thermo Electron's subsidiaries, including the Company.
(c) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
Date: March 17, 1999 THERMEDICS INC.
By: /s/ John T. Keiser
John T. Keiser
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of March 17, 1999.
Signature Title
- --------- -----
By: /s/ John T. Keiser President, Chief Executive Officer,
John T. Keiser and Director
By: /s/ Theo Melas-Kyriazi Chief Financial Officer
Theo Melas-Kyriazi
By: /s/ Paul F. Kelleher Chief Accounting Officer
Paul F. Kelleher
By: /s/ T. Anthony Brooks Director
T. Anthony Brooks
By: /s/ Peter O. Crisp Director
Peter O. Crisp
By: /s/ Paul F. Ferrari Director
Paul F. Ferrari
By: /s/ George N. Hatsopoulos Director
George N. Hatsopoulos
By: /s/ John N. Hatsopoulos Director
John N. Hatsopoulos
By: /s/ John W. Wood Jr. Chairman of the Board and Director
John W. Wood Jr.
By: /s/ Nicholas T. Zervas Director
Nicholas T. Zervas
16
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermedics Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Thermedics Inc.'s Annual
Report to Shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated February 11, 1999. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
listed in Item 14 on page 15 is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. The schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the consolidated financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
February 11, 1999
17
<PAGE>
SCHEDULE II
THERMEDICS INC.
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Description Provision Accounts Accounts Other (a) Balance
Balance at Charged to Recovered Written at End
Beginning Expense of Year
of Off
Year
- ----------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Allowance for Doubtful Accounts
Year Ended January 2, 1999 $4,207 $1,002 $ - $(1,614) $ 903 $4,498
Year Ended January 3, 1998 $4,903 $ 815 $ - $(1,406) $ (105) $4,207
Year Ended December 28, 1996 $4,244 $1,352 $ 206 $(1,048) $ 149 $4,903
Description Amount Expenditures Other (c) Balance
Balance at Capitalized at End
Beginning as Cost of of Year
of Year Acquisition
- --------------------------------------------- ----------- ----------- ------------- ----------- -----------
Accrued Acquisition Reserves (b)
Year Ended January 2, 1999 $ 259 $1,309 $ (592) $ (11) $ 965
Year Ended January 3, 1998 $ 903 $ 299 $ (839) $ (104) $ 259
Year Ended December 28, 1996 $1,402 $ 758 $(1,151) $ (106) $ 903
(a) Includes allowance of businesses acquired and disposed of during the year as
described in Note 3 to Consolidated Financial Statements in the Registrant's
1998 Annual Report to Shareholders and the effect of foreign currency
translation.
(b) The nature of the activity in this account is described in Note 3 to
Consolidated Financial Statements in the Registrant's 1998 Annual Report to
Shareholders.
(c) Represents reversal of accrued acquisition expenses and corresponding
reduction of cost in excess of net assets of acquired companies resulting
from finalization of restructuring plans and the effect of foreign currency
translation.
</TABLE>
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2.1 Asset and Stock Purchase Agreement dated as of January 28, 1994,
between Thermo Electron and Baker Hughes Incorporated (filed as
Exhibit 2.1 to the Registrant's Current Report on Form 8-K relating
to events occurring on March 16, 1994 [File No. 1-9567] and
incorporated herein by reference).
2.2 Assignment and Assumption Agreement dated March 16, 1994, among
Thermo Electron, the Registrant, and Thermo Instrument Systems Inc.
(filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K
relating to events occurring on March 16, 1994 [File No. 1-9567] and
incorporated herein by reference).
2.3 Agreement and Plan of Merger dated as of November 29, 1995, by and
among the Registrant, ATI Merger Corp., Analytical Technology, Inc.,
and, for certain limited purposes, Thermo Instrument Systems Inc.
(filed as Exhibit 2 to the Registrant's Current Report on Form 8-K
relating to events occurring on November 29, 1995 [File No. 1-9567]
and incorporated herein by reference).
2.4 Asset and Share Purchase Agreement dated as of November 29, 1995, by
and among Thermo Instrument Systems Inc., ATI Acquisition Corp.,
Analytical Technology, Inc., and, for certain limited purposes, the
Registrant (filed as Exhibit 10(a) to the Registrant's Current Report
on Form 8-K relating to events occurring on November 29, 1995 [File
No. 1-9567] and incorporated herein by reference).
2.5 Asset Purchase Agreement dated as of January 25, 1996, among
Thermedics Detection Limited, Moisture Systems Corporation, Moisture
Systems Limited, and Anacon Corporation (filed as Exhibit 2.5 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 30, 1995 [File No. 1-9567] and incorporated herein by
reference). Schedules to this Agreement have been omitted pursuant to
Rule 601(b)(2) of Regulation S-K. The Registrant hereby undertakes to
furnish supplementally a copy of any omitted schedule to the
Commission upon request.
2.6 Agreement and Plan of Reorganization among Thermo Cardiosystems Inc.,
ITC Acquisition Corp., Thermo Electron Corporation, ITC Holdings
Inc., and International Technidyne Corporation dated as of May 2,
1997 (filed as Exhibit 2.1 to Thermo Cardiosystems' Quarterly Report
on Form 10-Q for the quarter ended March 29, 1997 [File No. 1-10114]
and incorporated herein by reference).
3.1 Articles of Organization (filed as Exhibit 3(a) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1988 [File No. 1-9567] and incorporated
herein by reference).
3.2 Amendment to Articles of Organization dated October 25, 1993 (filed
as Exhibit 3(c) to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended October 2, 1993 [File No. 1-9567] and
incorporated herein by reference).
3.3 Amended and Restated Articles of Incorporation of the Registrant
(filed as Exhibit 3(i) to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 29, 1996 [File No. 1-9567] and
incorporated herein by reference).
3.4 Amended and Restated By-laws of the Registrant (filed as Exhibit 3(c)
to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 28, 1992 [File No. 1-9567] and incorporated
herein by reference).
4.1 Fiscal Agency Agreement dated January 5, 1994, among Thermo
Cardiosystems, Thermo Electron, and Chemical Bank (filed as Exhibit
4.11 to Thermo Cardiosystems' Annual Report on Form 10-K for the
fiscal year ended January 1, 1994 [File No. 1-10114] and incorporated
herein by reference).
19
<PAGE>
Exhibit
Number Description of Exhibit
4.2 Fiscal Agency Agreement dated November 19, 1993, among Thermo Voltek,
Thermo Electron, and Chemical Bank (filed as Exhibit 4.3 to Thermo
Voltek's Annual Report on Form 10-K for the fiscal year ended January
1, 1994 [File No. 1-10574] and incorporated herein by reference).
4.3 Fiscal Agency Agreement dated as of June 3, 1996, among Thermedics,
Thermo Electron, and Chemical Bank, as fiscal agent (filed as Exhibit
4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 29, 1996 [File No. 1-9567] and incorporated herein
by reference).
4.4 Guarantee Reimbursement Agreement dated February 7, 1994, among
Thermo Cardiosystems, Thermo Voltek, the Registrant, and Thermo
Electron (filed as Exhibit 4.4 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 1, 1994 [File No. 1-9567]
and incorporated herein by reference).
4.5 Fiscal Agency Agreement dated as of May 14, 1997, among Thermo
Cardiosystems Inc., Thermo Electron Corporation, and Bankers Trust
Company as fiscal agent relating to $70 million principal amount of 4
3/4% Convertible Subordinated Debentures due 2004 (filed as Exhibit 4
to Thermo Cardiosystems' Quarterly Report on Form 10-Q for the
quarter ended June 28, 1997 [File No. 1-10114] and incorporated
herein by reference).
The Registrant hereby agrees, pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K, to furnish to the Commission upon request, a copy of
each other instrument with respect to other long-term debt of the
Company or its subsidiaries.
10.1 Amended and Restated Corporate Services Agreement between Thermo
Electron and the Registrant dated as of January 3, 1993 (filed as
Exhibit 10(a) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 2, 1993 [File No. 1-9567] and incorporated
herein by reference).
10.2 Lease dated November 1983 between WGO Limited Partnership, as Lessor
and the Registrant, as Lessee (filed as Exhibit 10(l) to the
Registrant's Registration Statement on Form S-1 [Reg. No. 2-96962]
and incorporated herein by reference; amendments thereto filed as
Exhibit 10(l) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988 [File No. 1-9567] and
incorporated herein by reference).
10.3 Thermo Electron Corporate Charter as amended and restated effective
January 3, 1993 (filed as Exhibit 10(h) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 2, 1993 [File
No. 1-9567] and incorporated herein by reference).
10.4 Lease dated August 25, 1978, between National Boulevard Bank of
Chicago and Walpak Company (filed as Exhibit 10(p) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988 [File No. 1-9567] and incorporated
herein by reference).
10.5 Exclusive Base Technology License Agreement between Thermo Electron
and the Registrant dated January 8, 1988 (filed as Exhibit 10(q) to
the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 2, 1988 [File No. 1-9567] and incorporated herein by
reference).
10.6 Research and Development Contract between Thermo Electron and the
Registrant dated January 8, 1988 (filed as Exhibit 10(r) to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 2, 1988 [File No. 1-9567] and incorporated herein by
reference).
20
<PAGE>
Exhibit
Number Description of Exhibit
10.7 Exclusive License and Marketing Agreement between Thermo Electron and
the Registrant dated January 8, 1988 (filed as Exhibit 10(s) to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 2, 1988 [File No. 1-9567] and incorporated herein by
reference).
10.8 Intellectual Property Cross-license Agreement between the Registrant
and Thermo Cardiosystems (filed as Exhibit 10(i) to Thermo
Cardiosystems' Registration Statement on Form S-1 [Reg. No.
33-25144] and incorporated herein by reference).
10.9 Amendment No. 1 dated March 29, 1991, to Exclusive License and
Marketing Agreement between the Registrant and Thermo Electron (filed
as Exhibit 10(r) to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 30, 1991 [File No. 1-9567] and
incorporated herein by reference).
10.10 Management Agreement by and between Thermo Electron and the
Registrant dated November 15, 1991 (filed as Exhibit 10(t) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991 [File No. 1-9567] and incorporated
herein by reference).
10.11 Agreement dated May 26, 1993, between Thermo Cardiosystems and The
Polymer Technology Group, Incorporated (filed as Exhibit 10(nn) to
the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended July 3, 1993 [File No. 1-9567] and incorporated herein by
reference).
10.12 Amended and Restated Master Repurchase Agreement dated as of July 2,
1996, between the Registrant and Thermo Electron (filed as Exhibit
10.12 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 28, 1996 [File No. 1-9567] and incorporated
herein by reference).
10.13 $38,000,000 Promissory Note dated as of December 11, 1995, issued by
the Registrant to Thermo Electron (filed as Exhibit 10(b) to the
Registrant's Current Report on Form 8-K relating to events occurring
on November 29, 1995 [File No. 1-9567] and incorporated herein by
reference).
10.14 $15,000,000 Promissory Note dated as of February 13, 1996,
issued by the Company to Thermo Electron (filed as Exhibit 10
to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 30, 1996 [File No. 1-9567] and
incorporated herein by reference).
10.15-17 Reserved.
10.18 Incentive Stock Option Plan of the Registrant (filed as Exhibit
10(d) to the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-84380] and incorporated herein by reference). (Maximum
number of shares issuable in the aggregate under this plan and the
Registrant's Nonqualified Stock Option Plan is 1,931,923 shares,
after adjustment to reflect share increases approved in 1986 and
1992, 5-for-4 stock split effected in January 1985, 4-for-3 stock
split effected in September 1985, and 3-for-2 stock splits
effected in October 1986 and November 1993.)
10.19 Nonqualified Stock Option Plan of the Registrant (filed as Exhibit
10(e) to the Registrant's Registration Statement on Form S-1 [Reg.
No. 33-84380] and incorporated herein by reference). (Maximum number
of shares issuable in the aggregate under this plan and the
Registrant's Incentive Stock Option Plan is 1,931,923 shares, after
adjustment to reflect share increases approved in 1986 and 1992,
5-for-4 stock split effected in January 1985, 4-for-3 stock split
effected in September 1985, and 3-for-2 stock splits effected in
October 1986 and November 1993.)
21
<PAGE>
Exhibit
Number Description of Exhibit
10.20 Equity Incentive Plan of the Registrant (filed as Appendix A to the
Proxy Statement dated May 10, 1993, of the Registrant [File No.
1-9567] and incorporated herein by reference). (Maximum number of
shares issuable is 1,500,000 shares, after adjustment to reflect
3-for-2 stock split effected in November 1993.)
10.21 Thermedics Inc. - Thermedics Detection Inc. Nonqualified Stock Option
Plan (filed as Exhibit 10.20 to Thermo Electron's Annual Report
on Form 10-K for the fiscal year ended January 2, 1993 [File
No. 1-8002] and incorporated herein by reference).
10.22 Thermedics Inc. - Thermo Sentron Inc. Nonqualified Stock Option
Plan (filed as Exhibit 10.51 to Thermo Cardiosystems' Annual
Report on Form 10-K for the fiscal year ended December 30, 1995
[File No. 1-10114] and incorporated herein by reference).
10.23 Thermedics Inc. - Thermo Cardiosystems Inc. Nonqualified Stock
Option Plan (filed as Exhibit 4(b) to Thermo Cardiosystems'
Registration Statement on Form S-8 [Reg. No. 33-45282] and
incorporated herein by reference).
10.24 Thermedics Inc. - Thermo Voltek Corp. Nonqualified Stock Option
Plan (filed as Exhibit 10.24 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended January 3, 1998 [File
No. 1-9567] and incorporated herein by reference).
10.25 Directors Stock Option Plan of the Registrant (filed as Exhibit 10.20
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 [File No. 1-9567] and incorporated herein by
reference).
10.26 Deferred Compensation Plan for Directors of the Registrant
(filed as Exhibit 10(g) to the Registrant's Registration
Statement on Form S-1 [Reg. No. 33-96962] and incorporated
herein by reference).
In addition to the stock-based compensation plans of the Registrant,
the executive officers of the Registrant may be granted awards under
stock-based compensation plans of Thermo Electron for services
rendered to the Registrant or to such affiliated corporations. The
terms of such plans are substantially the same as those of the
Registrant's Equity Incentive Plan.
10.27 Restated Stock Holdings Assistance Plan and Form of Promissory Note
(filed as Exhibit 10.27 to the Registrant's Annual Report on Form
10-K for the fiscal year ended January 3, 1998 [File No. 1-9567] and
incorporated herein by reference).
10.28 Amended and Restated Master Guarantee Reimbursement and Loan
Agreement, dated December 10, 1997, between Thermo Electron and the
Registrant (filed as Exhibit 10.28 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended January 3, 1998 [File No.
1-9567] and incorporated herein by reference).
13 Annual Report to Shareholders for the year ended January 2, 1999
(only those portions incorporated herein by reference).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
Exhibit 13
Thermedics Inc.
Consolidated Financial Statements
1998
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Thermedics Inc. 1998 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Revenues (Note 13) $ 313,131 $307,666 $ 292,077
--------- -------- ---------
Costs and Operating Expenses:
Cost of revenues 164,345 155,680 148,137
Selling, general, and administrative expenses (Note 8) 89,660 86,308 85,045
Research and development expenses 26,595 24,270 21,363
Nonrecurring costs (Notes 3 and 12) - - 17,637
--------- ------- ---------
280,600 266,258 272,182
--------- ------- ---------
Operating Income 32,531 41,408 19,895
Interest Income 13,069 13,326 10,765
Interest Expense (includes $663 to parent company in 1998; (5,581) (3,398) (3,770)
Note 3)
Gain on Issuance of Stock by Subsidiaries (Note 10) - 17,075 23,651
Gain on Sale of Investments, Net (includes gain on sale of 39 432 956
related-party investments of $428 in 1997; Notes 2 and 8)
Other Income - 54 -
--------- ------- ---------
Income Before Provision for Income Taxes, Minority Interest, and 40,058 68,897 51,497
Extraordinary Item
Provision for Income Taxes (Note 5) 15,312 19,675 13,969
Minority Interest Expense 5,774 7,730 8,390
--------- ------- ---------
Income Before Extraordinary Item 18,972 41,492 29,138
Extraordinary Item, Net of Provision for Income Taxes of $3,092 (Note7) 4,638 - -
--------- ------- ---------
Net Income $ 23,610 $41,492 $ 29,138
========= ======= =========
Earnings per Share (Note 14)
Basic $ .57 $ 1.13 $ .80
========= ======= =========
Diluted $ .55 $ 1.07 $ .75
========= ======= =========
Weighted Average Shares (Notes 8 and 14)
Basic 41,221 36,700 36,417
========= ======= =========
Diluted 43,242 38,911 38,202
========= ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Thermedics Inc. 1998 Financial Statements
Consolidated Balance Sheet
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Assets
Current Assets:
Cash and cash equivalents (includes $73,377 and $175,101 under $142,108 $187,012
repurchase agreements with parent company)
Short-term available-for-sale investments, at quoted market value 43,310 58,317
(amortized cost of $43,155 and $58,144; Note 2)
Accounts receivable, less allowances of $4,498 and $4,207 63,438 61,488
Inventories 62,783 59,574
Prepaid income taxes and expenses (Note 5) 14,572 12,769
-------- --------
326,211 379,160
-------- --------
Property, Plant, and Equipment, at Cost, Net 21,907 21,611
-------- --------
Long-term Available-for-sale Investments, at Quoted Market Value 47,259 12,665
(amortized cost of $47,226 and $12,655; Note 2) -------- --------
Other Assets 12,723 12,139
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 3) 145,518 110,977
-------- --------
$553,618 $536,552
======== ========
3
<PAGE>
Thermedics Inc. 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Liabilities and Shareholders' Investment
Current Liabilities:
Note payable to parent company (Note 3) $ 19,000 $ -
Notes payable and current maturity of long-term obligation (Note 3) 6,312 7,498
Accounts payable 20,695 18,020
Accrued payroll and employee benefits 12,830 12,576
Accrued income taxes 8,159 6,815
Accrued warranty costs 4,483 3,784
Other accrued expenses 20,344 18,838
Due to parent company and affiliated companies 2,096 2,266
-------- --------
93,919 69,797
-------- --------
Other Deferred Items 191 177
-------- --------
Long-term Obligations (Note 7) 122,802 142,771
-------- --------
Minority Interest 88,730 96,461
-------- ---------
Commitments and Contingencies (Note 6)
Shareholders' Investment (Notes 4, 7, 8, and 9):
Common stock, $.10 par value, 100,000,000 shares authorized; 41,739,308 4,174 3,685
pro forma and 36,846,175 shares issued
Capital in excess of par value 106,846 113,913
Retained earnings 139,644 116,034
Treasury stock at cost, 47,348 and 134,172 shares (1,026) (3,449)
Accumulated other comprehensive items (Note 15) (1,662) (2,837)
-------- --------
247,976 227,346
-------- --------
$553,618 $536,552
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Thermedics Inc. 1998 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Operating Activities
Net income $ 23,610 $41,492 $ 29,138
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,593 10,361 10,431
Gain on repurchase and exchange of subordinated (7,730) - -
convertible debentures (Note 7)
Minority interest expense 5,774 7,730 8,390
Gain on issuance of stock by subsidiaries (Note 10) - (17,075) (23,651)
Nonrecurring costs (Notes 3 and 12) - - 17,637
Provision for losses on accounts receivable 1,002 815 1,352
Gain on sale of investments, net (Note 2) (39) (432) (956)
Increase (decrease) in deferred income taxes - 45 (601)
Other noncash expenses 1,725 780 938
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable 3,969 491 (13,906)
Inventories 843 (5,367) (839)
Prepaid income taxes and expenses (44) (845) 16
Accounts payable (64) (2,042) 892
Other current liabilities (3,637) 2,906 (1,162)
Other - - (270)
--------- ------- ---------
Net cash provided by operating activities 37,002 38,859 27,409
--------- ------- ---------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (43,976) (5,658) (37,044)
Acquisition of product lines - - (4,737)
Purchases of available-for-sale investments (213,035) (89,900) (99,800)
Proceeds from sale and maturities of available-for-sale 193,492 118,413 118,356
investments
Purchases of property, plant, and equipment (7,638) (7,087) (8,621)
Proceeds from sale of business 2,250 - -
Other (594) 275 (754)
--------- ------- ---------
Net cash provided by (used in) investing activities (69,501) 16,043 (32,600)
--------- ------- ---------
Financing Activities
Proceeds from issuance of notes payable to parent company (Note 3) 21,000 - 15,000
Repayment of notes payable to parent company (Note 3) (2,000) - (53,000)
Purchases of Company and subsidiaries' common stock (19,517) (51,091) (15,665)
Net proceeds from issuance of subordinated convertible obligations - 68,028 63,249
(Note 7)
Repayment and repurchase of long-term obligations (Note 7) (11,384) (700) (2,432)
Net increase (decrease) in short-term borrowings (1,533) 2,699 (1,944)
Net proceeds from issuance of Company and subsidiaries' common 442 29,122 49,780
stock (Note 10)
International Technidyne transfers (to) from Thermo Electron - 350 (5,567)
Other 137 - (146)
--------- ------- ---------
Net cash provided by (used in) financing activities $ (12,855) $48,408 $ 49,275
--------- ------- ---------
5
<PAGE>
Thermedics Inc. 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Exchange Rate Effect on Cash $ 450 $ 902 $ 1,303
-------- ------- ---------
Increase (Decrease) in Cash and Cash Equivalents (44,904) 104,212 45,387
Cash and Cash Equivalents at Beginning of Year 187,012 82,800 37,413
-------- ------- ---------
Cash and Cash Equivalents at End of Year $142,108 $187,012 $ 82,800
======== ======== =========
Cash Paid For
Interest $ 5,196 $ 2,467 $ 5,333
Income taxes $ 16,628 $14,588 $ 7,108
Noncash Activities
Fair value of assets of acquired companies $ 54,390 $ 9,351 $ 42,955
Cash paid for acquired companies (43,976) (6,291) (37,445)
-------- ------- ---------
Liabilities assumed of acquired companies $ 10,414 $ 3,060 $ 5,510
======== ======= =========
Issuance of subordinated convertible debentures in connection $ 15,859 $ - $ -
with exchange offer ======== ======= =========
Issuance of Company common stock to parent company in exchange $ 8,040 $ - $ 4,236
for common stock of subsidiaries ======== ======= =========
Conversions of Company and subsidiary convertible obligations $ - $ 4,650 $ 31,562
======== ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Thermedics Inc. 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Comprehensive Income
Net Income $ 23,610 $41,492 $ 29,138
--------- ------- ---------
Other Comprehensive Items, Net (Note 15):
Foreign currency translation adjustment 1,172 (2,545) (321)
Net unrealized gains (losses) on available-for-sale investments 3 56 (828)
--------- ------- ---------
1,175 (2,489) (1,149)
--------- ------- ---------
Minority interest (270) 626 495
--------- ------- ---------
$ 24,515 $39,629 $ 28,484
========= ======= =========
Shareholders' Investment
Common Stock, $.10 Par Value:
Balance at beginning of year $ 3,685 $ 3,684 $ 3,399
Activity under employees' and directors' stock plans 1 1 12
Conversions of subordinated convertible debentures - - 74
Issuance of Company common stock to parent company in exchange 488 - 199
for common stock of subsidiaries (Note 8) --------- ------- ---------
Balance at end of year 4,174 3,685 3,684
--------- ------- ---------
Capital in Excess of Par Value:
Balance at beginning of year 113,913 138,433 120,665
Activity under employees' and directors' stock plans (1,966) (1,239) 737
Tax benefit related to employees' and directors' stock plans 280 55 1,218
Conversions of subordinated convertible debentures - - 7,631
Issuance of Company common stock to parent company in exchange 7,552 - 4,037
for common stock of subsidiaries (Note 8)
Effect of majority-owned subsidiaries' equity transactions (12,933) (23,336) 4,145
--------- ------- ---------
Balance at end of year 106,846 113,913 138,433
--------- ------- ---------
Retained Earnings:
Balance at beginning of year 116,034 74,542 47,928
Net income 23,610 41,492 29,138
International Technidyne transfers to Thermo Electron - - (2,524)
--------- ------- ---------
Balance at end of year $ 139,644 $116,034 $ 74,542
--------- -------- ---------
7
<PAGE>
Thermedics Inc. 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Treasury Stock:
Balance at beginning of year $ (3,449) $(4,729) $ (42)
Activity under employees' and directors' stock plans 2,423 1,572 58
Purchases of Company common stock - (292) (4,745)
--------- ------- ---------
Balance at end of year (1,026) (3,449) (4,729)
--------- ------- ---------
Accumulated Other Comprehensive Items (Note 15):
Balance at beginning of year (2,837) (348) 801
Other comprehensive items 1,175 (2,489) (1,149)
--------- ------- ---------
Balance at end of year (1,662) (2,837) (348)
--------- ------- ---------
$ 247,976 $227,346 $ 211,582
========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
Thermedics Inc. 1998 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermedics Inc. (the Company) develops, manufactures, and markets on-line
product quality assurance systems, security devices, and laboratory products
including electrochemistry and microweighing systems; precision weighing and
inspection equipment, implantable heart-assist systems, whole-blood coagulation
testing equipment, and skin-incision devices; and electronics-test instruments
and a range of power electronics; as well as other products.
Relationship With Thermo Electron Corporation
The Company was incorporated in 1983 as a wholly owned subsidiary of
Thermo Electron Corporation. As of January 2, 1999, on a pro forma basis,
assuming the completion of the transaction discussed in Note 8, Thermo Electron
owned 30,850,049 shares of the Company's common stock, representing 74% of such
stock outstanding.
During 1998, Thermo Electron announced a proposed reorganization involving
certain of Thermo Electron's subsidiaries, including the Company. As part of
this reorganization, Thermo Electron announced that the Company may acquire
Thermo Electron's wholly owned biomedical group in exchange for shares of
Company common stock, and the Company's equity interest in its Thermedics
Detection Inc., Thermo Sentron Inc., and Thermo Voltek Corp. subsidiaries (Note
16).
Principles of Consolidation
The accompanying financial statements include the accounts of the Company;
its wholly owned subsidiaries; and its majority-owned public subsidiaries,
Thermedics Detection, Thermo Sentron, Thermo Cardiosystems Inc., and Thermo
Voltek. All material intercompany accounts and transactions have been
eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1998, 1997, and 1996 are for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996, respectively. Fiscal 1998 and 1996
each included 52 weeks; fiscal 1997 included 53 weeks.
Revenue Recognition
The Company recognizes the majority of its revenues upon shipment of its
products. The Company provides a reserve for its estimate of warranty costs at
the time of shipment. Revenues and profits on substantially all contracts are
recognized using the percentage-of-completion method. Revenues recorded under
the percentage-of-completion method were $7,494,000, $8,735,000, and $6,564,000
in 1998, 1997, and 1996, respectively. The percentage of completion is
determined by relating either the actual costs or actual labor incurred to date
to management's estimate of total costs or total labor, respectively, to be
incurred on each contract. If a loss is indicated on any contract in process, a
provision is made currently for the entire loss. The Company's contracts
generally provide for customer billing on a cost-plus-fixed-fee basis when
certain milestones are attained, or monthly, as costs are incurred. Revenues
earned on contracts in process in excess of billings are included in inventories
in the accompanying balance sheet and were not material at year-end 1998 and
1997. There are no significant amounts included in the accompanying balance
sheet that are not expected to be recovered from existing contracts at current
contract values, or that are not expected to be collected within one year,
including amounts that are billed but not paid under retainage provisions.
Gain on Issuance of Stock by Subsidiaries
At the time a subsidiary sells its stock to unrelated parties at a price
in excess of its book value, the Company's net investment in that subsidiary
increases. If at that time the subsidiary is an operating entity and not engaged
principally in research and development, the Company records the increase as a
gain.
9
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
If gains have been recognized on issuances of a subsidiary's stock and
shares of the subsidiary are subsequently repurchased by the subsidiary, the
Company, or Thermo Electron, gain recognition does not occur on issuances
subsequent to the date of a repurchase until such time as shares have been
issued in an amount equivalent to the number of repurchased shares. Such
transactions are reflected as equity transactions, and the net effect of these
transactions is reflected in the accompanying statement of comprehensive income
and shareholders' investment as "Effect of majority-owned subsidiaries' equity
transactions."
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 4). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
Income Taxes
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
Earnings per Share
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the year. Diluted earnings
per share have been computed assuming the conversion of convertible obligations
and the elimination of the related interest expense, and the exercise of stock
options, as well as their related income tax effects (Note 14).
Cash and Cash Equivalents
At year-end 1998 and 1997, $72,714,000 and $175,101,000, respectively, of
the Company's cash equivalents were invested in a repurchase agreement with
Thermo Electron. Under this agreement, the Company in effect lends excess cash
to Thermo Electron, which Thermo Electron collateralizes with investments
principally consisting of corporate notes, U.S. government-agency securities,
commercial paper, money market funds, and other marketable securities, in the
amount of at least 103% of such obligation. The Company's funds subject to the
repurchase agreement are readily convertible into cash by the Company and have
an original maturity of three months or less. The repurchase agreement earns a
rate based on the 90-day Commercial Paper Composite Rate plus 25 basis points,
set at the beginning of each quarter.
At year-end 1998, $663,000 of the Company's cash equivalents, denominated
in Dutch guilders, were invested in a repurchase agreement with a wholly owned
subsidiary of Thermo Electron. Under this agreement, the Company in effect lends
excess cash to the subsidiary, which Thermo Electron collateralizes with
investments principally consisting of corporate notes, U.S. government-agency
securities, commercial paper, money market funds, and other marketable
securities, in the amount of at least 103% of such obligation. The Company's
funds subject to the repurchase agreement are readily convertible into cash by
the Company. The repurchase agreement earns a rate based on Netherlands market
rates, set at the beginning of each month. At year-end 1998 and 1997, the
Company's cash equivalents were also invested in U.S. government-agency discount
notes and money market preferred stock. Cash equivalents are carried at cost,
which approximates market value.
10
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market value and include materials, labor, and manufacturing overhead.
The components of inventories are:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ----------- -----------
Raw Material and Supplies $25,275 $23,857
Work in Process 15,918 18,218
Finished Goods 21,590 17,499
------- -------
$62,783 $59,574
======= =======
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: buildings and improvements, 5 to 32
years; machinery and equipment, 2 to 10 years; and leasehold improvements, the
shorter of the term of the lease or the life of the asset. Property, plant, and
equipment consists of:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ----------- -----------
Land and Buildings $ 6,139 $ 6,154
Machinery, Equipment, and Leasehold Improvements 54,548 49,443
------- -------
60,687 55,597
Less: Accumulated Depreciation and Amortization 38,780 33,986
------- -------
$21,907 $21,611
======= =======
Other Assets
Other assets in the accompanying balance sheet includes the cost of
acquired patents, trademarks, acquired technology, and other specifically
identifiable intangible assets. These assets are amortized using the
straight-line method over their estimated useful lives, which range from 4 to 40
years. These assets were $5,492,000 and $4,400,000, net of accumulated
amortization of $3,716,000 and $3,253,000, at year-end 1998 and 1997,
respectively.
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method over periods not exceeding 40 years.
Accumulated amortization was $14,925,000 and $12,116,000 at year-end 1998 and
1997, respectively. The Company assesses the future useful life of this asset
whenever events or changes in circumstances indicate that the current useful
life has diminished. The Company considers the future undiscounted cash flows of
the acquired companies in assessing the recoverability of this asset. If
impairment has occurred, any excess of carrying value over fair value is
recorded as a loss.
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments, net of minority
interest, are reflected in the "Accumulated other comprehensive items" component
of shareholders' investment (Note 15). Foreign currency transaction gains or
losses are included in the accompanying statement of income and are not material
for the three years presented.
11
<PAGE>
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation
Certain amounts in 1997 and 1996 have been reclassified to conform to the
presentation in the 1998 financial statements.
</TABLE>
2. Available-for-sale Investments
The Company's debt securities are considered available-for-sale
investments in the accompanying balance sheet and are carried at market value,
with the difference between cost and market value, net of related tax effects
and minority interest, recorded in the "Accumulated other comprehensive items"
component of shareholders' investment (Note 15).
The aggregate market value, cost basis, and gross unrealized gains and
losses of short- and long-term available-for-sale investments by major security
type are:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(In thousands) Gross Gross
Market Cost Unrealized Unrealized
Value Basis Gains Losses
- -------------------------------------------------- ------------- ------------- ------------- --------------
1998
Government-agency Securities $88,425 $88,336 $ 98 $ (9)
Other 2,144 2,045 124 (25)
------- ------- ------- -------
$90,569 $90,381 $ 222 $ (34)
======= ======= ======= =======
1997
Government-agency Securities $55,391 $55,334 $ 66 $ (9)
Corporate Bonds 11,547 11,521 26 -
Other 4,044 3,944 174 (74)
------- ------- ------- -------
$70,982 $70,799 $ 266 $ (83)
======= ======= ======= =======
Short- and long-term available-for-sale investments in the accompanying
1998 balance sheet include $42,475,000 with contractual maturities of one year
or less, $47,260,000 with contractual maturities of more than one year through
five years, and $834,000 with contractual maturities of more than five years
through ten years. Actual maturities may differ from contractual maturities as a
result of the Company's intent to sell these securities prior to maturity and as
a result of put and call features of the securities that enable either the
Company, the issuer, or both to redeem these securities at an earlier date.
12
<PAGE>
2. Available-for-sale Investments (continued)
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains and losses recorded in the
accompanying statement of income. Gain on sale of investments, net, resulted
from gross realized gains of $39,000, $432,000, and $1,086,000 in 1998, 1997,
and 1996, respectively, and gross realized losses of $130,000 in 1996 relating
to the sale of available-for-sale investments.
3. Acquisitions
In June 1998, Thermo Sentron acquired the three businesses that
constituted the product-monitoring group of Graseby Limited (the
product-monitoring businesses), a subsidiary of Smiths Industries plc, for
$43,976,000 in cash, net of cash acquired, and the assumption of certain
liabilities. The U.K.-based product-monitoring businesses design, manufacture,
and distribute specialized packaged-goods equipment, including checkweighers and
metal detectors, for the food and pharmaceutical industries. To partially
finance this acquisition, Thermo Sentron borrowed $21,000,000 from Thermo
Electron pursuant to a promissory note due December 1998, bearing interest at
the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter. In December 1998, Thermo Sentron repaid $2,000,000 of
this amount and issued Thermo Electron a new promissory note for $19,000,000 in
exchange for the initial note. This note is due June 1999 and bears interest
under the same terms as the initial note. As of January 2, 1999, the interest
rate on this note was 5.36%.
In May 1997, Thermo Cardiosystems acquired International Technidyne from
Thermo Electron in exchange for 3,355,705 shares of Thermo Cardiosystems' common
stock. International Technidyne is a leading manufacturer of near-patient,
whole-blood coagulation testing equipment and related disposables, and also
manufactures premium-quality, single-use skin-incision devices. Because the
Company, Thermo Cardiosystems, and International Technidyne were deemed for
accounting purposes to be under control of their common majority owner, Thermo
Electron, the transaction has been accounted for at historical cost in a manner
similar to a pooling of interests. Accordingly, all historical financial
information presented has been restated to reflect the acquisition of
International Technidyne.
Revenues and net income, as previously reported by the separate entities
prior to the acquisition and as restated for the combined Company, are:
(In thousands) 1996
- -------------------------------------------------------------------------------------- ---------- ----------
Revenues:
Historical $258,085
International Technidyne 33,992
--------
$292,077
========
Net Income:
Historical $ 26,831
International Technidyne 4,672
Minority interest expense not previously reported (2,365)
--------
$ 29,138
========
In addition, during 1997, two of the Company's majority-owned subsidiaries
made acquisitions for $6,291,000 in cash.
In December 1996, Thermo Cardiosystems acquired substantially all of the
assets, subject to certain liabilities, of Nimbus Medical, Inc., a research and
development organization specializing in ventricular-assist devices and total
artificial hearts, for $5,013,000 in cash. Nimbus is engaged strictly in
research and development activities and,
13
<PAGE>
3. Acquisitions (continued)
through its acquisition date, had not completed development of any commercial
products for which it retains ownership rights. Nimbus' assets acquired by
Thermo Cardiosystems included certain technology in development. The feasibility
of the technology in development had not been conclusively established at the
acquisition date and such technology had no future use other than in potential
future generations of heart-assist devices or in total artificial hearts. In
connection with the acquisition of Nimbus, Thermo Cardiosystems wrote off
$4,909,000, which represents the portion of the purchase price allocated to
technology in development based on estimated replacement cost.
In January 1996, Thermedics Detection acquired the assets and certain
liabilities of Moisture Systems Corporation and certain affiliated companies
(collectively, Moisture Systems), and the stock of Rutter & Co. B.V. (Rutter)
for a total purchase price of $21,668,000 in cash, which included the repayment
of $700,000 of debt. Moisture Systems and Rutter design, manufacture, and sell
instruments that use near-infrared spectroscopy to measure moisture and other
product components. In connection with these acquisitions, the Company borrowed
$15,000,000 from Thermo Electron pursuant to a promissory note due March 1997,
and bearing interest at the 90-day Commercial Paper Composite Rate plus 25 basis
points, set at the beginning of each quarter. The Company repaid the $15,000,000
promissory note to Thermo Electron in September 1996. During 1996, the Company's
majority-owned subsidiaries made other acquisitions for $15,501,000 in cash.
These acquisitions, excluding Thermo Cardiosystems' acquisition of
International Technidyne, have been accounted for using the purchase method of
accounting, and their results of operations have been included in the
accompanying financial statements from their respective dates of acquisition.
The aggregate cost of these acquisitions exceeded the estimated fair value of
the acquired net assets by $67,945,000, which is being amortized over periods
not exceeding 40 years. Allocation of the purchase price for these acquisitions
was based on estimates of the fair value of the net assets acquired and, in the
case of the product-monitoring businesses, is subject to adjustment upon
finalization of the purchase price allocation. The Company has gathered no
information that indicates the final allocation of purchase price will differ
materially from the preliminary estimates. Pro forma data is not presented since
the acquisitions were not material to the Company's results of operations.
In connection with these acquisitions, the Company has undertaken
restructuring activities at the acquired businesses. The Company's restructuring
activities, which were accounted for in accordance with Emerging Issues Task
Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing
levels and the abandonment of excess facilities. In connection with these
restructuring activities, as part of the cost of the acquisitions, the Company
established reserves, primarily for severance and excess facilities. In
accordance with EITF 95-3, the Company finalized its restructuring plans no
later than one year from the respective dates of the acquisitions, except for
the acquisition completed in 1998, for which finalization will occur no later
than one year from the date of the acquisition. Unresolved matters at January 2,
1999, primarily included completion of planned severances and
14
<PAGE>
3. Acquisitions (continued)
abandonment of excess facilities for the acquisition completed during 1998. A
summary of the changes in accrued acquisition expenses, which are included in
other accrued expenses in the accompanying balance sheet, is:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- --------------
Balance at December 30, 1995 $ 849 $ 553 $ - $ 1,402
Reserves established 577 144 37 758
Usage (779) (372) - (1,151)
Decrease due to finalization of (33) (69) - (102)
restructuring
plan, recorded as a decrease to cost in
excess of net assets of acquired
companies
Currency translation adjustment (2) (2) - (4)
-------- -------- -------- --------
Balance at December 28, 1996 612 254 37 903
Reserves established 237 62 - 299
Usage (548) (254) (37) (839)
Decrease due to finalization of (104) - - (104)
restructuring plan, recorded as a
decrease to cost in excess of net
assets of acquired companies
Currency translation adjustment - - - -
-------- -------- -------- --------
Balance at January 3, 1998 197 62 - 259
Reserves established 537 772 - 1,309
Usage (552) (40) - (592)
Currency translation adjustment (5) (6) - (11)
-------- -------- -------- --------
Balance at January 2, 1999 $ 177 $ 788 $ - $ 965
======== ======== ======== ========
4. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has stock-based compensation plans for its key employees,
directors, and others. Two of these plans permitted the grant of nonqualified
and incentive stock options. These plans expired during 1993. Two other plans
permit the grant of a variety of stock and stock-based awards as determined by
the human resources committee of the Company's Board of Directors (the Board
Committee), including restricted stock, stock options, stock bonus shares, or
performance-based shares. The option recipients and the terms of options granted
under these plans are determined by the Board Committee. As of year-end 1998,
only nonqualified stock options have been awarded under these plans. Generally,
options granted to date are exercisable immediately, but are subject to certain
transfer restrictions and the right of the Company to repurchase shares issued
upon exercise of the options at the exercise price, upon certain events. The
restrictions and repurchase rights generally lapse ratably over a five- to
ten-year period, depending on the term of the option, which may range from seven
to twelve years. Nonqualified stock options may be granted at any price
determined by the Board Committee, although incentive stock options must be
granted at not less
15
<PAGE>
4. Employee Benefit Plans (continued)
than the fair market value of the Company's stock on the date of grant. To date,
all options have been granted at fair market value. The Company also has a
directors' stock option plan that provides for the grant of stock options to
outside directors pursuant to a formula approved by the Company's shareholders.
Options awarded under this plan are exercisable six months after the date of
grant and expire three or seven years after the date of grant. In addition to
the Company's stock-based compensation plans, certain officers and key employees
may also participate in stock-based compensation plans of Thermo Electron.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 388,000 shares at a weighted average exercise price of $19.39 per share
elected to participate in this exchange and, as a result, received options to
purchase 194,000 shares of Company common stock at $10.81 per share, which are
included in the 1998 grants in the table below. The other terms of the new
options are the same as the exchanged options except that the holders may not
sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.
</TABLE>
<TABLE>
<CAPTION>
A summary of the Company's stock option activity is:
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- --------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 1,584 $14.93 1,664 $14.99 1,557 $12.38
Granted 628 13.52 111 19.00 303 27.17
Exercised (139) 7.91 (63) 7.92 (137) 9.12
Forfeited (137) 19.53 (128) 22.75 (59) 22.42
Canceled due to exchange (388) 19.39 - - - -
----- ----- -----
Options Outstanding, End of Year 1,548 $13.46 1,584 $14.93 1,664 $14.99
===== ====== ===== ====== ===== ======
Options Exercisable 1,545 $13.46 1,584 $14.93 1,664 $14.99
===== ====== ===== ====== ===== ======
Options Available for Grant 490 296 284
===== ===== =====
</TABLE>
16
<PAGE>
4. Employee Benefit Plans (continued)
<TABLE>
A summary of the status of the Company's stock options at January 2, 1999,
is:
Options Outstanding
------------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In Contractual Life Price
thousands)
- ----------------------------------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C>
$ 4.70 - $ 10.96 605 4.5 years $ 8.47
10.97 - 17.22 765 6.6 years 15.26
17.23 - 23.47 107 7.1 years 19.04
23.48 - 29.73 71 4.4 years 28.21
-----
$ 4.70 - $ 29.73 1,548 5.7 years $13.46
=====
</TABLE>
The information disclosed above for options outstanding at January 2,
1999, does not differ materially for options exercisable.
Employee Stock Purchase Program
Substantially all of the Company's full-time U.S. employees are eligible
to participate in an employee stock purchase program sponsored by the Company or
its majority-owned public subsidiaries and Thermo Electron. Prior to the 1998
program year, the applicable shares of common stock could be purchased at the
end of a 12-month period at 95% of the fair market value at the beginning of the
period, and shares purchased were subject to a six-month resale restriction.
Effective November 1, 1998, the applicable shares of common stock may be
purchased at 85% of the lower of the fair market value at the beginning or end
of the period, and the shares purchased are subject to a one-year resale
restriction. Shares are purchased through payroll deductions of up to 10% of
each participating employee's gross wages. No shares were issued under this
program during 1998. During 1997 and 1996, the Company issued 9,000 shares and
10,000 shares, respectively, of its common stock under this program.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
after 1994 under the Company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method set forth
under SFAS No. 123, the effect on the Company's net income and earnings per
share would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(In thousands except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Net Income:
As reported $23,610 $41,492 $29,138
Pro forma 20,886 39,454 27,960
Basic Earnings per Share:
As reported .57 1.13 .80
Pro forma .51 1.08 .77
Diluted Earnings per Share:
As reported .55 1.07 .75
Pro forma .49 1.01 .72
17
<PAGE>
4. Employee Benefit Plans (continued)
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $4.15,
$8.81, and $11.49 in 1998, 1997, and 1996, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Volatility 38% 39% 39%
Risk-free Interest Rate 4.8% 6.2% 5.7%
Expected Life of Options 4.1 years 5.6 years 5.0 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plan
The majority of the Company's full-time U.S. employees are eligible to
participate in Thermo Electron's 401(k) savings plan. Contributions to the
401(k) savings plan are made by both the employee and the Company. Company
contributions to the 401(k) plan are based upon the level of employee
contributions. For these plans, the Company contributed and charged to expense
$1,643,000, $1,758,000, and $1,460,000 in 1998, 1997, and 1996, respectively.
5. Income Taxes
The components of income before provision for income taxes, minority
interest, and extraordinary item are:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------- -------- --------- --------
Domestic $30,606 $ 63,053 $43,172
Foreign 9,452 5,844 8,325
------- -------- -------
$40,058 $ 68,897 $51,497
======= ======== =======
18
<PAGE>
5. Income Taxes (continued)
The components of the provision for income taxes are:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------- -------- --------- --------
Currently Payable:
Federal $ 7,615 $ 13,256 $12,058
State 2,074 3,008 2,327
Foreign 3,534 2,049 3,618
------- -------- -------
13,223 18,313 18,003
------- -------- -------
Net Deferred (Prepaid):
Federal 2,063 496 (3,843)
State 322 145 24
Foreign (296) 721 (215)
------- -------- -------
2,089 1,362 (4,034)
------- -------- -------
$15,312 $ 19,675 $13,969
======= ======== =======
The Company and its majority-owned subsidiaries receive a tax deduction
upon exercise of nonqualified stock options by employees for the difference
between the exercise price and the market price of the underlying common stock
on the date of exercise. The provision for income taxes that is currently
payable does not reflect $808,000, $1,591,000, and $3,520,000 of such benefits
of the Company and its majority-owned subsidiaries that have been allocated to
capital in excess of par value, directly or through the effect of majority-owned
subsidiaries' equity transactions, in 1998, 1997, and 1996, respectively. The
provision for income taxes that is currently payable also does not reflect
$1,800,000 of tax benefits used to reduce cost in excess of net assets of
acquired companies in 1996.
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income before provision for income taxes, minority interest,
and extraordinary item due to:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------- -------- --------- --------
Provision for Income Taxes at Statutory Rate $14,020 $ 24,114 $18,024
Increases (Decreases) Resulting From:
Gain on issuance of stock by subsidiaries - (5,976) (8,278)
State income taxes, net of federal tax 1,557 2,057 1,534
Amortization and write-off of cost in excess of net assets of 483 401 3,256
acquired companies
Reduction in valuation allowance - - (684)
Tax benefit of foreign sales corporation (442) (698) (437)
Foreign tax rate and regulation differential (27) (125) (132)
Nondeductible expenses 153 107 228
Other, net (432) (205) 458
------- -------- -------
$15,312 $19,675 $13,969
======= ======= =======
19
<PAGE>
5. Income Taxes (continued)
Prepaid and deferred income taxes in the accompanying balance sheet
consist of:
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------- --------- --------
Prepaid (Deferred) Income Taxes:
Reserves and accruals $ 4,701 $ 3,732
Inventory reserves 3,196 3,869
Depreciation and amortization 2,029 1,912
Accrued compensation 1,131 1,988
Write-off of acquired technology (Note 3) 1,560 1,834
Tax loss and credit carryforwards 1,756 1,180
Trademarks and other intangible assets (924) (1,069)
Allowance for doubtful accounts 560 328
Warranty reserves 400 107
Other, net - 72
-------- -------
$ 14,409 $13,953
======== ========
Thermo Voltek has federal tax net loss carryforwards, subject to the
limitations described below. These net operating loss carryforwards will begin
to expire in 1999. Pursuant to U.S. Internal Revenue Code Sections 382 and 383,
the utilization of the net operating loss carryforwards is limited to the tax
benefit of a deduction of approximately $240,000 per year with any unused
portion of this annual limitation carried forward to future years. As of January
2, 1999, net operating loss carryforwards totaled $3,852,000, including $603,000
that have not been benefited since they will expire unused.
The Company has not recognized a deferred tax liability for the difference
between the book basis and tax basis of its investment in the common stock of
its domestic subsidiaries (such difference relates primarily to unremitted
earnings and gains on issuance of stock by subsidiaries) because the Company
does not expect this basis difference to become subject to tax at the parent
level. The Company believes it can implement certain tax strategies to recover
its investment in its domestic subsidiaries tax-free.
A provision has not been made for U.S. or additional foreign taxes on
$15,331,000 of undistributed earnings of foreign subsidiaries that could be
subject to taxation if remitted to the U.S. because the Company plans to keep
these amounts permanently reinvested overseas.
6. Commitments and Contingencies
Operating Leases
The Company and its subsidiaries lease various office and manufacturing
facilities under operating lease arrangements expiring from 1999 through 2068.
The accompanying statement of income includes expenses from operating leases of
$6,221,000, $5,470,000, and $5,689,000 in 1998, 1997, and 1996, respectively.
Future minimum payments due under noncancelable operating leases as of January
2, 1999, are $5,543,000 in 1999, $4,544,000 in 2000, $3,554,000 in 2001,
$3,222,000 in 2002, $2,266,000 in 2003, and $4,455,000 in 2004 and thereafter.
Total future minimum lease payments are $23,584,000.
20
<PAGE>
6. Commitments and Contingencies (continued)
Contingencies
Thermo Cardiosystems has received correspondence alleging that the
textured surface of the left ventricular-assist systems' (LVAS) housing
infringed the intellectual property rights of another party. In general, an
owner of intellectual property can prevent others from using such property
without a license and is entitled to damages for unauthorized past usage. The
Company has investigated the bases of the allegation and, based on the opinion
of its counsel and the Company's assessment of the proceedings in the United
States Patent and Trademark Office to date, believes that if Thermo
Cardiosystems were sued on these bases, it would have meritorious defenses.
Given the inherent uncertainties in dispute resolution, however, if Thermo
Cardiosystems were sued and the outcome were unfavorable, the Company's results
of operations or financial condition could be materially adversely affected in
amounts the Company cannot reasonably estimate.
See Note 16 for a discussion of litigation concerning the Company's merger
with Thermo Voltek.
7. Short- and Long-term Obligations and Other Financing Arrangements
Long-term Obligations
(In thousands except per share amounts) 1998 1997
- -------------------------------------------------------------------------------------- ---------- ----------
Noninterest-bearing Subordinated Convertible Debentures, due 2003, $ 31,565 $ 65,000
Convertible at $32.68 per Share
2 7/8% Subordinated Convertible Debentures, due 2003, Convertible at 15,859 -
$14.928 per Share
3 3/4% Subordinated Convertible Debentures, due 2000, Convertible Into 5,250 7,750
Shares of Thermo Voltek at $7.83 per Share
4 3/4% Subordinated Convertible Debentures, due 2004, Convertible Into 70,000 70,000
Shares of Thermo Cardiosystems at $31.415 per Share
Other 176 52
-------- --------
122,850 142,802
Less: Current Maturity of Long-term Obligation 48 31
-------- --------
$122,802 $142,771
======== ========
In June 1998, the Company offered holders of its noninterest-bearing
subordinated convertible debentures due 2003, convertible at $32.68 per share,
the opportunity to exchange such debentures for newly issued 2 7/8% subordinated
convertible debentures due 2003, convertible at $14.928 per share. Holders of
$21,724,000 principal amount of outstanding debentures exchanged such debentures
for $15,859,000 principal amount of newly issued debentures. This transaction
resulted in an extraordinary gain of $3,076,000, net of taxes of $2,071,000, in
accordance with the provisions of EITF No. 96-19. In addition, during 1998, the
Company and a majority-owned subsidiary repurchased $14,211,000 principal amount
of subordinated convertible debentures for $11,384,000 in cash, resulting in an
extraordinary gain of $1,562,000, net of taxes of $1,021,000.
The Company's convertible obligations are guaranteed on a subordinated
basis by Thermo Electron. The Company has agreed to reimburse Thermo Electron in
the event Thermo Electron is required to make a payment under its guarantee of
the Company's, Thermo Voltek's, or Thermo Cardiosystems' obligations.
In lieu of issuing shares of Thermo Voltek common stock upon the
conversion of the 3 3/4% subordinated convertible debentures due 2000, Thermo
Voltek has the option to pay holders of the debentures cash equal to the
weighted average market price of its common stock on the last trading date prior
to conversion.
21
<PAGE>
7. Short- and Long-term Obligations and Other Financing Arrangements (continued)
During 1997 and 1996, convertible obligations of $4,650,000 and
$31,562,000, respectively, were converted into common stock of the Company or
its subsidiaries.
See Note 11 for fair value information pertaining to the Company's
long-term obligations.
Short-term Obligations and Other Financing Arrangements
Several of the Company's foreign subsidiaries have lines of credit
outstanding of $5,473,000 and $5,506,000 as of year-end 1998 and 1997,
respectively. Amounts borrowed under these agreements are included in notes
payable and current maturity of long-term obligation in the accompanying balance
sheet, and are guaranteed by either the Company or Thermo Electron.
In addition, the Company's Netherlands-based subsidiaries have an
agreement with a wholly owned subsidiary of Thermo Electron under which the
subsidiaries can borrow funds that bear interest at a rate based on Netherlands
market rates, set at the beginning of each month. At year-end 1998, the Company
had borrowings under this agreement of $791,000, which are included in notes
payable and current maturity of long-term obligation in the accompanying 1998
balance sheet.
The weighted average interest rate on these borrowings was 6.5% and 7.4%
at year-end 1998 and 1997, respectively. Unused lines of credit were $11,123,000
as of year-end 1998. In addition, included in notes payable and current maturity
of long-term obligation in 1997 is a $1,961,000 promissory note relating to an
acquisition by Thermo Sentron, bearing interest at 7.94%. The promissory note
was repaid in January 1998.
8. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In 1997 and 1996, the Company paid an amount equal to
1.0% of the Company's revenues. The fee is reviewed and adjusted annually by
mutual agreement of the parties. The corporate services agreement is renewed
annually but can be terminated upon 30 days' prior notice by the Company or upon
the Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo
Electron Corporate Charter defines the relationships among Thermo Electron and
its majority-owned subsidiaries). In addition, the Company uses data processing
and contract administration services of two majority-owned subsidiaries of
Thermo Electron, and is charged based on actual usage. For these services, as
well as the administrative services provided by Thermo Electron, the Company was
charged $2,517,000, $3,143,000, and $2,953,000 in 1998, 1997, and 1996,
respectively. Management believes that the service fees charged by Thermo
Electron and its subsidiaries are reasonable and that such fees are
representative of the expenses the Company would have incurred on a stand-alone
basis. For additional items such as employee benefit plans, insurance coverage,
and other identifiable costs, Thermo Electron charges the Company based upon
costs attributable to the Company.
Research and Development Agreements
Pursuant to a subcontract entered into in October 1993, which expires in
February 1999, Thermedics Detection performs research and development services
for Thermo Coleman Corporation, which is the prime contractor under a contract
with the U.S. Department of Energy. Thermo Coleman is a majority-owned
subsidiary of Thermo Electron. Thermo Coleman paid Thermedics Detection $2,000,
$533,000, and $619,000 for services rendered in 1998, 1997, and 1996,
respectively.
Thermedics Detection entered into a funded research and development
arrangement with ThermoLase Corporation, a publicly traded, majority-owned
subsidiary of ThermoTrex Corporation, which itself is a publicly
22
<PAGE>
8. Related-party Transactions (continued)
traded, majority-owned subsidiary of Thermo Electron, in December 1997 to
develop a cryogenic cooling device for ThermoLase. ThermoLase purchased product
totaling $303,000 from Thermedics Detection in 1998.
Distribution Agreement
Pursuant to an international distributorship agreement, Thermedics
Detection appointed Arabian Business Machines Co. (ABM) as its exclusive
distributor of the Company's security instruments in certain Middle Eastern
countries. ABM is a member of The Olayan Group. Ms. Hutham S. Olayan, a director
of Thermo Electron, is the president and a director of Olayan America
Corporation and Competrol Real Estate Limited, two other members of The Olayan
Group, which is indirectly controlled by Suliman S. Olayan, Ms. Olayan's father.
Revenues recorded under this agreement totaled $248,000, $480,000, and $652,000
in 1998, 1997, and 1996, respectively.
Management Contract
One of the Company's executive employees in 1998 and 1997 and two of the
Company's executive employees in 1996 allocated a portion of their salary,
bonus, and travel expenses for the time they devote to Thermo Electron and
Thermo Instrument. In 1998, 1997, and 1996, the Company was reimbursed $270,000,
$194,000, and $707,000, respectively, under this arrangement.
Other Related-party Transactions
Thermedics Detection purchases an X-ray source that is used as a component
in its InScan systems from Trex Medical Corporation, a publicly traded,
majority-owned subsidiary of ThermoTrex. Thermedics Detection paid Trex Medical
$381,000 and $48,000 for these products in 1998 and 1997, respectively.
Thermo Electron's Tecomet division provides metal fabrication services in
connection with the manufacture of the heart-assist devices sold by Thermo
Cardiosystems. Thermo Cardiosystems paid $1,717,000, $1,872,000, and $2,892,000
for these services in 1998, 1997, and 1996, respectively.
Repurchase Agreements
The Company invests excess cash in repurchase agreements with Thermo
Electron as discussed in Note 1.
Short-term Available-for-sale Investments
As of December 28, 1996, the Company's short-term available-for-sale
investments included $3,336,000 (amortized cost of $3,182,000) of 6 1/2%
subordinated convertible debentures due 1997, which were purchased on the open
market. The debentures had a par value of $3,100,000 and were issued by Thermo
TerraTech Inc., a majority-owned subsidiary of Thermo Electron. The debentures
were sold in 1997, resulting in a gain of $428,000, included in gain on sale of
investments, net, in the accompanying statement of income.
Short-term Obligations
See Note 3 for a discussion of the Company's related-party obligations.
Common Stock
On February 5, 1998, the Company's Board of Directors voted to issue
4,880,533 shares of its common stock to Thermo Electron in exchange for
3,355,705 shares of common stock of Thermo Cardiosystems. The Company's issuance
of the 4,880,533 shares of its common stock to Thermo Electron is subject to
approval by the Company's shareholders in a meeting scheduled for March 31,
1999. However, because Thermo Electron is the majority shareholder and intends
to vote its shares in favor of the transaction, approval is assured and,
therefore, the shares are considered to be outstanding as of February 5, 1998,
for purposes of computing weighted average shares. The shares of common stock
will be exchanged at their respective fair market values as of February 5, 1998.
In January and April 1996, the Company issued an aggregate of 1,987,273
shares of its common stock to Thermo Electron in exchange for 634,049 shares of
common stock of Thermo Voltek and 929,947 shares of common
23
<PAGE>
8. Related-party Transactions (continued)
stock of Thermo Cardiosystems. The shares of common stock were exchanged at
their respective fair market values on the dates of the transactions. See Note
16 for additional information pertaining to related-party common stock activity.
9. Common Stock
At January 2, 1999, the Company had reserved 4,111,635 unissued shares of
its common stock for possible issuance under stock-based compensation plans and
possible issuance upon conversion of its subordinated convertible debentures.
10. Transactions in Stock of Subsidiaries
In March 1997, Thermedics Detection sold 2,671,292 shares of its common
stock in an initial public offering at $11.50 per share, for net proceeds of
$28,078,000, resulting in a gain of $17,075,000.
In March 1996, Thermedics Detection sold 300,000 shares of its common
stock in a private placement at $10.00 per share, for net proceeds of
$3,000,000, resulting in a gain of $2,516,000. In November 1996, Thermedics
Detection sold 383,500 shares of its common stock in a private placement at
$10.75 per share, for net proceeds of $3,964,000, resulting in a gain of
$3,165,000.
In April 1996, Thermo Sentron sold 2,875,000 shares of its common stock in
an initial public offering at $16.00 per share, for net proceeds of $42,335,000,
resulting in a gain of $17,970,000.
During 1997 and 1996, a large portion of Thermo Cardiosystems'
subordinated convertible obligations was converted into shares of Thermo
Cardiosystems common stock. No gains were recorded on the conversions of these
convertible obligations as Thermo Cardiosystems was principally engaged in
research and development at the time the convertible obligations were issued.
The Company's percentage ownership of its majority-owned subsidiaries at
year end was:
1998 1997 1996
- ------------------------------------------------------------------------- ---------- ----------- ----------
Thermo Cardiosystems (a) 60% 51% 54%
Thermo Voltek 67% 65% 51%
Thermo Sentron 74% 71% 71%
Thermedics Detection 84% 83% 96%
(a) Reflects the Company's purchase of 3,355,705 shares of Thermo Cardiosystems
common stock in 1998 as discussed in Note 8.
11. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale investments, accounts receivable, note payable
to parent company, notes payable and current maturity of long-term obligation,
accounts payable, due to parent company and affiliated companies, and long-term
obligations. The carrying amount of these financial instruments, with the
exception of available-for-sale investments and long-term obligations,
approximates fair value due to their short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on quoted
market prices. See Note 2 for fair value information pertaining to these
financial instruments.
24
<PAGE>
11. Fair Value of Financial Instruments
The fair value of long-term obligations was determined based on quoted
market prices. The carrying amount and fair value of the Company's long-term
obligations are:
1998 1997
-------------------- ----------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -------------------------------------------------------------- ---------- ---------- ---------- -----------
Convertible Obligations $122,674 $103,480 $142,750 $ 130,201
Other Long-term Obligations 128 128 21 21
-------- -------- -------- ---------
$122,802 $103,608 $142,771 $ 130,222
======== ======== ======== =========
12. Nonrecurring Costs
The Company recorded nonrecurring costs of $12,728,000 in 1996 for the
write-off of cost in excess of net assets of acquired company and certain other
intangible assets associated with its Corpak subsidiary. The Company no longer
expects to reinvest in its enteral nutrition-delivery business. The Company's
analysis indicates that the expected future undiscounted cash flow from this
business would be insufficient to recover the Company's investment.
In addition, in 1996, Thermo Cardiosystems wrote off $4,909,000 of
acquired technology associated with the acquisition of Nimbus (Note 3).
13. Business Segments, Geographical Information, and Concentrations of Risk
The Company's principal businesses operate in four reportable segments.
The Quality Assurance and Security Products segment develops, manufactures, and
markets high-speed detection and measurement instruments and security products.
The Precision Weighing and Inspection Equipment segment develops, manufactures,
and markets high-speed precision-weighing and inspection equipment. The Heart
Assist and Blood Testing Devices segment develops, manufactures, and markets
LVAS, whole-blood coagulation testing equipment, and skin-incision devices. The
Power Electronics and Test Equipment segment designs, manufactures, and markets
electronics-test instruments and a range of products related to power
amplification, conversion, and quality. The Company also develops, manufactures,
and markets enteral nutrition-delivery systems and a line of medical-grade
polymers used in medical disposables and in nonmedical, industrial applications,
including safety glass and automotive coatings.
The Company's Quality Assurance and Security Products segment derived
revenues from laboratory products of $51,302,000, $53,054,000, and $50,854,000
in 1998, 1997, and 1996, respectively, and from detection instruments of
$40,273,000, $51,320,000, and $43,750,000 in 1998, 1997, and 1996, respectively.
The Company's Heart Assist and Blood Testing Devices segment derived
revenues from LVAS of $30,303,000, $26,960,000, and $29,970,000 in 1998, 1997,
and 1996, respectively. In addition, this segment derived revenues from
blood-coagulation testing equipment and skin-incision devices of $36,545,000,
$35,874,000, and $33,992,000 in 1998, 1997, and 1996, respectively.
Certain raw materials used in the manufacture of Thermo Cardiosystems'
LVAS are available from only one or two suppliers. Thermo Cardiosystems is
making efforts to minimize the risks associated with sole sources and ensure
long-term availability, including qualifying certain other alternative materials
and components or developing alternative sources for materials or components
supplied by a single source. Although the Company believes that it has adequate
supplies of materials and components to meet demand for the LVAS for the
foreseeable future, no assurance can be given that the Company will not
experience shortages of certain materials or components in the future that could
delay shipments of the LVAS.
25
<PAGE>
13. Business Segments, Geographical Information, and Concentrations of Risk (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Business Segment Information
Revenues:
Quality Assurance and Security Products $ 91,575 $104,374 $ 94,604
Precision Weighing and Inspection Equipment 98,763 78,695 70,027
Heart Assist and Blood Testing Devices 66,848 62,834 63,962
Power Electronics and Test Equipment 37,940 44,648 48,507
Other 18,005 17,115 14,977
--------- ------- ---------
$ 313,131 $307,666 $ 292,077
========= ======== =========
Income Before Provision for Income Taxes, Minority Interest, and
Extraordinary Item:
Quality Assurance and Security Products $ 12,937 $20,430 $ 9,848
Precision Weighing and Inspection Equipment 9,056 8,886 7,355
Heart Assist and Blood Testing Devices 8,554 10,461 10,220
Power Electronics and Test Equipment (493) 56 5,522
Other 3,998 3,679 (10,938)
Corporate (a) (1,521) (2,104) (2,112)
--------- ------- ---------
Total operating income 32,531 41,408 19,895
Interest and other income, net 7,527 27,489 31,602
--------- ------- ---------
$ 40,058 $68,897 $ 51,497
========= ======= =========
Total Assets:
Quality Assurance and Security Products $ 132,971 $146,224 $115,547
Precision Weighing and Inspection Equipment 140,164 115,101 107,185
Heart Assist and Blood Testing Devices 172,363 173,208 124,978
Power Electronics and Test Equipment 58,915 63,895 74,409
Other 12,893 10,525 8,070
Corporate (b) 36,312 27,599 26,510
--------- ------- ---------
$ 553,618 $536,552 $ 456,699
========= ======== =========
Depreciation and Amortization:
Quality Assurance and Security Products $ 3,301 $ 3,298 $ 3,979
Precision Weighing and Inspection Equipment 2,603 1,641 1,676
Heart Assist and Blood Testing Devices 2,599 2,258 2,032
Power Electronics and Test Equipment 1,995 2,176 1,649
Other 1,077 974 1,081
Corporate 18 14 14
--------- ------- ---------
$ 11,593 $10,361 $ 10,431
========= ======= =========
26
<PAGE>
13. Business Segments, Geographical Information, and Concentrations of Risk (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Capital Expenditures:
Quality Assurance and Security Products $ 2,775 $ 1,887 $ 2,266
Precision Weighing and Inspection Equipment 1,043 708 872
Heart Assist and Blood Testing Devices 1,599 2,333 2,571
Power Electronics and Test Equipment 998 935 2,047
Other 1,223 1,206 865
Corporate - 18 -
--------- ------- ---------
$ 7,638 $ 7,087 $ 8,621
========= ======= =========
Geographical Information
Revenues (c):
United States $ 244,710 $245,680 $ 227,078
England 31,437 17,116 12,995
Other 53,309 59,114 64,024
Transfers among geographical areas (d) (16,325) (14,244) (12,020)
--------- ------- ---------
$ 313,131 $307,666 $ 292,077
========= ======== =========
Long-lived Assets (e):
United States $ 19,968 $19,675 $ 19,475
Other 3,631 3,041 3,090
--------- ------- ---------
$ 23,599 $22,716 $ 22,565
========= ======= =========
Export Revenues Included in United States Revenues Above (f): $ 70,165 $79,724 $ 67,002
========= ======= =========
(a) Primarily general and administrative expenses.
(b) Primarily cash, cash equivalents, and short- and long-term
available-for-sale investments.
(c) Revenues are attributed to countries based on selling location.
(d) Transfers among geographical areas are accounted for at
prices that are representative of transactions with unaffiliated parties.
(e) Includes property, plant, and equipment, net, and other long-term tangible assets.
(f) In general, export revenues are denominated in U.S. dollars.
27
<PAGE>
14. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------------- -------- --------- --------
Basic
Net Income $23,610 $ 41,492 $29,138
------- -------- -------
Weighted Average Shares 36,783 36,700 36,417
Effect of Shares Issuable in Exchange for Thermo Cardiosystems 4,438 - -
------- -------- -------
Common Stock (Note 8)
Pro Forma Basic Weighted Average Shares 41,221 36,700 36,417
------- -------- -------
Basic Earnings per Share $ .57 $ 1.13 $ .80
======= ======== =======
Diluted
Net Income $23,610 $ 41,492 $29,138
Effect of:
Convertible obligations 138 - 50
Majority-owned subsidiary's dilutive securities (23) (39) (441)
------- -------- -------
Income Available to Common Shareholders, as Adjusted $23,725 $ 41,453 $28,747
------- -------- -------
Pro Forma Basic Weighted Average Shares 41,221 36,700 36,417
Effect of:
Convertible obligations 1,928 1,989 1,346
Stock options 93 222 439
------- -------- -------
Pro Forma Weighted Average Shares, as Adjusted 43,242 38,911 38,202
------- -------- -------
Diluted Earnings per Share $ .55 $ 1.07 $ .75
======= ======== =======
The computation of diluted earnings per share excludes the effect of
assuming the exercise of certain outstanding stock options because the effect
would be antidilutive. As of January 2, 1999, there were 1,198,000 of such
options outstanding, with exercise prices ranging from $10.13 to $29.73 per
share.
An extraordinary gain recorded by the Company increased basic and diluted
earnings per share by $.11 in 1998 (Note 7).
15. Comprehensive Income
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"other comprehensive items, net," which represents certain amounts that are
reported as components of shareholders' investment in the accompanying balance
sheet, including foreign currency translation adjustments and unrealized net of
tax gains and losses from available-for-sale investments.
28
<PAGE>
15. Comprehensive Income (continued)
Accumulated other comprehensive items in the accompanying consolidated
balance sheet consist of the following:
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------- --------- --------
Cumulative Translation Adjustment $(1,782) $(2,954)
Net Unrealized Gain on Available-for-sale Investments 120 117
------- -------
$(1,662) $(2,837)
======= =======
Unrealized gains (losses) on available-for-sale investments, a component
of other comprehensive items in the accompanying statement of comprehensive
income and shareholders' investment, includes the following:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------- -------- --------- --------
Unrealized Holding Gains (Losses) Arising During the Year (net of $ 27 $ 333 $ (216)
income tax (provision) benefit of $(16), $(187), and $125)
Reclassification Adjustment for Gains Included in Net Income (net of (24) (277) (612)
income tax provision of $14, $155, and $344) ------- -------- -------
Net Unrealized Gains (Losses) (net of income tax (provision) benefit $ 3 $ 56 $ (828)
of $(2), $(32), and $469)
======= ======== =======
16. Proposed Reorganization and Merger With Thermo Voltek
Proposed Reorganization
During 1998, Thermo Electron announced a proposed reorganization involving
certain of Thermo Electron's subsidiaries, including the Company. Under this
plan, the Company would acquire Thermo Electron's wholly owned biomedical group
for shares of Company common stock. In addition, the Company's equity interests
in Thermo Sentron, Thermedics Detection, and Thermo Voltek subsidiaries would be
transferred to Thermo Electron for shares of common stock of the Company. Thermo
Electron would, in turn, take Thermo Sentron and Thermedics Detection private;
shareholders of these subsidiaries would receive cash in exchange for their
shares of common stock. The proposed transactions are subject to a number of
conditions, including the establishment of prices and exchange ratios;
confirmation of anticipated tax consequences; the approval by the Board of
Directors of the Company (including its independent directors); negotiation and
execution of definitive agreements; clearance by the Securities and Exchange
Commission of any necessary documents in connection with the proposed
transactions; approval by the Board of Directors of Thermo Electron; and receipt
of fairness opinions from an investment banking firm on certain financial
aspects of the transactions.
Merger With Thermo Voltek
On March 31, 1998, the Company proposed to acquire, through a merger, all
of the outstanding shares of common stock of Thermo Voltek that the Company does
not own, other than shares owned by Thermo Electron, at a price of $7.00 per
share in cash. In addition, the proposal contemplates the assumption of Thermo
Voltek's $5,250,000 principal amount of 3 3/4% subordinated convertible
debentures due 2000. As of January 2, 1999, the Company owned 67% of the
outstanding common stock of Thermo Voltek. In addition, Thermo Electron owns
approximately 3% of the outstanding common stock of Thermo Voltek.
Thermo Voltek appointed a special committee, comprised of its independent
directors, to evaluate the proposal with the assistance of a financial advisor,
HSBC Securities, Inc. In September 1998, Thermo Voltek's Board of Directors,
upon recommendation of the special committee, voted to proceed with the
Company's proposal and in November 1998 entered into a definitive merger
agreement with the Company. The merger is still subject to approval by the
holders of a majority of Thermo Voltek's shares, excluding the Company, Thermo
Electron, and the directors and officers of the Company, Thermo Voltek, and
Thermo Electron. A meeting of Thermo Voltek's shareholders will occur on March
25, 1999, to consider this matter.
29
<PAGE>
16. Proposed Reorganization and Merger With Thermo Voltek (continued)
In late March and early April 1998, four putative class actions were filed
in the Court of Chancery of the State of Delaware in and for New Castle County
by shareholders of Thermo Voltek. On October 6, 1998, the Court of Chancery
entered an order consolidating these four actions under the caption In re Thermo
Voltek Corp. Shareholders Litigation, Consolidated C.A. 16287 (the Action). The
complaint in the Action names the Company, Thermo Voltek, Thermo Electron, and
directors of Thermo Voltek as defendants and alleges, among other things, that
Thermo Voltek's directors violated the fiduciary duties of loyalty, good faith,
and fair dealing that they owed to all shareholders of Thermo Voltek other than
the named defendants and the affiliates of the named defendants because the
proposed price of $7.00 per share to be paid to Thermo Voltek's shareholders
under the terms of the proposed Merger Agreement was allegedly unfair and
grossly inadequate. The complaints further allege that the Company, Thermo
Voltek, and Thermo Electron have violated their alleged fiduciary duty of fair
dealing by proposing the merger transaction at the time. The complaints request
that the Court of Chancery, among other things, declare that the Action is a
proper class action and enjoin the proposed transaction or order that any
transaction be approved by a majority of the Thermo Voltek shareholders other
than the named defendants and their affiliates.
On November 17, 1998, the Company, Thermo Voltek, Thermo Electron, and the
individual defendants filed an answer to the complaint in the Action in which
they deny the allegations of any violation of law or breaches of any duty to the
plaintiffs or the purported class set forth in the complaints. The Company filed
a motion to dismiss the complaint for, among other things, procedural and
jurisdictional defects and failure to state a claim upon which relief can be
granted, which is currently pending before the court. The parties are currently
conducting discovery. Due to the inherent uncertainty of litigation, the outcome
of this matter cannot be estimated. The Company expects, however, that any
resolution will not materially affect its future results of operations or
financial position.
17. Unaudited Quarterly Information
(In thousands except per share amounts)
1998 First Second Third Fourth
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
Revenues $75,661 $76,711 $81,515 $79,244
Gross Profit 37,000 37,839 37,454 36,493
Income Before Extraordinary Item 5,368 5,274 4,278 4,052
Net Income (a) 6,573 8,707 4,278 4,052
Earnings per Share:
Basic .16 .21 .10 .10
Diluted .16 .20 .10 .09
1997 First (b) Second Third Fourth
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
Revenues $72,057 $75,996 $76,217 $83,396
Gross Profit 35,096 37,856 37,784 41,250
Net Income 21,966 5,506 6,664 7,356
Earnings per Share:
Basic .60 .15 .18 .20
Diluted .56 .14 .17 .19
(a) Reflects the effect of net of tax extraordinary gains of $1,205,000 and
$3,433,000 in the first and second quarters, respectively, which increased
basic and diluted earnings per share by $.03 and $.08 in the first and
second quarters, respectively.
(b) Reflects a nontaxable gain of $17,075,000 from the issuance of stock by
subsidiaries.
30
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermedics Inc.:
We have audited the accompanying consolidated balance sheet of Thermedics
Inc. (a Massachusetts corporation and 74%-owned subsidiary of Thermo Electron
Corporation) and subsidiaries as of January 2, 1999, and January 3, 1998, the
related consolidated statements of income, cash flows, and comprehensive income
and shareholders' investment for each of the three years in the period ended
January 2, 1999. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermedics
Inc. and subsidiaries as of January 2, 1999, and January 3, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended January 2, 1999, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 11, 1999
31
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
The Company's businesses operate in four reportable segments: Quality
Assurance and Security Products (Quality Assurance), Precision Weighing and
Inspection Equipment (Inspection Equipment), Heart Assist and Blood Testing
Devices (Heart Assist Devices), and Power Electronics and Test Equipment (Power
Equipment). Through the Company's Thermedics Detection Inc. subsidiary, the
Quality Assurance segment develops, manufactures, and markets high-speed
detection and measurement instruments used in a variety of on-line industrial
process applications, security applications, and laboratory analyses. The
Inspection Equipment segment includes the Company's Thermo Sentron Inc.
subsidiary, which develops, manufactures, and markets high-speed
precision-weighing and inspection equipment for industrial production and
packaging lines. In June 1998, Thermo Sentron acquired the three businesses that
constituted the product-monitoring group of Graseby Limited (the
product-monitoring businesses), a subsidiary of Smiths Industries plc (Note 3).
The Power Equipment segment, through the Company's Thermo Voltek Corp.
subsidiary, manufactures electronics-test instruments and a range of products
related to power amplification, conversion, and quality.
The Heart Assist Devices segment, consisting of the Company's Thermo
Cardiosystems Inc. subsidiary, manufactures two implantable left
ventricular-assist systems (LVAS): a pneumatic, or air-driven, system and an
electric version. The electric LVAS is being used in Europe as a bridge to
transplant and to provide long-term cardiac support for patients not eligible
for a heart transplant. In general, a profit cannot be earned from the sale of
an LVAS in the United States until approval of the device for commercial sale
has been received from the U.S. Food and Drug Administration (FDA). With the
FDA's approval, the Company began earning a profit on the sale of its air-driven
LVAS in 1994. In September 1998, the Company announced that the FDA granted
approval for commercial sale in the U.S. of the electric LVAS as a bridge to
transplant, and as a result, Thermo Cardiosystems has become eligible to earn a
profit on the sale of the electric LVAS. Until FDA approval has been obtained,
the Company may not earn a profit on the sale in the U.S. of other products
currently used in clinical studies. Thermo Cardiosystems' International
Technidyne Corporation subsidiary is a leading manufacturer of near-patient,
whole-blood coagulation testing equipment and related disposables and also
manufactures premium-quality, single-use skin-incision devices.
The Company also develops and manufactures enteral nutrition-delivery
systems and a line of medical-grade polymers used in medical disposables and in
nonmedical, industrial applications, including safety glass and automotive
coatings.
A significant amount of the Company's revenues is derived from sales of
products outside of the United States, through export sales and sales by the
Company's foreign subsidiaries. The Company expects an increase in the
percentage of revenues derived from international operations. During 1998, the
Company had exports from its U.S. and foreign operations to Asia of
approximately 8% of total revenues. Exports to Asia in 1998 were primarily to
Japan, Taiwan, and China. Asia is experiencing a severe economic crisis, which
has been characterized by sharply reduced economic activity and liquidity,
highly volatile foreign-currency-exchange and interest rates, and unstable stock
markets. The Company's export sales have been adversely affected by the unstable
economic conditions in Asia. Although the Company seeks to charge its customers
in the same currency as its operating costs, the Company's financial performance
and competitive position can be affected by currency exchange rate fluctuations
between the U.S. dollar and foreign currencies. Where appropriate, the Company
uses forward contracts to reduce its exposure to currency fluctuations.
32
<PAGE>
Results of Operations
1998 Compared With 1997
Total revenues increased to $313.1 million in 1998 from $307.7 million in
1997. Increases in revenues at the Inspection Equipment segment of $20.1 million
and Heart Assist Devices segment of $4.0 million were partially offset by
decreases in revenues at the Quality Assurance segment of $12.8 million and
Power Equipment segment of $6.7 million.
Revenues from the Inspection Equipment segment increased to $98.8 million
in 1998 from $78.7 million in 1997. Revenues increased $24.6 million as a result
of acquisitions made by Thermo Sentron in 1998 and 1997. This increase was
offset in part by decreases of $2.3 million primarily due to decreased demand in
the United Kingdom and $2.2 million due to the impact of a stronger U.S. dollar
relative to currencies in foreign countries in which Thermo Sentron operates.
Heart Assist Devices segment revenues increased to $66.8 million in 1998
from $62.8 million in 1997. Revenues from Thermo Cardiosystems' LVAS increased
to $30.3 million in 1998 from $27.0 million in 1997, primarily due to an
increase in revenues from the electric LVAS as a result of FDA approval, which
was granted in September 1998. To a lesser extent revenues increased due to a
price increase for the electric LVAS and an increase in revenues from the
air-driven LVAS. These increases were offset in part by a decrease in revenues
due to the expiration of several government contracts.
Revenues from the Quality Assurance segment decreased to $91.6 million in
1998 from $104.4 million in 1997. Revenues from Thermedics Detection's
industrial process instruments and related services decreased to $30.1 million
in 1998 from $39.2 million in 1997, primarily due to lower revenues from
ALEXUS(R) and near-infrared analyzers, offset in part by an increase in revenues
from Thermedics Detection's InScan(R) product line. Revenues in 1997 included
$6.6 million from a mandated ALEXUS product-line upgrade of The Coca-Cola
Company's existing installed base. Revenues from EGIS(R) explosives-detection
systems and related services decreased to $8.2 million in 1998 from $10.3
million in 1997, primarily due to lower shipments of security systems.
Thermedics Detection completed shipments under a contract with the U.S. Federal
Aviation Administration (FAA) during 1998, which contributed $2.6 million of
revenues in 1998.
Revenues from the Power Equipment segment decreased to $37.9 million in
1998 from $44.6 million in 1997, primarily due to lower demand for certain
lower-margin products in Europe and lower sales of electrostatic discharge (ESD)
test equipment to the semiconductor industry, due in part to Asian economic
conditions. In November 1998, Thermo Voltek sold its Universal Voltronics
division for $2.5 million, $2.2 million of which had been received as of
year-end 1998. Universal Voltronics had unaudited revenues and operating income
of $4.7 million and $0.7 million, respectively, in 1998.
The Company's backlog decreased to $29.8 million at year-end 1998 from
$36.6 million at year-end 1997, primarily due to Thermedics Detection's
completion of its contract with the FAA and a decrease in demand at Thermo
Voltek.
The gross profit margin decreased to 48% in 1998 from 49% in 1997. The
gross profit margin at the Quality Assurance segment decreased to 54% in 1998
from 56% in 1997, primarily due to lower revenues and, to a lesser extent,
changes in product mix. The gross profit margin at the Inspection Equipment
segment decreased to 38% in 1998 from 40% in 1997, primarily due to the
inclusion of lower-margin revenues from the product-monitoring businesses. These
decreases were offset in part by an increase in the gross profit margin at the
Heart Assist Devices segment to 58% in 1998 from 57% in 1997, primarily due to
manufacturing efficiencies and cost reduction efforts implemented at
International Technidyne in 1998.
Selling, general, and administrative expenses as a percentage of revenues
increased to 29% in 1998 from 28% in 1997. The increase is primarily due to a
decrease in revenues at the Quality Assurance segment and, to a lesser extent,
an increase in sales and marketing staff at the Heart Assist Devices segment in
anticipation of increased electric LVAS sales following the FDA's approval.
These increases were offset in part by a decrease in selling, general, and
33
<PAGE>
1998 Compared With 1997 (continued)
administrative expenses as a percentage of revenues at the Power Equipment
segment due to efficiencies gained from operational, organizational, and
personnel changes implemented in 1997.
Research and development expenses increased to $26.6 million in 1998 from
$24.3 million in 1997. The increase reflects increased expenses at the Heart
Assist Devices segment associated with a clinical trial being conducted to
evaluate the electric LVAS as an alternative to medical therapy as well as costs
associated with the development of Thermo Cardiosystems' HeartMate II system. In
addition, research and development expenses increased at Thermo Sentron due to
the inclusion of expenses from the product-monitoring businesses.
Interest income decreased to $13.1 million in 1998 from $13.3 million in
1997, primarily due to lower average invested balances as a result of cash
expended for the acquisition of the product-monitoring businesses and repurchase
of securities of the Company and certain of its majority-owned subsidiaries.
These decreases were offset in part by an increase in interest income due to
higher average invested balances as a result of Thermo Cardiosystems' issuance
of $70.0 million principal amount of 4 3/4% subordinated convertible debentures
in May 1997. Interest expense increased to $5.6 million in 1998 from $3.4
million in 1997, primarily as a result of Thermo Cardiosystems' issuance of 4
3/4% subordinated convertible debentures and interest expense on borrowings from
Thermo Electron Corporation used to partially finance the acquisition of the
product-monitoring businesses.
The Company has adopted a strategy of spinning out certain of its
businesses into separate subsidiaries and having these subsidiaries sell a
minority interest to outside investors. The Company believes that this strategy
provides additional motivation and incentives for the management of the
subsidiaries through the establishment of subsidiary-level stock option
incentive programs, as well as capital to support the subsidiaries' growth. As a
result of the sale of stock by subsidiaries, the Company recorded a gain of
approximately $17.1 million in 1997 (Note 10). Such gains represent an increase
in the Company's proportionate share of the subsidiary's equity and are
classified as "Gain on issuance of stock by subsidiaries" in the accompanying
statement of income. The size and timing of these transactions are dependent on
market and other conditions that are beyond the Company's control. Accordingly,
there can be no assurance that the Company will be able to generate gains from
such transactions in the future. Further, in October 1995, the Financial
Accounting Standards Board (FASB) issued an exposure draft of a Proposed
Statement of Financial Accounting Standards, "Consolidated Financial Statements:
Policy and Procedures." In February 1999, the FASB issued a revision of the
earlier document entitled "Consolidated Financial Statements: Purpose and
Policy." The October 1995 exposure draft had proposed new rules for how
consolidated financial statements should be prepared. Under that proposed
statement, there would be significant changes in the way the Company records
certain transactions of its controlled subsidiaries. Among those changes, any
sale of the stock of a subsidiary that does not result in a loss of control
would be accounted for in equity of the consolidated entity with no gain or loss
being recorded. The 1995 exposure draft addressed rule changes concerning
consolidation procedures, which would affect the Company's ability to record
gains on issuance of subsidiary stock, and consolidation policy, which does not
affect the accounting for such gains. The February 1999 revised exposure draft
addresses only consolidation policy. The FASB indicated that it will consider
resuming discussion on consolidation procedures after completion of the efforts
on consolidation policy. The timing and contents of any final statement on
consolidation procedures are uncertain.
The effective tax rates were 38% and 29% in 1998 and 1997, respectively.
The effective tax rate in 1998 exceeded the statutory federal income tax rate
primarily due to the impact of state income taxes and nondeductible amortization
of cost in excess of net assets of acquired companies. The effective tax rate in
1997 was below the statutory federal income tax rate primarily due to the
nontaxable gain on issuance of stock by subsidiary, offset in part by the impact
of state income taxes and nondeductible amortization of cost in excess of net
assets of acquired companies.
Minority interest expense decreased to $5.8 million in 1998 from $7.7
million in 1997, primarily due to lower profits at certain of the Company's
majority-owned subsidiaries and the Company's increased ownership of Thermo
Cardiosystems (Note 8).
34
<PAGE>
1998 Compared With 1997 (continued)
In June 1998, the Company exchanged $21.7 million principal amount of
noninterest-bearing subordinated convertible debentures for $15.9 million
principal amount of 2 7/8% subordinated convertible debentures due 2003,
resulting in an extraordinary gain of $3.0 million, net of related income taxes
of $2.1 million. In addition, the Company and a majority-owned subsidiary
repurchased $14.2 million principal amount of subordinated convertible
debentures for $11.4 million in cash, resulting in an extraordinary gain of $1.6
million, net of related income taxes of $1.0 million (Note 7).
1997 Compared With 1996
Total revenues increased to $307.7 million in 1997 from $292.1 million in
1996. Increases in revenues of $9.8 million and $8.7 million at the Quality
Assurance and Inspection Equipment segments, respectively, were offset in part
by decreases of $3.9 million and $1.1 million at the Power Equipment and Heart
Assist Devices segments, respectively.
Revenues from the Quality Assurance segment increased to $104.4 million
in 1997 from $94.6 million in 1996. Revenues from Thermedics Detection's process
detection instruments and related services increased to $39.2 million in 1997
from $35.7 million in 1996, primarily due to ALEXUS revenues of $6.6 million
from the fulfillment of a mandated product-line upgrade from The Coca-Cola
Company to its existing installed base and, to a lesser extent, increased
shipments of Thermedics Detection's InScan systems, which were introduced in
1996. These increases were offset in part by a decrease in demand in Europe at
Thermedics Detection's Moisture Systems subsidiary. Revenues from Thermedics
Detection's EGIS explosives-detection systems and related services increased to
$10.3 million in 1997 from $7.1 million in 1996, primarily due to $3.2 million
of shipments under a contract with the FAA.
Revenues from the Inspection Equipment segment increased to $78.7 million
in 1997 from $70.0 million in 1996, primarily due to an increase of $7.2 million
related to greater product demand and $4.2 million due to acquisitions made by
Thermo Sentron in 1997 and 1996. These increases were offset in part by a
decrease of $2.7 million due to the impact of a stronger U.S. dollar relative to
currencies in foreign countries in which Thermo Sentron operates.
Revenues from the Power Equipment segment decreased to $44.6 million in
1997 from $48.5 million in 1996, primarily due to lower demand for
electromagnetic compatibility (EMC) test products, resulting from the declining
influence of IEC 801, the European Union directive on EMC that took effect
January 1, 1996, and, to a lesser extent, a decline in the component-reliability
market for ESD test equipment resulting from a slowdown in capital expenditures
by the semiconductor industry. These decreases in revenues at Thermo Voltek were
offset in part by an increase in revenues of $5.8 million due to acquisitions.
Heart Assist Devices segment revenues decreased to $62.8 million in 1997
from $64.0 million in 1996, primarily due to a $6.6 million decrease in revenues
from the air-driven LVAS, offset in part by the inclusion of $2.0 million in
revenues from an acquisition. The decrease in revenues was also offset by a $1.9
million increase in revenues from its electric LVAS and a $1.9 million increase
in revenues from International Technidyne.
The gross profit margin remained constant at 49% in 1997 and 1996. The
gross profit margin at the Quality Assurance segment increased to 56% in 1997
from 52% in 1996, primarily due to a change in product mix to higher-margin
revenues from The Coca-Cola Company's mandated product line upgrade, field
service efficiencies in 1997, and a change in sales mix to higher-margin
revenues at Moisture Systems. To a lesser extent, the gross profit margin
improved at the Quality Assurance segment due to the effect in 1996 of a charge
for inventory obsolescence in connection with planned product changes. These
increases were offset in part by a decrease in the gross profit margin at the
Power Equipment segment, primarily due to a decrease in sales of certain
higher-margin EMC test products, as well as the effect of a decrease in total
revenues.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 28% in 1997 from 29% in 1996. Selling, general, and administrative
expenses as a percentage of revenues decreased at the Quality Assurance segment
due to $1.5 million of nonrecurring costs in 1996 and, to a lesser extent, an
increase in revenues in 1997, offset in part by increased selling expenses as
Thermedics Detection developed a sales force for its InScan and Flash-
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1997 Compared With 1996 (continued)
GC(TM) systems. Selling, general, and administrative expenses as a percentage of
revenues increased at the Heart Assist Devices segment due to higher marketing
expenses as a result of an increase in its LVAS sales force and, to a lesser
extent, promotional expenses at International Technidyne. Selling, general, and
administrative expenses as a percentage of revenues also increased at the Power
Equipment segment due to the effect of a decrease in revenues, and severance and
related costs incurred as part of a continuing evaluation of its lines of
business.
Research and development expenses increased to $24.3 million in 1997 from
$21.4 million in 1996, primarily due to increased research and development
expenses at the Quality Assurance segment to develop new products and at Thermo
Cardiosystems. The increase in research and development expenses at Thermo
Cardiosystems primarily relates to a clinical trial being conducted to evaluate
the electric LVAS as an alternative to medical therapy and, to a lesser extent,
the inclusion of expenditures at Nimbus, acquired in December 1996.
In 1996, the Company recorded nonrecurring costs of $12.7 million for the
write-off of cost in excess of net assets of acquired company and certain other
intangible assets associated with its Corpak subsidiary (Note 12). In addition,
in connection with the December 1996 acquisition of Nimbus, Thermo Cardiosystems
wrote off $4.9 million, which represents the portion of the purchase price
allocated to technology in development (Note 3).
Interest income increased to $13.3 million in 1997 from $10.8 million in
1996, due to higher average invested balances at Thermedics Detection and Thermo
Sentron as a result of their initial public offerings of common stock in March
1997 and April 1996, respectively, and at Thermo Cardiosystems as a result of
the issuance of 4 3/4% subordinated convertible debentures in May 1997. Interest
expense decreased to $3.4 million in 1997 from $3.8 million in 1996, primarily
due to the repayment of $53.0 million of notes payable to Thermo Electron in
September 1996, conversions of subordinated convertible obligations, and a
reduction in short-term borrowings at Thermo Sentron, offset in part by Thermo
Cardiosystems' issuance of debentures.
The Company recorded gains on issuance of stock by subsidiaries of $17.1
million and $23.7 million in 1997 and 1996, respectively.
The effective tax rates were 29% and 27% in 1997 and 1996, respectively.
The effective tax rates were below the statutory federal income tax rate
primarily due to nontaxable gains on issuance of stock by subsidiaries, offset
in part by the impact of state income taxes and nondeductible amortization of
cost in excess of net assets of acquired companies.
Minority interest expense decreased to $7.7 million in 1997 from $8.4
million in 1996, primarily due to lower profits at Thermo Cardiosystems and
Thermo Voltek, offset in part by the minority interest associated with
Thermedics Detection and Thermo Sentron.
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Liquidity and Capital Resources
Consolidated working capital was $232.3 million at January 2, 1999,
compared with $309.4 million at January 3, 1998. Cash, cash equivalents, and
short- and long-term available-for-sale investments were $232.7 million at
January 2, 1999, compared with $258.0 million at January 3, 1998. Of the $232.7
million balance at January 2, 1999, $197.8 million was held by the Company's
majority-owned subsidiaries and the remainder by the Company and its wholly
owned subsidiaries.
During 1998, $37.0 million of cash was provided by operating activities.
Cash of $4.0 million was provided by a decrease in accounts receivable,
primarily at the Power Equipment segment due to lower revenues. This increase in
cash was partially offset by $3.6 million of cash used to fund a decrease in
other current liabilities, primarily at the Inspection Equipment segment.
Excluding available-for-sale investments activity, the Company's primary
investing activity in 1998 was the purchase of the product-monitoring businesses
by Thermo Sentron for $44.0 million, net of cash acquired, and the assumption of
certain liabilities (Note 3). In November 1998, Thermo Voltek sold its Universal
Voltronics division for $2.5 million, $2.2 million of which had been received as
of year-end 1998. Universal Voltronics had unaudited revenues and operating
income of $4.7 million and $0.7 million, respectively, in 1998. The Company
expended $7.6 million for purchases of property, plant, and equipment during
1998. During 1999, the Company expects to make capital expenditures of
approximately $10 million.
During 1998, the Company's financing activities used cash of $12.9
million. In June 1998, Thermo Sentron borrowed $21.0 million from Thermo
Electron to partially finance the acquisition of the product-monitoring
businesses. In December 1998, Thermo Sentron repaid $2.0 million of this amount
and issued Thermo Electron a new note for $19.0 million in exchange for the
initial note (Note 3). In addition, The Company and a majority-owned subsidiary
expended $11.4 million for the repurchase of subordinated convertible debentures
(Note 7).
During 1998, the Company and certain of its majority-owned subsidiaries
expended $0.9 million and $18.6 million, respectively, to purchase the common
stock of certain of the Company's majority-owned subsidiaries. These purchases
were made pursuant to authorizations by the Company's and the applicable
majority-owned subsidiaries' Boards of Directors. As of January 2, 1999, $0.3
million and $13.9 million remained under the Company's and its majority-owned
subsidiaries' authorizations, respectively. Any such purchases are funded from
working capital.
The Company expects to continue to pursue its strategy of expanding its
business both through the continued development, manufacture, and sale of new
products, and through the possible acquisition of companies that will provide
additional marketing or manufacturing capabilities and new products.
In March 1998, the Company proposed to acquire, through a merger, all of
the outstanding shares of common stock of Thermo Voltek that the Company does
not own other than shares owned by Thermo Electron, as well as assume Thermo
Voltek's $5.3 million principal amount of 3 3/4% subordinated convertible
debentures due 2000. The total transaction cost is estimated to be approximately
$25 million, which would be paid from internal funds. The Company is currently
party to litigation in the Delaware State Chancery Court with respect to this
transaction (Note 16).
While the Company currently has no other definitive acquisition
agreements, it expects that it would finance any acquisitions through internal
funds or through borrowings from Thermo Electron, although it has no agreement
with Thermo Electron that assures funds will be available on acceptable terms or
at all. The Company believes that its existing resources are sufficient to meet
the capital requirements of its existing operations for the foreseeable future.
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Market Risk
The Company is exposed to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices, which could affect its future
results of operations and financial condition. The Company manages its exposure
to these risks through its regular operating and financing activities.
Foreign Currency Exchange Rates
The Company generally views its investment in foreign subsidiaries with a
functional currency other than the Company's reporting currency as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in British pounds sterling and
German deutsche marks. The effect of a change in foreign exchange rates on the
Company's net investment in foreign subsidiaries is reflected in the
"Accumulated other comprehensive items" component of shareholders' investment. A
10% depreciation in year-end 1998 functional currencies, relative to the U.S.
dollar, would result in a $8.4 million reduction of shareholders' investment.
Interest Rates
Certain of the Company's short- and long-term available-for-sale
investments and subordinated convertible debentures are sensitive to changes in
interest rates. Interest rate changes would result in a change in the fair value
of these financial instruments due to the difference between the market interest
rate and the rate at the date of purchase or issuance of the financial
instrument. A 10% decrease in year-end 1998 market interest rates would result
in a negative impact of $7.8 million on the net fair value of the Company's
interest-sensitive financial instruments.
The Company's cash, cash equivalents, available-for-sale investments
maturing within one year, note payable to parent company, and notes payable and
current maturity of long-term obligation are sensitive to changes in interest
rates. Interest rate changes would result in a change in interest income due to
the difference between the current interest rates on cash and cash equivalents
and the variable rate that these financial instruments may adjust to in the
future. A 10% decrease in year-end 1998 interest rates would result in a
negative impact of $0.4 million on the Company's net income.
Equity Prices
The Company's and its subsidiaries' subordinated convertible debentures
are sensitive to fluctuations in the price of Company or subsidiary common stock
into which the obligations are convertible. Changes in equity prices would
result in changes in the fair value of the subordinated convertible debentures
due to the difference between the current market price and the market price at
the date of issuance of the financial instrument. A 10% increase in the year-end
1998 market equity prices would result in a negative impact of $3.2 million on
the fair value of the Company's subordinated convertible debentures.
Year 2000
The Company continues to assess the potential impact of the year 2000 on
the Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading significant information
technology systems and facilities; (ii) testing and developing upgrades, if
necessary, for the Company's current products and certain discontinued products;
(iii) contacting key suppliers and vendors to determine their year 2000
compliance status; and (iv) developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related
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<PAGE>
Year 2000 (continued)
equipment for year 2000 compliance. The Company also evaluated the potential
year 2000 impact on its critical facilities. The Company is currently in phase
two of its program, during which any noncompliant systems or facilities that
were identified during phase one are prioritized and remediated. Based on our
evaluation, the Company does not believe that any material upgrades to its
critical facilities are required. The Company is currently upgrading or
replacing such noncompliant information technology systems, and this process was
approximately 70% complete as of January 2, 1999. In many cases, such upgrades
or replacements are being made in the ordinary course of business, without
accelerating previously scheduled upgrades or replacements. The Company expects
that all of its material information technology systems and critical facilities
will be year 2000 compliant by the end of 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells or for which the Company continues to provide technical support. The
Company has completed testing all of its material current products and it
believes that all of such material products are year 2000 compliant. However, as
many of the Company's products are complex, interact with or incorporate
third-party products, and operate on computer systems that are not under the
Company's control, there can be no assurance that the Company has identified all
of the year 2000 problems with its current products. The Company believes that
certain of its older products, which it no longer manufactures or sells, may not
be year 2000 compliant. The Company is continuing to test and evaluate such
products. The Company is offering upgrades and/or identifying potential
solutions where reasonably practicable.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. The Company has started to follow-up and
monitor the year 2000 compliance progress of significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. The Company has not completed the majority of its
assessment of third party risk, but expects to be substantially completed by
October 1999.
Year 2000 Compliance Status
- --------------------------------------------------------------------------------------
Material Information
Technology Systems and Facilities Approximately 70% completed
Material Current Products Substantially completed
Evaluation of Third Party Risk Less than 50% completed
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred expenses to third parties (external costs)
related to year 2000 issues of approximately $0.7 million as of January 2, 1999,
and the total external costs of year 2000 remediation are expected to be
approximately $1.3 million. Year 2000 costs are funded from working capital. All
internal costs and related external
39
<PAGE>
Year 2000 (continued)
costs other than capital additions related to year 2000 remediation have been
and will continue to be expensed as incurred.
The Company does not track the internal costs incurred for its year 2000
compliance project. Such costs are principally the related payroll costs for its
information systems group.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
material suppliers or vendors experience business disruptions due to year 2000
issues, the Company might also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition, in amounts that cannot
be reasonably estimated at this time.
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Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in 1999 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Risks Associated With Acquisition Strategy. The Company's strategy
includes the acquisition of businesses and technologies that complement or
augment its existing product lines. Promising acquisitions are difficult to
identify and complete for a number of reasons, including competition among
prospective buyers and the need for regulatory approval, including antitrust
approvals. There can be no assurance that the Company will be able to complete
future acquisitions or that it will be able to successfully integrate any
acquired business. In order to finance such acquisitions, it may be necessary
for the Company to raise additional funds through public or private financings.
Any equity or debt financing, if available at all, may be on terms which are not
favorable to the Company and, in the case of equity financing, may result in
dilution to the Company's shareholders. Recently, Thermo Electron Corporation,
the Company's parent, proposed a plan whereby the Company would acquire Thermo
Electron's wholly owned biomedical group for shares of Company common stock, and
the Company's equity interest in Thermo Sentron Inc., Thermedics Detection Inc.,
and Thermo Voltek Corp. The proposal is subject to a number of conditions and
there can be no assurance that it will be completed. Further, if the transaction
is completed, there can be no assurance that the Company can successfully
integrate this business into its existing businesses.
Risks Associated with Spin-out of Subsidiaries. The Company has adopted a
strategy of spinning out certain of its businesses into separate subsidiaries
and having these subsidiaries sell a minority interest to outside investors. As
a result of the sale of stock by subsidiaries, the issuance of stock by
subsidiaries upon conversion of convertible debentures and similar transactions,
the Company records gains that represent the increase in the Company's net
investment in the subsidiaries. These gains have represented a substantial
portion of the net income reported by the Company in certain periods. The size
and timing of these transactions are dependent on market and other conditions
that are beyond the Company's control. Accordingly, there can be no assurance
that the Company will be able to generate gains from such transactions in the
future.
Further, in October 1995, the Financial Accounting Standards Board (FASB)
issued an exposure draft of a Proposed Statement of Financial Accounting
Standards, "Consolidated Financial Statements: Policy and Procedures." In
February 1999, the FASB issued a revision of the earlier document entitled
"Consolidated Financial Statements: Purpose and Policy." The October 1995
exposure draft had proposed new rules for how consolidated financial statements
should be prepared. Under that proposed statement, there would be significant
changes in the way the Company records certain transactions of its controlled
subsidiaries. Among those changes, any sale of the stock of a subsidiary that
does not result in a loss of control would be accounted for in equity of the
consolidated entity with no gain or loss being recorded. The 1995 exposure draft
addressed rule changes concerning consolidation procedures, which would affect
the Company's ability to record gains on issuance of subsidiary stock, and
consolidation policy, which does not affect the accounting for such gains. The
February 1999 revised exposure draft addresses only consolidation policy. The
FASB indicated that it will consider resuming discussion on consolidation
procedures after completion of the efforts on consolidation policy. The timing
and contents of any final statement on consolidation procedures are uncertain.
International Operations. Sales outside the U.S. have accounted for a
significant percentage of the Company's total revenues. The Company intends to
continue to expand its presence in international markets. International sales
are subject to a number of risks, including the following: agreements may be
difficult to enforce and receivables difficult to collect through a foreign
country's legal system; foreign customers may have longer payment cycles;
foreign countries may impose additional withholding taxes or otherwise tax the
Company's foreign income, impose tariffs, or adopt other restrictions on foreign
trade; fluctuations in exchange rates may affect product demand and adversely
affect the profitability in U.S. dollars of products and services provided by
the Company in foreign markets
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where payment for the Company's products and services is made in the local
currency; U.S. export licenses may be difficult to obtain; and the protection of
intellectual property in foreign countries may be more difficult to enforce.
There can be no assurance that any of these factors will not have a material
adverse effect on the Company's business and results of operations. During 1998,
the Company had exports from its U.S. and foreign operations to Asia of
approximately 8% of total revenues. Exports to Asia in 1998 were primarily to
Japan, Taiwan, and China. Asia is experiencing a severe economic crisis, which
has been characterized by sharply reduced economic activity and liquidity,
highly volatile foreign-currency-exchange and interest rates, and unstable stock
markets. The Company's export sales have been adversely affected by the unstable
economic conditions in Asia.
Technological Change and Competition. The market for many of the Company's
products is characterized by changing technology, evolving industry standards,
and new product introductions. The Company's future success will depend, in
part, upon its ability to enhance its existing products and to develop and
introduce new products and technologies to meet changing customer requirements.
The Company is currently devoting significant resources toward the enhancement
of its existing products and the development of new products and technologies.
There can be no assurance that the Company will successfully complete the
enhancement and development of these products in a timely fashion, or that these
products will compete successfully with those of the Company's competitors. The
Company is aware of one other company that has received premarket approval from
the FDA for an implantable LVAS that competes with the Company's LVAS. Certain
of the Company's competitors, including its competitor in the implantable LVAS
market, have greater resources, manufacturing and marketing capabilities,
technical staff, and production facilities than those of the Company. As a
result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
promotion and sale of their products than can the Company. Competition could
increase if new companies enter the market, or if existing competitors expand
their product lines.
Intellectual Property Rights. The Company relies upon trade secret
protection and patents to protect its proprietary rights. There can be no
assurance that patents will issue from any pending or future patent applications
owned by or licensed to the Company, or that the claims allowed under any issued
patents will be sufficiently broad to protect the Company's technology. In the
absence of patent protection, the Company may be vulnerable to competitors who
attempt to copy the Company's products or gain access to its trade secrets and
know-how. Proceedings initiated by the Company to protect its proprietary rights
could result in substantial costs to the Company. The Company has received
correspondence from a third party alleging that the textured surface of the LVAS
infringes certain patent rights of such third party. The Company believes that
it has meritorious defenses to the claims of the third party. However, no
assurance can be given that the Company would be successful if litigation were
commenced or that others will not claim that the Company infringes their
intellectual property rights. There can be no assurance that competitors of the
Company will not initiate litigation to challenge the validity of the Company's
patents, or that they will not use their resources to design comparable products
that do not infringe the Company's patents. There may also be pending or issued
patents held by parties not affiliated with the Company that relate to the
Company's products or technologies. The Company may need to acquire licenses to,
or contest the validity of, any such patents. There can be no assurance that any
license required under any such patent would be made available on acceptable
terms, or that the Company would prevail in any such contest. The Company could
incur substantial costs in defending itself in suits brought against it, or in
suits in which the Company may assert its patent rights against others. If the
outcome of any such litigation is unfavorable to the Company, the Company's
business and results of operations could be materially adversely affected. In
addition, the Company relies on trade secrets and proprietary know-how which it
seeks to protect, in part, by confidentiality agreements with its collaborators,
employees, and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.
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Uncertainty of Regulatory Approval for Biomedical Devices. Thermo
Cardiosystems' biomedical devices, including its LVAS, are subject to approval
by the FDA before they may be sold for profit in the United States. Thermo
Cardiosystems is also subject to regulatory requirements in foreign countries in
which it markets its devices. The process of obtaining regulatory approvals is
lengthy, expensive, and inherently uncertain. Even after FDA and other
regulatory approvals have been obtained, such approvals can be suspended or
revoked if Thermo Cardiosystems' products do not continue to satisfy regulatory
requirements. Failure to comply with applicable regulatory requirements can
result in, among other things, fines, suspensions of approvals, recalls of
products, operating restrictions, and criminal prosecutions.
In October 1994, Thermo Cardiosystems received FDA approval for the
commercial sale of its pneumatic LVAS. In April 1994, Thermo Cardiosystems
received the CE Mark for commercial sale of the pneumatic LVAS in all European
Union countries. Thermo Cardiosystems' HeartPak(TM) portable console received
the CE Mark in February 1995 and is currently in Phase I clinical trials in the
U.S. In September 1998, Thermo Cardiosystems' electric LVAS received premarket
approval by the FDA for use as a bridge to transplant. The electric LVAS
received the CE Mark in August 1995 for use as a bridge to transplant and as an
alternative to transplant. Thermo Cardiosystems' electric LVAS is currently in
use in clinical trials in the U.S. testing the safety and efficacy of the device
as both a bridge to transplant and as an alternative to transplant.
Significant design changes to Thermo Cardiosystems' LVAS, including use of
the portable console for the pneumatic LVAS, must be approved pursuant to a
supplement to an approved PMA application. Failure of Thermo Cardiosystems to
obtain FDA approval for the commercial sale of the electric LVAS as an
alternative to transplant would have a material adverse effect on Thermo
Cardiosystems' long-term growth prospects. In addition, failure of Thermo
Cardiosystems to obtain approval for the HeartPak portable console would likely
require patients supported by the pneumatic LVAS to remain hospitalized.
This could materially decrease the market for the pneumatic LVAS.
Uncertainty of Patient Reimbursement. The cost of implanting a cardiac
support system is substantial. In addition, the Company's coagulation-testing
equipment can cost several thousand dollars per instrument. Without the
financial support of the government or third-party insurers, the market for
Thermo Cardiosystems' devices will be limited. Medicare and Medicaid limit the
reimbursement that U.S. hospitals receive for treating certain medical
conditions by setting maximum fees that can be charged to their patients. Under
these systems, hospitals are paid a fixed amount for treating each patient with
a particular diagnosis. Private insurers also have initiated reimbursement
systems designed to slow the escalation of health care costs. In addition, the
federal government is considering, and certain state governments are considering
or have adopted, new health care policies intended to curb rising health care
costs. Such policies include rationing of government-funded reimbursement for
health care services and imposing price controls upon providers of medical
products and services. These policies could have the effect of limiting the
availability of reimbursement for procedures, such as the implantation of an
LVAS, that involve prolonged treatment of critically ill patients.
In November 1995, the U.S. Health Care Finance Administration (HCFA)
issued a decision that extends Medicare coverage to LVAS devices used as a
bridge to heart transplant, which fulfill certain Medicare coverage criteria.
This decision, updated in April 1997, has applied to Thermo Cardiosystems'
pneumatic LVAS and has been extended to the electric LVAS. Several major
non-government insurers have also agreed to offer coverage for the pneumatic
LVAS and the electric LVAS; however, no assurance can be given that additional
third party payers will cover the electric LVAS immediately because of the
device's intended out-patient use. Even though reimbursement has been
established by HCFA and by certain non-government insurers for LVAS devices, the
Medicare coverage criteria could be amended or revised by HCFA, the amount of
available reimbursement may change, and reimbursement may be denied by an
insurer under certain circumstances, including if it is determined that a
procedure was not the most cost-effective treatment method, was experimental, or
was used for an unapproved indication. No assurance can be given that additional
third-party reimbursement for the LVAS devices will be granted within a
reasonable period of time, or at all. The unavailability of third-party
reimbursement for procedures involving Thermo
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Cardiosystems' systems or for Thermo Cardiosystems' biomedical devices would
have a material adverse effect on the Company's business.
Uncertainty of Opinion Leader Acceptance and Support. A limited number of
cardiac surgeons and cardiologists influence medical device selection and
purchase decisions for a large portion of the target patient population. The
Company will achieve its business objectives only if its LVAS are recommended
for use by such opinion leaders. In addition, acceptance by these physicians of
Thermo Cardiosystems' whole-blood coagulation monitoring systems and Coumadin
monitors is also important to the success of Thermo Cardiosystems' business.
Thermo Cardiosystems has developed working relationships with a number of
leading medical centers, and its existing and proposed LVAS and its
blood-coagulation monitoring systems have been well received by opinion leaders
in cardiac surgery and cardiology. Moreover, since the inception of its work on
cardiac support systems in 1966, Thermo Cardiosystems has relied upon surgical
teams at medical institutions to perform clinical trials that are necessary to
obtain FDA approvals. A continuing working relationship with those and other
institutions will be important to the success of Thermo Cardiosystems. No
assurance can be given that existing relationships and arrangements can be
maintained or that new relationships will be established. Furthermore, economic,
psychological, ethical, and other concerns may limit acceptance of heart assist
devices in general, and there can be no assurance that markets of sufficient
size will develop for Thermo Cardiosystems' LVAS.
Availability of Components and Raw Materials. Thermo Cardiosystems relies
on a number of custom-designed components and materials supplied by other
companies to manufacture its LVAS. Thermo Cardiosystems is making efforts to
minimize the risks associated with sole sources and ensure long-term
availability, including qualifying alternative materials and components or
developing alternative sources for the materials and components supplied by a
single source. Although Thermo Cardiosystems believes that it has adequate
supplies of materials and components to meet demand for its products for the
foreseeable future, no assurance can be given that Thermo Cardiosystems will not
experience in the future shortages of certain materials or components that could
delay shipments of its products. The cost to Thermo Cardiosystems to evaluate
and test alternative materials and components and the time necessary to obtain
FDA approval for these materials and components are inherently difficult to
determine because both time and cost are dependent on at least two factors: the
similarity of the alternative material or component to the original material or
component, and the amount of third-party testing that may have already been
completed on alternative materials or components. There can be no assurance that
the substitution of alternative materials or components would not cause delays
in Thermo Cardiosystems' LVAS development programs or adversely affect Thermo
Cardiosystems' ability to manufacture and ship LVAS to meet demand.
Limited Manufacturing and Marketing Experience of Thermo Cardiosystems.
Prior to FDA approval of commercial sale of the pneumatic LVAS, Thermo
Cardiosystems' LVAS business was engaged only in research and development. Since
that time, Thermo Cardiosystems has been building its manufacturing, marketing,
and sales capabilities. Although Thermo Cardiosystems has not experienced
difficulties in manufacturing its LVAS at volume, cost, and quality levels
sufficient to satisfy the increased demand resulting from commercial approval,
no assurance can be given that Thermo Cardiosystems will not encounter
difficulties as sales volumes increase or new products and/or components are
approved for commercial sale. Thermo Cardiosystems does not have experience in
the large-scale commercialization of LVAS medical devices. Although Thermo
Cardiosystems has added sales and marketing staff and is expanding its
distribution capabilities worldwide, no assurance can be given that Thermo
Cardiosystems will be able to market and sell its LVAS successfully in high
volumes.
Product Liability. Thermo Cardiosystems and Thermedics Detection face an
inherent business risk of exposure to product liability claims relating to the
use of their products. With respect to Thermo Cardiosystems, this risk may
increase as the number of LVAS implants increase and as the number of centers
implanting the device expands. Although Thermo Cardiosystems and Thermedics
Detection currently maintain product liability insurance against this risk,
there can be no assurance that they will continue to be able to obtain such
coverage at economically feasible rates,
44
<PAGE>
if at all, or that such coverage will be adequate in terms and scope to protect
Thermo Cardiosystems and Thermedics Detection completely in the event of a
successful product liability claim.
Effect of Government Regulations and Approvals on Market for Thermo
Sentron's Products. The market for certain of Thermo Sentron's products, both in
the United States and abroad, is subject to or influenced by various domestic
and foreign clean air and consumer protection laws. Thermo Sentron designs,
develops, and markets its products to meet customer needs created by existing
and anticipated regulations, and any changes in these regulations may adversely
affect consumer demand for Thermo Sentron's products. In addition, the marketing
of certain of Thermo Sentron's products is dependent upon the receipt of
regulatory and other approvals, including industry association approvals of the
design, construction, and accuracy of Thermo Sentron's products. Delays in
obtaining, or the failure to obtain, any such approvals could have a material
adverse effect on Thermo Sentron's business and results of operations.
Effect of Electrical Standards on Demand for Thermo Voltek's Products.
Demand for Thermo Voltek's EMC testing products and services is driven to a
large extent by mandatory government standards and voluntary industry standards
relating to electromagnetic compatibility. In particular, demand for many of
Thermo Voltek's products results from efforts by manufacturers to comply with
IEC 801, an EU directive that became effective on January 1, 1996. As the number
of noncomplying manufacturers is reduced over time, demand for Thermo Voltek's
products is likely to be adversely affected. In addition, if new EMC standards
requiring new testing capabilities are enacted less frequently or if EMC
standards become less strict or not strictly enforced, demand for Thermo
Voltek's products could be adversely affected.
Dependence of Security Instruments Market on Government Regulation and
Airline Industry. Sales of Thermedics Detection's explosives-detection systems
for use in airports has been and will continue to be dependent on governmental
initiatives to require, or support, the screening of checked luggage, carry-on
items, and personnel with advanced explosives-detection equipment. Substantially
all of such systems have been installed at airports in countries other than the
United States in which the applicable government or regulatory authority
overseeing the operations of the airport has mandated such screening. Such
mandates are influenced by many factors outside of the control of Thermedics
Detection, including political and budgetary concerns of governments, airlines,
and airports. Of the more than 600 commercial airports worldwide, more than 400
are located in the United States. Accordingly, Thermedics Detection believes
that the size of the market for explosives-detection equipment is, and will
increasingly be, significantly influenced by United States government
regulation. In the United States, the Aviation Security Act of 1990 directed the
FAA to develop a standard for explosives-detection systems and required airports
in the United States to deploy systems meeting this standard in 1993. To date,
no system has demonstrated that it meets all FAA standards under realistic
airport operating conditions. As a result, the FAA has not mandated the
installation of automated explosives-detection systems, and only a limited
number of these systems have been deployed in the United States. The FAA first
certified a computed X-ray tomography system for checked luggage in December
1994. Thermedics Detection's systems are trace detectors for which no FAA
certification process for checked baggage, carry-on, or personal screening
exists to date. Currently, Thermedics Detection is seeking FAA approval for its
EGIS and EGIS II (formerly named Rampart) systems for use by airlines in
screening carry-on electronic items and luggage searches, however, there can be
no assurance that such FAA approvals will be obtained. Each airline must seek
this approval for each application. Although the FAA has provided significant
funding to Thermedics Detection in connection with the development of its
explosives-detection technology, there can be no assurance that any of
Thermedics Detection's systems will ever meet this or any other United States
certification standard. Any product utilizing a technology ultimately
recommended or required by the FAA will have a significant competitive advantage
in the market for explosives-detection devices. Unless the FAA takes action with
respect to a particular explosives-detection product or technology, airlines
will not be required to purchase or upgrade their security systems, including
upgrading existing metal-detection equipment. Earnings of U.S. air carriers
tends to fluctuate significantly from time to time. Any depression in the
financial condition of such carriers would likely result in lower capital
spending for
45
<PAGE>
discretionary items. Moreover, there can be no assurance that additional
countries will mandate the implementation of effective explosives screening for
airline baggage, carry-on items or personal items, or that, if mandated,
Thermedics Detection's systems will meet the certification or other requirements
of the applicable government authority. Even if Thermedics Detection's systems
were to meet the applicable requirements, there can be no assurance that
Thermedics Detection would be able to market its systems effectively.
In October 1996, the United States enacted legislation which includes a
$144.2 million allocation to purchase explosives-detection systems and other
advanced security equipment, including trace detection equipment such as the
systems manufactured by Thermedics Detection, for carry-on and checked baggage
screening. The FAA has made purchases of, or placed orders for the purchase of,
security equipment under this legislation, including an order to purchase $5.8
million of Thermedics Detection's EGIS systems. There can be no assurance,
however, that this legislation will not be modified to reduce the funding for
advanced explosives equipment, that the necessary appropriations will be made to
fund further purchases of advanced explosives-detection equipment contemplated
by the legislation, that trace-detection equipment such as the systems
manufactured by Thermedics Detection will be mandated, or that, even if further
appropriations are made and such equipment is mandated, any of Thermedics
Detection's explosives-detection systems will be purchased for installation at
any airports in the United States. Further, there can be no assurance that the
U.S. will mandate the widespread use of these systems after completion of the
initial purchases.
Significance of Certain Customers to Thermedics Detection. Sales of
industrial process instruments and related services to bottlers licensed by The
Coca-Cola Company (Coca-Cola Bottlers) were $6,199,000, $13,194,000, and
$10,641,000 in 1998, 1997, and 1996, respectively. In 1997, Thermedics Detection
completed the fulfillment of a mandated product-line upgrade for The Coca-Cola
Bottlers. Although the Company anticipates that Thermedics Detection will
continue to derive revenues from the sale of upgrades and new systems to new
plants, as well as services to The Coca-Cola Bottlers, Thermedics Detection does
not expect that revenues derived from these customers will continue at a rate
comparable to prior years. Further, Thermedics Detection intends to continue to
develop and introduce new industrial process products for the food, beverage,
and other markets; however, there can be no assurance that Thermedics Detection
will be successful in the introduction of new industrial process products or
that any sales of these products will be sufficient to maintain a rate of growth
equivalent to prior years.
Dependence Upon OEM Relationships. A portion of the Company's sales are
through Original Equipment Manufacturers (OEM) arrangements. The Company's sales
depend, in part, on the continuation of these OEM arrangements and the level of
end-user sales by such OEMs. There can be no assurance that the Company will be
able to maintain its existing, or establish new, OEM relationships.
Risks of the Company's Year 2000 Issues. While the Company is attempting
to minimize any negative consequences arising from the year 2000 issue, there
can be no assurance that year 2000 problems will not have a material adverse
impact on the Company's business, operations, or financial condition. While the
Company expects that upgrades to its internal business systems will be completed
in a timely fashion, there can be no assurance that the Company will not
encounter unexpected costs or delays. Despite its efforts to ensure that its
material current products are year 2000 compliant, the Company may see an
increase in warranty and other claims, especially those related to Company
products that incorporate, or operate using, third-party software or hardware.
In addition, certain of the Company's older products, which it no longer
manufactures or sells, may not be year 2000 compliant, which may expose the
Company to claims. If any of the Company's material suppliers, customers, or
vendors experience business disruptions due to year 2000 issues, the Company
might also be materially adversely affected. There is expected to be a
significant amount of litigation relating to the year 2000 issue and there can
be no assurance that the Company will not incur material costs in defending or
bringing lawsuits. In addition, if any year 2000 issues are identified, there
can be no assurance that the Company will be able to retain qualified personnel
to remedy such issues. Any unexpected costs or delays arising from the year 2000
issue could have a significant adverse impact on the Company's business,
operations, and financial condition in amounts that cannot be reasonably
estimated at this time.
46
<PAGE>
Selected Financial Information
(In thousands except per share amounts) 1998(a) 1997(b) 1996(c) 1995(d) 1994
- -------------------------------------------------- ---------- ----------- ---------- ---------- ----------
Statement of Income Data
Revenues $313,131 $ 307,666 $292,077 $208,041 $183,753
Income Before Extraordinary Item 18,972 41,492 29,138 17,174 12,695
Net Income 23,610 41,492 29,138 17,174 12,695
Earnings per Share:
Basic .57 1.13 .80 .51 .39
Diluted .55 1.07 .75 .48 .38
Balance Sheet Data
Working Capital $232,292 $ 309,363 $208,170 $114,340 $131,578
Total Assets 553,618 536,552 456,699 386,249 306,691
Long-term Obligations 122,802 142,771 74,359 45,201 82,551
Shareholders' Investment 247,976 227,346 211,582 172,751 136,783
(a) Reflects an extraordinary gain of $4.6 million, net of taxes.
(b) Reflects a nontaxable gain of $17.1 million from the issuance of stock by
subsidiaries and the May 1997 issuance of $70.0 million principal amount of
4 3/4% subordinated convertible debentures by Thermo Cardiosystems.
(c) Reflects the January 1996 acquisition of Moisture Systems and Rutter, the
May 1996 issuance of $65.0 million principal amount of noninterest-bearing
subordinated convertible debentures, and nontaxable gains of $23.7 million
from the issuance of stock by subsidiaries.
(d) Reflects the December 1995 acquisition of Orion Research Inc.
47
<PAGE>
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol TMD. The following table sets forth the high and low sale prices of
the Company's common stock for 1998 and 1997, as reported in the consolidated
transaction reporting system.
1998 1997
------------------- --------------------
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
First $17 13/16 $14 5/8 $21 1/2 $16 5/8
Second 17 15/16 12 3/8 19 1/16 15
Third 13 9/16 7 1/2 19 7/8 15 1/8
Fourth 11 1/4 6 5/8 20 1/2 15 1/16
As of January 29, 1999, the Company had 2,106 holders of record of its
common stock. This does not include holdings in street or nominee names. The
closing market price on the American Stock Exchange for the Company's common
stock on January 29, 1999 was $9 per share.
Common stock of the Company's majority-owned public subsidiaries is traded on the American Stock
Exchange: Thermo Cardiosystems Inc. (symbol TCA), Thermo Voltek Corp. (symbol TVL), Thermo Sentron Inc.
(symbol TSR), and Thermedics Detection Inc. (symbol TDX).
Shareholder Services
Shareholders of Thermedics Inc. who desire information about the Company
are invited to contact the Investor Relations Department, Thermedics Inc., 81
Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046, (781) 622-1111.
A mailing list is maintained to enable shareholders whose stock is held in
street name, and other interested individuals, to receive quarterly reports,
annual reports, and press releases as quickly as possible. Distribution of
printed quarterly reports is limited to the second quarter report only. All
material is available from Thermo Electron's Internet site
(http://www.thermo.com/subsid/tmd1.html).
Stock Transfer Agent
BankBoston is the stock transfer agent and maintains shareholder activity
records. The agent will respond to questions on issuance of stock certificates,
change of ownership, lost stock certificates, and change of address. For these
and similar matters, please direct inquiries to:
BankBoston
c/o Boston EquiServe Limited Partnership
P.O. Box 8040
Boston, Massachusetts 02266-8040
(781) 575-3120
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Company's Board of Directors and will depend upon, among other
factors, the Company's earnings, capital requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended January
2, 1999, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, Thermedics Inc.,
81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.
Annual Meeting
The annual meeting of shareholders will be held on Thursday, May 27, 1999,
at 1:30 p.m., at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.
48
</TABLE>
THERMEDICS INC.
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
At February 28, 1999, the Registrant owned the following companies:
STATE OR
JURISDICTION OF PERCENT OF
NAME INCORPORATION OWNERSHIP
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Corpak Inc. Massachusetts 100
Walpak Company Illinois 100
TV Acquisition Corporation Delaware 100
TMD Holdings Inc. Delaware 100
TMO TCA Holdings, Inc. Delaware 100
Thermedics Detection Inc. Massachusetts 83.79**
(additionally, 4.57% of the shares are owned directly by The
Thermo Electron Companies Inc.)
Detection Securities Corporation Massachusetts 100
Orion Research, Inc. Massachusetts 100
Advanced Sensor Technology Massachusetts 100
Orion Research Limited United Kingdom 100
Orion Research Puerto Rico, Inc. Delaware 100
Russell pH Limited Scotland 100
Rutter & Co. Netherlands 100
Rutter Instrumentation S.A.R.L. France 90
Systech B.V. Netherlands 50
ThermedeTec Corporation Delaware 100
Thermedics Detection de Argentina S.A. Argentina 100
(1% of which shares are owned directly by Thermedics Detection
Inc.)
Thermedics Detection de Mexico, S.A. de C.V. Mexico 100
Thermedics Detection GmbH Germany 100
Thermedics Detection Limited United Kingdom 100
Thermedics Detection Scandinavia AS Norway 100
Thermo Sentron Inc. Delaware 74.25**
(additionally, 12.00% of the shares are owned directly by The
Thermo Electron Companies Inc.)
Allen Coding Systems Limited United Kingdom 100
Allen Coding Corporation Delaware 100
Goring Kerr Limited United Kingdom 100
Best Checkweighers Limited United Kingdom 100
Intertest (UK) Limited United Kingdom 100
Goring Kerr Detection Limited United Kingdom 100
Graseby Goring Kerr (NZ) Limited New Zealand 100
Graseby Goring Kerr Canada Inc. Ontario 100
Graseby Product Monitoring GmbH Germany 100
Goring Kerr Inc. New York 100
Ramsey France S.A.R.L. France 100
Ramsey Ingenieros S.A. Spain 100
Ramsey Italia S.R.L. Italy 100
Tecno Europa Elettromeccanica S.R.L. Italy 100
Ramsey Technology Inc. Massachusetts 100
Xuzhou Ramsey Technology Development Co., Limited China 50*
Thermo Sentron Australia Pty. Ltd.. Australia 100
<PAGE>
STATE OR
JURISDICTION OF PERCENT OF
NAME INCORPORATION OWNERSHIP
- ------------------------------------------------------------------------------------------------------------
Thermo Sentron B.V. Netherlands 100
Thermo Sentron Canada Inc. Canada 100
Thermo Sentron GmbH Germany 100
Thermo Sentron Limited United Kingdom 100
Hitech Electrocontrols Limited United Kingdom 100
Hitech Licenses Ltd. United Kingdom 100
Hitech Metal Detectors Ltd. United Kingdom 100
Westerland Engineering Ltd. United Kingdom 100
Thermo Sentron SEC Corporation Massachusetts l00
Thermo Sentron (South Africa) Pty. Ltd. South Africa 100
TMD Securities Corporation Massachusetts 100
Thermo Cardiosystems Inc. Massachusetts 60.05**
(additionally, 0.21% of the shares are owned directly by The
Thermo Electron Companies Inc.)
International Technidyne Corporation Delaware 100
International Technidyne Corporation Limited United Kingdom 100
Nimbus Inc. Massachusetts 100
TCA Securities Corporation Massachusetts 100
Thermo Voltek Corp. Delaware 66.45**
(additionally, 2.74% of the shares are owned directly by The
Thermo Electron Companies Inc.)
Thermo Voltek Europe B.V. Netherlands 100
Comtest Instrumentation, B.V. Netherlands 100
Comtest Italia S.R.L. Italy 100
Comtest Limited United Kingdom 100
Milmega Limited United Kingdom 100
TVL Securities Corporation Delaware 100
UVC Realty Corp. New York 100
* Joint Venture/Partnership
** As of January 2, 1999
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
by reference of our report for Thermedics Inc. dated February 11, 1999, included
in or made a part of this Form 10-K, into the Company's previously filed
Registration Statement No. 2-93746 on Form S-8, Registration Statement No.
33-00183 on Form S-8, Registration Statement No. 2-93747 on Form S-8,
Registration Statement No. 33-8992 on Form S-8, Registration Statement No.
33-31621 on Form S-8, Registration Statement No. 33-9215 on Form S-8,
Registration Statement No. 33-43707 on Form S-3, Registration Statement No.
33-40866 on Form S-3, Registration Statement No. 33-64070 on Form S-8,
Registration Statement No. 33-86972 on Form S-8, Registration Statement No.
33-86974 on Form S-8, Registration Statement No. 033-65279 on Form S-8,
Registration Statement No. 033-61435 on Form S-8, Registration No. 333-02149 on
Form S-3, and Registration No. 333-32035 on Form S-3.
Arthur Andersen LLP
Boston, Massachusetts
March 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS
INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 2, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 142,108
<SECURITIES> 43,310
<RECEIVABLES> 67,936
<ALLOWANCES> 4,498
<INVENTORY> 62,783
<CURRENT-ASSETS> 326,211
<PP&E> 60,687
<DEPRECIATION> 38,780
<TOTAL-ASSETS> 553,618
<CURRENT-LIABILITIES> 93,919
<BONDS> 122,802
0
0
<COMMON> 4,174
<OTHER-SE> 243,802
<TOTAL-LIABILITY-AND-EQUITY> 553,618
<SALES> 313,131
<TOTAL-REVENUES> 313,131
<CGS> 164,345
<TOTAL-COSTS> 164,345
<OTHER-EXPENSES> 26,595
<LOSS-PROVISION> 1,002
<INTEREST-EXPENSE> 5,581
<INCOME-PRETAX> 40,058
<INCOME-TAX> 15,312
<INCOME-CONTINUING> 18,972
<DISCONTINUED> 0
<EXTRAORDINARY> 4,638
<CHANGES> 0
<NET-INCOME> 23,610
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.55
</TABLE>
